Masterarbeit, 2021
96 Seiten, Note: 2,0
1 Introduction
2 Problem Formulation
3 Literature Review
3.1 Distinctions Between and Definitions of Mergers, Acquisitions, and other Forms of Restructuring
3.1.1 Differentiation by Economical Background
3.1.2 Differentiation by Legal Background
3.1.3 Differentiation by Willingness of the Takeover Target
3.2 Due Diligence
3.2.1 Financial Due Diligence
3.2.2 Cultural Due Diligence
3.2.3 Human Resources Due Diligence
3.2.4 Organizational Structure Due Diligence
3.2.5 Management Due Diligence
3.2.6 Other Types of Due Diligence
3.2.7 Impact of Due Diligence on M&A Success
3.3 Employee Turnover after M&A - Studies & Reasons
3.4 Post-Merger Integration (PMI)
3.4.1 Integration Planning
3.4.2 Integration Execution
3.4.3 Integration Monitoring
3.5 Literature Review - Conclusion
4 Research Methodology
4.1.1 Qualitative & Quantitative Research: A Quick Overview
4.2 Choice of Research Method
4.2.1 Choice of Qualitative Data Collection Technique
4.2.2 Choice of Interview Method
4.3 Qualitative Content Analysis by Mayring
4.4 The Interview Guideline
4.5 Definition of Experts and Chosen Field
5 Interview Analysis
5.1 Interview Partners
5.2 Goal and Type of the M&A Transaction
5.3 Differentiation between Employees
5.4 Factors that Impact the Risk of Key Players Leaving
5.5 Retention Measures
5.6 Summary and Discussion
5.7 Limitations of this Research
6 Retention Guideline
7 Conclusion
8 References
Appendix A
Figure 1: Cultural End States. Own representation; adapted from Marks and Mirvis (2010, pp. 205-210)
Figure 2: Depth of Integration, Meynerts-Stiller (2019, p. 114)
Figure 3: Types of Integration, own illustration based on Haspeslagh and Jemison (1991)
Figure 4: McKinsey 7S Framework, own illustration based on Venema (2012)
Figure 5: John Kotter's 8-step model, own illustration based on Kotter (1996)
Figure 6: Retention Guideline
Table 1: Differences between financial due diligence and audits. Own representation based on Howson (2003, p. 49)
Table 2: The 12 Cultural Domains by Carleton and Lineberry, own illustration
Table 3: Interview Partners
The yearly number of worldwide M&A transactions increased from 1990 to 2019 by nearly five times. The yearly average increased steadily over the last decades. The 1990's averaged about 20.500 deals, the 2000's 37.000 deals and the 2010's 46.500 deals per year. (Thomson Financial, Institute for Mergers, Acquisitions and Alliances [IMAA], 2020)
Smith (2002) analyzed 49 studies regarding the success rates of organizational change. Among them were also 9 studies concerning M&A transactions. The median success rates for these transactions stated at 33%, while the median success rate for all analyzed studies in different forms of organizational change, ranging from strategy deployment to general culture change or software implementation, also was 33%.
It should be mentioned that the measurements of success for most forms of organizational change are varying or sometimes not disclosed at all and therefore these results should be taken with caution. A valuable takeaway of Smith's analysis though definitely should be the assumption that change in organizations is very often accompanied by a myriad of hurdles and challenges.
More recent academic work also backs that statement. Malmendier, Moretti, and Peters (2018) looked at stock performance of winning and losing bidders. They conclude that the entities that lost takeover bids on average outperform the winning bidders by 24 to 37% over the next 3 years.
King, Dalton, Daily, and Covin (2004) come to the conclusion that on average M&A activity does not lead to improvements of financial performance for the acquiring company. Instead, their results show either no or a slightly negative change in performance post-merger.
Reasons for these low success rates are not entirely clear but for sure manifold. What can be said with certainty is the fact that merging companies have to deal with increased employee turnover, especially management turnover. Approximately 50-75% of key managers leave voluntarily within two to three years after a company has been acquired. (Howson, 2006, p. 213)
Walsh (1988) concludes in his study of top management turnover following mergers and acquisitions that 59% of the top management of target companies have either left or have been terminated five years after the transaction.
