Knotted forever…

By Amit Pande & Sandeep K Krishnan In an ideal merger, the newly created entity pools the best features of the two merging organizations. A well planned process built on the foundations of an open, honest and consistent communication strategy can pave the way.

Mergers and acquisitions have become a common phenomenon in recent times. A merger of the size like HP-Compaq has implications for the workforce of these companies across the globe. Although the merging entities give a great deal of importance to financial matters and the outcomes, HR issues are the most neglected ones. Ironically studies show that most of the mergers fail to bring out the desired outcomes due to people related issues. The uncertainty brought out by poorly managed HR issues in mergers and acquisitions have been the major reason for these failures. The human resource issues in the mergers and acquisitions (M&A) can be classified in two phases the pre-merger phase and the post merger phase. Literature provides ample evidence of difference in between the human resource activities in the two stages: the pre-acquisition and post acquisition period. Due diligence is important in the first phase while integration issues take the front seat in the later. The pre acquisition period involves an assessment of the cultural and organizational differences, which will include the organizational cultures, role of leaders in the organization, life cycle of the organization, and the management styles. The mergers often prove to be traumatic for the employees of acquired firms; the impact can range from anger to depression. The usual impact is high turnover, decrease in the morale, motivation, productivity leading to merger failure. The other issues in the M&A activity are the changes in the HR policies, downsizing, layoffs, survivor syndromes, stress on the workers, information system issues etc. The human resource system issues that become important in M&A activity are human resource planning, compensation selection and turnover, performance appraisal system, employee development and employee relations. M&A activity presents a different set of challenge for the human resource managers in both acquiring and acquired organizations. The M&A activity is found to have serious impact on the performance of the employees during the period of transition. The M&A leads to stress on the employee, which is caused by the differences in human resource practices, uncertainty in the environment, cultural differences, and differences in organizational structure and changes in the managerial styles. The organizational culture plays an important role during mergers and acquisitions as the organizational practices, managerial styles and structures to a large extent are determined by the organizational culture. Each organization has a different set of beliefs and value systems, which may clash owing to the M&A activity. The exposure to a new culture during the M&A leads to a psychological state called culture shock. The employees not only need to abandon their own culture, values and belief but also have to accept an entirely different culture. This exposure challenges the old organizational value system and practices leading to stress among the employees. Research has found that dissimilar cultures can produce feeling of hostility and significant discomfort which can lower the commitment and cooperation on the part of the employees. In case of cultural clash, one


a case of discrimination will arise against the employees of HLL. career path. The employees of nondominating culture may also get feelings of loss of identity associated with the acquired firm. Further the VRS scheme launched by the firm evoked very tepid response. working in new departments and fear of working with new teams. However the court supported TOMCO employees in the process. The uncertainty during the M&A activity divert the focus of employees from productive work to issues like job security. The compensation issues may also involve legal angle. changes in designation. the employees in TOMCO enjoyed better terms and services compared to the HLL employees. The Indian arms however couldn’t merge in the last seven years because of high pay differential between workers of Glaxo and Wellcome in India. Some employees also have to be relocated or assigned new jobs. Research has found that at least two hours of productive work per employee per man day is lost during the M&A activity in the organizations. The M&A activity leads to duplication of certain departments. hence the employees find themselves in a completely different situation with changes in job profiles and work teams. Two cases in the Indian context are important which underline the importance of legal issues related to compensation in M&A activity.of the cultures that is dominant culture may get preference in the organization causing frustration and feelings of loss for the other set of employees. In case of hostility in the environment the employees of two organizations may develop “us” versus “them” attitude which may be detrimental to the organizational growth. which they refused. 2 lakhs in 1998. The human resource systems vary across organizations owing to the differences in the organizational culture. The HLL employees argued that if TOMCO employees are allowed to work on their original terms and conditions. The increased political processes that may be underway in the organizations to sustain the importance of the various individuals and departments will add to the confusion. For example if the compensation in the acquired firm is lesser compared to the acquiring firm. the acquisition will raise employee expectations (for the employees of acquired firm) of a possible hike in compensation which may not be realistic. The pay differential can act as a de-motivator for the employees of acquiring firm and may have long term consequences. Since both the set of employees now belong to same firm. The second case involves merger of Glaxo and Wellcome-Burroughs who decided to merge in 1996. sectoral differences and national cultural differences. two classes of employees will come in existence. In certain cases like acquisition of a lesser known or less profitable organization by a better one can lead to feelings of superiority complex among the employees of the acquiring organization. Compensation differences need to be rectified by the acquiring firm so as to maintain the morale of acquired firm employees and to retain them. The first case involving Hindustan Lever Limited acquiring TOMCO. The workers of Wellcome were offered a one time compensation of Rs. The compensation structure 2 . The M&A activity also causes changes in their well defined career paths and future opportunities in the organization. On the other hand if the compensation level of employees in acquiring firm is lower the employees may press to have equal compensation across all the divisions of the firm. hence the excess manpower at times needs to be downsized hence the first set of thoughts that occur in the minds of employees are related to security of their jobs. This may have an impact on the performance of the employees. Since 1997 the firms have been working as independent subsidiaries in India.

