Phases

CHAPTER 4 IHRM IN C R O S S – B O R D E R MERGERS & A C Q U I S m O N S , INTERNATIONAL ALLIANOES A N D S M E s

8 3

 

• Mergers and acquisitions (M&As); and

 

• • International joint ventures (IJVs).

 

At the end of the chapter we will address the special case of globalizing small and medium-sized enterprises (SMEs) while looking for attendant IHRM responses. SMEs represent important elements in the world economy. However, in IHRM research they are often neglected, There is evidence that their approaches to international human resource management differ to a large extent from those of large MNEs and this is why we cover this topic in the present chapter. Chapters 2, 3 and 4 complement each Other and are designed to deliver insights in the most important organizational contexts for international human resource management.

 

CROSS-BORDER ALLIANOES

 

The strategic importance of alliances has increased in the course of globalization . – Cross-border alliances are cooperative agreements between t w o or more firms f r o m different national back-grounds, w h i c h are intended to benefit all partners. As depicted in Figure 4 . 1 these comprise equity as well a non-equity arrangements.^

 

 

• A non-equity cross-border alliance ‘is an investment vehicle in which profits and other responsibilities are assigned to each party according to a contract. Each party cooperates as a separate legal entity and bears its own liabilities’.” Examples include international technology alliances or strategic research and development alliances^ as well as cooperative agreements in different functional areas such as marketing or production.^

 

• Equity modes involve a ‘foreign direct investor’s purchase of shares of an enterprise in a country other than its own’.” These include the establishment of subsidiaries as mentioned in Chapter 3,

 

FIGURE 4.1 Equity and non-equity modes of foreign operation

 

S u b c o n t r a c t i n g

 

O u t s o u r c i n g .

. • O f f s h o r i n g

 

Subsidiaries Franchising

 

Joint ventures

 

M e r g e r s a n d acquisitions

 

E q u i t y a n d n o n – e q u i t y b a s e d m o d e s o f

 

f o r e i g n o p e r a t i o n

 

Licensing

 

M a n a g e m e n t contracts

 

I Equity m o d e s • N o n – e q u i t y modes I M i x e d

 

S o u r c e ; Further d e v e l o p e d f r o m M. K u t s c h k e r a n d S. S c h m i d , Internationales Management, 6 t h E d . (Munich a n d Vienna: O l d e n b o u r g , 2 0 0 8 ) , p. 8 4 7 . R e p r o d u c e d with permission .

84

CHAPTER 4 IHRM !N GROSS – BORDER MERGERS & ACQUISITIONS, INTERNATIONAL ALLIANCES A N D S M E s

 

 

either through Greenfield investments or acquisitions, as well as through joint ventures or

 

 

mergers. The latter typically involve long-term collaborative strategies, which require the support of

 

 

appropriate HR practices.’^ They represent typical cross-border equity-based alliances.

^

 

Equity as w e l l as non-equity cross-border alliances pose specific challenges to international h u m a n resource management. Often, these are crucial to the success of the international opera-t i o n . As Schuler and Tarique note, ‘Some of the H R issues that are critical to the success of eq-uitt’-based international or cross-border alliances may also rise in non – equity cross-border alliances, but they are often less central to the success of the alliance’.^ Hence, the difference i n H R J M in equity and non – equity cross-border alliances is supposed to lie in the differing extent to w h i c h specific H R measures are used.^” However, it has to be stated that there is a research defi-cit w i t h respect to H R M i n non-equity cross-border alliances’-‘ and it is beyond the scope of this chapter to discuss implications of all foreign entry modes in d e t a i l . ‘ ”

 

CROSS-BORDER MERGERS AND ACQUISITIONS

 

A merger is the result of an agreement betu’een t w o companies to join their operations together. Partners are often equals. For example, the DaimlerChrysier merger was supposed to be a merger between equals i n its first stage.’^ M o r e i n f o r m a t i o n about this merger and its eventual lack of success can be found in I H R M in A c t i o n Case 4 . 1 .