Cannella and Hambrick (1993) come to the conclusion that the departure of top executives after mergers negatively effects the success of an acquisition.
To further illustrate the practical implications of this topic I want to mention the failed acquisition of Bison Schweiz AG by Raiffeisen Informatik through the Comparex Group, one of Raiffeisen Informatik's subsidiaries. Raiffeisen Informatik acquired german PC-Ware Information Technologies AG in 2009. With this came a 70% share in the Swiss “BISON Systems AG”, with “Bison Holding AG” as the 30%-Minority Shareholder. (Schindler, 2009, June) In 2010 Bison Systems AG was renamed to COMPAREX Schweiz AG. There were also efforts to introduce a new ERP system to connect COMPAREX Schweiz AG to the COM- PAREX Group's ERP systems.
On April 14, 2010, COMPAREX Schweiz AG's management board stepped down and with it 180 of its 200 employees left the company. The Bison Group, Comparex Schweiz AG's minority owner, took in management and employees on the next day. (Schodl, 2010, April) Comparex Schweiz AG had to cease operations two years later and after extensive litigation parts of its former management were found guilty of embezzlement and sentenced to probation penalties in 2020. (Hugenschmidt, 2020, January)
The existing literature acknowledges the problem of employee turnover after M&A transactions but has not yet come up with a review of factors that impact employee turnover after M&A transactions. To find out what those factors could be, I will conduct interviews with experts in the field. Such research is currently non-existent and therefore it will be able to add valuable practical insight into a topic that is being dealt with, if at all, from an outsider's perspective.
The proposed negative financial effects as well as the aforementioned worst-case scenario at COMPAREX, i.e. some kind of mass exodus of employees and/or management that could end up in the downfall of at least parts of a company, lead me to believe that research is needed, on what factors influence the probability and extent of voluntary employee turnover after M&A transactions.
This thesis will attempt to answer the following research questions:
Which factors impact the likelihood and extent of employee turnover after M&A transactions?
What measures can be taken during post-merger integration to retain key players?
Mergers and acquisitions can be differentiated in multiple ways and by various variables.
These include:
- Economical background: e.g. vertical/horizontal integration; creation of a conglomerate
- Legal background: differentiation by how the merging entities are combined legally or how an acquired company is integrated into the acquiring company's legal structure
- Hostile vs. friendly takeover's
Vertical Integration aims at the integration of companies along their own path of production. The goal is, by acquiring or merging with another company, to increase the number of steps of e.g. a production process that a company is doing itself and increasing profit, quality or reliability. Vertical Integration can be done forwards and backwards. Forwards would mean the acquisition of a company that engages in the distribution or further processing of an acquirers products. (Kedia, Ravid, & Pons, 2011)
Looking at the microchip-producing company Intel, forward vertical integration could be done by acquiring notebook-producing company Dell.
There are many reasons for vertical integration. One of them is “vertical market failure”. This describes a market that is not reliable enough for a company to engage in it and therefore being inclined to vertically integrate that “market”. To give an example, this can be the case for companies that rely on certain raw materials or specifically manufactured parts when the number of suppliers is low, prices are highly volatile and quality is lacking.
Kedia et al. (2011) come to the conclusion that vertical deals are more successful, when asset specificity is high, meaning that the degree of specification of assets acquired (e.g. acquiring only a specific line of business of another company) has a positive impact on the profitability of the acquisition.
It also seems reasonable to imply that a vertical merger has better implications when the number of transactions between companies is higher than lower. This should be especially true, when we estimate the degree of interdependency of two companies by number of transactions between them.
In contrast to vertical integration, horizontal integration is the acquisition of a company that is located on the same level of production. In most cases a direct or potential competitor is acquired, which often also raises antitrust issues and regularly needs special permits by antitrust regulators. (Sherman, 2018)
A popular example of a horizontal merger would be the merger between T-Mobile US and Sprint, with both companies being wireless network operators.
