Communication challenges

In 2010, PWC conducted a survey on companies that had completed mergers and acquisitions.
Communication challenges came out as one of the top factors that caused company synergies to
fail. Communicating with employees, empowering them and creating a culture for them to thrive
are all fundamental parts to integration. When mergers and acquisitions occur, employees and
management are generally left in the dark. Fear and lack of answers deter top management from
providing the information that employees need to redirect their actions in the merged company.
Rumors fill mystery and vacuums, and employees are left asking questions like: “Why is the
organisation merging?”; “How will the merger affect my work?”; and “What support will I
receive during the merging process?” This lack of communication creates distrust and
uncertainty in the workplace, leading to lower employee engagement levels. Communicating is a
skill that should come naturally, however it can be the hardest skill to learn. When managing any
key project, such as mergers and acquisitions, it‟s important to keep the employees from both
parties informed at all times. Inform the employees of the progress of the integration through
different communication channels (emails, intranet, etc). Being aware of the questions, concerns
and fears that employees might have, and, proactively communicating answers, will build
transparency and trust, and lead to a successful merger.

BenQ announced a merger with Siemens without warning in 2005. The products the new merged
company were supposed to produce would be a perfect amalgamation of Asian perceptual design
and German rational craft. However, the obstacles of communications and cultural differences
between West and East, proved to be a failure, as the company ended up losing 800 million
euros.

BenQ had no experience in the field of mobile business and simply not competent enough to
handle business internationally. Handing over Siemans to such an enterprise made the employees
of both companies disappointed. The merger was deemed an economic disaster (annual
shareholders‟ meeting of Siemens, 2007). Employees at the newly merged company had a
feeling of betrayal and they felt that they could never inculcate trust in their minds for one
another.

Had employees known about such a decision well in advance, they would have been able to
mentally prepare for such a situation. BenQ should have established an effective communication
plan before the deal had been concluded, keeping in mind the differences between the two
corporate cultures.

From the beginning, there were reportedly conflicts between German management and the
Taipei Headquarters on the process of development of a new products. During the post
acquisition stage, BenQ implemented a series of strategic changes, and expected their German
counterparts to automatically understand. They assumed that the employees would cooperate
with the new implementations, but with big disruptions going on resulted in confusion and
created misunderstanding and mass distrust. As soon as BenQ board felt their German
counterparts were not adhering to their orders, they would subsequently take financial support
from Siemens. This was was considered harsh and insensitive in Germany, but In Taiwan,
however, this would have been considered a rational decision.
This BenQ study, shows that if an effective communication plan had been implemented well in
advance, keeping in mind the difference in the corporate cultures, the acquisition would have
probably gone a lot smoother. Lacking such a plan leads to employees feeling betrayed,
unappreciated and unmotivated to work. Eventually this resulted in a high rate of employee
turnover.

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feedback with Impraise.

Employee retention challenges

During mergers and acquisitions, employee retention can be a challenge, as many believe it can
be a threat. Inherently, many mergers and acquisitions (M&As) deals have retention issues,
which result from negative attitudes felt by employees. This can include uncertainty about the
future of the organization's direction, job security, perceptions of lack of leadership credibility
and feelings of confusion due to lack of communication. In essence, employees often lose trust in
their organisation and feel betrayed by their leadership. During this delicate process, it's essential
to keep employee turnover low because business continuity is key to realizing the benefits of the
merger. there can be also large financial implications from the cost of hiring new employees.
What's more, employee turnover can result in loss of knowledge and customer relationships.

Generally, employees can have several reactions regarding the M&A. A merger brings several
organisational changes, which can either lead to stress, anxiety, role conflict or to the feeling of
not being treated fairly. These feelings often have implications for the employees and their future
at the organisation. Companies must proactively work to maintain or regain employee trust to
keep them and the intellectual talent they represent. Reduction and replacement strategies play a
crucial role for the integration of a M&A. Its up to management to continuously communicate
with employees to create transparency and address any concerns they may have.

