PRESENTATION

ON

THE HUMAN SIDE OF MERGERS AND ACQUISITIONS

SUBMITTED TO: Ms. Shweta Malhotra

SUBMITTED BY: Alisha Mahajan Nidhi Mishra

GITARATTAN INTERNATIONAL BUSINESS SCHOOL

The Human Side of Mergers and Acquisition

Merger and Acquisition:

The authors Anthony F. Buono and James Bowditch define Mergers as two companies combining to become one, and acquisitions as one company purchasing and taking over another. The Federal Trade Commission outlines five different types of mergers and acquisitions: 1. Horizontal: When the companies involved produce similar products or services in the same geographical market. 2. Vertical: When the companies involved had a buyer-seller type relationship prior to the merger or acquisition. 3. Product Extension: When the organizations involved are functionally similar regarding production or distribution, but create products that do not compete directly with one another. 4. Market Extension: When firms manufacture the same products but sell them in separate geographical locations. 5. Unrelated: When two completely unrelated companies combine or one unrelated company is acquired by another dissimilar company.

Reasons/ Advantages of Merger:

There are numerous reasons for companies to merge or acquire. Some of the most frequent include: Horizontal mergers for market dominance; economiesof scale Vertical mergers for channel control Hybrid mergers for risk spreading, cost cutting, synergies, defensive drivers Growth for world-class leadership and globalreach Survival; critical mass Acquisition of cash, deferred taxes, and excessdebt capacity Move quickly and inexpensively Flexibility; leverage Bigger asset base to leverage borrowing Adopt potentially disruptive technologies Financial gain and personal power Gaining a core competence to do more combinations Talent, knowledge, and technology today

Mergers and acquisitions are increasingly being used by firms to strengthen and maintain their position in the market place. They are seen by many as a relatively fast and efficient way to

expand into new markets and incorporate new technologies. Yet their success is by no means assured.

80% of Mergers are a failure

The reasons for lack of merger success are numerous and complex. However, often an employee supposes that upon completion of the M&A, it will be business as usual. The reality is that M&A needs to be recognized as a long-term plan, which will involve change. Thompson Dunn has observed the major challenge encountered by companies to be a lack of appreciation for differing cultures. As a company with an international client base, Thompson Dunn confronts this dilemma (individual values, beliefs and leadership styles) on a daily basis. Edgar Schein, writes that culture matters because it is a powerful, tacit, and often unconscious set of forces that determine both our individual and collective behavior, ways of perceiving, thought patterns, and values. It is absolutely crucial to understand this when organizing a merger, as these cultural elements determine strategy, goals and modes of operating. This could indeed be the fundamental factor that determines whether the new company is efficient and successful, or adds to the 80% of failures list.

Reasons for Failure of Mergers and acquisitions:

Mergers and acquisitions fail for a variety of reasons, often several simultaneously. Expectations are unrealistic Hastily constructed strategy, poor planning,unskilled execution Talent is lost or mismanaged Power and politics are the driving forces, ratherthan productive objectives Requires an impossible degree of synergy Culture clashes between the two entities gounchecked Transition management fails The underestimation of transition costs Focus of executives is distracted from the core business. Perhaps of these, culture clashes, gaps, or incompatibilityand losses of key talent are cited the most frequently, although even these become intertwined with other reasons (Bianco, 2000; Fairlamb, 2000b). Leadership Well-thought out goals and objectives Due diligence on hard and soft issues Well-managed M&A team Successful learning from previous experience Planning for combination and solidification stepscompleted early Key talent retained Extensive and timely communications to all stakeholders.

Impact of Mergers & Acquisitions on Human Resources:

Mergers and acquisitions have become a common phenomenon in recent times that synergies exist, allowing the two companies to work more efficiently together than separately. A merger is a combination of two companies to form a new company, while an acquisition is the purchase of one company by another with no new company being formed. The merging entities give a great 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 poorly managed HR issues. HR should play a significant role in all mergers and acquisitions long before the deal is executed. All areas of human resources and labor relations must be monitored and analyzed employment practices (job descriptions, classifications) compensation practices, etc. benefits (design & administration), organization design, training & development practices, performance management, safety and risk management, communications, employee relations. Differences in any of those areas may seem minor to leadership, but major to the employees who are impacted. Any decision to carry out a merger or acquisition should consider not only the legal and financial implications, but also the human consequences It is widely accepted, that the 'human factor' is a major cause of difficulty in making the integration between two companies work successfully. If the transition is carried, without awareness of the vast differences that may exist between corporate cultures, the result is a stressed, unhappy and uncooperative workforce and consequently a drop in productivity. Recent Mergers & acquisitions undertaken Some of those are :Hindalco acquired Canada based Novelis, Tata Steel acquired Corus Group, Dr. Reddy's Labs acquired Betapharm Ranbaxy Labs acquired Terapia SA and VSNL acquired Teleglobe. The process of mergers and acquisitions has gained substantial importance in today's corporate world. This process is extensively used for restructuring the business organizations. In India, the concept of mergers and acquisitions was initiated by the government bodies. Some well known financial organizations also took the necessary initiatives to restructure the corporate sector of India by adopting the mergers and acquisitions policies. The Indian economic reform since 1991 has opened up a whole lot of challenges both in the domestic and international spheres. The increased competition in the global market has prompted the Indian companies to go for mergers and acquisitions as an important strategic choice. The trends of mergers and acquisitions in India have changed over the years. The immediate effects of the mergers and acquisitions have also been diverse across the various sectors of the Indian economy.

Mergers and Acquisitions across Indian Sectors:

Among the different Indian sectors that have resorted to mergers and acquisitions in recent times, telecom, finance, FMCG, construction materials, automobile industry and steel industry are worth mentioning. With the increasing number of Indian companies opting for mergers and acquisitions, India is now one of the leading nations in the world in terms of mergers and acquisitions. The merger and acquisition business deals in India amounted to $40 billion during the initial 2 months in the year 2007. The total estimated value of mergers and acquisitions in India for 2007 was greater than $100 billion. It is twice the amount of mergers and acquisitions in 2006.

Major Mergers and Acquisitions in India

Recently the Indian companies have undertaken some important acquisitions. Some of those are as follows: Hindalco acquired Canada based Novelis. The deal involved transaction of $5,982 million. Tata Steel acquired Corus Group plc. The acquisition deal amounted to $12,000 million. Dr. Reddy's Labs acquired Betapharm through a deal worth of $597 million. Ranbaxy Labs acquired Terapia SA. The deal amounted to $324 million. Suzlon Energy acquired Hansen Group through a deal of $565 million. The acquisition of Daewoo Electronics Corp. by Videocon involved transaction of $729 million. HPCL acquired Kenya Petroleum Refinery Ltd. The deal amounted to $500 million. VSNL acquired Teleglobe through a deal of $239 million. When it comes to mergers and acquisitions deals in India , the total number was 287 from the month of January to May in 2o11. It has involved monetary transaction of US $47.37 billion. Out of these 287 merger and acquisition deals, there have been 102 cross country deals with a total valuation of US $28.19 billion.

The Human Side of Mergers and Acquisitions:

Plenty of attention is paid to the legal, financial, and operational elements of mergers and acquisitions. But executives who have been through the merger process now recognize that in today's economy, the management of the human side of change is the real key to maximizing the value of a deal.

The management of the human side of M&A activity, however, based upon the failure rates of M&As, appears to be a somewhat neglected focus of the top management's attention. People issues occur at several phases or stages of M&A activity. More specifically, people issues in just the integration phase of mergers and acquisitions include: (1) Retention of key talent; (2) Communications; (3) Retention of key managers; and (4) Integration of corporate cultures.

HR issues in three Stage Models of Mergers and Acquisitions In HR there are two phases: Pre-acquisition Post acquisition period. In pre-acquisition phase things which needs to be taken care of: 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. In post acquisition phase: power equation between management and trade unions needs to be dealt with utmost care. These are the issues which are very brittle. Designations for the employees compensation structure and performance appraisal systems. The three stages: (1) Pre-combination; (2) Combination and integration of the partners; and (3) Solidification and advancement.

HR Issues in the three Stages of M&A:

Stage 1: Pre-Combination

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

Stage 2-Combination and Integration

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 practice

Stage 3: Solidification and Assessment

Solidifying leadership and staffing Assessing the new strategies and structures Assessing the new culture Assessing the new HRM policies and practices Assessing the concerns of stakeholders Revising as needed Learning from the process

Top 5 HR Mistakes in Mergers & Acquisitions, and How to Avoid

Mergers & acquisitions are ways for companies to grow, acquire talent, and technologies or obtain synergies. Whatever the reason your organization might have, chances are, as an HR professional, youll encounter at least a few acquisitions throughout your career. HR can add a lot of value during the acquisition process and certainly should be involved. Here are the top 5 mistakes to avoid that are within HRs control. Doing so adds value by creating a much better experience for all parties involved: the acquired company, the acquiring business unit, and, for HR itself.

