Chapter 14
Organizing Change during Mergers and Acquisitions
In This Chapter
Identifying reasons for mergers and acquisitions
Working through the M&A change process
Guiding employees through a merger or acquisition
Taking care of staffing issues
Moving forward after the deal is done
Surprise, surprise: When two companies merge, change is going to happen! Mergers and acquisitions are increasingly commonplace today. Look in any business magazine and you’ll read about some company buying some other company. But what you see in that article is just the tip of the iceberg, because a company negotiating a great deal is just one part of the M&A puzzle. Other pieces of the puzzle include getting employees on board with how the goals of the company and their responsibilities will change (or not change in the future), who will be part of the new company and who may not be, who is leading the new company, and what will be expected from employees in the short and long term. And that’s just the beginning of the change list during M&A activities: Throw in new benefit structures, different organizational charts, and new ways of working with customers, and you start to realize how extensive change can be during a merger or acquisition.
If your company is facing an M&A situation, you have come to the right place. In this chapter we define the M&A change process, discuss some of the main reasons companies go through mergers or acquisitions, and take a look at what employees in both the acquiring and the acquired companies may be thinking. We provide you with an in-depth review of how to work with the common staffing considerations that mergers and acquisitions present and address what should happen to support the new company long after the deal is done.
Taking Change to a New Level: Combining Companies
Since the 1980s, a steady stream of mergers and acquisitions has taken place, launched by deregulation in the financial markets and by technology that empowers companies to operate in more markets and on a global level with greater ease. Most mergers and acquisitions occur for financial reasons: greater market share, lower operating costs, or a broader customer base. That being said, these financial goals would be almost impossible without a big effort on the “people” side.
The entire purpose of mergers and acquisitions is to change and grow stronger, bigger, or more efficient, all of which take a considerable amount of effort. As with all large scale changes, especially something as large as combining companies, in order to be successful, employees must accept the change and be willing and able to work in the new environment. In this section, we make sure you understand all your M&A jargon and break down all the possible reasons an organization may consider M&A.
Defining mergers and acquisitions
Mergers and acquisitions can be looked at like any other change opportunity, but in a much broader way because every department, team, product, and service is impacted. Add in possible regulatory and compliance issues, and you can see why M&A is a hot topic in organizational change circles. Before we move on, though, we need to first define what exactly we’re talking about.
A merger is the creation of an entirely new firm through the combination of two or more equal partners. Neither company is being acquired or doing the acquiring. The new company may even take on a new name if an entirely new business entity is created. A recent example of a merger in the airline industry was the joining of Continental Airlines and United Airlines. The name of the final company is United, but the corporate logo was retained from Continental, and all the assets and liabilities were combined.
An acquisition is when one company buys another, either through a cash payment or the issuance of securities. One company is the buyer and another company is the purchased entity, and the bought company is usually combined into the company doing the buying. In some cases, companies are bought and sold multiple times. In 1999, Ford Motor Company bought Volvo for US$6.45 billion; just over a decade later, Ford sold Volvo to the Chinese car company Geely for US$1.5 billion.
Mergers and acquisitions are complicated and pricey undertakings. However, although each merger and acquisition has nuances, the change aspects are very similar because company culture and identity, reporting relationships, and business operations all change at some level regardless of who is buying whom. We focus most of this chapter on the change aspects of M&A, but first we walk you through the reasons why mergers and acquisitions happen in the first place.
Grasping the reasons for M&A
As you read through this chapter, you see that mergers and acquisitions are a big deal with a significant amount of work involved in order for the goals to be met. So why would any company want to put itself through such an ordeal? Why not just pour another cup of joe and rest on your laurels?
Mergers and acquisitions take place for many strategic business reasons, but the most common reasons for any business combination are economic at their core. Following are some of the various economic reasons:
Increasing capabilities: Increased capabilities may come from expanded research and development opportunities or more robust manufacturing operations (or any range of core competencies a company wants to increase). Similarly, companies may want to combine to leverage costly manufacturing operations (as was the hoped for case in the acquisition of Volvo by Ford). Capability may not just be a particular department; the capability may come from acquiring a unique technology platform rather than trying to build it.
Biopharmaceutical companies are a hotbed for M&A activities due to the extreme investment necessary for successful R&D in the market. In 2011 alone, the four biggest mergers or acquisitions in the biopharmaceutical industry were valued at over US$75 billion.
