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MERGERS AND ACQUISITIONS IN BANKING AND FINANCE: DO THEY CREATE VALUE FOR THE
SHAREHOLDERS? PAY ATTENTION TO THE HUMAN SIDE OF THE DEAL
By Antonios Tseos
The University of Leicester
Subject Area: Finance & Economics
Submitted: 26th November 2010
Student Number: 107248SINS319
Dissertation submitted to University of Leicester in partial fulfilment of the requirements for the degree of Master of Science in Finance.
Contents Page
Acknowledgements 4
Executive Summary 5
1. Introduction 7
1.1 Structure of Dissertation 12
2. Why Banks Merge? Reasons and Evidence. 14
2.1 Expected Benefits of Mergers and Acquisitions. 15
2.2 Motives of Mergers and Acquisitions in Banking. 16
2.2.1 Reasons for the recent activity of mergers
in the Banking sector. 20
2.3 The evidence 26
3. M&As as a strategic choice. 31
3.1 The three main areas of strategy. 31
3.2 Key Elements of strategic decisions as value drivers for M&As. 35
3.2.1 Vision and Mission. 35
3.2.2 Corporate Strategy and Organizational Culture. 36
3.2.3 Types of Organizational Cultures. 38
3.2.4 Different Forms of Cultural Integration. 42
3.3 Leadership 47
3.3.1 Leadership in the context of purpose. 52
4. Types of Mergers and Acquisitions and probable effects on 55
HR management.
5. The Process of Mergers and Acquisitions and the need for 59
an updated systematic approach.
6. Conclusion 71
7. Recommendations 77
8. Reflections 78
9. References 79
Appendix 1 Case Study: The case of the acquisition of Royal Trustco Ltd
by the Royal Bank of Canada by Burns and Rosen (1997). 84
2
Appendix 2 Proposal of the dissertation. 94
List of Tables Page
Table 1 Cultural Types and Merger Outcomes 41
Table 2 Personalized versus socialized charismatic leadership 51
List of Figures
Figure 1 Total value of M&A transactions in the US vs the EU
27
(1995-2002)
Figure 2 Sectoral distribution of M&A transactions in 2000 27
Figure 3 M&A failures in the financial service industry. 29
Figure 4 Merger Type and difficulties of Implementing Merger 58
Figure 5 Typical process for M&A deals completion 61
3
Acknowledgements
I would like to express my gratitude to Evgenia Koubouli for her enthusiastic support during the preparation of this research. Due to her, this thesis became a reality. Also the experience I had as an employee of Laiki Bank during the merger with Egnatia Bank and Marfin Bank helped me in many ways to complete this thesis. On purpose, though, I did not proceed in the analysis of the merger stress syndrome.
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Executive Summary
The purpose of this paper is to try, through an extended literature review, to recognize
if HR management is a vital issue for the success of financial institutions mergers and
acquisitions, and if there is an adequate systematic approach to the issue. It researches
whether there are specific practices that banks could follow in order to manage
successfully organizational and socio-cultural post- merger integration, if the amount of
prior acquisition experience has significant impact on post acquisition performance, and
if there is evidence that top level and middle level management quality is of crucial
importance for the successful outcome of bank mergers and acquisitions. The final aim
is to discover if there is space for further academic research on the specific practices
that top level and middle level management should follow in order to make a merger or
acquisition successful. During the last decades the world has witnessed an
unprecedented wave of M&A deals. Financial institutions were, among others, the
leaders in mergers and acquisitions in volume and value. Nevertheless, the time and
money spent in such transactions, though justified by pure theory, many times are not
justified by the outcome. Evidence shows that merger and acquisition deals have a high
probability of failure. Many studies, advisory firms, and companies that involve often
in such transactions report the aspect of human capital management as one of the most
serious reasons of M&A failure. This paper makes a contribution to filling the gap that
exists in the literature. Researchers almost totally ignore the simple employees of
financial institutions as a sample for the research in the field. Furthermore, a new
research methodology of M&A deals is required that will provide companies with an
5
updated systematic approach to the implementation of M&A deals which will facilitate
the organizational and socio-cultural implementation of the firms. This updated
systematic approach should focus on the issue of the management of human capital.
The new systematic approach is important due to the high failure rate of M&A deals,
and due to the fact that managers do not seem to learn from their experience in the
field. It appears also, that Leadership is another value driver for M&A transactions, but
further investigation on the issue is important. Also, further research should be
contacted on the importance of middle management and trade unions in the deals.
6
1. Introduction
Its all about simple mathematics; 1+1=3! It is a mistake that senior managers often
make in their calculations about the value of the new company that is created through a
merger or an acquisition. Of course, theory justifies in multiple ways the reasons for
such strategic movements like mergers and acquisitions between companies. The
driving forces for mergers and acquisitions are many like revenue synergies, cost
synergies, market share increase, new geographic markets, information technology
evolution etc. But, what does evidence signifies about the real outcome of them? The
focus on the increase of the shareholder value and the fastest way to get there should be
the main principle of managers. Instead of that, several studies indicate that more than
half of such deals destroy shareholders’ value. The evidence signifies that something is
not right in the process of making the deal. So, this report will focus on the reason that
is, most of the times, reported by CEOs, CFOs, and advising companies as a major
factor that influence the outcome of a merger or an acquisition; the human side of the
M&A activity.
More specifically, the main objective of this study is to try, through an extended
literature review, to recognize if HR management is a vital issue for the success of
financial institutions mergers and acquisitions, and if there is an adequate systematic
approach to the issue.
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In order to reach this main research objective, the following specific sub-questions are
covered:
A. Are there specific practices that banks could follow in order to manage
successfully organizational and socio-cultural post- merger integration?
B. Has the amount of prior acquisition experience a significant impact on post
acquisition performance?
C. Is there evidence that top level and middle level management quality is of
crucial importance for the successful outcome of bank mergers and
acquisitions?
D. Is there space for further academic research on the specific practices that top
level and middle level management should follow in order to make a merger or
acquisition successful?
Most of the times managers, trying to forecast the synergies between the companies
that will create value for the shareholders, focus on the financial side of the deal.
Nevertheless, balanced management of economic capital and human capital is the way
to the success of a deal. According to a research by KPMG (1999), companies that left
the cultural issues until the post-deal period were 26% less likely than average to have a
successful outcome. In contrast, companies that prioritized their attention on financial
or legal issues were 15% less likely than average to have a successful deal.
Since M&As are a strategic decision for a company, in this paper the writer tried to
correlate some major features of strategic theory with the current literature on M&As.
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In the new economy, material and capital are turning more and more into a commodity
giving way to intellectual capital and talent. The management of human capital is not
an easy issue because it includes many parameters that must be evaluated. The different
types of culture and the dissimilar strength of the culture that each company has may
lead to a cultural clash which may be disastrous for the outcome of a deal. The concept
of Cultural fit (compatibility of national and organizational cultures), in M&As and its
vital role regarding M&A success is often mentioned in current literature, though there
is controversy on the issue. A proactive strategy for dealing with corporate culture and
human resource issues is fundamental to the success of mergers and acquisitions.
However, these issues are rarely considered until serious difficulties arise. The
managers must communicate to the employees, in a clear and trustworthy manner, the
vision, and the mission of the new entity. Trust among mangers and employees is a
major asset and a significant value driver for an M&A deal. The formers, if they want a
deal that will add value and will maximize the shareholders’ wealth, must evaluate the
differences in corporate culture and find ways to integrate the merging firms in a
collaborative manner.
Also, companies, when they formulate their strategies, should take into account the
environment where they operate. Bryson (2002) considers the role of trade unions in
M&As as a potential value driver that merger literature has not addressed enough.
Moreover, the purpose of the corporate strategy should be to add value to the supplies
brought into the organization (Lynh 2003).
Furthermore, leadership is vital for the development of the purpose and strategy of an
organization (Lynh 2003). The leaders have remarkable potential for influencing the
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overall direction of the company. According to Waldman and Javidan (2009) post
M&A performance, especially in terms of achieving the integration of merging firms, is
strongly affected by organizational factors, such as leadership. There is controversy in
current literature, also, for the issue of leadership and its effect on the outcome of
M&As. Even more, the M&A literature tends to either ignore the importance of
leadership or make brief reference to it (Waldman and Javidan 2009).
The process of implementing mergers and acquisitions is highly elaborated by deal
advisors and many writers in the current literature who have proposed a systematic
approach for the successful completion of an M&A deal. They have suggested specific
aspects that a potential buyer should address in each one of the steps of the process in
order to have a successful merger or acquisition outcome. In the current literature the
issue of human capital management or HR department involvement in the M&A
process is considered, among others, the main value driver for a deal. It seems though
that the current systematic approach and the proposals that experts in the field of
M&As have offered for a successful deal are not enough since at least 1 out of 2 deals
fails to deliver the expected positive outcome. Every M&A transaction has unique
characteristics, and as such, each transaction should be examined uniquely and
inferences should be provided after all transactions are categorized accordingly, to job
sectors, nations, cultural strength, type of leadership, economic environment etc. Most
of the current research is based on secondary data trying to produce statistical
inferences without trying to understand the uniqueness of each transaction.
Furthermore, some studies try to draw inferences using telephone interviews only with
the directors of the firms together with share price data. Other researches use
questionnaires as a medium to collect data. Questionnaires or telephone interviews are a
1
better approach than simple secondary statistical data, but even they can be misjudged,
or the respondent can lie. In addition, most researchers using questioners or telephone
interviews for their suggestions address most of the times to a sample of upper level
management and some times of middle managers without taking in to consideration the
simple employee.
Furthermore, it seems that most of the managers do not pay attention to the current
proposals of experts for a successful deal or/and they do not seem to learn form their
experience on M&As. Again, there is contradiction in literature about how previous
experience of firms in M&As affects the possible outcome of new deals.
The finding from my study is that due to the contradiction that exists in current
literature about the factors of success or failure of an M&A deal, and the ongoing high
failure rate of the deals, a new research methodology of M&A deals is required that
will provide companies with an updated systematic approach to the implementation of
M&A deals which will facilitate the organizational and socio-cultural implementation
of the firms. This updated systematic approach should focus on the issue of the
management of human capital which is considered, maybe, the most important value
driver for M&As. The new systematic approach is important due to the high failure rate
of M&A deals, and due to the fact that managers do not seem to learn from their
experience in the field. It seems also, that Leadership is another value driver for M&A
transactions, but further investigation on the issue is important. Also, further research
should be contacted on the importance of middle management in the deals, and finally
writers almost totally ignore the simple employees as a sample for the research in the
field.
1
The above inferences have been drawn in order to improve the process and the success
rate of M&As which as a strategic choice, are a powerful tool in the managers’ hand
that can help them boost the growth of the company quickly and effectively and gain
sustainable advantage. The choice to proceed in merge or an acquisition is considered
one of the most important means by which companies respond to changing conditions
(Bruner 2004 cited Bertoncelj and Kovac 2007).
1.1 Structure of Dissertation
In the course of this dissertation, the summary outlined below shall be the areas to be
covered.
Chapter 1: Introduction/Research Questions.
Chapter 2: The first chapter defines the reasons for which banks and financial
institutions proceed in mergers and acquisitions and gives evidence about the number
and value of the deals for the last decade. Also, in this chapter there is indication about
the possible positive or negative outcome of the deals.
Chapter 3: Since M&As are a strategic decision for a company, in this chapter the
writer defines what a strategy is for a company and describes its major elements and
tries to correlate strategic theory with the current literature on M&As. Managers
employ M&As in order to achieve some specific purpose which is the long term
survival and growth of the organization and the well being of its stakeholders. To
facilitate that purpose managers should focus more on people, their behaviour, the new
1
organizational culture, and values. The cases of Leadership, middle managers,
integration managers and trade unions are also discussed.
Chapter 4: In order to give a more general view of the human resource problems that
arise during the post- merger or acquisition integration of the buyer and the target, in
this chapter we present the major types of mergers and acquisitions that exist in relation
to the implications that they have on the issue of HR management.
Chapter 5: Deal advisors and many writers in the current literature have proposed a
systematic approach for the successful completion of an M&A deal. But, is it enough?
No, since at least 1 out of 2 deals fails to deliver the expected positive outcome. In this
chapter the typical process of an M&A deal and the systematic approach for the
successful completion of a deal that exists so far are discussed. The controversy that
exists on the issue in literature is also discussed, and a proposal for a new research
methodology in the field of M&As is given.
Chapter 6: Summarizes the conclusions regarding the study.
Chapter 7: Summarizes the proposal of the writer for further academic research on the
subject of mergers and acquisitions.
Chapter 8: Reflections are given.
1
EXTENDED LITERATURE REVIEW
2. Why Banks Merge? Reasons and Evidence
M&As are a part of a general strategic plan for a bank, thus M&As policies and
decisions should take place within the general framework of the bank’s strategic
planning processes (Bertoncelj and Kovac 2007). M&As, as a strategic choice, are a
powerful tool in the managers’ hand that can help them boost the growth of the
company quickly and effectively and gain sustainable advantage. The alternative way
by which a company can expand the existing activities is internally or organically
(University of Leicester 2001). The growth of a company is usually expressed in terms
of sales growth, market share growth, profit growth, or the size of the company
(University of Leicester 2001). A couple of decades ago, the growth strategy was
based, mainly, on organic growth. Nowadays, though, business systems are going
through a dramatic transformation in response to the continual changes in the business
environment and companies are constantly adapting to those changes. A merger or
acquisition, as a strategic choice is considered one of the most important means by
which companies respond to changing conditions (Bruner 2004 cited Bertoncelj and
Kovac 2007). Beyond all, the ultimate goal of a strategic movement like a merger or an
acquisition is or should be the maximization of the shareholders’ wealth. So, how
exactly are extracted the expected benefits of an M&A deal?
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2.1 Expected Benefits of Mergers and Acquisitions
M&As are investment decisions and, as such, they are evaluated in the context of
capital budgeting. The expected benefits of the acquisition are the incremental cash
flows generated by the combination of the previously independent firms. The cost of
the investment decision includes the legal fees, the fees to investment bankers and to
accountants or any other such fees, and the premium paid to the shareholders of the
seller. In particular, a firm should proceed with the acquisition of another firm if it is,
somehow, certain that there is an economic gain from the transaction; that is, only when
the two firms worth more together than apart; in short, 1+1 must equals more than 2.