No. 1: Not being involved early enough

Human Resources can and should play an early and important role in acquisitions. There are many key decisions that can influence the rest of the acquisitions success, which HR can guide and influence. To be able to create an overall integration plan, HR needs to understand the incoming employee population: where they are, what they do, current compensation and benefits, and how all of these items fit into the current and future organization. Additionally, HR needs to help identify key employees and develop an appropriate retention strategy to ensure they will remain engaged and part of the new organization.

Not having HRs involvement in this planning and analysis risks creating problems and rework down the road. No. 2: Not understanding employees needs and concerns

Imagine for a minute that you are in these employees shoes: your work-world has been turned upside down, and there is a lot of uncertainty. Acquired employees need to be regularly communicated to in an open and honest way, and they need to be treated with respect, whether they are being retained or not. They should understand timelines, next steps, benefits and compensation all the things that can and will have a huge impact on them and their families. A thoughtful and well-planned process can have an enormous influence on the incoming employees motivation, morale and respect for their new employer. No. 3: Not involving and empowering the incoming leadership team

If you are retaining the acquired companys leadership team, you will want them to be motivated and excited about joining your organization. To do so, you need to involve them in your integration process immediately and ensure they understand items such as your culture, your critical HR processes and how to level, pay and review people. If they arent involved in these decisions from the get-go, engagement and trust issues will become inevitable. No. 4: Not working with the receiving business unit

You need to understand both the receiving business and the acquired company well in order to create a successful integration plan. For example, working with the receiving business unit ensures there is a connection between the leadership teams. HR has a unique opportunity and responsibility to get to know the acquired company well. HR should ensure there are no internal equity issues being created or any precedents being set that the business will later have to live with. No. 5: Underestimating the time, work that acquisitions & integration require

Acquisition work is a full-time job. To be effective and successful, you need fully dedicated resources that can really understand all the dynamics and complexities of the deal, execute in extremely tight timeframes, be able to respond to sudden changes and unexpected situations, and solve problems effectively and quickly. Having built-out processes, templates and proven integration and communication plans is invaluable.

Awareness and taking action on these common mistakes will make your acquisition integration much more successful and show the rest of your business just how much of an impact HR can really have.

Role of the HR Department in M&A activity:

1. 2. 3. 4. 5. 6. 7. 8. 9. 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 Overseeing the communications Managing the learning processes Re-casting the HR department itself Identifying and embracing new roles for the HR leader Identifying and developing new competencies

Role of HR department and HR professionals in Merger & Acquisition:

HR department plays an important role during a merger. The success or failure of a merger or acquisition deal depends upon to a large extent on the involvement of HR professionals. Many mergers fail to achieve their objectives because HR professionals are either not involved or are involved at a very late stage in the merger process. To ensure a successful merger, the HR department of the concerned companies should undertake the following activities: Formulating strategy- all companies should formulate a strategy before starting the process of a merger or acquisition. HR departments should be involved in formulating the strategy. Creating teams- HR department should form teams including members from both the companies. The team members should be trained to develop various types of skills. Creating structure- HR department should create a new organizational structure in line with the merged entity's new strategy.

Developing a communication plan- HR department should prepare a communication plan so that information is collected and delivered to the right people at the right time. Creating a transition system- HR department should also prepare a blueprint of the new HR systems, like compensation and performance appraisal system to avoid confusion after the merger.

Steps for Successful Merger & Acquisitions:

There are several steps organizations can take to increase the overall likelihood of a successful merger/acquisition:

Set up formal communication channels as early as possible in the process Send out newsletters about the merger/acquisition Create hotlines that answer questions about the combination Provide honest answers Conduct surveys to gain employee feedback

Provide counseling services about the merger/acquisition. Organizations must also take the time to prepare their members for the coming corporate changes, otherwise the merger or acquisition will be met with resistance. The psychological effects of combination stresses can be grouped into five different manifestations:

1. 2. 3. 4. 5.

Uncertainty and anxiety Grief, loss, and termination Obsession with the combination Decreased trust levels Self-centered activities

Companies about to embark on a merger or acquisition should compare organizational cultures with one another beforehand. There are four different kinds of cultural combination strategies that can be employed:

1. Cultural Pluralism: When both organizations allow each other to operate autonomously. 2. Cultural Blending: When both firms want to blend their cultures together into one new and unified culture. 3. Cultural Takeover: When the culture of the dominant firm replaces the culture of the acquired firm. 4. Cultural Resistance: When there is a lack of attention paid to the differences between the organizational cultures in the combination process and cultural conflict occurs.

