Mergers & Acquisitions Communication, Change, People, &

Process

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Mergers & Acquisitions – Key Terminology

• Acquisition - purchase of shares, assets, or companies in a merger• Merger – two separate companies combine (only one survives)• Consolidation – combination of two or more companies (new corporation formed)• Leveraged Buyout (LBO) – acquisition by group of investors or management (MBO- management buyout) purchase a company• Holding Company – owns sufficient voting stock to have controlling interest in one or more companies called subsidiaries• Divestitures – are a means of facilitating acquisition of company to improve earnings or shareholder value, or as a means to raise capital• Divestitures: Spin-offs – company distributes all of its shares in a subsidiary to the company’s shareholders as a tax-free exchange• Divestitures: Equity carve-outs – similar to spin-off . Occurs when a company sells some of its shares in a subsidiary to the public• Hostile Combinations – acquiring (bidding) company makes purchase offer but management of target company resists.

Bidder then tries to take control of the target through a tender offer to purchase a majority of the target’s stock at a predetermined price

higher than current market price to attract the shareholders’ attention. May result in a bidding war• Friendly Combinations – management of both companies come to an agreement . Many acquisitions that begin

as hostile end up being completed on a friendly basis.• Motives for Acquisitions – economies of scale, increased revenue/increased market share, cross selling, synergy, taxes, and diversification• Financial Analysis – analyze financial statements, understand lenders’ and investors’ required returns, and corporate valuation analysis• Due Diligence - requires broad & deep data analysis of assets & liabilities• Post-Merger Integration – managers of the acquired company will feel some loss of autonomy, once simple procedures become complicated.

Strengths and weaknesses along with the skills and potential of its personnel will not become immediately apparent. Disciplines, procedures,

and controls may not work as well in the new environment and there may be a clash of cultures.

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Mergers & Acquisitions – Lessons LearnedQueens University Study

Communication If employees are unaware of how they will be evaluated for the retention decision, feelings of

powerlessness will be high. A realistic merger preview depicting job expectations for the future will allow employees to cope

more realistically with new or modified job demands. The longer fear of the unknown lasts, the more damage will be done.

Change

Management of the transition stage requires a delicate balance between providing a stabilizing influence and creating a climate for change. Uncertainty and anxiety, anger, frustration, psychological withdrawal and family disruptions are pervasive during M&A activity.

The study found a positive correlation between job insecurity and resistance to change. The study advocates a single reduction in the work-force, based on a solid understanding of the

anatomy of the organization. The manner in which the workforce reductions are undertaken has a significant impact on the organization’s success in managing the survivors: how employees are terminated is often interpreted by the survivors as an indication of how they can expect to be treated by the new company

Transitions

In the final analysis, it is the employees who allow an organization to realize its change objectives. It is only when they truly understand the need for change, the direction set, and are actively

engaged in the process that change can happen. Faced with a ‘burning platform’ most will be responsive to new approaches, but it is only when the

infrastructure and support mechanisms are in place that they can give their support to Implementing change.

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Mergers & Acquisitions – Lessons LearnedQueens University Study

People

The most valuable employees—those that the post-merger corporation can least afford to lose—tend to be the first to leave the organization.

Those who voluntarily leave their company indicate that uncertainty leads them to do so early in the acquisition process.

After downsizing, considerable uncertainty and frustration may be exhibited among remaining employees, who may feel that the termination decisions were based on unclear or inappropriate criteria.

Differences in the two organizational cultures can lead to competition between employee groups and hostile ‘we-they’ attitudes. Managers should try to avoid this situation by carefully mixing employees as much as possible at all organizational levels. When combining departments, functional counterparts should not be placed in subordinate and supervisory relationships.

Automate elimination of redundant positions correlates highly with post-event problems. In one study, two-thirds of the firms that adhered to this policy encountered post-event difficulties. Policies that created fewer problems included automatic retention of all employees wishing to stay, one-on-one interviews with employees, and retention of employees meeting specific criteria.

Process

75 percent of the organizations surveyed had terminated employees following a merger or acquisition event.

70 percent of the companies that had downsized following a merger or acquisition reported one or more post-event problems, compared with 40 percent of the companies that had retained all their workers.

Of the companies reporting no post-event problems, 41.8% had left the management structure unchanged. Of the companies reporting problems, only 13.0% did not alter the management structure.

When key functions were centralized in the acquired firm, problems such as higher absenteeism and turnover and lower productivity were nearly twice as likely as when no change was made.

Organizations that make a series of cuts tend to keep the employees’ anxiety focused on personal survival with no sense of where the cuts would come next. The result is a ‘vicious cycle of disintegration’ in which a first set of cuts leads to declining morale and lower performance, which in turn leads to a second round of cuts and further decline in morale and performance.

