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HR Due DiligenceHR Rocks !!!
HR Due Diligence in Acquiring a Business
- Integration Management
Visit hrmba.blogspot.com
for more presentations, project reports, notes etc.
HR Due Diligence
Topics covered
Mergers and Acquisitions: Importance and Reasons for Failure
People related problems that led to Financial underperformance
Due Diligence
What to look for in Due Diligence
Why are people neglected during M&A ?
HR integration - Stages, challenges and Solution
Case Study – DaimlerChrysler
HR Due Diligence
Mergers & Acquisitions
Mergers and acquisitions represent the coming together of companies for financial, market, technology and other considerations.
In a merger, two companies come together and create a new entity.
In an acquisition, one company buys another one and manages it consistent with the acquirer’s needs.
Mergers and acquisitions represent the coming together of companies for financial, market, technology and other considerations.
In a merger, two companies come together and create a new entity.
In an acquisition, one company buys another one and manages it consistent with the acquirer’s needs.
HR Due Diligence
Importance of Mergers & Acquisitions
Horizontal mergers for market dominance; economies of scale Vertical mergers for channel control Hybrid mergers for risk spreading, cost cutting, synergies, defensive
drivers Growth for world class leadership and global reach Survival; sales maximization Acquisition of cash, deferred taxes, and excess debt capacity Move quickly and inexpensively Flexibility; leverage Adopt potentially disruptive technologies Financial gain and personal power Gaining a core competence to do more combinations
Horizontal mergers for market dominance; economies of scale Vertical mergers for channel control Hybrid mergers for risk spreading, cost cutting, synergies, defensive
drivers Growth for world class leadership and global reach Survival; sales maximization Acquisition of cash, deferred taxes, and excess debt capacity Move quickly and inexpensively Flexibility; leverage Adopt potentially disruptive technologies Financial gain and personal power Gaining a core competence to do more combinations
HR Due Diligence
HR Due Diligence
When Mergers fail …
HR Due Diligence
Reasons for Failure
Expectations are unrealistic
Hastily constructed strategy, poor planning, unskilled execution
Failure/inability to unify behind a single macro message
Talent is lost or mismanaged
Power and politics are the driving forces, rather than productive objectives
Expectations are unrealistic
Hastily constructed strategy, poor planning, unskilled execution
Failure/inability to unify behind a single macro message
Talent is lost or mismanaged
Power and politics are the driving forces, rather than productive objectives
HR Due Diligence
Reasons for failure
Culture clashes between the 2 entities go unchecked
Transition management fails
The underestimation of transition costs
Defensive motivation
Focus of executives is distracted from the core business
Culture clashes between the 2 entities go unchecked
Transition management fails
The underestimation of transition costs
Defensive motivation
Focus of executives is distracted from the core business
HR Due Diligence
Reasons for Financial underperformanceSource/Study Cited Drivers of M&A Underperformance
Merger Integration: Why the SoftIssues Matter Most, Bain & Co, 2003
• Compared to the sector index, share price performance was 5.1% ahead of average price in deals where management proactively addressed culture.
• Compared to the sector index, shared price performance was -4.4% in deals where companies failed to address cultural issues.
Success Factors in Acquisitions,PricewaterhouseCoopers, EBF, 2001
• Acquisitions that ought to have been successful according to business criteria failed because of neglect of the human factors involved.
• Failure to tackle the people issues, such as retaining top talent and communicating effectively with the workforce, is one of the reasons why the majority of deals fail to meet expectations.
“Tying the Corporate Knot- Effects of Mergers and Acquisitions”, American Mgmt Association, 1989
Merging companies with markedly different HR practices were three times more likely to have significant productivity and turnover problems.
HR Due Diligence
Source/Study Cited Drivers of M&A Underperformance
"Merger Mania: Reshaping the Telecom Industry," Rural Telecommunications, 1997
• 85% of respondents asserted that people problems were more likely to affect a merger's long term success than financial problems.
Acquisitions Horizons study, 1980s, cited in Price Pritchett, After the Merger: Managing the Shockwaves
The 2 top most reasons cited for the underperformance of mergers and acquisitions were
1) management talent in the acquired company was not as deep as expected 2) key talent left the firm.
