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Hewitt Quarterly
Asia Pacific
is made possible through the combined skills and experience
of Hewitt consultants from across the Asia-Pacific region.
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For further information please
contact:
Hewitt Associates
2601-05 Shell Tower
Times Square
Causeway Bay
Hong Kong
Tel: (852) 2877-8600
Fax: (852) 2877-2701
editor-hqap@hewitt.com
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Merger and acquisition activity in Asia Pacific has increased dramatically in recent years. In 1998, Asian M&A transactions accounted for only approximately eight percent of worldwide deals. Today that figure is closer to 25 percent. And while the potential strategic and financial benefits of a deal are significant, the uncertainty brought about by poorly managed HR issues can ultimately lead to its failure if not properly addressed in the early stages.
According to one senior HR executive, "You can buy the best company in the world and kill it in the first 30 days. The benefits of an M&A do not come automatically. Completing an acquisition only buys you the opportunity to generate value: integration is what delivers it."
There are a multitude of people-related costs, liabilities and risks associated with M&A transactions, and studies have shown that by identifying and addressing these issues ahead of the deal being signed, entities can more easily overcome these challenges. "Thinking and acting early is key. The more work that can be done in advance of the closing date, the better," says Christian Doeringer, Head of Hewitt's Guangzhou Operation and the Corporate Restructuring and Change practice in China. |
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Doeringer continues, "A restructuring of any kind is a major change event and many would argue that no other transition is more difficult, challenging or chaotic as a merger or acquisition. People issues remain the most critical area to address throughout the M&A process, particularly in the initial three to six month period following the legal deal closure."
Due Diligence
Far more than a purely financial evaluation of people-related liabilities and risks, HR due diligence is a chance to identify key people within the acquired or merged entities, and take immediate steps to keep them from leaving once the deal is complete. If conducted thoroughly, the due-diligence process can also illustrate where the two companies converge and diverge on aspects such as leadership, communication, training, performance, and management.
Last year, Hewitt conducted the Mergers and Acquisitions Asia Pacific Study 2006, which explored the transition challenges faced throughout the M&A process. The study also identified the top HR issues during due diligence such as retention of key employees, compliance with applicable laws, and alignment of cultural fit and compensation and benefit plans. These issues, although challenging, can be overcome if properly managed.
In addition, the study found that foolishly few companies consider long-term integration issues as an important part of the due diligence process, focusing instead on verifying the immediate deal rationale.
Doeringer explains, "Companies that only focus on immediate and short-term implications during the due diligence process run the risk of a potentially more complex and costly post-merger integration. And despite the fact that people issues can affect the success of a deal, many HR departments don't become involved until well after the due diligence phase is over, when it's too late to dodge risks and avert key human capital-related liabilities." Doeringer is right. According to the Hewitt study, more than one third of responding companies don't have a defined process for evaluating HR issues and potential liabilities during an M&A transaction.
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Integration
The structuring, financing and closing of a deal are only preliminary steps, and the real work begins after the deal is signed. There is no one best way to integrate two organizations, but without a clear integration plan and timetable, a merger or acquisition can easily fail.
Of all the challenges companies face during M&A integration, cultural fit, harmonization of compensation and benefit plans, and leadership assessment and selection are the hardest to overcome. "Moving quickly—but not recklessly—through the integration process clears up uncertainty and minimizes the inevitable drop in productivity as organizations merge. Speed and clarity are essential for a successful transition," advises Doeringer.
M&As not only change the way people work, but also blend the cultures and processes of merging organizations. While some companies make the mistake of trying to integrate too much too quickly, others don't integrate quickly enough, leaving each organization standing almost as a separate entity for too long. This situation can ultimately lead to an "us and them" culture clash, which is one of the major causes for unsuccessful M&A implementation, according to Hewitt's study.
Doeringer points out, "In most M&A deals, it's unrealistic to assume that one business can absorb another without being altered. When two companies merge, one may change more than the other, but both will change." He continues, "Each organization has its own work style, value systems and culture, and a merger can lead to a clash of those cultures as a new combined organization emerges."
Differences between two organizational cultures can create tension and lead to competition between employee groups. To avoid this, Doeringer recommends a thorough understanding of both cultures and how they differ. And because there is no single way to ensure culture integration in the post-merger process, companies must assess their options closely.
While some organizations decide that all entities should adopt the culture of the larger acquiring company, others opt for creating a new culture for the combined organization. This can be developed by conducting an organizational cultural assessment; identifying potential cultural integration challenges; carrying out focus groups and executive leadership interviews; holding workshops with executives to define the new culture; and executing an ongoing change management plan to address any gaps. Additionally, it's important to encourage interaction among employees from all entities, for example by implementing cross-organizational working teams at all levels.
Smoothing out cultural differences not only leads to faster and better learning within an organization but is also a tangible source for creating a competitive advantage, which ultimately has a profound influence on the new organization's bottom line. As Doeringer explains, "Early identification of cultural differences, and quick decisions on how to address them, will lead to increased support from both "sides", and a much smoother integration."
