Human Resources Management and Mergers and Acquisitions
“The term merger and acquisitions are usually used indistinctly, but there are some differences between both terms. An acquisition occurs when a company buys another company and establishes itself as the new owner. The acquired company legally disappears and its stocks are not anymore in the market. In a merger, two companies decide to create a new company” (Freund, 1976).
“There are several reasons for a company to acquire or merge. The most important are: economies of scale, channel control, risk spreading, cost cutting, synergies, defensive drivers, gain of word-class leadership, survival, acquisition of cash, deferred taxes, excess debt capacity, flexibility, biggest asset base to leverage borrowing, adopt potentially disruptive technologies, financial gain, personal power, gaining a core competence to do more combinations, talent and knowledge (Hartz, 1999).
“It is said that the volume of worldwide M&A surpassed an all-time record during 2007 with US $4.5 trillion in announced deals, a 24% increase over the previous record of US $3.6 trillion set in 2006.The number of M&A deals too rose to a whopping 42,437 in the year 2007, as against 38,580 in 2006” (J. Robert Carleton, 2004)
The above figure tells us, the amount of M&A transaction that is being carried out in the recent times by many of the companies. The fact is that about 80% of the companies fail to adapt to the changes and result in failure [Grubb and Lamb (2000)]. There are various advantages and disadvantages with regards to M&A processes. Let us see some of the Advantages and Disadvantages of M&A process in the upcoming paragraphs. This would clearly enable us to understand the different literature written by various authors and the proceedings of their research and findings (Stanley Foster Reed, 2007).
Background about HRM
HRM is a highly diverse and often controversial field. In this study, HRM is defined as a process of “developing, applying and evaluating policies, procedures, methods and programs relating to the individual in the organization” (Pieper, 1990) HRM is a highly dynamic process where environmental forces continually impinge on all policies, procedures, methods and programs, thereby forcing HRM to adapt. HRM practices can vary across organizations and countries (Scholz, 2008)
Researchers working in the field of HRM called for the transformation of the HRM system more than a decade ago, at which time they identified support to the process of organizational learning as the key strategic task facing the HRM function in many MNCs today (Chris Brewster, 2004) suggested that HRM practices “can contribute to sustained competitive advantage through facilitating the development of competencies that are firm specific, produce complex social relationships, â€¦ and generate organizational knowledge” (Paul N. Gooderham, 2003). However, few studies have recognized that the traditional prescriptions of high performance HRM practices1 do not fit the emerging knowledge-related goals of organizations. For example, Keegan and Turner (2002) argued that formal planning and job analysis procedures were not used by knowledge-intensive firms since they were engaged in uncertain, ambiguous tasks and dealt with highly turbulent and expertise-demanding environments. They, together with later researchers, argued for a new HRM task – to be centered around the process of learning and enhance the capacity of organizational members to contribute to knowledge-related organizational goals (Ehnert, 2009).
To identify which HRM practices could be employed to help organizations to achieve knowledge-related outcomes, a brief review of representative case-based and existing empirical studies undertaken by scholars from different research fields (international HRM, innovation, strategy, international business, etc.) on the link between HRM practices and various knowledge-related outcomes is necessary. My purpose is to determine what HRM practices organizations could employ to enhance knowledge-related outcomes, otherwise referred as knowledge-driven HRM practices (Cole, 2002).
