Copyright © 2005 by Ethan A. Winning
So far in 2005, there have been 120 notable acquisitions. Included in those are Oracle and Peoplesoft, Lowes and Bulova, Dow Jones and Marketwatch, 3Com and Turningpoint, Toronto-Dominion Bank and Banknorth Group, Symantec and Veritas, Novartis and EON, L-3 Comm and Titan Corp, Omicare and Neiborcare, Sprint and Nextel, Premier Valley Bank and Yosemite Bancorp, and WestAmerica Bancorp and Redwood Empire Bancorp. The reason I note the last two - which most of you wouldn't know about - is that they are the final two independent banks of the more than 300 small financial institutions that I worked with in the 80s and 90s.
My background or foreground depending upon how you want to look at it was with a financial institution, Wells Fargo Bank. When I started with them in Personnel in Los Angeles, there were fewer than 50 employees in one branch. It wasn't that long ago, or at least it doesn't seem so long ago. Though we read about the megamergers today, they represent perhaps as little as 20 percent of all M&As. This article is written for HR managers involved in smaller mergers or acquisitions.
Wells Fargo Bank, now part of Norwest Bancorp in Minneapolis, began its growth through a merger with American Bank & Trust Co., but became a behemoth to some extent through acquisitions. When Wells started its push into Southern California, as a member of the personnel department and because of a background in psychology, I was put on the acquisition team. Wells' board, president, and senior administration knew what they were doing: they had a business plan, a positive and rational acquisition scheme, and a notion that the employees of the acquired bank(s) would not take kindly to even friendly takeovers. That's where I came in.
As experienced as senior management was, they missed a few things along the way. California is a no use it or lose it state: whatever vacation has been accrued must be paid to the employee upon termination of employment. What I found in the first phase of the acquisition plan was that a bank with just 35 employees which was to be acquired, had a $255,000 vacation liability. That was a chunk of change in those days - not that it isn't today - but it was a bigger chunk in days when Wells was still using its stagecoach for promos in branch openings. (1852)
So add accrued vacation and sick leave to the list of things to look at in a merger or acquisition. Wells did, and all because a very young, very sure personnel manager who couldn't balance a checking account put two and two together to get $255,000. Out of the mouths of babes oft times come things you don't want to hear.
Marriages Not Always Made in Heaven: Don't let anyone tell you that a merger or acquisition is the union or marriage of two sets of employees. Outside of some of the executives, it is more like two mind sets who have never dated, and now are thrown together because of the wishes of stockholders or boards over whom they have had no control.
Let's first get our definitions straight. In a way, mergers and acquisitions are the same especially if you accept the legal definition. Though a merger is usually thought of as a union of two enterprises, the legal definition comes closer to reality: "The absorption of a lesser estate, liability, right, action, or offense into a greater one." And if you're one of the acquirees, it doesn't matter cuz you've got 75-25 odds of getting fired anyway.
On the other hand, an acquisition is the purchase of an asset or the entire assets of an entire company as when Oracle acquired Peoplesoft in 2005. That it did so either to extend its reach in this type of software business or to limit its competition doesn't matter, at least not to the HR manager of the acquiring company. (Hostile takeovers won't be discussed because they aren't that common. However, for those who followed the Oracle ... or more appropriately.. Ellison/PeopleSoft takeover, it was devastating to the PeopleSoft employees and, from what I have heard from the latter, Oracle acted more like conquerors than those looking for a merger to benefit the customers and clients of the final entity.)
Enough Prelude, Now the Pre-Merger Examination or Audit: There are at least three stages (in honor of Wells Fargo) in a merger or acquisition:
- the meeting of minds, offers, and initial plan;
- the financial and other audits, aka due-diligence;
- and combining the two entities to form a fundamentally cohesive and productive new organization.
Or, if you prefer something more formal:
- Initial plan
When Human Resources gets involved has been discussed in prior articles, but I think that it should be at the audit or due-diligence stage. If the acquirer's HR department has the maturity and experience, it can have a greater positive impact on the integration phase than if HR is brought in only after the merger has taken place. If HR is valued by the acquiring company's management, it should be fairly obvious to them that people are going to be the greatest asset, challenge, and liability. Often, people are also the greatest cost or if not the greatest, always the second-greatest. (The greatest could be and used to be interest on loans. You can always think about the federal government if you want a concept that fits.)
Invariably, 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 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. Please note that not all acquisitions are hostile. Often the acquirer is saving a once-viable company from certain demise, and there are also examples of strength through acquisition, e.g., Whirlpool acquiring Maytag. (It's still a little sad to see such brands disappear, but I didn't want Eric Byrnes to go to Colorado either. You just have to the best face on it, even if inside you're throwing a hissy fit.)
Payroll, Compensation, Performance, Benefits: "Job descriptions and compensation, bonuses, health benefits, vacations, disability and maternity leave, sick leave, Workers' Comp." Before I began writing this article, I was thinking back to the last M&A I was involved in. When I thought about due-diligence, the words that are in italics flowed to consciousness. It still amazes me how many variables there are underneath the basic layer of "Compensation" or payroll. If you come away with nothing else from this paper, then always note these often hidden costs and barriers to the dream of a marriage that is made in heaven.
The first thing that we used to examine was compensation, individual as well as departmental. Now that comes under "Payroll," but I disagree to some extent because payroll, often handled by an outside company, is too compacted to shake out the necessary information. Time permitting - and don't rush the process - get as many job descriptions as possible, even if they're only a paragraph for each critical position. I won't harp on its importance (http://www.ewin.com/subart/jduse.htm, jdq.htm, jd.pdf), but you must match apples and apples insofar as possible if you are to determine the pay practices of the acquired company and how the acquired company has valued its employees. You also get the first inkling if there are some who have been overpaid or overvalued in comparison to your own employees. Of course, they're always overpaid while yours are undervalued if the acquired company pays more. Games often ensue, and I have seen HR go to its senior management and start politicking for higher salaries to match the acquired company's.
