Vol. 50, No. 6
HR is helping businesses puzzle through the difficult process of a successful merger or acquisition.
As the economy brightens, experts predict that the recent flurry of mergers—including high-profile mega-mergers like SBC Communications/AT&T and Procter & Gamble/Gillette—will increase throughout 2005. And this time around, unlike the last merger-frenzy period in the late 1990s, businesses seem to have learned that they need to involve HR early in the process.
“There is a growing understanding that people issues can make or break a deal,” says Frank Giampietro, principal and mergers and acquisitions leader for North America in Towers Perrin’s Philadelphia office. In the vast majority of merger and acquisition (M&A) deals, he says, “part of what you are buying is the talent and intellectual capital of the organization. You can erode that so quickly if you get off on the wrong [foot].”
By contrast, when HR gets involved early in the process, the odds increase that a merger will be successful, according to a 2004 Towers Perrin study, HR Rises to the Challenge: Unlocking the Value of M&A. Giampietro says the study reinforced a business case “that was already out there.”
Earlier research by the consulting firm found that most of the M&As that took place between 1995 and 2000—when HR was rarely involved in the early stages of the M&A process and people issues were frequently cited as key obstacles to merger success—failed to meet key business and financial objectives. Almost half of the deals surveyed failed in the eyes of shareholders, based on comparing total shareholder returns (stock price appreciation plus dividends) during the three-month period prior to the deal to returns during the three years after the deal.
Thus, it’s good news for HR—and businesses—that the latest Towers Perrin report found that nearly two-thirds of HR executives surveyed are now involved in M&A due diligence, and three-quarters expect to be highly involved in this phase in future deals. Companies, then, appear to be learning from past mistakes. Researchers also found that nearly 80 percent of M&As completed in the last few years have substantially met key strategic objectives.
“Five years ago, HR was saying, ‘People issues are important, but we’re not getting to help,’ ” says Giampietro. “Now they are.”
‘It’s the People, Stupid!’
HR’s early involvement in M&As really took off in the last three years at a number of best practice companies. And the experiences of those who were among the first in the M&A pool are instructive for any HR professional facing a potential merger or acquisition.
Tom Pierson, director of mergers and acquisitions at Agilent Technologies in San Jose, Calif., says it was about three years ago at Agilent that HR “made it clear [to top management] that we could add value, and we began to be invited to be a part of the ‘secret deal funnel’—[the pre-deal stage]—along with legal, finance and corporate development.”
HR’s seat at Agilent’s M&A table didn’t just happen, says Pierson, who worked hard to develop a relationship with the vice president of corporate development and make HR’s case. Today, Pierson represents HR as the fourth member of the group that meets monthly to discuss current and future deals.
For Pierson, the reason to involve HR early in the M&A process is clear: “It’s the people, stupid!”
He adds: “People [across companies] want the same things. They want honesty, openness, integrity. They want to know that their work matters, and they want to be treated fairly.”
Companies that meet those employee needs by involving HR when structuring an M&A deal can save “trouble, trauma and money,” he says. At Agilent, HR has saved money by identifying areas of legal or financial exposure—gray areas in equity plans, for instance—and then figuring out how to mitigate that exposure, says Pierson, who also manages the company’s global compensation.
Today, Agilent has “six to 12 M&As in our funnel at any given time,” Pierson says. He’s involved from the pre-deal stage up to “the cocktail party phase, when we engage with the target company.”
Of course, not all these deals get closed, he says, “but it takes just as much effort on the front end to decide that you’re not going to do a deal as it takes to decide to do one. We [HR] have definitely helped nix deals by spotting problems others have missed,” he says.
‘The Soft Stuff Is The Hardest Stuff’
The toughest problem companies face in the M&A process continues to be merging two cultures, according to the Towers Perrin study. Giampietro stresses that HR needs to make a “meaningful assessment” of each company’s culture. However, “you don’t [assess] culture as a separate thing,” he says. Culture permeates everything, so you need to be aware of it and integrate it into the M&A process, Giampietro says.
