WHY HUMAN RESOURCES IS IMPORTANT IN MERGES AND ACQUISITIONS

As per the world, Sri Lanka is also now trending with mergers and acquisitions. As examples very
recently Hutch and Etisalat - two prominent service providers in the telecommunication industry
merged (Business Times, 2018) and one of the Global Giant in the Insurance sector, Allianz
acquired 100% stake in Janashakthi who is ranked #3 in General Insurance sector in Sri Lanka
(Wettasinghe, 2018)

Mergers and acquisitions (M&A) is a general term that refers to the consolidation of companies or
assets (Investopedia.com, 2018). M&A can include a number of different transactions, such as
mergers, acquisitions, consolidations, tender offers, purchase of assets and management
acquisitions (Investopedia.com, 2018). In all cases, two companies are involved (Investopedia.com,
2018). However M&A are not the same terminologies but often it is used interchangeably. In
acquisitions, one organization will purchase full or a part of another organization. While in merger
two or more than two organizations form one organization (Alao 2010). Merger is the legal activity
in which two or more organizations combine and only one firm survive as a legal entity (Horne and
John 2004).

The benefits arising from M&A are extended or addition of products, services or technologies,
increase its capabilities and service offerings, improve cash flows or increased opportunities often
arise from acquiring new skills and technologies that enhance current products (Stahl and
Mendenhall,2005).

In 2017, US M&A volume was expected to reach its highest level since its last cyclical peak in
2007. However, total closed M&A deals, measured in $ value, are projected to drop year over year,
which signals that the market is experiencing fewer M&As in 2017 (watermarkadvisors.com,
2018).
Figure 1.0: Transaction Volume of Mergers & Acquisitions over the last 30 years.

(Source: Thomson Financial, Institute for Mergers, Acquisitions and Alliances,2017)

Mergers and acquisitions are used by companies to fortify and preserve their place in the market
place. Human resources assist in managing any complications or challenges linked to people in the
companies as the merger or acquisition process takes place (Stahl and Mendenhall,2005), and an
estimated 70 percent to 90 percent of all M&As fail to achieve their anticipated strategic and
financial objectives (Christensen et al,2011). This rate of failure is often attributed to various HR-
related factors, such as incompatible cultures, management styles, poor motivation, loss of key
talent, lack of communication, diminished trust and uncertainty of long-term goals (Christensen et
al, 2011). However many researches on successful and failed M&As have proved that involving
HR at the very early stages of any merger or acquisition is important (Love,2000). Hence, at the
beginning of any merger or acquisition procedure, heads of the companies ideally need to reflect on
questions such as how to bring into line the cultures of the organisations, how to converse, and how
to generate sustainable staff assignation as these are often vital to implementing the transition
effectively at a very early stage of the M&A (Lilliot,2018).

Company Culture
The clash between the cultures of the combining organizations has received growing attention by
both practitioners and academics (Porter, 1985). Stahl and Mendenhall, (2005) states that human
resources essentially should have a steady grip on the culture of the company for which they work
and must be thorough with the culture of the other organization prior to making such a
determination. Cultural differences may comprise of how the two organizations describe and
measure accomplishment within the organization; employee benefits (personal time and insurance),
how issues within the company are handled; the management methods of the two companies; and
the overall attitude of the employees towards business functions and the trade in which they work.

Employee Benefit Schemes

Management team of the purchasing company evaluate whether the M&A makes strategic and
financial sense. Human resources of the purchasing company explicitly weigh the employee
benefits schemes of the other company to discover any probable glitches, such as a pension plan
running low on funds or a health insurance package that will cost a substantial amount for the
company (Patrick,2015).

Employee Concerns
People habitually fear change, and a merger or acquisition generates ambiguity and transformation
for employees both of the purchasing company and the purchased company. Human resources in
both companies help even out the transition for employees, helping calm any uncertainties as well
as answering questions about how the merger or acquisition affects each employee. If the
employees of both companies do not have considerable fear over the transformation, productivity is
more likely to remain as previous. Human resources can detect and address any rumours about
redundancies, office relocation or other changes employees fear, giving feedback to management
about employee worries (Patrick,2015).

