Knotted forever…

By Amit Pande & Sandeep K Krishnan

In an ideal merger, the newly created entity pools the best features of the two merging
organizations. A well planned process built on the foundations of an open, honest and
consistent communication strategy can pave the way.

Mergers and acquisitions have become a common phenomenon in recent times. A merger
of the size like HP-Compaq has implications for the workforce of these companies across
the globe. Although the merging entities give a great deal of importance to financial
matters and the outcomes, HR issues are the most neglected ones. Ironically studies show
that most of the mergers fail to bring out the desired outcomes due to people related
issues. The uncertainty brought out by poorly managed HR issues in mergers and
acquisitions have been the major reason for these failures.
The human resource issues in the mergers and acquisitions (M&A) can be classified in
two phases the pre-merger phase and the post merger phase. Literature provides ample
evidence of difference in between the human resource activities in the two stages: the
pre-acquisition and post acquisition period. Due diligence is important in the first phase
while integration issues take the front seat in the later. The pre acquisition period
involves an assessment of the cultural and organizational differences, which will include
the organizational cultures, role of leaders in the organization, life cycle of the
organization, and the management styles. The mergers often prove to be traumatic for the
employees of acquired firms; the impact can range from anger to depression. The usual
impact is high turnover, decrease in the morale, motivation, productivity leading to
merger failure. The other issues in the M&A activity are the changes in the HR policies,
downsizing, layoffs, survivor syndromes, stress on the workers, information system
issues etc. The human resource system issues that become important in M&A activity are
human resource planning, compensation selection and turnover, performance appraisal
system, employee development and employee relations.
M&A activity presents a different set of challenge for the human resource managers in
both acquiring and acquired organizations. The M&A activity is found to have serious
impact on the performance of the employees during the period of transition. The M&A
leads to stress on the employee, which is caused by the differences in human resource
practices, uncertainty in the environment, cultural differences, and differences in
organizational structure and changes in the managerial styles.
The organizational culture plays an important role during mergers and acquisitions as the
organizational practices, managerial styles and structures to a large extent are determined
by the organizational culture. Each organization has a different set of beliefs and value
systems, which may clash owing to the M&A activity. The exposure to a new culture
during the M&A leads to a psychological state called culture shock. The employees not
only need to abandon their own culture, values and belief but also have to accept an
entirely different culture. This exposure challenges the old organizational value system
and practices leading to stress among the employees. Research has found that dissimilar
cultures can produce feeling of hostility and significant discomfort which can lower the
commitment and cooperation on the part of the employees. In case of cultural clash, one

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of the cultures that is dominant culture may get preference in the organization causing
frustration and feelings of loss for the other set of employees. The employees of non-
dominating culture may also get feelings of loss of identity associated with the acquired
firm. In certain cases like acquisition of a lesser known or less profitable organization by
a better one can lead to feelings of superiority complex among the employees of the
acquiring organization. In case of hostility in the environment the employees of two
organizations may develop “us” versus “them” attitude which may be detrimental to the
organizational growth.
The uncertainty during the M&A activity divert the focus of employees from productive
work to issues like job security, changes in designation, career path, working in new
departments and fear of working with new teams. The M&A activity leads to duplication
of certain departments, hence the excess manpower at times needs to be downsized hence
the first set of thoughts that occur in the minds of employees are related to security of
their jobs. The M&A activity also causes changes in their well defined career paths and
future opportunities in the organization. Some employees also have to be relocated or
assigned new jobs; hence the employees find themselves in a completely different
situation with changes in job profiles and work teams. This may have an impact on the
performance of the employees. Research has found that at least two hours of productive
work per employee per man day is lost during the M&A activity in the organizations. The
increased political processes that may be underway in the organizations to sustain the
importance of the various individuals and departments will add to the confusion.
The human resource systems vary across organizations owing to the differences in the
organizational culture, sectoral differences and national cultural differences. For example
if the compensation in the acquired firm is lesser compared to the acquiring firm, the
acquisition will raise employee expectations (for the employees of acquired firm) of a
possible hike in compensation which may not be realistic. On the other hand if the
compensation level of employees in acquiring firm is lower the employees may press to
have equal compensation across all the divisions of the firm. The pay differential can act
as a de-motivator for the employees of acquiring firm and may have long term
consequences. The compensation issues may also involve legal angle. Two cases in the
Indian context are important which underline the importance of legal issues related to
compensation in M&A activity.
The first case involving Hindustan Lever Limited acquiring TOMCO, the employees in
TOMCO enjoyed better terms and services compared to the HLL employees. The HLL
employees argued that if TOMCO employees are allowed to work on their original terms
and conditions, two classes of employees will come in existence. Since both the set of
employees now belong to same firm, a case of discrimination will arise against the
employees of HLL. However the court supported TOMCO employees in the process. The
second case involves merger of Glaxo and Wellcome-Burroughs who decided to merge in
1996. The Indian arms however couldn’t merge in the last seven years because of high
pay differential between workers of Glaxo and Wellcome in India. The workers of
Wellcome were offered a one time compensation of Rs. 2 lakhs in 1998, which they
refused. Further the VRS scheme launched by the firm evoked very tepid response.
Since 1997 the firms have been working as independent subsidiaries in India.
Compensation differences need to be rectified by the acquiring firm so as to maintain the
morale of acquired firm employees and to retain them. The compensation structure