“Culture is a five-to-10-year, very delicate change,” agrees Susan Bowick, who retired in 2004 as executive vice president of HR and workforce development at Hewlett-Packard (HP). “The soft stuff is the hardest stuff.”
When company cultures merge, both sides may find that they don’t even share a common understanding of business parlance. As a result, HR should begin looking for language differences right from the pre-deal stage as a way of anticipating cultural differences.
“It’s critical to get people speaking the same language,” says Bowick, who led HR through HP’s merger with Compaq Computer Corp. in 2001. (See “Orchestrating a Mega-Merger”.) “For instance, we discovered that people at both companies were using the term ‘customer solution,’ but it meant different things to each of them. HR was the first to identify the disconnects and get them on the table,” she says.
Jan Capps, vice president of HR for North America at Syngenta, a global agribusiness with headquarters in Basil, Switzerland, agrees that culture and language are key issues in M&As. “I’ve found that you really have to get behind the language issue,” she says. “Language causes problems throughout the merger process, both on the ‘soft’ side and on the harder side.”
On the “soft” side, Capps cites a merger in which two companies said they valued empowerment. But because each company defined the word differently, “each thought it had a culture of empowerment—and each thought the other did not.”
On the “hard” side, one company may have a 5 percent incentive target but routinely pay at 3 percent, says Capps. Another company may set a target of 5 percent but pay anywhere from 0 percent to 10 percent. “Both talk about the same target, but they mean very different things,” she says.
SWAT Team or Petri Dish
Companies take a variety of approaches to integrating cultures, depending on the reason for the acquisition. HR must anticipate not only how the other company’s culture differs from its own, but also how it plans to execute the cultural integration.
Some companies take a “SWAT team” approach, says Aaron Katz, assistant vice president for legal affairs at Sysco Systems. “They go in on day one and say, ‘Now you’re [Company X].’ ” Others focus on blending the best elements from each company, while some organizations take a semiautonomous approach with the acquired company.
At Sysco, a food service marketing and distribution company headquartered in Houston, Katz says they haven’t had a serious culture problem with acquired companies because “we are able to preserve the acquired company’s culture and then slowly ‘Syscometize’ them if necessary.”
Steve Fitzgerald, director of organizational learning and effectiveness at Sto- rageTek, a data storage and security firm based in Louisville, Colo., says the choice of integration method depends on the reason for acquisition. If you are buying a potential competitor, immediate cultural immersion makes sense. On the other hand, he says, if you are buying a company because it fills a hole in your organization’s capabilities, “you may want to keep the acquired company semiautonomous” and let it continue to do what it does best. “No one size fits all.”
Steve Brinch, vice president of HR for information and technology services at Lockheed Martin Corp. in Bethesda, Md., says he conducts a culture assessment of target companies. However, since the defense aeronautics and systems integration company looks at other federal contractors when targeting potential acquisitions, “most of our acquisitions don’t have a vastly different culture,” says Brinch.
Bowick says the SWAT team approach wouldn’t have worked for HP. “[Compaq’s] mergers with Digital [Equipment Co.] and Tandem [Corp.] were not complete when the HP merger began, so we really had to work with four companies, not just two.” It didn’t make sense, she says, to say, “This is HP; take it or leave it.”
Sysco’s executive vice president and chief administrative officer, Ken Carrig, believes a bad cultural fit may be the result of a bad strategic fit. Sometimes, he says, “the organization was broken when it was bought, and it couldn’t be fixed. I think that often at companies where acquisitions don’t work, it’s because people don’t read between the lines.” In those cases, Carrig believes, “the business had more problems than were initially presumed.”
Carrig says Sysco is a very entrepreneurial company, which has an effect on cultural integration. “It’s like a $30 billion company that has 50 $600 million companies,” he says. “We hold new operating centers responsible for results, but we try not to tell them how to fix problems. I think this flexibility is one reason why Sysco has been so successful in the integration of acquisitions.”
