A merger is the result of an agreement between two companies to join their operations together.
Partners are often equals. For example, the DaimlerChrysler merger was supposed to be a merger between equals in its first stage.13 More information about this merger and its eventual lack of success can be found in IHRM in Action Case 4.1.
An acquisition, on the other hand, occurs when one company buys another company with the interest of controlling the activities of the combined operations.14 This was the case when the Dutch steel company Mittal, ranked second by volume in crude steel production in 2006, initiated a hostile takeover of the Luxembourg-based Arcelor group, ranked first in the same statistic.15
Figure 4.2 shows that a merger usually results in the formation of a new company while an acquisition involves the acquiring firm keeping its legal identity and integrating a new com- pany into its own activities. The HR challenge in both cases consists of creating new HR prac- tices and strategies that meet the requirements of the M&A.
Company A Company B Company A Company B
Company A and Company B form together the new
Company C
Company A buys Company B
Company A Merger
Intra-acquisition HR challenge Intra-merger
HR challenge
Acquisition
Within the context of this international volume, our focus will be on cross-border mergers and acquisitions. This means that firms with headquarters located in two different countries are the focus of our attention. Many of the HRM challenges faced in M&As are similar, and for this reason we will not further differentiate between these two entities, but summarize them and use the abbreviation M&A. The United Nations Conference on Trade and Development (UNCTAD) defines cross-border M&As as follows:16
Cross-border M&As involve partial or full takeover or the merging of capital, assets, and liabilities of existing enterprises in a country by TNCs [transnational corporations] from other countries. M&As generally involve the purchase of existing assets and companies.
FIGURE 4.2 The formation processes of M&As and HR challenges
IHRM in Action Case 4.1
HR in the DaimlerChrysler merger
The merger
The merger between Chrysler and Daimler Benz was one of the largest in history. Both companies had started to screen the automobile industry for partners in 1997. In early 1998 Jürgen E. Schrempp, Chief Executive Officer (CEO) of the German-based Daimler Benz company, took the initiative and suggested a merger to Robert J. Eaton, CEO of the American-based Chrysler corporation. The merger contract was signed in May 1998.
HR in the different phases of the M&A
At the beginning of the merger ‘soft’ people skills were not an important issue to consider. Even in the second phase when the merger was negotiated, HR issues continued to play a minor role. Negotiations were dominated by legal and financial aspects. Due to the strict secrecy at this stage, the corporate HR directors from both com- panies were not informed nor involved.
In the integration planning phase in August 1998, management teams from both firms developed strategies for the merged company. These teams identified a number of issues that had to be dealt with during the post-merger integration. With respect to HR, one important challenge was to solve the remuneration problem: the German top managers earned much less than their American counterparts. The contrary was the case for the lower manage- ment levels. It was decided that the salaries for the German top managers who had international responsibility would be raised to the US level. For a broader group of German managers a component of their salary would be linked to the company’s profit and its share price. At this stage all employees were informed using various media such as letters, the intranet, or films. Furthermore, there were early evidence pointing to unforseen cultural issues in the merger. The new board was composed of 18 members, including both Schrempp and Eaton as chairmen, eight board members from Chrysler and the same number from Daimler-Benz, plus two from the Daimler subsid- iaries Dasa and Debis.
During the post-merger integration phase mixed teams worked on more than 1000 projects identified by the post-merger integration co-ordination team. Only 43 projects were in the area of HR. They addressed topics such as corporate culture, employee profit-sharing, leadership styles, labor relations, global job evaluation, exchange programs and management development. It is important to note that the board member responsible for HR was not included in the ‘Chairman’s Integration Council’, the core of DaimlerChrysler’s management structure during the post-merger integration phase. Within the first two years of the merger, DaimlerChrysler lost about 20 top executives, mostly from the Chrysler side. There is little evidence of a systematic retention program for this lev- el. During the information campaign for the other levels, the focus was on job security. Only two years after the merger, DaimlerChrysler executives had admitted that the merger was experiencing cultural problems. Examples included inappropriate humor, political correctness, perceived excessive formality, sexual harassment, private relationships and documentation of meetings. The company offered intercultural training for executives and man- agement exchange programs.