Gaining a competitive advantage or larger market share: Companies may decide to merge into order to gain a better distribution or marketing network. A company may want to expand into different markets where a similar company is already operating rather than start from ground zero, and so the company may just merge with the other company. This distribution or marketing network gives both companies a wider customer base practically overnight.
One such acquisition was Japan-based Takeda Pharmaceutical Company’s purchase of Nycomed, a Switzerland-based pharmaceutical company, in order to speed market growth in Europe. (That deal was valued at about US$13.6 billion, if you’re counting.)
Diversifying products or services: Another reason for merging companies is to complement a current product or service. Two firms may be able to combine their products or services to gain a competitive edge over others in the marketplace. For example, in 2008, HP bought EDS to strengthen the services side of their technology offerings (this deal was valued at about US$13.9 billion).
Although combining products and services or distribution networks is a great way to strategically increase revenue, this type of merger or acquisition is highly scrutinized by federal regulatory agencies such as the Federal Trade Commission to make sure a monopoly is not created. A monopoly is when a company controls an overwhelming share of the supply of a service or product in any one industry.
Replacing leadership: In a private company, the company may need to merge or be acquired if the current owners can’t identify someone within the company to succeed them. The owners may also wish to cash out to invest their money in something else, such as retirement!
Cutting costs: When two companies have similar products or services, combining can create a large opportunity to reduce costs. When companies merge, frequently they have an opportunity to combine locations or reduce operating costs by integrating and streamlining support functions. This economic strategy has to do with economies of scale: When the total cost of production of services or products is lowered as the volume increases, the company therefore maximizes total profits.
Surviving: It’s never easy for a company to willingly give up its identity to another company, but sometimes it is the only option in order for the company to survive. A number of companies used mergers and acquisitions to grow and survive during the global financial crisis from 2008 to 2012. During the financial crisis, many banks merged in order to deleverage failing balance sheets that otherwise may have put them out of business.
Mergers and acquisitions occur for other reasons, too, but these are some of the most common. Frequently, companies have multiple reasons for combining.
Even though management and financial stakeholders view mergers and acquisitions as a primarily financial endeavor, employees may see things a little differently (they’re thinking WIIFM, or what’s in it for me?). Combining companies has some potential downsides for employees, who have to deal with immediate fears about employment or business lines, but more positive sides of merging may include more opportunities for advancement, or having access to more resources to do one’s job.
Considering the factors of success
What makes the M&A process successful? Although mergers and acquisitions have been happening for almost as long as organizations have been in business, companies still don’t have a perfect formula for how to succeed with a business combination. However, two critical areas tend to lead to the companies meeting their strategic goals:
The process: One of the most important areas successfully combined companies undertake is an organization-wide change process. This process starts with a clear strategy and specific goals, not only for the new company but for the integration process as well.
The fit: The second area that helps to determine success is how complementary the products, services, and culture of the two organizations are before the change. The fit of companies often comes down to whether or not the other company’s strengths complement your company’s weaknesses (check out the SWOT analysis in Chapter 1) and how much risk the company willing to take (check out Chapter 6 for more on risk analysis).
Although each situation is different and each change and integration plan is different, these two areas are the make-or-break aspects of change during a merger or acquisition.
Following the M&A Process
The M&A process has three fundamental steps. (It is much more detailed than this, really, but we like to start with the basic steps and then dig into some of the details.) First, an executive (or executives) somewhere has some motivation to merge with or acquire another company and starts the entire process. The motives are important because they determine the strategic goals of the entire process. Second, the merger begins to happen (we did say this was a very fundamental view!). Companies perform their due diligence as they move from wanting to combine to getting ready to integrate as a new company. Third, the companies combine and the real change happens.
Because we love analogies, think of an M&A like two individuals dating and eventually getting married. First, there are just two individuals who decide they want something more (the first step: the motivation to merge), so they get engaged, start planning their wedding, and then tie the knot (the second step: the due diligence and integration process). After the wedding happens, their new life begins (the third step in the M&A process). The first two steps lay the groundwork for what is ahead, and the third step is when things really change.
Recognizing the need for enterprise-wide change and being realistic about how the two companies will work together in the long run, both operationally and culturally, should be continually addressed in the basic steps of mergers and acquisitions: during the decision to merge, during the due diligence and negotiation process, and as the new organization becomes one after the merger is official. In this section, we go a little deeper into these fundamental steps of the M&A process.
