Post Merger People Integration(2).pdf

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Whitepaper on

Post MergerPeople

Integration


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3/28 2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms

affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.

FOREWORD

1 Knowledge@Wharton KPMG Survey 2011:

Confidence Grows for M&A in 2011, February 2011

2 McKinsey&Company, Perspectives on Merger

Integration, June 2010




EXECUTIVE SUMMARY

Organizations typically undertake

Merger and Acquisition (M&A)activity for variety of reasons such

as growth, synergy, diversification,

horizontal or vertical integration,

defensive measure and sometimes

pressure to do a deal, any deal.

Each reason may have its unique

impact on the integration strategy

of the merging entities. For

instance, in some cases top teams

are expected to closely collaborate

in key areas of synergies, whereas

in some other cases parallel

structures are retained to leverage

unique market capabilities.

People issues in a merger or an

acquisition can start surfacing in

the early stages of the deal if not

properly accounted and planned

for. Proactive post merger people

integration may help address

such issues. Entire process of

post merger people integration

may be broadly divided into four

stages, namely, scoping, HR due

diligence, integration and change

institutionalization. It is advisable

that HR be involved and kept

abreast of the CEOs agenda with

regard to the proposed merger in all

the stages.

Some of the key people &

organization related risks oftenencountered in a typical M&A deal

may be broadly classified into six

categories, namely, people cost

risk, structure risk, talent risk,

culture risk, regulatory risk and

engagement risk. The risks may

be individually investigated and

evaluated for their adverse impact

on the M&A deal. Appropriate

cost-benefit analysis may be done

for various risk mitigating strategies.

Additionally, a Heat Map may

also be created to categorize the

risks as High (denoted by red color),

Medium (denoted by amber color)

and Low (denoted by green color).

Accordingly action plans be created

and resources be allocated to

mitigate high priority risks.

Effective change management is

the key to seamless post merger

integration. Thoughtful planning and

flawless execution may mitigate

most of the identified risks. Many

companies manage change during

post merger integration at three

levels- organizational level, team

level and individual level. Firms

may typically go through multiple

experiences (experience of ending,

neutral zone and new beginning)while integrating into a new entity.

Ending and beginning are the

important features of mergersand acquisitions, and these are

most usually addressed at the

team level. Depending on the

type of synergy expectations,

existing team structures may get

re-adjusted. Change management

at the individual level is more

about managing various employee

emotional states associated with

different stages of mergers and

acquisitions.

It is advisable to have a dedicated

project organization structure in

place to facilitate and expedite

the integration activities. Many

organizations typically deploy

a 3-layer project organization

structure.

Aspiration to conduct effective

post merger integration posesunique leadership challenges for

the organizations. Leaders need

to steer the merging companies

in ways to unlock the potential

synergies. Also leaders need to play

an active role to conduct effective

change management at the

organization, team and individual

levels.




It is interesting to track the changes in

direction that merger and acquisition

activity have gone through over the last

100 years. Economists and historians

primarily refer to 6 waves in the mergers

and acquisitions activity1(refer figure-1

as illustration).

First Wave (1897-1904):Horizontal

combinations and consolidations of

several industries; US dominated.

Second Wave (1916-1929):Mainly

horizontal deals, but also manyvertical deals; US dominated.

Third Wave (1965-1969):The

conglomerate era involving

acquisition of companies in different

industries.

Fourth Wave (1981-1989): The era

of corporate raider, financed by junk

bonds.

Fifth Wave (1992- 2000):larger mega

mergers, more activity in Europe and

Asia.

Sixth Wave (2003-till now):More

strategic mergers designed to

compliment company strategy. Focus

on post merger integration.

The adjoining figure illustrates six waves

in the merger and acquisition activitywith select examples.

1

Mergers & Acquisitions: The story so far

1 Esther Cameron & Mike Green (2009), Making

Sense of Change Management, Kogan Page,

London




There exist multiple reasons for

companies to merge or acquire. Most of

them can be grouped into one or more

of the following categories2.Growth:It is usually associated with

acquiring new customers. However,

it can also be about getting access to

facilities, brands, trademarks, patents,technology or even employees.

