Human Resources: Executive Summary: Mergers and Acquisitions

After several years of declining activity, mergers and acquisitions (M&As) are making a comeback in the United States. Yet recent research suggests that many firms are not as prepared as they should be to manage HR issues related to mergers or to involve HR early in the due diligence process.

More deals are occurring, and the value of those transactions is also on the rise. Year-end totals for 2003 marked the first upswing in U.S.-based merger and acquisition activity since the turn of the century, according to Mergerstat. Nearly 8,000 deals were reported, compared with 7,874 the previous year. What's more, aggregate deal value is on the rise, jumping to $528 billion from $461.3 billion in 2002.

Mega-deals (those valued at over $1 billion) have had significant impact, but some analysts have noted that their popularity may be short-lived. In 2003, U.S.-based mega-market deals jumped to 87 transactions totaling $286.7 billion, up from 68 deals valued at $218.3 billion in the previous year. Such transactions also boomed in the first quarter of 2004. As many as 30 such deals were reported, with a total value of more than $214 billion, Mergerstat notes. However, firms are beginning to question the profitability of such transactions, and deal sizes have diminished for now.

Regardless of size, many firms are not prepared to meet the people management challenges that M&As often introduce. A study conducted by Accenture, a global management consulting, technology services and outsourcing company, found that only 48% of surveyed firms believe their post-merger integration practices are sound. The same study suggests that performance management systems are not adequately tied to merger successes; just 37% of respondents reported that executives are evaluated according to ongoing integration metrics.

Pre-planning can help firms avoid pitfalls that would otherwise doom a deal, whether a merger is cross-border or domestic. Mergers fail for three primary reasons, according to a poll by Thomson Financial and the Association for Corporate Growth: inadequate post-merger integration, too high a price paid for the acquired business and insufficient communications.

Due diligence is key in pre-planning, but some firms are not doing all they should. Slightly less than two-thirds of companies surveyed conducted due diligence in the M&A process, according to a 2004 survey by Corporate Finance magazine. What's more, Bain & Company reports that half of the 250 senior managers polled noted that their due diligence efforts missed major M&A problems.

One solution may be to involve HR early in the process. For example, Schneider Electric is "committed to making the HR function a fully fledged partner at the M&A table" and assures participation in the M&A operations and processes, notes Jean-Luc Santerre, vice president of corporate social development for the French firm, which operates in 130 nations. "To achieve this we have a defined HR process for due diligence and are building one for integration," he explains. Three areas must be evaluated early in the M&A process - cultural fit, organizational design and change management.

It's never too early for an organization's HR function to develop some expertise in M&As. After all, based on current trends, the likelihood of a company's becoming involved in a merger is increasing. By making basic preparations, HR can help firms update their processes and procedures and decide if a future M&A would be in their best interest.

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