PepsiCo acquired Kentucky Fried Chicken in the late 1980s. The pressure the acquisition put on
KFC‟s management, filtered down the ranks to the rest of employees. Managers and employees
alike were anxious about the future and their prospects for advancement under the new
ownership. According to a Harvard Business Review article, most KFC managers thought the the
new holding company, PepsiCo regarded them as dispensable. A large portion of KFC‟s top
management ended up leaving soon after the acquisition and the remainder felt a sense of unease
as the company culture shifted.

The loss of employees during the acquisition process will inevitably affects daily business
activities. This has a knock on effect down the hierarchical line and further demoralizes a already
compromised workforce. Companies contemplating an acquisition should focus on retaining key
executives for the long haul. Failing to keep a critical mass of the old guard may set off a domino
effect the organization will be feeling for many years to come.

Cultural Challenges
Mergers and acquisitions usually occur because financial and business rationale add up, but fail
to realise the cultural implications that may occur. Various studies conducted on the outcome of
M&A‟s show that 30% of them fail within three years, the majority due to the disparities in
organizational culture. During the process, it's easy to treat a prospective transaction as purely
mechanical and scientific process. However, the people aspect of any deal is always critical.
Culture fits can provide the assurance that combining two companies makes sense.

Culture is the long standing implicitly shared values, beliefs and assumptions that influence the
behaviour, attitudes and meaning in an organisation. It‟s difficult for a merged company to carry
the culture of the previous organisations, because employees seldom replace their underlying
values and beliefs in the long run. Generally, when mergers and acquisitions occur, they bring
shifts in management practices and strategies, which can have negative implications on the
people at the organisation. A sudden shift in these practices, brings disruption and unease to a
company.

Pre merger due diligence will weed out all the measurable processes within an organisation,
however it‟s vital to conduct culture surveys to determine the norms within both organisations.
Cultural influences have the potential to be broad and far reaching. For example decision making
at one company can be polar opposites to another, the leadership style could be dictatorial or
consultative and the way people work could be formal or based on informal relationships.

When Daimler announced that it would be merging with Chrysler it was called a merger of
equals, as both operated in the same industry and effectively produced the same product.
However, Daimler had a culture of conservatism, efficiencies and playing it „safe‟. Chrysler was
daring, diverse and creative. Months following the merger, it was deemed a fiasco. Different
company cultures had both Daimler and Chrysler at war. Both companies were fundamentally
different on every level, including formality, philosophies and operating styles. German culture
took over the once laid back culture at Chrysler. Employee satisfaction dropped to all time lows
and by 2000 the company was making major losses.

Apart from the differences in corporate cultures, there were also the issues of trust. Employees
on both sides felt reluctant to work with each other. Following the merger, huge bulks of
Chrysler‟s key executives either resigned or were replaced by their German counterparts. These
two factors resulted in conflicting orders and goals in different departments. American and
German managers had different values, which drove and directed their work. The newly merged
company was heading in opposing directions from the beginning. Daimler imposed a
hierarchical approach, on which the new company should work. Such a situation did not inspire
chrysler employees and raised some serious communication concerns.

The company, facing major setbacks, moved to replace the American CEO, James P Holden,
with Dieter Zetsche from Germany. Shortly after Zetsche's appointment, he began laying off
employees, in order to mitigate company wide loses. By the end of 2000, Daimlerchrysler made
a third quarter loss of 512 million dollars and its shared value slipped below $40 dollar a share
(from a high of $108 in early 1999). The synergies that were expected, never came to fruition,
and the merger simply drove both companies into chaos. By 2007, Daimler sold Chrysler for 6
billion dollars.
Solutions

For whatever reason mergers and acquisitions occur, it's vital that the decision makers take the
intangible factors into account. It‟s difficult to quantify the human side to mergers, and they are
often overlooked. Typically, CEOs would overlook this aspect because of the notion of being
able to rehire employees and managers. However, in the long term this is detrimental to the
outcome of the merged organisation. In order for CEOs, executives and managers to fully
understand the extent to which the merger will affect the culture, they must develop a culture
strategy. Impraise, has developed a product which measures the overall cultural values, habits
and skills of the organisation. Through continuous feedback, managers will be able to understand
their employees concerns and issues before they are a threat to the company in the long run. By
implementing such a strategy, the merging company can understand where the cultural
differences are, engage with employees throughout the merging period and carry out a successful
culture shift.