Literature review on Merging and acquisition
The extensive literature review of both domestic and cross-border on M&A shows three determinants “(a) features of acquiring firms and targets (b) features of transaction itself (c) and the post integration process. But the feature which caught the minds of many authors is the features of acquiring firms and targets”. (Capron, Dussauge & Mitchell, 1998; Hopkins, 1999; Sirower, 1997). From the perspective of acquiring firms, the goal would be to enhance the resources and capabilities of the firm to the maximum level which creates synergy in terms of its market position, asset turnover, and financial returns, post -merger performance (Seth, 1990; Markides, Ittner & Oyon, 2001)
Another literature review by Hopkins (1999) suggests that there are four motives for international acquisitions. “They are (a) personal motives (b) Strategic motives (c) Market motives (d) Economic motives”. The author believes that the personal motive alone teds to decrease value and the other three are all sources of value creation for acquisitions. According to the author, strategic motives would include creation of synergy, capitalize on a firm core competence, and provide the firm with complementary resources, strengths and product. Market motives will involve exploring into the new markets in different countries. And economic motives will include economies of scale, economies of scope. All these factors tend to create value for the acquirer as per the author. For e.g.: HP taking over Compaq to take a bigger share of the market and to position its market into different countries where Compaq had already explored. Both were equal competitors and now merged to create synergy of resources, strength and product.
Another study on acquisitions generating enhanced innovative activities (Ahuja and Katila, 2001) talks about the importance of growing the firm’s knowledge base, (Granstrand and sjolander, 1990; Gerpott, 1995; Vermeulen and Barkema, 2001), and obtaining technological know-how and developing technical capabilities, which are increasingly important motives for acquisitions. The example for this industry would be the latest take-over of the LAND ROWER by TATA, where the company wants to explore the new technology available in the foreign market. Another classical example would the joint venture of Hero Honda in which the Honda delivered the technology to another firm in India to become Hero-Honda.
Author Jian (2004) emphasis on the tax benefit that is available to the M&A companies. Generally, the home government encourages the foreign companies to invest in the home country so as to generate local employment, create value, and improve the economy. Hence, the FDI’s are being preferred by companies so as to gain tax benefits, generate revenue or save manufacturing costs, etc. FDI’s contribute to a great extent to the companies for example: If a company manufactures and sells its product in the home country then it will save cost on transportation, and other import and export duties for goods and services according to the author. (Orit 2004)
Hence we can say that there are various benefits available to the companies involved in M&A, however just like a coin which has two sides, the below paragraphs will explain the other side of the M&A processes.
Andrew Shapiro, executive consultant at The Forum Corporation (Europe), said: “The sticking point for less successful firms is their inability to create a culture and sense of continuity within the newly combined organization. This is crucial for growth, particularly for M&A when the challenges to existing cultures are so great”.
Many authors have criticized the concept of synergies over the years According to
Kitching (1967), operational and managerial synergies seem to be vague concepts of merger activity. Also according to Trautwein (1990), financial synergy cannot be achieved in an efficient capital market. Also Rumlet (1982) claimed that there was no evidence for a lower systematic risk or perfect internal capital market.
The first and foremost aspect which affects a company in an M&A is the cultural differences in terms of integrating the organizational, national, and international cultures among the merged companies. Many other UK researchers like Cartwright and Cooper (1996: 93) suggests that “The national culture in which an organization operates will to some extent will influence the type of culture and style of work organization companies will adopt. However, within the same national economy, researchers have demonstrated the potential diversity and plurality of corporate cultures which operated across different business and sectors and industries”. The acquired company always suffers when it comes to M&A, it is generally the acquired company which has to transform into an entirely new organization and follow the acquirer.
Author Steven (2007) suggests that most companies fail in their post-merger stage as they fail to integrate the cultural structure within its organizational dynamics.
Managerial relationships are the indicators of a merger to be successful or failure, but the successful integration of senior management alone will not suffice if the line managers and other workers of the firm become factious. Employees may not be directly connected with the acquisition but the impact of the merger will be felt all over the companies’ culture.” M&A are about power, differing perceptions, cultural implications of which extends beyond boardroom”. (Cartwright and Cooper)
According to author (Cartwright and Cooper 1994) the most common stresses are:
Loss of identity / increased organizational size.
Lack of information/ poor or inconsistent communication.
Fear of job loss/demotion.
Career path disrupted.
Loss of, or reduced power, status and prestige.
Changes in rules, regulation, procedural and reporting arrangements.
Changes in colleagues, bosses and subordinates.
Ambiguous reporting system, roles and procedures.
Redundancy and devaluation of old skills and expertise.
