A few years back, one of the leading engineering companies of the country was besieged. The takeover bid (unsuccessful, as it turned out later) was made by an ambitious and financially astute textile giant. The chairman was replaced, and new nominees moved into the boardroom. While the business world buzzed with the implications of the takeover, people within the acquired company were busy grappling with an unfamiliar sense of insecurity. For years they had seen themselves as professionals with a reputation for competence and stability. Now to many, that seemed a thing of past. The new management, they anticipated, will naturally change the organisational priorities, and therefore also, their professional identity. One of the senior executives of this company put it despondently, "Well, earlier we were professionals first, and businessmen later. Now, I believe it will be the other way round."

It is, in fact, only logical that the impact of any merger or takeover should get translated into human terms down the line. Mergers and acquisitions bring forth the problems of cultural integration of two entirely disparate organisations, each with its own unique history, systems, and structures. Given the growth in the numbers of M&As, this issue has acquired an even greater managerial importance. Between 1988 and 1992, the number of M&As in India grew from 15 to 30. By 1994, this number had increased to 150. And in 1996, an estimated almost 450 mergers and acquisitions took place.

 

The Culture Shock

Corporate mergers and acquisitions, almost universally accompany significant changes in the managerial structure and systems: key personnel are replaced; new, and more stringent, reporting and control procedures come into force; and, major decisions no longer remain within the activity-domain of the acquired firm. Such changes, while inevitable, also carry a subtle implication that the relationship between the acquiring and the acquired organisation is that of the victor and the vanquished. Even the terms used for describing takeovers - e.g., sharks, targets, bidding war, massacre, white knight, etc. - are based on the metaphor of a battle, in which one party wins, while the other has to lose.

Of course, not all M&As are hostile. But even the friendliest amongst them (such as bailing out the company from a financial crisis, or a merger of two divisions of the same company) have a destabilising effect on the employees. A transfer of ownership, even at its minimum, calls for changes in the performance criteria, reporting procedures and control mechanisms. Even though such changes are based on sound business logic, they are usually imposed, and, hence, alienate people. "We're no longer the same well-knit group," one senior manager of an acquired company grudgingly commented. "Everyone is now suspicious of the others. Worse, everybody feels insecure and helpless, like a commodity which has changed hands."

The feelings which mergers and takeovers arouse among the employees may not be expressed openly, but they are very much evident in a number of common post-M&A symptoms, e.g., increase in executive turnover, breakdown of lines of communication and control, general apathy or resistance among executive to implement changes, etc.

It is also important to appreciate that the human fallouts of M&A are, by no means, merely accidental by-products of an otherwise straight forward business strategy. Rather, they are embedded in the very logic of mergers and acquisitions. M&As are based on the larger partner's (or acquiring company's) belief that it can utilise the capital in the target company more efficiently than is being done currently. To achieve this hoped for efficiency, it is but natural for the acquiring company to redesign the work systems and reporting procedures of the target company. These changes, in turn, interfere with the existing cultural equilibrium, and give rise to many potentially dysfunctional human issues.

 

The Human Fallouts

Let us look at some of the most common human issues which are part and parcel of the M&A situation:

1. Powerlessness: One of the most common feelings generated by M&As is that of a loss of self-determination. The post-M&A phase is usually characterised by changes in the strategic stance (and therefore, in the operating systems) of the acquired company. For instance, a merger or acquisition to achieve backward integration makes it a logical necessity for the target company to lose its market-orientation. It must become a mere feeder unit, and must plan and produce to suit the priorities of the acquiring company. Even when the new management does not change the internal operating controls and coordination systems (e.g., in conglomerate takeovers), the targets and budgets are still decided by the holding company.

For instance, when HLL acquired Tomco (according to the company, it was a merger, not takeover!), even though it did not implement new and drastic measures, it did change certain existing systems and practices. It shifted the production from Sewree plant to facilities at Chiplun, Ghaziabad and Kerala. The product-line of Tomco's Madras factory was changed to producing hair oil, and many product-lines were outsourced. In addition, new systems were brought in to monitor and reduce raw material and inventory costs. At each of the Tomco factories, one Lever production personnel was posted as an "advisor" and so on.