Making the decision to merge or acquire
Before any of the benefits of mergers or acquisitions can happen, a company’s leaders need to know why they want to combine forces and what they hope to get out of the endeavor. Many organizations pinpoint their reasons by identifying their core competencies, the capabilities they have that create a competitive advantage for that company in the long run, are hard for another company to copy, are part of the company’s culture, and are meaningful to their customers. These capabilities can be managerial, people driven, or technical. Some companies’ greatest competencies are their people, especially for service-companies or for heavily R&D-focused companies where innovation and brainpower are at the core of the company’s identity. The success of Apple has frequently been associated with its powerful innovation, research, and development, led by former CEO and chairman Steve Jobs.
Core competencies are by definition hard to develop any other way than through experience or by being purchased, and therefore, they are often at the center of M&A decisions. By understanding your company’s core competencies, you can better evaluate what’s missing and how other companies may be a good fit with your organization. For example, if you find that you lack the technical competence to respond to changes in the marketplace, you may want to seek out and acquire an organization that is innovative in the technical arena. You also may want to build on one of your existing core competencies to further strengthen your position.
It probably goes without saying, but the decision to merge with or acquire a company must be based on the strategic goals of the company. As you can tell by the volume and cost associated, these things don’t just happen unintentionally or based on spur-of-the-moment reasons (at least not the most successful ones).
Performing due diligence and integration
Due diligence and integration make up an incredibly complex process that spans from the time the two organizations initially agree the companies should become one to closing the deal. The process is very analytical and methodical but at times can seem like chaos.
Due diligence and integration can be seen as an in-depth data-gathering and decision-making process before the deal closes. Organizations start by creating clear objectives and goals for the merger, and then they evaluate if the objectives can be met both strategically and financially. This part also includes negotiation and working through any regulatory or compliance issues that may arise. The goal of the due-diligence phase is to have a plan and agreement on how the companies will operate together after the combination is complete, which includes everything from which functions will combine and which will stay the same to what name the new company will have and how much the entire deal will cost.
This description is a very generalized, 20,000-foot view of the due diligence process. For more on the ins and outs of the merger and acquisition process, pick up a copy of Mergers & Acquisitions For Dummies, by Bill Snow (Wiley).
During the integration and due-diligence phase, a number of steps are taken, departments are combined, and management decisions are made. Most problems in the post-integration phases come from lack of clarity about how decisions are made and who is making them. With so much happening in the integration and so much information being passed back and forth, M&A change leaders can help alleviate some of the pain by identifying differences and similarities in management style and facilitating decisions on how decisions will be made — both during and after the merger closes.
Supporting Employees during the M&A Process
During a merger or acquisition, you have to deal with the tangible aspects of change (better financial statements, new technology, and improved distribution networks) and the intangible aspects (organizational culture, employee morale). Although economic reasons drive the overwhelming majority of reasons to merge, employees bring significant value to the combined entity. Even if the reason for merging is to combine manufacturing facilities, if employees aren’t on board and supported during the process, the company won’t obtain the full value of the integration because many employees will continue to do what they know — with a different company.
Combining two balance sheets is relatively easy; merging two cultures is not so easy. People are not like machines, and integrating teams of employees is much harder than changing the logo on their business cards. The goal of change leaders during the M&A process is to engage the people side of the business so the full financial value of the endeavor can be realized.
Why are employees so valuable in the M&A process? Outside of the change aspects discussed in this book, employees bring specific skills and capabilities to the table. Even if the merger or acquisition is intended to improve a process, gain market share, or cut costs, the functional skills of employees (including the routines, knowledge, and experiences) are the glue that holds all the processes together. Employees with leadership and management skills are also part of the overall M&A process, because they are the people who help set the corporate direction, financial controls, and overall management of the new company.
Assessing and assisting the employee transition
Following are the three benchmarks that successful M&A teams go through as they involve their employees in the process. By observing whether employees are acting in line with these goals, you can gauge your progress and increase assimilation efforts where needed.
Assimilating the new and old organizational culture: Keeping employees in the dark about the future company is a surefire way to derail even the highest-value merger or acquisition. As soon as possible, employees in the acquired company should have the opportunity to work with leaders and employees on both ends to learn more about the history, culture, and company values of the new company. Employees need this opportunity to learn what has worked in the firm doing the buying, why the bought firm is attractive to the acquirer, and how they may be able to best contribute to the new organization.