Delivering the Benefits of Mergers and Acquisitions, Coopers & Lybrand,1996.
• 85% of mergers and acquisitions underperformed due to differing management attitudes and culture.
• 80% of mergers and acquisitions underperformed due to a lack of integration and planning.
• 45% of mergers and acquisitions underperformed as a result of poor management practices at the acquired company.
Reasons for Financial Underperformance
HR Due Diligence
The DNA of an Organization
HR Due Diligence
HR Due Diligence
What is Due Diligence Pre-cursor to actual announcement of merger Comprises of Cultural Due Diligence and HR Due
Diligence
Involves consideration of differences in the corporate culture of the companies and identifying issues critical to integration
Pre-cursor to actual announcement of merger Comprises of Cultural Due Diligence and HR Due
Diligence
Involves consideration of differences in the corporate culture of the companies and identifying issues critical to integration
HR Due Diligence
What is Due Diligence Helps management plan necessary actions for
resolving them before the merger is announced
Wider the cultural gap, more difficult will be the merger and more crucial will be the diligence phase
Helps management plan necessary actions for resolving them before the merger is announced
Wider the cultural gap, more difficult will be the merger and more crucial will be the diligence phase
HR Due Diligence
Issues to watch out for
Cultural and Talent Indicators
Workforce Assessment
Remuneration
Employment Agreements & Legal
Compliance
Risks in Due Diligence
HR Due Diligence
Cultural and Talent Indicators
Speak to key personnel about staff behavior.
Get feedback from key clients about services quality,
staff attitude, reliability.
Get turnover data, compare it with industry
standards and look for potential problems.
Get staff retention details
Identify the key talent needed to be retained.
Speak to key personnel about staff behavior.
Get feedback from key clients about services quality,
staff attitude, reliability.
Get turnover data, compare it with industry
standards and look for potential problems.
Get staff retention details
Identify the key talent needed to be retained.
HR Due Diligence
Workforce Assessment
Obtain headcount allocations for each category.
Is the organization structure efficient or flabby.
What is the headcount requirement of the merged organization for each job category.
Do a skills requirement study. For example:Technical qualifications for trade or technical
organization.Soft skills for service oriented organization.
Obtain headcount allocations for each category.
Is the organization structure efficient or flabby.
What is the headcount requirement of the merged organization for each job category.
Do a skills requirement study. For example:Technical qualifications for trade or technical
organization.Soft skills for service oriented organization.
HR Due Diligence
Remuneration
Critical, because large amount of time and money is expended.
Obtain remuneration data and compare with the labor market position for the industry.
Underpaid staff need to be brought to industry standards, not possible at one go
Overpaid staff need to be realigned sensitively.
Bonus schemes: Realign criteria for incentives in the new entity.
Critical, because large amount of time and money is expended.
Obtain remuneration data and compare with the labor market position for the industry.
Underpaid staff need to be brought to industry standards, not possible at one go
Overpaid staff need to be realigned sensitively.
Bonus schemes: Realign criteria for incentives in the new entity.
HR Due Diligence
Employment Agreements & Legal Compliances
Check out for redundancy liabilities like transfers, leaves, trade unions, health & safety.
Do not overrate the value of complying with the law. It is important but not more than skill and behavior assessment.
Maintain a balance between time and efforts spent in alignment of people and skills versus drafting elaborate compliance procedures.
Check out for redundancy liabilities like transfers, leaves, trade unions, health & safety.
Do not overrate the value of complying with the law. It is important but not more than skill and behavior assessment.
Maintain a balance between time and efforts spent in alignment of people and skills versus drafting elaborate compliance procedures.
HR Due Diligence
Major Risks in Due Diligence
Insufficient remuneration analysis could lead to loss of key
personnel. Minimal analysis of labor relations could ignore history of
labor conflicts. A new management team could be required if target
company’s management team is not very forward looking or
dynamic. Target company’s management team could have troubles
adjusted to constraining culture if it is more entrepreneurial
than acquiring company.
Insufficient remuneration analysis could lead to loss of key
personnel. Minimal analysis of labor relations could ignore history of
labor conflicts. A new management team could be required if target
company’s management team is not very forward looking or
dynamic. Target company’s management team could have troubles
adjusted to constraining culture if it is more entrepreneurial
than acquiring company.