Clearly, the main goal of horizontal mergers most of the time is to increase market share and thus market power. With less providers of services or goods more often than not comes increased potential of determining prices and higher profits.
A market-extension merger is very similar to a horizontal merger. It is considered as a merger or acquisition of companies who offer the same products but on different markets or for different target groups. (Goldberg, 1973, pp. 137-138)
An example would be a Bank that operates only in the USA which buys a Canadian Bank. The offered product is almost the same for both companies, however the acquiring Bank now has entered a new market.
A product-extension merger takes place between two companies that operate in a similar field, having different products that are however functionally related in production or distribution and offered in the same market. (Goldberg, 1973, pp. 137-138)
An Austrian example of such a transaction would be the acquisition of highspeed-landlineinternet supplier UPC by mobile network operator T-Mobile Austria in 2018. (“Megadeal: T- Mobile kauft UPC Austria,” 2017) Through this transaction, T-Mobile Austria was able to offer highspeed landline internet to its customers. While both companies offered products in the telecommunications market, the products itself were different from each other.
A conglomerate merger is performed when two firms with completely unrelated business activities engage in M&A activity. The term conglomerate is used for multi-industry companies. Reasons behind this type of merger often include diversification, market and product extension and creation of synergies. A loss of efficiency and loss of focus on core business are often mentioned as upcoming problems. (Matsusaka, 1993, pp. 357-358)
A popular example for a conglomerate merger is the acquisition of media company Time Warner by web portal and online service provider Aol. (“AOL, Time Warner to Merge,” 2000) Another illustrative example of a conglomerate would be Nestle, being engaged in fast moving consumer goods, drinking water, pharmaceutics and cosmetics, among others.
In a statutory merger, only one of the two merging companies survives after completion of the transaction. This means, one company buys all the assets and liabilities of another company, which is now defunct and unable to continue their business. It is common that the acquired company is now operating under the identity of the acquirer. (Bruner & Perella, 2012, pp. 554-555)
With this kind of merger, an acquiring company uses one of its subsidiaries, either newly created for this special purpose or already existing, to acquire another company. The acquired company itself ceases to exist and is merged into the subsidiary. Since there are three entities involved, a parent company, a subsidiary and the target company, it is also referred to as a “triangular merger”. (Bruner & Perella, 2012, p. 553)
While in a statutory merger, as mentioned before, only the acquiring company survives, in a statutory consolidation both merging companies form one new entity together, with the two old firms ceasing to exist. Most of the time Shareholders of both “old” companies will own the shares of the newly formed entity. (Vesely, 1968, pp. 975-976)
A tender offer is a form of public takeover bid. A company interested in acquiring another company will publicly announce said interest and directly engage with existing shareholders, offering a certain price for their shares for a limited amount of time. Tender offers can be very expensive, as they not only include a price offered per share well above current market value, but also need lots of consulting to set up and follow through. One reason why tender offers are performed despite its costly nature is the fact that the availability of shares on the open market might be limited and a takeover could very often not be performed by buying shares on the open market. That shareholders would not sell their stock even with a significant premium on the open market sounds fairly counterintuitive at first glance. One explanation would be that shareholders, once it is publicly known that a company wants to perform a takeover, expect increasing share prices because of those circumstances and refuse to sell even for a premium. It should also be noted that tender offers can be made and often are made, without consent of the board of directors of the target company. (Cohen, 1990, pp. 113-116)
An example for a tender offer would be the offer made to Cadbury shareholders by Kraft Foods in 2009. Kraft Foods first publicly announced its interest to take over Cadbury and then made a formal tender offer to Cadbury's shareholders. After some initial takeover defense by Cadbury's management, negotiations and an increase in price per share to be paid, the deal was done. (“Kraft Foods erobert die Weltspitze,” 2010)
Shareholders who hold a majority, in many countries, have the option to force minority shareholders to sell their shares. This is called a squeeze-out (sometimes also referred to as freeze- out), because of the way the minority shareholders are figuratively “squeezed out” of the company. (Van der Elst & van den Steen, 2009)
To give an example: in 2020 Audi's majority shareholder Volkswagen AG squeezed out the minority shareholders who held 0.36 % of Audi's shares. (“VW kann Audi wie geplant von der Borse nehmen,” 2020)
For a takeover to be called friendly, the management and board of directors of the target company have to agree to being taken over and also agree to the valuation (i.e. price per share). Furthermore, the incumbent management will propose the takeover offer to its shareholders and demonstrate that the takeover seems beneficial and appropriate in price. Friendly takeovers seem to happen more frequently with “synergistic mergers”, where the focus is on the synergies that the companies share. (Morck, Shleifer, & Vishny, 1988)
This conclusion appears to be very understandable, as the synergy between companies should help bridge other differences between the managements of the acquirer and the target. The argument of using synergies and growing more efficiently together sure seems to me as a very unifying one.
