HR Due DiligenceHR Rocks !!!

HR Due Diligence in Acquiring a Business

- Integration Management

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HR Due Diligence

Topics covered

Mergers and Acquisitions: Importance and Reasons for Failure

People related problems that led to Financial underperformance

Due Diligence

What to look for in Due Diligence

Why are people neglected during M&A ?

HR integration - Stages, challenges and Solution

Case Study – DaimlerChrysler

HR Due Diligence

Mergers & Acquisitions

Mergers and acquisitions represent the coming together of companies for financial, market, technology and other considerations.

In a merger, two companies come together and create a new entity.

In an acquisition, one company buys another one and manages it consistent with the acquirer’s needs.

Mergers and acquisitions represent the coming together of companies for financial, market, technology and other considerations.

In a merger, two companies come together and create a new entity.

In an acquisition, one company buys another one and manages it consistent with the acquirer’s needs.

HR Due Diligence

Importance of Mergers & Acquisitions

Horizontal mergers for market dominance; economies of scale Vertical mergers for channel control Hybrid mergers for risk spreading, cost cutting, synergies, defensive

drivers Growth for world class leadership and global reach Survival; sales maximization Acquisition of cash, deferred taxes, and excess debt capacity Move quickly and inexpensively Flexibility; leverage Adopt potentially disruptive technologies Financial gain and personal power Gaining a core competence to do more combinations

Horizontal mergers for market dominance; economies of scale Vertical mergers for channel control Hybrid mergers for risk spreading, cost cutting, synergies, defensive

drivers Growth for world class leadership and global reach Survival; sales maximization Acquisition of cash, deferred taxes, and excess debt capacity Move quickly and inexpensively Flexibility; leverage Adopt potentially disruptive technologies Financial gain and personal power Gaining a core competence to do more combinations

HR Due Diligence

HR Due Diligence

When Mergers fail …

HR Due Diligence

Reasons for Failure

Expectations are unrealistic

Hastily constructed strategy, poor planning, unskilled execution

Failure/inability to unify behind a single macro message

Talent is lost or mismanaged

Power and politics are the driving forces, rather than productive objectives

Expectations are unrealistic

Hastily constructed strategy, poor planning, unskilled execution

Failure/inability to unify behind a single macro message

Talent is lost or mismanaged

Power and politics are the driving forces, rather than productive objectives

HR Due Diligence

Reasons for failure

Culture clashes between the 2 entities go unchecked

Transition management fails

The underestimation of transition costs

Defensive motivation

Focus of executives is distracted from the core business

Culture clashes between the 2 entities go unchecked

Transition management fails

The underestimation of transition costs

Defensive motivation

Focus of executives is distracted from the core business

HR Due Diligence

Reasons for Financial underperformanceSource/Study Cited Drivers of M&A Underperformance

Merger Integration: Why the SoftIssues Matter Most, Bain & Co, 2003

• Compared to the sector index, share price performance was 5.1% ahead of average price in deals where management proactively addressed culture.

• Compared to the sector index, shared price performance was -4.4% in deals where companies failed to address cultural issues.

Success Factors in Acquisitions,PricewaterhouseCoopers, EBF, 2001

• Acquisitions that ought to have been successful according to business criteria failed because of neglect of the human factors involved.

• Failure to tackle the people issues, such as retaining top talent and communicating effectively with the workforce, is one of the reasons why the majority of deals fail to meet expectations.

“Tying the Corporate Knot- Effects of Mergers and Acquisitions”, American Mgmt Association, 1989

Merging companies with markedly different HR practices were three times more likely to have significant productivity and turnover problems.

HR Due Diligence

Source/Study Cited Drivers of M&A Underperformance

"Merger Mania: Reshaping the Telecom Industry," Rural Telecommunications, 1997

• 85% of respondents asserted that people problems were more likely to affect a merger's long term success than financial problems.

Acquisitions Horizons study, 1980s, cited in Price Pritchett, After the Merger: Managing the Shockwaves

The 2 top most reasons cited for the underperformance of mergers and acquisitions were

1) management talent in the acquired company was not as deep as expected 2) key talent left the firm.

