Introduction
Companies are now required to be very dynamic, efficient, profitable, adoptive, and forward looking in order for them to gain a dominant and ocmpetitive edge. Without these qualities, they cannot compete in a very international and globally compettive market. In some industries like in banking and insurance, they may transfer into new and foreign markets (Ashkenas & Francis, 2000). In others industries such as in medical products and suplies, companies may choose to work with smaller firms which have developed or are developing new products which they can manufacture and/or distribute more efficiently. Meanwhile, the rest of the industries enphasize on their own unitary growth, leadership and development (Ashkenas & Francis, 2000). Regardless of industry, however, it seems impossible for companies to compete with one another without expansion. Hence, merger and acquisition becomes a viable option (Schuler, 2001).
Mergers and acquisitions (M&A) have developed to be a major part of most corporate growth strategies. To distinguish them. A merger consists of combining two companies and becoming a unified and new corporate entity (Harding & Rouse, 2007). In an acquisition, one corporate entity buys another one and manages it in conformity to their own management requirements (Harding & Rouse, 2007). Mergers and acquisitions present several options of how companies must combine with one other. These include licensing, joint ventures, alliances and partnerships, and various combinations (Denison, Adkins & Guidroz, 2011).
M&A constitue the greatest implications for a corporate entity’s investment size, control, integration requirements, pains of separation, and people management issues (Ashkenas, et. al., 2000). According to Denison, Adkins & Guidroz (2011, p. 4), most M&A activities now span across national borders. Harding & Rouse (2007) also said that nearly two thirds of companies lose market share in the first quarter after a merger, after the third quarter, the figure is 90%.
Examples of mergers and acquisitions include the popular deals between many of the largest and most successful global companies in the world such as the following: AOL–Time Warner, Chase–J.P. Morgan, Celltech–Medeva, Credit Sussie–DLJ, Daimler–Chrysler, McKinsey–Envision, Deutsche Telekom–Voice Stream, GE–Honeywell, NationsBank–Bank of America, Nestle´–Purina, Pfizer–Warner Lambert, SKB–Glaxo, and UBS–Paine Webber (Fairlamb, 2000; Seriver, 2001; Lowry, 2000). The future shows a golden time for the M&A trends in various commercial industries.
Culture and M&A
Culture is one of the major aspect in the success or failure of the M&A. Poor cultural fit is always cited as one of the major reasons for a failure in M&A (Vestring, et. al., 2004). In previous times, scholars have initiated greater comprehensive assessments of the role of organizational culture in the M&A process (Vestring, et. al., 2004). In one specific review, it is said that the study of culture in M&A is still in its premature stage and there are inconsistencies in clearly supporting the positive or negative role which culture can play in an M&A process (Schuler, 2001).
Researchers proposed various propositions about the culture literature in the M&A field. They showed that culture is a multi stage variable which consists of organizational, industrial, functional, national, occupational, and professional cultures (Schuler, 2001). They also agreed that cultures are interlinked and it presents a fast changing challenge to organizations in the M&A process. They also presented that the quality of the entity’s integration strategy can impact the influences which culture input into the organizational performance (Kay & Shelton, 2000). They also agreed that more researches must be conducted in order to qualify these relationships and to further improve the M&A performance through cultural integration (Krattenmaker, 1999).
In cross-border M&As, the effect of the differences in national culture is very strong (Kay & Shelton, 2000). In terms of cultural familiarity explanations, it is said that companies are most likely to invest in countries which have a greater cultural affinity with their own (Ashkenas, et. al., 2000). They are said to have a better performance post integration (Ashkenas, et. al., 2000). On the contrary, the resource-based perspective of the compnay assumes that the greater the cultural differences, the more successful the M&A will become. They believe that this is due to the cultural differences between the cross border entities which enhance potential synergies among the players (Kay & Shelton, 2000). However, the contention on these two contrasting explanations have not yet been conclusively studied.
In this respect, a UK based company will find it easier to deal with a first world country rather than in Brazil or India, which are all developing economies. Sanchez-Arias, et. al. (2013), explained that the top and growing mobility of executives, along with knowledge transfer, is one of the main issues which can affect merging or acquiring a Latin American or an Asian company. It is said to be more profitable and effective for outside companies to pursue lateral recruitment and choose people who can grow with them or get trained individuals from the domestic labor market. This is a major problem in filling in the executives of a merged or acquired company in a developing country.
A corollary issue would be the training and retaining local or foreign talent to recover learning investment and the development of a multicultural and multigenerational learning experiences (Sanchez-Arias, et. al., 2013). Most of the time, the local talents come and learn everything and become excellent in their positions only to leaver after a couple of years. They use the international training to migrate from their country to more first class countries or from their current positions to external work opportunities. This might be an issue for the UK consulting company in Brazil.
