Midland Banking HSBC
Chapter 2: Background Theory
2.1 Recent trends
In 1992, the Hong Kong and Shanghai Banking Corporation successfully took over Midland bank Plc following a non-hostile bid. It also represented the culmination of a long -term strategy on the part of HSBC Holdings. The result was the creation of the second largest non-Japanese bank in the world and the largest in the UK, measured by 1992 market capitalization. However the bid was strongly contested by Lloyds Bank in a counter bid in the spring of 1992. (Paul Stonham, 1994)
Newspapers, Journals, Magazines are filled with such extracts. Mergers and acquisitions are now relatively commonplace throughout the various industry sectors, (from Banking to Telecommunication and Hotels to Supermarket), where the rapid amassing of intellectual property, new technology, and even better products are defining the winners in what has become a hyper competitive market.
From 1992 to 2000, the pace of merger activity rose to unprecedented levels. The volume of transactions rose from $322 billion in 1992 to $ 6.2 trillion in 2000. The clearest reflection of this trend is the $180 billion Vodafone Air touch Mannesmann the largest in the history by far. With the 10 largest mergers in history having taken place since 1999, this appears to be the era of mega merger. (J. Fred Weston, S. Weaver, 2002)
“A billion dollar deal used to be remarkable, but there were almost 200 mergers of this size or greater last year in the US alone”
(Bernard Black, 2007)
By the end of 2007, worldwide merger and acquisition activity had reached $4.5 trillion from 42491 cross-border transactions compared to $3.6 trillion generated in 2006. In terms of sectors finance proved to be the most targeted ones globally in 2007, with deals in this industry up 27% from 2006. (Cust and Gibbon, 2008)
Many of today’s most successful companies including Walt Disney Co. use mergers and acquisitions very effectively to improve their skills. Deals between Arcelor and Mittal have fundamentally altered the shape of the steel industry. Daimler’s merger with Chrysler and the America Online acquisition of Time Warner have created whole new industries.
Why mergers fail?
The $230 billion mega-merger of America online and publishing empire Time Warner was supposed to be the best thing since sliced bread and a sure fire for the investors and the U.S. economy. Now the marriage is over and the newly separated companies are trying to reestablish their worth and customer base. (Kavanagh and Ashkansay, 2006)
Mergers and acquisitions are highly complex events with infinite number of factors that can lead to its success or failure. Because they influence so many parts of the participating organizations in such fundamental ways, mergers represent a very difficult organizational change process. In fact, in most cases mergers and acquisitions do not seem to lead to higher performance. (Agarwal and Jaffe, 2000; King et al., 2004)
Clearly, many things can go wrong. Expectations may be unrealistic; strategy hastily constructed and poorly planned or executed. Talent may be lost or mismanaged. Success may require an impossible degree of synergy and transition costs may be underestimated. Culture clashes between the entities can go unchecked. The merger may distract the focus of executives from the core business at a crucial time. (Financial times, 2001)
Every merger or acquisition promises to create value from some kind of synergy. Yet statistics show that the benefits that look so good on paper often do not materialize. (Financial times, 2006)
Mr. Lafely a veteran CEO of P&G believes that four out of five mergers don’t work out and big deals fail more often than small ones. He admits that the $57 billion purchase of a company known for serving men rather than women: Gillette, was a risk that paid off after some initial struggle. According to him strategy, company’s culture and bosses are the main reasons for the failure of mergers. It takes strong management and a lot of luck to make a corporate merger work successfully (Economist 2007,)
Wharton management professor Harbir Singh believes that the crucial distinguishing factor between success and failure in a merger is a realistic outlook on the part of top-level executives that needs to be maintained through the entire integration process. Often acquisitions fail when executives and Directors are too obsessed with the acquisition, wanting it to work at any cost.
According to Bekier, Bogardus and Oldham (2001) failure to focus on revenue may be one of the major reasons for the failure of many mergers. Some companies merge on the hope that there will be synergies that result in cost savings, but history has shown that they often aren’t achievable.