Assimilation goes both ways: Acquiring companies also need to know more about the culture that their new peers operated in before being acquired because, after all, the acquired company must have been doing something right to make it an attractive acquisition candidate.
Being ready to work together: Acquired employees may feel they’re being forced into doing things another way. Just like a marriage, you can’t just throw together two companies (or people) and expect them to coexist perfectly without some help. When one company is bought, they may feel like their company is losing out and the other company is winning. However, if leaders encourage employees to work with one another and reward them for doing so, old routines on both sides of the deal are likely to come together to create better ways of doing business in the new company.
Sharing capabilities and knowledge: Value creation is the main reason for mergers and acquisitions, and sustainable value is only created when information is shared and capabilities are continually developed. Thus the merger or acquisition is not a once-and-done activity but a long-term focus that ensures the new firm has the resources (technical and human) to operate in the new way and also makes sure that employees are encouraged and rewarded for sharing knowledge.
We have seen some acquisitions that initially did a great job of cutting costs by buying another company and eliminating overlap, but the two firms continued to treat one another like evil stepsisters, with the employees never really wanting to share anything and always feeling a bit bitter that things had to change in the first place. Not surprisingly, the expected return on the acquisition was never fully realized. Sometimes, the M&A process can be a rather quick one, and after the deal is done it is a great idea to take a second look at what capabilities were expected to be shared and how this can really happen now that the deal is done.
Knowledge transfer (that is, learning) is a not just teaching another person how to do something. Long-term learning comes when a task or skill is taught in the context of why it happens. Buddy training, mentoring, and coaching can help facilitate this knowledge transfer and supplement any classroom or e-training as employees learn from one another.
Don’t forget to get a dedicated change project team aligned to the integration. The project team should be a mix of both companies. Dedicated resources throughout the initial phases of the integration help speed the process, facilitate any questions from employees, and identify gaps and potential concerns early on in the process.
Considering what the “bought” company is thinking
One of the biggest conflicts “bought” employees try to come to terms with is that they were doing some things well but other things have to change. Their company was bought because of some value, which means they were doing something right. However, after the deal is done, these employees must integrate into the acquiring company’s norms, culture, and way of doing things, leaving behind a good part of what they may feel they were doing right.
Take the case of two pharmaceutical companies. One was wildly successful immediately after the company was founded; the other had to pull itself up by the bootstraps and hammer away at research and development for two decades before it became very successful. The latter company felt it was successful because it had to do things efficiently and work together as a team. Employees had modest office spaces, reasonable benefits, and a can-do culture. When they were acquired by the “lucky” company, employees of the acquired company saw the acquiring company as a bunch of spoiled rich kids who never really had to work hard and who just threw money at problems because they had so much financial success almost from day one. This type of strife is common, because employees have genuine loyalty to the original organization and even anger or hostility toward the new organization. Leaders in this particular pharmaceutical company were smart, and one of the ways they worked on integrating the best of the two cultures was to appoint “bought” employees to efficiency teams throughout the company with the goal of identify areas where innovation, rather than money, could better solve problems.
Change required by a merger or acquisition can be jarring for employees, who may have been thinking that everything was going along just fine. Even if their view isn’t a realistic picture of what was really been happening, it could be the perspective of many employees in an acquired firm. How can leaders avoid this pitfall? While leaders “sell” the reasons for the merger or acquisition, often on a strategic and financial level, leaders on both sides should take the time to get individuals and small teams to identify advantages that will impact the employees on a day-to-day basis. Value creation must take place for the employees as well as for the firm. Value for the employees may be more job security, greater benefits, or career advancement.
Although employees in both organizations need to understand the purpose of the acquisition and their role in the new organization, the needs in the acquired company are different from those in the acquiring company. Taking these needs into consideration and knowing when to allow employees the time to assimilate and when to push for results helps speed the change process in the long term.
Staffing Considerations during Merger or Acquisition
The goal of M&A activities is to create greater value for both companies through more financial power, increased market share, or streamlined operating efficiencies. Before any of these benefits can happen, however, productivity and employee engagement need to be taken into consideration.