Best practices followed by HR during Merger & Acquisitions:

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

Culture Compatibility: An important issue in M&A

It's important to identify cultural areas of dissonance so that people can dispel misconceptions and begin creating a culture that's right for the new organization. That's often left until after the final papers are signed, which is risky because culture mismatches can be the Achilles' heel of many deals. Often, the most seemingly inconsequential programs and policies have great symbolic impact. Practices regarding casual dress, attitudes about long hours, and how offices are apportioned are deeply ingrained and must be dealt with. One can't consider culture compatibility without touching on the different views that the acquirer and the acquired have about the new company. The acquirer assumes that the new company will closely resemble the original but with greater mass and capabilities. The acquired company expects that many of its strengths will be crucial to the new company. For example- Exxon-Mobil Merger The Exxon-Mobil merger had to overcome many cultural problems. Although the merger involved American companies, unlike the Dailmer-Chrysler merger, considerable differences in culture and work style had to be dealt with. Exxon was known for its conservative culture, whereas Mobil was known for its bold and robust nature. These differences in culture were reflected in their corporate symbols. Exxons symbol was a stalking tiger, whereas Mobils symbol was a flying horse. The tiger represented Exxons conservative approach while the flying horse represented Mobils open and transparent culture. At Exxon even the smallest thing was planned and executed carefully, whereas at Mobil new ideas and risk taking were always encouraged. Exxon took a lot of time to take decisions because of bureaucratic structure, whereas at Mobil even risky decisions were taken quickly. (Source: ICMR)

Acquisition strategy of GE Capital The GE Capital uses a successful model called Pathfinder for acquiring firms. The model disintegrates the process of M&A into four categories which are further divided into subcategories. The four stages incorporate some of the best practices for optimum results. The pre-acquisition phase of the model involves due diligence, negotiations and closing of deals. This involves the cultural assessments, devising communication strategies and evaluation of strengths and weaknesses of the business leaders. An integration manager is also chosen at this stage. The second phase is the foundation building. At this phase the integration plan is prepared. A team of executives from the GE Capital and the acquiring company is formed. Also a 100 day communication strategy is evolved and the senior management involvement and support is made clear. The needed resources are pooled and accountability is ensured. The third is the integration phase. Here the actual implementation and correction measures are taken. The processes like assessing the work flow, assignment of roles etc are done at this stage. This stage also involves continuous feedbacks and making necessary corrections in the implementation. The last phase involves assimilation process where integration efforts are reassessed. This stage involves long term adjustment and looking for avenues for improving the integration. This is also the period when the organization actual starts reaping the benefits of the acquisition. The model is dynamic in the sense that company constantly improves it through internal discussions between the teams that share their experiences, effective tools and refine best practices. Acquisition strategy of Cisco The acquisition strategy of Cisco is an excellent example of how thorough planning can help in Successful acquisitions. After experiencing some failures in acquiring companies, Cisco devised a three step process of acquisition. This involved, analyzing the benefits of acquiring, understanding how the two organizations will fit together how the employees from the organization can match with Cisco culture and then the integration process. In the evaluation process, Cisco looked whether there is compatibility in terms of long term goals of the organization, work culture, geographical proximity etc.

For example: Cisco believes in an organizational culture which is risk taking and adventurous. If this is lacking in the working style of the target company, Cisco is not convinced about the acquisition. No forced acquisitions are done and the critical element is in convincing the various stakeholders of the target company about the future benefits. The company insists on no layoffs and job security is guaranteed to all the employees of the acquired company. The acquisition team of Cisco evaluates the working style of the management of the target company, the caliber of the employees, the technology systems and the relationship

