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Paper on Merger and Acquisition

MBA Paper

For any company the human capital or employees are the greatest asset, challenge and liability. This is even truer in the context of an acquisition or merger, for adding new technology to complement the existing one and gain a larger market share. That brings us to the acquisition of Z Inc. by Corporation.

Corporation, a global leader in wired and wireless broadband communications semiconductors, acquired Z Inc., a privately-held, Santa Clara-based provider of semiconductor and software solutions for Bluetooth® wireless headset products in March, 2005. The acquisition of Z significantly accelerated Corporation's time to market and competitive position in the wireless headset market segment, which In-Stat/MDR estimated would lead to the growth of nearly 90 million units per year by 2008.

When Z was acquired by Corporation in March, 2005, it had fifty employees. Corporation paid thirty two million for the acquisition. As Z was an engineering startup, it only had a part time Human Resource person who was laid off during the acquisition. From the Human Resource perspective, the merger and acquisition was handled by the Human Resources of Corporation. Here, they took a passive role in the merger and acquisition, as far as the Z employees were concerned. They did not welcome or interact directly with the engineers and so the engineers did not have a positive viewpoint about the Human Resources.

After the merger, the new offer letters and benefits were explained by the Z managers to their reportees. The HR never showed their face. In my opinion, the Corporation Human Resources should have taken a more proactive approach in the integration of the two companies. There are many reasons for that, the first and foremost being the main reason behind the merger. Z was bought to complement Corporation‘s technology. So, it wanted to keep all the engineers. In order to retain them, the HR needed to make them feel welcome and should have been the point of contact regarding making them feel welcome, communicating regularly regarding compensation, benefits and other HR resources questions. Also, they should have done some team building events in the beginning of the integration to minimize the feeling of uncertainty among the Z engineers.

The only retention step which the Corporation Human Resources took was to institute a long term incentive (LTI) clause for two years, in the offer letters to the Z employees. The agreement also stated that once the Z employees sign the new offer letter, they would have to pay a huge fine if they left the Corporation within two years. This had an adverse impact of the architects and senior engineers who refused to sign the clause and left immediately. This was a huge setback for Corporation as these were the people who had designed the technology for which it had paid $32 million.

I interviewed an engineer (name changed for confidentiality) who was part of the merger with Corporation. I have stated his replies verbatim for this paper.
Anita: When you heard about the merger, how did you feel as an employee?
John Doe: Z was doing well at one time. By the end of 2004, it was in a bad financial situation which we weren’t aware of. We were from the beginning, thinking that it will become IPO. There were rumors in early 2005 that the company might get acquired. We were informed by the CEO that he was talking to some prospective companies for getting acquired. Half the employees liked the idea whereas the other half wanted the company to go IPO. They thought that their technology was so good, it would make them millionaires. I was happy about the merger since I was aware of the dire financial condition. We were not getting the venture capital we needed to survive and thrive. But, when we heard about the merger, apart from the fact that we kept our jobs, we were apprehensive that we will lose our individuality and personal touch. Corporation was a giant compared to the fifty people company we were a part of.
Anita: How were you and your coworkers affected?
John Doe: When we were bought over by Corporation, we were happy about the stock options of an established company and made some money because of the merger. But we never felt valued enough during or after the merger. We almost felt like step children. The work environment changed. We had to follow more regulations, and there was more bureaucracy. We lost the personal touch and it was more difficult to blend in with the corporate culture. Corporation employees always had the upper hand and most of the promotion and advancement opportunities went to them. Corporation was asking all senior Z employees to sign a two year agreement. This resulted in many senior people leaving immediately after the merger. These were the core technology developers. Because of this, Corporation teams were able to force Z teams to use their methodologies and thus get an upper hand.
Anita: What was the effect on productivity, loyalty and morale?
John Doe: Initially the productivity went up, and later went down. We tried to prove initially how good we were technically. Some of wanted to do outstanding work to compensate the loss of the core team. However, loyalty was adversely affected later, as we lost the personal touch of a smaller company and it took a long time to integrate with Corporation team members. After the initial euphoria, we were not that motivated to perform as we became a small wheel in a big factory. We handled a very small piece and were not aware of the big picture. Morale kept on going down.

The human resources took a backseat. The engineers were not happy with the ways things were handled. They were agnostic towards Human Resources. They did not feel that the Human resources was very effective in the merger. The only time they interacted with the HR was in the hallway. Even the new offer letter was given by their manager. Benefits and compensation were explained by the manager. The HR did not come to welcome us. So, I did not feel that the Human Resources added any value to our company or the merger & acquisition.

Being a Human Resource professional who takes pride in the profession, I was aghast to hear such a dismal opinion about human resources. Though it’s unfortunate, many IT professionals in different IT companies such as Cisco Systems and Sun Micro-systems think of the Human resources as a function they can do without. These reasons made me reflect on the reason behind this viewpoint in IT companies and made me realize that we need to do something very effectively and proactively to make the IT professionals realize the true importance of Human resources and give the credit it deserves in merger and acquisitions and other operational functions.

