Friday, September 20, 2019
The causes and effects of mergers and acquisitions
The causes and effects of mergers and acquisitions It is still the start of the 21st century and as per the predictions, the world is moving at a brisk speed. The people who catches up with the world right now will be able to survive others will not be able to follow them. Same is the case with the companies of the 21st century. Companies today need to be fast growing, efficient, profitable, flexible, adaptable, and future-ready and have a dominant market position. Without these qualities, firms believe that it is virtually impossible to be competitive in todays global economy. Academics and other observers advance value-maximization, managerial ego, mimicry, the need to reduce uncertainty and defensive considerations (acquire to avoid being acquired; ensure that growth keeps up with that of competitors, etc.) and high levels of corporate reserves and share valuations among the motives behind consolidation in financial services. Supporters of MAs allege that they facilitate synergies between merged organizations, generate efficiency improvements and increase competitiveness. Indeed, they hold that mergers, by increasing economies of scale and spreading costs over a larger customer base, enable financial operators to provide services at lower prices. Demonstrating that MAs improve efficiency is thus central to making the case for the consumer benefits of mergers and in assessing their potential impact on consumers. If mergers improve efficiency, then larger, combined firms may be expected to pass some savings on to consumers through lower prices or improved service. In some industries such as insurance or banking, firms may move into new markets. In others such as pharmaceuticals or software technology, firms may work with smaller firms that have developed or are developing new products that they can manufacture and/or distribute more efficiently, while other firms focus on their own internal growth, leadership and development. Regardless of industry, however, it appears that it has become all but impossible in our global environment for firms to compete with others without growing and expanding through deals that result in mergers or acquisitions. Mergers and acquisitions are increasingly being used by firms to strengthen and maintain their position in the market place. They are seen by many as a relatively fast and efficient way to expand into new markets and incorporate new technologies. Yet their success is by no means assured. To the contrary, a majority fall short of their stated goals and objectives. Mergers Acquisitions an opportunity to improve employee relations or pull off some krafty moves? Mergers and Acquisitions (MA) have been a current topic within HR and Employment Law for a long time now but the last ten years has seen far greater opportunities opening up for companies (including private equity funds etc) to make that transforming acquisition or merger with a rival which will deliver major financial benefits and enhance shareholder value. Of course it is a well known fact that more than 60% of mergers/acquisitions fail to achieve their planned objectives. One major contributory factor in this has been the failure to pay sufficient attention to the people aspect of this type of change. Emotions can and do run high during protracted MA battles. Obviously the financial, legal and commercial issues will take precedence over the people issues. However compelling the financial or commercial case, a takeover will not succeed if key individuals are not motivated to make the new arrangements work. Those key individuals can be at any level in the business and it is not always the case that there are many other qualified and more motivated people just waiting to take their places. Rectifying these problems, although possible, can be costly. Kraft may rue the day when they failed to deliver on their commitment and dismissed many knowledgeable and experienced staff at Cadburys near Keynsham.Ã Neglecting the human factor is a frequent cause of failure Cultural and symbolic elements in MAs are typically framed in terms of the distinction between the merging firms, thus leading to an us versus them dualism. The creation of formal, internal communications mechanisms as early as possible in the process is necessary to limit the anxiety that will otherwise be fuelled by rumour, the grapevine, or even outside news reports. Employees complain that their first knowledge that their employer is involved in a merger or acquisition is often from the morning news before setting off for work. According to a Hewitt Associates executive, the fact that the human factor is taken into account in only 5 per cent of MAs explains why more than half of them in all sectors fail. Teams are usually put together to oversee merger and acquisition operations. These teams almost always comprise specialists in legal and financial issues as well as experts in strategy but rarely do they include human resource directors. One possible explanation is the fact that speed is generally considered of capital importance for success. While the integration phase of merging enterprises may cover between three to five years, the first 100 days after the announcement of the transaction are the most crucial for success or failure. It has become common practice to prepare and communicate to staff and shareholders a programme of integration activities to cover this period, when the feelings of fear, apathy, demotivation and the classical victor and vanquished syndromes are at their highest. Since a majori ty of mergers end up with the elimination of overlapping functions and positions, the first 100 days are likely to be those when staff are most uncertain about jobs, career prospects and the disappearance of their own corporate culture. To reduce the possibilities of failure in MAs, some management experts have recommended that human capital be placed at the centre of the process, or at least be given equal attention to that assigned to economic and financial considerations. According to this school of thought, such a redirection would enable acquirers to select the most compatible acquisition targets from a human resource perspective and make integration that much easier. Frank communication on a daily basis between management and staff helps to dispel some of the uncertainties of MAs and avoid organizational drift. Employees should be informed in good time about the manner in which redundancies, if there are to be any, will be decided and about the role of their trade unions or representatives in the process. It is also important for staff from the acquired organization to be assured that the rights and entitlements they had with their previous employer are to be respected; otherwise there is a high probability of conflict. Merger uncertainties are also frequently blamed for the loss of talent from target companies, which can destroy the very basis for the merger. The failed merger plans between the Deutsche Bank and Dresdner Bank in April 2000 demonstrate how staff resistance can undermine corporate strategies and management wishes. Integration of teams from the respective investment banks of the two parent banks posed a risk to the balance already achieved between staff in Deutsche Morgan Grenfell and the previously acquired Bankers Trust. MAs imply immediate and direct job losses A study on the efficiency effects