Today's mergers are about more than physical and financial assets. When it's people you're trying to acquire, financial success depends on how you handle the human issues.

Since the well publicized "M&A fever" of the late 1980s, merger and acquisition activity has only increased. Global M&A transactions reached $1.6 trillion in 1997, about three times the level of a decade ago. Many factors-including increased global competition, deregulation, regional treaties, and the rapid pace of technological change-are fueling the new wave of M&A. The key difference between 1989 and 1999 was the growing importance of workforce issues in M&A deals. Companies today continue to focus on the people.

With talent shortages cropping up worldwide, employers are highly motivated to grow through acquisition of talent. In addition, as the world economy shifts to one that is service- and information-based, people are an increasingly important part of M&A deals, particularly for financial services, health care, high tech, software, and Internet services companies.

Despite the flurry of activity, success rates for mergers and acquisitions aren't very encouraging: as low as 50% by some estimates. Why? Many companies have not yet mastered the human side of M&A deals. Their frustration showed in a Hewitt Associates survey of organizations involved in global M&A activity. "Integrating organizational cultures" was the top challenge named by those surveyed in all regions of the world, even those with merger experience. "Keeping employees focused" and "integrating employee programs" were the next two.

"Companies are gaining more experience in making deals happen, but from a people perspective the companies continue to struggle with making deals work," says Pete Sanborn, a Hewitt Organization Effectiveness consultant. To succeed in this era of mergers and acquisitions, companies must address people issues in ways that achieve the long-term goals of the business. Here's a look at some of the critical areas.

Planning the Process

For companies that make frequent acquisitions, establishing a uniform acquisition process is an investment that can have a profound effect on overall success.

"If you've got one team looking at a deal in 14 countries, and another team doing a deal in seven countries, and they are not using the same methodologies, you're going to get fractured deliverables," says Mark Arian, global co-leader of Hewitt's M&A team. "One team will focus on employment law. One will focus on culture integration and one will focus on executive compensation, depending on what they think is important. You're going to have radically different outcomes in all your deals, not to mention a loss of efficiency."

General Electric Company, a conglomerate that targets approximately 300 firms for acquisition each year and ends up doing about 70 deals annually, found it was "reinventing the wheel" with each acquisition, according to Arian. "The due diligence process wasn't consistent in terms of HR issues. Labor and employment law, communication, culture—these things were not being addressed at the same level of detail in each transaction." As GE's partner in the M&A process, Hewitt worked with the company to develop a comprehensive human resources due diligence tool kit-a resource that will soon be on-line and accessible to the entire organization. The tool kit provides agreed-upon guidelines on how to analyze pending deals, identifies the ramifications of certain issues, and provides a place to capture due diligence findings and make them accessible to the integration team. While the tool kit allows the flexibility necessary to be adapted for deals worldwide, it also provides GE's many M&A teams with a common framework that was missing before, and prevents duplication of effort between due diligence and integration.

First Union, a frequent acquirer in the banking industry, had a similar problem. Though the company was experienced in mergers and acquisitions, as deals got larger and more complex, they became more difficult to manage. "First Union wanted not only to document the process, but to institutionalize the knowledge they had in-house, instead of letting that information reside only in the minds of a few individuals," says Mark Oshima, a Hewitt Organization Effectiveness consultant. Hewitt interviewed key people about what was and wasn't working with the merger process, then developed a preliminary M&A methodology, working through detailed processes for targeting acquisitions, due diligence, cultural integration, communication, organization design, training on human resources policies, and integrating HR systems. Hewitt is also in the process of making it available electronically. The on-line tool includes a tracking database that enables people across HR to find the status of particular deals. "Now they know that all the issues will be taken care of systematically," Oshima says.

When GE Capital made a large financial commitment to fulfill its acquisition strategy in Asia, the company asked Hewitt to teach its human resources professionals how to carry out an M&A deal. Hewitt developed an intensive one-day workshop that simulated due diligence for a multi-country acquisition, complete with original-language documents. Participants were asked to review the issues, identify potential deal-makers and deal-breakers, make a decision on proceeding, and report back to management. The team gained a solid understanding of the due diligence process, according to Sarah McEwen, Hewitt's Asia-Pacific M&A practice leader. "Despite the training, GE Capital asked us to provide due diligence support due to the sheer number of target companies they are considering at any one time," she says. Because GE has a common framework for its M&A process, the company is assured of a consistent approach in every transaction.

Creating Culture Fit

Experts agree that in most successful business combinations, neither company's corporate culture survives completely intact. Instead, a new, blended culture takes the place of the other two.

"Upfront, mutual understanding of the ways two companies operate helps make for a successful transition," Sanborn says. "Defining unspoken 'rules of the road' for the combined organization is crucial to the integration process and to achieving the anticipated synergies." Culture is a complex issue, but taking the time to understand it can tell you how well people will work together, and how certain compensation programs and benefits structures may be received.

When The Thomson Corporation acquired West Publishing to form West Group, the acquiring firm intended to create a new, fully integrated culture that retained the best aspects of both companies. A comprehensive organizational culture survey revealed that while the two cultures shared some similarities, some significant differences spelled a potential mismatch. For example, one company's employees focused on precision and process, while the others were geared towards speed and results. To head off the inevitable culture clash, management drafted statements of the targeted culture and employment relationship and, from that, developed a human resources strategy to meet its objectives.