Personality/ culture clashes.
Increased work load
Another major concern would be the post-merger actives, which the company needs to carry out as quickly as possible to give financial viability. The company has to prove its investors positively else the company will face a huge problem to fund investment further. Many companies carry out these alone and forget cultural issues that they need to sort out, this will set the tone for the entire work environment. To overcome this issue, a company has to take joined decision making which will reduce the cultural conflicts up to a certain extent. It is the company’s responsibility to communicate to its employees of all post-merger happening like the positions that an employee will hold the roles and responsibly, objectives, job security, and growth opportunities. This will make employees feel part of the newly merged company and will work to their potential. (Delloitte official website)
Another important aspect in the merger is the personal trait of the mangers which they have to demonstrate to its subordinates. The managers have to take initiative to make sure that there is perfect balance amongst the employees so that they develop a new culture with new and old employees of the company. There should be a perfect mixture.
There are four basic culture principles to avoid cultural issues “(1) Unity (2) Certainty,
(3) Creativity (4) Authority. The post merger operations bring into focus the human aspects of business operation. Though humans are notoriously unpredictable, understanding and effective implementation of basic principle is important of the post merger integration phase”. (Harvey et.al 1969)
Above are the some of the discussion put forth by various authors with regards to M&A. By the above discussion, we can understand that M&A process has various advantages also some disadvantages. M&A process is very cumbersome task and also there various issues that the companies have to consider. The companies should not carry out M&A on the bases of financial growth or expanding its market share, it should also consider the human elements and other cultural aspects which will arise. Thus we can say that M&A is important but should be transformed into a completely new organization.
History about Vodafone Company
The Company was incorporated under English law in 1984 as Racal Strategic Radio Limited (registered number 1833679). After various name changes, 20% of Racal Telecom Plc capital was offered to the public in October 1988. The Company was fully demerged from Racal Electronics Plc and became an independent company in September 1991, at which time it changed its name to Vodafone Group Plc.
Vodafone understands that businesses need a communications partner with solutions that scale and adapt as their business needs change. They may need a few smart phones for voice and email on the move. Or they may require a fully integrated solution that enables sharing of documents, video conferencing and access to corporate applications from any location. Whatever their size and whatever their need, they are constantly looking for new, innovative ways to help their business customers grasp every opportunity in a simple and straightforward way.
The commitment to the community in which we operate extends beyond the products and services they offer. The cornerstone of our commitment to global social investment is the Vodafone Group Foundation. Funded by annual contributions from the Vodafone Group, the Foundation and its network of 27 country foundations supports the community involvement activities of Vodafone and funds selected global initiatives directly.
True to the origins, Vodafone has always committed to deliver useful and inspiring innovation. In 1991 the enabled the world’s first international mobile roaming call. In 2002, with Vodafone Live! They set a new standard for mobile communications with internet access on the move. Fuelled by the desire for sustainable innovation, they recently introduced Vodafone Money Transfer which allows customers in emerging markets to send and receive money safely and easily using their mobile phone. We’ve also caused a stir in the industry with the Vodafone 150 – our most affordable ultra low cost handset yet.
History about Hutchison Essar Company
Established in 1994 in Indian market, Hutchison Essar, an Essar group and Hutchison Whampoa undertaking, is one of the leading cellular service providers. Having its services in five continents, Hutch was among the companies that started cellular services in India. Hutch has now spread its wings all over the country, with its punch line “wherever you go, our network follows”.
Hutch provides both postpaid and prepaid cellular services with lots of value added services to its customer base. With a total market share of 22%, Hutch’s customer base amounts to 2.44 crore subscribers. Essar Group has a turnover of over US$ 2.2 billion and the enterprise value of US$ 15 billion. The company has a wide range of manufacturing and service business sectors like Telecom & BPO, Engineering & Constructions, Steel, Oil & Gas, Power, and Shipping & Logistics. Since 1983, Hutchison Whampoa Limited is into mobile business in Hong Kong and now has more than 40 million customers. Vodafone is acquiring Hutchison Telecomm International Limited, a subsidiary of Hutchison Whampoa Limited, with 33% stake in the company, changing Hutchison Essar to Vodafone Essar.
