From the desk of Kamahl Barhoush
Change Management During Mergers & Acquisitions
For any organisation thinking of, or having already taken part in a merger or acquisition (M&A), the optimistic outlook of features and benefits can very rapidly come crashing down if the reality of change, its impact and how to manage that impact, are not carefully considered… and masterfully executed.
Each organisation that is merging, brings its own culture and way of doing things, and as no 2 cultures are the same, no matter how similar, change (and the need for change management) is inevitable.
There are 5 main factors that disturb the equilibrium of an organisation in a major way during M&A.
- System Dynamics: Each organisation consists of systems, which constantly exchange ideas with each other. Factors such as internal politics, technology, legal system, IT system and accounting system often affect the alignment and relationships thereby demanding change in related business units and employees of that unit.
- Structure-focused change: When two organisations decide to marry each other, changes like downsizing and decentralising are bound to happen to reduce costs and increase the productivity and efficiency. Companies involved must be sensitive to the laws/policies of the acquired company and be proactive rather than reactive.
- Profitability issues: Profitability issues include issues such as loss of revenue, loss of market share, low productivity, and engagement with processes of restructuring and reengineering. These all lead to major changes in the organisational setup.
- Government Policies: This factor is very crucial when the M&A takes place between two cross border acquisition. As with Structure-focused change in point 1,the companies involved need to be sensitive to the laws/policies of the acquired company, as well as the implication of these laws/policies across different governing states/borders and again, be proactive rather than reactive in implementing new policies and procedures.
- Person-focused change: This change is concerned with the human resource planning and enhancing employee competence and performance. In order to induce such change human resource management needs to tackle issues of redefining organization goals and strategy, recruitment and selection policies, stress management, employee training and development, and distribution ofbenefits.
So change is inevitable.
As a manager, how you interact with the employees and how you handle the aforementioned issues mean a lot for the success and failure of your M&A.
The 9 Areas Of Focus For Management
Without fail, the M&A’s that succeed have a clearly defined process around each of the 9 areas of focus.
The 9 areas of focus are the areas that, if left unattended or ignored, have the potential to turn into significant issues. Costing time, money and in some extreme cases, the success of the merger as a whole, these areas MUST form a part of the constant focus of management if success is to be assured.
As the manager, it is critically important that you rely on objective views on how your team are coping under the following 9 areas. In most cases, we tend to look through ‘rose coloured glasses’ in our management style and see things as performing better than they may actually be.
The 9 areas of focus are:
1 Resistance to Change
During merger and acquisition, organisations face the most obsure and recalcitrant problem: resistance to change.
2 Lack of Communication
The manager has not communicated well the detailed aspects of the change. People may only understand the change in broad terms and not in practical terms. Employee does not know how they should go about for change and are not convinced about the purpose of change.
3 Confusion and Frustration
Too many parties involved in the change without a clear definition of their roles will bring confusion and frustration.
4 Force of habit
Feeling of comfort in the existing routines and not interested in changing the existing ways of doing things
5 Lack of confidence in management
It is also a predominant reason for the people to accept change. They are not sure that once change has taken place, things will become better for them.
6 Fear of insecurity
People are worried about the potential role he/she will be offered.
7 Fear of unknown
It is because of uncertainty about the nature of change. They are not sure what is happening and what future holds for them.
8 Loss of Competency
Existing skills and the competencies the person possess will no longer be of any use after the M&A has taken place.
9 Lack of support
Namely, direct supervisors failing to implement the change in an effective manner.
Change programs fail not because of lack of skills but because of courage to implement them. If change is effectively managed
- Employees will know why change is happening.
- Employees will feel part of solution and change.
- Motivation will remain same as people become more consumed with the change being introduced and thus productivity.
- Early detection of resistance and dealt early.
- Leaders will be able to channel all the resources in an effective way.
- There will not be unrest between the employees and senior leaders.
- Training can be used to build skills and knowledge of employees. A clear and outright declaration on how people are going to be rewarded if they achieve successful results from change would go a long way.
Overcoming Resistance To Change
In order to effectively manage change, one must first acknowledge that there will be both a conscious and unconscious resistance from even the most dedicated employee.
This is a natural human trait and in no way reflects the employees attitude, loyalty or love of working with your company.
That said, knowing it is a natural state that everyone will experience in some way, small or significant, there are 3 stages to managing this resistance to ensure a smooth, effective and profitable transition:
The first stage is unfreezing the organisation’s existing culture by discontinuing current practises, attitudes and behaviours.
The second stage is transition, which basically involves teaching the work force new concept.
And the final stage is refreezing the culture by reinforcing new practises, attitudes and behaviours once the change was implemented.
There are 2 different theories on how to approach change. No one theory is necessarily better than the other, rather, it’s a case of finding and deciding which theory would work best for your organization.