Effective Management Of Change During Merger And Acquisition

Symbiosis Institute of Management Studies Annual Research Conference (SIMSARC13)

By Sugandh Kansal, Arti Chandani

Abstract

The on-going dance of merger and acquisition happening every week is hard to miss. But it has
been found that most mergers and acquisition fail because of poor handling of change
management. Change is the only thing that will never change so let‟s learn to adopt by change
management. This paper will analyse all the factors that lead to change. The major reasons that
lead to change are system dynamics, structure-focused changed, person-focused change, and
profitability issues. The resistance to change can be attributed to the lack of communication, no
clear vision, no proper reward system, confusion and frustration, force of habit, fear of unknown,
fear of insecurity, loss of competency and lack of support.

It presents different model that can be used for change management and different theories that
can be used to handle change during M&A. It also highlights the strategies this can be followed
by the leaders of the organization: Integration plan, Employee Involvement, Clear Vision,
Customer Focus, HR structuring and Downsizing. The factors discussed are based on the
empirical findings, case study and earlier papers. To, support that the change can be managed
effectively and efficiently, the paper shows as to how change was managed in the merger of
ICICI bank and Bank of Madura.
1. Introduction

In mergers, two or more companies engage in some negotiation which ultimately leads to
transaction. Acquisition also involves two or more companies but in acquisition the bigger
company swallows the smaller company. So merger and acquisition is the process of integrating
two or more companies with different values, cultures and forces into one cohesive unit. From an
economic point of view, there are 2 types of mergers: Horizontal mergers and Vertical mergers.
Horizontal mergers involve companies with similar area of work e.g., Chevron and Texaco.
Vertical mergers involve companies with diverse area of work e.g. AOL and Time Warner.

The merger is not only seen from the financial perspectives but it is the union of two different
companies and two different cultures which is bound to bring some anomalies. It is very
important that the concern departments should be actively involved in the process so that they
under these difference and plan in an orderly manner for the smooth transition During M&A, the
leaders of both the companies face many challenges: cultural management, stress management,
redundancies, HR restructuring, resistance to change, job insecurity, talent drainage, low
motivation etc. All the aforementioned factors are responsible for change. KPMG has found that
80% of the mergers and acquisitions fail because of improper handling of change management.
Below is the list of few companies which failed miserably because of poor handling of the
aforementioned reasons.

As per data released by Grant Thornton, domestic acquisitions remain the mainstay of the
acquisitive growth of many industries but at the same time companies are less hesitant in making
cross border acquisition. Some of the important regional highlights are below:

North America

There is more emphasis on domestic acquisition with 88% domestic deal. However, both US and
Canadian have shown a considerable proliferate in their interest for cross border acquisitions
also.

Europe
There is not much emphasis on domestic acquisition, as companies from these regions continue
to show an increase in desire to drive growth through a cross border acquisition. Spain (61%) is
most fervent about future cross border M&A activity.

BRIC

BRIC Countries (87%) are mainly focussing on making acquisitions within their own borders
however BRIC market respondents have shown a propensity towards overseas acquisitive
growth with an increase of 20% year on year.

Asia Pacific

Indian respondents (59% increases) are mainly focussing on overseas opportunities for
acquisition. While Japanese (91% increase) are more interested in growing through domestic
acquisition. At the same time Singapore and UAE are two of the countries which believe in
growing through cross border acquisitions. Australian is focussing on domestic market only as
part of their acquisition strategy.

So the role of managers plays a significant role in this era of globalization. In order to handle the
paradigm shift, managers‟ are required to understand the nuances of change in an organization as
a whole.