HR Due Diligence
Major Risks in Due Diligence
If target company has more organizational layers, trimming
could be required and initially committed promise of not
downsizing will be breached, leading to an atmosphere of
mistrust. If analysis of compensation practice is insufficient and target
company has generous packages, there could be a post
merger exodus of talent. If target company’s management practices and culture is not
analyzed adequately, the acquirer may be unprepared for the
extent of effort required for the cultural integration exercise.
If target company has more organizational layers, trimming
could be required and initially committed promise of not
downsizing will be breached, leading to an atmosphere of
mistrust. If analysis of compensation practice is insufficient and target
company has generous packages, there could be a post
merger exodus of talent. If target company’s management practices and culture is not
analyzed adequately, the acquirer may be unprepared for the
extent of effort required for the cultural integration exercise.
HR Due Diligence
HR Due Diligence
People issues are critical, yet neglected
Possible reasons include: The belief that they are too soft, and, therefore, hard to
manage
Lack of awareness or consensus that people issues are critical
No spokesperson to articulate these issues
No model or framework that can serve as a tool to systematically understand and manage the people issues; and therefore
The focus of attention in M & A activity is on other activities such as finance, accounting, and manufacturing
Possible reasons include: The belief that they are too soft, and, therefore, hard to
manage
Lack of awareness or consensus that people issues are critical
No spokesperson to articulate these issues
No model or framework that can serve as a tool to systematically understand and manage the people issues; and therefore
The focus of attention in M & A activity is on other activities such as finance, accounting, and manufacturing
HR Due Diligence
HR Integration: Stages, Challenges and Solution
The experiences of companies in merger and acquisition activity suggest a model of M & A activity that has three stages:
Stage 1: Pre-combination
Stage 2: Combination - Integration of the partners
Stage 3: Solidification and advancement - the new entity
The experiences of companies in merger and acquisition activity suggest a model of M & A activity that has three stages:
Stage 1: Pre-combination
Stage 2: Combination - Integration of the partners
Stage 3: Solidification and advancement - the new entity
HR Due Diligence
Stage 1- Pre-Combination
HR Issues HR Implications and Actions
Identifying reasons for the M & A Knowledge and understanding need to be disseminated
Forming M & A team/leader Leadership needs to be in place
Searching for potential partners Composition of team impacts success
Selecting a partnerSystematic and extensive pre-selection and selection are essential
Planning for managing the process of the M and/or A Conducting thorough due diligence of all areas is vital
Planning to learn from the process Cultural assessment
Planning for combination minimizes problems later
Creating practices for learning and knowledge transfer
HR Due Diligence
Stage 2: Combination: Integration of the Co.
HR Issues HR Implications and Actions
Selecting the integration manager Selecting the appropriate candidate
Designing/implementing teamsCreating team design and selection are critical for transition and combination success
Creating the new structure/strategies/ leadership Communicating is essential
Retaining key employees Deciding on who stays and goes
Motivating the employeesEstablishing a new culture, structure, and HR policies and practices is essential
Managing the change process
Communicating to and involving stakeholders
Deciding on the HR policies and practices
HR Due Diligence
What is Change Management
Structured approach to transitioning individuals, teams, and organizations from a current state to a desired future state.
The current definition of Change Management includes both organizational change management processes and individual change management models, which together are used to manage the people side of change.
Structured approach to transitioning individuals, teams, and organizations from a current state to a desired future state.
The current definition of Change Management includes both organizational change management processes and individual change management models, which together are used to manage the people side of change.