Most organizational leaders recognize that M&A efforts are most successful when the people side of the deal is addressed. Like most changes, upfront and frequent communication partnered with proactive and sincere involvement in the process improves the business outcome. We like to call addressing staffing concerns as helping people deal with the deal. Mergers and acquisitions are a bit different than other organizational changes because of the rapid pace of change often associated with the process. Additionally, both companies experience quite a bit of uncertainty because even though plenty of planning, data collection, and strategic visioning for the future take place, until the deal is signed nothing is 100 percent accurate due to the limitations of what can and cannot be shared before the deal closes.
In Chapter 2, we discuss the productivity dip during change. During the M&A process, employees may become especially distracted by this uncertainty. The best thing leaders can do to decrease and shorten the productivity dip is to be upfront and honest about the changes ahead and clearly communicate what can and cannot be shared during the due diligence. Employees realize that before the deal is done there are regulatory, financial, and competitive reasons why everything cannot be disclosed. However, telling employees merely that much helps to create two-way communication that will benefit the company in the days to come. Besides communication, leaders want to focus on three staffing concerns common during the M&A process: minimizing employee attrition, retaining key staff, and maintaining employee morale. We discuss these three areas in the following sections.
We have seen successful companies try to keep acquisitions behind closed doors, leading to something of the white elephant in the room. Everyone knows something is happening, but rather than talk about it openly, employees take cues from water-cooler talk, become wary of company leaders and their messages, and may even hold back any extra effort because they have no real idea about what is down the road. All of these behaviors can destroy leadership credibility and have a negative impact on the overall acquisition. The best thing leaders can do is to be upfront and honest about the changes ahead and clearly communicate what can and cannot be shared during the due diligence.
Within the first 90 days of closing the deal, the change team should revisit the organizational and knowledge assumptions made during the due diligence and pre-close process and create a realistic plan regarding what needs to happen now that information between the two companies can flow openly.
Minimizing employee attrition
Employee attrition is when employees leave a company, either voluntarily (an employee may find a new job or retire) or involuntarily (they may be fired or laid-off). Merger syndrome (this is a scientific name, we swear) is when employees leave the company immediately before or after the deal closes. Lack of a clear future, stress from change, and uncertainty about leadership are all reasons employees choose to jump ship instead of seeing where the ship is going to sail, so to speak.
When a large group of employees depart during the M&A process, a significant amount of knowledge departs too. Employees who remain question whether they should be looking elsewhere, too. And we aren’t talking about just minimizing the loss of your star players (we talk about them in the upcoming section “Retaining key staff”) but also about losing institutional knowledge. Employees throughout the organization provide continuity that customers are craving during a merger. Customers are looking for cues from the new company about what is ahead and how their needs will be supported. If all the employees that customers know within the company say sayonara, customers may also soon leave for competitors.
Keep an eye out for stress in the organization and allow employees time to deal with the added stress of the change, learn about the new company, and do their jobs. If the number of sick days starts creeping up or if productivity is dipping significantly, do a gut check and ask employees what else can be done to help people work through the changes the merger has created. Remember that change does not happen overnight!
As you work on minimizing employee attrition, include these key incentives:
A bright and believable future: Employees want to know that the company’s best days are ahead of it, and they want to know how they will play a role in this future. Employees are smart and don’t fall for an idyllic future with no substance, so be realistic and share as much detail as you possibly can. Leaders can paint the picture of the future, but employees must see and believe it is going to happen. To build credibility, keep 100 percent of the say-do ratio; that is, do 100 percent of what you say.
A positive work environment: If employees are supported and feel they’re making a difference, you have a higher chance of retaining them. A positive work environment includes trusting and rewarding employees for doing the right thing and thanking managers who retain employees. Have managers talk with each employee (if possible) to make sure they have the tools they need to do their job and manage stress. Listen to their concerns and treat employees as people. Respect and dignity in the face of change is one of the surefire ways to keep employees engaged and at work.
Strong communication from leadership can greatly support a positive work environment. How management, notably direct supervisors, communicates during times of transition is a key ingredient to retaining staff. When allowed by the laws and regulations that govern a merger, management can provide ongoing updates (meetings and e-mails), face-to-face communication, and recognition for behaviors that are consistent with the new or evolving post-merger culture.