Synergy:It represents the potential

ability of the merged entity to be

more successful than the individualcompanies. It may translate into:

Growth in revenue

Cost reduction

Financial synergies More competent, clearer governance.

Diversication:This type of M&A

activity was particularly significant in the

third wave era. It is commonly used as a

part of corporate risk mitigation strategy.Horizontal and Vertical Integration:

Many companies choose to merge with

or acquire their competitors to increase

their market share. Else companies maydecide to merge with or acquire their

customers or vendors to achieve one of

the following.

Dependable source of supply

Ability to demand specialized supply

Lower costs of supply

Improved competitive position.

Defensive Measures:Some mergers

are defensive and are response to other

mergers that threaten the commercial

position of the company.Pressure to do a Deal, Any Deal:There

is often tremendous pressure on the

CEO to reinvent cash and grow reported

earnings (Seldon and Colvin, 2003).

2

Figure 1



London




2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms


Each respective reason for embarking on the M&A activity has corresponding people and organization related implications.

Table-1 illustrates such implications.

Table 1 - People and Organization Related Implications of M&As

M&A Type Key People and Organization Related Implication

Growth Senior management team expected to make discrete changes in performance goals

Some new entrants may join top team

Expected administrative efficiencies in term of common support functions

Process and systemic integration may be considered in specific areas depending on the

requirement.

Synergy Top teams to collaborate on key areas of synergy. Other areas are left intact.

Diversication Loosely coupled management teams

Expected administrative efficiencies in terms of common support functions

Joint reporting to the holding company/corporate office

Separate identities and logos.

Horizontal and Vertical

Integration

Integrated top teams

Merged administrative systems in terms of common support functions

Tightly coupled core processes

Single corporate identity

Better partnership working

Pooled resources.

Defensive Measures If managed well, it may lead to greater commercial strength.

Source:KPMG Analysis

Anyone who has researched merger success rate knows that more than 70 percent

of all the mergers and acquisitions fail to produce any benefit for the shareholders,

and over half actually destroy value3. Majority of the companies report that their

M&A deal failures may be attributed to people and organization issuessuch

as lack of shared vision, leadership clash, cultural mismatch, loss of key talent,

misaligned structures, lack of management commitment, lack of employee

motivation, poor communication and poor change management.

People issues in a merger can begin at the earliest stages of the deal if not properlyaccounted and planned for. It is essential that HR be involved and kept abreast of

the CEOs agenda with regard to the proposed merger. It is imperative that HR asks

critical questions in the initial meetings as well as across the merger process. The

function must be aware of the key stages and milestones in the process This would

also enable HR to effectively assess the key pitfalls that needed to be overcome to

support the CEOs agenda and manage human capital risks.

3

3 McKinsey&Company, Perspectives on Merger

Integration, June 2010




4




5

Post merger people integration

Entire process of post merger people integration may be broadly divided into 4 stages, namely, scoping, HR due diligence,

integration and change institutionalization (refer figure-2 as illustration)1.

Figure 2

1 KPMG Analysis




6

Scoping:In this stage companies agree

on the reasons and potential benefits of

the proposed merger or acquisition. Top

teams identify key areas of synergies/

collaborations and clearly define go& no-go areas. Also in this stage,

vision of the merged entity is clearly

articulated.

HR Due Diligence:HR due diligence is

a systematic intelligence performed for

ascertaining the viability and possible

integration of the human aspects of

the transaction, process, scheme or

company so as to determine the worth

or verify the fulfillment of definiterequirements. Also HR Due Diligence

is conducted to assess the quantum of

people and organization risks associated

with an M&A. Such risks may be broadlyclassified into following 6 categories.

People Cost Risk

Structure Risk

Talent Risk

Culture Risk

Regulatory Risk

Engagement Risk.

Some part of risk identification also

overlaps with the scoping stage of the

M&A process.

People and Organization Integration:

Companies need to clearly identify

the extent of potential people and

organization related risks in the scoping

and the due diligence stage. The risksmay be individually investigated and

evaluated for their adverse impact on

the M&A deal. Appropriate cost benefit

analysis may be done consequently.

Additionally, People Risk Heat Map

may also be created to categorize the

risks as High (denoted by red color),

Medium (denoted by amber color)

and Low (denoted by green color).