2. Objective

 To study the factors which lead to resistance to change

 To suggest ways in to overcome their resistance during merger and acquisition.

3. Factors affecting the equilibrium of merged unit

Each organisation which is merging brings a culture with itself, when merged with another, is
bound to affect each other. There is a plethora of factors that can disturb the equilibrium of the
organisation in a major way during M&A.

 System Dynamics: Each organization consists of systems which constantly exchange ideas with
each other. Factors such as internal politics, technology, legal system, IT system and accounting
system often affect the alignment and relationships thereby demanding change in related
business units and employees of that unit.

 Structure-focused change: When two organizations decide to marry each other, changes like
downsizing and decentralizing are bound to happen to reduce costs and increase the
productivity and efficiency. Companies involved needs to be sensitive to the laws/policies of the
acquired company and be proactive rather than reactive.

 Person-focused change: This change is concerned with the human resource planning and
enhancing employee competence and performance. In order to induce such change human
resource management needs to tackle issues of redefining organization goals and strategy,
 recruitment and selection policies, stress management, employee training and development,
benefits etc.

 Profitability issues: It includes issues such as loss of revenue, market share, low productivity,
engagement with processes of restructuring and reengineering lead to major changes in the
organizational setup.

 Government Policies: This factor is very crucial when the M&A takes place between two cross
border acquisition. The companies involved needs to be sensitive to the laws/policies of the
acquired company and be proactive rather than reactive.

 Person-focused change: This change is concerned with the human resource planning and
enhancing employee competence and performance. In order to induce such change human
resource management needs to tackle issues of redefining organization goals and strategy,
recruitment and selection policies, stress management, employee training and development,
benefits etc.

So change is inevitable. So as a manager how you interact with the employees and how you
handle the aforementioned issues mean a lot for the success and failure of M&A.

3.1. Resistance to Change

During merger and acquisition, organisation faces the most abstruse and recalcitrant problem:
resistance to change.

3.2. Lack of Communication

The manager has not communicated well the detailed aspects of the change. People may only
understand the change in broad terms and not in practical terms. Employee does not know how
they should go about for change and are not convinced about the purpose of change.

3.3. Confusion and Frustration

Too many parties involved in the change without a clear definition of their roles will bring
confusion and frustration.

3.4. Force of habit

Feeling of comfort in the existing routines and not interested in changing the existing ways of
doing things

3.5. Lack of confident in the management

It is also a predominant reason for the people to accept change. They are not sure that once
change has taken place, things will become better for them.

3.6. Fear of insecurity

People are worried about the potential role he/she will be offered.

3.7. Fear of unknown

It is because of uncertainty about the nature of change. They are not sure what is happening and
what future holds for them.

3.8. Loss of Competency

Existing skills and the competencies the person possess will no longer be of any use after the
M&A has taken place.

3.9. Lack of support

Direct supervisors not implementing the change in a proper channelized way. Change programs
fail not because of lack of skills but because of courage to implement them. If change is
effectively managed

 Employees will know why change is happening.

 Employees will feel part of solution and change.
 Motivation will remain same as people become more consumed with the change being
introduced and thus productivity.
 Early detection of resistance and dealt early.
 Leaders will be able to channelize all the resources in a proper way.
 There will not be unrest between the employees and senior leaders.
 Training can be used to build skills and knowledge of employees

A clear and outright declaration on how people are going to be rewarded if they achieve
successful results from change would go a long way.