Delivering the Benefits of Mergers and Acquisitions, Coopers & Lybrand,1996.

• 85% of mergers and acquisitions underperformed due to differing management attitudes and culture.

• 80% of mergers and acquisitions underperformed due to a lack of integration and planning.

• 45% of mergers and acquisitions underperformed as a result of poor management practices at the acquired company.

Reasons for Financial Underperformance

HR Due Diligence

The DNA of an Organization

HR Due Diligence

HR Due Diligence

What is Due Diligence Pre-cursor to actual announcement of merger Comprises of Cultural Due Diligence and HR Due

Diligence

Involves consideration of differences in the corporate culture of the companies and identifying issues critical to integration

Pre-cursor to actual announcement of merger Comprises of Cultural Due Diligence and HR Due

Diligence

Involves consideration of differences in the corporate culture of the companies and identifying issues critical to integration

HR Due Diligence

What is Due Diligence Helps management plan necessary actions for

resolving them before the merger is announced

Wider the cultural gap, more difficult will be the merger and more crucial will be the diligence phase

Helps management plan necessary actions for resolving them before the merger is announced

Wider the cultural gap, more difficult will be the merger and more crucial will be the diligence phase

HR Due Diligence

Issues to watch out for

Cultural and Talent Indicators

Workforce Assessment

Remuneration

Employment Agreements & Legal

Compliance

Risks in Due Diligence

HR Due Diligence

Cultural and Talent Indicators

Speak to key personnel about staff behavior.

Get feedback from key clients about services quality,

staff attitude, reliability.

Get turnover data, compare it with industry

standards and look for potential problems.

Get staff retention details

Identify the key talent needed to be retained.

Speak to key personnel about staff behavior.

Get feedback from key clients about services quality,

staff attitude, reliability.

Get turnover data, compare it with industry

standards and look for potential problems.

Get staff retention details

Identify the key talent needed to be retained.

HR Due Diligence

Workforce Assessment

Obtain headcount allocations for each category.

Is the organization structure efficient or flabby.

What is the headcount requirement of the merged organization for each job category.

Do a skills requirement study. For example:Technical qualifications for trade or technical

organization.Soft skills for service oriented organization.

Obtain headcount allocations for each category.

Is the organization structure efficient or flabby.

What is the headcount requirement of the merged organization for each job category.

Do a skills requirement study. For example:Technical qualifications for trade or technical

organization.Soft skills for service oriented organization.

HR Due Diligence

Remuneration

Critical, because large amount of time and money is expended.

Obtain remuneration data and compare with the labor market position for the industry.

Underpaid staff need to be brought to industry standards, not possible at one go

Overpaid staff need to be realigned sensitively.

Bonus schemes: Realign criteria for incentives in the new entity.

Critical, because large amount of time and money is expended.

Obtain remuneration data and compare with the labor market position for the industry.

Underpaid staff need to be brought to industry standards, not possible at one go

Overpaid staff need to be realigned sensitively.

Bonus schemes: Realign criteria for incentives in the new entity.

HR Due Diligence

Employment Agreements & Legal Compliances

Check out for redundancy liabilities like transfers, leaves, trade unions, health & safety.

Do not overrate the value of complying with the law. It is important but not more than skill and behavior assessment.

Maintain a balance between time and efforts spent in alignment of people and skills versus drafting elaborate compliance procedures.

Check out for redundancy liabilities like transfers, leaves, trade unions, health & safety.

Do not overrate the value of complying with the law. It is important but not more than skill and behavior assessment.

Maintain a balance between time and efforts spent in alignment of people and skills versus drafting elaborate compliance procedures.

HR Due Diligence

Major Risks in Due Diligence

Insufficient remuneration analysis could lead to loss of key

personnel. Minimal analysis of labor relations could ignore history of

labor conflicts. A new management team could be required if target

company’s management team is not very forward looking or

dynamic. Target company’s management team could have troubles

adjusted to constraining culture if it is more entrepreneurial

than acquiring company.

Insufficient remuneration analysis could lead to loss of key

personnel. Minimal analysis of labor relations could ignore history of

labor conflicts. A new management team could be required if target

company’s management team is not very forward looking or

dynamic. Target company’s management team could have troubles

adjusted to constraining culture if it is more entrepreneurial

than acquiring company.

