Impact Of Consolidations And M & A’s

"Life is about change. Sometimes it's painful. Sometimes it's beautiful. But most of the time, it's both." — Lana Lang

 

In recent times, Mergers and Acquisitions have increasingly gained traction all across the world. Some of the reasons behind this are globalization, liberalization, technological advancements, and an intense competitive business environment.  Mergers and Acquisitions are extensively used for restructuring the organisation, and lately, they have become one of the favoured routes for either inorganic growth or consolidation. The rapid advancement of disruptive technologies and innovative ideas have shaken the existing status quo, and, given the speed of advancement, no business can afford to be complacent, and, this perhaps is one of the biggest reasons fuelling heightened M&A activity.

 

There is an overall buoyancy in the M&A scenario in India due to positive government intervention through economic reforms, some big-ticket M&A transactions such as the takeover of Essar Oil by Rosneft, Flipkart’s merger with eBay India (2017) etc. Businesses in India have made the right noise, and, if the projections are to be believed, the value of M&A transactions and the quantum of deals is set to surpass all previous records. The M&A activity in the previous years has witnessed a slowdown in the US and Europe, while they have remained upbeat in Asia.

 

Poor success rate of M&A’s

 

Although M&A activities are expected to bring synergies to the table with increased economies of scale, the moot question is whether M&A shall succeed? Research by leading academic institutes indicate that the failure rate of M&A deals is very high, more than 70 percent of all M&A transactions end in failures. An M&A deal is considered to be a failure if the association does not lead to any significant value creation, and, the acquirer subsequently realises significant write-downs. M&A deals would qualify as failures if the deal leads to a large-scale exodus of core leadership and talent of the acquired company. M&A deals are deemed to be failures if the acquired company is divested down the line admitting failure to integrate or in the worst case, the acquirer itself become financially insolvent. In such light, the logical question that comes to mind is- what are the reasons for these spectacular failures? Inadequate due diligence which leads to improper valuations of the acquiree is one primary reason for M&A failures. M&A transactions, which appear to be strategic fits, but are at odds culturally, and, are thus destined to fail. E.g. the merger between Daimler Benz and Chrysler; the deal had all the structural and financial merits, but post-merger, the combined entity could not be productive mainly due to the vast difference in their cultural identities.

 

Lack of leadership and inadequate communication is another prime reason for M&A failures. And, in most cases, the leadership fails to convince people on both sides to work together, and, lack of clarity in communication and the ensuing chaos leads to an eventual breakdown. Mergers and acquisitions can prove to be a huge risk to human resources of both companies, and therefore, it is important to investigate the impact of such transactions from an HR angle, and, to identify possible reasons for failure and also the remedial steps to be taken to address this issue. In the words of Mary Shelley, "Nothing is as painful to the human mind as a great and sudden change." Market consolidations, mergers and acquisitions (M&A) are a mere departure from the status quo, a change in the existing set of rules, ways of doing business, change of culture among few other things and all these phenomena impact the workforce of the involved organisations in a major way.

 

In Quotes “Market consolidations, mergers and acquisitions (M&A) are a mere departure from the status quo, a change in the existing set of rules, ways of doing business, change of culture …

 

A mere economic consideration

 

In almost all cases, M&A deals are made solely on economic considerations, the impact of such corporate decisions on the employees working for the companies involved is rarely taken into consideration. Perhaps, this remains as the reason behind 2/3rd of all M&A's ending up as disasters. In most cases involving M&A’s, the average employee is left on his own to deal with this major change in the organisational hierarchy, business policies, work culture, and the overall organisational structure.

 

Fear and resistance: Any announcement from the management regarding M&A faces huge resistance from employees. There are many reasons for such resistance, and, it only subsides if the employees are convinced about the benefits of the act in the long term. The biggest resistance to this change comes from the inherent belief that the act of M&A is unjust, and, is being thrust upon. In addition, the fear of the unknown that is going to ensue once the M&A process is kick-started is another reason for employee dissatisfaction.

 

The perceived fear means different things to different employees, and, for some, the fear is of potential job loss, while others fear the smooth sailing of their assimilation into a completely new system of doing things. These fears negatively impact employee productivity and overall satisfaction levels, in extreme cases, it can also lead to mass exodus of trusted employees over perceived injustice or mistreatment. The overall environment of fear and resistance has a cascading effect with one set of problems leading to other.

Stress & Anxiety: Fear and resistance are followed by stress and anxiety. In most cases, once the announcement of an impending M&A is made, most of the employees are caught off guard, which leads to widespread uncertainty among employees. Employees can become increasingly concerned about how the merger will impact them; personally and professionally. Additional job responsibility, recognition, salary and benefits after the transition are only some of the concerns held by the employees. Combining different companies means blending the employee pool as well as the corporate culture. This novelty can lead to anxious moments for an average employee. The stress and anxiety coupled together lead to conflict and confrontation.

 

Conflict & Confrontation: Most often, M&A activities lead to the elimination of existing roles and subsequent reduction in the workforce. This often leads to open conflict and confrontation as a general sense of insecurity takes over among the employees. The conflict is not only between the employees of the two entities, who are competing against each other to secure their respective roles. The primary reason for this conflict is that in order to safeguard their own position and interest in the company, existing employees engage in acts of sabotage, where they tend to undermine the work of others, which leads to an overall loss in productivity.

 

Anger & Discontent: M&A transactions, if poorly handled, can lead to widespread anger and discontent, and, this happens because of the perception that the employees have been wronged, and, have been thrust into an uncertainty that they had never asked for. Employees generally feel deceived and abandoned since their employer has left them in the lurch to fend for themselves, which leads to discontent. Relationships between employees and the management, which were previously intact, tend to become strained, as widespread discontent is prevalent.

 

Failure to integrate: The combined effect of all employee issues during the M&A process, the fear, the anxiety, the stress, and the discontent makes the integration of the two organisations highly susceptible to failure. As per data, more than 2/3rd of the M&A transactions fail or do not meet the intended goal as the two organisations are not fully able to integrate and leverage the synergies that were once perceived as strengths. The probability of a successful merger and integration increases when the leadership maintains an open and honest line of communication with the employees.

 

The process of M&A is by and large extremely stressful for the employees which could lead to behaviour and consequences that can broadly be summarized as follows:

 

·Talent exodus and loss of expertise

·Mass Attrition

·Lowered commitment and disloyalty

·Performance drops and lowered productivity

·General lack motivation

· Sabotage

·Lack of respect to authority and diminished work ethic

·Increased absenteeism

·Health problems due to stress and anxiety

·Power struggles and Politics

 

 

It is important for organisations and their managers and HR to recognize that the amount of upheaval involved with M&A generated HR integration can be substantial. The effects of mergers and acquisitions on employee morale can be disastrous if the reorganization of the business is not handled effectively. Therefore, it is paramount that the management provides ample opportunities for employees to get to know each other and be comfortable, to openly address concerns, and to work together toward the creation of a new culture that inculcates the best aspects of two disparate work cultures. Achieving the desired results, often hinges on executives’ ability to engage the workforce and lead proactively, positively, and enthusiastically throughout the transition.

 

Managing change during mergers and acquisitions is an extremely important aspect. An M&A transaction not only is an endeavour to integrate two companies under one corporate goal and culture, but also to bring together large groups of people with individual personality traits, and to motivate them to work together in a productive and efficient manner. Without a clear strategy, effective execution and open communication towards employees/ stakeholders, and a courageous, strong leadership, the merger or acquisition will struggle to deliver the desired results. The entire process of M&A must be well deliberated and planned and should be anchored with realist goals and an open and effective communication mechanism that engages all stakeholders across levels. An M&A transaction leads to a lot of change, and, it is therefore the responsibility of the top management and leadership on both sides to manage this change effectively, and to ensure that the ensuing transition, however chaotic it might seem in the short term, should at the end be a positive experience for the employees.

 

In Quotes "The entire process of M&A must be well deliberated and planned and should be anchored with realist goals and an open and effective communication mechanism that engages all stakeholders..."

Rahul Agarwal is the Director, Wealth Discovery-EZ Wealth.

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