At Silicon Valley giant Cisco Systems in San Jose, Calif., the culture grows and evolves over time—and as new companies are integrated, says Mike LaBianca, an HR vice president in charge of acquisitions, compensation, benefits and employee relations. He says 20 percent to 25 percent of Cisco’s senior leaders come from acquisitions, and “that’s a retention selling point. Our culture is a petri dish that allows good ideas to grow.”
Cisco, too, is an entrepreneurial company that “goes after talented people with brilliant ideas,” says LaBianca, “and that requires an analysis of the ‘DNA’ of the people being acquired to see if they are good fits.” The company culture embraces new people and new ideas, he says.
Getting Managers Involved
Capps has become very well versed in the ins and outs of the M&A process during a 26-year career that began at Ciba-Geigy. Several mergers later, at Novartis, she worked on the mega-merger of Novartis and Zenaca in 2000 that created Syngenta. She says the company has a “tremendous track record of success [in M&As] as measured by the stock market and employee surveys.”
The corporate VP of HR for the entire company, who is based in Basil, Switzerland, is involved in the early stages of M&A planning, and Capps comes in after a deal is announced. Her No. 1 issue, she says, is people placement—“who goes and who stays. Their work suffers until that is settled.”
Capps reminds hiring managers that as they work on designing the new organizational chart and getting people placed, “their alliance to their people can be blinding.” She stresses that managers “must be sure the selection process is based on skills, not relationships.”
Capps believes strongly that line managers are the key to success. “Everybody’s always concerned about getting the CEO in front of the organization” after a deal is announced, she says. But it’s equally important, if not more so, says Capps, to give line managers the information they need to talk to employees about the upcoming changes. “Those are the people employees will really trust,” she says. “They will be more themselves in front of their line managers than they will be with the top senior management.”
Give line managers the tools they need, maintains Capps, to help them solve the problems. “Business gets done at the department level,” she says. “You build culture one person at a time.”
On Your Mark, HR
As the mergers and acquisitions market heats up, HR professionals need to be sure they are ready. “When it hits [a merger or acquisition deal], you don’t have time to ‘skill up,’ ” says Capps. “If you weren’t already working hand in hand with the CEO, you can’t expect to be brought in early on a merger.”
She stresses that HR must be “physically fit as a function. The CEO must have confidence in and respect for the [HR] function.”
Bowick agrees. If HR is to be prepared to participate early on, she says, it must build a body of expertise inside the HR function. “HR also must understand the business, not just comp and benefits.”
StorageTek’s Fitzgerald also recognizes the importance of proactively planning ahead. “If you are in the strategic HR function, you should be able to identify that M&As may be ahead. You’re not going to know way in advance, because of Sarbanes-Oxley requirements, so let’s be ready,” he says.
Fitzgerald and his team documented a very detailed (hundreds of pages), step-by-step mergers and acquisitions checklist for the company several years ago and had it ready long before it was needed, he says. “The templates are all on my laptop. I can pick it up and go and be ready immediately when needed,” he says. “HR’s got to be involved in talking about strategy,” emphasizes Fitzgerald. “It’s a ‘we’ thing, not ‘us and them.’ ”
That kind of preparation can help other functions become more comfortable seeking HR’s input on potential deals. For example, at Cisco, the acquisitions team and the business development team often call HR for its input when they are considering a target company, says LaBianca.
But LaBianca never loses sight of the fact that HR’s success in guiding mergers requires a focus on employees. “We’ve been very successful with acquisitions because HR is very open with employees,” he says. “That’s our key secret ingredient—the employee comes first.”
The HR community is doing a better job today of proving its value, believes Pierson, but he urges HR professionals to continue to step forward and demonstrate HR’s readiness and ability to participate as a full partner in all stages of the M&A process. “Don’t sit around and wait for the invitation,” because it won’t come, he says.
Above all, don’t let management forget: “It’s the people, stupid!”
Ann Pomeroy is senior writer for HR Magazine.