The economic gain of the merger is calculated as follows in equation 1:
Gain = PVAB - (PVA + PVB) = Value of Synergy (Equation 1)
PVAB is the value of the combined business.
PVA is the pre-acquisition value of the bidder.
PVB is the pre-acquisition value of the seller.
In the simple case where the acquisition is paid with cash, the cost of the acquisition is
calculated as follows in equation 2:
Cost = cash – PVB (Equation 2)
The cost of the acquisition is equal to the cash payment minus the seller’s value as a
separate entity. The cost as calculated above is the premium paid to the shareholders of
the seller which, in essence, is the part of the total gain of the merger that the seller’s
shareholders reap. In fact, when a buying firm calculates the cost of the acquisition
1
should also take in to consideration the legal fees, the investment banker’s fees, the
accountant’s fees and all the other costs related to the transaction including the cost of
the time it will consume to close the deal. Many times the buyers do not take in to
consideration the above lateral fees which are enormous, especially in a hostile
takeover, so they do not have a clear picture of the final gain of the deal.
So, what is the gain or loss of the buyer’s shareholders in an acquisition of
another firm? It is the NPV of the investment decision which is calculated as follows in
equation 3:
NPV = [PVAB - (PVA + PVB )] - [(cash - PVB)]= gain – cost (Equation 3)
If the NPV is positive, the buyer should proceed with the acquisition since the
transaction will increase the wealth of the shareholders (Brealey and Myers 2003).
The motives of proceeding in to mergers or acquisitions are numerous and are
described in literature in multiple ways. Some of the generally accepted reasons are
reported below and specific analysis is given for the reasons of bank M&As.
2.2 Motives of Mergers and Acquisitions in Banking
It is important to distinguish between mergers and acquisitions. The term merger refers
to the situation in which two companies harmoniously form one corporation (Alkhafaji
1990). Mergers differ from takeovers in that during a takeover there is little or no
concern for the target company. In a merger, the companies work together to achieve
the best for both and, furthermore, a mergers is a friendly or voluntary combination of
two or more companies. In contrast, an acquisition is ‘any transaction in which a buyer
acquires all or part of the assets and business of a seller, or all or part of the stock or
other securities of the seller, where the transaction is closed between a willing buyer
and a willing seller’ (Scharf 1971:3).
1
M&A transactions can be separated in strategic M&As and financial M&As.
Strategic M&As take place based on the pre-merger expectation of developing
synergies between merging firms through integrating the management teams,
organizational structures and cultures, systems, and processes of the two pre-merger
organizations. In contrast, financial M&As are based on pure transaction or the buying
of a stream of revenues for the purpose of better asset management; little if any
synergies or integration processes are expected (Waldman and Javidan 2009).
Integration of firms can take several forms the basic of which are horizontal
integration, vertical integration, and conglomeration. Horizontal mergers occurs when
firms combine at the same stage of production, involving similar products or services
(University of Leicester 2001). Vertical mergers occur when the firms combine at
different stages of production of a common good or service (University of Leicester
2001). Conglomerate mergers occur when a company adds different products or
services to its operation. Furthermore, mergers and acquisitions can be either hostile or
friendly, and they can be implemented either domestically within the same country, or
cross-border between firms located in different countries.
As far as the driving forces of M&As is concerned, they are multiple. “The most
general motive is simply that the purchasing firm considers the acquisition to be a
profitable investment’ (Pautler 2001:1). Firms undertake M&As when it is the most
profitable means of enhancing capacity, obtaining new knowledge or skills, entering
new geographic areas, or reallocating assets into the control of the most effective
managers (Pautler 2001:1). Efficiency improvement is a major goal of managers for the
1
united firm. ‘The potential efficiency gains from mergers and acquisitions include both
operating and managerial efficiencies’ (Pautler 2001:2).
“Operational efficiencies may arise from economies of scale, production
economies of scope, consumption economies of scope, improved resource
allocation (e.g. more resources in the hand of better managers), moving to an
alternative less costly production technology or asset configuration, improved
use of information and expertise, improved focus on core skills of the firm, a
more effective combination of assets, improvements in the use of brand name
capital, and reductions in transportation and transaction costs” (Pautler
2001:3).
Managerial efficiencies stem from the fact that M&As create a market for corporate
control which is an important safeguard against inefficient management. The existence
of such a market provides benefits in the form of more efficient reallocation of
resources from relative inefficient to efficient firms (Pautler 2001:3).
There are, of course, financial M&As which may, purely, lead to financial
efficiencies. For instance, firms may diversify their earnings by acquiring other firms or
their assets with dissimilar earnings streams. Earnings diversification may smooth the
variation of firms’ profitability reducing the risk of bankruptcy which destroys a firm’s
value (Pautler 2001:4). Additionally, acquirers may gain from tax reduction benefits
associated with mergers and acquisitions. According to Pautler (2001), the loss of a tax
benefit in US related to a change in the ‘General Utilities’ doctrine, was almost surely
the cause of a late 1986 increase in merger activity as companies tried to escape the
1
increased taxes that would be required in 1987. Finally, larger firms that are the
outcome of a merger or an acquisition may have better access to capital markets and
banks may be willing to lend them at a lower net interest rate. As a result, through
mergers and acquisitions, firms can have a lower cost of capital.
Yet, another driving force of mergers and acquisitions is the market power gain
of the combined company. By focusing on a particular market, merging firms could
increase their market power and thereby take advantage of monopolistic or
oligopolistic returns. Market power allows firms to charge more or pay less for the
same product or service. George Stigler (1968 cited Pautler 2001:5), argued that gain in
market power might have been a primary motivation for many of the M&As during the
last quarter of the nineteenth century and the first half of the 20th century.
In addition, another, not such strategic, reason that many mergers and
acquisitions take place is management greed or hubris. Morck, Shleifer, and Vishny
(1990 cited Pautler 2001:6) present evidence consistent with the idea that managerial
incentives may drive some mergers that ultimately reduce the long-run value of the
company. The managers may overemphasize growth, over diversify, or they may
choose the wrong target firm. Mitchell and Lehn (1990 cited Pautler 2001:6), argue that
managers who make poor acquisitions increase the probability to become they
themselves acquisition targets.
Finally, HR M&As (HR stems from Human Resource) are becoming more and
more famous (Schuler and Jackson 2001). Indeed, a main reason for companies to
merge or acquire is to gain access to talent, knowledge, and technology. It appears that
1
this specific reason for M&As is rising in its level of importance and such deals are
what bankers call HR deals (HR for Human Resource). In these acquisitions the
employees are seen as more valuable than the company’s product. Some banks are
applying metrics like price-per-employee to value these deals (Schuler and Jackson
2001).
The above general reasons for M&As can be further analysed in the context of the deals
that take place in the banking and financial services sector.
2.2.1 Reasons for the recent activity of mergers in the Banking sector
The motives for bank mergers are separated in efficiency related and strategic reasons
(Gupta and Chevalier 2005).
I. Efficiency Gains from M&A Deals
Economies of Scale
Through M&A deals, banks hope to gain economies of scale. These economies of scale
become mostly important for investments in information technology systems.
Installation of IT systems is becoming extremely important in this new era of
technology. The IT systems will allow banks to offer better products to their customers
in the face of increased globalisation in today's financial markets. Bigger size and the
related economies of scale enable banks to offer more products (Gupta and Chevalier
2005). On the other hand, Walter (2004) argues that there is also the possibility for
diseconomies of scale attributable to unbalanced increases in administrative overhead,
management of complexity, agency problems, and other cost factors that could take
2
place in very large financial firms. When economies of scale prevail, increased size will
help create shareholder value and systemic financial efficiency, but if diseconomies
prevail both will be destroyed. Studies of both scale and scope economies in financial
services are inconsistent. Most of the studies have found that economies of scale are
achieved with increase in size among small banks (below $100 million in asset size),
and a few studies have shown that scale economies may exist in banks falling into $100
million to $5 billion range. There is very little evidence on scale economies for banks
of up to $25 billion in size. The compromise seems to be that economies and
diseconomies generally do not result in more than about 5% difference in unit costs
(Walter 2004).
Cost Cutting
Often, there are overlaps in the operations of two banks especially in terms of the
geographic area covered. By M&As, the size of the bank increases, but intense cost
savings are to be had by closing redundant retail branches, dealing rooms, expensive IT
systems, and of course by laying off employees. For example, when Bank of Scotland
initiated a hostile $36 billion offer to take over National Westminster Bank, Bank of
Scotland promised to deliver savings up to $1.67 billion in a period of three years by
cutting costs at National Westminster Bank which was considered the country's least
efficient bank (Gupta and Chevalier 2005). In fact, financial firms of about the same
size and providing roughly the same services can have very different cost levels per
unit of output (Walter 2004). Empirical research has found very large differences in
cost structures among banks of similar size, suggesting that the way banks are run is
more important than their size or the selection of business that they follow (Walter
2004).
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Diversification
One of the reasons for financial sector M&A deals is that greater diversification of
income from multiple products, client – groups, and geographies creates more stable,
safer, and as a result more valuable institutions. The result form grater diversification
should be higher credit quality and debt ratings and, therefore, lower cost of financing
than those financial institutions which have are more focused oriented (Walter 2004).
The ability to control risk has become very important in the last decade for the
banking system. The companies that demand credit lines and equity offerings are
becoming larger. When a bank serves such clients should, at least temporarily, be able
to bear the firm’s risk, if it doesn’t want to share the market with other banks through
syndication lending (Gupta and Chevalier 2005). Surprisingly, past research has found
that M&A deals neither decrease nor increase the risk of the buyer (Walter 2004).
Economies of Scope
It is often argued that offering a broad range of financial services is more efficient than
offering these services in separate units. This aspect is especially important if the
merging banks have different activities – for example in the case of an investment bank
merging with a commercial bank as in the case of the BNP-Paribas merger. There are a
number of reasons for why it may be cheaper to provide a large range of products and
services than offering only highly specialized services (Gupta and Chevalier 2005):
A) Reusability of Information
Banks are essentially information intermediaries and information produced in a lending
relationship will be also useful either if the company wants to issue debt or equity.
Therefore, multiproduct banks should be able to operate more efficiently than purely
2
investment or purely commercial banks. For example, when underwriting equity, banks
will be able to draw on the experience from lending and their information from
providing payment facilities to the firm.
B) Reputational spillovers
To have a good reputation both among firms and individuals who need credit and
investors is a crucial asset for any bank. Companies have to be sure that the bank will
not utilize market power stemming from their informational advantage, and that they
will strive to obtain good conditions and prices in the case of equity issuance. Also,
investors will trust an underwriter with a successful track record more than a newcomer
who would have incentives to sell overpriced equity. Recent empirical studies have
shown that mispricing of issues is indeed more frequent for small and relatively
unknown investment banks than for the embedded firms. A merger could help to
transfer reputation form the acquirer to the target. Clients can reasonably expect that the
procedures and caution applied at a well known acquirer will be transmitted to the
target.
B) Better product mix
The argument of product mix is similar to the “economies of scope” argument.
However, while economies of scope only concern the cost factor the product mix
argument concerns the revenue side. In fact simultaneous offering of a broad product
range could make the bank’s products more attractive for customers and therefore
enable the bank to charge higher prices. Some companies may prefer a one shop policy.
It makes things much easier if the same bank is able to provide the same service in all
countries in which the company operates (Gupta and Chevalier 2005).
2
II. Strategic Reasons for Bank M&As
Increased Competition
The banking industry is very fragmented across the world. For example, in Germany,
the four largest banks hold less than 20% of the retail market. This increased
competition in the banking sector has decreased the interest margins and has raised
concerns about insufficient risk coverage. Therefore, although banks strive to increase
their size, they do not want to add capacity to the industry. The best option is to have an
M&A or an alliance. Some banks are using alliances and mergers as a strategic method
to establish their position in previously unreachable markets. An excellent example is
the take over of Bankers Trust by Deutsche Bank. Through this deal, Deutsche Bank
tried to enter the American Investment Banking sector (Gupta and Chevalier 2005).
Domino Effect
Another reason for which banks are merging is simply because everyone else is doing
it! The formation of Citigroup, the continuous expansion of Deutsche Bank, and the
collapse of the Japanese financial sector, prompted the merger involving Dai-Ichi
Kangyo Bank, Fuji Bank and Industrial Bank of Japan (Gupta and Chevalier 2005).
Too big to fail
Whereas this argument is rarely advanced by the bank managers, it has been discussed
expensively in the academic literature. Without a doubt, the failure of a very large bank
would cause such a disturbance to the economy of a county that it makes government
intervention almost inevitable. The current economic crisis has proved to one extend
that such a factor exists. Nowadays, due to the highly globalized market, the failure of a
2
large bank like Lehman Brothers affects the markets worldwide (Gupta and Chevalier
2005).
Empire building
Finally, as with all industries a primary reason for bank M&As may be the egos and the
compensation of top management. It is well known that executives’ remuneration
depends less on the company’s performance than on its size. Consequently, even if
there are no likely efficiency gains, bank managers may be eager to merge simply
because they anticipate more income for them. This may be more relevant to the case of
commercial banks acquiring investment banks. On average the salaries in investment
banks are in a completely different range and commercial bankers may hope that they
will be able to bring into line their compensation with the remuneration of their
colleagues from investment banking. Also, pure thirst of power may also play a role
(Gupta and Chevalier 2005). Pure thirst for power is many times reported in current
literature as managerial hubris. In ancient Greek mythology, the word ‘‘hubris’’ meant
disrespect/arrogance against the Gods. In the business world, a large number of CEOs
suffer from this syndrome. They have large egos, and they believe that as they are close
to being gods themselves, not only can they not make mistakes, but also whatever they
choose to do will be a success. Also, other executives see M&As as the perfect chance
to seek career progress and ego satisfaction (Donaldson and Preston, 1995 cited
Papadakis 2007). For example, the successive chairmans of Deutsche Bank have
frequently stated their ambition to become the largest universal bank in the world
without actually explaining why this would also be a good thing for the shareholders
(Gupta and Chevalier 2005). Public awards and increasing praise may lead an executive
to overestimate his or her ability to add value to firms. CEOs who are publicly praised
2
in the popular press tend to pay 4.8% more for target firms. Hubris can also lead
executives to fall in love with the deal, lose objectivity, and misjudge expected
synergies (QFINANCE 2010a).