Corresponding action plans be created

and resources allocated to mitigate the

identified risks.

Change Institutionalization:

Appropriate change managementprogram may be put in place to manage

the change before and during the

integration, and to institutionalize the

change after the integration. Structure,

processes and metrics may be designed

to affect the same. However many

times in-spite of having the best in

class change management techniques,

many M&As do not reap the desired

result. This may be attributed to the

inability of the companies to address

the leadership challenges emerging out

of a merger or an acquisition. Research

says that the leadership of change is one

of the single most important defining

parameters of successful post merger

integration.

Thus, in a nutshell, top management

of the companies undertaking M&Amay focus on following issues to help

ensure effective post merger peopleintegration.

Addressing people and organization

risks

Managing change during post merger

integration

Addressing leadership challenges.




7

Addressing key people and organization risks

One of the most important aspects of managing successful

post merger people integration is proactively addressing the

risks associated with people and organization. Most of such

risks can be grouped into six broad categories, namely, people

cost risk, structure risk, talent risk, culture risk, regulatory

risk and engagement risk. Each risk category may consists of

multiple dimensions (Refer Figure-3 for Illustration)1.

Figure 3

1 KPMG Analysis




8

People Cost Risk

In M&A transactions most firms

diligently focus on the risks and liabilities

of existing businesses (hidden or off

balance sheet), e.g., adequacy of claim

reserves and claim exposures. But

there are also values, risks and liabilitiesassociated with the people side of the

businesses that are frequently missed

or overlooked.

One of the most important areas

in this regard is pension and other

rewards liabilities. These may have

huge underestimated obligations which

may not be immediately apparent. The

rewards which may indicate substantial

accruing liabilities could be in the

form of termination indemnities,

accrued performance payments, retireemedical etc.

Some of other areas of concern that

carry future liabilities include:

Jubilee payments and contracts

liabilities

severance costs for excess

personnel

fixed-term contracts with key

executives

Structure Risk

Sound organization design applied

from early in the acquisition can be an

effective catalyst for ensuring that the

structure, process, governance, metrics,

and people are optimally configured andaligned to fulfill the methodology of the

newly integrated company. The absence

of good design, on the other hand, can

result in ambiguous goals, lack of role

clarity, and inefficient decision making,

all potentially disastrous to a successfulintegration.

Depending on the exact reason and

envisioned objective as why the merger

or acquisition occurred in the first

place, several approaches are taken to

harmonize the organization structures.For instance, if one company (A) has

taken over another (B) to gain entry into

a new/related industry or new/related

market, then it is a good idea for A to

retain the organizational structure of B

and let it operate as a strategic business

unit on its own. A few structural changes

may occur at the top management

level where the role of the CEO/MD of

company (B) may become redundant,

or may report in to a role in Company A.

This is primarily on account of the factthat Company B has knowledge that

Company A does not possess.

However, if a decision was taken tomerge Company A and Company B, ahorizontal merger (which again could

be due to several reasons) then the

following actions may be taken into

consideration:

With the sponsorship of senior

leaders, establish a new

organizational mission, objectives,

and strategies based on the merger.

Depending on the situation, the new

organizational structure may reflect an

effective new entity.

Very often, when redesigning the

roles and responsibilities of top-level

managers, organizations prefer to

hold visioning workshops where

role-wise key metrics are deliberated

and discussed. It may also be a good

idea to present the new strategic

plan and envisioned structure to themid-level managers and allow them

to ask questions. This will allow for

an assessment of each companys

corporate culture as well, whichin turn to some extent is reflected

by the organization structure. For

instance, combining a traditional

top-down organizational structure

with a collaboratively run organization

requires more planning to effectively

blend the two cultures, preservingthe best of both.

Train people for new roles. It is a goodpractice to recognize that before

people can behave in new waysin a new organizational reporting

structure, they need to develop

the skills and competence to do

so. Human Resources could work

towards establishing orientation

programs to ensure all functions

integrate effectively.

Also the new structure may be finalized

so as to help ensure appropriate

information flow within the organization.This may be adjusted by introducing

suitable horizontal and vertical linkages

across the organization. The final step

while freezing the structure for the new

organization involves the identification

of unnecessary positions which couldbe done away with.




