Mergers and acquisitions by aapokorn

Human Resource Management and Acculturation: The Glue that Binds Mergers and Acquisitions

Alexis Lake MGT 5005 Human Resource Management and Development October 12, 2016

In today’s business world, there is a pervasive growth in the amount of mergers and acquisitions completed both nationally and internationally. Mergers and acquisitions (M&A) are increasingly popular because they quickly accelerate growth into new industries, widen distribution channels, diversify product offerings, and further the reach of a company into new regions or countries. Acquiring a business has the opportunity to be faster and more cost effective than a company instituting these same changes organically. However, despite the increase and perceived ease of M&As, “managers of acquiring firms reported that only 56 percent of their acquisitions could be considered successful when measured against their original goals” (Weber & Fried). Others report “30 percent to 70 percent of mergers and acquisitions fail mainly due to people and culture issues” (Jain, 2013). This lack of success is often attributed to the acculturation process or integration of company cultures. Most company “managers acknowledge that underestimating the importance and difficulty of combining cultures were major oversights in their integration efforts” (Marks & Mirvis, 2011). Human resources plays a crucial role in leading this acculturation process and bringing two companies together. A seasoned human resources (HR) manager will understand the various phases of a merger or acquisition, as well as the fluctuating responsibilities of the HR function and the differing levels of acculturation, which are both dependent on the type of M&A activity. All of these considerations together, from the type of M&A to the level of acculturation, will allow for a clear path to acculturation and a defined scope of involvement for human resource managers. Before defining a clear direction for acculturation, it is essential to understand the typical steps in a merger or acquisition and the traditional role of human resources in each of those steps. These steps include: pre-merger, integration, and post-merger. Throughout each of these steps or phases human resources takes on several roles including: an administrative expert in creating

new policies, procedures; a strategic partner in long- and short-term planning; an employee champion in communicating changes and retaining key talent; and a change agent in implementing the transition plan, creating trust, and integrating company cultures. The specific tactics and level of involvement in each phase vary depending on the type of acquisition and acculturation strategy, but every M&A process begins with pre-merger research. The first step, called the pre-merger research or due diligence phase, is “a screening process based on criteria for the selection of the potential target for merging or acquiring” (Vazirani, 2013). A due diligence team is founded and typically includes the acquiring company’s top leadership from finance, legal, manufacturing, etc., and should always include human resources. While in the past human resource managers may have had to fight to have a seat at the M&A table, “today’s breed of senior executives ‘get it’ - either because they have worked in organizations where culture has been actively managed or because they have mismanaged a previous merger or acquisition” (Marks & Mirvis, 2011). Current companies and executives understand the crucial role of human resources management during a merger or acquisition. During due diligence phase, human resources is a strategic partner in first articulating and understanding the lead company’s goals in acquiring the target company and the intended relationship between companies post-merger. For example, the deal could be based on expanding into global markets, increasing a distribution channel, or gaining new technologies. This understanding of strategic goals will become paramount in later defining the type of M&A and creating a clear action plan for acculturation. The due diligence phase is additionally significant for how humans resource managers act as a change agent and employee champion by conducting a cultural assessment of the target company. Researching and determining a culture may feel like circumstantial evidence in an

M&A, but it is really the hard facts on what the target company values, how they make decisions, or they recognize or reward employees in comparison to the parent company. In international M&A activities there could be language differences, variations in cultural work styles, or disparity in employee- and company-expectations. Cultural assessments may also turn up key employee retention issues or a negative notion about the acquiring company. In addition to the cultural assessment, human resource managers should identify key HR-related risks, such as: underfunded pensions, union contracts, pending lawsuits, labor disputes, or variations in executive compensation (Lee & Carpenter, 2013). Due diligence may turn up significant differences or cultural barriers that may or may not be deal-breakers, but certainly areas that need to addressed during the second phase - integration. Integration is the phase where the two organizations or companies actually come together. All of the legal proceedings and deals made during the pre-merger phase are completed. During the integration, there could be headcount reductions, changes in a company’s culture, structure, or any other number of changes and challenges. Integration is largely considered the most difficult phase of any M&A activity because “what people notice first are the differences between the two cultures and what makes their own unique” (Marks & Mirvis, 2011). Human resource managers should work swiftly and efficiently in communicating with acquired employees about the integration, the positive outcomes expected, and the realistic challenges and next steps. A lack of communication during the integration process can create uncertainly for acquired employees and great risks for retaining key talent. During a merger or acquisition employees can also become targets for competitors. For example, in the merger of Chase Manhattan and J.P. Morgan, “headhunters contacted hundreds of employees from both companies to see if they were willing to work for other financial institutions” (Stanwick &