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among the organizations may also differ creating troubles, for example one of the firms
may have performance based pay while other may have higher component of fixed pay.
Hence the differences in compensation structure and performance appraisal systems also
need to be rectified so as to bring equity in the human resource systems and to treat
employees at the equal level.
Another practical problem is differences in the grading or organizational structures in the
systems. Since the organizational structures are different designations for the employees
are used, during the integration of acquired organization the acquiring organizations need
to develop a mechanism to remove the differences in the grading systems bring them at
equal level, as many a times the compensation is related to the grade of employee in the
organization.
The employee relations issues gain more importance in the acquisitions of manufacturing
units in India. The power equation between management and trade unions is bound to
change with the acquisition. The acquiring management also needs to keep track of
number of unions in the workplace and equations between them as many Indian
manufacturing units have multiple unions. Hence comprehensive analysis of trade unions
operating in the plant should be done. This will require study of management-union
equation, employee contracts, political linkages of the unions, compensation related
clauses, number of trade union and dynamics between the unions.
The impact on the employees can be divided into categories of psychological trauma,
increased workload, survivor guilt and stress. The reaction of the employees can vary
from anger to dejection and depression. The process of merger can have inbuilt
psychological and social threats which should be identified like exodus of managers due
to the perceived job insecurity. There is also fall in the morale, commitment and loyalty.
The merger can lead to depression and impaired performance. The dissimilarity in the
cultures can produce the feelings of hostility and significant discomfort, which impact on
the commitment and cooperation on the part of employees. The cultural difference also
leads to counterculture feelings where employees tend to completely reject the dominant
culture of the organization. The impact of cultural shock is significant and long lasting on
the employees. The initial shock is followed by employees making their own perceptions
based on values and past experiences. The more dissimilar the culture is higher will be
the cultural shock. The likely reactions as noted by studies are anger fear, denial
frustration and depression which leads to altered behavior, reduced productivity, stress,
illness, accidents , conflicts and a total lack of commitment to make merger work. The
feeling of political back stabbing adds to the psychological trauma.
Kids Corner and Kamala
Kamala who was in her early forties was quite puzzled with what is happening with her
career. As she was listening to a lecture on people issues in mergers and acquisitions, she
could not just let herself free from the experiences she was having for the past 6 months.
Kamala is working as a Principal in a nursery school which takes care of about 100
students. She had four teachers working under her and other three office staffs. The
events unfolded as follows. Vidhya group was interested in taking over “Kids Corner”
which was the nursery managed by Kamala. Although Kamala was not a partner in “Kids
Corner”, she was given a lot of freedom and authority in running the organization. As a
principal she was vested with the responsibility of taking any decision which affected the
organization. The partners of “Kids Corner” were running the organization as a service to