Opportunities for involvement, feedback, and personal development: No one likes being told what to do. By involving groups of employees throughout the process, the leadership team can gain valuable feedback, and individuals have a chance to voice ideas and concerns. Additionally, as part of the integration, be sure to identify the new ways employees will be able to grow with the company through expanded roles and responsibilities. A defined schedule for training and professional development sends a strong message to employees that they are valued.
Money: We discuss financial retention strategies for key players later in this chapter, but keep in mind that each employee has financial needs and goals. Most likely, at least one of the companies in the deal will be changing its total compensation package (benefits, salary, bonuses), so as soon as you can, communicate the potential changes or additions. If employees don’t hear anything about their pay, they may begin making career choices based on assumptions and fear rather than fact.
Employees will want to stay with a company if they feel they have room to grow, are encouraged to try new things, and feel valued for their work, both mentally and financially.
Although money is a great motivator, so are two words: thank you. If you can tell employees how their work effort is helping the team and the company, they will feel valued. And employees who feel valued rarely pack their bags and walk out the door.
Maintaining employee morale
Employee morale isn’t just something that the perky new employee in HR is cheering about. It can make or break a company after a merger or acquisition. Why? When employee confidence is high, employees usually are more likely to work harder to make the change happen and maintain a positive view of the changes and challenges that lie ahead. You can imagine what may happen when morale is low: This negativity can filter through everything from lunchroom gossip to damaging discussions with customers.
The most important way to maintain and increase morale is quite simple: Ask employees what you can do. By engaging your employees, you can find out what the organization and its leaders can do better. Not only does this conversation create a dialogue between management and employees, but as long as leadership acts on the recommendations (or at least some of the recommendations), it also shows employees that their opinions matter. In Chapters 8 and 10 we provide ideas on how to motivate people to move forward, which helps maintain morale during change.
The view from the top and the view from employees can be quite different during a merger or acquisition. Leaders, especially senior executives, have access to information and have extensive decision-making responsibilities during the merger or acquisition, as well as (in most cases) significant personal financial benefits from a completed transaction. Often, when most employees learn about the change, leaders have been working on it for months (if not longer). Employees sometimes feel they may be coming to the party quite late, even if communication has been proactive, because the leadership has already processed the change and is ready to get moving. With new decisions and constant uncertainty, morale can easily drop. Here is what you can do to maintain morale during M&A:
Be honest with employees. Really honest. During mergers and acquisitions, too many leaders say what their PR firm told them to say or what they think employees want to hear. Some leaders may talk about how the two companies will take the best of both worlds and make one perfect company, but in reality, even if this was the honest intention, identifying and creating the best of both worlds is quickly pushed aside to get operations up and running as quickly as possible. A high trust environment (which is one outcome of honest communication) creates productivity and innovation. It is great to be optimistic, but leaders also need to be realistic.
Focus on the future culture. The culture of an organization includes a wide array of elements, ranging from what people wear to work to the way people address problem solving. When the deal is signed, the two separate and different cultures still exist and can exist for quite some time. Culture may not be tangible, but years down the road, employees may still refer to themselves as “from the old company.” This perspective is a very vocal way of showing that the two cultures never really merged.
The best way to address cultural issues is head on and with completely open and honest communication. Don’t tiptoe around how the culture will look, feel, and breathe — tell employees what is expected of them, what is expected to go, and what is expected to stay, and involve employees in making it happen. Immediately re-vamp the onboarding process for new employees to focus on the new company. Redesign your performance-management system to align with the new values of the company. Make sure managers walk the talk so employees have a model of what they should do. For more on managing cultural change, see Chapter 16.
Talk about the process. As soon as federal regulations allow it, clear communication helps keep at bay cynicism about the motives behind the merger or acquisition. Few employees have been through enough corporate combinations to understand the process, so explaining the process helps to build trust within the organization. Here are a few questions you can answer:
• How will the new leadership team be created? When will employees know about the new executive team? Everyone — customers, shareowners, and employees — will want to know who is running the show. For a number of reasons, most likely some senior leaders are not going to be part of the new organization or will be in different roles within the organization. This leadership change is often one of the first decisions made during the M&A process, and providing this information establishes the open and honest communication wanted by employees.
• How will processes and technology be integrated? Who is leading the integration effort? How can employees provide feedback about the integration? Most employees understand that every detail of the organization is not 100 percent set in stone before, during, or immediately after the merger. These things take time, so explaining what the process will be and who will be leading it helps to create certainty during uncertain times.