Organizations involved in mergers and acquisitions are usually preoccupied in cutting costs but ultimately it is the revenue that determines the outcome of a successful merger.
Martin Sikora in his article mergers and acquisitions: The dealmaker’s journal mentions that ignoring the customer during the merger process may also be one of the possibilities for the failure. He cites an example of merger between two technical firms in Silicon Valley both of who had IBM as the leading customer. When the merger was announced they both lost IBM’s business as they failed to inform IBM of the change. Organizations should always communicate with customers during merger and acquisition times informing them about the benefits they will be able get post-merger and how this merger would be helpful for them.
Daimler's chief of passenger cars, Juergen Hubbert, was quoted in The Economist: "We have a clear understanding: one company, one vision, one chairman, two cultures." Thus differences of culture at Daimler and Chrysler made its merger more difficult. It was supposed to be the merger of equals but has turned out to be just another disastrous car-industry takeover. This explains that organization culture also plays an important role in deciding the fate of the corporate marriage.
The failure of an M&A is frequently blamed on a clash of cultures between the merging companies that resulted in major integration problems and undermined the success of the deal. The cultural and communication challenges are even greater when the merger is between a western company and one from an emerging market. An internal study conducted by Siebel Systems (which was recently acquired by Oracle) revealed that all of the company's acquisitions had failed because of "cultural conflicts".
The cultural and communication challenges are even greater when the merger is between two different countries. Research carried out by Susan Cartwright of Manchester Business School and Cary Cooper of Lancaster University Management School on a wide range of industries across Europe suggests that in mergers of equals sized companies, the cultures of the combining organizations must be similar because the success of the merger depends on the ability to create a coherent "third culture" which combines elements of both cultures. Since organizations normally strive to retain their own culture, mergers between companies with dissimilar cultures will result in major integration problems.
Another aspect that is often neglected is the people aspect. Effective mergers and acquisitions claim poor handling of people during merger leads to the loss of key employees restructured responsibilities and derailed careers. Kavanagh and Ashkanasy (2006) estimate that ‘employee problems’ are responsible for between a third and half of all mergers failures.
Chris Watkins at Hay Management Consultants have a similar view about the role and importance of human resources during Mergers and Acquisitions. According to him 70 percent of mergers and acquisitions fail to live up their promises, not through any failure in economic terms but because the integration of people is unsuccessful. (Sunday Telegraph, June 2001)
Mike Broad (2001) believes that most mergers fail to achieve their potential because senior managers lack a clear strategy and mismanage people issues. Poor handling of employees during merger often leads to their absenteeism, poor performance and derailed careers.
It has been estimated that most companies spend only about $10 per employee per year on internal communications, less than what is spent on many Christmas parties. However when an employee leaves a company, an average of $8300 is incurred by business in replacement costs. When one considers the additional cost to a business of unhappy employees who are unproductive, poor internal communications can be substantial expense for a business; keeping in mind the billions of dollars spent on the merging exercise, just in anticipation that it will succeed. (Kautz, 2000)
The degree of HR’s participation is therefore directly linked to the success of mergers and acquisitions. Jeffrey A Schmidt (2001) is of the view that the earlier the HR department in involved in the merger process; the greater are the chances of success. The role of HR department in mergers and acquisitions shall be detailed in the following chapter.
Role of HR in Mergers and Acquisitions
“If IBM acquires Microsoft and Bill Gates decided to join another company, is IBM buying the full value of Microsoft?”
Awareness of human resources in acquisitions is important because human resource practices have influence on the outcomes of mergers and acquisitions.
Kavanagh and Ashanasy (2006) estimate that employee problems are responsible for between a third and half of all merger failures. They further state that the acquiring firm gains not only the targets land, buildings and operations but also its people. Thus they should manage the human resources properly to enhance results in merger and acquisitions. Proper management of the acquired people has a tremendous impact in creating the value for the acquirers.