HR Due Diligence

Major Risks in Due Diligence

If target company has more organizational layers, trimming

could be required and initially committed promise of not

downsizing will be breached, leading to an atmosphere of

mistrust. If analysis of compensation practice is insufficient and target

company has generous packages, there could be a post

merger exodus of talent. If target company’s management practices and culture is not

analyzed adequately, the acquirer may be unprepared for the

extent of effort required for the cultural integration exercise.

If target company has more organizational layers, trimming

could be required and initially committed promise of not

downsizing will be breached, leading to an atmosphere of

mistrust. If analysis of compensation practice is insufficient and target

company has generous packages, there could be a post

merger exodus of talent. If target company’s management practices and culture is not

analyzed adequately, the acquirer may be unprepared for the

extent of effort required for the cultural integration exercise.

HR Due Diligence

HR Due Diligence

People issues are critical, yet neglected

Possible reasons include: The belief that they are too soft, and, therefore, hard to

manage

Lack of awareness or consensus that people issues are critical

No spokesperson to articulate these issues

No model or framework that can serve as a tool to systematically understand and manage the people issues; and therefore

The focus of attention in M & A activity is on other activities such as finance, accounting, and manufacturing

Possible reasons include: The belief that they are too soft, and, therefore, hard to

manage

Lack of awareness or consensus that people issues are critical

No spokesperson to articulate these issues

No model or framework that can serve as a tool to systematically understand and manage the people issues; and therefore

The focus of attention in M & A activity is on other activities such as finance, accounting, and manufacturing

HR Due Diligence

HR Integration: Stages, Challenges and Solution

The experiences of companies in merger and acquisition activity suggest a model of M & A activity that has three stages:

Stage 1: Pre-combination

Stage 2: Combination - Integration of the partners

Stage 3: Solidification and advancement - the new entity

The experiences of companies in merger and acquisition activity suggest a model of M & A activity that has three stages:

Stage 1: Pre-combination

Stage 2: Combination - Integration of the partners

Stage 3: Solidification and advancement - the new entity

HR Due Diligence

Stage 1- Pre-Combination

HR Issues HR Implications and Actions

Identifying reasons for the M & A Knowledge and understanding need to be disseminated

Forming M & A team/leader Leadership needs to be in place

Searching for potential partners Composition of team impacts success

Selecting a partnerSystematic and extensive pre-selection and selection are essential

Planning for managing the process of the M and/or A Conducting thorough due diligence of all areas is vital

Planning to learn from the process Cultural assessment

Planning for combination minimizes problems later

Creating practices for learning and knowledge transfer

HR Due Diligence

Stage 2: Combination: Integration of the Co.

HR Issues HR Implications and Actions

Selecting the integration manager Selecting the appropriate candidate

Designing/implementing teamsCreating team design and selection are critical for transition and combination success

Creating the new structure/strategies/ leadership Communicating is essential

Retaining key employees Deciding on who stays and goes

Motivating the employeesEstablishing a new culture, structure, and HR policies and practices is essential

Managing the change process

Communicating to and involving stakeholders

Deciding on the HR policies and practices

HR Due Diligence

What is Change Management

Structured approach to transitioning individuals, teams, and organizations from a current state to a desired future state.

The current definition of Change Management includes both organizational change management processes and individual change management models, which together are used to manage the people side of change.

Structured approach to transitioning individuals, teams, and organizations from a current state to a desired future state.

The current definition of Change Management includes both organizational change management processes and individual change management models, which together are used to manage the people side of change.

