Chapter 12 Forging Cross-Border Mergers and Acquisitions
The Globalization of CEMEX For CEMEX, acquisitions were the main vehicle for global growth The M&A route was seen as an opportunity to create value by implementing more efficient processes - the CEMEX Way Post-merger integration has focused on promoting best practices and learning from past experience Instilling new management behavior was an important outcome of the integration process Can CEMEX continue to pursue an aggressive acquisition strategy when the global economy faces turbulence?
Trends in Global Mergers and Acquisitions Source: Announced global M&A volumes reported yearly by Thomson Reuter. Approximate figures.
Alternative International Growth Strategies Implement M&A… Go alone (greenfield)... Form an alliance... • Pros • Working with familiar people and resources • Fast decision making • Full control • Can exploit existing competitive advantages • Cons • May be risky • May be too slow • May need help • Pros • Risk sharing • Economies of scale • Quick access to resources and skills • Political necessity • Learning opportunity • Cons • May be difficult to manage well • Long-term instability • Pros • Achieve major change quickly • Full control • Synergy and leverage • Cons • Expensive • Integration may be difficult • Mostly irreversible
The International M&A Story… • Some evidence that cross-border acquisitions have a better track record. • Why? • Greater complementarities between parties • International M&A’s are usually in a related industry • Strong core capabilities – weak players don’t go global • Early recognition of cultural and people issues • Challenges more visible = less hubris & more focus on execution
Transformation High Best of Both Absorption Degree of Change in AcquiringCompany’s Culture and Practices Stand Alone Low Integration Challenge Low High Four Types of Acquisition Integration Source: Adapted from Killing, 2003
Which Approach to Choose? • There is a difference between absorption and integration • Absorption: Make the acquired company just like the purchaser(GE Capital, ExxonMobil) • Integration: Create new identity, share strength while maintaining separate identities (Renault/Nissan, AstraZeneca) Learning from Experience • Stand-alone does not last • Absorption (assimilation) tends to work best – most of the time… • Decisions on what is “best of both” are painful • Transformations are difficult • …but all acquisitions require at least some degree of integration! • Integration is always about people
Organization and management: Organization charts - Job title hierarchy Management committee Succession plans Employment contracts Retention agreements HR policies: Hiring procedure Employment documents Job descriptions Work rules - Vacation policy - Discipline Performance management Early retirement Termination/severance Compensation/benefits: Executive compensation General compensation Incentive compensation - Bonus eligibility - Stock plans Pension plan - Coverage - Assets and liabilities Non-monetary rewards DUE DILIGENCE TEAM Labor relations Union status HRIS Employee records Workforce demographics Litigations and claims Human Resource Due Diligence Checklist
Human capital audit questions: What are the unique organizational capabilities of the target firm? What competencies do the employees have and how do they compare to the buyer? What are the source firm’s sources of talent? What is the target firm’s compensation philosophy? What influences the social relationships in the target firm? What will happen if certain managers leave? The Human Capital Audit
Questions to ask: What are their core beliefs? What drives their strategy? Is the company long- or short-term oriented? Is the company results or process oriented? How do they approach external partners? Who are their most important stakeholders? Cultural Due Diligence
Managing the Merger Syndrome Most of the actual creation (or destruction) of shareholder value happens during the post-merger integration phase A systematic, explicit integration (change) process is at the heart of most successful acquisitions The ability to focus on the few key value drivers is a critical part of the integration process - no ambiguity about the vision “Merger syndrome” is difficult to avoid; Involvement and inspiration are needed – plan quick wins
The Role of HR The M&A Integration Agenda • Anticipate leadership and people issues • Put transnational teams in place on day 1 • Decide who will stay and who will go • Develop employee trust • Use the “Four I” framework
The “Four I” Framework – for the first 100 days • Insight – helping employees to understand the stress of change • Information – one cannot do enough to satisfy employee’s thirst for information, especially in distant locations • Inspiration – building positive expectations for the future at the earliest stage • Involvement – face-to-face contact is the best tool for breaking down feelings of winners and losers
Integration Starts at the Top Strong leadership at the top is not enough, but … • Credible new vision for the organization • Visible sense of urgency • Effective two-way communication … are all required ingredients of M&A success Stability in the leadership team, trust and mutual respect facilitate effective integration
The Role of the Integration Manager Facilitates and manages integration activities • Align practices with new standards • Communicate key messages • Identify and implement new value-adding functions Help the acquired business to understand the new owner’s capabilities • Assist the new company in taking advantage of existing resources • Educating new management team about common processes • Interpreting new language, culture and customs Help the new owner understand the acquired business • Manage the information “gate” • Brief the new owner on how things work
The Role of the Integration Team • Facilitate and manages integration activities • Help to create shared vision and objectives • Align practices with new standards • Communicate and “safeguard” key messages • Use feedback to accelerate the integration process • Measure progress against business goals • Help the businesses to understand each other’s capabilities • Help to diffuse new language, culture and customs • Assist businesses in taking advantage of existing resources • Identify and implement new opportunities for business synergy • Facilitate personnel exchange and communication
Moving With Speed In most cases speed is advisable. Many companies report that faster integration would have been better Size and experience matter! “Serial” acquirers prefer quick integration Do not confuse integration and restructuring – if restructuring is necessary, it should be done early, fast and only once • Optimal speed depends on the strategic intent behind the acquisition • Even if integration is deliberately slow, strategic direction should be clear from the beginning
Key HRM Issues: Communication In cross-border acquisitions, distance and cultural differences may intensify tensions due to misunderstandings • Need for clear vision and strategy for the way forward • Need for consistency • Need for open communication – play it straight Effective communication during integration is a two-way process Effective communication requires personal engagement Avoiding “merger syndrome” – creating positive energy
Key HRM Issues: Retaining Talent Retention and mobilization of talent should be a key priority • Do you know where the good people are? • Confront difficult staffing decisions early in the process The best will exit first! Fast communication is the first line of defence Retention strategies • Mentorship and development opportunities • Accountability and retention incentives for supervisors • Employment agreements with key staff • Top management involvement is essential Startbefore closing
Key HRM Issues: Building the New Culture Cultural integration will always take longer than changing the operating system A focus on performance culture seems to be a unifying theme in most successful acquisitions Post-merger cultural change is difficult to manage without continuous reinforcement of values and norms Values and norms have to be translated into action A new culture can take hold fast when it is seen as beneficial to employees
Measuring M&A Success • • Integration goals: Reorganizing and restructuring targets in terms of schedule and cost, including breakdowns for specific business units or geographical areas. • • Integration of key HR systems: Tracking integration objectives in combining systems for human resource information, compensation, talent development, and performance management according to established schedule and budgets. • • Retention of talent: Retention of acquired talent, success rates for different retention tools, retention rates for specific business units and functions, and cost-effectiveness indicators such as retention/replacement expenses. • • Best practices: Shared and adopted practices compared across organizational units, including estimation of the impact on revenues, cost, or other performance indicators such as customer satisfaction. • • Employee feedback data: These include attitude surveys and data from exit interviews.
Acquisition capability is essential for the success of many multinationals Reflecting on and codifying M&A experience improves performance Acquisition tools should provide more than “best practice” roadmaps – most international acquisitions are one of a kind: Issues and questions to be addressed Broad guidelines on what to consider Simple and concise instruments Sources of advice Being proactive in M&A learning is a prerequisite for HR professionals to be involved in the next round Building Learning Capability