The main factors in a merger and acquisition include the following:
• Initial Plan
• Due Diligence
• Acquisition
In a merger and acquisition, the human resource should be involved from the beginning, in order to be an effective facilitator of the merger and acquisition. If not at the initial planning stage, they should definitely get involved at the due diligence stage. This can help the HR have a more effective and positive impact than if it gets involved only in the acquisition phase. If the HR leaders have the experience and the foresight, they can help the integration be smooth with less glitch. Before a merger is finalized, the about-to-be acquired company's books, policies, practices, and past actions are scrutinized. The acquiring company's HR manager or managers have a number of areas to study and analyze, and from that examination determine a course of action. It is only through such an examination that one can plan and hope for as smooth a transition as possible under less-than-ideal circumstances. (Ethan A. Winning, HR's Role in Mergers and Acquisitions).

It is very important for the HR to get involved either before or in the due diligence stage as this stage includes due diligence in areas regarding job descriptions, compensation and benefits, payroll, worker’s compensation, sick leave and other vacation accrual and performance. The job descriptions will aid the HR in deciding which employees to keep and which to let go. Compensation and benefits will give them a clear picture of how similar or different they are in comparison to the company which is acquiring. For example, in the case of the acquisition of Z, the Corporation HR would get an idea about the compensation and benefits of Z and how similar or different they are. In most of the cases since the bigger and more stable companies end up acquiring smaller companies, they have better compensation and benefits.

Worker’s compensation, sick leave and other vacation accruals are a sub part of the benefits and will give the acquirer an idea of how much payment they are liable for, in case they have to lay off some employees from the acquired company. Performance measurements and evaluations if available, will give the HR an idea about on the job performance of various employees, which areas they are strong and weak in, whether they are an over or an under performer. Once the HR has done this due diligence, they can share the information with their management, giving them a better idea about the cost of the people in the company they are acquiring.

In order to make the merger and acquisition have the maximum Return on Investment (ROI), it is very important to make it as smooth as possible, whether it’s a hostile takeover (as in the case of Oracle and PeopleSoft), or it’s a marriage made in heaven( as in the case of Amazon and Zappos). Terminations in some aspect are a part of almost every merger. It is very important for HR to play a major role to do the maximum damage control. Another major aspect is deciding whom to retain to get the maximum ROI from the merger. Knowing the past performance of employees is another major factor which will help in the right decision making in relation to who are the top performers and who will impact the bottom line positively.

Now that we have discussed the different aspects of mergers and acquisitions HR should participate in to be an effective partner and make the transition smooth, I will like to share a conversation with a HR professional who was a transition consultant for MobileAria which was acquired by Wireless Matrix in July 2006 for 11.2 million. (http://lbs.gpsworld.com/gpslbs/article/articleDetail.jsp?id=365192).

Since MobileArea was already in bankruptcy court and had been waiting for a buyer for a few months, the general environment at work was one of stress, despair and uncertainty. The HR Manager took a proactive approach and facilitated weekly meetings informing the employees the latest of what was happening and kept them from totally giving in to despair. At that time, the market was not good enough for employees to find alternative employment immediately. Also, the employees were paid above market. So, even if they found similar positions, the pay would be much lower. This and the transparency and constant communication from HR kept them at their current position till an acquisition took place. Once Wireless Matrix won the acquisition bid, their HR contacted these employees in a very sympathetic manner and promised them bonuses if they stayed till the integration took place. The time frame was approximately six months. Because of the HR sympathy and the general impression that they will be taken care of, many people stayed. But, there was an aura of uncertainty and employees found it difficult to concentrate and work much as they did not know who will remain and who will be let go once the merger was finalized. Constant communication by Wireless Matrix HR was the silver lining for them. Once the merger was finalized, the HR gave them a welcome letter and orientation package and this made them have positive viewpoint of the HR.

The senior management was let go from Mobile Area. Still the HR kept the acquired company employees happy by stressing on the multitude of opportunities they had being a part of a big and stable company. In this scenario, HR was able to gain trust and respect by reaching out and being sympathetic to these employees.
The two examples of two mergers mentioned in this paper give very different viewpoint about HR’s role in merger and acquisitions in two different scenarios. This leads to the conclusion that in order to gain trust and confidence, the HR has to take a proactive approach, get actively involved in the different stages, do due diligence and reach out to the employees of the acquired company and make them feel welcome and comfortable. That will serve the purpose of making the transition smooth and get the maximum ROI from the merger and acquisition.















References:
Krishnan, A. (2007, January 28). Author sees a bigger role for human resources. News & Observer, The (Raleigh, NC), Retrieved May 16, 2009, from Newspaper Source database.
N.A., N. (n.d.). Employees of West Virginia-Based Bank Laid Off as Merger Is Completed. Charleston Gazette, The (WV), Retrieved May 17, 2009, from Newspaper Source database.
http://lbs.gpsworld.com/gpslbs/article/articleDetail.jsp?id=365192
Management & HR Articles, Ethan A winning Associates Inc., retrieved May 15, 2009, from www.ewin.com

posted by HappinessFactors @ 7:30 PM