HR Due Diligence

in Acquiring a Business
- Integration Management
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 Topics covered

 Mergers and Acquisitions: Importance and Reasons for Failure

 People related problems that led to Financial underperformance

 Due Diligence

 What to look for in Due Diligence

 Why are people neglected during M&A ?

 HR integration - Stages, challenges and Solution

 Case Study – DaimlerChrysler

HR Due Diligence
 Mergers & Acquisitions

Mergers and acquisitions represent the

coming together of companies for
financial, market, technology and other
considerations.
In a merger, two companies come
together and create a new entity.
In an acquisition, one company buys
another one and manages it consistent
with the acquirer’s needs.

HR Due Diligence
 Importance of Mergers &
Acquisitions

 Horizontal mergers for market dominance; economies of

scale
 Vertical mergers for channel control
 Hybrid mergers for risk spreading, cost cutting,
synergies, defensive drivers
 Growth for world class leadership and global reach
 Survival; sales maximization
 Acquisition of cash, deferred taxes, and excess debt
capacity
 Move quickly and inexpensively
 Flexibility; leverage
 Adopt potentially disruptive technologies
 Financial gain and personal power
 Gaining a core competence to do more combinations

HR Due Diligence
HR Due Diligence
When Mergers fail …

HR Due Diligence
 Reasons for Failure

 Expectations are unrealistic

 Hastily constructed strategy, poor planning,

unskilled execution

 Failure/inability to unify behind a single macro

message

 Talent is lost or mismanaged

 Power and politics are the driving forces, rather

than productive objectives

HR Due Diligence
 Reasons for failure

 Culture clashes between the 2 entities

go unchecked

 Transition management fails

 The underestimation of transition costs

 Defensive motivation

 Focus of executives is distracted from

the core business

HR Due Diligence
 Reasons for Financial
underperformance
Source/Study Cited Drivers of M&A Underperformance
Merger Integration: Why the
Soft • Compared to the sector index, share price performance was
Issues Matter Most, Bain & Co, 5.1% ahead of average price in deals where management
2003 proactively addressed culture.

• Compared to the sector index, shared price performance was

-4.4% in deals where companies failed to address cultural
issues.

Success Factors in Acquisitions,

PricewaterhouseCoopers, EBF, • Acquisitions that ought to have been successful according to
2001 business criteria failed because of neglect of the human
factors involved.

• Failure to tackle the people issues, such as retaining top talent

and communicating effectively with the workforce, is one of the
reasons why the majority of deals fail to meet expectations.

“Tying the Corporate Knot- Merging companies with markedly different HR practices were
Effects of Mergers and three times more likely to have significant productivity and
Acquisitions”, American Mgmt turnover problems. HR Due Diligence
Association, 1989
 Reasons for Financial
Source/Study
Underperformance Cited Drivers of M&A Underperformance
• 85% of respondents asserted that people problems were more
"Merger Mania: Reshaping the likely to affect a merger's long term success than financial
Telecom Industry," Rural problems.
Telecommunications, 1997

The 2 top most reasons cited for the underperformance of

Acquisitions Horizons study, mergers and acquisitions were
1980s, cited in Price Pritchett,
After the Merger: Managing the 1) management talent in the acquired company was not as
Shockwaves deep as expected
2) key talent left the firm.

Delivering the Benefits of

Mergers and Acquisitions, • 85% of mergers and acquisitions underperformed due to
Coopers & Lybrand,1996. differing management attitudes and culture.

• 80% of mergers and acquisitions underperformed due to a

lack of integration and planning.

• 45% of mergers and acquisitions underperformed as a result of

poor management practices at the acquired company.
HR Due Diligence
The DNA of an Organization

HR Due Diligence
HR Due Diligence
 What is Due Diligence
 Pre-cursor to actual announcement of merger
 Comprises of Cultural Due Diligence and HR
Due Diligence

 Involves consideration of differences in the

corporate culture of the companies and
identifying issues critical to integration

HR Due Diligence
 What is Due Diligence
 Helps management plan necessary
actions for resolving them before the
merger is announced

 Wider the cultural gap, more difficult

will be the merger and more crucial
will be the diligence phase
HR Due Diligence
 Issues to watch out for

Cultural and Talent Indicators

Workforce Assessment
Remuneration
Employment Agreements &
Legal Compliance
Risks in Due Diligence

HR Due Diligence
 Cultural and Talent Indicators

 Speak to key personnel about staff behavior.

 Get feedback from key clients about services quality,
staff attitude, reliability.
 Get turnover data, compare it with industry standards
and look for potential problems.
 Get staff retention details
 Identify the key talent needed to be retained.

