M&A Roulette: Using HR to Beat the Odds
October 18, 2004
Summary—This conversation will focus on three areas in which HR can contribute to merger & acquisition success.
The following interview, conducted by Rich DiGeorgio, is a condensed version of HR.com's live, one-hour online learning seminar, which was also broadcast on Voice America Internet radio.
RD: My guests today are Ken Murphy, Dennis Zeleny, and Howard Guttman. Ken Murphy is the senior vice president of HR for Altria Group. He took the role in the winter of 2003. Previously, Mr. Murphy served as the senior vice president of HR for Philip Morris, USA. Mr. Murphy is responsible for directing all of the employee and organizational HR functions for the Altria family of companies. He has worked in HR for General Foods, Kraft Foods Canada, and Philip Morris since 1981. He has been involved with a number of mergers and acquisitions including the Kraft merger with General Foods.
Throughout his career, Dennis Zeleny has played a major role in all aspects of HR: leadership development, organizational design and effectiveness, talent management, staffing, compensation and benefits, mergers and acquisitions, and employee relations. Most recently, Mr. Zeleny was the senior vice president of HR for DuPont. Prior to this he was vice president, global human resources for Honeywell. Mr. Zeleny also spent 16 years at PepsiCo, where he held a number of leadership roles including vice president, human resources for Frito-Lay, Pepsi-Cola West, and Taco Bell. Among his many M&A successes was the Allied Signal and Honeywell merger.
Howard Guttman is the principal of Guttman Development Strategies Inc., a management-consulting firm specializing in developing high performance teams, executive coaching, and strategic and operational alignment located in Ledgewood, New Jersey. Among his U.S. and international clients are Campbell Soup, Colgate Palmolive, Johnson & Johnson, Master Foods USA, Motorola, L’Oreal USA, Pfizer, and Sara Lee Corporation. Mr. Guttman is the author of When Goliaths Clash: Managing Executive Conflict to Build a More Dynamic Organization. He is a frequent contributor to professional journals such as Executive Excellence, Human Resource Executive, and Leader to Leader.
Our topic today is M&A Roulette: Using HR To Beat The Odds. To set this up, 75% of all mergers and acquisitions fail or don’t add to shareholder wealth. We believe that strategic HR involvement may make M&A efforts more likely to succeed. A 1995 Mercer-Business Week study found that of the recent 150 deals valued at $500 million or more, half actually destroyed shareholder worth judged by stock performance. And another third only contributed marginally to shareholder wealth. This is just one of over a dozen studies that put the number of failed mergers and acquisitions at between 50 and 80%. Worldwide, M&A activity peaked at $3.4 trillion in the year 2000. While M&A activity has been off considerably since then, it is coming back. Combining these two historic facts shows that there is a great opportunity for organizational improvement related to M&A activity.
This conversation will focus on three areas in which HR can contribute to M&A success. Those three areas are: 1) before change and control–that is, the date when the merger or acquisition is legally official, 2) the first 100 days after the merger or acquisition, and 3) the longer term.
RD: Starting with HR’s role before change and control, what are the most valuable contributions HR can make during the period of time before the deal is done?
KM: First, helping the business keep its eyes wide open. The first role of the HR professional is as a business member of an executive team. It is trying to understand what we are buying, asking if we know what we are buying, is it a good fit for the strategies of the business, and are we doing it for the right reasons? The second is getting beneath the organizational levels to see the show stoppers lurking in the woods: things that might be problems down the road—compensation structures, benefit issues, dormant litigation issues, and true identification of synergies. Usually, when we buy a business it is because we think we can leverage our existing infrastructure, we can bring a business in, and we can make the most of the systems that we have already built. The fact is, you need to understand what systems the other company has before you do that. A third piece is to get a good idea of what it is really going to cost to pay for severance, relocation, or closing facilities if needed. It is important to know and understand what these costs are.
RD: Dennis, could we get your perspective?