Many other motives for mergers and acquisition could be presented in this
section though the most frequently described in literature are the above mentioned.
Although considerable time and effort is usually dedicated from researchers to analyze
the drives of mergers and acquisitions, they are nothing but a mean to an end, to a
higher purpose which must be the goal to boost shareholders’ wealth. But, what does
the evidence shows?
2.3. The evidence
During the last decades the world has witnessed an unprecedented wave of M&A deals.
According to Thomson financial data, the total transaction value of M&As reached
almost $3,500 billion in 2000 (distributed among 37,000 transactions), compared to less
than $500 billion recorded at the beginning of the 1990s. Hence, the total value of the
M&A operations multiplied seven-fold during a decade, in nominal terms (Ayadi and
Pujals 2004). In Figure 1 the total value of M&A deals is presented for EU and US.
2
Figure 1. Total value of M&A transactions in the US vs the EU (1995-2002)
(AYADI and PUJALS 2004)
A distinguishing feature of the latest M&A wave is that it is more prominent in some
sectors of the economy than in others. In the past few years, an increasing proportion of
worldwide M&A transactions concerned TMT sectors (technology, media and
telecommunications) and financial services (banking, insurance and securities) (see
Figure 2). Since the burst of the technological and financial bubble, the ‘old economy’
sectors have dominated the M&A market (Ayadi and Pujals 2004).
.Figure 2. Sectoral distribution of M&A transactions in 2000
(AYADI and PUJALS 2004)
2
In the U.S. and the Euro area, M&A activity in the financial institution sector has led to
a radical and nonstop decline in the number of banks and amplified concentration.
While the number of banks in the U.S. fell by more than one-third until the end of the
1990s, the number of credit institutions in the Euro area also declined substantially,
from around 9,500 in 1995 to 6,400 in 2004 (Marsch, Schmieder and van Aerssen
2007). The worldwide M&A market topped US$ 4.3 trillion and over 40,000 deals in
2007. More recently, globalization has increased the market for cross-border M&As. In
2007 cross-border transactions were worth US$ 2.1 trillion, up from US$ 256 billion in
1996. Transnational M&As have seen annual increases of as much as 300% in China,
68% in India, 58% in Europe, and 21% in Japan (QFINANCE 2010a).
Thus, taking to account the above data, and since considerable capital and time,
which are valuable resources for a company, is spent in M&A transactions, we would
expect the outcome of the deals to be positive for the companies involved in such
transaction and their stakeholders. On the contrary, the evidence is highly disappointing
showing that a great percentage of the deals have a negative outcome. Most large
mergers and acquisitions have difficulties to achieve the expected synergies (see figure
3). A decade ago (01.1999) the Economist reported study results of mergers: Two out
of three M&A transactions did not work. In 2003, a study by Merrill Lynch reported
that most mergers cannot deliver their promised return. In addition, large transactions
follow the trend to perform worse compared to small transactions. Also, Merrill Lynch
found out that at least 50 % of important transactions (time frame since 1990) did
reduce shareholder returns and therefore organizational value (Eddielogic 2008).
2
Figure 3. M&A failures in the financial service industry.
(CapGemini E&Y: Alliances and Mergers Services for the Financial Service Industry 2001, cited Eddielogic 2008)
To be more convincing, according to A.T. Kearney (2000 cited Bertoncelj and Kovac
2007:168), 58 percent of all mergers, acquisitions and other forms of corporate
restructuring fail to produce results rather than create value. Moreover, according to a
KPMG (1999) research, 17% of the deals had added value to the combined company,
30% produced no discernible difference, and as many as 53% actually destroyed value.
In other words, 83% of mergers were unsuccessful in producing any business benefit as
regards shareholder value (KPMG 1999). A McKinsy & Company study (2000 cited
Bertoncelj and Kovac 2007:168) found that “61 percent of acquisition programs were
failures because the acquisition strategies did not earn a sufficient return (cost of
capital) on the funds invested.” Examples include the acquisition of Bank of Scotland
by the Halifax Building Society in the UK in 2001, to create a financial institution
known as Halifax Bank of Scotland (HBOS). Subsequently, in September 2008, Lloyds
2
TSB acquired HBOS, after shares in the latter plummeted amid concerns over its future.
However, Lloyds TSB then had to be rescued by the UK government. In March 2009,
Lloyds TSB announced losses from HBOS of more than £10 billion, and the British
government subsequently acquired a majority stake in Lloyds TSB in return for
insuring the bank against future losses on £260 billion of toxic loans, 80% of them from
the HBOS side of the banking group (QFINANCE 2010b).
Overall, the prospect of further bank industry M&A appears high. Especially,
the subprime crisis of US-American mortgages (and its primary and secondary impacts
on the financial system) has enlarged the pressure for M&As in the financial services
market. This is not to say that M&A activity will necessarily lead to profitable growth.
Eventually, though, there is hope that M&As in the financial service Industry can work.
HSBC, Royal Bank of Scotland, Deutsche Bank in the case of the acquisition of
Bankers Trust, and Unicredit were quite successful in their transactions. Well
established and smart executed acquisitions processes as well as sound strategic
decisions were the major factors to fulfil the deals’ objective.
3
3. M&As as a strategic choice
Since M&As are a strategic decision for a company, in this chapter the writer defines
what a strategy is for a company and describes its major elements and tries to correlate
strategic theory with the current literature on M&As. Managers employ M&As in order
to achieve some specific purpose which is the long term survival and growth of the
organization and the well being of its stakeholders. To facilitate that purpose managers
should focus more on people, their behaviour, the new organizational culture, and
values. In the new business environment the key success factor is innovation, i.e. a
human being with his/her creativity, talents, skills, and relationships (Bertoncelj and
Kovac 2007). `Human capital becomes a winning factor and strategic resource, thus
satisfied and confident creative individuals will make it possible for companies to join
the club of the successful` (Bertoncelj and Kovac 2007:172).
3.1 The three main areas of strategy
Corporate strategy can be defined as the identification of the purpose of the
organization and the plans and actions to achieve that purpose (Lynch 2003). Every
organization has to manage its strategies in three main areas:
a) Its internal Resources.
b) The external environment
c) Its ability to add value to what it does (Lynh 2003).
a) The resources of an organization are its human resource skills, the investment, and
the capital all over the company. Organizations should develop corporate strategies in
3
order to optimize the use of its resources. It is important to discover the sustainable
competitive advantage that will help the company to survive and prosper against
competition (Lynh 2003). Material resources and financial capital, the efficient use of
which is considered a competitive advantage, were key resources some decades ago but
nowadays they are to a lesser extent. In the new economy, material and capital are
turning more and more into a commodity giving way to intellectual capital and talent.
Intellectual capital is a key resource that is interlaced in the process of creating added
value (Bertoncelj and Kovac 2007). Financial capital, although it keeps its role as an
important deciding factor, it is not anymore the only deciding factor. Rather, the human
being is becoming the most important resource and ought to be managed efficiently
(Bertoncelj and Kovac 2007). Concerning the banking industry which relies much on
the skills, knowledge, and competence of the employees (when we say employees in
this case we include also the management of the company), an acquisition of a
specialized firm by a larger, broader, more heavily capitalized firm can provide
substantial revenue related gains through both market share and price effects (Walter
2004). On the other hand, loss of key talent is a significant reason for a failed bank
merger or acquisition. For example, consistent with NationsBank’s (aka, Bank of
America) strategy of acquisition, CEO Hugh McColl paid a premium price of $1.2
billion for Montgomery Securities in October 1997. Afterwards, most of the best
investment bankers walked out after a series of rows with Montgomery’s management,
and culture clashes with the commercial bankers at headquarters. They were recruited
in the firm of Thomas Weisel, run by Montgomery’s eponymous former boss. Though
Bank of America spent a further fortune trying to revive the investment bank,
Montgomery was not any more the serious force it was before the merger (Schuler and
Jackson 2001). It is a basic assumption that the human resources make up an important
3
source of competitive advantage for the organization (e.g. Wright and McMahan 1992,
Pfeffer 1994, Storey 1995, cited Bjo¨rkman and Søderberg 2006). Acquiring new
knowledge represents a source of competitive advantage and firms that accumulate
skills and knowledge appropriate to their environment will outperform those which do
not (Geroski and Mazzucato, 2002, cited Holland and Salama 2010). Furthermore,
according to Appelbaum et al (2000 cited Appelbaum et al. 2007) human capital will
always be one of the most important resources companies rely on to achieve
competitive advantage in the marketplace and therefore management must be prepared
to design sound behavioural approach to M&A if they want to achieve this competitive
advantage.
b) As far as the environment is concerned, the companies must develop corporate
strategies taking into account their strengths and weaknesses in relation to the
environment in which they operate (Lynh 2003). For example, banks operating in a
highly segmented and highly competitive market may consider to acquire a bank in a
country were the economic environment allows for loans with high spreads over the
base rate. Moreover, while a bank merger or acquisition may prove beneficial for the
economy, government regulations may create initial challenges for such an
undertaking. For example, in many emerging markets frequently there are considerable
restrictions on modifying the terms or conditions of the employment relationship which
can result in increase expense and time to integrate (Fealy and Kompare 2003).
Furthermore, while union membership is dropping during the last decade, trade unions
can cause tremendous problems during an M&A transaction. In Europe, trade unions
have played a major role lobbying against deals, claiming that they are anticompetitive.
In some cases there may be specific legal obligations, such as advanced notice periods,
3
when a buyer must notify employee representatives for its intended actions. Failure to
notify or consult with a representative can delay the integration or interrupt the whole
transaction. Consequently, buyers must familiarize themselves with the legal
requirements and the interpersonal history of labour relations of the country of the
target. In many countries, strong relationships between the buyer and the employee
representative are actively promoted, and buyers are told that employee representatives
will serve as their partners helping for the general acceptance of the changes. Whether
or not a buyer can depend on an employee representative to actually facilitate the
process is a matter of speculation (Fealy and Kompare 2003). The academic and
practitioner literature has largely ignored the role of unions, and the impact of
employment relations policy contexts in managing the human resource management
risks associated with mergers. Bryson (2002) considers the role of trade unions in
M&As as a potential value driver that merger literature has not addressed enough. He
presents a New Zeland –based merger between Westpac and TrustBank as a useful
demonstration of the possibilities of union involvement contributing to workforce
stability. In this case established trust based relationships, local decision makers, well
developed union infrastructures and coverage levels proved fundamental to
union/management/employee cooperation.
c) Moreover, the purpose of the corporate strategy should be to add value to the
supplies brought into the organization (Lynh 2003). ‘To produce as much as possible at
the lowest price means higher added value’ (Bertoncelj and Kovac 2007). For example,
banks use energy, skills, technology, and capital (deposits for example) and provide
companies and individuals with loans, non-life and life insurance, traditional banking
services like the issuance of letters of guarantee etc. The above services have a value
3
which is higher than the combined value of all the factors which have been used to
provide the service. Creating (the greatest possible) added value remains the most
important goal of every company regardless of its organizational form, size or
evolutional phase. By creating additional value, the necessary resources are provided
for the sustainable development of a company, but nowadays in response to changing
conditions physical and financial assets as well as intellectual capital should be used
and therefore be managed. “Resources are like raw material; what matters is how the
firm integrates resources to reach its objectives” (Bruner, 2004 cited Bertoncelj and
Kovac 2007).
According to the current literature, there are some specific elements of the
corporate strategy which are considered major value drivers for mergers and
acquisitions.
3.2 Key Elements of strategic decisions as value drivers for M&As
Effective communication of the vision and the mission of the merged company to all its
stakeholders, knowledge, anticipation, recognition, and appropriate management of
cultural differences of the organizations that are involved in the M&A deal, and
successful management of the transaction or the existence of charismatic leadership, are
reported in current literature as value drivers for M&A transactions.
3.2.1 Vision and Mission
A corporate strategy should comprise a vision and a mission. A mission statement
summarizes the broad directions that the organization will follow and briefly addresses
the reasoning and values that lie behind it. The target of the mission statement is to
communicate to all the stakeholders inside and outside the company what the
3
organization stands for and where it is headed. It must be expressed in a language and
with a commitment that all of those involved can understand and feel relevant to their
own circumstances. Vision is the ability to move the organization forward in a
significant way beyond the current environment. For example, banks forecasting that
internet would be a new way of servicing customers and invested on that prior to the
others gained a competitive advantage. According to Thuy Vu Nga and Kamolrat
(2007), if Strategic Vision and Fit is as clear as possible in a merger, and if strategic
vision is expressed and focused on long-term competitive advantage and designed for
synergies in size, geography, people, and services can be one of the six keys to merger
success.
3.2.2 Corporate Strategy and Organizational Culture
Every company has a distinct culture. Culture is defined by Lynh (2003) as a set of
‘beliefs, values, and learned ways of managing an organization and this is reflected in
its structures, systems, and approach to the development of corporate strategy’. Culture
derives from the company’s past and present, its people, technology, and physical
resources, and from the targets, objectives, and values of those who work for it (Lynh
2003). According to Pikula (1999), the strength of the culture of a company depends on
the factor below:
A) The number of shared beliefs, values, and assumptions.
B) The number of employees who accept, reject, or share in the basic beliefs, values,
and assumptions.
A smaller, centrally located organization is likely to have a stronger organizational
culture than one which is larger and geographically dispersed due to the fact that
employee interaction is more frequent and informal in a smaller organization. When a
3
corporate culture is established, it provides employees with identity and stability, which
in turn provide the corporation with dedication (Pikula 1999).