accidents . The partners of “Kids Corner” were running the organization as a service to 3 . Kamala is working as a Principal in a nursery school which takes care of about 100 students. political linkages of the unions. denial frustration and depression which leads to altered behavior. The cultural difference also leads to counterculture feelings where employees tend to completely reject the dominant culture of the organization. Hence the differences in compensation structure and performance appraisal systems also need to be rectified so as to bring equity in the human resource systems and to treat employees at the equal level. increased workload. The power equation between management and trade unions is bound to change with the acquisition. she could not just let herself free from the experiences she was having for the past 6 months. reduced productivity. There is also fall in the morale. Although Kamala was not a partner in “Kids Corner”. for example one of the firms may have performance based pay while other may have higher component of fixed pay. stress. The impact of cultural shock is significant and long lasting on the employees. Since the organizational structures are different designations for the employees are used. The events unfolded as follows. as many a times the compensation is related to the grade of employee in the organization. The acquiring management also needs to keep track of number of unions in the workplace and equations between them as many Indian manufacturing units have multiple unions. Hence comprehensive analysis of trade unions operating in the plant should be done. during the integration of acquired organization the acquiring organizations need to develop a mechanism to remove the differences in the grading systems bring them at equal level. The process of merger can have inbuilt psychological and social threats which should be identified like exodus of managers due to the perceived job insecurity. Kids Corner and Kamala Kamala who was in her early forties was quite puzzled with what is happening with her career. number of trade union and dynamics between the unions. she was given a lot of freedom and authority in running the organization. commitment and loyalty. Another practical problem is differences in the grading or organizational structures in the systems. The likely reactions as noted by studies are anger fear. compensation related clauses. conflicts and a total lack of commitment to make merger work. The initial shock is followed by employees making their own perceptions based on values and past experiences. The feeling of political back stabbing adds to the psychological trauma. The merger can lead to depression and impaired performance. The reaction of the employees can vary from anger to dejection and depression. Vidhya group was interested in taking over “Kids Corner” which was the nursery managed by Kamala. This will require study of management-union equation. The employee relations issues gain more importance in the acquisitions of manufacturing units in India. The impact on the employees can be divided into categories of psychological trauma. survivor guilt and stress. which impact on the commitment and cooperation on the part of employees.among the organizations may also differ creating troubles. The more dissimilar the culture is higher will be the cultural shock. As a principal she was vested with the responsibility of taking any decision which affected the organization. The dissimilarity in the cultures can produce the feelings of hostility and significant discomfort. illness. As she was listening to a lecture on people issues in mergers and acquisitions. employee contracts. She had four teachers working under her and other three office staffs.

we can see how the confusion after merger affects the professional life. the differences that may exist in practices. she had a chat with the professor and narrated the experience she is undergoing. Managing M & A Clearly defined communication strategy during M&A plays an important role in removing the employee fears and kill rumors floating around in the organization. Kamala thought that there is a major dent in the freedom she had in running the organization. A new person was appointed as the manager of Kids Corner. As the professor explained how some of the major mergers turned out to be acquisitions with the bigger and stronger company trying to take full control. They wanted the salary to be cut to almost half. However they didn’t have professionally managed preschool in their portfolio. With this Kamala thought that she was cheated by the Vidhya group. The parents of the kids were also involved in the take over negotiations. She was in a complete dilemma and has now started thinking of the options she had before her. Kamala initiated the process of merging Kids Corner with Vidhya group. The revenues which were collected as fees from the kids were used to fund the salary and other running expenses of the nursery. the mystery about the future. She brought out the options before her – Whether to continue with “Kids Corner”. Some of the teachers left the organization feeling uncomfortable with the new management and their style of functioning. She was further shocked when the new management informed her that the salary that she is drawing now is too high for the organization to afford. He took some of the major decisions regarding the running of the organization. Kamala was sidelined in some of the major decisions which were taken regarding the running of Kids Corner. Kamala represented Kids Corner in all the major negotiations with the Vidhya Group. If organizations of large size merge. The Vidhya Group and the parents were of the opinion that since she managed the institute till now. she knows best to do it further. The inclusion of Kids Corner would help then to get a good group of students in the entry level classes of their high school too. The ownership of Kids Corner was taken over by the Vidhya Group. The way the new management dealt with Kamala also changed a lot. The organizations need to reach their employees before the press as the employees will have 4 . Kamala was worried about her destiny in the organization. The result as we have seen in the case may be employees leaving the company or drop in productivity due to apathy towards work and the management. It is important to understand a merger will be the case of managing a number of employees like Kamala and this should be a well planned process. Lots of ambiguity crept in regarding the fate of Kids Corner. which Kamala was unaware of. feeling of distrust and rumors will be creating havoc in the life of employees. She was impressed with the way that Vidhya group discussed various issues with her. join another organization which may give a comparable salary and job profile or fight it out with the new management.the society. After the session. She is on leave for almost a week and had discussed this issue with her colleagues and family. They also guaranteed her the post of Principal once the group takes over the Kids Corner. Vidhya group managed many educational institutions from high schools to engineering colleges. However things changed a lot since then. Kamala also thought this as an opportunity to grow and increase the visibility of Kids Corner. In the case of Kamala.