Another issue in Brazil and Indian people workforce is that the human resource training and development programs should be culturally suited to their needs and orientation ((Sanchez-Arias, et. al., 2013). In a merger and acquisition, sometimes, the company operations run quicker than the learning initiatives, the UK based company should ensure that these are constantly aligned and that every formal and informal learning experience is related to the thrust of the ocmpany and to the Brazilian or Indian staff. Hence, there is a crucial need to migrate from training to on-the-job learning and from developing competence to developing capabilities which can be assessed, observed, and translated into business enhancements of the UK company.
According to Denison, Adkins, & Guidroz (2011, p. 6), culture is usually neglected in the study of M&A until later on, or when the merger or acquisition deal has been sealed. However, since ‘‘culture clashes’’ are usually pinpointed for the failure of M&As, it is vital for companies to have a thorough understanding of their own culture at the start of their merger and acquisition activities if they consider the M&A as a fundamental tactic to their growth strategy (Harding & Rouse, 2007). To illustrate, a company which intends to merge or acquire another entity should be clear with its own organizational identity such as its mission and strategy, customer needs, internal processes, and assumed behaviors and practices (Ashkenas & Francis, 2000). Their internal knowledge allows for a better assessment of cultural fit as prospective targets are considered. This activity can also be advantageous in determining the cultural features of the company or group which they will merge with or acquire. Hence, in the process, they can check whether or not their own cultural values and visions fit altogether. According to Denison, Adkins, & Guidroz (2011), evaluating the entity’s cross-border capabilities for managing cultural complexity is a especially significant aspect of this process. A general assessment of the knowledge and capabilities needed to move effectively into a new geographic location can aid in determining both opportunities and limitations (Denison, Adkins, & Guidroz, 2011).
Aside from the cultural elements, leadership and change management strategy on M&A integration in various organizations also showed that managers are responsible for moving the merger process (Schuler, 2001). They must be equipped with the needed change management skills to ensure success. This is to say that M&As are not isolated commercial activities and complex change management skills and clearly stated vision are required to fulfill its goals.
Subsequently, the human resource management aspect is also very important in the M&A process. Initially, the HRM team makes sure that the said organizational culture is not overlooked (Schuler, 2001). Harding and Rouse (2007) also proposed that various companies take a proactive steps to assess the organizational cultures which they consider to acquire. The HRM may conduct various interviews or utilize a cultural evaluation kit in order to obtain important data. Developing a detailed understanding of how the managers and staff in one organization develop strategies and goals, engage with the marketplace and reward behaviors will provide crucial insights with regards to the prospective synergies and conflict areas which might arise during the cultural integration process (Harding & Rouse, 2007). Due diligence with respect to the cross-border management capabilities of both companies is also crucial at this point.
HR Issues and M &A
Significant amount of attention is given to the legal, financial, and operational aspects of mergers and acquisitions. However, global managers now recognize and put into greater emphasis that the digital economy now requires a smart management of the human side of change management. Hence, human resource management is a major key in the success of an M&A (Harding & Rouse, 2007). This will enable the maximum value of the deal. According to Armour (2000), most employers now acknowledge the value of human resource concerns as they mainly distinguish the success or failure of a merger or acquisition. The full employment economy has to be dealt with with savvy human management of the corporate integration.
The management of the human side of M&A process has been considered to be a neglected field. This is in consideration of the past failures of several M&As. As Armour (2000) put it, various mergers did not create the shareholder value as expected of them. They just relied on top management’s capabilities and potentials. Hence, the most common failure in M&A is the combination of cultural differences and a poorly conceived human resource integration strategy (Ashkenas & Francis, 2000).
Several false asuumptions have been made in the neglect of the HRM issues in mergers and acquisitions and these include the following:
❖ The conviction that people are too soft, and, thus, hard to manage;
❖ Lack of awareness or consensus that human resource issues are crucial;
❖ No spokesperson to express these human resource management issues;
❖ No model or framework which can act as a tool to systematically conceive and manage the people issues;
❖ The traditional setting of M&A focus on other activities like finance, accounting, and manufacturing.
According to research, the human resource issues occur at various levels or stages of M&A activity. To be specific, there are significant people issues in the primary M&A level and these are the following: 1. retention of primary talent; 2. communications; 3. retention of main managers; and 4. integration of corporate cultures (Denison, Adkins, & Guidroz, 2011). Out of these, some other issues emerge such as the assessment and the selection of duplicate managerial talent to identify who leaves and who stays after the M&A (Denison, Adkins, & Guidroz, 2011). In the process of combining corporate cultures, the whole sets of human resource policies and practice from both entities should be put into further assessment and/or revision or replacement (Denison, Adkins, & Guidroz, 2011). While these human resource issues are crucial in any international M&A activity, their significance tends to vary accoridng to the merger and acquisition types (such as licensing, joint ventures, partnerships, etc.). To illustrate, if it is an acquisition which will enable the separation of the acquired company, there may be lesser assessment, selection, and replacement decisions as compared to acquisitions which result in full integration of the two corporate entities (Denison, Adkins, & Guidroz, 2011).
Aside from these human management issues in the initial phase of the M&A activity or process, there are also several other people issues which are seen in the before and after integration phases (Denison, Adkins, & Guidroz, 2011).