“ I remember the day before the press conferences where the new merger between MeritaNordbanken and Unidanmark should be announced. HR was simply nowhere at the organization chart. And I thought how can you set up an organization with 40,000 employees and claim that and HR organization is not needed. And I said to the CEO: You are sending a signal to the employees that they are secondary to the merger. They do not exist in your mind if you do not establish a separate HR function.” Recalls one of the senior HR managers at MeritaNordbanken. (Soderberg and Bjorkman, 2006)
The Johnson & Johnson study found that many acquired businesses lose essential people. Yet retaining these people is crucial to achieving goals through the transition period and the long-term competitive advantage associated with specialized knowledge. Uncertainty caused by unclear strategy, no HR assessment and insufficient communication can drive away staff. Selection needs to be aligned closely with incentives for employees to stay.( nEWPAPER)
One HR professional at MeritaNordbanken admits “ I could have hindered people from leaving the company, if my own role would have been well defined. I could have persuaded them to calm down. Often the importance of HR is forgotten.
(Soderberg and Bjorkman, 2006)
Aguilera and Dencker (2004) believe that HRM plays an important role in merger and acquisition process by managing the employees in the turbulent times of change, reinforcing the new culture and providing leadership and communication to reduce employee turnover. Thus HRM can have an influence on the success of mergers and acquisitions in each stage of the process.
Before the deal:
During the deal:
“Its relatively easy at board level to say how well these companies fit together strategically but getting people at all levels to let go things they liked and embrace the new company, the new culture: that was the real challenge.” says Malcolm Hurrel, vice-president HR of AstraZeneca. (Blau,2002)
After the deal:
Each type of merger or acquisition creates different people management issues. For example, a merger of equals often compels the two companies to share staffing implications, whereas a merger of unequal companies results in these being shared unequally. An acquisition that involves integration has greater staffing implications than one involving separation (financial times 2001)
Impact of M&A on employees:
“People issues are the most difficult and important aspect of a successful merger and acquisition.” (Scott L. Corwin, 2001)
Mergers and Acquisitions involve changes in organizational structure, value-creation and in the culture of both the organization. They often have a strong impact on the employees and if these changes are not handled properly then it leads to high absenteeism, lack of motivation, high turnover that affect employee performance and eventually organizational performance. (Rasu et.al, 2006)
Employees are usually apprehensive and overreact when they hear that their company is getting merged or acquired. “ I once worked with a blue-chip car manufacturer that got acquired,” Mark recalls. “ The first rumour hit within a day: three thousand people were going to be laid off at headquarters- which was strange, since only 1000 people worked in the headquarter. People just assume the worst. ” (Julitte Borda, November 1998)
Employees are interested in obtaining information about the consequences of the merger and acquisition that will affect them directly in terms of job security, career prospects, and new working environment. Therefore HR department should communicate with the employees during and after the merger assuring them about their continuity and future in the organization that would motivate them to be loyal with the organization focus on their work. Honest and realistic communication can help employees to cope with the changes of merger and acquisition and thus reduce the negative impact that merger/acquisition has on organizational effectiveness. (Rasu et.al, 2006)
When the corporate marriage between Daimler Chrysler came to an end. There was a strong rumor amongst employees that over 10000 jobs are to be cut in what insiders were calling as the ‘Saint Valentines Day Massacre’. The true figure turned out to be 13000, about 16% of the workforce.( financial times 2000)
Cartwright and cooper (2000) highlight another area of concern that affects the employees of the merging organization that is the amount of stress that they go through during merger process in unimaginable. Many employees do not have the resources or knowledge to effectively eliminate the merger produced stress. They further continue by saying that “ Merger-produced stress has nor been on the must do or must consider agenda of the management and human resource professionals”. Management thus should consider eliminating their stress during the merger by involving them in the process and communicating with them in an honest and sincere manner about the merger.