Analysis and appraisal of culture is considered important because it influences every
part of the company and has an impact on its performance. It is the filter and shaper
through which the leaders, managers, and workers develop and implement their
strategies (Lynh 2003). There are, also, environmental influences on organizational
culture which may be, for example, language and communication. Language and
communication may be seen as variations between countries and represent a difference
that need to be accommodated in strategy in order to control it better and to motivate
those involved in it in a better way (Lynh 2003). As mentioned before, another example
of environmental influence on organizational culture may be the existence of trade
unionism which as an element of the environment, needs to be considered thoroughly.
Concerning the case of an M&A deal, the bidder, as part of its strategy, may want to
assimilate the culture of the target in order to grasp the forecasted synergies faster,
considering that the culture of the target company is inferior and unproductive. It is
recognized though that the threat posed by a strategic change can be a significant
barrier to the development of corporate strategy. The employees of the target feel the
fear and the anxiety of losing their jobs, so they become unproductive and not adaptive
to change, and furthermore, they present absenteeism, and high turnover. Furthermore,
the stronger the culture of the target, with well-ordered values, beliefs, and assumptions
the stronger will be the resistance to change from the employees (Pikula 1999). Much
will depend on the type of merger and the compatibility between the two organizations’
cultures.
3
Unfortunately, the data confirm the reason that bank employees face the case of
a merger or an acquisition transaction as a threatening event. Statistics show that the
jobs cut due to bank consolidations in Western Europe numbered at least 130,000 for
the period 1991-2001. In the United States, the number of jobs in the banking and
financial sector decreased 5 per cent between 1985 and 1995. More specifically, during
the Chemical Bank's 1995 merger with Chase Manhattan and Bank America's 1998
acquisition of NationsBank 30,000 job were lost (bnet 2001).
Also, differences in the two organizational cultures involved in an M&A deal
and how they are managed are crucial to the success or failure of the process (Pikula
1999). When a corporate culture is established, it provides employees with identity and
stability, which in turn provide the corporation with commitment (Pikula 1999).
Conversely concerning an M&A deal, a strong culture, with well-ordered values,
beliefs, and assumptions may obstruct the efforts for adjustment (Pikula 1999). Much
will depend on the type of merger and the compatibility between the two organizations’
cultures.
3.2.3 Types of Organizational Cultures
According to Roger Harrison (Cartwright and Cooper 1992 cited Pikula 1999) there are
four main types of organizational culture summarized below:
Power Cultures
In organizations with power cultures, the president, the founder, or a small core group
of key managers have the power. This type of culture is most common in small
organizations. Employees are motivated by feelings of loyalty towards the owner or
3
their supervisor. Tradition and physical and spiritual sense are the key elements of these
types of organizations. Power cultures are characterised by inequitable compensation
systems and other benefits based on favouritism and loyalty, as well as performance.
Role Cultures
Role cultures are highly autocratic. There is a clear division of labour, and management
practises are clearly defined. Rules and procedures are also clearly defined, and a good
employee is one who tolerates them. Organizational power is defined by position and
status. These organizations respond slowly to change; they are predictable and risk
averse.
Task/Achievement Cultures
Task/achievement cultures emphasize completion of the task; the employees usually
work in teams, and the emphasis is on what is achieved rather than how it is achieved.
Employees are flexible, innovative, and highly autonomous.
Person/Support Cultures
Organizations with a person/support culture have minimal structure and serve to foster
personal development. They are egalitarian in principle. Decision making is conducted
on a shared cooperative basis.
Table 1 summarizes the likely outcomes of mergers between partners of various
cultural types. The table is not an ultimate statement of likely outcomes, since other
factors can play a major role in determining the cultural fit between two organizations.
Yet, it represents drawbacks and obstacles that organizations may come across in an
M&A transaction.
3
Cultural integration can be complex because it may involve not only the
cultures of two organizations, but in the case of an international M&A deals, it also
involves the amalgamation of national cultures. Merging firms with conflicting cultures
will differ in terms of values, beliefs, and assumptions — all of which help to define
desirable behaviours and decision-making processes. Cultural differences could
generate alternative perspectives and culture clashes, especially on the part of the
acquired firm, which may see itself as the loser in the deal (Waldman and Javidan
2009). International bank M&As show a slower pace than national deals exactly
because the organizational integration is more difficult than in the case of national
deals. For example, in a case study of the merger of the Finnish Merita Bank with the
Swedish Nordbanken shows that the decision to root Swedish as the senior
management language had disintegrating effects on the organization. Top managers did
not have a realistic understanding of the level of language competence within the
organization and the strong emotional reaction among Finish – speaking employees
surprised them (Piekkari, et al. 2005).
4
Table 1
(Cartwright and Cooper 1993 cited Pikula 1999)
Other societal cultural differences that can come into play in the case of international
M&As include the case where the firms from societies high on uncertainty avoidance
are likely to prefer making choices based on more predictable outcomes, rather than
4
taking risks to exploit gains. Moreover, they are likely to engage in detailed planning in
anticipation of unknown events. In contrast, firms from societies low on uncertainty
avoidance will be keener to accept risk and assume an action-orientation, rather than
engaging in detailed planning (Waldman and Javidan 2009). Zaheer et al. (2003 cited
Dauber 2009) extent the concept of culture claiming that within organizations there are
also subcultures, such as professional culture. Thus, cultural differences may refer to
several levels of analysis in the context of M&As: National, industry, organizational
and group level Dauber (2009). Acquiring firms must remember that each region,
country, and company exhibits vast differences. According to Fealy and Kompare
(2003), for the buyer to gain a better understanding of these differences, it is always
beneficial to enlist the assistance of local resources. These people live in the
environment every day and they have first hand knowledge that will help the acquirer
deal with the problem of the integration of the two companies.
3.2.4 Different Forms of Cultural Integration
Regardless of the cultural fit, all M&A transactions will involve some conflict and
instability during a necessary process of acculturation. While the two firms try to
overcome their difficulties, each firm, depending on the merger type, the amount of
contact each has with the other, and its cultural strength, will compete for resources and
try to protect its territory and cultural norms. The conflict between the two
organizations will in the end be resolved either positively or negatively. In a positive
adaptation, agreement will be reached concerning ‘operational and cultural elements
that will be preserved and those which will be changed’ (Nahavandi and Malekzadeh
1993: 62 cited Pikula 1999). In a negative adaptation, the conflict will lead to employee
frustration and high turnover rates, which could result in operational deficit.
4
When an organization acquires or merges with another, the manipulation of the cultural
issue or else the acculturation process may take one of three possible forms depending
on the nature of the two cultures, the motive of the deal and the purpose and power
dynamics of the combination (Pikula 1999).
The Open Marriage
In an ‘open marriage’, the acquiring firm accepts the acquired firm’s differences in
personality, or organizational culture (Cartwright and Cooper 1993a: 63-4 cited Pikula
1999). The buyer allows the target to operate as an autonomous business unit but
usually intervenes to maintain financial control. The strategy used by the acquirer in
this type of acquisition is ‘non-interference.’
Traditional or Redesign Marriages
In ‘traditional or redesign marriages,’ the buyer dominates and redesigns the acquired
organization. These types of deals implement wide-scale and drastic changes in the
acquired company. Their success depends on the buyer’s ability to replace the acquired
firm’s culture (Cartwright and Cooper 1993a: 64 cited Pikula 1999). In reality, this is a
win/lose situation.
The Modern or Collaborative Marriages
Successful ‘modern,’ or collaborative, M&A deals rely on an integration of operations
in which the equality of both organizations is recognized. ‘The spirit of the
collaborative marriage is shared learning. In contrast to traditional marriages, which
focus around destroying and displacing one culture in favour of another, collaborative
marriages seek to positively work up and integrate the two cultures to create a “best of
4
both worlds” culture (Cartwright and Cooper 1992:74 cited Pikula 1999). In
collaborative marriages the two organizations are in a ‘win-win’ situation.
Furthermore, according to Cartwright and Cooper (1993a:65,66 cited Pikula
1999) there are four different modes of acculturation:
Assimilation
Assimilation is the most common method of acculturation and results in one firm, the
buyer. Usually the target gives up its culture willingly replacing it with that of the
acquiring firm. Thus, the acquiring firm undergoes no cultural loss or change.
Generally, in this case the acquired organization has had a weak, dysfunctional, or
undesired culture. Therefore, the new culture usually dominates and there is little
conflict. On the other hand, according to Waldman and Javidan (2009) absorption or
assimilation is likely to give way to two important side effects: (1) resistance to change,
and (2) withdrawal behaviour. Absorption, and its accompanying preservation of
information, is likely to amplify the uncertainty of individuals, especially in the
acquired firm. People may begin to wonder what exactly management is trying to hide,
and imaginations are likely to suggest the worst in terms of reorganizations, job loss,
and so forth.
Integration
If the cultures are integrated, the target can maintain many of its cultural characteristics.
Ideally, the merged firm retains the best cultural elements from both firms. During
integration, conflict is heightened initially, as two cultures compete and negotiate but it
is reduced substantially upon agreement by both parties.
4
Separation
If the acquired firm has a strong corporate culture and wishes to function as a separate
entity under the umbrella of the acquiring firm, it may refuse to adopt the culture of the
acquiring firm. Substantial conflict may be provoked and execution will be difficult.
Waldman and Javidan (2009) name separation as preservation. Preservation or
separation may make the most sense when the merging firms display greatly different
businesses and cultures, and more humble or gradual integration is desirable or feasible.
Such is the case when the pre-merger driver is purely financial in nature.
Deculturation
Deculturation occurs when the culture of the target is weak, but it is unwilling to adopt
the culture of the acquiring firm. A high level of conflict, perplexity, and hostility is the
result. Deculturation as it called by Pikula (1999) is a total disaster for an M&A deal. A
company without a culture can not implement its strategy and a company without a
strategy is a boat without a compass in the middle of the ocean.
The concept of Cultural fit (compatibility of national and organizational
cultures), in M&As and its vital role regarding M&A success is often mentioned in
current literature. (Cartwright & Cooper, 1993; Chatterjee et al., 1992; Child et al.;
2001; Datta, 1991; Fink & Holden, 2007; Hurt & Hurt, 2005; Larsson & Lubatkin,
2001; Olie, 1994; Teerikangas & Very, 2006; Weber, 1996; Weber, et al., 1996; etc.).
Some writers consider cultural fit as even more important than strategic fit (Cartwright
& Cooper, 1993; Chatterjee et al., 1992; Weber, 1996; Weber, et al., 1996 cited Dauber
2009). However, the issues whether organizational or national culture differences have
4
a stronger impact on M&A success and the positive or negative effects of them, are still
subject to debates. Moreover, some academics argue that “cultural fit” is given if values
are similar, while others define complementary values as “fitting” cultures. Also, in
respect to the last issue, no clear answer was found. While some authors argue that
organizational and national cultural differences affect M&A success (Waldman &
Javidan 2009 cited Dauber 2009), other studies assume that only organizational culture
has a stronger impact on M&A outcomes (Stahl & Voigt, 2008; Schweizer, 2005 cited
Dauber 2009). Zaheer et al. (2003 cited Dauber 2009) argue that subcultures, such as
professional cultures, may be of equal significance and need to be addressed.
According to Björkman et al. (2007 cited Dauber 2009), cultural differences cause a
lower level of social integration. Also, Stahl & Voigt (2008 cited Dauber 2009)
emphasize that cultural diversity can generate barriers for achieving socio-cultural
integration. However, they did not find evidence that complementarity of organizations
significantly affects synergy realization. On the other hand, Harrison et al. (2001 cited
Dauber 2009) suggest that similar organizations can more easily be integrated than
complementary firms. Even more, according to Chakrabarti et al. (2009 cited Dauber
2009) culturally distant M&As perform better. Finally, knowledge, anticipation,
recognition, and appropriate management of cultural differences can reduce problems
deriving form cultural diversity (Duncan & Mtar, 2006; Zaheer et al., 2003 cited
Dauber 2009). A cultural clash may be detrimental for the new combined entity. For
example in case of the acquisition of Barings Bank by Dutch-owned ING, Barings,
which was considered to be a fortress of traditional English merchant banking, was
acquired by ING in an attempt to raise the latter's profile. However, ING tried to make
Barings mirror its way of operating through the forced introduction of the previously
4
unknown practice for Barings of cross selling. This has resulted in defections and
extensive displeasure among Barings' staff (Balmer and Dinnie 1999).
The importance of the focus on human capital as a driver for M&A success is
one of the major issues discussed nowadays in the M&A literature. On the other hand,
an issue that M&A researchers have not dealt with thoroughly is charismatic leadership.
3.3 Leadership
Leadership is defined as influence that is the art or process of influencing people so that
they will make every effort, willingly, toward the achievement of the company’s
mission (Lynh 2003). The corporation’s strategy does not just drop out of a process of
discussion, but may be dynamically directed by an individual or group. Leadership is
vital for the development of the purpose and strategy of an organization (Lynh 2003).
The leaders have remarkable potential for influencing the overall direction of the
company. According to Lynch (2003), leaders should to some extent reflect their
followers and may need to be good team players in some company cultures if they want
to change elements of their company, or else they will not be followed. On the other
hand, according to Kay (1994 cited Lynch 2003) many successful companies rely on
teams rather than leaders. On the contrary again, according to Waldman and Javidan
(2009) post M&A performance, especially in terms of achieving the integration of
merging firms, is strongly affected by organizational factors, such as leadership.