HR Due Diligence

Change Management Styles

Individual Change Management Unfreeze – Change – Refreeze Kubler-Ross Formula for change ADKAR

Organizational change management Dynamic conservatism The role of the management The constructionist principle (reflection, advocacy, inquiry) Scenario Planning Theory U of Otto Scharmer

Individual Change Management Unfreeze – Change – Refreeze Kubler-Ross Formula for change ADKAR

Organizational change management Dynamic conservatism The role of the management The constructionist principle (reflection, advocacy, inquiry) Scenario Planning Theory U of Otto Scharmer

HR Due Diligence

Productivity drops by 50% Leadership attrition soars 47% within 3 years Employee satisfaction drops 14% 90% of high-tech mergers fail to deliver

expected increases 80% of employees begin to feel management

cares more about financials than product quality or people

Productivity drops by 50% Leadership attrition soars 47% within 3 years Employee satisfaction drops 14% 90% of high-tech mergers fail to deliver

expected increases 80% of employees begin to feel management

cares more about financials than product quality or people

Pitfalls of Poor Integration

HR Due Diligence

Stage 3: Solidification and Assessment

HR Issues HR Implications and Actions

Solidifying leadership and staffing Elective leadership and staffing of the new entity are essentialAssessing the new strategies and structures Creating and evaluating a new structure

Assessing the new culture Melding two cultures needs assessment revision

Assessing the new HR P & PThe concerns of all stakeholders need to be addressed and satisfied

Assessing the concerns of stakeholders The new entity must learn

Revising as needed

Learning from the process

HR Due Diligence

Role of HR Department in M&A activity Research indicates that only 35% of senior HR executives are

involved in M & A activities.

80% of combinations fail at the implementation stage as a result of the following factors an inadequate road map

senior HR professionals brought in too little, too late;

senior HR professionals lacking in either/both business/global experience;

an inadequate skills base overall; and ultimately, failed organizational change

Research indicates that only 35% of senior HR executives are involved in M & A activities.

80% of combinations fail at the implementation stage as a result of the following factors an inadequate road map

senior HR professionals brought in too little, too late;

senior HR professionals lacking in either/both business/global experience;

an inadequate skills base overall; and ultimately, failed organizational change

HR Due Diligence

Developing key strategies for a company's M & A activities.

Managing the soft due diligence activity

Providing input into managing the process of change

Advising top management on the merged company’s new organizational structure

Developing key strategies for a company's M & A activities.

Managing the soft due diligence activity

Providing input into managing the process of change

Advising top management on the merged company’s new organizational structure

Major activities to be performed by HR

HR Due Diligence

Creating transition teams

Overseeing the communications

Managing the learning processes

Re-casting the HR department itself

Creating transition teams

Overseeing the communications

Managing the learning processes

Re-casting the HR department itself

Major activities to be performed by HR

HR Due Diligence

Partnership

Change Facilitator

Strategy Implementor

Strategy Formulator

Innovator

Collaborator

Partnership

Change Facilitator

Strategy Implementor

Strategy Formulator

Innovator

Collaborator

New roles for the HR leader

HR Due Diligence

Identifying and developing new competencies of HR leader

Business competencies

Leadership competencies

Change and knowledge management competencies

Industry knowledge Strategic analysis Consulting and communicating

Competitor understanding Managing cultural diversity Group process facilitation

Financial understanding Creator of learning cultureDesigning and working in flexible structure

Global perspective/knowledge Planning skills Partnering and parenting

Strategic visioning Adaptability Negotiating

Partner orientation Learning facilitator Network building

Multiple stakeholder sensitivity Value shaper HR alignment

Merger and acquisition knowledge

HR Due Diligence

HR Due Diligence

HR Due Diligence

Synergies were expected in different areas. Complementary geographical markets Unique Portfolio Cost synergies in

Purchasing Integration & Financial Services R&D Sales & Distribution Infrastructure Higher Sales

Benchmarking each other and mutual learning processes Lean ways for Daimler Engineering skills for Chrysler

Synergies were expected in different areas. Complementary geographical markets Unique Portfolio Cost synergies in

Purchasing Integration & Financial Services R&D Sales & Distribution Infrastructure Higher Sales

Benchmarking each other and mutual learning processes Lean ways for Daimler Engineering skills for Chrysler

HR Due Diligence

The German part dominated the post-merger integration structure of the DaimlerChrysler AG.

Both companies prepared themselves for a merger.

Pre-merger preparations: First negotiations in 1995 PEOPLE: Chairmen, because of different expectations POWER: Chances at Daimler vs. Fears at Chrysler PURPOSE: maintain strength in technology vs. R&D investments and new markets

The Integration Structure had a major German influence. Common Board with 18 members (10:8 for Daimler - 2 non-automotive businesses) Real power base Integration Council October 1999 there was a 2:1 majority for Daimler on the board Absorption Mode by Daimler

The German part dominated the post-merger integration structure of the DaimlerChrysler AG.