9

Talent Risk

Very often one of the key objectives

of a merger or an acquisition is to

acquire valuable human talent of an

organization. The talent pool is a critical

success factors for many deals and as

a part of the due diligence process, itis necessary to study and evaluate the

available pool. Various retention factors

within an organization need to be

assessed and the viability of the samebe evaluated. Also those in charge of

an acquisition often limit their focus to

a small handful of top people, ignoring

people at the middle and the line

levelsleaving valuable human capital

vulnerable to poaching by competitors.

An acquisition or merger can create

conditions in which a company is atrisk for losing just those people whomay be critical to immediate and

longer-term business goals by virtue of

their management skills, knowledge

of business systems and processes,

and intellectual capital. This can have

consequences, not only downstream,

but for the transaction itself.

Additionally, there also exists a

need to appropriately integrate the

talent processes of the two merging

companies. Studies show that the

degree of integration is of high

importance to the success of mergersor acquisitions. Depending upon the

kind of the acquirer and the target

organization, and the vision for the

merged organization, varying levelof integration of the different talent

processes may be established. On the

one hand integration can be minimal,

such that all differences between

the acquirer and the target remain in

place. On the other hand integration

can be maximal, such that there are no

differences left between the acquirer

and the target, making them one.

Culture Risk

An organizations culture consists of

the underlying values, beliefs, and

practices that define an organizations

management philosophy. Numerous

authors have discussed the potential

troubles of culture dissonance betweenmerging organizations and report

the same to be one major source

of conflict. According to the report

from the Economic Intelligence Unitorganizational culture differences and

human capital integration issues ranked

as the two most significant challenges

faced by respondents in recent

transactions1.

Bipolar culture assessment may be

conducted to get the preliminary

indications on the degree of culturalalignment/ misalignment between themerging organizations. The assessment

may be conducted on key culture

dimensions with each dimensions

having two culture extremes. The

As-Is state indicates the existing

state of the firms culture on the given

dimension, whereas the To-Be state

indicates the desired state of the

merged entity on the same dimension.

Following may be referred to for

illustration purpose.

1 M&A Beyond Borders: Opportunities and Risks,

March 2008, Economist Intelligence Unit




10

Figure 4




11

Cultural compatibility can have

significant impact on the ultimate

success of the M&A. In the light of

perceived culture misalignments it

is suggested that a separate culturalintegration action plan be created and

worked upon. Mismanagement of

cultural issues may prevent the merging

firms to realize the full synergy.

Regulatory Risk

One of the critical parameters of

an HR due diligence process is the

assessment of people related matters

governed by laws and regulatory bodies.Since companies being acquired/

merged might have no geographical

boundaries, and laws affecting human

capital might vary from place to place,these laws need to be scrutinized very

carefully before articulating human

capital related laws for the overall entity.

Major areas of study impacting overall

HR processes include variations in labor

laws, HR contracts with the unions

and collective agreements, payroll andstaff structures, staff terms, payment

terms, industrial relations and relations

with statutory bodies. Labor laws and

HR contracts with unions are a major

area of concern as the laborers and

employees of the organization may feel

agitated and skeptical on account of

perceived mistrust. This is a sensitive

issue and very often can make or break

a deal especially in manufacturing and

other such labor heavy industries.

Engagement Risk

Research indicates that a firms

productivity can drop by between

25 and 50 percent while undergoing

such a large-scale change. Job losses,

restructuring, imposition of a new

corporate culture and top leadershipchanges may lead to uncertainty and

anxiety among employees and thus may

result in reduced engagement levels.

Also, when employees feel disengagedor are on the fence, they are likely to

watch for signals of failure, take cues

from the grapevine, intentionally reduce

their work output, distrust company

leaders and their messages, and hold

back on extra effort. Thus there exists

a need to prepare a comprehensive

change management plan and to partner

employees in the change journey.

Moreover, it is also suggested that

organizations undertaking M&A

activity may investigate the existing

engagement levels of employees in

the HR due diligence stage. Research

suggests that engaged employees are

20 percent more productive than the

disengaged ones3. Thus may possibly

impact the synergies expected out of a

merger or an acquisition.