The M&A literature tends to either ignore the importance leadership or make brief
reference to it (Waldman and Javidan 2009). Researchers have explored the impact of
managerial actions and decisions on the success of M&As, but they have not focused
4
on the role of leadership. Sitkin & Pablo (2005 cited Waldman and Javidan 2009), in
their review of the M&A literature, concluded that theory and research have not
thoroughly examined leadership elements in the M&A implementation process despite
its potential importance. Two of the writers that identified the importance of leadership
as a reason for success in M&A deals are Schuler and Jackson (2001). In their study,
they propose a three stage model to implement M&A transactions which, as a
systematic approach, increases the probability of a successful outcome for a deal. The
three stages of the model are (1) pre-combination, (2) combination – integration of the
partners, and (3) solidification and advancement. In contrast to Waldman and Javidan
(2009) who argue that post M&A performance, especially in terms of achieving the
integration of merging firms, is strongly affected by the element of leadership, Schuler
and Jackson (2001) argue that the existence of leadership through all of the their three
stages model is important for the successful completion of the deal. Furthermore,
Schuler and Jackson (2001) describe successful leaders as being:
Sensitive to cultural differences
Open-minded
Flexible
Able to recognize the relative strengths and weaknesses of both companies
Committed to retaining key employees
Good listeners
Visionary
Able to filter out distractions and focus on integrating key business drivers
Some of the essential tasks the new business leader can execute include:
Providing structure and strategy
Managing the change process
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Retaining and motivating key employees
Communicating with all stakeholders
Also, according to Schuler and Jackson (2001), it is critical that the leader of the
acquiring company has a solid knowledge about the acquired company.
On the other hand Waldman and Javidan (2009) go one step further and
research the impact of charismatic leadership on the organizational integration of
companies. More specifically, they identify a theoretical model of alternative forms of
charismatic leadership, and their relationships with post-combination change strategies
that accompany an M&A. They identify charisma as a ‘relationship between an
individual (leader) and one or more followers based on leader behaviours that engender
intense reactions and attributions on the part of followers’ (Waldman and Javidan
2009). Mumford & Van Doorn (2001 cited Waldman and Javidan 2009) contrasted
pragmatic and charismatic forms of leadership. The former involves the identification
of problematic needs of people and social systems, objective analysis of the situation,
and development and implementation of solutions. In the research of Mumford & Van
Doorn, Waldman and Javidan (2009) recognize the more limited applicability of
pragmatic leadership to an M&A. Specifically, such leadership is not particularly
relevant when goals are unclear and consensus is not evident and straightforward. In the
era of M&As, the execution direction is often not clear, and there can be much room for
disagreement, debate, and even conflict. Moreover, pragmatic leadership may not be
effective when there are “markedly different vested interests” (Mumford & Van Doorn,
p. 283 cited Waldman and Javidan 2009), as is often the case with an M&A, especially
with regard to acquiring versus acquired firms. On the contrary, a common aspect of
charismatic leadership is the expression of vision in an attempt to integrate multiple
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groups and reach consensus (Waldman and Javidan 2009). In total, Waldman and
Javidan (2009) conclude that charismatic leadership is likely to be a form of leadership
especially relevant to the implementation of an M&A.
Additionally, Waldman and Javidan (2009) recognize two types of charismatic
leaderships: (1) personalized charismatic leadership (PCL), and (2) socialized
charismatic leadership (SCL). ‘The difference deals with the nature of the leader's
power motive, or the extent of an individual's desire to have an impact on others or
one's environment’ (House & Howell, 1992; Strange & Mumford, 2002 cited Waldman
and Javidan 2009). Also, it deals with the degree to which an individual has a strong
responsibility orientation, or beliefs and values reflecting high moral standards, a
feeling of obligation to do the right thing, and concern about others (Winter, 1991 cited
Waldman and Javidan 2009). Although, both forms of charisma reflect a strong power
motive, the SCL is more self-controlled and directed toward the achievement of goals
and objectives for the wellbeing of the collective entity, rather than for personal gain
(House & Howell, 1992 cited Waldman and Javidan 2009). Quite the opposite, the PCL
uses power mainly for personal gain, is somewhat unequal or controlling of others, and
egotistic (Conger, 1990; Hogan, Curphy, & Hogan, 1994; Kets de Vries, 1993;
Maccoby, 2004 cited Waldman and Javidan 2009). Therefore, the PCL will potentially
put his or her self-interests before that of the organization's (Fama & Jensen, 1983 cited
Waldman and Javidan 2009). Finally, Waldman and Javidan make five interesting
propositions which, in short state that first the SCL leader is associated with
collaborative vision-formation and decision-making processes in the post-merger phase
of an M&A, second he or she is likely to reward subordinate managers and employees
who attempt to achieve integration, third he or she will help the new company to
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archive the expected post merger synergies as a result of the development of a unified
or strong culture in the post merger firm, fourth prior to the completion of the M&A, he
or she may spend time with due diligence attempting to understand compatibility
between the joining firms, and fifth he or she is to create a shared vision based largely
in values to which followers can readily connect.
On the other hand, PCL leader first stress conformance to the leader's vision,
image-building, and personal identity with the leader, second he or she is likely to view
a participative process in vision formation as a possible threat or sign of weakness, thus
potentially damaging his/her image, third he or she will show less concern for building
trust across units and individuals, and in its place will demonstrate a persistence on
organizational and cultural assimilation, and fourth he or she is more likely to use
selective, rather than open, communication to persuade followers that such decisions
make sense, and at the extreme, even instilling fear. Below Fig. 1 depicts the distinction
between PCL and SCL in terms of leader motivation and vision formation strategy.
Table 2. Personalized versus socialized charismatic leadership
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(Waldman and Javidan 2009)
Finally, according to Tanure and Duarte (2007) the president, as well as the top
management of the acquiring company, has a vital role of establishing an understanding
that human capital is a key asset of the company. More specifically, investigating the
acquisition process of two Brazilian Banks by ABN AMRO, they discovered that HRM
may effectively contribute to the performance of a M&A deal, but the involvement of
the HR department in the deal depends on the fact that the president as well as the top
management of the acquiring company acknowledges that human capital plays an
important role in the successful completion of the deal.
3.3.1 Leadership in the context of purpose
Waldman and Javidan (2009) in their research for leadership and its importance for the
successful completion of an M&A deal, do not define specific managerial levels. Their
reference point is the top decision-maker accountable for the successful implementation
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of an M&A who may be the CEO, a lower level manger, or even a specific integration
manager accountable for the success of the post merger integration of the two
companies.
Indeed, all over the current literature, the existence of an integration manager
and integration teams are considered value drivers for M&A deals. According to
Schuler and Jackson (2001), ‘perhaps the most critical HR issue for the success of this
integration stage is selection of the integration manager’. Deals that were guided by the
integration manager first retained a higher percentage of the acquired companies’
leaders, second retained a higher percentage of the total employees, and third achieved
business goals earlier. Moreover, according again to Schuler and Jackson (2001) the
integration manager must not be one of the people running the business. He or she
usually is someone on loan to the business to focus solely on integration issues and to
provide continuity between the deal team and the management of the new company.
Going even further, according to the contingency strategic theories, leaders should be
promoted according to the needs of the organization at a particular point in time (Lynh
2003). Within contingency theory, there is one approach which is called the best - fit
analytical approach. It is based on the concept that leaders, subordinates, and strategies
must come in to some sort of compromise if they are to be successfully carried forward.
This is useful in corporate strategy since it allows each situation to be treated
differently and it acknowledges three main elements:
A) The CEO,
B) The senior/middle managers who carry out the tasks,
C) The nature of the purpose and strategies that will be assumed.
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As far as the middle management is concerned, its importance in the performance of an
M&A deal is not thoroughly researched. Nevertheless, Papadakis (2007) argues that the
lack of involvement of middle managers before the merger or acquisition is a crucial
mistake that companies often make as they are the natural link between top
management and the rest of the organization, and their active involvement is often
critical to a merger’s success. Without a doubt, one of the most commonly overlooked
factors in an M&A deal is the significance of middle managers. The integration often
focuses at the top of the organization lacking to recognize middle managers as a very
crucial group to the organization’s efficacy. In most cases they remain under-utilized or
even ignored (Papadakis 2007).
Concluding, M&As are strategic choices and as such should be evaluated and
researched in the context of strategic theory. In this chapter we identified human capital
as the most important resource nowadays which ought to be managed efficiently if
managers want to have a successful M&A deal. The management of human capital is
not an easy issue because it includes many parameters that must be evaluated.
Managers should focus more on people, their behaviour, the new organizational culture,
and values. A proactive strategy for dealing with corporate culture and human resource
issues is fundamental to the success of mergers and acquisitions. However, these issues
are rarely considered until serious difficulties arise. The managers must communicate
to the employees, in a clear and trustworthy manner, the vision, and the mission of the
new entity. Trust among mangers and employees is a major asset and significant value
driver for an M&A deal. They must evaluate the differences in corporate culture and
find ways to integrate the merging firms in a collaborative manner if they want a deal
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that will add value and will maximize the shareholders’ wealth. Socialized charismatic
leadership may be the solution to the problem of post merger integration of the merging
firms, though its pre merger existence may increase even further the probability of
success. Even more, charismatic leaders are not found only among the top executives,
but may also be found in middle management the contribution of which maybe of
upmost importance for the successful completion of a deal. Furthermore, a socialized
charismatic, hired integration manager who will focus only on the completion of the
deal may be a pay check for the shareholders.
In general, sustainable growth in a given business environment and time span can be
achieved only through the optimum structure of financial resources and the use of
human capital (Bertoncelj and Kovac 2007). Now let us see, in a more general
perspective, the HR management problems that arise in the several main types of
M&As.
4. Types of Mergers and Acquisitions and probable effects on HR management.
In order to give a more general view of the human resource problems that arise during
the post- merger or acquisition integration of the buyer and the target, in this chapter we
present the major types of mergers and acquisitions that exist in relation to the
implications that they have on the issue of HR management.
In general, according to Schuler and Jackson (2001), there are mergers of equals
which include the merger between Citicorp and Travellers forming Citigroup and
mergers between unequals such as between Chase and J.P. Morgan creating JPMorgan-
Chase. It is critical to recognise these types of mergers and acquisitions in describing
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and acting upon the unique people management issues each has. For example, a merger
of equals often requires the two companies to share in the staffing implications. On the
other hand, a merger of unequals results in the staffing implications being shared
unequally (Kay and Shelton, 2000 cited Schuler and Jackson 2001).
Furthermore, according to Pikula (1999), in Vertical Mergers, because the
target generally falls under the buyer’s corporate umbrella, most of the interaction
between the two firms is at the corporate level. The level of complication at the
corporate level increases, as do the rules governing the acquired corporation, which
faces a reduction in self-determination. This phenomenon leads to the downgrading of
subsidiary executives to middle management which often leads, in turn, to a higher
level of executive turnover. The turnover increases if the executives of the acquired
firm are treated as if they have been under enemy control, causing them to feel inferior
and experience a loss of social standing.
Horizontal Mergers are the most difficult mergers as far as the human resource
management issue is concerned, because the buyer already has know-how in the
business operations and will act to consolidate the two firms to avoid redundancy and
become more cost-effective. Downsizing and intentional quits usually come first or
immediately follow the merger. The strong interactions between the employees of both
corporations may result in conflict and the ‘compatibility of styles and values between
management and staff becomes central in personnel decisions. Since most mergers
involve one party being more than equal, it is reasonable to speak of the acquiring
organization as having the majority of control over these matters. Often, the entire
culture of the acquiring firm is forced upon the target’ (Walter 1985, 312 cited Pikula
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1999). The buyer usually tries to guarantee that all employees of the merged
corporation are directed by the same policies and procedures. Nevertheless, the
employees of the target may resist any changes that are forced. And, as stated above,
the stronger the culture of the target firm, the stronger will be the resistance to change.
If the organizational cultures of the two companies are considerably different,
productivity gains may not be realized for several years (Nahavandi and Malekzadeh
1993, 29 cited Pikula 1999), and in the worst case, the merger may fail.
Therefore, the buyer must communicate clearly the reasons for the change in the
procedures, to allow the target firm’s employees to get ready for and respond to any
suggested changes.
The Concentric Mergers occur between two firms with highly similar
production or distributional technologies (Walter 1985, 311 cited Pikula 1999). In
concentric mergers there is a propensity to combine operations in the departments
focused on technology and marketing. The result is the sharing of expertise between the
two firms, but resistance may appear by the employees of both firms. The best way to
defeat this resistance is by obtaining the permission of the acquired firm’s human
resources management before the merger (Pikula 1999).
Finally, in the Conglomerate Mergers, since the two firms are dissimilar in
product or service, internal changes to the acquired firm, which will remain rather
independent, are likely to be negligible, and there will be few cultural consequences.
Irregularly, the buyer will send a new team from head office to manage the target and
this may cause conflict among the CEOs of the target, and may result in an increased
quit rate among its employees and feelings of anxiety and volatility. Regardless of these
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difficulties, ‘conglomerate takeovers tend to be the most benign of all the sources of
cultural change’ (Walter 1985, 313 cited Pikula 1999).
In figure 4 below it is presented the level of difficulty to implement a merger
concerning the HR management issue taking in to account the type of the merger.
Needless to say that an M&A deal between two commercial banks is at the higher level
of difficulty.
Figure 4. Merger Type and difficulties of Implementing Merger
(cited Pikula 1999)
From what we have seen so far in this paper, researchers have recognized various
difficulties and differentiations in implementing an M&A deal. As far as the human
resources management issue is concerned, it has been researched in the current
literature, though not enough, and there is high contradiction among the writers. It is
inferred that managers should be aware of the HR management issue and its high
importance in the implementation of a successful deal.
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Deal advisors and many writers in the current literature have proposed a systematic
approach for the successful completion of an M&A deal. But, is it enough? No, since at
least 1 out of 2 deals fails to deliver the expected positive outcome. Let us discuss about
the typical process of an M&A deal and the systematic approach for the completion of a
deal that exists so far.
5. The Process of Mergers and Acquisitions and the Need for an updated systematic approach
The process of implementing mergers and acquisitions is described slightly differently
by different authors in literature. It can take several forms the most common of which is
the following three step process: planning, implementation and integration (Picot
2002). In the planning phase, the general plan for the transaction is developed ‘in the
most interdisciplinary and comprehensive manner possible’ (Picot 2002:16). Planning
covers the operational, managerial, legal techniques and optimization aspects with
special regards to the two following phases. The implementation phase includes parts
like the issuance of confidentiality or non-disclosure agreements, the letter of intent and
the deal closure contract. The integration phase, which according to many authors is the
most important part of the transaction, deals with the organization of the new company,
the implementation of the financial plan that has been formulated in the first stages, and
the management of the human side of the transaction, that is the creation of one
common culture etc.