DZ: I agree with what Ken is saying. Deals fail not because somebody got the math wrong. Deals can go sideways because of miscues regarding the human element or the cultural attributes. HR needs to be at the table from the very start for this reason. The line executives who put these deals together understand the business proposition but often aren’t trained to go more deeply into what the HR ramifications are. What are the people-related obstacles? What are the human pieces? How close are the cultures to each other? What are the expectations of the leadership? What do policies and programs that are in place tell you about the company? These are the issues that the HR professionals need to address to make sure that deals do not derail. If HR people are not involved in this part of the transaction, they will not have the credibility or knowledge to contribute as the company moves further into the deal. So, doing a great job of the fundamentals means, as Ken said, understanding what the plans are, what the costs are, understanding the culture, beginning to get a feel for the personalities who are involved in the deal and what their expectations are so that, in addition to the dollars-and-cents aspect of the deal, the human elements are also addressed.
RD: Howard, what’s your perspective?
HG: I agree with what Dennis and Ken are saying in terms of the substantive content pieces. Another key role for HR to play is that of keeper of the entire process. Part of HR’s job is to play a leadership role in making sure that the senior team is tightly aligned, especially in terms of key objectives related to the merger or acquisition. The HR team must be clearly focused on strategic priorities and must also play the process-keeper role to ensure that the senior team is congruent regarding where it is headed with the merger or acquisition. From an individual role and an accountability standpoint, what are the expectations of each member of the senior team? What are the rules of engagement? For example, how are they going to handle issues such as confidentiality, communication, etc.?
RD: We’ve gotten into some of the potential issues that can be significant factors impacting a deal, such as leadership, conflict, and alignment. From your own experience, can you talk about a situation that you dealt with where alignment was difficult and you had to straighten it out?
KM: One example is of a little coffee company in Canada that Kraft bought. The ultimate success of the acquisition was the fruit of lessons hard-learned in the past. It was a unique West Coast coffee company that had its own culture and was very successful. Kraft was buying a small company. Kraft is a big company and was going to basically take this smaller one into its systems. The upfront candor helped people understand that Kraft was going to buy their brands, then take them into its systems, infrastructure, and culture. Kraft management did not paint a false picture of what was going to remain true in that company. It turned out to be a very successful acquisition, whereas, in the past, Kraft might have—out of the goodness of its heart—said that it would preserve things down the road. But that is not a smart thing to do in the end. So upfront candor helped to successfully bring a small company into a big one.
RD: Another example?
DZ: Yes, on paper and from a financial standpoint, one acquisition I was involved in looked like a perfect deal. Great synergy, distribution channels lined up, financials were perfect, etc. But when we took a look at some of the people issues inside the company—the culture, work practices, employee programs, labor relations, pension plans, and policies—we realized that it was not a good match. Culturally and operationally the differences between our two companies were too great to overcome. It would have been very difficult to make changes and get the required operational flexibility, given the differences between the two companies. If HR had not been at the table, the deal might have gone forward. As it turned out, the decision we made to pass on this acquisition was the right one.
RD: Howard, what are your thoughts?
HG: We were called in to facilitate a merger for a company from the consumer-packaging world. The company that initiated the merger was a strong, forceful leader. In embarking upon the process of aligning its senior team with that of the smaller company, it became apparent that the members of the smaller company’s team did not feel comfortable expressing their viewpoint or raising issues with the bigger company’s team. What ended up happening was that a key contingent of the smaller company was going underground. They felt they were not able address these key issues. If key people are not able to talk openly, first they go underground, then they decide to leave. You do not want this to happen. So the lesson learned is that if there is resistance in the room bring it into the open—because, if you don’t, the issue will eventually come back to haunt you.
RD: Let’s follow up on that because one of the significant issues during due diligence is making sure there is an open dialogue about whether the merger or acquisition is a good idea and what the issues are. Sometimes the financial people just speak to other financial people and you do not get enough different perspectives to have a good dialogue. What’s HR’s role in making this a good dialogue?