HR Due Diligence
 Workforce Assessment

 Obtain headcount allocations for each

category.
 Is the organization structure efficient or
flabby.
 What is the headcount requirement of
the merged organization for each job
category.
 Do a skills requirement study. For
example:
Technical qualifications for trade or
technical organization.
Soft skills for service oriented organization.
HR Due Diligence
 Remuneration

 Critical, because large amount of time and money

is expended.

 Obtain remuneration data and compare with the

labor market position for the industry.

 Underpaid staff need to be brought to industry

standards, not possible at one go

 Overpaid staff need to be realigned sensitively.

 Bonus schemes: Realign criteria for incentives in

the new entity.
HR Due Diligence
 Employment Agreements & Legal
Compliances

 Check out for redundancy liabilities like

transfers, leaves, trade unions, health &
safety.

 Do not overrate the value of complying

with the law. It is important but not more
than skill and behavior assessment.

 Maintain a balance between time and

efforts spent in alignment of people and
skills versus drafting elaborate
compliance procedures.
HR Due Diligence
 Major Risks in Due Diligence
 Insufficient remuneration analysis could lead to
loss of key personnel.
 Minimal analysis of labor relations could ignore
history of labor conflicts.
 A new management team could be required if
target company’s management team is not very
forward looking or dynamic.
 Target company’s management team could have
troubles adjusted to constraining culture if it is
more entrepreneurial than acquiring company.

HR Due Diligence
 Major Risks in Due Diligence
 If target company has more organizational layers,
trimming could be required and initially committed
promise of not downsizing will be breached, leading to
an atmosphere of mistrust.
 If analysis of compensation practice is insufficient
and target company has generous packages, there
could be a post merger exodus of talent.
 If target company’s management practices and culture
is not analyzed adequately, the acquirer may be
unprepared for the extent of effort required for the
cultural integration exercise.

HR Due Diligence
HR Due Diligence
 People issues are critical, yet
neglected
Possible reasons include:
 The belief that they are too soft, and, therefore,
hard to manage

 Lack of awareness or consensus that people

issues are critical

 No spokesperson to articulate these issues

 No model or framework that can serve as a tool

to systematically understand and manage the
people issues; and therefore

 The focus of attention in M & A activity is on

other activities such as finance, accounting, and
manufacturing
HR Due Diligence
 HR Integration: Stages, Challenges
and Solution
 The experiences of companies in merger
and acquisition activity suggest a model of
M & A activity that has three stages:
Stage 1: Pre-combination

Stage 2: Combination - Integration of

the partners

Stage 3: Solidification and

advancement - the new entity

HR Due Diligence
 Stage 1- Pre-Combination

HR Issues HR Implications and Actions

Identifying reasons for the M & A Knowledge and understanding need to be disseminated

Forming M & A team/leader Leadership needs to be in place

Searching for potential partners Composition of team impacts success

Selecting a partner Systematic and extensive pre-selection and selection are

essential
Planning for managing the process of the M Conducting thorough due diligence of all areas is vital
and/or A
Planning to learn from the process Cultural assessment

Planning for combination minimizes problems later

Creating practices for learning and knowledge transfer

HR Due Diligence
 Stage 2: Combination: Integration
of the Co.

HR Issues HR Implications and Actions

Selecting the integration manager Selecting the appropriate candidate

Designing/implementing teams Creating team design and selection are critical for
transition and combination success
Creating the new structure/strategies/ leadership Communicating is essential

Retaining key employees Deciding on who stays and goes

Motivating the employees Establishing a new culture, structure, and HR policies

and practices is essential
Managing the change process

Communicating to and involving stakeholders

Deciding on the HR policies and practices

HR Due Diligence
 What is Change Management

 Structured approach to transitioning

individuals, teams, and organizations from a
current state to a desired future state.

 The current definition of Change Management

includes both organizational change
management processes and individual change
management models, which together are used
to manage the people side of change.

HR Due Diligence
 Change Management Styles

Individual Change Management

 Unfreeze – Change – Refreeze
 Kubler-Ross
 Formula for change
 ADKAR
Organizational change management
 Dynamic conservatism
 The role of the management
 The constructionist principle (reflection, advocacy,
inquiry)
 Scenario Planning
 Theory U of Otto Scharmer

HR Due Diligence
 Pitfalls of Poor Integration

 Productivity drops by 50%

 Leadership attrition soars 47% within 3 years
 Employee satisfaction drops 14%
 90% of high-tech mergers fail to deliver
expected increases
 80% of employees begin to feel management
cares more about financials than product
quality or people

HR Due Diligence
Stage 3: Solidification and Assessment

HR Issues HR Implications and Actions

Solidifying leadership and staffing Elective leadership and staffing of the new entity are essential

Assessing the new strategies and Creating and evaluating a new structure
structures
Assessing the new culture Melding two cultures needs assessment revision

Assessing the new HR P & P The concerns of all stakeholders need to be addressed and
satisfied
Assessing the concerns of stakeholders The new entity must learn

Revising as needed

Learning from the process

HR Due Diligence
Role of HR Department in M&A activity
 Research indicates that only 35% of senior HR
executives are involved in M & A activities.

