This report provides an analysis of the merger between two giants, and one of the biggest mergers ever recorded in the history of United States. A merger between the fourth largest investment bank in the US, and the second largest bank in the United Kingdom. We would also discuss few of the challenges the management of the new organisation faced at the time of the integration. Issues relating to
Human resource management.
Cultural difference.
Conflict and change management.
This report finds the prospects of the company, position of the new company. An analysis of dilemmas faced by Barclays staff and the stakeholders, and was the decision of a merger a right one? This report will discuss how companies use M&A as a growth strategy, common reasons for M&A failures and successes, HR practices critical to successful integration, and the role of HR in M&A.
INTRODUCTION
It's been about three years since the bloodshed on Wall Street that took Lehman Brothers. September 15, 2008 was the date of Lehman brother holding Inc, the fourth largest investment bank, convulsed world markets and wrecked the fortunes of millionaire financiers. Lehman brothers holding inc a 158 years old bank reported revenues of nearly $60 billion and record earnings in excess of $4 billion for its fiscal year ending November 30, 2007.2 During January 2008, Lehman's stock traded as high as $65.73 per share and averaged in the high to midâ€fifties,3 implying a market capitalization of over $30 billion.4 Less than eight months later, on September 12, 2008, Lehman's stock closed under $4, a decline of nearly 95% from its January 2008 value.5 On September 15, 2008, LBHI sought Chapter 11 protection,6 in the largest bankruptcy proceeding ever filed.
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Source: Yahoo Finance
Their bankruptcy filing came about three months after world stock markets precipitously dropped some 25% due to the meltdown in securitized sub-prime mortgage market. It also came about a year and three quarters into the Great Recession, given that December 2007 became the US National Bureau of Economic Research officially-recognized downturn start date. With over $600 billion in assets, Lehman's has been the largest Chapter 11 filing in U.S. history to date. Further, it caused the Dow Jones average to fall over 500 points the day they filed as well as causing an even bigger fall on 2 weeks later which, it turns out are two of the biggest one day falloffs in history
Ref: Lehman Brothers Holdings Inc. ("LBHI"), Annual Report for 2007 as of Nov. 30, 2007
CHALLENGES FACED BY MANAGEMENT
Companies are constantly seeking opportunities to grow and expand their business, increase competitive edge and drive market value. For many, this encompasses merging with, or acquiring, other companies. Businesses are making big bets with enormous investments in hopes of being more than the sum of their parts. One of the most common arguments for mergers and acquisitions is the belief that "synergies" exist, allowing the two companies to work more efficiently together than either would separately. Such synergies may result from the firms' combined ability to exploit economies of scale, eliminate duplicated functions, share managerial expertise, and raise larger amounts of capital (Ravenscraft and Scherer 1987)
MERGERS AND ACQUISITIONS (M&A) - AN INTRODUCTION
A merger can be defined as a situation when either two or more independent companies merge, or when one or more persons already controlling at least one company acquire direct or indirect control of the whole or parts of at least one undertaking. Whereby in a merger, the two or more companies create a new entity and in an acquisition, the acquired company loses its economic and legal autonomy [Gerpott 1993]. Mergers and Acquisitions (M&A) have become the preferred route for expansion and Consolidation. The unshakeable and rock solid companies aspiring to emerge as significant players on the global stage, are scouting to acquire prospective and attractive companies, gasping for survival due to the mounting competitive pressures. Mergers and acquisitions represent the ultimate in change for a business. No other event is more difficult, challenging, or chaotic as a merger and acquisition.
Sources ref: [e.g. Jansen 2000; Haspeslagh/Jemison 1991].
Merger and acquisition can divided in three stages, preparation stage, transaction stage (pre merger) and the integration stage (post merger).
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The idea or preparation phase explains the need for a merger or an acquisition, which is given by the company's objectives and desires.
The second phase includes the search for an appropriate target company, the valuation, legal and financial negotiation.
The last phase, integration, consists of fusing the two companies into one.