In what is considered a hostile takeover, the incumbent management of the target firm is either not informed of another company's takeover plans or does not approve them. The abovedescribed tender offer is the go-to method used for hostile takeovers. Usually, many different defense tactics of the management of the target company must be overcome by the would-be acquirer, who in this context is also called a “raider”. Empiric evidence seems to lead to the understanding that hostile takeovers are more often done for old, slowly growing companies where the incumbent management might be doing a poor job, at least in the view of the raider. (Schnitzer, 1996, pp. 37-38)
The argument could be made that with hostile takeovers, the acquirer sees unused potential in a company held back by a lack of proper management. This would also give a reason why incumbent management was not approached in the first place or why incumbent management does not approve of the deal.
Morck et al. (1988, pp. 101-102) call such hostile takeovers “disciplinary takeovers”, the reason being their disciplinary nature towards the incumbent managements non-valuemaximizing practices.
Due Diligence is a vehicle used to get an understanding of what a target company exists of and how different parts of a company work. The existing literature covers due diligence of almost every section of companies fairly extensively.
I will give an overview of due diligence of the following areas in the upcoming subchapters:
- Financial Due Diligence
- Cultural Due Diligence
- Human Resources Due Diligence
- Management Due Diligence
A special focus will be put on due diligence regarding human resources and cultural fit. When we talk about management and employee turnover after mergers and acquisitions, the analysis of the human capital and the human resource function seems to be very important. The detection of risk respective to that matter could be located here. The analysis of existing literature will give an idea with which importance that topic is covered.
It should be mentioned that there are many more types of due diligence, e.g. legal due diligence, tax due diligence or asset due diligence, which I will not cover in detail, as I suspect them to be of rather low relevance to this thesis' subject. However, I will introduce some of those due diligence areas briefly to help to create an understanding of the topics that the due diligence process can cover.
With the help of Financial Due Diligence an acquiring company is trying to get insights into a target company's financial situation in the past, the present and as well as possible the expectations of the upcoming years.
The goal of financial due diligence is to gain information of the target company, which should help with finding the correct price that should be paid for a company. A risk mapping should be done, where risks are identified and quantified. Areas that risks could be identified in include capital markets, supply chain, legal and political framework, the market itself, competition and technology. (Nieland, 2002)
Another part of financial due diligence is the analysis of the balance sheet. This is done to, among others, answer the following questions (Nieland, 2002):
- Are the liabilities correctly valued? How do different currencies affect the liabilities?
- Are the accounts receivables recoverable?
- Is the target company legally liable for debt not shown in the balance sheet? (e.g. guarantees)
- Are provisions made appropriately?
- Are the main assets valued correctly and sustainable?
Financial due diligence regularly goes beyond just analyzing balance sheets and profit and loss statements. To get an impression of how the synergies of two companies could affect future earnings, estimations and calculations are done. (Garzella & Fiorentino, 2014) Synergy is described as the surplus of performance that two companies can deliver when merged to one single company, in comparison to the added-up performances of both companies operating alone. (Sirower, 1997)
Garzella and Fiorentino (2014) explored different synergy valuation models and concluded that many of them are flawed, especially when it comes to the way strategic synergies are weighted in calculations. This can be viewed as one of many reasons, why today, despite decades of research on the topic of post-merger performance, M&A transactions still fail regularly.