 

A n acquisition, on the other hand, occurs when one company buys another company w i t h the interest of controlling the activities of the combined operations . ”’ This was the case when the Dutch steel company M i t t a l , ranked second by volume in crude steel production in 2006, initiated a hostile takeover of the Luxembourg-based Arcelor group, ranked first in the same statistic.’^

 

Figure 4.2 shows that a merger usually results in the f o r m a t i o n of a new company while an acquisition involves the acquiring f i r m keeping its legal identity and integrating a new company into its o w n activities. The H R challenge i n both cases consists of creating new H R practices and strategies that meet the requirements of the M & A .

 

 

FIGURE 4.2 The formation processes of M&As and

HR Challenges

 

M e r g e r

 

A c q u i s i t i o n

C o m p a n y A

C o m p a n y B

C o m p a n y A

C o m p a n y B

C o m p a n y A a n d C o m p a n y B

C o m p a n y A buys C o m p a n y B

f o r m t o g e t h e r t h e n e w

 

 

C o m p a n y C

C o m p a n y A

 

W i t h i n the context of this international volume, our focus w i l l be o n cross-border mergers and acquisitions ( M & A s ) . This means that firms w i t h headquarters located in t w o different countries are concerned. M a n y of the H R M challenges faced i n mergers and in acquisitions are similar, and

 

The m

 

screer

 

Daimie

 

Ghrysh

 

HR in

 

At me I the me aspect, involv

 

In tl the me Integra manag levels, raised” pany’s Intrane compc the sat

 

Durl merger porate and mt man’s phase, let side for the admitte mality, training

 

Long-t(

 

In 200C price. A Somey sing the had cut for that! succest

 

Source:

 

(pp. 35-Copyrig permiss

8 6 CHAPTER 4 IHRM IN C R O S S – B O R D E R MERGERS & A C Q U I S m O N S , INTERNATIONAL ALLIANCES A N D SMES

 

for this reason we w i l l not further differentiate between these t w o entities, but summarize them and use the abbreviation M & A . U N C T A D defines cross-border M & A s as f o l l o w s : ‘ ^

 

Cross-border M&As involve partial or full takeover or the merging of capital, assets and liabilities of existing enterprises in a country by TNCs [transnational corporations] from other countries. M8As generally involve the purchase of existing assets and companies.

 

Cross-border M & A s have seen tremendous g r o w t h over the last t w o decades in part because of the phenomenon of globalization . ‘Both the value and number of cross-border M & A s rose in 2005, to $716 billion (an 88 per cent increase) and to 6134 (a 20 per cent increase) respec-tively’ . ‘^ This is depicted in Figure 4.3.

 

One major reason to engage in mergers or acquisitions is often to facilitate rapid entry into new markets . ‘” Thus, ‘mergers and acquisitions are a predominant feature of the international business system as companies attempt to strengthen their market positions and exploit new market opportunities’ . ^” Some of the factors that a f i r m takes into consideration when deciding on a target country include: the g r o w t h aspiration of the acquiring company, risk diversifica-t i o n , technological advantages, a response to government policies in a particular country, exchange rate advantages, favorable political and economic conditions, or an effort to f o l l o w clients.^’

 

 

Despite the high yearly g r o w t h rates in the area of M & A s there seems to be a gap between the expected added value and the benefits realized f r o m an M I & A . – ^ ITowever, there is g r o w i n g appreciation that the w a y the M . & A is managed d u r i n g the different phases (especially in the post-merger integration phase) has an impact on its performance, and in t u r n on the added value created.-‘^ M & A management has been investigated f r o m many different perspectives. The w o r k of Larsson and FinkelsteiiG” provides an excellent overview of M & A s f r o m different research fields including strategic management, economics, finance, organizational theory and human resource management.^^ O f course, all sources of research are i m p o r t a n t when explain-ing the phenomenon of M & A success.