HR Due Diligence
Change Management Styles
Individual Change Management Unfreeze – Change – Refreeze Kubler-Ross Formula for change ADKAR
Organizational change management Dynamic conservatism The role of the management The constructionist principle (reflection, advocacy, inquiry) Scenario Planning Theory U of Otto Scharmer
Individual Change Management Unfreeze – Change – Refreeze Kubler-Ross Formula for change ADKAR
Organizational change management Dynamic conservatism The role of the management The constructionist principle (reflection, advocacy, inquiry) Scenario Planning Theory U of Otto Scharmer
HR Due Diligence
Productivity drops by 50% Leadership attrition soars 47% within 3 years Employee satisfaction drops 14% 90% of high-tech mergers fail to deliver
expected increases 80% of employees begin to feel management
cares more about financials than product quality or people
Productivity drops by 50% Leadership attrition soars 47% within 3 years Employee satisfaction drops 14% 90% of high-tech mergers fail to deliver
expected increases 80% of employees begin to feel management
cares more about financials than product quality or people
Pitfalls of Poor Integration
HR Due Diligence
Stage 3: Solidification and Assessment
HR Issues HR Implications and Actions
Solidifying leadership and staffing Elective leadership and staffing of the new entity are essentialAssessing the new strategies and structures Creating and evaluating a new structure
Assessing the new culture Melding two cultures needs assessment revision
Assessing the new HR P & PThe concerns of all stakeholders need to be addressed and satisfied
Assessing the concerns of stakeholders The new entity must learn
Revising as needed
Learning from the process
HR Due Diligence
Role of HR Department in M&A activity Research indicates that only 35% of senior HR executives are
involved in M & A activities.
80% of combinations fail at the implementation stage as a result of the following factors an inadequate road map
senior HR professionals brought in too little, too late;
senior HR professionals lacking in either/both business/global experience;
an inadequate skills base overall; and ultimately, failed organizational change
Research indicates that only 35% of senior HR executives are involved in M & A activities.
80% of combinations fail at the implementation stage as a result of the following factors an inadequate road map
senior HR professionals brought in too little, too late;
senior HR professionals lacking in either/both business/global experience;
an inadequate skills base overall; and ultimately, failed organizational change
HR Due Diligence
Developing key strategies for a company's M & A activities.
Managing the soft due diligence activity
Providing input into managing the process of change
Advising top management on the merged company’s new organizational structure
Developing key strategies for a company's M & A activities.
Managing the soft due diligence activity
Providing input into managing the process of change
Advising top management on the merged company’s new organizational structure
Major activities to be performed by HR
HR Due Diligence
Creating transition teams
Overseeing the communications
Managing the learning processes
Re-casting the HR department itself
Creating transition teams
Overseeing the communications
Managing the learning processes
Re-casting the HR department itself
Major activities to be performed by HR
HR Due Diligence
Partnership
Change Facilitator
Strategy Implementor
Strategy Formulator
Innovator
Collaborator
Partnership
Change Facilitator
Strategy Implementor
Strategy Formulator
Innovator
Collaborator
New roles for the HR leader
HR Due Diligence
Identifying and developing new competencies of HR leader
Business competencies
Leadership competencies
Change and knowledge management competencies
Industry knowledge Strategic analysis Consulting and communicating
Competitor understanding Managing cultural diversity Group process facilitation
Financial understanding Creator of learning cultureDesigning and working in flexible structure
Global perspective/knowledge Planning skills Partnering and parenting
Strategic visioning Adaptability Negotiating
Partner orientation Learning facilitator Network building
Multiple stakeholder sensitivity Value shaper HR alignment
Merger and acquisition knowledge
HR Due Diligence
HR Due Diligence
HR Due Diligence
Synergies were expected in different areas. Complementary geographical markets Unique Portfolio Cost synergies in
Purchasing Integration & Financial Services R&D Sales & Distribution Infrastructure Higher Sales
Benchmarking each other and mutual learning processes Lean ways for Daimler Engineering skills for Chrysler
Synergies were expected in different areas. Complementary geographical markets Unique Portfolio Cost synergies in
Purchasing Integration & Financial Services R&D Sales & Distribution Infrastructure Higher Sales
Benchmarking each other and mutual learning processes Lean ways for Daimler Engineering skills for Chrysler
HR Due Diligence
The German part dominated the post-merger integration structure of the DaimlerChrysler AG.
Both companies prepared themselves for a merger.
Pre-merger preparations: First negotiations in 1995 PEOPLE: Chairmen, because of different expectations POWER: Chances at Daimler vs. Fears at Chrysler PURPOSE: maintain strength in technology vs. R&D investments and new markets
The Integration Structure had a major German influence. Common Board with 18 members (10:8 for Daimler - 2 non-automotive businesses) Real power base Integration Council October 1999 there was a 2:1 majority for Daimler on the board Absorption Mode by Daimler
The German part dominated the post-merger integration structure of the DaimlerChrysler AG.
