Mergers and acquisitions (cont.)

IMMAS-V

Lecture content M&A research and practice (cont.)

• Success and failure factors• Integration approach and Post-acquisition Performance and

Management • Processes of Post-acquisition Change• National Management Practices of  Integration and Control

Performance after Cross- border Acquisition • Human resource management for M&A

IntegrationTransition managementBridging the gapsStructural and process integration

7 KSFFsBusiness environmentDeal motiveDeal strategyProcessing of the dealLeadershipOrganization cultureNational culture

Successful outcome of the

IM&A

1Strategic

goals 2Set strategic

criteria11

Review ofperformance

10Integration of the

acquisitions/merger

9Acquisitions

financing

8Purchase and sale

agreement7

Due diligence and validation of the target company

6Negotiate with the

seller/structurethe deal

5Evaluate and value the selected target

4Analysis of targets

and strategic fit

3Search process/

gather information

Failure risks associated with mergers

• Many studies find that at least 50% of mergers (especially big mergers) are unprofitable

• Overvaluation, over-indebtedness

• Overestimating management capabilities (“hubris”)

• Difficulty of integrating the merged companies (e.g. different corporate or national cultures)

Obstacles to integration

The principles of integrations

• Rationalise the products• Combine back office and support functions• Cherry-pick the best branches and offices (and people)• Reduce overheads• Achieve economies of scale• Increase product holdings across a much bigger

customer base.

Factors for Successful Integration

• Sound M&A transaction supports strategic goals• Customer must remain in the focus during integration• Organization and governance of new company are clearly defined• Planning preparation finalized before “Day 1“• Concrete synergy and implementation roadmap• Timely decisions (e.g. personnel, IT, ...) prior to implementation to

provide clear orientation• Intensive communication to all stakeholders• Focus on staff retention• Awareness of cultural differences• Implementation schedule must ensure fast implementation to realize

predicted synergies

*Source: “Lessons From the M&A Front: The Morning After,” Deloitte Consulting Report (1999); “Why Mergers Fail” McKinsey Quarterly (2001); “Not AllM&A’s Are Created Equal – and That Matters,” Harvard Business Review (2001); „M&A Fireside Chat“, Impact, Linklaters (2004)

M&A: integration strategy of two businessesFOCUS ON Stakeholder satisfaction• The goal of mergers and acquisitions is to enhance shareholder value—

everything else can be considered "damageDevelop a strategy. Where the key elements of a business combination's

will typically be to:– Leverage the merged companies' brands, products and services to customers– Strengthen market share or competitive positioning– Improve net cash flows through substantial cost savings– Deliver the benefits anticipated at the business unit level– Manage budgeted costs for the post-merger integration.

Processes• Business processes play a vital cross-functional role in post-merger

integration. They are the engines that enhance value:• Supporting revenue generation through integration• Spurring cost reduction through shrinking management costs and facilities• Optimizing logistics channels.

Copyright © 2009 Accenture

M&A: integration strategy of two businesses (cont.)

Capabilities• Capabilities as the combination of people skills, business practices,

leading technologies and physical infrastructure that create value for company. Find the right way to move functions from one place to another? Identify unique product and process technologies and best operating practices of the merging organizations

Stakeholder Contribution• Create strong (stronger) investor profile• A positive response from securities analysts and business media• Retained employees loyal to the new enterprise• No erosion is allowed to commbined customer base by

opportunistic competitors.

Copyright © 2009 Accenture

Integration planning

• Identify and quantify synergies• Structure and organize integration project• Set up Integration Office• Develop integration master plan and keep it up-to-date• Effectively manage IT integration• Establish effective reporting and communications processes• Create change management process for post-merger integration• Introduce effective controlling of integration project (Integration

Scorecard)• Develop structured incentive program for retention of key

employees• Promote awareness of cultural differences• Kick-off integration project

Integration team/managers’ functions

Integration team creation and functions Source: www.oliverwyman.com

Getting ready to mergeSource: www.oliverwyman.com

Develop a 100-day plan

Develop an experience-based plan, target operating model and implementation plan. Centrally facilitate, for all lines of business and operational areas, the creation of a target operating model, gap analysis and an implementation plan.

M&A is successful only if executed company-wide—one line of business can’t be successful if others fail.