Financial due diligence also looks at many other financial indicators, such as (Pomp, 2015):
- Liquidity and development of cash flows
- Working Capital and cash conversion cycle
- Budgeting accuracy historically and analysis of deviations
Financial Due Diligence should not be mistaken or compared to yearly (often mandatory) auditing procedures. Differences are manifold and stated in the subsequent table.
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Table 1: Differences between financial due diligence and audits. Own representation based on Howson (2003, p. 49)
Whenever two companies merge or one company acquires another, the two entities cultures will inevitably meet. This chapter will focus more on organizational culture rather than culture attributed to certain countries, regions or areas. It should, however, be kept in mind that organizational culture presumably will be affected by local culture in some capacity.
From the beginnings of the use of the term “organizational culture” there have been many attempts of defining it. To begin, I would like to give a very informal “definition”:
“the way we do things around here” - Deal and Kennedy (1982, p. 4)
Albeit a very informal statement, it does imply many things. According to this statement organisational (or corporate) culture means how business is done. Organisational culture does not mean, what business a company is in or what “things” an organization does. It is the summary of the ways a company is choosing to do its business.
Now let us take a look at more formal attempts of definitions. Edgar Schein (2017, pp. 20-21) created a list of definitions found in literature and also tried to put these definitions into clusters. I have collected some here.
Observed behavioral regularities in interactions:
“The language they use along with the regularities in the interaction such as “Thank you” followed by “Don't mention it,” or “How is your day going so far,” “Just fine.” Observed interaction patterns, customs, and traditions become evident in all groups in a variety of situations.”
Proclaimed values:
“The articulated, publicly announced principles and values that the group claims to be trying to achieve, such as “product quality,” “price leadership,” or “safety”. Many companies in Silicon Valley such as Google and Netflix announce their culture in terms of such values in all of their recruiting materials and in books about themselves.”
Formal philosophy:
“The broad policies and ideological principles that guide a group's actions toward stockholders, employees, customers, and other stakeholders [...]”
Group norms:
“The implicit standards and values that evolve in working groups [...]”
Embedded skills:
“The special competencies displayed by group members in accomplishing certain tasks, the ability to make certain things that get passed on from generation to generation without necessarily being articulated in writing.”
Habits of thinking, mental models, or linguistic paradigms: “The shared cognitive frames that guide the perceptions, thoughts, and language used by the members of a group and are taught to new members in the socialization or “onboarding” process as it is now often called.”
Shared meanings:
“The emergent understandings that are created by group members as they interact with each other where the same words used in different cultures can have very different meanings.”
Edgar Schein (2017, p. 21) himself came to the following definition, which he calls “dynamic”:
“The culture of a group can be defined as the accumulated shared learning of that group as it solves its problems of external adaptation and internal integration; which has worked well enough to be considered valid and, therefore, to be taught to new members as the correct way to perceive, think, feel, and behave in relation to those problems.
This accumulated learning is a pattern or system of beliefs, values, and behavioral norms that come to be taken for granted as basic assumptions and eventually drop out of awareness.”
The fact that definitions of culture can be very diverse and numerous, implies that organisational culture is a very broad concept. Schein (2017, p. 21) sums culture up as everything a group has learned as it evolved. An organization usually is made up of many small groups that will all have slightly (or even vastly) different cultures, which makes deciphering the culture of big organizations very complex.
For these reasons I will abstain from singling out and focusing on one of the mentioned definitions, but much rather leave it at this overview.
While the importance of strategic fit is well known when it comes to M&A transactions, cultural due diligence seems to have a relatively smaller role. Although HR-related issues have been identified as key success factors of acquisitions (Tanure, Cancado, Duarte, & Muylder, 2009, p. 139), studies carried out in Europe and the United States of America came to the conclusion that in only 1 out of 4 M&A transactions, the HR department was involved in the planning of the deal (Evans, Pucik, & Barsoux, 2011).