The main goal of Theory E is to maximise shareholder value.
It manages change from the top down with its main focus on building structure and systems. It first plans and then establishes programs. Employees are generally motivated through financial incentives and consultants are brought in to analyse and shape the problem.
Examples of companies that adopted this theory of M&A include:
General Electric (under Jack Welch) and IBM (under Louis Gerstner).
‘Theory O’ on the other hand focuses on developing organizational capabilities. It encourages participation from the bottom up, builds up corporate culture and focuses on employees’ behaviour and attitudes.
Theory O motivates employee through commitment.
In this theory, consultant support management in shaping their own solutions. Microsoft, Intel, 3M, Merck, and Schwab adopted theory O in many of their acquisitions.
Strategies to manage change during M&A
Companies should follow the following 6 strategies during mergers and acquisitions:
- Integration Plan: First step should be the setting up of a project team, comprising senior executives from both the organizations. Instead of focussing on daily routine activities, they become be responsible for carrying out post M&A activities smoothly. It is imperative that they communicate with employees early and immediately. This can be done using webcast, intranet or group meetings. Informing all the employees at the same time will minimize the potential for gossip and spread of misinformation. Their focus must be on ensuring employees realize the benefits of this marriage.
- Clear Vision: Senior executive in both of the organizations must create goals, values, vision and policies of the new company and clearly communicate it to the organization. Mary Hiland, CEO of Alliance for Community Care was responsible for carrying out the merger of three agencies in 1997. She received the award of excellence in Non profit Leadership Award on 10th May, 2001 and in the interview she said that her mantra of success was clear vision and the communication of this vision to the employees.
- Understanding Cultural differences: Culture plays an important part on the success and failure of new structure especially in the case of cross broader M&A. Culture difference was largely responsible for the downfall of merger between Chrysler and Daimler. Daimler and Chrysler employees have different views on important things like travel expenses and pay scale; they even have a fundamentally different approach towards lifestyle; Daimler favoured a more formal and structured style while Chrysler favoured a more relaxed and freewheeling style. This cultural conflict played a big role in the failure of merger of Daimler and Chrysler.
Leaders must be able to inspire people to come out from their comfort zone and accustomed norms and accept the new culture. To achieve this, a leader must be in constant touch with the employees. Spending time with them, knowing more about them, what irritates them, what excites them will help leader in making people accept the new culture.
- Employees Involvement: This gives an opportunity to both sides of employees to build their knowledge of the other’s organization. When they interact, they share knowledge about their respective process, systems, budget, headcounts and operations. Building trust is integral to building knowledge. Until the two sides trust each other, they will not reveal details or build cohesiveness.
- Customer Focus: In today’s competitive world, it is very important that company’s share future roadmaps with the existing customer and promise to the customer they will continue providing service and personnel support, and that sales people will continue to serve as they were doing before the M&A. This will help customers feel secure in its current purchase phase. If required, the merged unit can create a helpdesk also. This will reduce the number of unsatisfied customers and thus increases customer base and profitability. Cisco does this really well. Whenever Cisco acquires a new company, it immediately shares the product roadmap with its customers, keeping them engaged and aligned with the company as it shifts and grows.
- HR Restructuring: M&A’s have the potential of changing may attributes that directly affect it’s employees, namely:
- Change of geographical location
- Change in perks
- Change in salaries and compensation packages
- Change in Career paths
- Changes in jobs – new roles and assignment Employees are always concerned about the carrier opportunities, new roles they will be assigned or will they be transferred to new location post merger.
It is very important that HR discuss the aforementioned issues with the employees properly. This might involve HR conducting management training, individual counselling, and providing other professional help to employees.
They need to clearly communicate for what reasons these changes are taking place and why these changes are vital.
Retaining good employees from both the companies is always crucial. A team can be built with human resource representatives from both the organizations, whose main task is to identify valuable resources only. This will create loyalty and commitment to the new company and it will also give employees of the acquired company a feeling of equality.
- Downsizing: This is always considered a last option due to it’s significant impact on both employees and a customers views on the company they are dealing with.
If downsizing is unavoidable, severe stress can be somewhat alleviated by developing an effective plan.
Depending on the case, any of these 3 strategies can work well for companies engaging downsizing:
- Severance packages: used to motivate low commitment employees to leave.
- Outplacement: Helping employees to find work in some other company through the help of consultancy or personal contacts.
- Redeployment: Transfer employees to the sister company or another business unit
Change is difficult for most and change during Mergers and Acquisitions can be extremely difficult and stressful if not managed with specific regard to the implications, and with clear strategies on how to alleviate any potential down sides.
That said, when well thought out, well managed, and well executed, change in any form, can create exponential growth for companies and very bright futures indeed.
Good luck on your change journey, and always…