Mergers & Acquisition
In the year 2007, the world’s largest telecom company in terms of revenue, Vodafone Plc (Vodafone) made a major foray into the Indian telecom market by acquiring a 52 percent stake in the Indian telecom company, Hutchison Essar Ltd (Hutchison Essar), through a deal with the Hong Kong-based Hutchison Telecommunication International Ltd. (HTIL). It was the biggest deal in the Indian telecom market. Vodafone’s main motive in going in for the deal was its strategy of expanding into emerging and high growth markets like India. In 2007, India had emerged as the fastest growing telecom market in the world outpacing China. But it still had low penetration rates, making it the most lucrative market for global telecom companies.
Though Hutchison Essar was one of the established players in this market, HTIL had exited India as the urban markets in the country had become saturated. Future expansion would have had to be only in the rural areas, which would lead to falling average revenue per user (ARPU) and consequently lower returns on its investments. HTIL also wanted to use the money earned through this deal to fund its businesses in Europe.
Vodafone had to face face many obstructions in clinching the deal – initial opposition for the Indian partner of HTIL, Essar Ltd., aggressive bidding by competitors, as well as regulators who took their time to approve the deal. But in the end, Vodafone bagged the deal outbidding other competitors. Though some critics felt that Vodafone had overpaid for Hutchison Essar, Vodafone contended that the price was worth paying as the deal would help it get a massive footprint in one of the most competitive telecommunication markets in the world.
International mergers and acquisitions are growing day by day. These mergers and acquisitions refer to those mergers and acquisitions that are taking place beyond the boundaries of a particular country. International mergers and acquisitions are also termed as global mergers and acquisitions or cross-border mergers and acquisitions.
Globalization and worldwide financial reforms have collectively contributed towards the development of international mergers and acquisitions to a substantial extent. International mergers and acquisitions are taking place in different forms, for example horizontal mergers, vertical mergers, conglomerate mergers, congeneric mergers, reverse mergers, dilutive mergers, accretive mergers and others.
International mergers and acquisitions are performed for the purpose of obtaining some strategic benefits in the markets of a particular country. With the help of international mergers and acquisitions, multinational corporations can enjoy a number of advantages, which include economies of scale and market dominance.
International mergers and acquisitions play an important role behind the growth of a company. These deals or transactions help a large number of companies penetrate into new markets fast and attain economies of scale. They also stimulate foreign direct investment or FDI.
The reputed international mergers and acquisitions agencies also provide educational programs and training in order to grow the expertise of the merger and acquisition professionals working in the global merger and acquisitions sector.
The rules and regulations regarding international mergers and acquisitions keep on changing constantly and it is mandatory that the parties to international mergers and acquisitions get themselves updated with the various amendments. Numerous investment bank professionals, consultants and attorneys are there to offer valuable and knowledgeable recommendations to the merger and acquisition clients.
Wherever you go, the network follows! Hutch’s famous punch line which was adapted appropriately in its much loved advertisement turned out to be quite a pun as the ‘Merger&Acquisition’ bug followed and finally caught up with Hutch! Following an entire battle of give and take, Vodafone acquired Hutch for a whopping 10 billion USD! Most of us would be wondering, that why at all a company should acquire a rival? What are the gains and risks involved in the entire transaction and how are mergers different from acquisitions?
A Merger, as the name suggests occurs when two companies go ahead and merge into a bigger company, mostly under a different name. This is often a result of stock swap, which takes place when two companies agree to share the risks involved in the deal. A merger might resemble an acquisition, it is indeed quite similar, but it is named so in most cases due to political and marketing reasons to avoid media frenzy. Well, obviously a company acquires the other or two companies merge together to accelerate their growth without having to create a separate business entity. An acquisition, as opposed to a merger, can be friendly or hostile. If a company buys the shares of the other company without prior knowledge, it is a hostile takeover. However if both companies cooperate and reach at a final stand, an acquisition can be friendly.