DZ: Every deal is a little different, but I believe in open communications. If there are restrictions of a regulatory nature, you obviously have to honor those. But the more dialogue, the more connecting points you have between the two companies, the better off you are. You can never get enough communications in this kind of situation. HR has got to be part of the plan in terms of setting up a process so people have a clear expectation about what kind of information they can expect to receive. People are asking, “What about me?” HR has to be sensitive to this because it will affect productivity and customer relationships. Dealing with “me’ issues is at the forefront for employees. HR must steward a rational approach to maintaining organization calm and addressing this element in an M & A environment.
KM: HR has to be a steward of the process and must design a process to facilitate how functional counterparts can come together in a productive dialogue. We have to do that in a timely, structured manner. This is not a business deal only. It is a deeply emotional, anxiety-producing period. You are dealing with people who do not know what their future is going to be. You have to be respectful of that.
HG: Unlike the other people on the senior team, HR has to view itself as both business partner and process keeper. That’s not easy to do. Probably, of any function on the senior team, HR has the trickiest role.
RD: I like to look at leadership selection a bit. There are a number of issues that impact leadership selection. So I would like to ask: What are the key things that go through your mind as you’re thinking about the leadership selection process?
KM: One of the keys of due diligence is finding out who is in this business and who are the people that we want to hold on to and want to bring into our organization. We do this in a number of ways. We interview people in the organization to try to identify those who are going to be the best leaders and then bring them into the process as soon as possible. How do you take the people you know are going to be key to your success, bring them in, treat them as if it’s being done with them, as opposed to being done to them. We get them exposed to larger meetings in the parent organization and then include them in the process of finding the right answers.
RD: Howard, how about your perspective?
HG: The first thing we do when we assess executives in this situation is to see if they have the willingness to “play.” When I think about those who don’t make it in the acquired company, it’s usually because the new environment is not what they signed up for. Or they didn’t really have a clear picture of what they were getting married to. Typically, technical issues do not make or break a leader. It’s more about whether or not psychologically they are willing to leave their comfort zone and make a go of it in the new world—really embrace the new culture. Willingness is the first quality that we look for.
DZ: I agree with the comments that Howard and Ken have made. Selecting leadership is among the most important tasks in mergers and acquisitions. What I have learned from experience is that companies that get it right do not delegate this task or do it in a haphazard way. Top leadership needs to be involved: The president, CEO, chairman, and senior leadership are all involved in deciding which people get which jobs, who stays, and who doesn’t stay. Make these decisions as quickly as possible using a transparent process. You signal a great deal by how and whom you choose.
RD: There’s been some research that says that there are four major reasons a CEO may lose his/her job. One of them is a botched major acquisition or merger. If the HR people and the HR executive don’t have a great deal of credibility, they’re probably not going to get a full invitation to the table. What’s your sense of that?
DZ: That’s absolutely right. This is high-stakes activity. HR’s work is not fluff. It has to be founded in fact, and that is why when HR people are involved in this, they need to do their homework well. They need to be well trained.
RD: Ken, how about your comments?
KM: That’s true. A merger or acquisition is the 10-meter diving board. If you are not well versed in the lower-level challenges that get you a seat at the table, you are not going to have the opportunity to play a role in the merger or acquisition. A lot of traditional HR folks might focus on the softer side of an acquisition. The first proof of your credibility is that you’ve mastered the harder side—you really do understand the due diligence around the labor situation and pension funding—and then you can get into the cultural side.
RD: Let us move on to HR’s role in the first 100 days after control. We know from a lot of research that the first 100 days after a transition are very significant and set the tone for what follows. What are the most significant or valuable contributions that HR can make during this period in the first 100 days?