Develop a preliminary game plan to Evaluating current processes

Source: www.oliverwyman.com

Integration approaches acc. M. Hitt, V. Pisano

• Preservation

• Separation

• Symbiosis

• Integration

MA and HRM

IMMAS-V

M&A influence on HRMCross cultural differences of HRM

management in acquiring and target companies

M&A influence on HRM• M&As can be a significant source of trauma for

both employees and managers. • M&A often result in lowered trust, commitment,

satisfaction, and productivity, and increased absenteeism, turnover, and attitudinal problems (e.g., Buono et al., 1985; Larsson & Lubatkin, 2001; Nahavandi & Malekzedah, 1988; Nikandrou et al., 2000).

• HRM difficulties may add substantial costs to the integration process and hinder the ability of the organization to achieve the desired synergistic benefits of merging.

Human side of change in M&a situation: challenge for managers

• M&A is and should be considered an accelerated change programme• Change programmes are (or should be) about people• Change is unsettling• People, generally, do not give of their best when unsettled• Expecting to achieve business as usual (BAU) and embrace rapid

change requires more than 100 per cent of human potential, which doesn’t add up!

• M&A by its very nature reduces people’s performance by introducing the elements of doubt, distraction, disloyalty and self-interest

• Only the core architects of the M&A are informed enough to consistently rise above these concerns

• Everyone else, to varying degrees, finds their level of participation diminished until such time as the change is realised

• It is rare for a merger or takeover programme to be completed in less than 18 months

• Change management expertise and leadership commitment are therefore paramount

• There is no short-cut to this, no way of avoiding it and no way of delegating responsibility for it.

Human side of change: challenges for the ,,entire staff”

• Performance Targets

• Potential for precedent

• No blueprint

• ,,We were not our own masters” problem

• Meaningful consultation with Trade Union

• Policy ( internal-external)

The human side of mergers: communication

Develop a communications plan early• State the strategic and tactical goals and objectives throughout the

enterprise to provide people with the foundation upon which they can stand

• Describe the new organizational structure as early as possible and put people in the boxes, where possible

• Listen to the undercurrents and the “soft stuff”• Discuss the fact that there will be losers and deal with the feelings• Focus on performance and tell the organization how it is doing

Who are communication targets?

• Transition team members• Affected departments• Senior managers• Employees• Suppliers, distributors, etc• Stock analysts• Shareholders• Community• Family members

Human resource issuesin post-merger integration

• Organizational changes can cause:–motivational problems–depression and other types of mental illness–physiological problems related to stress–Absenteeism–A ’post-merger syndrome’ showing in:

• lack of social cohesion• identity problems• resistance to change

• Organizational resistance can take many forms:–lack of motivation–unwillingness to cooperate with the other side–politicking–strikes–acts of sabotage

The role of HR unit

• The HR unit function can have different roles in post-merger integration (e.g. Ulrich, 1997):

–Administrative expert–Employee champion–Strategic partner–Change agent

• In reality, the roles played depend on:–The strategic or non-strategic overall role of HR in the

organizations–Persons in questions–Dynamcis of the integration process–Internal politics

Transition approach

• Communication/Engagement• Reduction in Management and other costs• Team Effectiveness• Early promises re to ,,our People”

• Morale Issues

• Creation of new structures – tranche by tranche • Developing the new cohort

• Letting go of the old

• Placement & Support Unit– Career direction seminars and interview training

• Procedures for filling posts

Cross-border human resource management

• Strategic role: HRM policies should be congruent with the firm’s strategy and it’s formal and informal structure and controls

• Task complicated by profound differences between countries in labor markets, culture, legal and economic systems

Human Resource Management

for international business ( Hill, 2002+)

• HRM-refers to the activities an organisation carries out to use its human resources effectively

• Major tasks of HRM – Staffing policy– Management training and development– Performance appraisal – Compensation policy– Organisation culture &Staff relationship management

HR AnalysisPlanning, Policy andImplementation

Staffing•Recruitment•Placement•Records

Learning,Training, andEvaluating

CompensationRewardsandContracts

Organisationalculture &managementworkforcerelationships

Pre and post- merger HR management

Staffing policy

• Staffing policy– Means selecting individuals with requisite skills to do

a particular job– It is a tool for developing and promoting corporate

culture• Types of Staffing Policy

– Ethnocentric– Polycentric– Geocentric

Ethnocentric policy

• EthnocentrismTendency to consider one’s own culture as superior to others.