Coming back to the Hutch and Vodafone instance, which was a friendly acquisition, it is seen that a lot of expenditure is involved in such deals. When a company decides to take over the other, several factors need to be kept in mind. Considering that such actions are taken to increase the popularity, growth and market reach of a brand, one has to be aware of the consequences of the deal. How much technological know-how and expertise exists with the company to actually go ahead and ensure such a process. Mergers and acquisitions are an important part of brand building. It could also show how powerful you are as compared to your rival.
Factors Affecting International Mergers and Acquisitions
The following elements influence the international mergers and acquisitions from many aspects:
The capacity of average workers
Expectation of the consumers
Political features of a country
Tradition and culture of a country
These are the challenges faced by the human resources department when it comes to merge and acquisition.
The Role of HR
HR may be in a unique position to question assumptions about the nature of assets and
synergies. Investment bankers have a narrower training, and are rewarded for making
deals; human issues tend to get lost or overlooked.
The HR manager, on the other hand, has an opportunity to influence events so that each
company comes out ahead – but, to do that, the HR manager must preserve their own
position! Before, during, and after the merger, HR may be responsible for assuring that
cultural issues do not derail integration; for increasing innovation; for keeping
communication going in all directions (upwards, downwards, across departments, across
organizations); and for lessening the impact on those who are “reduced” and on the
Even at the highest level of the company, HR can have a role. The new leadership team
will need to work together on a daily basis, despite cultural and personality differences,
power issues, and other barriers. HR can act as a facilitator, and also as a coach to
individual executives. Personal and team assessments can be helpful in enabling team
members to work together constructively.
Opportunities for HR
Mergers and acquisitions are often planned and executed based on perceived cost savings
or market synergies; rarely are the “people” and cultural issues considered Yet, it is the
people who decide whether an acquisition or merger works. Do not reproduce without
written permission. The opportunity for HR lies in the fact that customer and employee
reactions determine whether the newly combined company will sink or swim.. If a
convincing argument is made to senior leaders, HR may gain more power to increase the
effectiveness of the organization, and may be able to mold the cultural changes instead of
being pushed along by them.
Hazards for HR
One result of many mergers is the consolidation of staff departments. Eliminating one of
the HR departments is sometimes stated up front as a justification for the merger.
For the “losing” department, layoffs tend to be a fact of life. The “winning” department
may find a substantially higher workload. If both HR departments are kept, there may be
issues of interdependence and autonomy, and hard decisions about which policies and
services should be shared and which should stay separate.
In many cases, the parent company has taken on a great deal of debt to finance an
acquisition. The next logical step is to cut costs – and HR is often the first department
on the block. Thanks to outsourcing agencies, even HR people in formerly indispensable
functions such as benefits administration can now be replaced for short-term gains (and,
sometimes, long-term losses – but since the stock market rewards cuts in head count.
Possible recommendations and conclusion:
Research has shown that 60-80% of international mergers fail because the companies involved have not put measures in place to deal with cultural differences like these or integrate both national and organisational cultures. Developing a ‘third culture’ that is understood and accepted by employees throughout the company is one of the best ways of ensuring a successful international merger. Communicaid’s cross cultural awareness training courses for mergers and acquisitions can help employees to develop the cultural awareness and intercultural sensitivity required to understand their colleagues’ cultural values and preferences. This in turn will provide them with the opportunity to develop an integrated approach to the company’s culture, essential for any international merger’s long-term success.
Armed with an understanding of these cultural differences, managers working for Vodafone or Hutch can really harness the broad diversity that this newly formed venture has to offer. Undertaking an intercultural training course such as Managing International Teams or Managing International Mergers and Acquisitions will give international managers involved in a merger or acquisition the insights they need to develop an effective working culture that plays to the strengths of their multicultural teams and maximises the cultural benefits of their company’s acquisition.