 80% of combinations fail at the implementation stage

as a result of the following factors
 an inadequate road map

 senior HR professionals brought in too little, too late;

 senior HR professionals lacking in either/both

business/global experience;

 an inadequate skills base overall; and ultimately,

failed organizational change

HR Due Diligence
Major activities to be performed by
HR
 Developing key strategies for a
company's M & A activities.

 Managing the soft due diligence activity

 Providing input into managing the process

of change

 Advising top management on the merged

company’s new organizational structure
HR Due Diligence
Major activities to be performed by
HR

Creating transition teams

Overseeing the communications

Managing the learning processes

Re-casting the HR department itself

HR Due Diligence
 New roles for the HR leader

 Partnership

 Change Facilitator

 Strategy Implementor

 Strategy Formulator

 Innovator

 Collaborator
HR Due Diligence
 Identifying and developing new
competencies of HR leader
Business competencies Leadership Change and knowledge
competencies management
competencies

Industry knowledge Strategic analysis Consulting and communicating

Competitor understanding Managing cultural diversity Group process facilitation

Financial understanding Creator of learning culture Designing and working in flexible

structure
Global perspective/knowledge Planning skills Partnering and parenting

Strategic visioning Adaptability Negotiating

Partner orientation Learning facilitator Network building

Multiple stakeholder sensitivity Value shaper HR alignment

Merger and acquisition knowledge

HR Due Diligence
HR Due Diligence
HR Due Diligence
Synergies were expected in different
areas.
 Complementary geographical markets
 Unique Portfolio
 Cost synergies in
 Purchasing
 Integration & Financial Services
 R&D
 Sales & Distribution Infrastructure
 Higher Sales
 Benchmarking each other and mutual
learning processes
 Lean ways for Daimler
 Engineering skills for Chrysler
HR Due Diligence
 The German part dominated the post-merger integration
structure of the DaimlerChrysler AG.

 Both companies prepared themselves for a merger.

 Pre-merger preparations:
 First negotiations in 1995
 PEOPLE: Chairmen, because of different expectations
 POWER: Chances at Daimler vs. Fears at Chrysler
 PURPOSE: maintain strength in technology vs. R&D investments
and new markets

 The Integration Structure had a major German influence.

 Common Board with 18 members (10:8 for Daimler - 2 non-
automotive businesses)
 Real power base Integration Council
 October 1999 there was a 2:1 majority for Daimler on the board
 Absorption Mode by Daimler

HR Due Diligence
 Post Merger Scenario

 Daimler Chrysler merger proved to be a costly

mistake for both the companies. Daimler was driven
to despair, and to a loss, by its merger with
Chrysler.

 The merged group reported a loss of 12 million

Euros

 Culture clash

 Ideology Clash

HR Due Diligence
• The crucial point in the cultural differences was the Business Culture.

• National Culture influence e.g. attitudes to work, authority and equality.

• Working late hours vs. Working on deadlines
• Command lower-levels vs. Discuss with lower-levels

• Business Culture was what was critical, which was different in terms of organization
structures, working styles, compensation schemes etc.
• STORIES: Rich successful engineering heritage vs. Self-made upcoming
company
• SYMBOLS: Executive assistants vs. No convention, equality
• POWER: Chairman vs. Charismatic Executives
• ORGANIZATION: Hierarchic, bureaucratic Holding vs. Intuitive cross-functional
• structure
• CONTROL: Compensation schemes
• ROUTINES & RITUALS: Late hours vs. Deadlines; formal vs. informal

• It evolved to the dominant German culture.

• German Engineering vs. Cowboy Independence
• Compromises instead of digital decision
• Pick a spot in the middle

HR Due Diligence
 The revolutionary strategic change was managed by an
interventional / directional approach.
 REVOLUTION as style of strategic change.
 Transformation
 Big Bang.
 Daimler tried an interventional approach although it
was a directive managing style right from the
beginning.
 Intervention, Stallkamp as change agent
 Fear of manipulation & resistance
 Direction, Hold on
 Crisis became obvious

HR Due Diligence
 Recommendation
No announcement as “merger of
equals”.
Beware of national differences
which can effect the business
culture.
Observing business cultures
better and digital decision right
from the beginning.

HR Due Diligence
 In the long run…

“It is clear that you cannot

stay in the top league if you
only grow internally. You
cannot catch up just by
internal growth. If you want
to stay in the top league,
you must combine.”
- Daniel Vasella, CEO,
Novartis

HR Due Diligence
 = HR
HR +
Rocks
Visit
hrmba.blogspot.com
for more
presentations, project
reports, notes etc.
HR Due
HR Diligence
Rocks !!!
HR Due Diligence