3 Debashish Sengupta, S. Ramadoss (2011),

Employee Engagement, Wiley India




Goods and Services Tax - Ready. Steady. Go? | 12




13

Managing change during post mergerintegration

Effective change management is

the key to seamless post merger

integration. Thoughtful planning and

flawless execution may mitigate mostof the identified risks. Many companies

manage change during post merger

integration at the following three levels.

Organizational Level

Team Level Individual Level.

Furthermore, it is also advisable to

put in place a dedicated post mergerintegration structure to conceptualize

and monitor various change

management related activities.

Managing Change at theOrganizational Level

Individual companies typically go

through following three organizational

experiences while integrating into a new

entity1(refer figure-5 as illustration)

Ending

Neutral Zone

New Beginning.

1 Bridges, W (1991) Managing Transitions, Perseus,

Reading, MA

Figure 5




14

Ending

Before one can begin something new,

one needs to end what used to be.

Companies need to identify who is

losing what, expect a reaction and

acknowledge the losses openly. It

may also be required to repeat theinformation about what is currently

changing since it may take some time

for the happenings to sink in. Its equally

important to ceremoniously mark theendings.

Neutral zone

Employees may feel disoriented in the

neutral zone. Motivation levels falls and

anxiety rises. Consensus may break

down as attitudes become polarized.

Temporary structures may be needed tomanage the transitional issues. Leaders

are required to monitor the pulse of the

firm on regular basis.

New beginning

Employees need to understand and

wholeheartedly accept the following

to help them embark on the new

beginning.

The purpose behind the M&A

The picture of how the new entity will

look like

A step-by-step plan to get there

Part to play in the outcome.

The need for constant communication

with the employees in all the three

types of organziational experiences

cannot be over emphasized.

Managing Change at the

Team LevelEnding and beginning are the important

features of mergers and acquisitions,

and these are most usually addressed at

the team level. Depending on the type

of synergy expectations, existing team

structures may get re-adjusted.

All teams go through a change processwhen they are first formed, and when

significant events occur such as a

new member arriving, a key member

leaving, change of scope, increasedpressure from outside, or a change in

organizational climate.

Thus many teams go through

following stages of development/re-

adjustments2. Table-2 further illustratesthe team activity with possible change

management responses.

Table 2 - Development of a Merged Team

Stage Team Activity Possible Change Management (CM) Response

Forming Confusion

Uncertainty Assessing Situation

Testing Ground Rules

Defining Goals & Establishing

Rules

Need to clearly define roles and responsibility in the new company/

function

Need to define key customers for the team and begin to agree on

new ground rules for how the team will work together

Discuss team background in terms of previous structures, processes

and culture

Storming Disagreement over priorities

Struggle for leadership

Tension & Hostility

Clique Formation

Need to conduct joint workshops/ discussion sessions to openly

resolve the issues relating to structure, processes and culture

Clarity on direction and purpose of the team

Norming

Consensus Leadership Accepted

Trust Established

Standards Set

Need to develop a decision making process Maintaining flexibility by reviewing goals and processes

Performing Successful Performance

Flexible task roles

Openness and helpfulness

Need to encourage delegation more frequently

Need to encourage innovation and

2 Tuckman, B (1965) Development Sequence in

Small Groups, Psychological Bulletin, 63, pp 384-

99




15

Managing Change at theIndividual Level

Change management at the individual

level is about managing and facilitating

employee experiences in various stages

of a merger or an acquisition.

Employees typically go through multiple

emotional states while dealing with thechange3(refer figure-6 as illustration).

Table-3 illustrates various phases of a merger or an acquisition and corresponding employee experiences. It further suggests

possible change management responses4.

Table 3 -Stages of Merger and Individual Employee Experiences

Stage of M&A Employee Experience Possible Change Management (CM) Response

Merger is

announced Shock, disbelief and relief that

rumours are confirmed Need to provide full and early communication of reasons behind, and

aim of the merger between

Specific plan are

announced

Denial: Its not really

happening

Mixture of excitement and

anxiety

Anger and Blame: This is all

about greed etc.

Need to discuss the implication of merger with individuals and team

Giving employees timescale for clarification of the new structure and

when they will know what their role will be in the new company

Changes start

to happen- newboss, new

colleagues, new

customers etc.