• What can employees tell customers or other individuals who may ask about the merger? Customers are smart and have lots of ears and eyes out in the marketplace. Sometimes they hear about mergers or acquisitions as quickly as employees (if not earlier). Work with employees who have direct and indirect customer-facing roles to let them know what they can tell them (and what they can’t).
• Where can employees go for more information? Above all else, be sure to create a two-way resource for employees to ask questions during the process. Additionally, this forum provides a resource to collect any rumors that may surface. Rumors will start no matter how much information you put out there, but there is no better way to stop the rumors than by hearing what they are and addressing them head on.
Consider registering for social media–monitoring services so you can determine what is being said about your company during this critical transition. Make sure that employees understand your company’s policy around posting to external social media websites to avoid leaking information or spreading rumors. For more on communicating during change, head over to Chapter 7.
Retaining key staff
So you’re doing your best to make sure there is not a mass exodus from the company post-merger, and you’re engaging employees to ensure employee morale stays positive. You should keep your eye on one more thing as you consider staffing concerns during a merger or acquisition: retaining key staff. Your organization likely has some employees whom you really want to keep. We know, all employees are important, but about 10 percent of your team is in absolutely critical positions. People tend to get caught up in the word key staff, so in this section we define it and then tell you how to keep those people.
Knowing who they are
Key staff members are people in your organization whose sudden absence would create difficulty in delivering on customer requirements. They may possess a skill that is hard to replace or train, they may be your most amazing star performers, they have a strong relationship with important clients, or they may be the ones that hold considerable institutional knowledge. Some managers have a hard time admitting that some of their staff is key and that others are people that they just want to keep. We know this distinction is hard to make, but identifying key staff helps you target retention strategies above and beyond what you are doing for the entire organization.
Key staff retention strategies should target roughly about 10 percent of the organization. If you find you need to retain more than 10 percent of your organization through targeted packages, you may consider offering a general retention for all staff. General retention may come in forms of a modest bonus (about 5 to 10 percent of annual salary is a good rule of thumb) or restricted stock.
Your company may have individuals or teams who aren’t necessarily key staff for long-term results but are needed to complete high-priority projects in the short-term. Offering these employees or teams some type of project-completion bonus helps make sure these employees wrap things up before they consider moving to another position or company.
Don’t limit your key staff to the highest levels of leadership. Yes, having consistent and strong leadership will help dramatically in the days ahead, but so will your sales team and R&D team. Sales teams have relationships with customers that are often next to impossible to rebuild overnight. R&D teams have institutional knowledge that spreads much farther than any documented procedure or process could ever account for in the company, and they may hold the secret to your next dominant product.
Implementing strategies to keep them on board
After you have identified your key staff, you can work on how to keep them from jumping ship. A retention package is simply a way of formally (and usually financially) letting employees know that although they do have the option of leaving, it’s worthwhile to stick around and see how wonderful the new company will be in the future.
Keeping key staff on board is all about timing. Retention bonuses often include some type of obligation or delayed payout, timed with how long you believe it may take to iron out any kinks in the new organization and timed with how long it will take to help the employee see the value of the merger. Other retention packages may be focused on the short term. You may have a group of employees who must stick around long enough to get the new organization launched. Often this group is in support functions like finance, technology, and human resources. Although you may be able to replace these positions if needed, knowing that the lights will stay on without much thought in the immediate months after the merger is a safety net worth creating.
Most retention comes in the form of a lump sum payment or additional performance bonus, but other parts of the stay bonus may be stock or stock options or additional benefits like vacation time, future paid sabbatical, or the option of flextime. You may not want to promise anything, but when you begin to communicate to key staff about how their retention is important for the success of the merger and the future of the company, you have a great opportunity to ask what they would consider an ideal retention package. Keep in mind that you’ll have to perform some keen negotiation and boundary setting, because a few employees may ask for an unreasonable amount (and if they do, it may be an indicator that they are more focused on their own needs and don’t have a vested interest in the future success of the company).
Retention of key employees (or any employees for that matter) is not just about keeping a warm body in a seat. Part of retaining employees may include offering options for tying company performance after the merger to financial rewards for employees. This deal, often called gain sharing, may be structured as profit sharing or stock. Along the same lines, adding performance objectives to retention plans is perfectly acceptable. The reason you are asking key staff to stay is that they need to keep doing what they have been doing!