the best strategy in this period is to convince the employees that they are part of new organization and their concerns will be taken care of. providing any piece of information which is unreal can lead to rumors and counteract. The communication should be sufficient enough to answer the queries and worries of the employees. fears and positive feelings also helps to lessen the stress on employees of acquired firm. The group meetings seem to help because many-a-times employees are reluctant to come out and speak their concerns. Studies show that communication strategy that involves senior managers of the acquired organizations work well. The four stages incorporate some of the best practices for optimum results. whereas in groups where everyone shares same set of feelings to an extent. The communication shouldn’t involve false promises which may counteract later. Firms can also use this period to analyze the human capital of the acquired firm and define their possible roles in the new organizations. Improved communication will help to better understand each other’s cultures and practices. plan synergies and train the employees as the new role. Involving other employees who are trusted by the employees for instance trade union leaders are also helpful. negotiations and 5 . HR takes control • Train managers on the nature of change • Technical retraining • Family assistance programs • Stress reduction program • Meeting between the counter parts • Orientation programs • Explaining new roles • Helping people who lost jobs • Post merger team building • Anonymous feedback helpline for employees The communication aspect being very important should be handled carefully by the human resource department. The transition period provides ample opportunity to design the new organization.feelings of getting cheated. The transition period can also be used to improve communication with the employees of acquired firm. The pre-aquisition phase of the model involves due diligence. building an atmosphere of mutual trust. In case of lengthy transition period the employee stress increases. The employees meeting in small groups so as to discuss their concerns. This will make the integration process easier for the acquiring organization. it becomes easier to come out with the common set of concerns and fears. The transition period also becomes crucial from communication point of view. this will help to lessen their worries related to job security. The model disintegrates the process of M&A into four categories which are further divided into subcategories. The communication should provide precise information to the employees. The first set of information should be related to their future jobs. This also provides confidence to employees that the new management is willing to listen to their concerns and feelings. explain the new roles to the employees. The communication can be through trusted and credible employees of the acquired company and trade unions can be involved in the process too. Acquisition strategy of GE Capital The GE Capital uses a successful model called “Pathfinder” for acquiring firms.

analyzing the benefits of acquiring. 1 Acquisition strategy of Cisco The acquisition strategy of Cisco is an excellent example of how thorough planning can help in successful acquisitions.C. The third is the integration phase. 76 Issue 1. Cisco is not convinced about the acquisition. The planned process of communication and integration has resulted in high rate of success in acquisitions for Cisco.. The acquisition team of Cisco evaluates the working style of the management of the target company. The model is dynamic in the sense that company constantly improves it through internal discussions between the teams that share their experiences. Here the actual implementation and correction measures are taken. an integration strategy is rolled out. A team of executives from the GE Capital and the acquiring company is formed. The needed resources are pooled and accountability is ensured. Jan/Feb98. This stage involves long term adjustment and looking for avenues for improving the integration.Making the Deal Real: How GE Capital Integrates Acquisitions. The company insists on no layoffs and job security is guaranteed to all the employees of the acquired company. This involves the cultural assessments. No forced acquisitions are done and the critical element is in convincing the various stakeholders of the target company about the future benefits. work culture. A top level integration team visits the target company and gives clear cut information regarding Cisco and the future roles of the employees of the acquired firm. geographical proximity etc. The processes like assessing the work flow. employees of the acquired firm are given 30 days orientation training to fit into the new organizational environment.J. This stage also involves continuous feedbacks and making necessary corrections in the implementation. DeMonaco. Also a 100 day communication strategy is evolved and the senior management involvement and support is made clear. For example Cisco believes in an organizational culture which is risk taking and adventurous. This involved. This is also the period when the organization actual starts reaping the benefits of the acquisition. In the evaluation process. If this is lacking in the working style of the target company. After the acquisition. Cisco devised a three step process of acquisition. After experiencing some failures in acquiring companies. and Francis. At this phase the integration plan is prepared. effective tools and refine best practices. (1998). Vol. An integration manager is also chosen at this stage. devising communication strategies and evaluation of strengths and weaknesses of the business leaders. the caliber of the employees. Cisco looked whether there is compatibility in terms of long term goals of the organization.N.closing of deals. the technology systems and the relationship style with the employees. The last phase involves assimilation process where integration efforts are reassessed. Harvard Business Review. p165. assignment of roles etc are done at this stage. R. L. The second phase is the foundation building. S. 6 . understanding how the two organizations will fit together – how the employees from the organization can match with Cisco culture and then the integration process. Source: Ashkensas. Once the acquisition team is convinced.

A well planned process built on the foundations of an open. ICFAI Center for management research) In an ideal merger. Personnel and Industrial Relations area of the Indian Institute of Management. Fellow Programme in Management.(The case is adapted from “Cisco’s acquisition strategy”.in 7 . Sandeep K Krishnan and Amit Pande are students. the newly created entity pools the best features of the two merging organizations. Ahmedabad.ernet. They may be contacted at sandeepk@iimahd. honest and consistent communication strategy can pave the and amitp@iimahd.

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