Depression: Finally letting

go of two companies, andaccepting the new company

Acceptance

Need to acknowledge and communicate the end of an era

Hold a wake for the old company and keep one or two bits of

memorabilia (photos, T-Shirts)

Forster development of the merged team and delegate new

responsibilities to the team

Need to coach in new skills and behaviours

New organization

begins to takeshape

Trying new things out

Finding new meaning

Optimism

New Energy

Need to foster communication at all levels between the two parties

Need to induct the employees of both the companies to the new

ways to doing business

Need to review and consolidate the changes since the beginning

Need to celebrate success as a group

3 Kubler-Ross, E (1969) On Death and Dying,

Macmillan, New York



London

Figure 6




16

Merger Project Organization

It is important to have a dedicated

project organization structure in

place to affect seamless post merger

integration. The structure may typically

exist at 3 layers (refer figure-7 as

illustration).

At layer-1, there exists an overall steering committee. The committee is responsible

for all the activities related to post merger integration. It establishes the initial

guiding ideas and performance parameters for the transition and for the neworganization, develops and/or approves strategy, and establishes and oversees the

infrastructure for change.

At layer-2, there exists an executive committee for people and organization

integration. The committee is exclusively responsible to monitor and mitigate

the risks associated with people and organization integration, namely people

cost risk, structure risk, talent risk, culture risk, regulatory risk and engagement

risk. It is advisable that the committee is put in place before the due diligence

commencement. The committee may have the representation from both themerging firms.

At layer-3, there exist various tasks forces with specific expectations and deadlines.

These task forces work to mitigate high impact people and organization risks. It is

advisable to create a comprehensive monitoring dashboard corresponding to each

of the identified risks. Tasks forces may have representation from both the merging

firms.

Figure 7




17

Addressing leadership challenges

Aspiration to conduct effective

post merger integration poses

unique leadership challenges for the

organizations. Leaders need to steer themerging companies in ways to unlock

the potential synergies. Also leaders

need to play an active role to conduct

effective change management at the

organization, team and individual levels.

As mentioned in the preceding section,

individual companies may typically go

through following three experiences

while integrating into a new entity

Ending

Neutral Zone

New Beginning

Leaders need to demonstrate behaviorsaddressing specific needs emerging out

of respective company experiences.

Some of the sample behavior

demonstrators corresponding to the

above types of firm experiences are

mentioned below1.

1 Bridges, W (1991) Managing Transitions, Perseus,

Reading, MA and Esther Cameron & Mike Green

(2009), Making Sense of Change Management,

Kogan Page, London




18

Leadership for the Ending Leadership for the Neutral Zone Leadership for the new beginning

Study changes carefully to understand

who is likely to lose what

Acknowledge the neutral zone to be a

state of flux and as an uncomfortable

time. Employees are usually anxious

during this time

Create a compelling business case for a

merger or an acquisition. Detail out the

pain points and also clearly detail out

the reasons for undertaking a merger or

an acquisition

Acknowledge losses openly. Sweeping

the losses under the carpet may spelltrouble for the organization

Incentivize employees to continue

doing their jobs during the neutral zone.Try and establish personal connect

with key employees to address theirapprehensions

Create a vision for the merged entity

Employees may be allowed to grieve

and express their sense of loss. The

idea is to provide an environment

where sentiments are expressed

rather than concealed

Create temporary structures in

terms of creating temporary policies,

procedures, roles and reporting

relationships to get through the neutral

zone

Share comprehensively the overall

change management plan

Try to make up for the losses using

innovative means. For instance, firms

may introduce some new roles to

compensate for the loss of existing

roles. Or firms may provide specifictraining to employees to compensate

for the loss of existing skills/

competencies

Create and constantly monitor a

comprehensive checklist of pitfalls

Explain the role to be played by the

employees in executing the plan

The importance of communication at

this stage cannot be overemphasized.

Provide as much information as is

feasible even at the cost of repetition

Set up a three layer merger project

organization structure as illustrated in

the preceding section

Build some occasion for quick

successes

Clearly delineate what will end and

what will continue

Celebrate the new beginning and the

conclusion of the time of transition

Come up with symbolic gestures to

mark the ending and honor the past. It

is advisable not to denigrate the past




19

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