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the society. The revenues which were collected as fees from the kids were used to fund
the salary and other running expenses of the nursery.
As the professor explained how some of the major mergers turned out to be acquisitions
with the bigger and stronger company trying to take full control, Kamala was worried
about her destiny in the organization. Kamala initiated the process of merging Kids
Corner with Vidhya group. Vidhya group managed many educational institutions from
high schools to engineering colleges. However they didn’t have professionally managed
preschool in their portfolio. The inclusion of Kids Corner would help then to get a good
group of students in the entry level classes of their high school too. Kamala also thought
this as an opportunity to grow and increase the visibility of Kids Corner. Kamala
represented Kids Corner in all the major negotiations with the Vidhya Group. She was
impressed with the way that Vidhya group discussed various issues with her. They also
guaranteed her the post of Principal once the group takes over the Kids Corner. The
parents of the kids were also involved in the take over negotiations. The Vidhya Group
and the parents were of the opinion that since she managed the institute till now, she
knows best to do it further.
The ownership of Kids Corner was taken over by the Vidhya Group. However things
changed a lot since then. Lots of ambiguity crept in regarding the fate of Kids Corner.
Kamala was sidelined in some of the major decisions which were taken regarding the
running of Kids Corner. Some of the teachers left the organization feeling uncomfortable
with the new management and their style of functioning. The way the new management
dealt with Kamala also changed a lot. A new person was appointed as the manager of
Kids Corner. He took some of the major decisions regarding the running of the
organization, which Kamala was unaware of.
Kamala thought that there is a major dent in the freedom she had in running the
organization. She was further shocked when the new management informed her that the
salary that she is drawing now is too high for the organization to afford. They wanted the
salary to be cut to almost half. With this Kamala thought that she was cheated by the
Vidhya group. She is on leave for almost a week and had discussed this issue with her
colleagues and family. She was in a complete dilemma and has now started thinking of
the options she had before her. After the session, she had a chat with the professor and
narrated the experience she is undergoing. She brought out the options before her –
Whether to continue with “Kids Corner”, join another organization which may give a
comparable salary and job profile or fight it out with the new management.

In the case of Kamala, we can see how the confusion after merger affects the professional
life. If organizations of large size merge, the differences that may exist in practices, the
mystery about the future, feeling of distrust and rumors will be creating havoc in the life
of employees. The result as we have seen in the case may be employees leaving the
company or drop in productivity due to apathy towards work and the management. It is
important to understand a merger will be the case of managing a number of employees
like Kamala and this should be a well planned process.
Managing M & A
Clearly defined communication strategy during M&A plays an important role in
removing the employee fears and kill rumors floating around in the organization. The
organizations need to reach their employees before the press as the employees will have

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feelings of getting cheated. Studies show that communication strategy that involves
senior managers of the acquired organizations work well. Involving other employees who
are trusted by the employees for instance trade union leaders are also helpful. The
employees meeting in small groups so as to discuss their concerns, fears and positive
feelings also helps to lessen the stress on employees of acquired firm. The group
meetings seem to help because many-a-times employees are reluctant to come out and
speak their concerns, whereas in groups where everyone shares same set of feelings to an
extent, it becomes easier to come out with the common set of concerns and fears. This
also provides confidence to employees that the new management is willing to listen to
their concerns and feelings, building an atmosphere of mutual trust.
The transition period also becomes crucial from communication point of view. In case of
lengthy transition period the employee stress increases, the best strategy in this period is
to convince the employees that they are part of new organization and their concerns will
be taken care of. The transition period can also be used to improve communication with
the employees of acquired firm. Improved communication will help to better understand
each other’s cultures and practices. Firms can also use this period to analyze the human
capital of the acquired firm and define their possible roles in the new organizations. The
transition period provides ample opportunity to design the new organization, explain the
new roles to the employees, plan synergies and train the employees as the new role. This
will make the integration process easier for the acquiring organization.