 

For the purposes of this chapter, we are going to focus solely on H R and its role in employee relations. The quality of employee relations, ranging f r o m employee support to employee resist-ance, is influenced by variables such as the similarity between the management styles of the t w o organizations,^^ the tp’pe of cross-border combinations, the combination potential in terms of ef-ficiency gains, or the extent of organizational integration . There is evidence that employee resist-ance endangers A 4 & A performance as it may hinder synergy realization. For this reason, it is

 

 

 

FIGURE 4,3 Mergers and acquisitions in USS Billions

 

1800 –

 

1600 –

 

-1

1

I

I

I

I

 

1994

1996

 

1998

 

2 0 0 0

 

S o u r c e : U N C T A D (ed), World Investment Report

2008

(New Y o r k a n d Geneva, United Nations, 2 0 0 8 ) , p. 5. R e p r o d u c G d

with permission .

 

 

un ter cai

 

is i inc inn a m

CHAPTER 4 IHRM IN C R O S S – B O R D E R MERGERS & AGOUISITIONS, INTERNATIONAL ALLiANGES A N D S M E s

8 7

 

i m p o r t a nt that all M & A s try and effectively manage issues where employee resistance is encoun-tered, in order that employee support can evolve. This is a process in which the H R M function can play a crucial role.

 

A study by Birkinshaw et al}^ f o u n d that the integration of tasks'” between t w o companies is interdependent w i t h h u m a n integration . The dimensions of human integration in this study included visibility and continuity of leadership, communication processes d u r i n g integration, integrating mechanisms used, acquired personnel retained, and voluntary personnel loss. Task and human integration interact in different phases to foster value creation in acquisitions:

 

 

In phase one, task integration led to a satisfying soiution that iimited the interaction between acquired and acquiring units, while human Integration proceeded smoothly and led to cultural convergence and mutual respect. In phase two, there was renewed task integration built on the success of the human integration that has been achieved, which led to much greater interdependencies between acquired and acquiring units.^°

 

 

Birkinshaw et al. conclude that the human integration process is especially difficult to manage and takes time. Comple.xity and the length of the integration process increase even more in the case of cross-border alliances.^’ One reason for this is that both of the firms undergoing acquisition processes are embedded in their o w n national, institutional, and cultural settings (see Chapter 2). Typical problems that arise in cross-border M & A s involve the f o l l o w i n g :

 

• Within the first year of a merger, it is not uncommon for a company’s top management level to lose up to 2 0 per cent of its executives. Over a longer time frame, this percentage tends to increase even further.33

 

• Personnel issues are often neglected, delayed or not a priority.””

 

• • Finally, a high number of M&As fail or do not produce the intended long term results,””

 

W h e n a firm is acquired by another f i r m , it constitutes an existing workforce . Considering this fact, we w i l l describe the typical phases characterizing cross-border M & A processes and outline w h i c h H R practices are important at each of the different stages. A t this point, it must be admit-ted that the extent to which these H R practices are carried out very much depends on the extent to which integration of the t w o companies is actually aspired. I n the case of l o w integration (e.g. if the M & A is carried out mainly for portfolio reasons) both companies remain separate cul-tures. However, in the case of high integration, it is crucial for the M & A to meet the H R requirements of the different phases, which w i l l be outlined in the next section.”*

 

 

M&A phases and HR implications

 

Typically, mergers and acquisitions are characterized by a series of phases. Depending on the publication, these phases svili have different names. However, the M & A process usually consists of the following four steps:

 

 

• A p r e – M & A p h a s e including a screening of alternative partners based on an analysis of their strengths and weaknesses.

 

• A d u e d i l i g e n c e p h a s e ” ” which focuses more in depth on analyzing the potential benefits of the merger. Here, product-market combinations, tax regulations, and also compatibility with respect to HR and cultural issues are of interest.””

 

• In the i n t e g r a t i o n p l a n n i n g p h a s e , which is based on the results of the due diligence phase planning for the new company is carried out.

 

in the i m p l e m e n t a t i o n p h a s e plans are put into action.

