HR Due Diligence in Acquiring a Business

- Integration Management
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HR Due Diligence HR Rocks !!!

Topics covered
 Mergers and Acquisitions: Importance and Reasons for Failure  People related problems that led to Financial underperformance  Due Diligence  What to look for in Due Diligence  Why are people neglected during M&A ?  HR integration - Stages, challenges and Solution  Case Study DaimlerChrysler

HR Due Diligence

Mergers & Acquisitions

 Mergers and acquisitions represent the coming together of companies for financial, market, technology and other considerations.  In a merger, two companies come together and create a new entity.  In an acquisition, one company buys another one and manages it consistent with the acquirer s needs.
HR Due Diligence

Importance of Mergers & Acquisitions

 Horizontal mergers for market dominance; economies of scale  Vertical mergers for channel control  Hybrid mergers for risk spreading, cost cutting, synergies, defensive drivers  Growth for world class leadership and global reach  Survival; sales maximization  Acquisition of cash, deferred taxes, and excess debt capacity  Move quickly and inexpensively  Flexibility; leverage  Adopt potentially disruptive technologies  Financial gain and personal power  Gaining a core competence to do more combinations

HR Due Diligence

HR Due Diligence

When Mergers fail

HR Due Diligence

Reasons for Failure

 Expectations are unrealistic  Hastily constructed strategy, poor planning, unskilled execution  Failure/inability to unify behind a single macro message  Talent is lost or mismanaged  Power and politics are the driving forces, rather than productive objectives
HR Due Diligence

Reasons for failure

 Culture clashes between the 2 entities go unchecked  Transition management fails  The underestimation of transition costs  Defensive motivation  Focus of executives is distracted from the core business
HR Due Diligence

Reasons for Financial underperformance

Source/Study Cited Drivers of M&A Underperformance Compared to the sector index, share price performance was 5.1% ahead of average price in deals where management proactively addressed culture. Compared to the sector index, shared price performance was -4.4% in deals where companies failed to address cultural issues.

Merger Integration: Why the Soft Issues Matter Most, Bain & Co, 2003

Success Factors in Acquisitions, PricewaterhouseCoopers, EBF, 2001

Acquisitions that ought to have been successful according to business criteria failed because of neglect of the human factors involved. Failure to tackle the people issues, such as retaining top talent and communicating effectively with the workforce, is one of the reasons why the majority of deals fail to meet expectations.

Tying the Corporate Knot- Effects of Merging companies with markedly different HR practices were three times Mergers and Acquisitions , American more likely to have significant productivity and turnover problems. Mgmt Association, 1989

HR Due Diligence

Reasons for Financial Underperformance

Source/Study "Merger Mania: Reshaping the Telecom Industry," Rural Telecommunications, 1997 Cited Drivers of M&A Underperformance 85% of respondents asserted that people problems were more likely to affect a merger's long term success than financial problems.

Acquisitions Horizons study, 1980s, cited in Price Pritchett, After the Merger: Managing the Shockwaves

The 2 top most reasons cited for the underperformance of mergers and acquisitions were 1) management talent in the acquired company was not as deep as expected 2) key talent left the firm.

85% of mergers and acquisitions underperformed due to differing management attitudes and culture. Delivering the Benefits of Mergers and Acquisitions, Coopers & Lybrand,1996. 80% of mergers and acquisitions underperformed due to a lack of integration and planning. 45% of mergers and acquisitions underperformed as a result of poor management practices at the acquired company.

HR Due Diligence

The DNA of an Organization

HR Due Diligence

HR Due Diligence

What is Due Diligence

 Pre-cursor to actual announcement of merger  Comprises of Cultural Due Diligence and HR Due Diligence

 Involves consideration of differences in the corporate culture of the companies and identifying issues critical to integration
HR Due Diligence

What is Due Diligence

 Helps management plan necessary actions for resolving them before the merger is announced

 Wider the cultural gap, more difficult will be the merger and more crucial will be the diligence phase
HR Due Diligence

Issues to watch out for

 Cultural and Talent Indicators  Workforce Assessment  Remuneration  Employment Agreements & Legal

Compliance
 Risks in Due Diligence
HR Due Diligence

Cultural and Talent Indicators

 Speak to key personnel about staff behavior.  Get feedback from key clients about services

quality, staff attitude, reliability.

 Get turnover data, compare it with industry

standards and look for potential problems.