• Key management positions filled by parent-country nationals

• Advantages:– Overcomes lack of qualified managers in host nation– Unified culture– Helps transfer core competencies

• Disadvantages:– Produces resentment in host country– Can lead to cultural myopia

Polycentric policy

• Host-country nationals manage subsidiaries• Parent company nationals hold key headquarter

positions• Advantages:

– Alleviates cultural misunderstandins.– Inexpensive to implement– Helps transfer core competencies

• Disadvantages:– Limits opportunity to gain experience of host-country

nationals outside their own country.– Can create gap between home-and host-country

operations

Geocentric policy

• Seek best people, regardless of nationality• Best suited to global and trans-national businesses• Advantages:

– Enables the firm to make best use of its human resources

– Equips executives to work in a number of cultures– Helps build strong unifying culture and informal

management network

• Disadvantages:– National immigration policies may limit implementation– Expensive to implement due to training and relocation– Compensation structure can be a problem.

Comparison of staffing approaches (Hill, 2002)

Use of Expatriates

Use of expatriates increases when:• Poor or insufficient local talent

• There is a need to ensure a strong corporate-wide vision (and culture).

• When domestic and foreign operations are highly interdependent.

• The political situation in the foreign country is unstable

• There are significant culture differences.

• Bottom line: When the home country does not TRUST the abilities and/or intentions of local labour force.

Culture clash management Culture is implicit. Because the values and rules that form a culture

become second nature over time, employees find their culture challenging to recognize. This often makes outsiders the most insightful cultural observers.

Culture shapes attitudes. It creates filters though which employees make sense out of their environment.

Culture influences how people behave. Culturally influenced actions feel right to people, even while it’s difficult for them to recognize why they act the way they do or why other ways of acting might also be appropriate.

Culture is resilient. Its elements are long-standing, not a matter of fads. Without a significant and deliberate effort, as well as the test of time, new cultural values that are imposed on people seldom replace their underlying values and beliefs in the long run.

Performance appraisal

• Problems:– Unintentional bias

• Host-nation biased by cultural frame of reference• Home-country biased by distance and lack of

experience working abroad

• Expatriate managers believe that headquarters unfairly evaluates and under appreciates them

• In a survey of personnel managers in U.S. multinationals, 56% stated foreign assignment either detrimental or immaterial to one’s career.

Guidelines for performance appraisal

• More weight should be given to onsite manager’s evaluation as they are able to recognize the soft variables

• Expatriate who worked in same location should assist home-office manager with evaluation

• If foreign on-site managers prepare an evaluation, home-office manager should be consulted before completion of formal the terminal evaluation

Compensation

• Two issues:– Pay executives in different countries according to the

standards in each country?

or

Equalize pay on a global basis?

– Method of payment

National differences in compensation

CEO HR Director Accountant Mfg. Employee

Argentina $860,704 $326,874 $63, 948 $17, 884

Canada 742,228 188, 070 44,866 36,289

Germany 421,622 189,785 61,375 36,934

Taiwan 179,486 102,491 30,652 11,924

United Kingdom

719,665 268,302 107,839 28,874

United States

1,403,899 306,181 66,377 44,680

Compensation issues

Type of Company Payment

EthnocentricHow much home-country

expatriates should be paid.

PolycentricPay can and should be

country-specific.

Geocentric/TransnationalMay have to pay its

international cadre of managers the same.

Components of expatriate pay • Base Salary

– Same range as a similar position in the home country• Foreign service premium

– Extra pay for work outside country of origin• Allowances

– Hardship, housing, cost-of-living and education allowances• Taxation

– Firm pays expatriate’s income tax in the host country• Benefits

– Level of medical and pension benefits identical overseas

National differences in CEO pay for midsize companies

The expatriate problem

Expatriate: citizens of one country working in another– Expatriate failure: premature return of the expatriate

manager to his/her home country

• Cost of failure is high: estimate = 3X the expatriate’s annual salary plus the cost of relocation (impacted by currency exchange rates and assignment location)

Expatriate failure rates

What is culture and how does it relate to international business management?

Culture as shared set of beliefs, values, and patterns of behavior common to a group of people.

Culture as collective ways of acting , thinking and feeling: ,,collective programming of the mind distinquishing the members of one group or category* of people from other“.

*nation, religion, occupation, organisation, gender

Cultural research approaches

• How does cultural diversity of the business environment influence organisation behaviour Adler , 1991 ; Ashkanazy et al., 2004; Hampden- Turner, Trompenhaars, 2000; Hofstede et al. 1984, 1991, 2002; House et al. 2004; Smith, 1997.

• How do behave the companies in order to manage two and more different cultural groups interaction (intra-organisational perspective):Hofstede, 1980; Hampden- Turner, Trompenaars, 2000; Jackson, Schuler 2004.