of bank mergers in the United States, which summarizes nine case studies, reports that all nine mergers resulted in significant cost cutting in line with pre-merger projections, although only four of the mergers were clearly successful in improving cost efficiency. As for employment, the largest volume of cost reductions was generally associated with staff reductions and data processing systems and operations. Payroll reductions often accounted for over 50Ã per cent of the total cost reduction and in at least one case the reduction in staff costs accounted for nearly two-thirds of the total. In all cases, the savings achieved were of the order of 30 to 40 per cent of the non-interest expenses of the target. All of the merged firms indicated that the actual savings either met or exceeded expectations. Most of the firms projected that the cost savings would be fully achieved within three years after the merger, with the majority of the savings be ing achieved after two years. Managing downsizing related Ã Ã Ã Ã Ã Ã to MA restructuring While MAs are driven largely by financial considerations, their success vitally depends on the motivation of retained workers to contribute to the achievement of merger objectives. The high proportion of failed MAs may not be unrelated to the manner in which staff are often relegated to cost variables rather than being made active partners in the change process. Social plans, guarantees against forced departures and the involvement of staff in MA-related decision-making are critical motivating factors. The study referred to in Chapter 1 concluded that the failure of the overwhelming majority of MAs resulted from concentration on hard legal and finance issues to the detriment of the soft people issues in merger planning and implementation. Poor communications with employees appeared to pose a greater risk than that with shareholders, suppliers or customers. The study found that success was linked to a holistic approach when the soft people and cultural issues were an integral part of the focus on financial performance. Of the companies involved in the survey, just nine (less than 10 per cent of respondents) addressed all the soft keys, and each was successful. The study stresses the fact that once value was lost, it was seldom recovered. Even though possibly the most difficult to implement effectively, headcount reduction was the area in which most companies reported achieving their targets. Loss of staff an inevitable result of MAs often included the very individuals the acquirer needed and intended to keep to succeed. MA value extraction was impossible without the enthusiastic cooperation of employees. MAs, remuneration and other compensation issues Two conflicting aims appear to characterize current practices in financial sector remuneration: the need to reduce labour costs within a context of increasing competition and decreasing profitability and the necessity to compensate and adequately reward employee performance and commitment within an environment of continuous and challenging change. Recent trends in compensation policies are moving towards more contingent, individualized and explicitly performance-based systems, while seeking to retain workers loyalty and commitment to organizational goals. This might explain why changes in compensation have tended to be less dramatic than expected compared with both current rhetoric and experience in other industries. The main exception to the industry trend is the United States, where in the absence of a collective wage agreement or any kind of coordination between banks in wage setting, wide differences in compensation levels both between and within financial institutions have a lways been the rule. Sales-based bonuses, either individual-based (as for lenders in wholesale operations) or distributed via managers to branch offices, are the most widespread example of incentives, while commissions have become common for crucial jobs, such as investment advisors.[76 MAs and working time The link between financial sector concentration and patterns in regular working time is difficult to identify because working-time agreements depend upon the national context and are not limited to the sector under consideration. Banks adoption of the retailing model is encouraging them to adjust their hours to customer requirements, extending opening hours on at least one day a week and even opening some branches on traditionally closed days such as Saturdays a trend which has aroused strong trade union reactions in a number of countries. It goes without saying that MAs can provide an opportunity for management to opt for more customer-friendly working hours. However, the rapid development of Internet-based direct banking and ATMs often accelerating and accelerated by MAs has the opposite effect of reducing the need for longer opening hours. Given that successful management of the restructuring process is vital for achieving organizational objectives, managers need to be aware that downsizing is more than a reduction in head count and work reorganization. Terminations destroy the firms social fabric as structures are altered, relationships disrupted and work patterns and communication flows modified, making it more difficult for retained staff to do their work. These structural problems may inhibit performance so that staff need help to cultivate new ties, although insufficient attention is usually given to the intricate relationship between the organizations formal and informal structures. In addition, survivors who are already subject to survivors syndrome find they have to work harder to cover staffing shortfalls, with the consequence that increased workloads feed the stress related to job insecurity, undermining the very efficiency goals that motivated the merger or acquisition. Job insecurity may make employees feel pressured into agreeing to put extra effort into their jobs to demonstrate organizational loyalty; but such working conditions are neither sustainable nor conducive to the achievement of corporate objectives. Financial sector restructuring around the world has led to a high rate of call centre growth. Research by Deloitte Touche has found, for instance, that Australia has 1,400 call centres and help-desks employing 50,000 people and annual sales of $2 billion. Staff turnover averages 18 per cent a year mainly due to stress, as confirmed by the fact that 80 per cent of workers are requesting stress management training assistance. The annual cost to the industry from the high turnover has been estimated at around $100 million. MAs generate high levels of staff anxiety and stress as their working world is turned upside down, their jobs come under threat and their career prospects and professional competence are called into question. Collective defensive mechanisms, especially in hostile takeovers involving previously keen competitors, may lead to a victor-vanquished syndrome inducing behaviour inimical to the smooth implementation of changes for successful integration. Employees from each company are aware that there are many duplicated positions to be eliminated and the struggle to survive will be fierce. Trade unions may themselves be at loggerheads as the merger may involve companies recognizing different negotiating partners. Not surprisingly, it is much easier for managers to convince shareholders about the merits of proposed mergers than it is to persuade their own staff.