4. Overcoming resistance to change

Kurt Lewin has suggested model which encompasses 3 stages: The first stage is unfreezing the
organization‟s existing culture by discontinuing current practises, attitudes and behaviours. The
second stage is transition which basically involves teaching the work force new concept. And the
final stage is refreezing the culture by reinforcing new practises, attitudes and behaviours once
the change was implemented. Similarly there are different approaches to change. Theory E main
goal is to maximize shareholder value. It manages change from the top down. Its main focus is to
build structure and systems. It first plan and then establish program. It motivates employee
through financial incentives. Consultants analyze and shape problem. GE under J. Welsh; IBM
under L. Gerstner has adopted this theory during merger and acquisition. Theory O on the other
hand develop organizational capabilities, encourages participation from the bottom up, build up
corporate culture employees‟ behaviour and attitudes. It motivates employee through
commitment. In this theory, consultant support management in shaping their own solutions.
Microsoft, Intel, 3 M, Merck, Schwab has adopted this theory in many of the acquisitions.
5. Strategies to manage change during M & A

Companies should follow the below mentioned strategies during merger and acquisition:-

5.1. Integration Plan

First step should be setting up of project team comprising of senior executives from both the
organization. Instead of focussing on daily routine activities, they should be responsible for
carrying post M&A activities smoothly. It is advisable they communicate employees early,
immediately. They can do it using webcast, intranet or group meetings. Informing all the
employees at the same time will minimize the potential for gossip and spread of misinformation.
They should make employees realize the benefits of this marriage. After the announcement of
merger, Cisco always has its executive owner present and involved.

5.2. Clear Vision

Senior executive in both the organization should create goals, values, vision and policies of the
new company. It should be clearly communicated to the organization. Mary Hiland, CEO of
Alliance for Community Care was responsible for carrying out the merger of three agencies in
1997. She received the award of excellence in Non profit Leadership Award on 10th May, 2001
and in the interview she said that her mantra of success was clear vision and the communication
of this vision to the employees.

5.3. Understanding Cultural differences

Culture plays an important part on the success and failure of new structure especially in the case
of cross broader M&A. Culture difference was largely responsible for the downfall of merger
between Chrysler and Daimler. Daimler and Chrysler employees have different views on
important things like travel expenses and pay scale; even they have a different approach towards
life; Daimler favoured a more formal and structured style while Chrysler favoured a more
relaxed and freewheeling style. This cultural conflict played a big role in the failure of merger of
Daimler and Chrysler. So Leaders should be able to inspire people to come out from their
comfort zone and accustomed norms and accept the new ones. And to achieve this, leader must
be in constant touch of the employees. Spending time with them, knowing more about them,
what irritates them, what excites them will help leader in making people accept the new culture.

5.4. Employees Involvement

This gives an opportunity to both sides of employee to build their knowledge of other‟s
organization. When they interact, they share knowledge about their respective process, systems,
budget, headcounts and operations. Building trust is integral to building knowledge. Until the
two sides trust each other, they will not reveal details.

5.5. Customer Focus

In today‟s competitive world, it is very important that company share future roadmap with the
existing customer and promise to the customer they will continue providing service, personnel
support and sales people will continue to serve as they were doing earlier. This will make
customer safe about its purchase order. And if required, the merged unit can create helpdesk also.
This will reduce the number of unsatisfied customers and thus increases customer base and
profitability. Cisco does that. Whenever Cisco acquires company, it immediately shares the
product roadmap which keeps the customer goal in align.

5.6. HR Restructuring

Again important part in M&A. M&A have the potential of changing the below things:

 Change of geographical location

 Change in perks
 Change in salaries and compensation packages
 Change in Career paths
 Changes in job – new roles and assignment

Employees are always concerned about the carrier opportunities, new roles they will be assigned
or will they be transferred to new location post merger. It is very important that HR discuss the
aforementioned issues with the employees properly. This might involve HR conducting
management training, individual counselling, and providing other professional help to
employees. They need to clearly communicate for what reasons these changes are taking place
and why these changes are vital. Retaining good employees from both the companies is always
crucial. A team can be build with human resource representative from both the organizations,
whose main task is to identify valuable resources only. This will create loyalty and commitment
to the new company and it will also give employees of the acquired company a feeling of
equality.

5.7. Downsizing

It should be considered the last option. In downsizing, severe stress can be prevented by
developing the proper plan. We can use any of the below mentioned technique depending on
case:

• Severance package will motivate low commitment employees to leave.

• Outplacement: Helping employees to get job in some other company through the help of
consultancy or personal contacts.