Changing Roles and Structure

When one company merges with or acquires another, some adjustments to both organizations may
happen, such as removing redundant positions or combining teams and departments. The process of
changing the two organizations they work together as one can take some time to complete and
human resources plays an important role in the changes (Stahl and Mendenhall,2005). Employee
engagement is key in this situation as they may share their experience each other and work towards
one common goal. Human resources should communicates to employees the changes in who they
report to, what work group or team employees are assigned to as well as any changes to different
positions’ roles in the organization (Stahl and Mendenhall,2005). Human resources may work along
with the management and to alter the job descriptions of employees in various positions, ensuring
everyone understands his role in the newly transformed organization (Armstrong,2010). The
pressures on organisations to change will increase over the next decades and methods managers
have used in attempt to transform their companies into stronger competitors using methods such as
total quality management, reengineering, right sizing, restructuring, and cultural change mostly fail,
because they fail to alter behaviour of employees (Kotter,1996).

Once the organisations have merged, assessment of the staff is vital. Effectiveness leadership can
vary considerably in relation to integration, specifically the process to ensure that employees feel
equipped and empowered to talk about the M&A with clients. (Andrew,1998) When Janashakthi
Insurance acquired AIA General Insurance in 2016, some of the unsatisfied call center employees of
AIA have given destructive impression on the acquisition where it had a negative impact in
retaining the AIA customers with Janashakthi.

Therefore in conclusion it is vital for the success of any M&A to keep employees satisfied and
make them feel secured. According to Stahl and Mendenhall (2005) several studies have been
carried out to evaluate whether Mergers and Acquisitions have been value enhancing or destructive
for of organizations, and the results are mixed. The outcome of these studies emphasise that Change
will always cause uncertainty in an organisation but, by managing that change and ensuring good
communication with employees, companies can avoid unnecessary risk of a M&A failure.
Therefore a professional Human Resource Management System is an essential and integral part of a
successful Merger or an Acquisition for the new venture’s strong foundation (Stahl and
Mendenhall,2005).

References:

Alao, R. O. (2010). Mergers and Acquisitions (M&As) in the Nigerian Banking Industry: An
Advocate of three Mega Banks. European Journal of Social Sciences, 15(4), 554-563.

Andrew J. S. (1998) Mergers and Acquisitions from A to Z: Strategic and Practical Guidance
for Buyers and Sellers.1st ed. New York, AMACOM

Armstrong, M. (2010). Armstrong’s essential human resource management practice. London,

Kogan Page.

Business Times (2018) Hutch, Etisalat merge Sri Lanka mobile ops. Sunday Times [online] 29
April 2018, available at http://www.sundaytimes.lk/180429/business-times/hutch-etisalat-
merge-sri-lanka-mobile-ops-291937.html. [Accessed on 26 May 2018].
Christensen, C.M., Alton, R., Rising, C., & Waldeck, A. (2011, March). The Big Idea: The New
M&A Playbook. Harvard Business Review.

Horne, J. C. V., & John M. Wachowicz, J. (2004). Fundamentals of Financial Management

(12th ed.): Prentice Hall.

Kotter, J. P. Leading Change. Boston: Harvard Business School Press, 1996.

Lilliot, L. (2018), Mergers & acquisitions. Harvard Law School Library. available at
<https://guides.library.harvard.edu/mergers#s-lg-page-section-2070046>. [Accessed on
22nd May 2018].
Love, C. (2000), Mergers and Acquisitions: The Role of HRM in Success, Ontario: Industrial
Relations Centre.
Mergers and Acquisitions - M&A. INVESTOPEDIA [Online]. Available at
<https://www.investopedia.com/terms/m/mergersandacquisitions.asp>. [Accessed on 5th
May 2018].
Patrick A.G. (2015). Mergers, Acquisitions, and Corporate Restructurings. 6th ed. New Jersey,
John Willey & Sons.

Porter, M. E. Competitive analysis. New York: Fee Press, 1985

Stahl, G.K. and Mendenhall, M. E. (2005) Mergers and Acquisitions: Managing Culture and
Human Resources. California, Stanford University Press.

Watermark Advisors (July,2017) Q2 2017 M&A Market Report. Watermark Advisors[Online].

Available at <https://watermarkadvisors.com/news/q2-2017-ma-market-report/>.
[Accessed on 5th May 2018].

Webber, Y. (1996) Corporate Cultural Fit and Performance in Mergers and Acquisitions.
Human Relations, 49(9) pp. 1181-1202.

Wettasinghe, C. (2018) Germany’s Allianz acquires Janashakthi’s general business for

Rs.16.4bn. Daily Mirror [online] 3 February 2018, Available at
<http://www.dailymirror.lk/article/Germany-s-Allianz-acquires-Janashakthi-s-general-
insurance-business-for-Rs-bn-145144.html>. [Accessed on 26 May 2018].