Such changed conditions have the potential for generating a sense of powerlessness among the employees, and often kill the initiative and entrepreneurial spirit in the acquired company. As one researcher noted: "By and large, mergers and acquisitions represent an assertion of property rights relative to human rights."

2. Alienation: Another common offshoot of M&As is a feeling of alienation among the employees of the acquired company. People anchor their identity around the relationships which they build with their organisation, its culture and people. When two companies come together through a merger or acquisition, these relationships suddenly undergo a dramatic change.

At the most obvious level, in the post-M&A period there are changes in the company's name, market-strategies, and control systems. Besides these, employees also have to contend with many other "minor" changes, which make their daily experience of working strange and alien. For instance, colleagues of many years either leave or are transferred to other parts of the organisation, or former powerful bosses suddenly lose their power and status in the company. For instance, after the merger of Warner Hindustan and Parke Davis in 1988, almost 30 top executives left within a period of two years. Similarly, in the HLL-Tomco merger, about 55 key Tomco executives left the company within a year or so. Since often the executives who leave are also the ones with whom people identify, for the remaining employees, their departure signifies both a psychological loss as well as a signal of uncertainty of one's own career prospects.

Similarly, reporting relationships and inter-role linkages no longer remain the same, and the work-priorities undergo a change. Very often, M&As also accompany reduction in the perks for the executives, while for the labour, there are changes in the bargaining rights and contracts, etc. The consequent demands for personal and professional adjustment take a heavy psychological toll on the employees.

3. Insecurity: Related to the feeling of alienation is the sense of insecurity. For the employees the news of takeover (even when it is termed as a "merger" by the new management) implies many things. The perceptions range from having been betrayed by the previous management to the possibilities of large-scale retrenchment. Being taken over is seen as proof of the ineffectiveness of the previous ways of working. For those managers who chose to remain with the company, the takeover is also felt as one's own inadequacy and lack of capability to manage. This feeling is further compounded by the fact that, following the takeover, many talented and committed executives either leave the organisation or are removed by the new management.

For instance, when Tata Tea took over the Hyderabad-based Asian Coffee Limited in 1994, it sent a team of 5 executives to "manage" the takeover. In the initial phase of takeover, many executives were sacked, and new systems were brought in place to check conformance to standards. Targets for each department were defined and monitored, employees were seconded to new functions from their existing departments, a new accounting and control system was implemented, and so on. Even though some of the changes were favourable to the employees (such as upward revision of pay scales, training, and computerisation of operations), it took almost two years for the new culture to stabilise.

4. Loss of Energy: The uncertainty which follows immediately after a merger or takeover has one other predictable consequence, namely, loss of human energy. This is the time when confusions abound. Significant changes in the organisational structure and personnel lead to a breakdown of established communication links. People are not sure what the new priorities of the company would be, whether certain procedures are still valid or not, to whom one is supposed to report to, or even whether or not one should use the old company letterheads. Employees typically deal with these anxieties by adopting a stance of "wait and see". Very little initiative is taken to start any new program or project. They become passive and wait to be told. Studies have shown that such symptoms persist even up to three years after the restructuring is achieved and the organisation has supposedly "stabilised".

 

The Strategies

It is paradoxical that while these human factors significantly determine the success or failure of any M&A, the merger\ acquisition planning pays scant attention to them. In fact, more often than not, these issues become even more aggravated because the acquiring company either neglects them or fails to comprehend their importance. Management of the acquiring company often fall into the trap of confusing their financial/legal victory as an evidence of their total grasp over the affairs of the target company. Or they assume that their successful acquisition will bring them spontaneous cooperation from the employees of the acquired company. The fact that almost always these assumptions prove to be wrong is the most important reason for the acquiring company to understand, plan for and manage the human issues involved in the takeover move. Let us look at some of the critical options which must be exercised to minimise the takeover traumas:

* Develop an Integration Strategy:

Typically, the focus of pre-M&A planning is on financial and legal issues. Very little attention is given to the problems of transition, e.g., staffing decisions, organisational design, management of change, etc., which emerge once the takeover is completed. For a smooth and synergistic integration, it is essential for the acquiring company to consider and plan for managing these issues at the time of the pre-takeover planning itself.

