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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, USA 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 experiencing fewer
M&As in 2017 (watermarkadvisors.com, 2017)

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 (Andrew1998). 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. (1996) Leading Change. Boston: Harvard Business School
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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.
Merger and Acquisitions - M&A INVESTOPEDIA [Online]. Available
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ns.asp>. [Accessed on 5th May 2018].
Patrick A.G. (2015). Mergers, Acquisitions, and Corporate
Restructurings. 6 ed. New Jersey, John Willey & Sons.
th

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 <https://daily mirror.lk/article/Germany-s-Allianz-
acquires-Janashakthi-s-general-insurance-business-for-Rs-bn-
145144.html>. [Accessed on 26 May 2018).