Management practices transfer across cultures

Are management theories universal?

– e.g. Ethnocentrism of U.S. management.

• Participation and individual performance are not emphasized as

much in other cultures.

– e.g. Japanese management practices application abroad.

Are there any systematical differences among countries

and/or cultures.

Global managers– Need to successfully apply management functions across international

boundaries.

M&A and a third culture? Cross- cultural M&A: national approaches?

• There is continuing debate concerning the influence of nationality on management practice in a globalizing world. Some argue that transnational forces now carry greater weight; others emphasize the influence of nationality.

• Cultural differences between acquirer and acquired companies may make managing the latter more difficult, though synergies are also possible.

•  Attention to human resource issues is particularly important following an acquisition, the more so if cultural differences are involved.

• Acquisitions in the same country by companies of different nationality will indicate whether different national management approaches can give equally good results despite the variance in cultural distance.

Culture clash in organisation (N. Adler, 1997)

• Domination of one culture;• Coexistance of cultures;• Cooperation of cultures

Culture shock degree and culture clash type in organisation?

Culture clusters by countries/regions

S. Ronen (1986) • Anglo-Saxon • Germanic, • Nordic (European) • Latin European, • Near east (Arab),• Far East, • Latin American • other.

Schwartz (1999)

Anglo-Saxon • Western European, • Eastern European • Islamic,• Far East, • Latin American

Interacting with others (Gesteland, 1997)

• Formal communication style ( Gesteland, 1997)– Use of titles (academic or professional)– Politeness & protocol important– Common in ascriptive cultures

• Informal communication style– Little use of titles or polite forms– Speaking plainly is encouraged– Common in achievement-based cultures

Contextual importance (Hall)

• High-context communication style– Vagueness common (implicit style)– Tact & diplomacy prioritised – Important to read between the lines/pick up signals– Harmony and “face” important

• Low-context communication style– Directness common (explicit style)– Clarity & honesty appreciated – Things can be taken on face value

G. Hofstede

• IBM company, between 1967 and 1973, covering more than 70 countries, from which the 40 largest only used first and afterwards extended the analysis to 50 countries and 3 regions.

• Individualism IDV• Masculinity - MAS, • Uncertainty Avoidance - UAI.• Power Distance - PDI, • Long-Term Orientation - LTO and was applied to 23 countries.

Hofstede – Culture specific

SMALL PDI WEAK UA

Nordic CountriesAnglo countries, USA, Netherlands,

LARGE PDI WEAK UA

China, India

German spk. countriesHungary, IsraelBaltic countries,

SMALL PDI STRONG UA

Latin Countries,Slovakia, Chech, Poland,

Korea, Japan,Russia,

LARGE PDI STRONG UA

COLLECTIVIST FEMININE

Thailand, Korea,Chile, Russia, Bulgaria, Portugal

COLLECTIVIST MASCULINE

China, Japan,Mexico, Venezuela, Arab world, Greece

Spain, France,Netherlands, Baltic countries, Nordic

Countries

INDIVIDUALIST FEMININE

Slovakia, Chech, PolandHungary, ItalyGerman spk. CountriesAnglo countries, USA

INDIVIDUALISTMASCULINE

“I” or “We” ?

• Individualist cultures– identity based on the individual– individual interests prevail over collective interests– personal goals and taking initiative important

• Collectivist cultures– identity based on belonging to a social group– preservation of group harmony important– collective interests prevail over individual interests– loyalty to the group

Leadership style

• High power distance

– Manager respected

– Hierarchical & directive management style

– Top-down communication style

– Authority, competence, decisiveness, respect

• Low power distance

– Consultative management style

– Managers encourage dialogue: two-way communication

– Flat organization

– Team-building, openness, empathy

Importance of work

• Masculine cultures– dominant values material success and progress– stress on equity, competition and performance– Gender differences expected– “live to work”

• Feminine cultures– dominant values consensus and cooperation – stress on equality, solidarity and quality of work life– Gender equality expected– “work to live”

Addressing culture when two companies integrate

1. Make culture a major component of the change management work stream.

2. Identify who “owns” corporate culture and have them report to senior management. 3. Insist that the cultural work focus on the tangible and the measurable.

4. Consider the strengths of both existing cultures, not just the weaknesses.

5. Implement a decision-making process that is not hampered by cultural differences.

6. Build the employee brand with a view toward how it will be understood by employees.

7. Put people with culture change knowledge and experience on the teams that define the key interfaces in the new organizational model.