Bundy (2005) refers to the first stage of an M&A deal as the courtship which
classically ends with an unofficial agreement to proceed to the more formal pre-deal
stage. Throughout this courtship stage, due diligence normally is at a high level with
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managers organizing the transaction and developing the pro forma financials. Managers
usually use publicly available information, or, relying on the good faith of the parties,
use data from inside the firms. This particular phase can reveal qualitative issues (e.g.,
whether or not the leaders can work together) that could stop the deal, and also
financial issues that would significantly affect the price.
The second stage is called by Bundy (2005) as the pre-deal stage which
typically ends with some form of public announcement and a formal commitment
document sometimes called a memorandum of understanding (MOU) or letter of intent
(LOI). During this stage, the deal usually is highly confidential. The buyer often
focuses on critical financial issues the availability of which is limited. The availability
of information is limited, because if the deal does not proceed both parties want to have
revealed as little information as possible. At this stage, due diligence is a top priority in
order to uncover issues that may influence whether the deal can proceed to the next
stage. Some times, the deal is friendly enough that more information can be revealed
that would help for the planning of the integration of the companies.
The third stage, is often called the doing the deal stage (Bundy 2005). It starts
with the announcement of the intent to merge, acquire, divest, etc., and ends with the
formal closing of the transaction. At this stage the firms involved still can get out of the
deal, the price of the deal can be changed, and the planning of the integration can be a
top priority to get the maximum value out of the deal in the earliest timeframe. Due
diligence can discover at this stage all of the significant information regarding the deal
such as data related to compliance, plan administration, value of benefits, compensation
programs, insurance programs, organizational structure and the HR function. At times,
6
the necessary to make knowledgeable decisions is not available until after the formal
close. In such a case, managers make certain assumptions and base decisions on those
assumptions. If the buyer does get access to the information needed, it is wise to review
the new information against assumptions that was made before and adjust decisions that
were based on assumptions that have proven to be incorrect (Bundy 2005).
Finally, the fourth stage is known as post-deal (Bundy 2005). Classically, the
closing is recorded in a formal document like a purchase and sale agreement or a
definitive merger agreement. Naturally, at this stage the implementation of the
integration plan must start with no further due diligence required. In reality, though,
further due diligence may be precious, especially if in the preceding stages, there were
restrictions on access to data or information imposed by regulatory authorities (Bundy
2005).
According to (KPMG 2001) a typical process of a deal is presented in figure 5.
Figure 5. Typical process for M&A deals completion
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(KPMG 2001)
Nevertheless, the process of the transaction is not as simple as is presented
above. Due to the, historically, high failure rate of mergers and acquisitions, the
researchers and the advisory firms have elaborated further the process and have
suggested specific aspects that a potential buyer should address in each one of the steps
of the process in order to have a successful merger or acquisition outcome. In the
current literature the issue of human capital management or HR department
involvement in the M&A process is considered, among others, the main value driver for
a deal (Bundy 2005, Schuler and Jackson 2001, KPMG 1999, De Souza et al. 2009,
Salama et al. 2003, Balmer and Dinnie 1999, Kerr 1995, Maire and Collerette 2010,
Carretta et al. 2008, Pikula 1999, De Giorgio 2002, Barnett 2004, Appelbaum 2007,
Bryson 2002, Lind and Stevens 2004, Wen Lin, Hung and Chien Li 2006, McGrady
2005, Lye 2004, Trompenaars and Woolliams 2010, Nguyen and Kleiner 2003,
Bjo¨rkman and Søderberg 2006, Silver 2009, Waldman and Javidan 2009). For
example, Wen lin et al. (2006) using a sample of 267 US banking firms, confirmed that
banking M&A could be very valuable if the firm had high HR capability. Evidence was
also found that HR capability had a direct impact on firm performance. Although
national M&A strategy was in general superior to international M&A strategy, a
company with exceptional HR capacity might slender the performance difference
between national and international M&A. Furthermore, Maire and Collerette (2010) in
their research identified a series of useful practices that can help a deal. These are the
following:
A) Consider the many dimensions at stake; allocate resources; set priorities; stay
focused.
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B) Employ a rigorous method; use a set of tools; conduct regular progress reviews and
adapt the action plan consequently.
C) Apply sufficient pressure; imprint and sustain pace; allocate time; build trust and
support.
D) Communicate abundantly; provide training; motivate people; listen to people's
concerns and complaints.
E) Identify and resolve socio-cultural differences; explain customs and processes.
F) Detect signs of resistance to change; manage resistance to change.
The question that arises is, why suddenly literature came up with such interest
for HR since the subject should have been in the agenda of M&As from the beginning,
or at least say from 1995 where Kristine Kerr published the article titled ‘HUMAN
RESOURCING FOLLOWING A MERGER’ at the International Journal of Career
Management . In this article the writer reports the successful HR management process
of HSBC and how much it helped in the successful outcome of the dramatic acquisition
of Middland bank while the former was in battle with Lloyds Bank for the same target.
Finally, is M&A research a trial and error process? Even more, a plethora of studies has
mentioned the importance of thorough due-diligence concerning all the aspects
including financial issues and HR management, applying adequate communication
strategies for all the stakeholders building trust, measuring potential synergies
adequately, pre-planning the organizational and socio-cultural integration process,
selecting the appropriate management team focusing on the integration manager,
increasing the speed of the implementation of the transaction, involving HR department
at the pre-deal step of the process of the deal, assessing correctly the cultural
compatibility etc. There are, also some creative techniques that deal with the complex
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nature of the M&A process like the one that Bundy (2005) has suggested as a method
that resolves the possible long regulatory approval processes of the deal, where the
interaction between the merging firms is restricted, that is known in M&A jargon as the
“clean team” approach. In fact, it allows the almost total sharing of information while
the transaction is still being considered for approval, therefore accelerating the
integration process. It is a simple process where a team from outside professionals is
created that operates parallel to, but separate from, the deal team and have no ongoing
connection to the parties involved in the deal. The ‘clean team’ can collect and work
out data from both sides and begin to make recommendations for the actual integration.
The clean team can share the information with the deal team and the firms involved
only if the deal is actually approved. Thus, instead of beginning the integration
planning after the deal closes, the firms involved can begin the actual integration
process as soon as the deal closes. Nevertheless, in a study of Dauber (2009) where he
contacted a review of 58 papers within the last decade in 20 highly cited journals, he
found that findings in literature in respect to integration and culture in M&As are
contradictory and to some extent biased.
The money and the time spent in mergers and acquisitions can be justified only
if the probability of success of such deals increases. Every M&A transaction has unique
characteristics attributed to different types of transactions, different national, or/and
organizational, or/and professional cultures, different types of leadership and lower
management, different mission and vision, different experience in the field of M&As,
different financial performance, different operating processes, the existence of labor
unions, the existence of clean teams, etc. The above differences include that the buyer
and the target may operate in different countries, or they may sell unrelated products or
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offer unrelated services. As such, each transaction should be examined uniquely and
inferences should be provided after all transactions are categorized accordingly, to job
sectors, nations, cultural strength, type of leadership, economic environment etc. The
categorization of each transaction is very important. For example, Tanure and Duarte
(2007), in their research concluded that if a company acquires several other companies,
differences in the objectives of each transaction may force the human resource
management team to realign its practices according to the objective and the integration
strategy of each deal. Therefore, the current research tries making inferences from
unrelated samples, so the outcome is obscure.
Moreover, most of the current research is based on secondary data trying to
produce statistical inferences without trying to understand the uniqueness of each
transaction. A characteristic empirically based M&A research uses structural equation
techniques or other statistical analyses to find correlations between variables. For
example, Brewer, Jackson, and Wall (2006) investigated the impact of the target chief
executive officer’s (CEO) post-merger position on the purchase premium and target
shareholders’ abnormal returns around the announcement of the deal in a sample of
bank mergers during the period 1990–2004. They found evidence that the target
shareholders’ returns are negatively related to the post-merger position of their CEO.
However, they continued, these lower returns were not matched by higher returns to the
acquirer’s shareholders, suggesting little or no wealth transfers. Additionally, according
to them, the evidence suggested that the target CEO becoming a senior officer of the
combined firm did not boost the overall value of the merger transaction. They used
event study based methodology where they measured the return to the target
shareholders using three different methods: (1) the purchase premium at announcement
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over the target’s stock price 40 trading days before the announcement, (2) the premium
over the target’s stock price 20 trading days before the announcement, and (3) the
cumulative abnormal returns during the window from two days before the
announcement date to two days after the announcement date, and the returns to the
acquirer and to the combination of the two firms with the cumulative abnormal returns
during the window from two days before the announcement date to two days after the
announcement date. Indeed, the event window is really short and there is much
discussion about whether abnormal returns of the stock prices can be related to the
position of the targets’ CEO.
Furthermore, some studies like the study of KPMG (2001), try to draw
inferences using confidential telephone interviews only with the directors of the firms
together with share price data. Other researches use questionnaires as a medium to
collect data. Questionnaires or telephone interviews are a better approach than simple
secondary statistical data, but even they can be misjudged, or the respondent can lie. In
addition, most researchers using questioners or telephone interviews for their
suggestions address most of the times to a sample of upper level management and some
times of middle managers. But, the simple employee also exists and he or she is there to
express feelings and give solutions. He or she definitely has something to say,
something to propose. It would be worthy for current M&A research to understand the
employee better and even learn from him or her.
Even if literature is abundant on proposals for successful M&As, it seems that
most of the managers do not pay attention on it. So, they should, at least, learn form
their experience. On the contrary again, it appears that, generally, companies or
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managers do not learn from their experience, or even if they learn, they have previously
wasted large amounts of capital and much time on unsuccessful transactions. There are
of course the exceptions like GE CAPITAL which has demonstrated an exceptional
performance in the field of M&As, or HSBC. GE CAPITAL through the realization of
more than a hundred mergers and acquisitions has recognized four critical factors for
successful post merger integration. First of all, for GE CAPITAL, acquisition
integration begins with due diligence, (Ashkenas, DeMonaco & Francis, 1998). If
significant differences, concerning the processes and the cultures of the two companies,
arise during due diligence, GE CAPITAL stops the transaction. For example, GE
CAPITAL backed off from the acquisition of a British leasing-equipment firm when
two senior managers of the former company having a lunch with two senior managers
of the latter firm during the final stages of due diligence for the acquisition, realized
major differences in basic management styles and values, (Ashkenas, DeMonaco &
Francis, 1998). Second, a manager should be appointed who will be particularly in
charge of the integration process. The integration managers who are most effective are
those that have served on the due diligence team, (Ashkenas, DeMonaco & Francis,
1998). Third, “decisions about management structure, key roles, reporting relationships,
layoffs, restructuring and other career-affecting aspects of the integration should be
made, announced, and implemented as soon as possible after the deal is signed-within
days, if possible,” (Ashkenas, DeMonaco & Francis, 1998). Creeping changes,
uncertainty, and anxiety that last for months immediately start to drain value from an
acquisition (Ashkenas, DeMonaco & Francis, 1998). In order the above changes to be
effected in a few days after the completion of the deal, thorough integration project
planning is needed in the very early stages of the transaction. Finally, for GE
CAPITAL, a successful integration joins not only the various processes and operations,
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but also the different cultures. The best way to do so is to make people work together
quickly, to solve business problems and accomplish results that could not have been
achieved before, (Ashkenas, DeMonaco & Francis, 1998). GE CAPITAL creates a 100-
day plan for acquisition integration where it organizes meetings, presentations etc.
Communication is the basic element of the 100-day plan, and the specific number of
days is analogous to the urgency of the process, since the final goal is to create value
from the acquisition quickly and reduce the probability of loss of value.
Other companies may never learn from their experience either because they do
not have the know how to do it, or because they are not aware of the advantage of
learning from doing. Again, there is contradiction in literature about how previous
experience of firms in M&As affects the possible outcome of new deals. According to
Gomes et al. (2007 cited Holland and Salama 2010), success in M&As is more likely
to be achieved by companies that have previous experience of mergers and acquisitions.
On the other hand, Papadakis (2005) argues that ‘previous experience does not emerge
as one of the statistically significant antecedents of effective implementation’.
Similarly, Hunt, 1990; Hunt, 1998; Bruton et al., (1994 cited Papadakis 2005) ‘have
reported previous experience to be generally non-significant with the exception for
special conditions (e.g. extremely hostile environments or in cases of M&As of
distressed firms)’. On the contrary again, according to Hubbard (1999), previous
experience will help the acquirers to make successful acquisitions in future. On top,
Ashkenas et al. (2000 cited Schuller and Jackson 2001) argues that ‘experience helps,
but it is the learning from the experience that seems to be critical’. They continue that
firms that have a systematic approach to making a deal are more likely to be successful.
What matters is the recognition of attention to human capital that exists all through the
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stages of M&As. Previous experience will only help when companies and managers
recognize the significance of the knowledge they acquire from the M&A deals they
complete as far as their further movements in the field is concerned.
The contradiction that exists in current literature about the factors of success or
failure of an M&A deal, and the ongoing high failure rate of the deals prove that it is
time for a change in the research methodology of M&A deals. The writer suggests that
research should focus on inside observation of every deal separately trying to gain
access to aspects that seem to be missing even today. Parallely, questioners or
telephone interviews may be a supportive factor for a better understanding of the
complex process of M&As. The research should include all the steps of the process and
all the ranges of employees and managers. It should not focus only on management and
it should not concentrate only on a specific step of the process. The intense employee
turnover that is observed in M&A deals may be a signal. Employees have something to
say but they can not. They feel something, but they can not tell it, or even if they say it
to someone, then for example a PCL type leadership will not be there to hear it.
Accurate categorization of each of M&A deal and then comparison of the
observations of the process and the questioners or telephone interviews of each deal
may lead to a new ground theory for M&As. Perhaps the solution lies to a socialized,
hired, charismatic integration manager who have learned from his or her experience,
and the problem is, finally, not so complex. Maybe, the new methodology after years of
studies will provide companies with an updated systematic approach to the
implementation of M&A deals which will facilitate the organizational and socio-
cultural implementation of the firms, and may promise increased probability of success.