Stanwick, 2011). Even if acquired employees stay they often feel “anxious and uncertain about their future with the company” (Stanwick & Stanwick, 2011) and many insecurities can form. These could range from the acquired employees having “apprehensions about the permanency of their leadership team,” (Khandelwal, 2015), job security fears, feelings of inferiority to the acquiring company, or uncertainty in relation to a new company culture. However, other acquired employees could view the integration as a positive opportunity to further their career in a larger organization, gain new skills, or become promoted faster. The leadership and employees of acquiring company could also feel that their practices or culture are superior or more advanced than those of the acquired company. However, many HR professionals advise that the “acquiring company should swallow its pride, and approach the acquisition with humility” (Lee & Carpenter, 2013). More often than not the acquired company is being targeted for its success. Quelling these feelings and concerns during the integration requires diligent, frequent, and repeated communication through multiple channels, internal and external platforms, digital and printed media, as well as messages from leadership through video, phone messages, or training presentations. The specific integration activities and tactics for HR will vary depending on the type of M&A and the level of acculturation. However, in any M&A activity, the final step is the post-combination or post-merger phase. The post-merger phase is focused on assessing and evaluating the M&A activity, developing new strategies, lessons learned for the future, and continuing to communicate employees. The role of HR may never truly end because it is important to continuously reinforce the goals of the M&A activity and the company culture. While post-merger may be considered the final phase, not all mergers are the same. There is no “one-size-fits-all” strategy and it unlikely that HR will play the same role or roles in each M&A activity. This is why it is

important to factor in the different types of mergers and acquisitions in determining a path for acculturation. There are three types of M&A activities: extension, redesign, and collaboration. The type of activity, typically determined in the pre-merger phase, sets the strategic goal for the M&A activity and defines the post-merger relationship between the acquiring and acquired companies. The first type, extension, is “typically carried out for growth or diversification of the business portfolio, or to enter new markets” (Bagdadli, Hayton, Perfido, 2015). In an extension, the parent company is “interested in limiting the relationship largely to financial investment and is not concerned with extensive integration of the acquired firm” (Bagdadli, Hayton, Perfido, 2015). An example of this type of acquisition is the sunglass company Oakley, which was acquired in 2007 by an Italian company and the world's largest eyewear company, Luxottica. Oakley’s production remained in the U.S., and maintained their product-line, which was quite different from Luxottica products, and very technical (Bagdadli, Hayton, Perfido, 2015). Oakley also held onto its own brand identity and remained very autonomous with a low level of integration from Luxottica (Bagdadli, Hayton, Perfido, 2015). Also, while only four years ago, the acquisition of Instagram by Facebook also appears to be an extension M&A activity. Facebook largely acquired Instagram for competitive reasons and “wanted to purchase Instagram before another bidder (maybe Google) made the deal” (Hill, 2012). Today, Facebook appears to “allow Instagram a high degree of autonomy” (Bagdadli, Hayton, Perfido, 2015). The extension M&A typically prescribes a lower level of acculturation and differs greatly from the second M&A type - redesign. The redesign M&A is when “the acquirer has the objective of taking control of the management of another firm and imposing its more sophisticated technology or management