In another light, there are several activities which are consistent with and suitable for the HR professional’s skills and competencies. These include:
1). Creating major strategies for a company’s M&A activities; 2.) Supervising the soft due diligence activity, which can include various activities such as obtaining knowledge of the composition and motivation of the two workforces, seucring management team of the other company, having an organizational system analysis, comparing of the benefits, compensation policies, and labor contracts of both entities, and evaluation of the cultural match between the two companies (Denison, Adkins, & Guidroz, 2011); 3.) Giving of input into the change management process; 4.) Advising top management on the merged company’s new organizational structure; 5.) Developing transition teams, specifically those which will do the following: create infrastructure for new organization, process and design systems, address cultural issues, give training, manage HR activities such as staffing, recruitment, training and retention, separation approaches, etc.; 6.) Supervising communications, specifically creating a communication plan which will realize the M&A vision and goals (Denison, Adkins, & Guidroz, 2011); 7.) Managing the learning processes, such as developing learning into the partnership agreement, staffing and setting up learning-driven career plans, among others; 8.) Re-casting the HR department itself and 9). Determining and developing new competencies (Denison, Adkins, & Guidroz, 2011).
Cultural Due Diligence
Cultural Due Diligence (CDD) is the steps of studying, evaluating, and defining the cultures of two or more particualr business units through a cultural evaluation to discover aspects of similarity and difference which will influence the integration efforts and attinment of strategic objectives (Harding & Rouse, 2007). In the case of M&A, this should be integrated with the common Due Diligence processes. The outcomes of this must be utilized as a foundational tool for making integration plans and a baseline for quantifying organizational progress in the integration activities through time. This motivates engagement and ensures the organization aligns itself and stay on track with its goals of fulfilling a strategic, human system integration (Harding & Rouse, 2007).
The cultural due diligence process must be conducted early on before the M&A completion is completed. The process can also be utilized as a benchmarking tool throughout the integration process to assess the progress and confidevelopment of the M&A and align the human systems to the business goals. This cultural due diligence process consists of major cultural and organizational effectiveness domains such as the following:
- Leadership: business strategy development, ethics, leadership effectiveness, mission, values, and vision.
- Relationships: collaboration, inter/intra group relationships, community and customers, and trust.
- Communication: employee trust in information, feedback and information sharing.
- Infrastructure: formal procedures, processes, policies, systems, structure and teams.
- Involvement & Decision Making: accountability, authority levels, decision making process, and expectations.
- Change Management: continuous learning, creativity, diversity innovation, and recognition.
- Finance: perception of financial health and the role of the employee and the level of financial comprehension and the business impact.
- Cultural Descriptors: a list of predetermined values which can be customized to reflect the organization’s values.
- General Climate: open-ended questions which capture the stories and suggestions from employees.
During the due diligence period, a target firm has been identified and leaders of the respective firms begin sharing financial and legal information to guide the decision regarding the potential benefits and liabilities of the merger (Krattenmaker, 1999). This is the best time to investigate the culture of the target organization and identify similarities and differences between the two compnaies. To exemplify, in the due diligence phase of Twentieth Century Advisors acquisition of Benham Capital Management Group, the two merging compnaies exchanged corporate values statements which showed that they both shared some of the same guiding principles (Ashkenas & Francis, 2000).
Conclusion and Recommendations
Many corporate entities neglect the cultural issues underlying an M&A deal. They do not realize until they fail that this is an important aspect of the integration in any M&A activity. Managing cultural integration is a challenge and the best practice guidelines may be unclear. However, the pattern of failures is often seen. They usually happen when the cultural issues, both at the external and the internal levels, are persistently positioned as not so vital in the same level as the scrutiny for the financial, operational and strategic issues (Ashkenas, et. al., 2000). In this context, issues on cultural differences can mature until they start to endanger the basic business fundamentals.
Suffice to say, people are the backbone of any business and they are at the heart of integration efforts in any M&A. While businesses usually say that they consider their people as thei rmost important assets, they do not realize this in any M&A process. The skills employees have and their rich employment experiences make up a crucial part of a company’s value (Schuler, 2001). Companies must highlight their human resources and bring them into the integration process in order to achieve business success and strong integration after an M&A.
This paper suggests practical recommendations in order to avoid the pitfalls of cross-border M&A. They are considered as relatively simple to express but also hard to actually implement.
- Involve the HRM department or an external consultant with an HR/OD background in the integration process from the start of the M&A process.
- Use an appreciative inquiry approach when evaluating the culture of business units. Stress on finding the best practices which support the achievement of objectives instead of parading areas of weakness.
- Use a validated assessment tool which gathers both quantitative and qualitative data.
- Include culture as part of the company’s due diligence efforts and prepare to address the inconsistencies between business units with action.
- Never stop communicating with the various stakeholders. Update the employees in the loop about to the progress of the integration effort.
- Involve employees in the integration process.
- Allocate dedicated time and resources for the M&A project.
- Regularly measure and report on project progress.
- Find ways of improving the process.
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