6
Hopefully, this new systematic approach will give a better than 50% percent probability
of success (50% is the best scenario now).
In Appendix 1 the writer reproduces a case study of the acquisition of Royal
Trustco Ltd by the Royal Bank of Canada. This piece of work is presented by Burns
and Rosen (1997). This is the third of three articles which describe, from a human
resource perspective, the various stages of an acquisition in the international financial
services sector. The view is at the standpoint of human resource professionals
employed by Royal Trustco at the time of the deal. It is only a sample of what we can
learn if researchers deal with each M&A transaction and finally accumulate this
knowledge, compare it, categorize it accordingly, and draw inferences from it.
7
6. Conclusions
To sum up, this study investigated, using the current literature, the impact of HR
management in the success of bank mergers and whether there is a winning systematic
approach to the issue that is adequate for the successful outcome of financial
institutions M&As.
The conclusion from my study is that a new research methodology of M&A deals is
required that will provide companies with an updated systematic approach to the
implementation of M&A deals which will facilitate the organizational and socio-
cultural implementation of the firms. This updated systematic approach should focus on
the issue of the management of human capital which is considered the most important
value driver for M&As. The new systematic approach is important due to the high
failure rate of M&A deals, and due to the fact that managers do not seem to learn from
their experience in the field. It seems also, that Leadership is another value driver for
M&A transactions, but further investigation on the issue is important. Also, further
research should be contacted on the importance of middle management, and trade
unions in the deals, and finally writers almost totally ignore the simple employees as a
sample for the research in the field.
The above inferences have been drawn in order to improve the process and the success
rate of M&As which as a strategic choice, are a powerful tool in the managers’ hand
that can help them boost the growth of the company quickly and effectively and gain
7
sustainable advantage. The choice to proceed in merge or an acquisition is considered
one of the most important means by which companies respond to changing conditions
(Bruner 2004 cited Bertoncelj and Kovac 2007). Though there are many reasons for
which companies proceed in M&As, the ultimate goal of such a strategic movement
like is or should be the maximization of the shareholders’ wealth.
During the last decades the world has witnessed an unprecedented wave of M&A deals.
Nevertheless, the evidence shows that at least 50% of the deals have a negative
outcome. There are, though, a few companies, that present sustainable success rate in
M&As.
Since M&As are a strategic decision for a company, in this paper the writer tried to
correlate some major features of strategic theory with the current literature on M&As.
In the new economy, material and capital are turning more and more into a commodity
giving way to intellectual capital and talent. Intellectual capital is a key resource that is
interlaced in the process of creating added value (Bertoncelj and Kovac 2007). Human
capital ought to be managed efficiently if managers want to have a successful M&A
deal. Concerning the banking industry, loss of key talent is a significant reason for a
failed bank merger or acquisition. The management of human capital is not an easy
issue because it includes many parameters that must be evaluated. The different types
of culture and the dissimilar strength of the culture that each company has may lead to a
cultural clash which may be disastrous for the outcome of a deal. The concept of
Cultural fit in M&As and its vital role regarding M&A success is often mentioned in
current literature, though there is controversy on the issue. Analysis and appraisal of
culture is considered important because it influences every part of the company and has
7
an impact on its performance. Managers should focus more on people, their behaviour,
the new organizational culture, and values. A proactive strategy for dealing with
corporate culture and human resource issues is fundamental to the success of mergers
and acquisitions. However, these issues are rarely considered until serious difficulties
arise. The managers must communicate to the employees, in a clear and trustworthy
manner, the vision, and the mission of the new entity. Trust among mangers and
employees is a major asset and significant value driver for an M&A deal. They must
evaluate the differences in corporate culture and find ways to integrate the merging
firms in a collaborative manner if they want a deal that will add value and will
maximize the shareholders’ wealth.
Also, companies, when they formulate their strategies, should take into account the
environment where they operate. In many emerging markets frequently there are
considerable restrictions on modifying the terms or conditions of the employment
relationship which can result in increase expense and time to integrate. Furthermore,
trade unions can cause tremendous problems during an M&A transaction. The
academic and practitioner literature has largely ignored the role of unions, and the
impact of employment relations policy contexts in managing the human resource
management risks associated with mergers. Bryson (2002) considers the role of trade
unions in M&As as a potential value driver that merger literature has not addressed
enough.
Moreover, the purpose of the corporate strategy should be to add value to the supplies
brought into the organization (Lynh 2003). Creating added value remains the most
important goal of every company regardless of its organizational form, size or
7
evolutional phase. By creating additional value, the necessary resources are provided
for the sustainable development of a company, but nowadays in response to changing
conditions physical and financial assets as well as intellectual capital should be used
and therefore be managed correctly.
Furthermore, leadership is vital for the development of the purpose and strategy of an
organization (Lynh 2003). The leaders have remarkable potential for influencing the
overall direction of the company. According to Waldman and Javidan (2009) post
M&A performance, especially in terms of achieving the integration of merging firms, is
strongly affected by organizational factors, such as leadership. There is controversy for
the issue of leadership in current literature, also, and its effect on the outcome of
M&As. Nevertheless, researchers have explored adequately the impact of managerial
actions and decisions on the success of M&As, but they have not focused on the role of
leadership. Currently, the new concept of charismatic leadership has emerged in respect
to the effect it has on the probable outcome of M&As. Waldman and Javidan (2009)
recognize two types of charismatic leaderships: (1) personalized charismatic leadership
(PCL), and (2) socialized charismatic leadership (SCL). Moreover, it is found that the
president, as well as the top management of the acquiring company, have a vital role of
establishing an understanding that human capital is a key asset of the company.
Additionally, all over the current literature, the existence of an integration manager and
integration teams are considered value drivers for M&A deals, a concept that falls in
the realms of contingency theory. Finally, it seems that the middle management and its
importance in the performance of an M&A deal is not thoroughly researched, even
though it is argued that the lack of involvement of middle managers before the merger
or acquisition is a crucial mistake that companies often make.
7
There is also abundant literature and controversy on the implications that the major
types of mergers and acquisitions have on the issue of HR management. In Vertical
Mergers, the turnover increases if the executives of the acquired firm are treated as if
they have been under enemy control, causing them to feel inferior and experience a loss
of social standing. Horizontal Mergers are the most difficult mergers as far as the
human resource management issue is concerned. In Concentric Mergers the result is
the sharing of expertise between the two firms, but resistance may appear by the
employees of both firms. Finally, in Conglomerate Mergers, since the two firms are
dissimilar in product or service, internal changes to the acquired firm, which will
remain rather independent, are likely to be negligible, and there will be few cultural
consequences.
The process of implementing mergers and acquisitions is highly elaborated by deal
advisors and many writers in the current literature who have proposed a systematic
approach for the successful completion of an M&A deal. They have suggested specific
aspects that a potential buyer should address in each one of the steps of the process in
order to have a successful merger or acquisition outcome. In the current literature the
issue of human capital management or HR department involvement in the M&A
process is considered, among others, the main value driver for a deal. It seems though
that the current systematic approach and the proposals that experts in the field of
M&As offer for a successful deal are not enough since at least 1 out of 2 deals fails to
deliver the expected positive outcome. Every M&A transaction has unique
characteristics, and as such, each transaction should be examined uniquely and
inferences should be provided after all transactions are categorized accordingly, to job
7
sectors, nations, cultural strength, type of leadership, economic environment etc. Most
of the current research is based on secondary data trying to produce statistical
inferences without trying to understand the uniqueness of each transaction.
Furthermore, some studies try to draw inferences using telephone interviews only with
the directors of the firms together with share price data. Other researches use
questionnaires as a medium to collect data. Questionnaires or telephone interviews are a
better approach than simple secondary statistical data, but even they can be misjudged,
or the respondent can lie. In addition, most researchers using questioners or telephone
interviews for their suggestions address most of the times to a sample of upper level
management and some times of middle managers without taking in to consideration the
simple employee.
Furthermore, it seems that most of the managers do not pay attention to the current
proposals of experts for a successful deal or/and they do not seem to learn form their
experience on M&As. Again, there is contradiction in literature about how previous
experience of firms in M&As affects the possible outcome of new deals.
The contradiction that exists in current literature about the factors of success or failure
of an M&A deal, and the ongoing high failure rate of the deals prove that it is time for a
change in the research methodology of M&A deals that will provide companies with an
updated systematic approach to the implementation of M&A deals which will facilitate
the organizational and socio-cultural implementation of the firms, and may promise
increased probability of success.
7
7. Recommendations
The writer suggests that the new research methodology that will update the current
process of M&A deals should focus on inside observation of every deal separately
trying to gain access to aspects that seem to be missing even today. Parallely,
questioners or telephone interviews may be a supportive factor for a better
understanding of the complex process of M&As. The research should include all the
steps of the process and all the ranges of employees and managers. It should not focus
only on management and it should not concentrate only on a specific step of the
process. Employees must be observed, and asked about their feelings and their
proposals for a better implementation of the deal.
Accurate categorization of each of M&A deal, for example, to job sectors,
nations, cultural strength, type of leadership, economic environment etc., and then
comparison of the observations of the process and the questioners or telephone
interviews of each deal may lead to a new ground theory for M&As. Perhaps the
solution lies to a socialized, hired, charismatic integration manager who have learned
from his or her experience, and the problem is, finally, not so complex.
7
8. Reflections
In my study, the research objectives were clearly defined and fulfilled. All my research
questions were answered adequately. In my opinion, further research will show that
leadership is very important for the successful outcome of an M&A deal. Unfortunately
leaders are few. Furthermore, even though literature addresses too much on the issue of
HR management, researchers do not take employees as a sample for questionnaires and
interviews. How can you expect to solve a problem if you do not ask the person who
really has the problem? Furthermore, I believe that the new methodology I propose will
take time since observations take time, but the outcome will be very successful.
Finishing, I would like to state that if I had more time and access to more resources, I
would study even more journals, but I believe that the outcome of my research would
not change. The thing is clear enough.
7
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APPENDIX 1.
Case Study: The case of the acquisition of Royal Trustco Ltd by the
Royal Bank of Canada by Burns and Rosen (1997)
In January 1993, the Board of Royal Trustco Ltd (Royal Trustco) decided to seek a new
controlling shareholder after the company had suffered major losses and a collapse in
market confidence. Most of the business was eventually bought by the Royal Bank of
Canada (Royal Bank) in September 1993 following a lengthy due diligence and
negotiation period, after which the control of the majority of Royal Trustco’s assets and
businesses passed from the Edper Group to Royal Bank. This is the third in a series of
three articles about the HR aspects of the take-over, and deals with the issues which
arose in the international businesses of Royal Trustco outside Canada which were
purchased by Royal Bank, and in Royal Bank itself as a result of the coming together of
two very different corporate cultures during and after the takeover. The first article
summarized the events which led to the company being put up for sale, and described
the emergence of and the responses to a serious HR challenge: how to manage people
in a service company effectively during a prolonged period of uncertainty about the
future of the business and who, if anyone, would eventually own it. The second article
described how the management of Gentra, the new name for the Royal Trustco
businesses excluded from the sale, managed the wind-down of those businesses. All
three articles will draw conclusions which we expect to be of interest to chief
executives and senior management teams who have to deal with substantial
organizational change. Royal Bank of Canada is Canada’s largest bank, employing
approximately 46,000 domestically and 3,000 internationally. It was interested in Royal
Trustco having identified wealth management as a key area for growth. Royal Trustco’s
main business in Canada was wealth management, including investment management,
trust services, mutual funds and custody. When it was put up for sale, the company
employed 5,000 people worldwide, over four-fifths of them in Canada. It targeted
affluent individuals as clients, but also had a large institutional clientele for its
investment management and custody businesses. Its business outside North America
(mostly in Europe, but also in the Caribbean and Asia) was quite different and
8
comprised a number of offshore private banking operations, again with private
individuals forming a significant part of its client base. It also had commercial banking
operations in London, Zurich and Hong Kong which had grown very quickly from
1985 to 1990. The most important of these latter businesses in terms of assets was in
London, where Royal Trustco had become heavily, and at some points unwisely,
involved in lending to the booming commercial and residential property market in the
1980s. Royal Trustco’s other private banking units in the rest of Europe, the Caribbean
and Asia, which like most of the Canadian business units were generally regarded as
good value for money, were bought by Royal Bank from Royal Trustco as part of the
deal. Of Royal Trustco’s 650 international employees, 450 were with operations
acquired by Royal Bank and 200 with businesses excluded from the sale. Royal Bank
and Royal Trustco signed an agreement under which the former bought the name and
most of the businesses of the latter for approximately C$1.7 billion. In addition to
commercial banking activities in London, Royal Trustco’s commercial property loan
portfolios in Seattle and Toronto, as well as some lower quality European loan assets,
were excluded from the purchase. Because of the purchase of its name by Royal Bank,
the corporation formerly known as Royal Trustco Ltd changed its name to Gentra Inc.
and dealing in its shares resumed on the Toronto Stock Exchange under the new name.
The integration of the purchased Royal Trustco businesses outside Canada into Royal
Bank began in June 1993. Royal Bank had access to industrial research which
suggested that just under 70 per cent of mergers fail, and so they decided to assign
people full time to the task of ensuring that take-over would be a success. The cost of
doing this was significant and was budgeted for as part of integration. Several task
forces were established, to which approximately 350 people were seconded part-time
from both Royal Trustco and Royal Bank. The work of these task forces was co-
ordinated by a Joint Transition Steering Committee. The Joint Transition Steering
Committee established five guiding principles:
1) Maintain customer focus (staff needed to know what they could say to customers);
2) Create a participative process;
3) Retain and develop key talent;
4) Build on the strengths of both organizations;
5) Deliver value to shareholders.