One goal of cultural due diligence is the analysis of cultural fit between the merging companies. It can be the basis of the development of a desired cultural end state, as described by Marks and Mirvis (2010, p. 205).
They mention four potential cultural end states, of which I will give an overview.
Preservation - Cultural Pluralism
With this type of cultural end state, the acuiree's culture remains mainly untouched and intact. It is prevalent in highly technological industries, where a certain culture has been a success factor and was of much importance for enhanced innovation and creativity.
Marks and Mirvis (2010) mention the acquisition of Lotus (today maybe known for it's Lotus Notes application) by IBM. IBM pre-merger came to the conclusion that it would be best, if Lotus culturally remains the same and does not get integrated into IBM's culture. Leadership functions were not taken over by IBM managers, but rather stayed in Lotus managers hands. Moreover employees were able to keep their pre-existing benefit plans and salarys.
Best of Both Worlds - Cultural Integration
Especially when talking about a merger of equals, both companies will want to keep their culture as good as possible. Dialogue is needed then, to have a chance at picking out and combining the best traits of each company's culture. If cultural integration does not happen, the full potential of the effects of synergy could be in jeopardy. Cultural integration does not mean making compromises, but much rather means that parts of both existing cultures are picked and the sum of those parts is the new integrated culture.
Absorption - Cultural assimilation
Marks and Mirvis (2010) assume that cultural assimiliation is the most common form of cultural end state after acquisitions. Companies that are very active in the field of M&A transactions have their own specific methodologies in place for assimilating subsidiaries up to certain degrees.
The success of cultural assimilation mostly depends on the acceptance of the acquired company's workers. Acceptance will be higher, the more the acquirer's ways of operating can be connected to improvements in their own work processes.
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Figure 1: Cultural End States. Own representation; adapted from Marks and Mirvis (2010, pp. 205-210)
Using standardized models to assess corporate culture appears to be very popular: all Big- Four companies, McKinsey, Bain, Boston Consulting Group, Mercer and many more offer some kind of corporate culture assessment using standardized models. Those are most likely based on surveys. Those results can then be benchmarked to other companies, departments or industries.
In the context of M&A it seems appropriate to do such a cultural assessment for both the buyer and the target. Then the results can be compared and conclusions can be drawn.
Organizational Health Index (OHI) by McKinsey
McKinsey's assessment (McKinsey & Company, n.d.) is based on a survey conducted among employees. On their website they claim to have over 5 million survey responses saved in their database.
McKinsey assesses 9 elements of organizational health that they believe have an impact on performance. Those elements include e.g. leadership, motivation, capability, accountability and environment and values.
When the results have been analyzed McKinsey will recommend one of their four developed management philosophies that they call “archetypes”. While their survey is completely standardized and not adapted to the company/culture in question, McKinsey tries to suggest that their approach is not “one fits all”. This however does not seem to be the whole truth. While they do not have just one type of philosophy that they recommend, having four of those does not make this approach tailored to the individual company.
The Denison Organizational Culture Survey (DOCS)
Denison is a consulting company focused on organisational culture, transformation and leadership. As the name says this assessment is also based on a 48-question survey that tries to measure four areas that Denison considers as “key drivers of high performance”. (Denison Consulting, n.d.) Those drivers are:
- Mission: “Do we know where we are going?”
- Adaptability: “Are we listening to the marketplace?”
- Involvement: “Are our people aligned and engaged?”
- Consistency: “Does our system create leverage?”
Those drivers each consist of three more detailed areas. For those areas the survey has three questions each, totaling 48.
When the survey is completed each of those 48 questions will be graded with a value of 0 to 100. Those numbers can then be compared to other companies, departments or whatever comparison is desired.
Carleton and Lineberry (2007, pp. 56-59) have argued that existent cultural assessment models based on attributional models are of very little value as they are highly standardized and make use of high-level abstraction.