• Redeployment: Transfer employees to sister company or other business unit.

6. Case Study: ICICI Bank merger with Bank of Madura (January 2001)

In January 2001, ICICI decided to expand their business by acquiring Bank of Madura. Even
BoM was also looking for private bank which can increase shareholder value, growth
opportunities for its employees, and provide latest technology based services to its customers.
Let us see how the leaders of the organization manage change during this merger.

ICICI was established by the government of India in 1955. ICICI‟s size was three times to that of
BOM. It has a staff strength of 14, 00 employees whereas BoM had a staff strength of 2500
employees. ICIC concentrated on individual unit as profit centres. While BoM concentrated on
the profitability of the overall bank as a whole. There were large differences in profiles, grades,
designations and salaries of personnel. Because of these differences, BoM employees feared that
their positions would come in for a closer scrutiny. They were sceptical about the rural branches
as ICICI business was urban based.

As mentioned earlier, ICICI took the same steps:

 Establishing clear communication channels throughout.

 Training programs were conducted which emphasized on knowledge skills, attitude and
technology to upgrade the skills of the employees.
 Direct dialogue with the employee unions of the BoM to maintain good employee relations.
 ICICI transferred 450 BoM employees to ICICI Bank, while 300 ICICI employees were shifted to
BoM branches.

And by the end of the year, ICICI seemed to have successfully handled the HR aspects of the
merger.

7. Case Study 2: AOL and Time Warner Merger

When the merger took place in 2001, it was hailed as a triumph. But it didn‟t go as per expected
lines. AOL seemed like the answer to Time Warner digital business. Both the companies lost
revenue and split in 2009. Few of the reasons are mentioned below:-

 The leaders of the both the organization Steve Case (AOL) and Jerry Levin (Time Warner)
couldn’t able to motivate and energize the employees and both of them seemed to lack the
vision.
 Structural Incongruities: AOL employees never exhibited the attributes of a typical Warner
company and thus making it difficult to establish a single cohesive unit and foster collaboration.
 Existence of disparate culture played a major role in the failure of merger.
The challenge before both the companies was to bridge corporate culture differences. It was
required that the leaders of both the organization create proper vision and integration plan and
make the employees accept the new reality of the business. They were no proper communication
from the senior executives. Leaders couldn‟t able to energize and motivate employees. In the
absence of this, there was chaos in both the organisation and the employees were not sure as to
which culture should they adopt and continue with. The AOL was centrally managed while Time
Warner was more or less decentralised where manager has the decision making power. There
was remarkable difference in the official dress code for the both the firms and there was no
proper understanding among the employees as to what would be the formal dress code after the
merger. All these factor lead to a situation where one can say that there was lack to manage the
change.

In a poll conducted on LinkedIn, it has been found that 80% of mergers fail because of inability
of the merged unit to generate synergies. Both the organization employees should have
demonstrated respect for each other culture; this would have encouraged collaboration. We can
conclude that it was basically companies‟ inability to handle change in an effective way that led
to their downfall.

8. Conclusion

It is human nature to resist change as it is as good as to unsettle the settled one. The change
management is very important for any organisation be it a change in the place or be it change in
the system. The changes management becomes more vital in the case of merger and acquisitions
as it does not affect one or few employees rather it has the widespread reach and effect.

It is very important for the organisation going for mergers and acquisition to understand the
importance of managing changes and plan suitably to have a smooth changes management.
There are many instances where the change, if not managed properly, lead to the situation where
the situation is reversed.
It can be concluded that companies should have a proper change management system in place
during mergers and acquisition. Companies involved should understand each other culture and
understand the importance of change. At the same time leaders from both sides should
understand the complexities and keep employees from both side involved during the integration.
They should be very clear and honest in what they communicate to the employees otherwise risk
of resistance and sabotage will proliferate. Providing clear, consistent and honest communication
also helps companies to retain customers and loyal employees and thus increases the efficiency
of the merged unit. Thus, communication seems to be the most important factor to make the
marriage successful.