88 CHAPTER 4 IHRM IN CROSS-BORDER MERGERS & ACQUlSmONS, INTERNATIONAL ALLIA14CES AI4D S M E s

 

 

FIGURE 4,4 HR activities in ttie phases of a cross-border M&A

 

I m p l e m e n t a t i o n a n d a s s e s s m e n t p h a s e

 

they three

 

P r e – M & A p h a s e

 

• • • IdGntification of people – related issues

 

• • • Planning f o r d u e diligence

 

• • • Assessing people

 

• • • W o r k i n g o u t t h e organizational/cultural fit

 

• • • Forming t h e M & A steering t e a m

 

• • • • Educating t h e t e a m o n t h e HR implications

 

D u e d i l i g e n c e p h a s e

 

Estimating people – related

 

• • • • • Transactional costs

 

• • • • • O n g o i n g costs

 

• • • • • Savings

 

• • • • • Identifying a n d assessing cultural issues

 

I n t e g r a t i o n p l a n n i n g p h a s e

 

Developing e m p l o y e e culture – sensitive

 

c o m m u n i c a t i o n strategies

 

• • • • • • Designing key t a l e n t retention p r o g r a m s

 

• • • • • • Planning and leading Integration efforts

 

• • • • • • Developing a n e w strategy f o r t h e n e w entity

 

• Helping t h e organization c o p e w i t h c h a n g e

 

• • • • • • • Defining an organizational blueprint a n d staffing plan

 

• • • • • • • • M a n a g i n g o n g o i n g c h a n g e , especially cultural c h a n g e

 

• • • • • • • • M a n a g i n g e m p l o y e e c o m m u n i c a t i o n s

 

• • • • • • • • Advising m a n a g e m e n t o n dealing w i t h people issues

 

• • • • • • • • A l i g n i n g HR policies, especially total rewards

 

• • • • • • • • M o n i t o r i n g t h e process of organizational a n d

 

people – related integration activities

 

• • • • • • • • Ensuring t h e capture of synergies via incentives

 

• • • • • • • • Initiating learning processes f o r f u t u r e M & A s

 

S o u r c e : B a s e d o n J . A . S c h m i d t , T h e Correct Spelling of M & A Begins with MR’, HR Magazine, Vol . 4 6 , N o . 6 (2001), p p . 1 0 2 – 1 0 8 . © 2 0 0 1 , Society for H u m a n Resource M a n a g e m e n t , Alexandria, VA. U s e d with permission . All rights reserved .

 

 

Various studies have shown that the H R department becomes increasingly involved in the phases of M & A integration as the process evolves. For example, a study conducted in Germany of 68 M & A s revealed that HR issues are only seriously considered once the integration strategy has actually been defined . “” Schmidt refers to a study of 447 senior H R executives w h o repre-sent mainly large companies w i t h more than 1000 employees. M o s t participants were f r o m N o r t h America, supplemented by companies f r o m Europe, Latin America and Asia. H e found that those companies which involved the H R department early in the process were more success-f u l than others w i t h late H R involvement.””” Both studies showed that the strongest involvement of the H R department t o o k place in the last t w o phases of the M & A process. F r o m this study Schmidt has derived best practices, which should be considered in the different M & A process phases. They are complemented by culture-specific aspects, w h i c h are of special importance i n cross-border M & A s (see Figure 4.4).

 

 

A n a n a l y s i s of the data gathered in the context of the Cranfield Studies on International H u m a n Resource Management ( C R A N E T ) shows that the f o l l o w i n g H R M measures have an important effect on the success of mergers and acquisitions: increasing involvement of H R M in the strategic decision-making processes of the f i r m , formalization of H R practices, support of the creation of organizational capabilities through training and development activities, and de-velopment of lines managers and internal labor markets. These aspects seem to be independent f r o m the consideration of specific M & A phases.” ‘

 

I H R M in A c t i o n case 4 . 1 analyzes the case of the DaimlerChrysier merger w i t h respect to the M & A phases and briefly outlines which H R measures were taken. If you compare the informa – tion given about the DaimlerChrysier merger w i t h the list of H R activities outlined in Figure 4.4 you can analyze the strengths and the weaknesses f r o m an H R perspective. W h a t lessons could be learned f r o m this process?

 

 

Strategic HRM and the role of the HR function in M&As ,

 

Aguilera and Dencker”” suggest a strategic approach to H R management in M & A processes. Based on strategic H R M literature suggesting a fit between business strategy and H R strategy

 

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