skills on the acquired firm” (Bagdadli, Hayton, Perfido, 2015). An example of a redesign M&A was when Luxottica acquired another sunglass company, Ray-Ban, from Bausch & Lomb in 1999. This acquisition “restored glamour and success” (Bagdadli, Hayton, Perfido, 2015) to RayBan, but not without significant changes. Luxottica bought the then struggling brand, “moved the production in Italy, and totally changed the production processes and top management,” (Bagdadli, Hayton, Perfido, 2015). Another example of a redesign M&A was when InBev, the global beverage company, acquired Anheuser-Busch in 2008. While some manufacturing plants and iconic brand stayed the same, the global strategy for Anheuser-Busch evolved. “Early in the integration process, the leadership team focused on the most effective way to introduce InBev's long-term global strategy to Anheuser-Busch managers and employees. One powerful tool was InBev's ‘Dream-People-Culture’ mission statement, which was tailored to the U.S. company and introduced into the Anheuser-Busch lexicon with strong messages emphasizing the value of its customers and products, to excite the imagination of the AB organization” (Rouse & Frame, 2009). A redesign M&A requires increased acculturation and involvement from HR managers, but the changes are solely focused on the acquired company. In some M&As there are significant changes between both companies. This is the third type of activity - collaboration or collaborative M&A. In a collaborative M&A activity “both firms anticipate benefits in terms of either operational output or financial gains” (Bagdadli, Hayton, Perfido, 2015), there could also be opportunities to exchange best practices and strategies. In this type of activity, there are significant changes to create a whole new company, but there are typically more synergies between the two merging companies. This could be due to “commonalities in terms of industry and… such features as size, culture, and technology” (Bagdadli, Hayton, Perfido, 2015). The 2010 merger of United Airlines and Continental Airlines is an example of a collaborative M&A activity. At the time of the announcement, “United [was] seen as the dominant partner, [but] the

merger was described as ‘a merger of equals’” (BBC Business News, 2010). Another example from Luxottica is the 2001 purchase of the Sunglass Hut. In this merger there was “an equal distribution of power, without any changes in the top management” (Bagdadli, Hayton, Perfido, 2015). Whether the M&A activity is an extension, redesign, or collaboration will determine the strategic goals of the acquiring company, intended level of acculturation, and the role of HR in the integration phase. Once the acquiring company sets the strategic goals and determines the type of acquisition, the human resources function should guide the acquiring company’s leadership in defining the “cultural end state” (Marks & Mirvis, 2011). There are three levels of acculturation or cultural end states: pluralism, integration, and assimilation. The level of acculturation “cannot be crafted until the organization has first developed its business strategy…and decided how much to integrate the two firms” (Marks & Mirvis, 2011). The type of cultural end state sets a clear path for how to acculturate the two companies and the level of involvement HR will have in the integration phase of any type of M&A activity. The first level of cultural end states is pluralism. This end state is closely associated with the extension M&A activity where the “acquired company faces only a modest degree of integration and retains its way of doing business” (Marks & Mirvis, 2011). The acquired company maintains and preserves its overall culture and a large measure of independence from the acquiring company. In order for pluralism to be a successful cultural end state, the HR function and leadership of acquiring company must “protect the boundaries of the [acquired company], limit instructions by lead company staff, and minimize conformance to its rules and systems” (Marks & Mirvis, 2011). In a pluralism, HR is largely focused on acting as an administrative support, but also as a change agent and employee champion. As an administrative

support, the HR function makes the staffing, training, performance management, and compensation practices as consistent as possible between the acquired and acquiring company. While adding acquired employees to the payroll and IT systems or corporate benefits program may seem like rudimentary tasks, the HR function has a large role in change management and communication with acquired employees. During a pluralism, challenges exist with modifications to compensation and benefits packages between the two companies. Employees of the acquired company may feel that their benefits are inconsistent or inferior to those of employees in the acquiring company, or that the new benefits are difficult to understand. Frequent, consistent, and accurate communication is needed between HR and acquired employees. This helps build trust, but also positions HR as a conduit of information and feedback during the integration phase. One example is a case study of a European company that acquired a company based in the United States. The acquired company previously “offered employees a single health insurance option” (Marks & Mirvis, 2011) while the acquiring company offered the new employees “with a choice of six health insurance plans” (Marks & Mirvis, 2011). The parent company saw these new options as improvements for the newly acquired employees. However, the employees reacted negatively and felt it was an inconvenience to have to research and choose a healthcare option (Marks & Mirvis, 2011). In this case, the HR manager received the feedback and “moved more carefully in contemplating future policy changes” (Marks & Mirvis, 2011). This type of feedback and reactions from employees also underscores the importance of a cultural assessment and proper due diligence even in a cultural pluralism. Also, HR should still be heavily involved in the integration phase as an administrative support, change manager, and employee champion in a cultural pluralism. While a cultural pluralism may require a more administrative involvement from HR, the

