When Change Professionals Can Save You Millions

Mergers and acquisitions create the most dramatic changes that most people will experience at work.  Despite being widely seen as a way of surviving in the global marketplace, they often fail to produce the results anticipated when the courting organizations first plan their match.

A recent survey of 78 businesses that had been through a merger or takeover in the past three years found that only 16% of respondents thought that it had been 'very successful' financially.  Nearly 70% described it as 'reasonably successful', while 11% said it had been 'totally unsuccessful'.

Asked how successful the process had been in terms of its effect on employees, around 19% thought it had been 'very successful', 52% said 'reasonably successful' and 27% said 'not at all successful'.  Poor communication, poor management and cultural gaps between the two organizations were given as the main reasons why, in human terms, mergers often fail.

Parallel research has corroborated these findings, citing a lack of attention to people issues as the principal cause of merger failure.  It has been found that such concerns are invariably low on the agenda when it comes to mergers.  Yet whatever the business rationale behind the change, the subsequent motivation and performance of people – and hence the performance of the new organization – are strongly affected by the way in which human resource (HR) issues are handled.

The research was developed from interviews and focus groups with HR practitioners and senior managers from 40 organizations in widely differing industries.  It included 13 detailed case studies, including Halifax, Homebase, Kvaerner, Shell and Whitbread.

Three important phases in a merger were identified: the run-up period; the immediate transition covering the first six months; and the longer term integration of the two organizations.


Poor Communication Leads to the Loss of Valuable Personnel

The importance of communication cannot be overemphasised, not least during the pre-merger phase.  For example, 18 months ago a manufacturing firm based in the UK accepted a takeover bid from a Swiss company.  The management team was pleased initially, because it had been looking for a buyer for some time.  Since then there has been little contact between the two, leaving the British firm in the dark about its buyer's plans.  In effect, the business is now in a state of limbo.  Some senior managers have jumped ship, while others are thinking of leaving.  There has been no new product development or investment and customer orders are dropping off.  The absence of dialogue has led to suspicion, demoralisation, the departure of key staff and lost business – and all before any contract has been signed.

Conversely, when the Bristol & West Building Society was looking for a partner to bolster its position in the marketplace, it quickly identified the Bank of Ireland as a potential buyer.  The merger took place after a period of relationship building between the management teams of both organizations.  Having taken time to understand each other's skills and attributes, the two found that they were complementary businesses and did not need to integrate fully.  As a result, the Bristol & West now have the stability of a large financial partner while, as far as employees are concerned, it is business as usual.

The starting point for communication is usually the merger announcement itself. This is nearly always an extremely sensitive issue.  In a very recent study, it was found that the workforce of one company first heard of its impending acquisition on a local radio news bulletin.  There was no formal internal announcement for a further three days.

A mishandled merger can lead to the loss of people – the vulnerable asset that often constitutes the market value that attracted the purchaser in the first place.  Employees' performance can fall sharply if senior decision makers do not take account of their emotional responses at the outset.

One of the reasons why 'people' issues get pushed down the business agenda is that the senior managers often feel threatened themselves, so they concentrate on covering their own backs before considering the employees.  A typical example was one managing director who waxed lyrical about the merits of a forthcoming merger while staff all around were fearing for their jobs.  Another reason is that senior managers often feel that they have experienced similar unpleasant circumstances and survived in the past and they want people like themselves to be the ones to survive the current atmosphere.

Once senior managers have secured their positions, they often find it difficult to understand that other people cannot see the opportunities presented by the merger.  It is thus essential in the pre-merger phase to explain to staff the business reasons for the merger, and to clarify expectations and priorities.  Senior managers need to build relationships, and HR practitioners should help them to plan through the people implications, both short term and long term.  In practice, HR practitioners are often excluded from this process because they lack the credence to put their case in the boardroom.  And yet this is precisely where the key decision makers should be thinking through the structure of the new organization.  Important issues will include what sort of culture it should have, the size, cost and spread of skillsets its people should have, along with the new HR strategy and the minutiae of pension arrangements and redundancy agreements.


Confusion and Fear

Confusion is usually the order of the day in the immediate aftermath of a merger.  Employees' fears tend to peak at this time, as issues such as pay, conditions and redundancies are dealt with, normally far slower than suggested by senior management.  Boardroom battles are also common.  The power balance in the new organization is often shown by the way in which new posts are allocated.  Such choices have huge symbolic importance – all the talk may be of a merger, but if managers from one firm get all the plum jobs, it will soon be seen as an acquisition.