Both companies prepared themselves for a merger.

Pre-merger preparations: First negotiations in 1995 PEOPLE: Chairmen, because of different expectations POWER: Chances at Daimler vs. Fears at Chrysler PURPOSE: maintain strength in technology vs. R&D investments and new markets

The Integration Structure had a major German influence. Common Board with 18 members (10:8 for Daimler - 2 non-automotive businesses) Real power base Integration Council October 1999 there was a 2:1 majority for Daimler on the board Absorption Mode by Daimler

HR Due Diligence

Post Merger Scenario

Daimler Chrysler merger proved to be a costly mistake for both the companies. Daimler was driven to despair, and to a loss, by its merger with Chrysler.

The merged group reported a loss of 12 million Euros

Culture clash

Ideology Clash

Daimler Chrysler merger proved to be a costly mistake for both the companies. Daimler was driven to despair, and to a loss, by its merger with Chrysler.

The merged group reported a loss of 12 million Euros

Culture clash

Ideology Clash

HR Due Diligence

• The crucial point in the cultural differences was the Business Culture.

• National Culture influence e.g. attitudes to work, authority and equality.• Working late hours vs. Working on deadlines• Command lower-levels vs. Discuss with lower-levels

• Business Culture was what was critical, which was different in terms of organization structures, working styles, compensation schemes etc.

• STORIES: Rich successful engineering heritage vs. Self-made upcoming company• SYMBOLS: Executive assistants vs. No convention, equality• POWER: Chairman vs. Charismatic Executives• ORGANIZATION: Hierarchic, bureaucratic Holding vs. Intuitive cross-functional• structure• CONTROL: Compensation schemes• ROUTINES & RITUALS: Late hours vs. Deadlines; formal vs. informal

• It evolved to the dominant German culture.• German Engineering vs. Cowboy Independence• Compromises instead of digital decision• Pick a spot in the middle

• The crucial point in the cultural differences was the Business Culture.

• National Culture influence e.g. attitudes to work, authority and equality.• Working late hours vs. Working on deadlines• Command lower-levels vs. Discuss with lower-levels

• Business Culture was what was critical, which was different in terms of organization structures, working styles, compensation schemes etc.

• STORIES: Rich successful engineering heritage vs. Self-made upcoming company• SYMBOLS: Executive assistants vs. No convention, equality• POWER: Chairman vs. Charismatic Executives• ORGANIZATION: Hierarchic, bureaucratic Holding vs. Intuitive cross-functional• structure• CONTROL: Compensation schemes• ROUTINES & RITUALS: Late hours vs. Deadlines; formal vs. informal

• It evolved to the dominant German culture.• German Engineering vs. Cowboy Independence• Compromises instead of digital decision• Pick a spot in the middle

HR Due Diligence

The revolutionary strategic change was managed by an interventional / directional approach.

REVOLUTION as style of strategic change. Transformation Big Bang.

Daimler tried an interventional approach although it was a directive managing style right from the beginning.

Intervention, Stallkamp as change agent Fear of manipulation & resistance Direction, Hold on Crisis became obvious

The revolutionary strategic change was managed by an interventional / directional approach.

REVOLUTION as style of strategic change. Transformation Big Bang.

Daimler tried an interventional approach although it was a directive managing style right from the beginning.

Intervention, Stallkamp as change agent Fear of manipulation & resistance Direction, Hold on Crisis became obvious

HR Due Diligence

RecommendationNo announcement as “merger of

equals”.Beware of national differences which

can effect the business culture.Observing business cultures better and

digital decision right from the beginning.

HR Due Diligence

“It is clear that you cannot stay in the top league if you only grow internally. You cannot catch up just by internal growth. If you want to stay in the top league, you must combine.”

In the long run…

- Daniel Vasella, CEO, Novartis

HR Due DiligenceHR Rocks !!!

HR + = HR Rocks

Visit hrmba.blogspot.com

for more presentations, project

reports, notes etc.

HR Due Diligence