style with the employees. Once the acquisition team is convinced, an integration strategy is rolled out. 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. After the acquisition, employees of the acquired firm are given 30 days orientation training to fit into the new organizational environment. The planned process of communication and integration has resulted in high rate of success in acquisitions for Cisco. Mahindra deserves to be complimented for not forgetting the people-aspect in his moment of glory. For, while sewing up the legal, financial and operational elements of an acquisition, most companies forget that M&As are not just about balance sheets, cash flows or marketing synergies; they are also about people who make the synergies happen. There are several reasons why Mahindra made conscious efforts to reach out to Satyam's employees. First, Tech Mahindra has less than half the workforce of Satyam and needs people. Second, its talent pool mainly specialises in the software skills related to telecom. So the company needs to retain Satyam employees who have non- telecom domain skills. Third, Satyam's employee strength has already come down to 48,000 -- it was 53,000 before the scam broke out. Many of its top executives who were running key verticals and geographies have already left the company and joined the clients they were servicing. For example, Subu Subramanian who headed the manufacturing and automotive vertical, and Anil Kumar who headed the financial sector of Satyam's BFSI segment -- responsible for handling 23 per cent of the Satyam's revenues -- have left. Land Rover and BMW Rover was the new name for what had been the car business of British Leyland (BL) a business that included names such as Rover, Morris, Austin, Austin Healey, Wolseley, Riley, Land Rover and MG. It had been formed through a series of mergers aimed at making a group large enough to compete in the world car market. In 1985, the Thatcher Government had talks about selling BLs car business to Ford and the truck & bus business to General Motors but neither deal got off the ground. In the end, it was sold to British Aerospace (BAe), was re-christened Rover and a partnership formed with Honda (which worked with Rover from 1979 to 1988) to provide the basis for new models. Honda also helped by introducing lean production techniques but Rover did not really have a learning culture. There were strong trade unions that resisted improvements to efficiency where this was seen to lose jobs. BAe was itself in financial difficulties in 1991 and many effiencies were forced through in order to cut costs. This led to the sale of Rover to BMW for 800m in 1994. BMW itself was looking for ways to increase its volume and its board felt there were few possible purchases available. They were attracted by many of the iconic brands such as Mini and Land Rover at this time, BMW did not make 4WD vehicles although one was under development.

BMWs mistakes: Lack of proper due diligence; clash of cultures; poor leadership. According to various reports and analyses of the takeover, there were three major problems facing BMW. Firstly, BMW did not do enough due diligence, completing a deal in only 10 days. That is to say, they did not look closely enough at the operation of the businesses within Rover. Had they done so, they may have had a much better view of Rovers problems such as inaccurate sales data. A closer look at the business would also have revealed he second problem; a cultural clash. As mentioned earlier, Rover did not have much of a learning culture. The company had a not invented here attitude that is to say that they were sceptical of other approaches to manufacturing. The business had become much more lean under BAe but had done woefully little research and development; its designs were mostly out-dated, although the work with Honda had actually improved quality close to BMWs standards. The third problem was poor leadership. The BMW board was split over whether Rover should have been acquired and more directors resigned in the one year after the acquisition than in the previous forty. This must be a reflection on the inability of then CEO, Berndt Pietschrieder to lead his board and management through the merger. Because some of the BMW executives were not commited to the acquisition, Rover never received the investment it needed to develop a BMW 2 Series equivalent to replace its ageing 200 series. At the lauch of the new Rover 75, some BMW executives were publicly saying that they planned to close the Longbridge plant. Postscript BMW owned Rover from 1994 to 2000 by which time the company was piling up losses at a rate of 2million a day. The Rover Longbridge plant was sold to Phoenix Consortium for just 10. Phoenix ownership saw further decline in what was now known as MG Rover; the plant was eventually sold off to a Chinese company for 53 million and MG cars are being produced in small numbers. BMW sold Land Rover to Ford for 1,800 million, sold other assets at market value and kept the Cowley Plant which has received major investment to develop the new Mini. At the time of the Rover acquisition, BMW was described as a company that makes one saloon in three different sizes. It had nothing like the diverse product range it does today with compact saloons, coupes and 4WD vehicles all developed internally. The only parts of Rover it still owns are Mini and an engine plant at Hamms Hall. The merger of BMW and Rover failed because of cultural differences, poor leadership and poor due diligence; if BMW had fully understood what it was buying, they may not have done the deal, done a different deal for selected assets, or bought at a lower price. BMW has, however, re-launched the Mini with great success and in fact sold other assets from the Rover Group at a profit or at market value. BMW leadership at the time was worried that it was being left behind with VW Audi having acquired Skoda and Seat whilst rival Mercedes Benz had beaten them to

the launch of a 4WD vehicle. In fact, BMW now has a product portfolio (including Mini) that is highly competive with both these companies - albeit without a volume car business. Although there was a lot of pain in the BMW acquisition of Rover, perhaps it should not be seen as an outright failure after all.

CONCLUSION Merger and Acquisitions success entirely depends on the people who drive the Business, their ability to Execute, Creativity, and Innovation. It is of utmost importance to involve HR Professionals in Mergers and Acquisitions discussions as it has an impact on key people issues. As Mergers and Acquisitions activity continues to step up globally, Companies involved in these transactions have the opportunity to adopt a different approach including the increased involvement of HR professionals. By doing so they will achieve a much better outcome and increase the chance that the overall deal is a total success. HR professionals can play an active role in the change process by offering interventions that will help ensure a successful merger.