People Matters in Mergers and Acquisitions

Growth is a natural phenomenon, whatever is born will grow. Every person has a dream to grow in life, physically, spiritually and materially. Similarly, every businessman establishes a business with a dream that it will grow. All stakeholders in a firm work day in and day out to ensure that the firm grows as they had dreamt it to. 

There are two ways in which a firm can grow. Organically and inorganically. Organic growth means that the firm introduces or develops new products or expands and enlarges the capacity of the existing products. This is a long and arduous route. Inorganic growth is the process of growing by acquiring other firms producing products or services that one wants to introduce or sell. Inorganic growth may be achieved through Mergers or Acquisitions or M&As. M&As may be used for expanding own product portfolios, for entering new geographies, for acquisition of new technologies or for building firms with better resources that can compete in the globalised world.

Though M&A are used together generically, there are differences between Merger and Acquisition. Merger entails two or more firms coming together out of which either only one remains in existence or a new joint firm is created. On the contrary, Acquisition is the process by which the acquiring firm obtains effective control over the assets and management of the acquired firm without the coming together.

M&As are a complex process wherein a lot of financial and strategic due diligence is carried out before the actual act is completed. However, despite the financial viability  and synergies in strategy, a number of M&As are failures. As per a paper by Jayesh N Chakravorty[1]  half the M&As are not successful.

One of the main reasons for failure of these M&As are human issues. Finally, whatever assets may a firm have and whatever products it may produce, it is the people who make the firm. Good, hardworking people led by their management. Companies which do not pay attention to people issue during M&As are doomed to face failure.

In addition to a structure, every organisation has a set of values and work culture. Though financial due diligence is essential, due diligence of the companies culture is extremely essential. Because, if the cultures of the merging entities are not compatible, it will create confusion and discomfort in the people working in these companies. This will lead to the good people packing their bags and leaving in droves to companies that provide similar cultures. Unfortunately cultural due diligence is an oft neglected area of an M&A.
Another very important people issue is the matter of trust between the acquiring management and the workforce of the acquired firm. Every individual has a tendency to protect his interest. Lack of trust and lack of clarity about the future creates confusion and would force people to leave.

Now, the question arises as to what should be done to retain the people and to ensure that the merger does not fail primarily due to people issues. Some of the actions that the acquiring company may take to avoid such failures are:-

  • Analyse the cultural differences deeply and if you find that the differences are very deep, maintain the identities of the merged firms to ensure no conflict of culture occurs. When Disney and Pixar, merged, Disney was a 90 year old company with a hierarchical formal structure while Pixar was a young company with a flat informal structure. Cultures of the two companies were poles apart. The two decided that they would not interfere with each other’s culture and let things be as they are. Conditions were laid out as part of the deal to ensure that Pixar remained a distinct entity. One of the main agreements was that Pixar’s HR policy of no employment contract with employees will continue.
  • If it has been decided that the companies would be integrated, the integration of the companies,  should be carried out on priority. Key persons form the acquired company should be retained and given prominent positions. Delay in integration leads to unnecessary ambiguity and heartburn. For example, though Air India and Indian Airlines have been merged for quite some time now, the HR policies and pay structures of the two are still not integrated leading to a lot of heartburn and dissatisfaction among the employees.
  • Third important issue is proper and timely communication. The merging entities should communicate clearly and in a timely manner to minimise uncertainties in the minds of the people. It should be very clear if there is going to be downsizing and which if any positions would become redundant. This will allow people to plan in advance and reduce the stress. Failure in managing communication may lead to - in addition to people leaving en-masse - low morale, loss of trust in management and inaccurate perceptions leading to loss of productivity, lower safety, poor customer service and even loss of customers. 
People are the most important asset of any company and overlooking people issues in a Merger & Acquisition scenario may be dooming the merger before it commences.

[1] Why do mergers and acquisitions quiet often fail? Advances in management Vol 5 (5) May (2012)

Cdr Rajesh Sinha (Retd)'s profile on LinkedIn