Another concern which employees normally have following a merger/ acquisition is of remuneration. Hunt, J.W and Downing (1990) are of the view that remuneration plays an important role in job satisfaction and thus in turn employees performance following a merger. Job satisfaction is a key factor guiding the employee’s performance and having a impact on organization performance.
However during the merger processes employees are more concerned about their job security as mergers and acquisitions involve a large amount of employee turnover. Therefore it is expected that after the merger employees will be concerned about their position and performance in the organization.
(Schweiger et.al, 1987)
As the employees are confident about their position in the new organization, their concern shifts from job security to career prospects. To maintain their position in the company post-merger they work hard to be acknowledged as a good performer and are often interested in getting feedback about their work.
Empson (2000) research on mergers and employee behavior suggest that M&A also have some positive influences on the employees. According to him M&A could be seen as an opportunity for new responsibilities, increased job security and varied work tasks. As now days most of the mergers take place between different countries M&A also serves as a gateway for the employees to start their career internationally.
Nigel Perks senior HR Director at LogicaCMG believes that Mergers and Acquisitions allow talented staff to take their careers to an international level without leaving the company. He further says, “ We try to mix the management team at the front end and use coaching to bring key people over. Our competitors want to hire the same people so we have o make them feel this is the best place to work.” (Johnson, 2007) This clearly explains the successful acquisitions that the company has been making in the International level and a presence in 41 countries of the world.
Organizational identification and communication during merger
Mergers are perceived as a threat to the stability and continuation of employee’s current identities. In merger processes employees of both the organization often loose their psychological commitment to identification with an organization because they often feel threatened by new identities and groups in which they have to work after mergers and thus in some cases employees often intend to leave the organization. The stronger the bonding with the existing department or organization it will be more difficult for the employees to identify with their new roles in the merged organization. (Bartels.et.al, 2006)
Organization identification can be described as the perception of oneness with the organization where the employees relate themselves in terms of organization they are a member. Employees will identify more closely with an organization when they experience similarities between the organizational identity and their own personal identity. Organizational identification influences the employee’s willingness to work hard to achieve organizational goals and to stay with the organization to achieve their own personal goals. (Ashforth and Mael, 1992)
In many realistic merger situations employees may identify with the pre- merger organization more closely as they have been working there and can easily identify with their work roles and workgroup. Employees who are directly involved in the merger processes may find some major changes in their pre-merger and post-merger work roles and thus they would find it difficult to identify with their new roles after the merger.
Jetten, O’ Brien and Trindall (2002) are of the view that sense of continuity plays a very important role in the employees feelings about the merger. In their study they mention if the employees are uncertain about the merger during the pre-merger stage, then they would be more unclear and uncertain about their own roles and job security after the merger.
Sense of continuity often arises among employees during the pre-merger stage especially when they are not directly involved in the merger process. Majority of the employees often are threatened about their continuity in the organization after mergers and acquisitions, others are worried about their nature of job, salary levels and other consequences. Thus sense of continuity plays a crucial factor affecting the employees post merger identification and their performance. The stronger sense of continuity is among the employees during the merger and acquisition process the more easily they would be able to identify with the new organization post-merger. employees would thus be able to easily identify with the post-merger organization if they don’t feel any job insecurity and there is proper communication before and after the merger.
(Van Knippenberg and Van Leeuwen, 2001)
Employees should be communicated throughout the merger process from the HR department as well as their managers about the merger process that would reduce the doubts in their mind about their continuity in the organization and would make it easier to identify with the post-merger organization. Kitchen and Daly (2002) go even as far to state that supportive communication is the most crucial factor for the success of an organization.
According to Jimmieson, Terry and Callan (2004) the information supply about organizational changes may help to reduce the feelings of uncertainty and threat caused among the employees due to these changes in the organization. It would thus help the employees to easily identify with the post-merger organization and thus would be crucial success factor for organizational changes. They further continued that the amount of communication about a merger reduced employee’s perception about the outcomes of the merger and contributed to their commitment and close post-merger identification with the organization.