Another key aspect of the transitional phase is ongoing communication.  One firm gained popularity by hiring consultants to coordinate team briefings and roadshows to explain the reasons behind the merger.  Unfortunately, when the consultants left at the end of their six-month contract, the communication suddenly ceased.  This created a new wave of uncertainty in the acquired company and demonstrated the importance of using consultants who are committed to encouraging independence and learning in their clients.

In the months following a merger the key HR role is to help senior managers understand the turbulence that their decisions can cause.  For example, when rationalising pay and benefits, it is important to try to ensure that everybody stands to gain, which may mean explaining the full extent of the relevant benefit packages to all employees.  People will react badly if they do not feel they are on 'the winning team'.

The post-merger phase is really about how the merged or acquired company is integrated into the initiating organization.  Some are integrated into a shared culture or into the acquiring company's culture; others prefer to keep the two businesses independent.  But, sooner or later, everyone will be affected by the process, because it will result in fundamental changes to both organizations.

This phase places huge demands on the management capability of the new business.  Senior and middle managers normally need considerable training and development in order to cope with the demands of the larger organization.  If they do not receive this training, then the company’s efficiency and profitability will be negatively hit.  The scale of the skill change required is usually not anticipated until the bottom line has been affected and it is rare that management makes a link between the lost opportunities and inefficiencies and its failure to invest in its people properly.

Culture clashes are a common characteristic of this period, as people from the different companies start to work together.  For example, if 'entrepreneurs' merge with 'bureaucrats', different work methods will reflect different values.

Typically, around two years after the merger or acquisition, a third culture emerges which usually mixes elements of its forerunners.  So combining entrepreneurs and bureaucrats, for instance, would ideally produce a culture that retains the quick response of the former group and the discipline of the latter.

Interestingly, the people who lose out in the first days of a merger – because their jobs are downgraded – often blossom in the new organization.  This could be because they are more prepared to adapt, learn and form new relationships.  They become the vanguard of the new culture, whereas those who prosper initially can suffer from complacency or are weeded out once the real (often political) reasons for their appointments become apparent.

But some merged organizations come nowhere near forging a new culture or making full use of their intellectual capital, and this can lead to the 'divorce courts'.  Sometimes, a demerger is agreed when services have not improved, good practice has not survived and customers have become fed up and gone elsewhere.

Ideally, both parties should consider the best way of meeting their objectives, rather than simply adopting the acquiring company's processes.  This happened recently where one retail company acquired a similar firm.  After initially allowing its own method of reporting management information to dominate, it made a switch when the other organization's systems proved better.

There is often an attitude expressed at the top echelons (particularly in the City) that people are paid enough and therefore they should be able to handle the additional pressures that come with mergers.  This expectation is normally just a fantasy and only adds to the fear that drives this sort of culture.  There are particular management skills needed during these times such as advanced communication and decision making, foresight, strategic thinking and delegation.  They are often assumed and infrequently trained and yet there are high grade training resources available.

A surprising role for HR in the later phases can also be to help both sides to grieve for their old organizations, something they often need to do before they can embrace the new.  It is a common fact that employees in the acquiring company often feel that their organization has also changed, and they tend to sense this only some months later, when it seems too late to acknowledge any sense of loss.

Not everyone makes mistakes when managing mergers and acquisitions.  Indeed, some companies clearly concentrate on the people issues right from the start.  These organizations – often experienced acquirers that have had their fingers burnt in the past – have succeeded by developing highly focused 'hit squads' of specialists to handle the merger process.  These task forces must enjoy the full backing of the Board and can then prove highly effective, because they are well practised both in getting the communications right and in making sure that key relationships are established early on.

But even when handled professionally, the process can still backfire.  An example was provided by a company that closed down its customer support site when a merger made it obsolete – only to find the very next week that a competing firm was opening a new office nearby.  The people it had made redundant walked away with handsome packages straight into similar jobs with the rival, taking valuable experience with them.

Should organizations even be attempting mergers?  There is much evidence to suggest that overall they should not but undoubtedly they will continue to do so, in much the same way that couples continue to marry despite the high divorce rate.  What is sad is that there is a general acceptance that mergers will be very painful and troublesome when this does not have to be the case.  If the correct resources are put into planning the merger in terms of the human effects it will have and the new culture is helped to emerge healthily, then thousands, indeed in many instances, millions, of dollars can be saved.  The earlier this work is started, the higher the returns will be.