 Get staff retention details  Identify the key talent needed to be retained.
HR Due Diligence

Workforce Assessment
 Obtain headcount allocations for each category.  Is the organization structure efficient or flabby.  What is the headcount requirement of the merged organization for each job category.  Do a skills requirement study. For example:
Technical qualifications for trade or technical organization. Soft skills for service oriented organization.
HR Due Diligence

Remuneration
 Critical, because large amount of time and money is expended.  Obtain remuneration data and compare with the labor market position for the industry.  Underpaid staff need to be brought to industry standards, not possible at one go  Overpaid staff need to be realigned sensitively.  Bonus schemes: Realign criteria for incentives in the new entity.
HR Due Diligence

Employment Agreements & Legal Compliances

 Check out for redundancy liabilities like transfers, leaves, trade unions, health & safety.  Do not overrate the value of complying with the law. It is important but not more than skill and behavior assessment.  Maintain a balance between time and efforts spent in alignment of people and skills versus drafting elaborate compliance procedures.
HR Due Diligence

Major Risks in Due Diligence

 Insufficient remuneration analysis could lead to loss of key

personnel.
 Minimal analysis of labor relations could ignore history of

labor conflicts.
 A new management team could be required if target

company s management team is not very forward looking or dynamic.

 Target company s management team could have troubles

adjusted to constraining culture if it is more entrepreneurial than acquiring company.

HR Due Diligence

Major Risks in Due Diligence

 If target company has more organizational layers, trimming

could be required and initially committed promise of not downsizing will be breached, leading to an atmosphere of mistrust.
 If analysis of compensation practice is insufficient and target

company has generous packages, there could be a post merger exodus of talent.
 If target company s management practices and culture is not

analyzed adequately, the acquirer may be unprepared for the extent of effort required for the cultural integration exercise.
HR Due Diligence

HR Due Diligence

People issues are critical, yet neglected

Possible reasons include:
 The belief that they are too soft, and, therefore, hard to manage  Lack of awareness or consensus that people issues are critical  No spokesperson to articulate these issues  No model or framework that can serve as a tool to systematically understand and manage the people issues; and therefore  The focus of attention in M & A activity is on other activities such as finance, accounting, and manufacturing
HR Due Diligence

HR Integration: Stages, Challenges and Solution

 The experiences of companies in merger and acquisition activity suggest a model of M & A activity that has three stages: Stage 1: Pre-combination Stage 2: Combination - Integration of the partners Stage 3: Solidification and advancement - the new entity
HR Due Diligence

Stage 1- Pre-Combination
HR Issues HR Implications and Actions

Identifying reasons for the M & A Forming M & A team/leader Searching for potential partners Selecting a partner Planning for managing the process of the M and/or A Planning to learn from the process

Knowledge and understanding need to be disseminated Leadership needs to be in place Composition of team impacts success Systematic and extensive pre-selection and selection are essential Conducting thorough due diligence of all areas is vital Cultural assessment Planning for combination minimizes problems later Creating practices for learning and knowledge transfer

HR Due Diligence

Stage 2: Combination: Integration of the Co.

HR Issues

HR Implications and Actions

Selecting the integration manager Designing/implementing teams Creating the new structure/strategies/ leadership Retaining key employees Motivating the employees Managing the change process Communicating to and involving stakeholders Deciding on the HR policies and practices

Selecting the appropriate candidate Creating team design and selection are critical for transition and combination success Communicating is essential Deciding on who stays and goes Establishing a new culture, structure, and HR policies and practices is essential

HR Due Diligence

What is Change Management

 Structured approach to transitioning individuals, teams, and organizations from a current state to a desired future state.  The current definition of Change Management includes both organizational change management processes and individual change management models, which together are used to manage the people side of change.

HR Due Diligence

Change Management Styles

Individual Change Management
        

Unfreeze Change Refreeze Kubler-Ross Formula for change ADKAR Dynamic conservatism The role of the management The constructionist principle (reflection, advocacy, inquiry) Scenario Planning Theory U of Otto Scharmer
HR Due Diligence

Organizational change management

Pitfalls of Poor Integration

 Productivity drops by 50%  Leadership attrition soars 47% within 3 years  Employee satisfaction drops 14%  90% of high-tech mergers fail to deliver expected increases  80% of employees begin to feel management cares more about financials than product quality or people
HR Due Diligence

Stage 3: Solidification and Assessment

HR Issues Solidifying leadership and staffing Assessing the new strategies and structures Assessing the new culture Assessing the new HR P & P HR Implications and Actions Elective leadership and staffing of the new entity are essential Creating and evaluating a new structure Melding two cultures needs assessment revision The concerns of all stakeholders need to be addressed and satisfied

