Mergers and Acquisitions and its impact on HRP23rd February 2021
Mergers and acquisitions (M&As) are tools businesses use to achieve organizational objectives tools that have profound impacts on the employees of the organizations at every level as two organizations attempt to integrate into one. A merger is generally defined as the joining of two or more different organizations under one common owner and management structure. An acquisition is the process of one corporate entity acquiring control of another corporate entity by purchase, stock swap or some other method.
Main reasons why companies merge together are:
i) To save the costs of production, particularly in a merger of former competitors.
ii) A merger also can generate capital to enter markets or launch products the companies would not be able to do as separate entities.
iii) Additionally, companies may possess complementary best practice and technical knowledge that makes it easier for them to compete in the market.
But sometimes acquisition can be risky because many things can go wrong with even a well-laid plan to grow by acquiring:
i) Cultures may clash,
ii) Key employees may leave,
iii) Synergies may fail to emerge,
iv) Assets may be less valuable, and
v) Costs may increase rather than fall.
HR practitioners in preparing for the challenges and practical realities of M&A transactions, including:
- Creation of new policies to guide the new organization.
- Retention of key employees.
- Employee selection and downsizing.
- Development of compensation strategies.
- Creation of a comprehensive employee benefits program.
HR professionals face a number of challenges during M&As, including:
- Attempting to maintain an internal status quo, or to effect change either to facilitate or thwart (in the case of a hostile takeover) a possible merger or acquisition, as instructed by upper management.
- Attempting to provide guidance to upper management from a “people” perspective as to whether organizational goals will be better fulfilled in the form of a merger versus an acquisition, or by making internal changes.
- Assuming that a merger or acquisition has been approved, discerning all aspects of the two separate organizations and the one combined organization that will be affected.
- Communicating with employees at every step in the M&A process with both an appropriate level of disclosure and an appropriate level of confidentiality.
- Devising ways to meld the two organizations most effectively, efficiently and humanely for the various stakeholders.
- Dealing with the reality that M&As usually result in layoffs of superfluous employees under the combined organization. This reality entails coordinating separation and severance pay issues between the combining organizations.
- Proactively avoiding legal issues for violation of federal and state anti-discrimination laws and the Worker Adjustment and Retraining Notification Act (WARN).
- Participating in the defense of lawsuits that may be brought as a result of a merger or acquisition.
- Aligning the HR function to achieve the organization’s strategic objectives. See Aligning Workforce Strategies with Business Objectives.
- Addressing the ethical dilemmas involved, in which an HR professional may be required to eliminate his or her own position, the position of a current co-worker, or the position of an HR counterpart in the combining organization.
The topmost common obstacles to achieve success with a merger or acquisition are:
- An inability to sustain financial performance.
- Loss of productivity
- Incompatible cultures
- Key managers and scarce talent leave unexpectedly
- A clash of management styles
- Cuts in pay or benefits programs create ill which will reduce productivity
- An inability to manage / implement change
- Objectives / synergies not being well understood
- Management doesn’t communicate its business rationale or its goals for the new company, and employees flounder in the ensuing confusion.
Many researchers have given some important reasons due to which companies merge or acquire:
1) Synergy: The most used word in M&A is synergy, which is the idea that by combining business activities, performance will increase and costs will decrease. Essentially, a business will attempt to merge with another business that has complementary strengths and weaknesses.
2) Diversification / Sharpening Business Focus: These two goals have been used to describe thousands of M&A transactions. A company that merges to diversify may acquire another company to reduce the impact of a particular industry’s performance on its profitability. Thus, companies often focus to merge with other companies that have deeper market penetration in a key area of operations.
3) Growth: Mergers give an opportunity to the acquiring company to grow market share without having to really earn it by doing the work themselves – instead, they buy a competitor’s business for a price. Usually, these are called horizontal mergers.
4) Increase Supply: Chain Pricing Power: By buying out one of its suppliers or one of the distributors, a business can eliminate a level of costs. If a company buys out one of its suppliers, it is able to save on the margins that the supplier was previously adding to its costs; this is known as a vertical merger. If a company buys out a distributor, it may be able to ship its products at a lower cost.
5) Eliminate Competition: Many M&A deals allow the acquirer to eliminate future competition and gain a larger market share in its product’s market. The downside of this is that a large premium is usually required to convince the target company’s shareholders to accept the offer. It is not uncommon for the acquiring company’s shareholders to sell their shares and push the price lower in response to the company paying too much for the target company.
6) Increasing capabilities: Increased capabilities may come from expanded research and development opportunities or more robust manufacturing operations. Similarly, companies may want to combine to leverage costly manufacturing operations. Capability may not just be a particular department; the capability may come from acquiring a unique technology platform rather than trying to build it.
7) Gaining a competitive advantage or larger market share: Companies may decide to merge into order to gain a better distribution or marketing network. A company may want to expand into different markets where a similar company is already operating rather than start from ground zero, and so the company may just merge with the other company.