If anybody is still doing budgets which used to be standard for all departments, a look at compensation can start with who you can and who you can't afford. If the compensation differential is 20 percent or more, don't even make an offer to retain. That used to be the mantra. It should probably still be the mantra since 20 percent cuts in pay will definitely leave the employee unhappy. Starting over: sometimes the two companies have such disparate systems that it's best to start from scratch, but that can only be accomplished if both companies are relatively young. It would be best if you can use the compensation system of either company, the one that makes for the smoothest transition and works best with the acquiring company's overall plan.
Benefits: Match health insurance benefits against yours. The cost of insurance, the contributions of employees, and what is charged for dependent coverage are extremely important considerations today. You could be looking at a difference of several hundred dollars per employee per month. Also note for reference that the two combined companies may have greater clout with the insurance carrier(s) than you have had in the past. You might want to check this out before the merger and report the costs as well as the potential savings if various plans are instituted or the separate plans now existing are combined.
Other benefit costs: Determine how many days (weeks, even months) employees of the acquired company have due. Estimate or determine the actual cost of those who may not make the final cut. For those who do not pay sick leave upon termination, devise a policy of how much sick leave can be used in the final three months of employment, or use payment of sick leave as part of a severance package. Note that while severance is not required except under plant closure laws, there are usually severance packages for all levels of employees.
"Secondary" benefits considerations: It's not what you initially were examining, but real challenges can be presented when you look at those who are on leaves of absence, especially Workers' Comp and maternity leave. These are people who cannot be terminated, well not easily. Here's where you need legal advice unless you're familiar with the land mines in these areas.
Perhaps I'm getting ahead of myself. What about performance evaluations?
Performance Evaluations: If you trust the evaluations found in personnel files - if there are any at all - an initial determination can be made regarding possible retention of employees. Be certain to look at patterns in evaluations. If you see the same comments over and over by the same supervisor, take the evaluation with a grain of salt or a whole lick. (And look at the supervisors' evaluations by their managers, and so on up the line.) I have found identical evaluations of four people in one department, identical from employee to employee and identical from year to year. (We didn't keep the supervisor.)
Interview the employees if there is time. Ask their perceptions of their own jobs, their department, supervisors, and even the merger. Most will be circumspect in their comments. Still, it will give you a better feel for who stays and who goes. On the other hand, remember that your own likes and dislikes will affect your judgment and evaluation.
Redundancies: What does matter is to make the transition as smooth as possible, and that is surely the rub. Realize that this is probably not a marriage made in heaven. In any merger, there will be terminations. (You can't call it downsizing since the new entity will have more employees than at least one of the old entities. Besides, downsizing is just a euphemism for permanent layoffs.) No matter how high the payoff, terminations almost always create hard feelings and, among senior managers, crushed egos. Part of the new HR manager's responsibility is to assuage those being laid off because past employees can try and sometimes succeed in hurting the new company's reputation, if only in the short term.
Knowing who to terminate and knowing who to retain are probably the two most important and difficult aspects of a merger. By ridding the company of redundancies, the company saves money, so one of the first responsibilities of HR is to identify the redundancies. Then it must decide whom to retain. In a sense, the redundancies represent the first cut. Redundancies are impersonal.
Next are those whose performance is suspect. With any luck, many of these have already been deemed redundant. But you're only going to note these anyway. Between this audit and the actual merger, some of these people will have already left. And all you're doing at this point in the process is making recommendations.
Keep in mind that you don't know it all and there are gaps in your company that employees in the acquired company can fill. The acquired company may have better employees than you, and now you have to make decisions about who on your own team you will keep, transferred, or let go. Hopefully, you and your management will have many months to make the determination. Often in smaller companies, you have less than six months.
Policies and Practices: Note that I said there is an examination of policies, practices, and past actions of the acquired company. I said this because the actions of the company speak louder than words, i.e., policies. Practices can often be found through interviews with staff as well as in past legal actions, if any, against the company by employees. It's not simply the policies and practices - which can be ascertained by reading their handbooks - that you're after. You really want to get a feel for the "culture" of the acquired company. It cannot be overemphasized: the goal is to have a smooth transition and wind up with the best fit with the greatest potential to meet the goals for this merger. Hopefully, you will find that there are commonalities upon which you can build that entity.
Something Old, Something New: In the old days, most of the information we needed was found in files, paper files. To some extent, it was much easier to study the differences and similarities in the companies.
One of the newest obstacles is IT itself. HR people are not always as technologically proficient as we would like, and that's why in today's mergers, the HR team should bring at least one IT person. Why? Well, again in the last merger I was involved with, we found different HR software, accounting software, payroll systems, and even the databases being used for accruals in both companies. One of the most time consuming aspects of that merger was to decide which was the best system, whether there were alternate systems that could be used, whether to combine the systems, or scrap everything and start from scratch.
Some Final Advice: Make no commitments or promises. That's not HR's job in the merger process. Furthermore, once the merger is official and integration starts, you're guaranteed to find that perspective, personnel, and data have changed. It often amazes me how much change actually does take place between inception and completion. In a large company, true integration can take three or more years, by the way. Sometimes, it never takes place. In smaller companies, the new entity should emerge in the second year. Then you can get back to the usually jousting and politicking for position.
Remember, how you manage mergers and acquisitions today is extremely important, perhaps not for you or your children, but certainly your grandchildren. After all, at our current rate of consolidation in 50 years, there will only be six companies worldwide for which they will work. Their future compensation, benefits, and security are in your hands.