role of HR expands and becomes very intricate in the second level of acculturation: cultural integration. A cultural integration, which is associated with the redesign M&A type, requires major changes for the acquired organization and often fosters many of the employee uncertainties and fears mentioned earlier. This level of acculturation “is probably the most common…especially when there is a difference in the size and sophistication between the lead and target firm” (Marks & Mirvis, 2011). In order for this type of cultural end state to be successful, the HR function must perform all four traditional roles, but diligently focus on acting as the employee champion and change agent. From the start of the integration, the HR function needs “to move somewhat quickly to avoid too much uncertainty” (Marks & Mirvis, 2011) among employees by “over [communicating] the benefits” (Marks & Mirvis, 2011) of the acquisition. The more that employees hear strategy and next steps for the M&A, as well as “the lead company’s ways of operating and enhancements in getting work done, the more likely they are to accept them” (Marks & Mirvis, 2011). However, moving too quickly can create cultural clashes if employees “dig in and protect their ways of doing things when they feel their cultures are threatened” (Marks & Mirvis, 2011). To avoid this, HR managers should closely collaborate with employees and form “transition teams charged with planning how to move from the target’s ways of doing things to the lead company’s ways” (Marks & Mirvis, 2011). While this may feel like an arduous task to organize, studies have found that if the “teams work well together, highquality decisions will emerge and so will confidence among the overall workforce that the combination is being well managed” (Marks & Mirvis, 2011). The cultural integration end state may be challenging, but consistent communication and involvement between the HR function and acquired employees is vital. The last level of acculturation is assimilation. Also known as the “best of both”

companies, this cultural end state is closely associated with the collaboration M&A activity. A cultural assimilation is a “merger of equals or an acquisition with the intention of selecting best practices from the partner organizations” (Marks & Mirvis, 2011). Whether bringing together or completely transforming the two companies, this approach requires major cultural changes and heavy involvement from HR throughout each phase of the merger or acquisition. The HR function should be at the table for every decision of the new company and the “consequences of how culture is managed are substantial - the two sides will either seek to work through their differences or fight over them like cats and dogs” (Marks & Mirvis, 2011). In the case of a cultural assimilation, the HR function plays all four traditional roles and there is often close collaboration between the HR departments at both companies. This allows both companies to understand their similarities and differences, become educated about potential cultural clashes, and create the mission, values and culture for the new identity (Marks & Mirvis, 2011). In the merger of HP and Compaq, the end state was focused on “one new company, one new culture” (Marks & Mirvis, 2011). To achieve this, HR departments from both companies conducted an analysis of current strategies, organizational structures, and technologies. From there the teams met and decided on which approaches to adopt and implement. This also illustrates how the HR function will collaborate closely with the new company leadership to define everything from a new set of policies, procedures, and values, formulating benefits packages, organizational structures, and performance management systems. Once these policies are created, it is up to the HR function to help institute, communicate, evaluate and evolve these policies as the administrative support, employee champion, and change agent. Often employees need to “deal with the loss of their ‘old ways’ and need some time to disengage from their past identities” (Marks & Mirvis, 2011). This transition is aided by “award and communication programs, which

help smooth resistance to change” (Bagdadli, Hayton, Perfido, 2015). The HR function could establish a reward system to honor employees who adopt or exemplify the new culture or values. A training program should also be established to educate and continuously reinforce the values, mission, and best practices of the newly formed company. A cultural assimilation end state presents challenges in identifying the best of both companies and implementing an entirely new mission, vision, and company culture. While the required tactics and responsibilities of human resources vary dependent on cultural end states of pluralism, integration, to assimilation, all HR managers should recognize that their involvement in a merger or acquisition might never truly end. The company’s culture must be reinforced in the post-merger or post-combination phase. This could include guiding senior executives, managers, and supervisors on how to best “model behaviors consistent with the desired culture” (Marks & Mirvis, 2011). There should always be surveys and feedback tools to assess the integration process, but also the “extent to which managers and supervisors [are] adhering to elements of the desired culture” (Marks & Mirvis, 2011). This will help gauge whether employees understand the changes, but also whether training programs are effective. Continuous education about new company policies, practices, benefits packages, and important company information will ensure employees “understand what is expected of them in the postcombination organization” (Marks & Mirvis, 2011). As mergers and acquisitions continue to increase in popularity, it will largely be up to human resource managers to ensure success through acculturation. Human resources should lead the acculturation process by first understanding the steps in a typical M&A, the HR’s everchanging responsibilities and the levels of acculturation dependent on the type of M&A activity. If acculturation is recognized as a key focus in M&A activities and more HR managers are

involved from the beginning, hopefully the percentages of failing mergers or acquisitions will decrease both nationally and internationally.

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