Company leaders should think about the selection process and rewards needed to retain the new organization's leaders, and deal with departing people quickly and effectively. It's important to announce the top team as soon as a merger or acquisition is unveiled, in order to create some clarity for the rest of the organization. However, identifying and selecting the best future leaders of the merged organization can be difficult and challenging.
This process differs significantly from standard succession planning. Mergers tend to be highly sensitive situations, and access to existing leaders of the acquired company is often limited until the deal has been closed. Furthermore, political reasons often dictate that individuals are required to fill certain roles, which means an objective, competency-based selection process may be difficult to achieve.
"In our experience, the long-term benefits of a thorough and objective leadership selection process far outweigh the advantages of a politically-correct leadership appointment. We've also found that leadership assessment tools are underused in many M&As, which can result in a low understanding of the potential demonstrated by many key employees," says Doeringer. He continues, "A strong merger preview depicting job expectations for the future allows employees to cope more realistically with new or modified job demands. Any layoffs or downsizing should take place as soon as possible to alleviate anxiety, reduce rumors, and allow employees to return to business as usual. The longer fear of the unknown lasts, the more damage will be done."
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Communication is key to organizational success and nowhere is this more apparent than in the influence of internal communication during a transformational process as dramatic as M&A. Although there is no general formula for effective communication in the M&A context, active and thoughtful leadership that recognizes the importance of timely and meaningful communication to the workforce is essential. An effective communication program should give as much detail as possible (without over-promising), entail as much personal employee involvement and as many feedback opportunities as possible, give clear statements about the vision of the combined organization and be supported by timely and regular follow-ups. "Constant communication and feedback are the oil of a well-run integration machine," notes Doeringer. "There is no such thing as over-communicating during M&A. A clear communication strategy that outlines-what, when, to whom, by whom and through what-will ensure consistent messages are delivered at the appropriate time." |
To help tell a consistent story about the M&A's potential benefits, practical challenges, and why employees want to be part of the new organization, companies should begin planning a communication program early. To avoid inaccurate rumors that are detrimental to organizational morale, employees should be informed as soon as possible about what to expect once the acquisition takes place. Management must continue to listen to and communicate with employees and relay accurate and comprehensive information throughout the process.
Companies that address M&A challenges earlier are more likely to enjoy greater employee productivity and motivation throughout the whole process. In fact, according to Hewitt's Mergers and Acquisitions Asia Pacific Study 2006, there appears to be a relationship between readiness to address M&A challenges and how well a company performs financially, as measured by shareholder return. "When leadership, communication, retention, and cultural issues are addressed early on, the new organization can devote more time to issues like integrating rewards, HR technology platforms and the HR function itself," asserts Doeringer. "This leads to increases in morale and employee Engagement following a restructuring which ultimately results in a better bottom line."
Differences in HR practices, uncertainty in the environment, culturally different organizational structures and changes in managerial styles all breed anxiety among the people involved and often reduce the willingness of employees to go the extra mile for their employer during the transitional period. As well as low levels of Engagement, employee turnover-both desired and unwanted-is more likely to increase during an M&A. In some cases, more employees leave following a restructuring than are laid-off or terminated as a result of downsizing. "There will almost inevitably be employee turnover associated with a merger," says Doeringer. "If talented people are not engaged, they are more likely to leave a business quickly. People are most open to new offers in times of uncertainty and M&A is one of those times. Subsequently it is vital to integrate talent quickly as a matter of priority."
By Christian Doeringer
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About Hewitt's Mergers and Acquisitions Asia Pacific Study 2006
In order to gain a thorough understanding of the extent to which HR issues are treated as a key strategic priority during a merger, acquisition or JV, Hewitt Associates conducted the Mergers and Acquisitions Asia Pacific Study 2006 from March to April 2006. The study explores the alignment of HR issues with corporate direction and HR's ability to deliver tangible benefits in a merger or acquisition. Companies in Australia, China, Hong Kong, India, Indonesia, Japan, Malaysia, Korea, New Zealand, Singapore, and Thailand were invited to participate in the survey, which was available in English, Chinese, Japanese, and Korean. Seventy-three global and local companies participated.
Key Findings
- Strong optimism in Asia about future M&A activity over the next two to three years
- Most participating companies will focus geographically on Asia Pacific
- The main reason for M&A in Asia Pacific is improved market access. This is followed by the desire to create a combined business, then the desire to achieve coordinated strategies
The study also showed:
- While many companies are satisfied with the way they achieved deal synergies, there is a lack of using formal tools and processes, which leads to lost opportunities
- Nearly 80 percent of companies measure success against the achievement of stated synergies. Market share change and customer satisfaction follow. Speed of business integration is underrated
- Immediate and short-term objectives drive the due diligence process, which can be a potential risk as long-term integration/transition concerns may not be addressed sufficiently
- The retention of key staff and compliance with the law is most important during due diligence
- Companies consider cultural fit and employee communication to be the most critical and challenging HR issues to overcome during M&A. This is similar to companies in other regions of the world. These issues, along with leadership assessment, will receive more attention in future M&As
- In addition, companies want to improve their change management process, assessment of target (pre-due diligence), start date for integration preparation, and alignment between synergies and integration
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