Werhane (1988) believes that employees have the right to information that affects their job, company or career and to participate in decisions that affect their employment. Thus it seems that communication is the most important tool that should be used properly by the HR people during the merger process to convey the sense of continuity so that the employees can easily identify with the post-merger organization and their new role.
Role of HR Directors and Top Management:
Top management team play a vital role in enhancing the post-acquisition performance as they are the people who possess knowledge critical to ongoing business operations and their departure may heighten the level of disruption and uncertainty in the firm following acquisition. Their major work is to make a fix between human resources and strategy of the firm. They are the ones who motivate and lead the employees and thus their retention may directly affect the employee’s performance in mergers and acquisitions. (Harvey and Kiessling, 2006)
HR directors along with top management play a very critical role in selecting and planning appropriate change management approaches. Their main work is to select and retain the most suitable employees so that they get into their new role and start performing as soon as possible. Through their constant counseling and support for employees and proactive actions they try to ensure employee commitment during mergers. (Cooke, 2006)
HR directors are the ones who work out how the combined organization’s top level and middle level managers will work together as a unified team especially when duplication of responsibility exists between the two companies. Another important role of HR directors in merger and acquisition is to influence the expectations employees have of the merger, both on a personal and organizational level. Corwin and are of the view that if the HR directors are able to properly communicate with the employees during the merger then it would give the employees a sense of continuity and would be easier for them to identify with the new organization and their new work roles after the merger process. (Corwin. et.al.2001)
Nigel Perks, HR director at LogicaCMG, is convinced that HR is central both to success in mergers and acquisitions and to binding together a global business, particularly in a people-intensive industry such as IT. He further say’s that “ When we do acquisitions it has to be ‘friendly’. If you do it aggressively, people will walk out and you are left with nothing. Plus, we only combine with like-minded firms where there is good fit”. (Johnson, 2007)
Extra-"A merger is like an erupting volcano. Everything turns to lava, and lava is fluid. You can mould it and shape it and turn it into new things, but eventually it solidifies. In the period when the lava is molten you have an incredible opportunity to do things differently - take advantage of that situation."
Cultural change-. At DaimlerChrysler, which was formed in 1998 when Germany's Daimler-Benz purchased the US's Chrysler, differences in compensation systems and decision-making processes caused friction between senior management, while lower- level employees fought over issues such as dress code, working hours and smoking on the job.
Language also became an issue when Lenovo, the leading Chinese PC maker, announced in December 2004 that it was acquiring IBM's PC business, most observers were sceptical that a company that grew in a communist system, and until recently sold exclusively in China, could succeed in managing a global business. Merging two companies with vastly different business models and cultures, while staying competitive in the fast-paced PC industry, seemed too daunting a challenge.
Studies have shown that in cross-border M&As, cultural differences can enhance the combined company's competitive advantage in a series of ways: by providing access to unique and potentially valuable capabilities that are embedded in a different cultural environment; by helping the company to develop richer knowledge structures; by overcoming rigidities and organisational inertia; and by fostering learning and innovation. Other studies indicate that cultural differences, which are more salient in cross-border M&As, lead the managers involved to pay greater attention to the less tangible, but critical, sociocultural and people factors that are often overlooked in domestic M&As.
Collectively, these findings suggest that the cultural issues inherent in cross-border M&As may not represent a daunting hazard. The same applies to international alliances and joint ventures. The alliance of Renault-Nissan, which is widely considered successful, is a case in point. As Carlos Ghosn, now president and CEO of both Nissan and Renault, has pointed out, "Cultural differences can be viewed as either a handicap or a powerful seed for something new." Indeed, in recent weeks, Mr Ghosn has spoken of a potential three-way alliance between Renault-Nissan and GM.