Since the speed of competition in many industries has made organic growth seem excessively time-consuming, many managers consider acquisition to be an attractive mean to expand a firm's knowledge base quickly. Wysocki [1997] means: "In today's economy, building work teams from scratch can be yesterday's luxury. So, when you can't build fast enough, you buy." Mergers and acquisitions have become a common phenomenon in recent times
From a global perspective, the rest of the world is also beginning to see increased merger and acquisition activities. We can see from the chart below that in the Pacific Rim alone there is a substantial amount of activity -
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Souce: learnings on M&A integrations, the cerebrus group
The first phase is the Pre-Merger which includes the planning of the merger and acquisition. There are many Human Resource issues along with other issues in the first phase. One of the issues that can be arisen in the pre-merger is to identify the reasons behind the Merger and Acquisitions. 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 second stage of integration in an M&A activity is extensive and complex. Whereas Stage 1 activities set the scene for M&A activity, those in Stage 2 are the ones that make the activity come to life. Clearly there are differences between a merger and an acquisition, differences between a merger of equals and non-equals, and differences between an acquisition with inclusion and an acquisition with separation. Then comes the last phase that is the solidification of the new entity. As the new combination takes shape, it faces issues of readjusting, solidifying and fine-tuning .On the third stage, HR issues like solidifying leadership and staffing, assessing the new strategies and structure, assessing the new culture are the main issues which an HR Manager is likely to face.
In the case of merger between Barclays PLC and Lehman Brother, the main human resource management challenges were the difference in cultures of the two organisations involved in the merger process and also the Motivation of staff from both companies and especially those from Lehman Brothers.
Tough M&As might look attractive on paper, there are many issues regarding the retention issues may take a negative side. Issues such as feeling of confusion in the staff of a new company due to lack of communication, uncertainty of job security, lack of leadership, uncertainty about the future organisation direction.
People management plays a critical role in M&A. People issues like staffing decision, Organizational design, etc are most sensitive issues in case of M&A negotiations, but it has been found that these issues are often being overlooked. The range of key issues that HR needs to address if the chances of success are to be optimized includes:
understanding, prior to embarking on acquisition, the strategic rationale underpinning the deal, together with the external constraints and opportunities
Ensuring that cultural due diligence is carried out prior to a deal, so that effective integration programmes can be implemented immediately post-deal
Moving quickly but fairly in the appointment of new management teams at all levels in the business, and dealing humanely with the casualties
Ensuring that due diligence provides comprehensive data on all aspects of reward, and that the costs of harmonization or 'pragmatism' are factored into the deal
Establishing early a flexible project management process, and ensuring that it has the necessary time, resources and processes to manage the transition
Communicating consistently, truthfully and when necessary
KEEPING EMPLOYEES FOCUCED
There are many ways to keep the employees focused, therefore, organizations must proactively work to maintain or regain employee trust to keep them and the intellectual capital they represent "on board." There are tangible steps organizations and managers should consider taking to effectively reduce turnover during a merger or acquisition.
Effective reward system should be in place, so that they are focused and dedicated to their work. The challenge for management of new entity thus formed is to create a reward policy that would appeal to employees of both the combining firms.
Effective communication is another element required for the success of an organisation. Organizations should proactively create communication strategies that utilize effective organizational communication practices. E.g.: management should explain why the merger or acquisition was advantageous; repeat messages through multiple communication channels; recognize that employees prefer face-to-face communications
Keeping the staff motivated to work is really very important, especially after a merger.
Motivation levels of Lehman Brothers' staff were not very high, This staff belonged to a company which was a leader in industry not so long ago but now it was being merged or overtaken by another competitive company.
Performance indicators should be used to judge the potential of the employees, this would help and enhance the performance of the organisation as a whole. Since Barclays and Lehman will have different performance management procedures and different parameters of performance. It becomes imminent that new entity comes up with performance management mechanism that is suitable to both the set of employees.
BARCLAYS PLC'S DECISION IN MERGING WITH LEHMAN BROTHERS
There are many issues relating to the merger and acquisition between Barclays and Lehman Brothers. The decision of the merger will be discussed in the analysis. The implications the challenges had on the merger would also be discussed. Whether the merger was a success or not?? This would be discussed in later part on the basis of 3 C's
Culture
Change
Conflict
The issues which are commonly seen during mergers and acquisitions are mostly related to culture, conflicts and change. So starting with culture we will move on to conflict and then change.
CONCLUSION
M&A's carry quite a burden for HR. As well as getting its own house in order - integrating HR programs, reconciling redundant HR functions and working through two service and technology strategies - it must also support and help other departments through their own individual transitions. As such, while the integration of the HR function, its systems and people programs is integral to a successful merger.
When going through M&As organizations usually focus primarily on the financial, economic and commercial aspects of the deal, and often only as an afterthought on people. Contradictory really, as most senior executives recognize that people are their greatest asset, but they just seem to overlook this mantra in the heat of a deal .The HR issues need to be treated as a key component of any merger, not on an ad hoc basis as they arise. The key to successfully managing many integration issues is effective communication. This entails devising a comprehensive communications strategy and implementing it with care and diligence.From the outset of negotiations, HR managers need to work with senior management to identify and troubleshoot these potential problems.