HR takes control
• Train managers on the nature of change
• Technical retraining
• Family assistance programs
• Stress reduction program
• Meeting between the counter parts
• Orientation programs
• Explaining new roles
• Helping people who lost jobs
• Post merger team building
• Anonymous feedback helpline for employees
The communication aspect being very important should be handled carefully by the
human resource department. The communication should provide precise information to
the employees, providing any piece of information which is unreal can lead to rumors and
counteract. The communication should be sufficient enough to answer the queries and
worries of the employees. The first set of information should be related to their future
jobs, this will help to lessen their worries related to job security. The communication
shouldn’t involve false promises which may counteract later. The communication can be
through trusted and credible employees of the acquired company and trade unions can be
involved in the process too.
Acquisition strategy of GE Capital
The GE Capital uses a successful model called “Pathfinder” for acquiring firms. The
model disintegrates the process of M&A into four categories which are further divided
into subcategories. The four stages incorporate some of the best practices for optimum
results. The pre-aquisition phase of the model involves due diligence, negotiations and

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closing of deals. This involves the cultural assessments, devising communication
strategies and evaluation of strengths and weaknesses of the business leaders. An
integration manager is also chosen at this stage. The second phase is the foundation
building. At this phase the integration plan is prepared. A team of executives from the GE
Capital and the acquiring company is formed. Also a 100 day communication strategy is
evolved and the senior management involvement and support is made clear. The needed
resources are pooled and accountability is ensured. The third is the integration phase.
Here the actual implementation and correction measures are taken. The processes like
assessing the work flow, assignment of roles etc are done at this stage. This stage also
involves continuous feedbacks and making necessary corrections in the implementation.
The last phase involves assimilation process where integration efforts are reassessed. This
stage involves long term adjustment and looking for avenues for improving the
integration. This is also the period when the organization actual starts reaping the benefits
of the acquisition. The model is dynamic in the sense that company constantly improves
it through internal discussions between the teams that share their experiences, effective
tools and refine best practices.

Source: Ashkensas, R.N., DeMonaco, L.J. and Francis, S.C. (1998).Making the Deal
Real: How GE Capital Integrates Acquisitions. Harvard Business Review, Jan/Feb98,
Vol. 76 Issue 1, p165, 1

Acquisition strategy of Cisco

The acquisition strategy of Cisco is an excellent example of how thorough planning can
help in successful acquisitions. After experiencing some failures in acquiring companies,
Cisco devised a three step process of acquisition. This involved, analyzing the benefits of
acquiring, understanding how the two organizations will fit together – how the employees
from the organization can match with Cisco culture and then the integration process. In
the evaluation process, Cisco looked whether there is compatibility in terms of long term
goals of the organization, work culture, geographical proximity etc. For example Cisco
believes in an organizational culture which is risk taking and adventurous. If this is
lacking in the working style of the target company, Cisco is not convinced about the
acquisition. No forced acquisitions are done and the critical element is in convincing the
various stakeholders of the target company about the future benefits. The company insists
on no layoffs and job security is guaranteed to all the employees of the acquired
company. The acquisition team of Cisco evaluates the working style of the management
of the target company, the caliber of the employees, the technology systems and the
relationship style with the employees. Once the acquisition team is convinced, an
integration strategy is rolled out. A top level integration team visits the target company
and gives clear cut information regarding Cisco and the future roles of the employees of
the acquired firm. After the acquisition, employees of the acquired firm are given 30 days
orientation training to fit into the new organizational environment. The planned process
of communication and integration has resulted in high rate of success in acquisitions for
Cisco.

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(The case is adapted from “Cisco’s acquisition strategy”, ICFAI Center for
management research)
In an ideal merger, the newly created entity pools the best features of the two merging
organizations. A well planned process built on the foundations of an open, honest and
consistent communication strategy can pave the way.

Sandeep K Krishnan and Amit Pande are students, Fellow Programme in Management,
Personnel and Industrial Relations area of the Indian Institute of Management,
Ahmedabad. They may be contacted at sandeepk@iimahd.ernet.in and
amitp@iimahd.ernet.in