HR'S Role in Mergers and Acquisitions - human resource management

Training & Development, Oct, 2000 by Ruth N. Bramson

It's about the people.

In June 1999, Shaw's Supermarkets acquired Star Markets for roughly $500 million. Shaw's at that time had 126 stores and about $3 billion in volume; Star had 54 stores and $1 billion in sales. That acquisition was Shaw's largest to date, growing revenue by roughly 50 percent and increasing its workforce from 20,000 to 32,000. It took eight months from signing the agreement to Federal Trade Commission approval. To bless the deal, the FIC required that 10 stores be divested. Shaw's anticipates achieving roughly $50 million in synergies, with about $10 million in the first year.

Completion of the acquisition and integration--operationally and culturally--of the two companies have required human resources to play a major role. The work is still going on: Although most of the integration plan has been implemented, the human side of the integration continues to evolve.

The key HR initiatives have included

* development of preliminary organizational designs and identification of the top three levels of management

* assessment of critical players and deployment of appropriate resources in the new company

* retention of key people and separation of redundant staff

* development of a total rewards strategy for the combined companies

* communications strategy development and implementation

* integration of payroll benefits and HR-IS

* an ability to do all of the above with speed.

We followed a carefully designed integration plan, with the HR element at the heart of much of it. The integration is proceeding on schedule and, by and large, the factors affecting the people have been executed successfully. The critical learning throughout the process has been that it's all about people.

The upheaval associated with any merger or acquisition is a prime opportunity for HR to demonstrate its knowledge and skill in the management of human capital. HR is an intrinsic part of the integration team in an m&a because of its ability to evaluate the compatibility of corporate cultures and different options for combining enterprises. HR must also be the trusted source of information for employees about what the m&a means for them.

The guiding principles:

* Take definitive action and make decisions quickly--the secret for holding onto good people.

* Be candid with employees, and treat them with respect. Let them know that the combined entity will be a more valuable organization.

* Whenever possible, use ownership of the company as represented by stock options and stock grants to get everyone pulling in the same direction.

* Be honest about the people decisions that must be made.

* Treat those leaving with the same respect and attention as those staying.

Rather than take a risk-averse, wait-and-see attitude that can lead quickly to irrelevance, HR executives should be integral to all phases of due diligence, to easing the transition, and to focusing employees on the creation of shareholder value as soon as possible. Taking a wait-and-see attitude will lead to an irrelevant role for HR. Instead, the role must be orchestrated so that its value becomes integral to the deal.

According to Mergerstat, there were more than 7,700 deals in 1998 involving U.S. companies valued at $1.2 trillion. Worldwide transactions totaled more than $2.4 trillion in nearly 23,000 deals. Of those, 96 percent were friendly, 85 percent were to gala competitive advantage, and 88 percent were companies in similar businesses. Though the final numbers aren't in yet for 1999, the pace can be expected to have increased.

Many companies report that their mergers are successful but admit the end results aren't as successful as they could have been. Recent studies place the success rate of merged companies at 30 to 60 percent, depending on what criteria you measure. No matter how flawless a deal seems on paper, the results are often disappointing. Most merged organizations lose 1 to 10 percent of their market value in the first year after the merger.

There's a lot to learn about managing the transition period, optimizing short-term performance, keeping the highest percent of talent, and integrating processes and systems. Companies that don't address those issues may suffer a loss of profitability, top talent, and confidence in leadership decisions.

Although a multitude of factors can contribute to a disappointing merger or acquisition, success depends ultimately on the effective use of people. A recent report from the Bureau of Business Research shows that organizational and cultural problems are more likely to derail a merger than are financial factors. Only 28 percent of companies said they did a good job of assessing the culture of their merging organizations before the deal, only 26 percent said they had put the right people in the right roles during the merger, and a scant 15 percent said they had successfully communicated the vision and goals after the union.

From the due-diligence stage through the identification and appraisal of people to the management of culture issues and communication, people issues impact every step along the way. Such issues are essential and integral to the process and must not be treated as an afterthought. It's unrealistic to assume that one business can absorb another without being altered. When two companies merge, one may change more than the other, but both will change.