Their criticism includes following statements:
- Attributional models falsely assume that a pre-determined set of variables can account for all cultural differences
- These models do not try to measure all the manifold variables of cultural attributes an organization can possess
- Due to the high degree of standardization, the models fail to account for local peculiarities or division specificities
They then introduce the concept of non-value and value-based differences to support their argument.
The example of two merging companies is presented to illustrate this concept. Company A makes intense use of e-mails, while Company B does not use e-mails. (For context: the example was used in their work, published in the mid-2000's; this, however, does not diminish its illustrative purpose) If the reason for Company B not using e-mails is the absence of the technological infrastructure, then the cultural differences regarding that topic could easily be erased by introducing e-mail technology to Company B. This constitutes a non-value based cultural difference.
In contrast, if Company B purposefully does not use e-mail, e.g. because the organization thinks it is more direct and efficient to talk directly in-person to colleagues, then it will be much harder to merge these two cultures. This is a value-based cultural difference.
Carleton and Lineberry (2007) stress that standardized attributional models do not possess the ability to understand why an attribute is present. Therefore, a differentiation between value and non-value based differences cannot happen, which, according to the authors, makes the informative value very limited.
Carleton and Lineberry's customized model
The goal of Carleton and Lineberry's (2007, pp. 59-60) customized due diligence model is to analyze organizational cultures through individually designed due diligence approaches.
While the models are customized, Carleton and Lineberry normally include the following elements:
- Individually designed series of interviews
- Focus groups
- Workplace Observations
- Customized quantitative surveys (with special focus, to account for uniqueness of the organization)
- Documentation reviews
This mix of individually designed qualitative and quantitative research methods will yield rich and robust data with great informative value and utility, according to the creators of that model.
When the data is collected, it gets grouped into 12 “cultural domains”, which can also be individualized if need be.
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Table 2: The 12 Cultural Domains by Carleton and Lineberry, own illustration
After data collection and data grouping is completed, the main deliverable of the model has to be tackled: deriving valuable management tools. These tools should serve as an aid in planning the integration of two organizational cultures into a desired new culture after a merger.
Tools come in variations, customized for the specific merger and can include the following:
- Detailed cultural profiles
- Specification of cultural similarities and differences within the twelve cultural domains
- Baseline perceptions of both organizations about current culture (status-quo perception)
- Prediction, specification and prioritization of problems regarding cultural clashes
- Estimation of degree of difficulty of integration
- Recommendations on how to reduce or avoid the identified potential problems
- Outlining an integration roadmap
Carleton and Lineberry conclude that their model with these tools should help in making important decisions very early in the merger process, based on valuable data. This should help with implementation and increase the chances of success of the merger.
Human Resources (HR) Due Diligence can entail the analysis of many different areas, such as payroll and salaries, compliance with local employment law and safety regulations, staff structure, redundancies, cultural aspects and analysis of incumbent management.
As cultural aspects and the review of management are very broad areas, additionally, as I also find them to be of high importance to this thesis' topic, they are covered separately in the subchapters “Cultural Due Diligence” and “Management Due Diligence”.
Therefore, this subchapter will cover the other above-mentioned areas of HR due diligence.
To begin with, it must be mentioned that the detail and emphasis of HR due diligence is at least partially dictated by the type of deal and the post-merger plans.
In deals where staff redundancies are expected, the cost of getting rid of these redundancies will be of special interest. On the other hand, there will be deals, where the employees are of highest importance, e.g. when buying a Research & Development department, where the know-how resides in the current personnel. The focus of HR due diligence in this case would probably be on ways to retain these employees after the merger as well as plans to unlock and enhance their know-how. When you plan on integrating the acquired personnel into your current personnel, you might want to take a closer look at salaries and compensation models in the company to be acquired and look for ways to align them with existing compensation models. (Howson, 2003, pp. 105-108)
These examples are mentioned to illustrate that the focus of HR due diligence is very dependent on what a company wants to achieve with a specific M&A transaction.
Payroll & Salaries
Probably the most important questions in this area of HR due diligence are “How much are the target's employees getting paid?”, “To which measurements are bonus payments tied?” and “How do the salaries of the target's employees compare to the salaries of the acquirer?”. Further, an acquirer will have to look at pension arrangements, fringe benefits, company cars and other parts of compensation.