Long-term effects
In 2000, profitability at Chrysler had sharply dropped and there was a 20 per cent decline in the DaimlerChrysler share price. At that time, the market capitalization of DaimlerChrysler was little more than that of Daimler-Benz before the merger. Some years later, at the beginning of 2007 and after important financial losses, mainly on the
Cross-border M&As have seen tremendous growth over the last two decades, in part because of the phenomenon of globalization. Although cross-border M&As are down from the historic high of 2007, “the value of cross-border M&A purchases [. . .] rose to US$441 billion, a 136%
increase over the same period of 2014”.18 This is depicted in Figure 4.3.
Chrysler side, the media was discussing the possibility of a separation of Daimler and Chrysler. Although Chrysler had to close several production plants and cut around 40,000 jobs following the merger, it continuted to experi- ence problems after the merger, which was a significant problem for the combined company.17 These problems seriously affected the success of the merger between Daimler and Chrysler and eventually led to a separation of the two partners in due course.
Source: Adapted from T. Kühlmann and P. J. Dowling, ‘DaimlerChrysler: A Case Study of a Cross Border Merger’, (pp. 351–363) in Mergers & Acquistions: Managing Cultural & Human Resources by G. K. Stahl and M. E. Mendenhall. Copyright © the Board of Trustees of the Leland Stanford Jr. University, 2005. All rights reserved.
Used with the permission of Stanford University Press, www.sup.org.
700
441
+136%
600 500 400 300 200 100 0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1
FIGURE 4.3 Mergers and acquisitions, 2005–2015 (billions of US$)
One major reason to engage in mergers or acquisitions is often to facilitate rapid entry into new markets.19 Thus, “mergers and acquisitions are a predominant feature of the international business system as companies attempt to strengthen their market positions and exploit new market opportunities”.20 Some of the factors that a firm takes into consideration when decid- ing on a target country include: the growth aspiration of the acquiring company, risk diversi- fication, technological advantages, a response to government policies in a particular country, exchange rate advantages, favorable political and economic conditions, or an effort to follow clients.21
Source: ©UNCTAD, cross-border M&A database (www.unctad.org/fdistatistics)
Despite the high yearly growth rates in the area of M&As, there seems to be a gap between the expected added value and the benefits realized from an M&A.22 However, there is growing appreciation that the way in which the M&A is managed during the different phases (especially in the post-merger integration phase) has an impact on its performance, and in turn on the added value created.23 M&A management has been inves- tigated from many different perspectives. The work of Larsson and Finkelstein24 provides an excellent overview of M&As from different research fields, including strategic man- agement, economics, finance, organizational theory, and HRM.25 Of course, all sources of research are important when explaining the phenomenon of M&A success.
For the purposes of this chapter, we are going to focus solely on HR and its role in employee relations. The quality of employee relations, ranging from employee support to employee resist- ance, is influenced by variables such as the similarity between the management styles of the two organizations,26 the type of cross-border combinations, the combination potential in terms of efficiency gains or the extent of organizational integration. There is evidence that employee resistance endangers M&A performance as it may hinder synergy realization.27 For this reason, it is important that all M&As try and effectively manage issues where employee resistance is encountered, in order that employee support can evolve. This is a process in which the HRM function can play a crucial role.
A study by Birkinshaw et al.28 found that the integration of tasks29 between two com- panies is interdependent with human integration. The dimensions of human integration in this study included visibility and continuity of leadership, communication processes during integration, integrating mechanisms used, acquired personnel retained, and voluntary per- sonnel lost. Task and human integration interact in different phases to foster value creation in acquisitions:
In phase one, task integration led to a satisfying solution that limited the interaction between acquired and acquiring units, while human integration proceeded smoothly and led to cultural convergence and mutual respect. In phase two, there was renewed task integration built on the success of the human integration that has been achieved, which led to much greater interdependencies between acquired and acquiring units.30
Birkinshaw et al. conclude that the human integration process is especially difficult to manage and takes time. Complexity and the length of the integration process increase even more in the case of cross-border alliances.31 One reason for this is that both of the firms undergoing acqui- sition processes are embedded in their own national, institutional, and cultural settings (see Chapter 2).32 Typical problems that arise in cross-border M&As involve the following:
● Within the first year of a merger, it is not uncommon for a company’s top management level to lose up to 20 per cent of its executives. Over a longer time frame, this percentage tends to increase even further.33
● Personnel issues are often neglected, delayed or not made a priority.34
● Finally, a high number of M&As fail or do not produce the intended long-term results.35
When a firm is acquired by another firm, it constitutes an existing workforce. Considering this fact, we will describe the typical phases characterizing cross-border M&A processes and outline which HR practices are significant at each of the different stages. It is important to note that the extent to which these HR practices are carried out very much depends on the extent to which integration of the two companies is a mutual objective . In the case of low integration (e.g. if the M&A is carried out mainly for portfolio reasons) both companies remain separate cultures. However, in the case of high integration, it is crucial for the M&A to meet the HR requirements of the different phases, which will be outlined in the next section.36
M&A phases and HR implications
Typically, mergers and acquisitions are characterized by a series of phases. Depending on the publication, these phases will have different names. However, the M&A process usually con- sists of the following four steps:
1 A pre-M&A phase, including a screening of alternative partners based on an analysis of their strengths and weaknesses.
2 A due diligence phase,37 which focuses more in-depth on analyzing the potential benefits of the merger. Here, product-market combinations, tax regulations and compatibility with respect to HR and cultural issues are of interest.38
3 The integration planning phase, based on the results of the due diligence phase, where planning for the new company is carried out.
4 The implementation phase, where the plans are put into action.
Various studies have shown that the HR department becomes increasingly involved in the phases of M&A integration as the process evolves. For example, a study conducted in Germany of 68 M&As revealed that HR issues are only seriously considered once the integration strategy has actually been defined.39 Schmidt refers to a study of 447 senior HR executives who represent mainly large companies with more than 1000 employees. Most participants were from North America, supplemented by companies from Europe, Latin America and Asia. He found that those companies which involved the HR department early in the process were more successful than others with late HR involvement.40 Both studies showed that the strongest involvement of the HR department took place in the last two phases of the M&A process. From this study Schmidt has derived best practices, which should be considered in the different M&A process phases. They are complemented by culture-specific aspects, which are of special importance in cross-border M&As (see Figure 4.4).
An analysis of the data gathered in the context of the Cranfield Network on International Human Resource Management (CRANET) shows that the following HRM measures have an
Estimating people-related
• Transactional costs
• Ongoing costs
• Savings
• Identifying and assessing cultural issues
Due diligence phase
Integration planning phase
Implementation and assessment phase
Pre-M&A phase
• Identification of people-related issues
• Planning for due diligence
• Assessing people
• Working out the organizational/cultural fit
• Forming the M&A steering team
• Educating the team on the HR implications
• Developing employee culture-sensitive communication strategies
• Designing key talent retention programs
• Planning and leading integration efforts
• Developing a new strategy for the new entity
• Helping the organization cope with change
• Defining an organizational blueprint and staffing plan
• Managing ongoing change, especially cultural change
• Managing employee communications
• Advising management on dealing with people issues
• Aligning HR policies, especially total rewards
• Monitoring the process of organizational and people-related integration activities
• Ensuring the capture of synergies via incentives
• Initiating learning processes for future M&As
FIGURE 4.4 HR activities in the phases of a cross-border M&A
Based on information in the article ‘The correct spelling of M&A begins with HR by Jeffery A. Schmidt, HR Magazine, June 2001.
(c) 2001, Society for Human Resource Management, Alexandria, VA. Used with permission. All rights reserved.’
important effect on the success of mergers and acquisitions: increasing involvement of HRM in the strategic decision-making processes of the firm, formalization of HR practices, support of the creation of organizational capabilities through training and development activities, and development of line managers and internal labor markets. These aspects seem to be independ- ent from the consideration of specific M&A phases.41
IHRM in Action Case 4.1 analyzes the case of the DaimlerChrysler merger with respect to the M&A phases and briefly outlines which HR measures were taken. If you compare the information given about the DaimlerChrysler merger with the list of HR activities outlined in Figure 4.4, you can analyze the strengths and the weaknesses from an HR perspective. What lessons could be learned from this process?
Strategic HRM and the role of the HR function in M&As
Aguilera and Dencker42 suggest a strategic approach to HR management in M&A processes.