"A well-planned transition and integration leads to bottom-line results," according to Jim Greenawalt, Senior Vice President of Human Resources for West Group. "West Group achieved accelerated financial and organizational synergies and new growth while maintaining focus on its customers and creating an 'employer of choice' culture."

Creating a new culture involves broad change management as well as individual transition management. Developing a transition plan is vital to helping employees address the psychological transitions they must complete before they can fully align with the new organization. Communication is the star of any transition plan, according to Lainchen Friese, a Hewitt communication consultant. "Don't skip lightly through this phase," she warns. "It's important to know where people are in the transition process and build employee communications that help them get comfortable with change." Despite the importance of communication—more than 75% of companies surveyed identified it as a critical activity in the Hewitt study—44% of the human resources directors surveyed indicated employee communication was allocated too few resources, and 43% said communication occurred too late. It's important to create connections with employees, help them interpret the information they are receiving, and define what the new organization is all about. The opportunity to communicate effectively starts on day one-the day the new acquisition or merger is announced. (For additional information on creating day-one connections, see accompanying article.)

The New Due Diligence

"There is still a lot of focus on the due diligence process in strictly financial terms, and not a lot of focus on integration and culture," says Ross Zimmerman, a Hewitt compensation consultant. The new view of due diligence, however, involves assessing the impact of the deal on existing employees. This can include implications for culture, pay programs, and rewarding people for taking on additional work. The liabilities addressed in traditional due diligence cannot be ignored: Pension, severance, disability, executive compensation, and other issues can affect the very feasibility of a deal. However, when they are intertwined with "soft" liabilities, such as cultural gaps, they can have a far greater effect than the numbers initially indicate.

Pay, for example, can become a huge catalyst for cultural change. "The larger the golden parachutes and severance agreements at the target company, the larger the retention awards and integration awards you have to present to get people's attention," Zimmerman says. This creates ramifications at the buying company when employees see that target company workers have lucrative agreements. In a cross-border merger, this may be complicated further, for example, when a non-U.S. purchaser doesn't offer its own employees the types of rewards American executives demand, such as stock options.

In fact, the increasingly global nature of today's mergers can complicate due diligence exponentially. When Wichita-based Koch Industries made an acquisition involving multiple countries, the company called in Hewitt to address international due diligence. Although Koch had done its own due diligence on previous acquisitions, the deal—which involved acquiring part of a German company as a joint venture with a Mexican company—required experts that could advise Koch on the due diligence issues for each country.

"In the end, you need a comprehensive summary of findings and issues that may go across countries," says Brian Makuck, a Hewitt actuarial consultant. "You've got to negotiate how you address, for example, a labor practice issue across all the countries. At the end of the day you'll end up with a list, by country, of all outstanding items."

Whether international or domestic, the new due diligence means preparing yourself for the impact the deal will have at the acquiring company. "If it's a people transaction, you need a much better understanding of health care, retirement, compensation, and organization development programs—what is the underlying cost structure of those programs," says Arian. "Either you're going to keep those programs intact for the acquired company, which will have implications back home, or you're going to try and marry them to your own programs, which creates complicated communication and transition issues."

Integrating HR Functions

Traditional due diligence sometimes overlooks the operation of the acquired company's benefits and human resource plans. The importance of fully integrating HR functions depends on the type of acquisition being made. If the acquired business will be left to run as an independent entity, then integrating human resources is less significant. If the two businesses will be fully integrated, then HR integration becomes a high priority. Redundant staff, independent programs and practices, and consistently communicating to the workforce are just some of the issues that can arise when two human resources departments must be blended.

"With full integration, you've got duplicate staff functions and often inconsistent HR systems," says Bob Gandossy, Hewitt's Organization Effectiveness practice leader. "Having a common technical platform is often a huge issue because, without it, it's difficult to make payroll changes, and it's hard to understand your combined workforce-even demographics are unavailable. And, of course, the lack of a common platform prevents you from communicating in real time."

Even more vexing than the technical challenges, however, are the organizational issues that can arise when blending two HR departments. That's what makes human resources a good place to start when integrating two cultures. "The HR department is a microcosm of all the details that have to be figured out in the whole organization," Gandossy says.

When two large telecommunications companies recently merged to form a new company of more than 150,000 employees, the deal required a full integration of human resources. The first step, Gandossy says, was getting agreement among the companies' HR executives on the strategy for their new HR organization. "In most mergers that's difficult, though it seems to be a simple step," Gandossy says. "People are often inaccessible because they're consumed with the mechanics of the deal. In addition, you're talking about 'what ifs.' There's an intellectual exercise and an emotional one. People are worried about what their jobs are going to be and what they're going to control." For this team, Hewitt led a series of discussions and established some agreed-upon principles of organizational design, considering different models that could support the new business. Then, key roles and responsibilities were established, high-level HR strategies were drafted, and a marketing plan was developed so the new human resources department could communicate to its various constituents.

A detailed human resources "pro forma" can be developed to identify potential trouble spots and synergies with people issues, just as a pro forma business analysis can shed light on the financials of a pending deal. "We can analyze culture, organizational fit, leadership, communication styles, benefits, and compensation synergies-who are the winners and losers, what is the company's ability to support the benefits and compensation of the new organization," Arian says. "That can serve as the launching point for the entire HR integration process."