Assessing the concerns of stakeholders The new entity must learn Revising as needed Learning from the process

HR Due Diligence

Role of HR Department in M&A activity

 Research indicates that only 35% of senior HR executives are involved in M & A activities.  80% of combinations fail at the implementation stage as a result of the following factors  an inadequate road map  senior HR professionals brought in too little, too late;  senior HR professionals lacking in either/both business/global experience;  an inadequate skills base overall; and ultimately, failed organizational change
HR Due Diligence

Major activities to be performed by HR

 Developing key strategies for a company's M & A activities.  Managing the soft due diligence activity  Providing input into managing the process of change  Advising top management on the merged company s new organizational structure
HR Due Diligence

Major activities to be performed by HR

 Creating transition teams  Overseeing the communications  Managing the learning processes  Re-casting the HR department itself
HR Due Diligence

New roles for the HR leader

 Partnership  Change Facilitator  Strategy Implementor  Strategy Formulator  Innovator  Collaborator
HR Due Diligence

Identifying and developing new competencies of HR leader

Business competencies Leadership competencies Change and knowledge management competencies
Consulting and communicating Group process facilitation Designing and working in flexible structure Partnering and parenting Negotiating Network building HR alignment

Industry knowledge Competitor understanding Financial understanding Global perspective/knowledge Strategic visioning Partner orientation Multiple stakeholder sensitivity Merger and acquisition knowledge

Strategic analysis Managing cultural diversity Creator of learning culture Planning skills Adaptability Learning facilitator Value shaper

HR Due Diligence

HR Due Diligence

HR Due Diligence

Synergies were expected in different areas.

 Complementary geographical markets  Unique Portfolio  Cost synergies in
 Purchasing  Integration & Financial Services  R&D  Sales & Distribution Infrastructure  Higher Sales

 Benchmarking each other and mutual learning processes

 Lean ways for Daimler  Engineering skills for Chrysler
HR Due Diligence

 The German part dominated the post-merger integration structure of the DaimlerChrysler AG.  Both companies prepared themselves for a merger.  Pre-merger preparations:
    First negotiations in 1995 PEOPLE: Chairmen, because of different expectations POWER: Chances at Daimler vs. Fears at Chrysler PURPOSE: maintain strength in technology vs. R&D investments and new markets

 The Integration Structure had a major German influence.

    Common Board with 18 members (10:8 for Daimler - 2 non-automotive businesses) Real power base Integration Council October 1999 there was a 2:1 majority for Daimler on the board Absorption Mode by Daimler

HR Due Diligence

Post Merger Scenario

 Daimler Chrysler merger proved to be a costly mistake for both the companies. Daimler was driven to despair, and to a loss, by its merger with Chrysler.  The merged group reported a loss of 12 million Euros  Culture clash  Ideology Clash

HR Due Diligence

The crucial point in the cultural differences was the Business Culture. National Culture influence e.g. attitudes to work, authority and equality. Working late hours vs. Working on deadlines Command lower-levels vs. Discuss with lower-levels Business Culture was what was critical, which was different in terms of organization structures, working styles, compensation schemes etc. STORIES: Rich successful engineering heritage vs. Self-made upcoming company SYMBOLS: Executive assistants vs. No convention, equality POWER: Chairman vs. Charismatic Executives ORGANIZATION: Hierarchic, bureaucratic Holding vs. Intuitive cross-functional structure CONTROL: Compensation schemes ROUTINES & RITUALS: Late hours vs. Deadlines; formal vs. informal It evolved to the dominant German culture. German Engineering vs. Cowboy Independence Compromises instead of digital decision Pick a spot in the middle

HR Due Diligence

 The revolutionary strategic change was managed by an interventional / directional approach.  REVOLUTION as style of strategic change.  Transformation  Big Bang.  Daimler tried an interventional approach although it was a directive managing style right from the beginning.  Intervention, Stallkamp as change agent  Fear of manipulation & resistance  Direction, Hold on  Crisis became obvious

HR Due Diligence

Recommendation
 No announcement as merger of equals .  Beware of national differences which can effect the business culture.  Observing business cultures better and digital decision right from the beginning.

HR Due Diligence

In the long run

It is clear that you cannot stay in the top league if you only grow internally. You cannot catch up just by internal growth. If you want to stay in the top league, you must combine.

- Daniel Vasella, CEO, Novartis

HR Due Diligence

HR +

= HR Rocks

Visit hrmba.blogspot.com for more presentations, project reports, notes etc.

HR Due Diligence HR Rocks !!!

HR Due Diligence