Based on strategic HRM literature suggesting a fit between business strategy and HR strategy, they argue that firms should match their M&A strategy with their HR strategy while relying on three conceptual tools:
Resources are defined as tangible assets such as money and people, and intangible assets, such as brands and relationships. In the context of HRM in M&A decisions about resources involve staffing and retention issues, with termination decisions being particularly important. Processes refer to activities that firms use to convert the resources into valuable goods and services. For example, in our case, these would be training and development programs as well as appraisal and reward systems. Finally, values are the way in which employees think about what they do and why they do it. Values shape employees’ priorities and decision-making.43
These ideas deliver starting points for developing HR strategies for the newly created entity and provide a basis for consideration of how to meet the intra-merger or intra-acquisition HR challenges outlined in Figure 4.1. Taking a strategic approach and aligning the HRM activi- ties with the M&A strategy with respect to resources, processes, and values is a challenging task for the HR manager to perform: the HR manager must develop a set of integrated HR activities which are not only in line with the business strategy but with the M&A strategy as well.44 Based on the work of Ulrich (1997),45 the HR function can take the role of strategic partner (i.e. management of strategic HR), administrative expert (i.e. management of the firm’s infrastructure), employee champion (i.e. management of the employee contribution), or change agent (i.e. management of transformation and change). In each phase of the M&A process each role involves different activities.
Rees and Edwards46 see an emerging integrated HR strategy within M&As, mainly as the result of the interplay of the various intraorganizational micropolitical forces and the influence factors from the institutional and industrial environment. M&As may provide an excellent basis to reconsider the HR strategy of a company and to place the HR function in an important position as a key actor responsible for intercultural integration and consideration of the legal environment of the various labor markets. However, there is a danger that, due to unfavorable micropolitical conditions within the merger, a company may not utilize the full strengths of its HRM function.
The role of expatriates in M&As
The role of expatriates has been discussed with respect to knowledge transfer between the acquiring and the acquired company. However, the transfer of embedded knowledge is not guaranteed by each international assignment. While some studies have revealed the importance of prior working experience with a specific host country or with a particular entry mode as a
success factor for expatriates involved in the integration of mergers,47 this has not been con- firmed for acquisitions. In a study by Hébert et al., prior experience did not have an impact on the performance of the acquired firm.48
In contrast to these findings, the above-mentioned study on M&As in Germany revealed that successful integration is dependent upon managers’ industry experience, experience with similar projects and, particularly in the case of cross-border alliances, level of intercultural competence.49 An emphasis on industry experience is in line with the suggestion by Hébert et al., who state that industry experience is an important asset when staffing an acquired subsidi- ary with an expatriate, because it can lead to a transfer of best practices.50
These arguments have implications for the staffing of the post-merger integration team.
Hébert et al.51 suggest that acquiring companies should not completely rely on the placement of expatriates within the top management team of an acquired subsidiary. They suggest cre- ating a strong team including a mix of both groups – expatriates and local members of top management – and recommend that acquisition integration be viewed as a collective learning process.
A study by Villinger of 35 acquisitions by Western MNEs in Hungary, the Czech Republic, Slovakia and Poland found that post-acquisition managerial learning52 highlights the impor- tance of appropriate cross-border management skills. The author emphasizes that local lan- guage skills as well as sensitivity towards cultural differences are crucial for M&A success. It is especially important to note this when companies from developing countries represent the acquired firm in the M&A process. As Villinger53 notes:
Interestingly, although language and communication problems are clearly pointed out as the key barrier to successful learning from both sides, there seems to be a consensus that the command of the partner’s language is mainly a requirement for eastern managers, and significantly less so for western partners. This may be surprising, as it can lead to a situation in which a hundred eastern european managers have to learn German, instead of a small number of German expatri- ates learning the local language. However, it may be argued that the language chosen for (future) communications will depend on the expected direction of ‘the flow of learning’ between the two partners.
A comparative approach to HRM in M&A processes
While it seems possible to identify the typical phases of M&A processes across nationalities and industries, the content of the HR measures appears to depend very much on the national- ity and culture of the companies involved in the M&A – a specific application of our previous discussion of ‘country of origin effect’ in Chapter 2. Child et al.54 highlight the following HRM policy characteristics for the different countries of their investigation (USA, Japan, Germany, France, and the UK):
● Performance-related pay is more popular in the USA than in Japan or Germany.55
● Recruitment in the USA tends to be rather short-term compared to Germany, France, and the UK.
In Japan the lifetime orientation is now less prevalent, but there is still a longer-term focus than in the other countries.56
● Training and career planning is most extensive in the USA.
Despite the fact that there are signs of convergence in HR practices across countries due to the increasing globalization of markets, the cultural and institutional differences between MNEs and the resulting impact on HR still seems to be important.57 This seems to also hold true when M&A processes are concerned and especially in the post-integration phase. Child et al.58 summarize the results of their case study research as follows: