Mergers and Acquisitions

Introduction:

A merger is a combination of two companies to form a new company, while an acquisition is the purchase of one company by another with no new company being formed. A merger occurs when one firm assumes all the assets and all the liabilities of another. The acquiring firm retains its identity, while the acquired firm ceases to exist. A majority vote of shareholders is generally required to approve a merger. A merger is just one type of acquisition. One company can acquire another in several other ways, including purchasing some or all of the company's assets or buying up its outstanding shares of stock. The term "acquisition" is typically used when one company takes control of another. This can occur through a merger or a number of other methods, such as purchasing the majority of a company's stock or all of its assets.

Reasons for Mergers and Acquisitions:

The management of an acquiring company may be motivated more by the desire to manage ever-larger companies than by any possible gains in efficiency. There are a number of reasons why a corporation will merge with, acquire, or be acquired by another corporation. Sometimes, corporations can produce goods or services more efficiently if they combine their efforts and facilities. Collaborating or sharing expertise may achieve gains in efficiency, or a company might have underutilized assets, the other company can better use. Also, a change in management may make the company more profitable. Other reasons for acquisitions have to do more with hubris and power.

Regulation of Mergers and Acquisitions:

Mergers and acquisitions are governed by both state and federal laws. State law sets the procedures for the approval of mergers and establishes judicial oversight for the terms of mergers to ensure shareholders of the target company, receive fair value. Generally, state law tends to be deferential to defences as long as the target company is not acting primarily to preserve its own positions. Courts tend to be sceptical of defences if the management of a target company has already decided to sell the company or to bring about a change of control. Because of the fear that mergers will negatively affect employees or other company stakeholders, most states allow directors at target companies to defend against acquisitions. Because of the number of state defences now available, the vast majority of mergers and acquisitions are friendly, negotiated transactions.

Motives behind M&A

i) The following motives are considered to add shareholder value:

Economies of scale, increased revenue / increased market share, cross selling, synergy, taxes, geographical or other diversification and resource transfer.

ii) The following motives are considered to not add shareholder value:

Diversification, overextension, manager's hubris, empire building, manager's compensation, bootstrapping and vertical integration

Mergers and Acquisitions: Doing the deal

Start with an Offer

When the CEO and top managers of a company decide that they want to do a merger or acquisition, they start with a tender offer. The process typically begins with the acquiring company carefully and discreetly buying up shares in the target company, or building a position.

The Target's Response

Once the tender offer has been made, the target company can do one of several things Accept the Terms of the Offer, Attempt to Negotiate, Execute a Poison Pill or Some Other Hostile Takeover Defence.

Closing the Deal

Finally, once the target company agrees to the tender offer and regulatory requirements are met, the merger deal will be executed by means of some transaction. In a merger in which one company buys another, the acquiring company will pay for the target company's shares with cash, stock or both. When the deal is closed, investors usually receive a new stock in their portfolios - the acquiring company's expanded stock. Sometimes investors will get new stock identifying a new corporate entity that is created by the M&A deal.

The Human Side of M&A Activity

Plenty of attention is paid to the legal, financial, and operational elements of mergers and acquisitions. But executives who have been through the merger process now recognize that in today’s economy, the management of the human side of change is the real key to maximizing the value of a deal. The management of the human side of M&A activity, however, based upon the failure rates of M&As, appears to be a somewhat neglected focus of the top management’s attention. People issues occur at several phases or stages of M&A activity. More specifically, people issues in just the integration phase of mergers and acquisitions include:

(1) Retention of key talent;

(2) Communications;

(3) Retention of key managers; and

(4) Integration of corporate cultures.

HR issues in three Stage Models of Mergers and Acquisitions

The three stages: (1) Pre-combination; (2) Combination and integration of the partners; and (3) Solidification and advancement.

Selected HR Issues in the three Stages of M&A

Stage 1: Pre-Combination

Identifying reasons for the IM & A
Forming IM & A team/leader
Searching for potential partners
Selecting a partner
Planning for managing the process of the IM and/or A
Planning to learn from the process
Stage 2-Combination and Integration

Selecting the integration manager
Designing/implementing teams
Creating the new structure/strategies/ leadership
Retaining key employees
Motivating the employees
Managing the change process
Communicating to and involving stakeholders
Deciding on the HR policies and practice
Stage 3: Solidification and Assessment

Solidifying leadership and staffing
Assessing the new strategies and structures
Assessing the new culture
Assessing the new HRM policies and practices
Assessing the concerns of stakeholders
Revising as needed
Learning from the process
Role of the HR Department in M&A activity

1. Developing key strategies for a company’s M&A activities

2. Managing the soft due diligence activity

3. Providing input into managing the process of change

4. Advising top management on the merged company’s new organizational structure

5. Overseeing the communications

6. Managing the learning processes

7. Re-casting the HR department itself

8. Identifying and embracing new roles for the HR leader

9. Identifying and developing new competencies

The strategic contribution of HR as consisting of the “Five P’s”: Philosophy, Policies, Programs, Practices, and Processes.

Conclusion

Merger and Acquisitions success entirely depends on the people who drive the Business, their ability to Execute, Creativity, and Innovation. It is of utmost importance to involve HR Professionals in Mergers and Acquisitions discussions as it has an impact on key people issues. As Mergers and Acquisitions activity continues to step up globally, Companies involved in these transactions have the opportunity to adopt a different approach including the increased involvement of HR professionals. By doing so they will achieve a much better outcome and increase the chance that the overall deal is a total success.