There was an HR transition task force whose agenda included: the preparation of an
inventory of specific skills available and required to fill key positions; a review of
8
salary and benefits including regarding the drafting of policies on staffing and job
posting; the design of an employee communications programme with particular regard
to morale and motivation; and organizational restructuring and redundancies. The HR
task force was also asked to make recommendations on the integration of training and
development activities. There had been an initial consolidation of the businesses in the
transition period from March to September 1993, during which the final terms of the
deal were agreed. Outside Canada, the international banking units of Royal Trustco and
the private banking units of Royal Bank of Canada were brought together under the
leadership of Laurent Joly, former head of Royal Trust International, who had played a
key role in the Royal Bank transaction. He was one of the few most senior Royal
Trustco executives to remain with the new organization. Following the signing of the
final agreement in September 1993, the international private banking units of Royal
Trustco and Royal Bank were brought together. The Royal Bank name was used
externally for these businesses since it was more widely recognized outside Canada: to
the outside world they became known as “Royal Bank of Canada, Global Private
Banking”, and comprised approximately 25 offices in more than 20 different countries
with over 800 employees. Within the former Royal Trustco company the international
private banking units had accounted for a significant share of Royal Trustco business
overall. Now, with the addition of the Royal Bank international private banking units,
their importance in the new Royal Trust division of Royal Bank was even greater.
These units were dispersed geographically: e.g. London, Jersey, Guernsey, Switzerland,
Asia and USA/Latin America/ Caribbean. In the main they operated in tight labour
markets, sometimes on islands where the local community figured larger in people’s
lives than their jobs. Some confusion was caused by the name changes referred to
above. As has been said, it had been decided for external marketing purposes that the
names of most of the international private banking units would be changed from Royal
Trust to Royal Bank of Canada. In Canada, however, the name Royal Trust was
maintained and it was decided that this part of Royal Bank would continue to have a
separate identity in other ways, with its own strategy and vision and the best of its old
culture. The identity of Royal Trust was preserved for three reasons. First, Royal Trust
had been a “carriage trade” name since 1899, and it was felt important to build on that
perceived image and, of course, the existing client, and deposit base. Second, research
had shown that the large client base wanted to deal with “Royal Trust” rather than with
a bank. Third, it was felt that existing employees would be more likely to wish to
8
continue working under their previous identity. Royal Trust retained its own
management structure and capital base. There are over 100 branches across Canada
which continue to operate under the Royal Trust name, and the wealth management
businesses, both personal and institutional, remain under the Royal Trust banner. The
Global Private Banking group was to be part of this Division, and so Royal Bank of
Canada Global Private Banking became part of “Royal Trust (a division of Royal Bank
of Canada Group)”. This business decision caused continuing human resources
headaches. The old Royal Bank units amalgamated into Global Private Banking were
surprised to find themselves under an overall “Royal Trust” umbrella. One senior Royal
Bank executive commented: “I thought we took you over: what is this, a reverse take-
over?” Global Private Banking experienced the actual merging of two companies,
unlike Canada where, to begin with, many of the Royal Trust units remained together
relatively untouched. Internationally, all Royal Trust and Royal Bank employee
communications and human resource policies had to be reviewed and consolidated,
with due sensitivity to the needs and expectations of the personnel of two previously
separate organizations. Global Private Banking branding was introduced on all internal
communications. The consolidation of pay and employment conditions was given a
high priority, and produced a rather unexpected but very useful benefit for the new
leader of Global Private Banking and his senior management team. They acquired
detailed knowledge of an area close to most people’s hearts, which gave them power
and influence in other aspects of the integration process. At the outset, it seemed that
the management of Royal Bank had two key aims in acquiring Royal Trustco: acquiring
at a very reasonable price a ready-made presence in areas and businesses where they
saw profits could be made and where there were complementary strengths and
weaknesses; and grafting onto the existing Royal Bank culture the more entrepreneurial
Royal Trustco approach to business development and growth. It was the latter of these
objectives that was to prove the more difficult to achieve. Interestingly, there was a
development which initially made it difficult for the cultural graft to take: feelings of
guilt on the part of some employees who “survived”. These had a negative effect on
morale and motivation. Such employees spent time talking about their sympathy for
people made redundant and their own anxiety about being selected for redundancy in
future, with an obvious effect on productivity. There was a tendency for people to keep
their heads down and become more risk averse. There was also an expectation that
Royal Trustco employees should be grateful and overjoyed to have survived, whereas
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in many ways they were the walking wounded. These issues of insecurity became
particularly pertinent where two or more units operated in the same geographic
location, which was the case in Switzerland, the Channel Islands, and Asia. With these
units, the major obstacle to a speedy resolution was that the executive responsible for
the decision felt that he had to be personally involved as a mediator, to ensure that the
issues were fairly balanced and the correct business decision for the future taken. This
meant heavy time involvement on his part and he was pulled in several directions, thus
slowing down reviews and increasing anxieties, while employees felt their futures to be
continually under threat. The danger with an extended decision making process is that
employees will be unsettled, unproductive and vulnerable to poaching. Poaching
happened in Asia where the employment market was more volatile. In Switzerland,
where the decision was taken to reduce Zurich to a representative office, some high-
performing staff were offered the opportunity to transfer to Geneva, which retained full
branch status. Most refused the offer of a transfer, some because of the physical
relocation, but others because their motivation had sunk too low during the period of
indecision: they preferred redundancy. A further undermining of the integration process
took place as a result of political manoeuvring. Sometimes this happened when senior
people became angry at not being offered key posts in the new organization, or at
having to give up some of their autonomy when new linking positions were established.
Some Royal Bank executives felt that they were poorly rewarded for years of loyalty
and hard work. This was a particular issue when they had to report to someone younger
and in their minds less experienced. There were also people who had been used to
running their own fiefdoms in an autocratic manner and did not wish to become part of
a wider team. Some middle managers felt threatened and insecure in a much larger and
more competitive environment. Instead of seeing this as an opportunity for
development: they fought to keep the informal organization as it had been before,
ignoring or actually resisting the fact of a much broader and more powerful formal
organization structure. Rather than by trying to win such people over, this problem was
dealt with in two ways. First they were openly challenged on their apparent lack of
desire to make the new structure work. Second they were “squeezed” from every
direction by feeding more and more information directly to employees, inviting more
employees to annual conferences or training events and openly cascading information,
then following up with surveys asking employees how much had actually filtered down.
It was felt that there would be some outcomes from the merger which would naturally
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support the integration process, for example an increase in the number of opportunities
for promotion and career development. In practice there were some problems, caused in
part by the historically different approach of each company to the internal posting of
vacancies. In Royal Trustco, vacancies were published internally up to a relatively
senior level, including for example country heads. In Royal Bank, posting stopped at a
considerably lower level. When open posting was introduced in line with the previous
Royal Trustco practice, it caused a shock to many people in Royal Bank who had been
used to a much more discreet process of selection with no open competition. Other
Royal Bank employees welcomed the change, but were then disappointed and
demoralized when, after enthusiastically applying for vacancies, they became aware
that it was a genuinely competitive process with selection decisions based on the same
principles as external selection. It would have worked better had employees been fully
briefed in advance on how the process worked. It was also felt that there were
opportunities which, if taken, would help integration. For example, immediately before
they acquired Royal Trustco, Royal Bank had been actively considering a change in its
basic organizational structure internationally. Royal Bank had quite a complex matrix
management structure outside of Canada with a heavy emphasis on geographic
responsibilities, and had already decided to change this to one based on global business
units. The acquisition of Royal Trustco’s international business which was already
structured in this way, presented an opportunity to accelerate the process of change, but
to take advantage of this opportunity required a clear statement of intent at the most
senior level. This statement was not made with sufficient clarity, and some fierce and
unproductive infighting broke out. The issue of cultural synthesis, including the
eradication of political infighting, was in fact one of the most important issues on which
the HR function was expected to advise. Training and development efforts needed to be
concentrated on how to achieve this quickly for two reasons. First, to achieve business
advantage by having the new organization marketing the full range of its new products
with one voice as soon as possible: the primary mechanism was to be product
knowledge training and a major creative effort was made in this area. Second, to create
an “identity” for the Global Private Banking division, to increase morale, reduce
“politicking” and increase international team-working across the old Royal Trustco and
Royal Bank cultural boundaries. With regard to merging two very different cultures,
Royal Bank senior people referred to their company in the past as a black stretch
limousine with tinted windows (so you can’t see inside) and lots of dials without
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numbers. The same people would describe Royal Trustco as a red Ferrari – flashy, lots
of show, driven by extroverts: rash entrepreneurs out of control. Royal Bank was seen
by former Royal Trustco employees as slow moving, bureaucratic and influenced
heavily by loyalty. The issue of loyalty showed itself in the placing of key Royal Bank
executives into senior positions in Global Private Banking, perhaps in some cases
because they were felt to be tried and tested. Sometimes this impeded changes within
the new unit. On the positive side certain younger employees received opportunities for
promotion that would not have been possible in the old structure. Royal Bank took the
following two initiatives to bring about the merging of the two cultures: the
introduction of a training programme called “Business as unusual”, and an international
conference entitled “Future search”. All employees participated in “Business as
unusual”, a programme designed to make them more open to change. This was a one
day workshop which was promulgated top down and often run as part of a team
building event. “Future search” was restricted to 65 participants, but drawn from every
level of the organization, including the Senior management team and chief executive.
The programme was designed in conjunction with Dr John Carter and took place in
London over two-and a-half days. It was based on the concept of a large representative
sample of the business being involved in improving the “whole system”. Participants
worked in groups and explored the past, present and future of the organization, society
and what it meant for them as individuals. Their brief was to map out future business
strategy, agree what changes were necessary in order to implement the strategy and
suggest specific mechanisms for bringing about those changes. The “Future search”
conference was difficult to organize because of its sheer size. It was decided that
communication of this event was key, so the entire conference was filmed and a
communication pack prepared, including guidance notes, which was then sent to
participants so that they could themselves then make presentations and seek “buy-in”
from colleagues in their local units. Together, these initiatives and the associated
communications programme resulted in an agreed business strategy for Global Private
Banking and a general understanding and support for the strategy by the great majority
of employees. The unifying effect of these two initiatives, in particular the Future
search initiative, and their contribution to the direction of the business was dramatic.
There is not enough space in this article to describe in detail the many other initiatives
which were taken to facilitate a full integration, for example: harmonization of
compensation and benefits, introduction of broad banding for salary grades and a new
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management and career development programme. The identification of key
competences was found to be a helpful linking process for these and other human
resource management functions like recruitment, succession planning and performance
management. These initiatives did a great deal on a practical level to support the
integration process. So where is Royal Trust and within that Global Private Banking
now? According to Tony Webb, President of Royal Trust, there have been three major
outcomes from the integration:
1 Clients have benefited from added security and the wider range of services available
from the Royal Bank Group.
2 Employees have benefited from increased job security and from re-established career
opportunities.
3 Shareholders have benefited from the extension of the Royal Bank Group’s activities
in wealth management – the investment of wealth, the transfer of wealth, and the
custody of wealth.
McKinsey had been retained to advise on both the transition phase and on the
integration process. Their research, referred to earlier, showed that of the Acquisition
programmes that they had been involved in 61 per cent had failed, 23 per cent had
succeeded and in 16 per cent of cases the outcome was uncertain. Usually the larger the
company acquired the more the chance of failure. They considered the Royal Bank-
Royal Trustco merger not only to be amongst the 23 per cent which succeeded, but also
to be one of the most successful. What were the factors which appeared to have made
the merger successful, and what could have been done better? Based on the experience
of these two companies, the following learning points arise:
• Any radical but inevitable changes, e.g. the close-down of overlapping business units,
should be made swiftly, ideally within six months. Otherwise there is a great risk that
the uncertainty will result in low morale and the loss of valuable people.
• International units often have their own special communication needs. These could be
met by the appointment of an individual with specific responsibility for international
communications. A dedicated international communications person, using HR people in
the international units as a conduit, could deal with the whole spectrum of
communication including management changes and new business directions.
• Harmonization of the existing pay and benefits package should be considered at an
early stage. This key area can consume much time and money, but has to be tackled. It
offers an opportunity to remove anomalous practices, and also confers the power of
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detailed knowledge of a very important area on the chief executive and senior
management team.
• Support for or resistance to change varies. Senior managers are often quick to see the
need for change and support it, middle managers tend to be more resistant because their
power base is often a product of the old structure. Mechanisms need to be developed to
deal with this.
• The process of changing the business and developing a clear vision of its future must
be participative, with contributions from all areas and levels. Transition task forces
drawn from all levels of staff across key areas worked very well, involving as they did
large groups of people in the integration process. Culture change by megaphone and
sledge-hammer which was, ironically, the approach used by Royal Trustco’s owners
during the 1980s, is likely to result in only superficial change. Using a large group
participative planning process such as Future Search, involving a broad cross section of
employees, is a method which can be successfully used to create buy-in and
commitment to business and cultural change.
• “Survivor syndrome” should be expected. It is unsafe to assume that those who
survive redundancy will be so grateful that their level of motivation will be high. Some
will experience feelings of guilt which will affect productivity unless dealt with
understandingly. Companies involved in mergers should introduce mechanisms to
“unbottle” emotions and feelings, and acknowledge the concerns of survivors.
• Every international unit is different and needs to be seen as part of the whole while
acknowledging that local strategies are also required.
Tony Webb, the Head of the new Royal Trust division within Royal Bank, said that if
he had the opportunity to do the whole thing over again, he would pay even more
attention to the “soft”, people issues, and this following a merger during which a
considerable amount of resources had in fact been devoted to such issues. The inference
is clear: for a merger to increase its chances of finishing amongst the élite 25 per cent
which succeed, particularly when participants are in a people intensive business, those
responsible for managing the process must give people issues like those described
above a very high priority. Large mergers continue to change the nature of
employment. Feelings of security and being part of a “family” can be destroyed with
little thought given to what most employees are getting in exchange. Self-confident
senior executives are more likely to find these developments acceptable and natural,
because they see their own role as agents of change, but they should recognize that for
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junior and middle-management employees’ change can be threatening and can
undermine their loyalty and productivity. Employees need something more from work
than its intrinsic rewards. They want stability, friendships, a sense of excitement and
something to believe in. Take-overs and mergers are often driven by considerations of
power and market share, with a business rationale which varies in its degree of
plausibility. If a new people business is to succeed, then attention must be paid to the
human aspects of the new organization before, during, and after its formation (Burns
and Rosen 1997).
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