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Mergers & Acquisitions – Cultures

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Culture of the Acquirer / Dominant Merger Partner

Culture of the Acquirer Or Other Merger Partner Likely Outcome Comments

POWER

ROLE / TASK ACHIEVEMENTPERSON / SUPPORT

ALL POTENTIALLY DISASTROUS

Assimilation resisted. Culture collisions will inevitably result and labor turnover rates can be expected to rise.

POWER POWER PROBLEMATIC Success very dependent on choice/charisma of organizational leader. Political infighting will likely result in a pseudo-merger situation.

ROLE POWER POTENTIALLY GOOD Assimilation likely to be accepted. Most acquired employees will welcome the ‘fairness’ of a role culture.

ROLE ROLE POTENTIALLY GOOD Smooth assimilation likely as effectively rewriting or presenting a new rule book is all that is required.

ROLE TASK ACHIEVEMENTPOTENTIALLY PROBLEMATIC

Many managers will have joined the acquired organization to escape the bureaucracy and red tape of a role culture.

ROLE PERSON / SUPPORT POTENTIALLY DISASTROUS

Anarchy likely. Members of a person / support culture will not accept that the size of the organization may now require greater infrastructure.

TASK

POWER ROLETASK / ACHIEVEMENT

POTENTIALLY GOOD

Smooth. Assimilation likely for those in existing power and role cultures; there will inevitably be a pleasant but still potentially disturbing culture shock. Some are likely to feel their status is eroded, particularly those with considerable position power. Many will find the new culture very demanding and perhaps stressful.

TASK PERSON / SUPPORTPOTENTIALLY PROBLEMATIC

While person / support cultures nurture self-development, they are not conducive to team cultures and consensual decision making.

Person / Support Cultures: Have minimal structure; nurtures personal growth & development; egalitarian in principle and decision making is conducted on a shared collective basis

Power Cultures: Power rests with the president, founder, or small core group of key managers; employees are motivated by feelings of loyalty; fosters a sense of tradition; tend to have inequitable compensation systems based on favoritism, loyalty, & performance

Role Cultures: Clear division of labor, organizational power defined by position & status; rules & procedures clearly defined; respond slowly to change, are predictable and risk averse

Task / Achievement Cultures: Emphasize accomplishment of the task; employees usually work in teams and are flexible, create, & highly autonomous; and emphasis is on what is achieved rather than how it is achieved.

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Mergers & Acquisitions – Closing Thought

Change is the law of life. And those who look only to the past or present are certain to miss the future.

John F. Kennedy

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Mergers & Acquisitions

Appendix

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Mergers & Acquisitions – Due Diligence Checklist

Organization of the Company Ownership and Control of the Company Assets and Operations Intellectual Property Reports Compliance with Laws Environmental Matters Litigation Significant Contracts and Commitments Employees, Benefits, and Contracts Tax Matters Miscellaneous

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Mergers & Acquisitions – Resources

Giddy, Ian - Professor of Finance at the Stern School of Business at New York University. Giddy, I. (2006) Mergers & acquisitions: An introduction¹; Sample due diligence checklist¹;

•Dr. Giddy's thirty years of practical and academic experience reflect his interest in international finance, corporate finance, structured finance, and risk management. He was a visionary who founded two nature reserves, Cloudbridge in Costa Rica, and Wildcliff in South Africa. His legacy will live on in the forests and mountains where he loved to hike.

Love Kristjanson, Carolyn - Human Resources Director Love, C.K. (2000) Mergers & acquisitions: The role of HRM in success ²

• Carolyn holds a Master’s degree in Industrial Relations from Queen’s University, ON and a B.commerce (Hons.) in Finance from the University of Manitoba.

Pikula, Deborah A. - HR Professional from Queen’s University, ON Master of Industrial Relations Program Pikula, D.A. (1999) Mergers & acquisitions: Organizational culture and HR issues ᶟ

• Human Resources and Industrial Relations Professional and graduate of the Queen’s University

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¹Source: Stern School of Business, New York University, New York, NY ; www.constable.net²Source: Industrial Relations Centre, Queens University, Kingston, ONᶟSource: Queen's IRC (Industrial Relations Centre) Archive Revitalization Project http://irc.queensu.ca/articles/queens-irc-archive-revitalization-project

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Mergers & Acquisitions – Links

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Title Description Link Document

M&A: Roll of HRM

HR Problems Managing for M&A

Successhttp://irc.queensu.ca/articles/mergers-and-acquisitions-role-hrm-success

M&A: Organizational Culture & HR Issues

Types of Cultures Merger Types HR Implications

http://irc.queensu.ca/articles/mergers-acquisitions-organizational-culture-hr-issues

M&A: Due Diligence Documentation Checklist http://giddy.org/mergers/documents/duediligence.htm

M&A: Terminology Terminology Definitions

http://pages.stern.nyu.edu/~igiddy/articles/mergers_intro.htm

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