If the target's employees are paid below the industry average, this might lead to costly salary increases, which therefore should be factored into the purchase price beforehand. (Howson, 2003, p. 111)
When acquiring a company during their financial year, accruals regarding payroll might not be done correctly. This often happens when leave an employee is entitled to is not fully consumed yet, when overtime is not accrued for or when employees are entitled to a 13th salary per year, like it is common in Germany, or even a 13th and 14th salary per year, which is legally mandatory in Austria. It could also be necessary to accrue for bonus payments, especially when they are tied to certain milestones that have already been passed, but the bonus has not been paid yet. If these accruals are missing, the acquirer would then pay for things that have already happened before the acquisition date.
Payment schemes and fringe benefits must also be looked at from an integration perspective. Will an acquirer be able to retain the car scheme of the target company? Will changes to such a scheme have a negative impact on employee turnover? (Howson, 2003, p. 111)
On top of that, legal questions concerning the payroll area come into play. An acquirer might not be able to immediately reduce salaries or lay off employees after the completion of an acquisition.
As an example, in Austria, depending on the type of transaction, it could be illegal to reduce salaries the first year after the acquisition as stated in § 3 AVRAG.
Change in employee benefits (consisting of salaries, cars, fringe benefits, working hours flexibility etc.) can be a great motivator if it is a positive change, but also a major reason for rejection of the “new” company if it is a negative change. (Grebey, 2012, p. 148)
Compliance with Employment Law and Safety Regulations
When carrying out HR Due Diligence, a review of employment law compliance as well as implementation of local safety regulations should be conducted. This mainly includes a check of the various local laws and regulations and the target's compliance with them. A common problem could be salaries below legal minimums. (Howson, 2003)
Redundancies
After mergers or acquisitions redundancies often are inevitable and sometimes even plannable. While the USA, and up to a certain degree the UK, give employers a fairly free hand when it comes to hiring and terminating employees, in many parts of Europe this is not possible. In France, one can only terminate employees, when the company is in a serious economic crisis. And even then, there will be two rounds of consultation with local labor authorities that will help with reducing redundancies and creating a social plan that will support employees in line to be terminated. (Howson, 2003, p. 114)
A similar legal situation exists in Austria, where the mere existence of an M&A transaction cannot be used as a reason to terminate people. (Austrian Supreme Court of Justice, Decision from 29.02.1996, RS0102122)
Staff Structure
It would be of great advantage to get an idea very early on in the acquisition process about who the key workers of the target are and where know-how resides. This also includes a look at which positions are filled with external staff or which tasks are done by external consultants. Once that is known, a comparison with the acquirer's own workers could be made (whenever a redundancy is to be expected), to identify who has better performance. To successfully make such an in-depth analysis, access to the target's employees will be needed, which is rare even in very friendly transactions. Therefore, if this analysis should be part of the Due Diligence process, access, cooperation of employees and an appropriate amount of time and planning is needed. (Howson, 2003, p. 111)
When a company is acquired or two companies merge, even when such a merger would be called a “merger of equals”, in most cases one company's organizational structure will be adopted, while the other one's structure changes. (Harding & Rouse, 2007)
Organizational structure includes e.g. the following functions (Harding & Rouse, 2007):
- Lines of internal reporting
- Deployment of business units, geographically and functionally
- Hierarchy and amount of leadership levels
- Decision-making processes and its effectiveness
To gain a basic understanding of the targets structure, a look at organizational charts, headcount, and job descriptions will be of much help. This “hard” data, however, will not paint the full picture, as it is unclear whether the processes on paper actually work the same way in practice. Therefore, through conducting interviews with the target's employees the effectiveness of the organizational structure as well as the de-facto decision-making processes must be uncovered. (Harding & Rouse, 2007)
Ideally the due diligence will find out, which processes work well and which leaders, departments or business functions possess the capabilities that would be expected to be needed in order for them to have success. (Harding & Rouse, 2007)
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