DZ: I believe that the first hundred days are critical. This is a period when the new organization needs to get out of the blocks running. When we did our deals, for example, during the Allied Signal/ Honeywell merger, we used the first 100 days to execute lots of decisions. Upon the change of control, that’s where you want to see action. And that’s when you want to see the organization begin to implement the changes and decisions that you’ve made up until this point. For example, when we pulled those two large companies together, on day one we had a plan for which facilities around the world would need to change or shut down. We made very specific, painful decisions, for example, to shut down the Minneapolis headquarters—formerly a Honeywell site—and this required 50 or 60 other decisions that had to be made before we could go public. For example, everything from severance plans, new job officers for employees, relocation policies, and a specific program to transfer the work was in place to execute on day one. The faster you move, the more you’re going to build confidence for success in the organization. Speed and decisiveness are very important. Also, keep communicating so people understand the future direction.
HG: Primarily, our focus has been trying to rapidly assimilate senior team members because you know that you’re not going to get traction further down in the organization until the senior team is on the same page. You want to rapidly get the team to the point where key issues are on the table. Part of the job of HR is to ensure that this happens quickly. And, finally, you want the new entity to become a high-performing organization. So the faster the process works to get the senior team to some semblance of high performance, the faster you’ll be able to get traction below.
RD: Do you feel that that is true, not only for the senior management, but for each of the major divisions that are part of this merger?
HG: Absolutely. What’s interesting is that if you think about drilling down into a function or cascading by levels, the senior team sets the bar. If the senior team is operating in a dysfunctional way, it’s not realistic to think that the rest of the organization can somehow supersede that. So that really is the key: to get the senior team out of the gate quickly.
RD: Ken, what’s your perspective on this?
KM: It is important to go into the organization on all levels. It is a highly destabilizing time: People are very nervous and the focus is on maintaining morale, keeping focused on the business, and building trust that it is going to be a good place to work. One of the things that we have learned over time is to get quickly to the sales force. You’d be amazed at how quickly performance in the business can deteriorate during this time, and all of a sudden what you think you bought, you didn’t buy, because people are leaving. Our operating companies really put a focus on making decisions quickly, and when a decision has not been made, tell people when the decision will be made. Constantly tell people the date when you can expect to know X, so that through this period, you establish some certainty in their world.
RD: I think this is a really significant challenge for HR, especially since HR has really been impacted themselves. How does a great HR leader handle this?
DZ: This is an opportunity for HR to lead by example. All the things we have talked about are important for HR. HR needs to reach out and understand the new HR organization and have concrete deliverables and a timeframe for getting all the HR work done. I’ve always taken the time to meet key people and talk to them, so I can understand their expectations, and they can hear mine. Building confidence and their buy in to the direction of HR is important. It is important to ensure that the rest of the organization is staying on track with all the important plan and design changes.
KM: This is an incredible development opportunity, giving people experiences they will remember throughout their careers and be able to publish on their resume. This is the World Series for a lot of people, and they will find new talents they never knew they had.
HG: HR has to continue to be the keeper of the process with the senior team. HR needs to be a radar screen and occasionally hold a mirror up to the senior team. HR should be a partner in asking tough questions.
RD: My final question: What can HR do to prepare itself so it can provide significant value during a merger or acquisition?
KM: First, understand the basics: Do you know what the business is trying to do, and can you speak about it? Second, don’t be shy about your unique contribution and perspective.
HG: If HR is going to play a significant role during a merger or acquisition, the first thing it must do is some serious soul-searching. HR professionals can begin by asking themselves whether or not they have the competencies needed to deliver value. If the answer is “no,” it is imperative that they get help to gain those competencies.
DZ: Understand the business proposition. That builds credibility. Do your homework and due diligence on HR policies and programs. Speak up and have a voice. Understand and never lose sight of the difficulties of this time. Be a positive force in bringing people together. If you do not have answers that resolve people problems, get help. There is nothing embarrassing about getting expertise to help you, so you can help hundreds or thousands of other people. Use common sense and always treat people with respect and dignity.