For instance, one of the reasons for the dismal performance of the Warner Hindustan-Parke Davis merger was the absence of a well defined strategy to merge the two cultures. Both were well-established companies with strong, but different cultures: While Parke Davis was a people-driven company with a participative culture, Warner Hindustan was a more task-focused and formal organisation. Even though the merger focused on rationalising the facilities, restructuring and allocation of designations, the cultural and procedural issues were left unattended. The differences in the cultural orientations and operating rules created many operational bottlenecks and resulted in lowering of performance.

* Prepare People for the Cultural Transition:

A successful takeover, above all, calls for a synthesis of two dissimilar cultures. The acquiring company, for example, may have an entrepreneurial and risk-taking style of functioning, while the target company may have an extreme bureaucratic and procedural orientation. Such cultural collisions have an unsettling impact on employees of both the organisations.

It is necessary, therefore, to not only familiarise the new management team about these cultural differences, but also to help it develop relevant skills for managing through them. Similarly, in the post-takeover phase, joint workshops for the key and influential executives of both the organisations can be of immense help in sharing mutual perceptions and evolving a common understanding of the problems of transition.

For instance, when Godrej Soaps took over Tranelektra Domestic Products, it managed the transition with a clear focus on enabling the employees to manage the change. Several rounds of meetings were held with the managers of Transelektra to alleviate their anxieties. In addition, many middle-level managers were sent to various Godrej sites for training so that they could have a first-hand experience of the kind of systems and practices which were likely to be brought in Transelektra. Later, these managers were made the change agents to train the Transelektra people, which also helped in smooth transition.

 

* Develop and Implement a Communication Plan:

Availability of accurate and reliable information has an important role in managing the changes which follow the takeover. The acquiring organisation, therefore, must make a consciously planned and systematic effort at informing people about its plans, policies, corporate values, etc. It is also necessary to regularly update people regarding the changes occurring in the organisation (its strategies, structure, procedures, etc.) through an extensive use of a variety of channels of communication, e.g., meetings, circulars, house journals, etc.

For instance, when Esab India Ltd. took over the welding division of Indian Oxygen Ltd. in 1991, within a year it found tremendous cultural frictions between the new and the old staff. The three newly acquired factories were operating as islands, with little integration with rest of the organisation. Things started changing, when in 1993, the company created channels of communication between the old and the new divisions. Day-long fortnightly meetings were organised for different levels of management. These meetings would start with an overview of the company's financial and marketing issues given by the managing director, and would be followed by discussions on specific operational problems.

It is important to note that the aim of these communication efforts is not to tell the employees only about the positive side of the changes; this may, in fact, create more misinformation, and, in the long run, harm the credibility of the new management. Nor it is necessary for the management to wait till they can provide the "final" picture; besides the fact that people do not really expect stability to arrive very soon after the takeover, the delay in receiving information would confirm their worst fears, and aggravate their anxieties.

 

* Generate Involvement and Participation:

The introduction of the new norms, culture and systems have the potential of alienating the employees of the target organisation, and thereby, decreasing their commitment to the change process. It is worthwhile, therefore, to involve the employees, particularly the key personnel, in the formulation of the action plans, system building and execution of policies. As we noted in the example of Esab India earlier, inviting participation of employees helped improving the situation. Similarly, when RPG took over Harrison Malayalam, the new reporting and control systems were worked out jointly by the executives of both companies.

As a matter of fact, the executives of the target organisation, due to their native experience, can provide better insights and resources for a smooth transition. Moreover, such participative activities also provide opportunity for interaction between the executives of the two companies. This helps paving way for a healthy assimilation of the two cultures.

 

* Strengthen HRD Role:

The human problems associated with the takeovers require humane handling. A smooth transition means that people perceive the change as desirable, and not as threatening. The changes which follow a M&A, for example, create career dilemmas for people, change the role alignment between people and departments, make demands for adjustments to new routines and culture. Helping people to cope with these changes necessitates strengthening the role of HRD in M&A planning and implementation. For instance, in the HLL-Tomco merger, the integration team included not only marketing and production executives, but also one HRD personnel. Similarly, at the outset of RPG's takeover of Harrison Malayalam, a new department of HRD created.

There are many ways in which HRD interventions can make people comfortable with these changes. Career counselling, stress reduction workshops, inter-role negotiations, training for developing new skills and competencies, etc., can do much to empower people for managing the transition.

 

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