At least 60 per cent of mergers end up destroying rather than creating value and the most frequently stated reason for this failure relates to people, and how they react or behave as a result of the changes; Peter Wallum, Worldwide Partner at Mercer Human Resource Consulting reports.
The people factor
Merging companies often become engulfed by their economic and financial issues, ironically ignoring a major factor, the people that can influence the success of their merger and return on investment. Research shows at least 60 per cent of mergers end up destroying rather than creating value. It also reveals that the most frequently stated reasons for this failure relate to people, and how they react or behave as a result of the changes.
The list of people-related tasks during a merger process is long and detailed: plan a high-level strategy, undertake due diligence, draft new terms and conditions, transfer pensions, cancel old benefits and start new ones. Even after the deal is completed, companies still need to integrate the two businesses in terms of organisation, management and communication.
Steps to successful integration
Organisations can take certain steps to help ensure they understand the issues, avoid the pitfalls and pave the way for successful integration.
Early planning
A major reason why mergers fail, even where the business logic for the deal is sound, is companies that fail to anticipate and plan how to deal with problems.
Though traditional due diligence may identify some of these problems, it is alarming how inadequate the process can be, akin to buying a house and doing the structural survey afterwards. In many cases, organisations complete a deal and acquire a company before fully thinking through what needs to be done next.
Although there will only be five or six ‘mission critical’ goals which will deliver the real value of the deal, there are 1001 things which can erode it. It is important to differentiate between the two, and deal with matters accordingly.
If issues such as who will be in the top management team or how to merge benefits plans are dealt with only after an acquisition is completed, valuable time is wasted during which employees will be unproductive and uncertain. It is important to get ahead of the game in order to avoid the inevitable downturn this will produce.
Prior to making a deal, businesses need to judge how manageable it will be to incorporate another organisation’s employees into their firm. This is often a ‘cultural’ issue. Each organisation has developed its own way of doing things, from how to conduct business and make decisions to what dress code is acceptable.
Organisations with different home-bases will have national differences overlaying company ones. And where the two organisations have been fierce competitors, the task of harmonious integration is even more difficult.
Companies should begin considering their strategy for the future and its detailed application even before due diligence takes place. The earlier the scenario planning, thinking and analysis gets started and gets done, the better. If it is done well, value destruction will be minimised. Done badly, and yet another theoretically sound acquisition will be doomed to failure.
Resources and expertise
Another reason why mergers fail is because the organisation does not have the necessary resources and expertise to handle the issues presented by a deal, especially as it needs to work within a very tight timeframe while ensuring that business continues as usual.
Though some experienced companies manage the entire process effectively with their own internal team of experts, those who misjudge the size of a job run the risk of suffering significant long-term costs that considerably outweigh the short-term investment in external support.
In particular, many companies significantly underestimate the regulatory and legal risks associated with a merger or acquisition, especially in cross-border deals.
Legislation, regulations, and ways of doing things can vary significantly between countries. Firms should get advice on the administrative and technical details before, during and after transferring people from one company to another. In many cases they also need an injection of skilled support for the duration of the peak workload.
Employee communication
When a bid is made and announced, several months can pass during which employees may be unsure about their careers. Uncertainty about future employment prospects, role or place of work inevitably causes a drop in morale and productivity.
At the very least, the strategies and goals to which people were working, and the incentive schemes that supported those objectives, will instantly have become outdated. Furthermore, head-hunters, never slow to spot an opportunity, will no doubt contact key employees and take the opportunity to poach them, further destabilising the organisation.
As a result, companies often experience a loss of momentum that may be difficult and time consuming to recuperate. To limit this risk they should focus on communication with employees during the entire merger process.
Focused communication is not simply sending out mass emails or generic ‘town-hall’ broadcasts. Rather, it involves sitting down with each valued worker individually and explaining what their role will be and what goals they need to keep in mind. Employers should convey to their employees that they are important to the business going forward and find ways to personally motivate each one of them.
With regular verbal and written communication before, during and after the deal, as well as face-to-face briefings, a number of things can be done to motivate and make people more willing to take a chance and stay. Money may be necessary, but it is unlikely to be an effective retention tool on its own.
Focusing on active communication with staff has proved time and again to be one of the most crucial steps to a successful merger or acquisition.
Project management
Inevitably in a merger a large number of things need to be done in a relatively short timeframe. Managing this effectively requires dedicated resources – project team, steering committee, etc and a highly effective project management process, which ensures that the right action is taken at the right time.
Project management does not have to be complicated to be effective, but it requires a clearly articulated plan that prioritises ‘mission-critical’ issues. It also requires detailed allocated responsibilities, a quickly responding escalation and decision-making process and effective risk assessment.
Poor project management will guarantee that the goals of a merger are not met. Making the investment upfront will greatly improve the prospect of achieving the predicted benefits from the deal.
Final thoughts
People, as individuals and working together in teams, are ultimately what makes an organisation work effectively. This is particularly true in service organisations, but even in heavily capital-intensive industries such as oil, the quality and skills of people are what differentiate the good from the outstanding.
By contrast, mergers focus on the financial, economic and commercial aspects of business, and only as an afterthought on people. Why should this be so, when so much research over at least 20 years suggests that failure can frequently be attributed to people issues? Most senior executives know that their employees are their greatest asset but just seem to overlook it in the heat of a merger or acquisition.
Taking account of people issues and managing them effectively as the basis of an acquisition will generate better short-term and long-term results, as experience and research proves.