Both companies prepared themselves for a merger.
Pre-merger preparations: First negotiations in 1995 PEOPLE: Chairmen, because of different expectations POWER: Chances at Daimler vs. Fears at Chrysler PURPOSE: maintain strength in technology vs. R&D investments and new markets
The Integration Structure had a major German influence. Common Board with 18 members (10:8 for Daimler - 2 non-automotive businesses) Real power base Integration Council October 1999 there was a 2:1 majority for Daimler on the board Absorption Mode by Daimler
HR Due Diligence
Post Merger Scenario
Daimler Chrysler merger proved to be a costly mistake for both the companies. Daimler was driven to despair, and to a loss, by its merger with Chrysler.
The merged group reported a loss of 12 million Euros
Culture clash
Ideology Clash
Daimler Chrysler merger proved to be a costly mistake for both the companies. Daimler was driven to despair, and to a loss, by its merger with Chrysler.
The merged group reported a loss of 12 million Euros
Culture clash
Ideology Clash
HR Due Diligence
• The crucial point in the cultural differences was the Business Culture.
• National Culture influence e.g. attitudes to work, authority and equality.• Working late hours vs. Working on deadlines• Command lower-levels vs. Discuss with lower-levels
• Business Culture was what was critical, which was different in terms of organization structures, working styles, compensation schemes etc.
• STORIES: Rich successful engineering heritage vs. Self-made upcoming company• SYMBOLS: Executive assistants vs. No convention, equality• POWER: Chairman vs. Charismatic Executives• ORGANIZATION: Hierarchic, bureaucratic Holding vs. Intuitive cross-functional• structure• CONTROL: Compensation schemes• ROUTINES & RITUALS: Late hours vs. Deadlines; formal vs. informal
• It evolved to the dominant German culture.• German Engineering vs. Cowboy Independence• Compromises instead of digital decision• Pick a spot in the middle
• The crucial point in the cultural differences was the Business Culture.
• National Culture influence e.g. attitudes to work, authority and equality.• Working late hours vs. Working on deadlines• Command lower-levels vs. Discuss with lower-levels
• Business Culture was what was critical, which was different in terms of organization structures, working styles, compensation schemes etc.
• STORIES: Rich successful engineering heritage vs. Self-made upcoming company• SYMBOLS: Executive assistants vs. No convention, equality• POWER: Chairman vs. Charismatic Executives• ORGANIZATION: Hierarchic, bureaucratic Holding vs. Intuitive cross-functional• structure• CONTROL: Compensation schemes• ROUTINES & RITUALS: Late hours vs. Deadlines; formal vs. informal
• It evolved to the dominant German culture.• German Engineering vs. Cowboy Independence• Compromises instead of digital decision• Pick a spot in the middle
HR Due Diligence
The revolutionary strategic change was managed by an interventional / directional approach.
REVOLUTION as style of strategic change. Transformation Big Bang.
Daimler tried an interventional approach although it was a directive managing style right from the beginning.
Intervention, Stallkamp as change agent Fear of manipulation & resistance Direction, Hold on Crisis became obvious
The revolutionary strategic change was managed by an interventional / directional approach.
REVOLUTION as style of strategic change. Transformation Big Bang.
Daimler tried an interventional approach although it was a directive managing style right from the beginning.
Intervention, Stallkamp as change agent Fear of manipulation & resistance Direction, Hold on Crisis became obvious
HR Due Diligence
RecommendationNo announcement as “merger of
equals”.Beware of national differences which
can effect the business culture.Observing business cultures better and
digital decision right from the beginning.
HR Due Diligence
“It is clear that you cannot stay in the top league if you only grow internally. You cannot catch up just by internal growth. If you want to stay in the top league, you must combine.”
In the long run…
- Daniel Vasella, CEO, Novartis
HR Due DiligenceHR Rocks !!!
HR + = HR Rocks
Visit hrmba.blogspot.com
for more presentations, project
reports, notes etc.
HR Due Diligence