As for the fine print: You need to work with your support team. Retention packages are not just a Christmas present coming out of the HR department, and you need to remember to work hand in hand with that group during the process. Additionally, you and the legal department will probably become quite good friends. Those employees are experts in covenants, contracts, clauses, non-competes, and other state or federal regulations that impact what you can and cannot offer as well as what employees can and cannot do.
One added detail you should not forget is that these 10 to 20 percent of employees are critical to your organization and could probably find another job relatively easily, even in the worst economic conditions. So don’t delay communicating that they are valuable to the organization and you plan on creating a retention plan for them (even if you don’t have all the details just yet). The last thing you want is for those hungry headhunters calling and planting seeds in your key staff’s minds that the grass is so much greener somewhere else. Make sure you communicate any retention offers before the deal closes — even if everything isn’t finalized.
Key employees have a way of seeing all, hearing all, and knowing all, which provides you with another retention strategy: The employees who are staying see how the organization treats employees who are leaving and may become more loyal if they see the company communicating truthfully, straightforwardly, and with empathy toward employees who are losing their jobs. Employees who are staying (or asked to stay) will believe the messages delivered to them about the future of the company too.
The Deal Is Done: How to Proceed Successfully
The deal is done, retention offers are signed, the communication plan is in full swing, and employees are beginning to explore the new environment with a positive attitude. Now your job as a change leader is to keep the momentum rolling so that all the value expected as part of the merger or acquisition can become a reality.
Here are a couple of things change leaders and executives can do to make sure the future is as bright as you expect it to be:
Keep your eyes and ears out there. Change agents after the merger (see Chapter 3 for more on change agents) can help identify any unexpected obstacles that may come up. Conducting a 90-day post-merger assessment is a great checkpoint to ask what is going well, what still needs work, and what change lessons can be learned from the successes and challenges of the M&A process.
Retain, focus, and engage — in that order. After employees feel secure in the new company (that is, they have a job and they may even have a retention package), you can then begin to refocus teams on the work at hand. Having objectives and projects to work on reminds employees that even though they probably still have a number of unanswered questions, work still needs to get done and should get done. Finally, when employees are back doing the work that needs to get done, then managers can work on reengaging employees around a common goal and mission. Trying to motivate employees and engage them in the new culture may seem artificial until employees have some experience working in it.
Give managers and supervisors the tools they need. Give front-line managers the information and necessary training to address questions and concerns raised before, during, and after the integration. Executives are great at communicating the vision and direction of the company, but managers and supervisors are the ones who work on the details long after the deal is done.
Train staff to integrate them into the new organization. The many changes that were identified during integration and due-diligence phase must now be implemented. Inform staff of all the decisions that have been made regarding changes in processes, organization structure, and organizational culture and provide training on how things will be done going forward in the combined company. Everyone needs to understand what is expected of them and gain the skills to be able to perform in the new organization.
Regularly check-in with employees about what is happening. Often, communication efforts are quite significant during the early stages of the integration. However, stopping or dramatically decreasing communication a few months after the deal is done can make employees feel either that they’re being left in the dark or that all the ideals about the value the merger would create never came true. Formally providing employees with the continued results of the merger every three to six months until all the expected value is attained helps to build a change-ready culture — one that knows leaders have the capability to set a vision for change and follow it through to completion. We also recommend that you conduct an employee-engagement survey before, during, and after the merger or acquisition to keep a pulse on what employees are thinking and feeling.
If the value of the M&A is not being seen, you may have a great opportunity to engage the bigger employee base on what else could be done. To promote two-way communication, you may want to provide an e-mail box or an internal social-media tool to encourage feedback and questions on the M&A. Employees recognize that all the goals set out at the beginning of the M&A process may not be met, and communication should address these changes as appropriate.
Recognize that the work is just beginning for some people. Even though the job of the executives and M&A team is coming to an end after the integration winds down, lower-level employees will just be starting to pick up all the work that needs to happen to make the merger a success. Continue to provide support to these employees and managers, because some gaps in information or organizational assumptions may surface long after the deal closes.
Even after the merger or acquisition, people may still be afraid that they’ll lose their jobs or that more things will change down the road. To help you address these concerns, check out Chapter 9 regarding how to work through resistance during change.