May 1, 2003

HR Communications In Mergers & Acquisitions

by Louella Eastman, CGU Group Canada (Aviva) and
Lorne Hartman, Ph.D. |
www.psybasenetwork.com | lorne.hartman@psybasenetwork.com


The failure rate in today’s merger world suggests at best a 50-50 chance of success. In fact, the worst-case findings indicate that up to 80 percent of all mergers bring disappointment. It doesn’t have to be that way.

Clearly, the process of integrating two companies involves a tremendous organizational effort. The outcome, whether or not the merger is a success, depends on the effectiveness with which the integration process addresses the challenges of transition and change. In particular, recognizing and dealing with differences in culture, management style and operating philosophy will make-or-break the success of the integration effort.

This article outlines a process and methodology for managing merger-related transition and change from an HR Communications perspective. To illustrate the approach, a series of mergers involving CGU Group Canada will be profiled with particular reference to the design and implementation of initiatives to support employee transition.


Introduction

Why Do Mergers Fail?

CGU Group Canada (Aviva): Case Study


INTRODUCTION

The value of Canadian corporate mergers and acquisitions has continued its decline in the first half of 2002 from its peak at the end of the 90s. Globally, M&A activity is even weaker. In actuality, however, whereas deal values have dropped significantly over the past two years, the number of deals completed has stayed relatively stable. But when you consider that at least one in two takeover deals fails, it’s difficult to understand this sometimes fatal attraction.

The rationale for a merger is usually based on elegant strategic logic, supported by first-rate financial analysis and documented in detailed legal agreements. A generic listing of the "top ten" motives for M&A include the following:

    1. Leverage undervalued company and brand

    2. Achieve growth more rapidly, and at less cost, than by internal effort

    3. Satisfy market demand for additional products/services

    4. Increase earnings per share

    5. Reduce dependence on a single product/service

    6. Acquire market share or position for present product/services

    7. Offset seasonal/cyclical fluctuations in present business

    8. Enhance the power/prestige of owner, CEO or management

    9. Increase utilization of present physical/human resources

    10. Acquire outstanding management or technical personnel

In the current wave of takeovers, the strategy of globalization is likely to be cited as a catalyst. Globally, firms are jockeying for position in the effort to reach a significant role in each domestic market as well as worldwide. The "rule of thumb" is that unless you are #1 or a close second or third, you won’t survive unless you are a strong, niche market player.

In many cases, the Property & Casualty insurance sector in Canada is one example, the market is so fragmented that it is extremely difficult to grow by organic means. Frequently, the potential target offers market flexibility because of their organization structure, as well as offering a major position in a niche market.

In the insurance business, this is becoming increasingly important as the traditional P&C companies encounter totally new competitors with ideas and approaches to the market that are not necessarily homegrown. A good example of this is the dramatic rise in non-traditional direct writers like the banks (although they have yet to reach their planned savings in cost structure). In the UK, we are beginning to see utility companies and retailers offering insurance to counter the banks and capitalize on their captive consumer market. We expect to see even more dramatic changes in the personal lines business over the next several years.

A merger can almost always be rationalized as an intelligent business response to a changing competitive environment caused variously by shrinking markets, deregulation or technological change. So why is that many studies of mergers have now shown that, despite some successes, the overall record is decidedly unimpressive?

WHY DO MERGERS FAIL?

Mergers fail for many reasons. Sometimes, the deal turns out to be a bad move:

  • Inadequate due diligence. Witness the case of a plant picked up in an acquisition that was discovered to be sinking into the ground -- literally, one inch every quarter.
  • Faulty strategic rationale. Pity those unfortunate investors that made major investments in the "new" economy just prior to the bubble bursting.
  • Expected synergies prove to be fantasy rather than reality. Often the fit is better in theory than in practice. Capturing synergies in mergers is like squeezing a lemon – sometimes "the juice just isn’t worth the squeeze".
  • Personal hubris (amongst the deal makers) results in over-payment. Occasionally, egos lead the way.

In 80 percent of the failures, however, faulty implementation — not strategy — is the reason. A number of studies clearly indicate that even good deals will fail if they are poorly managed after the merger. In particular, dealing effectively with emotional and people process issues proves to be the wild card that makes-or-breaks success.

The task of successfully integrating two companies is formidable. You can expect to encounter poor morale, rising staff turnover, and falling productivity in merging companies. Very few companies do a good job of it. In most cases, companies are not attentive enough to aligning key people process issues. In some cases, companies might actually have walked away from deals if they had included an assessment of key people process issues as elements in the due diligence process.

The most strategic of people processes to address in a comprehensive merger integration plan are staffing, change management and communication. The case study illustrates an approach and methodology to address these M&A integration-critical people processes.

A key question to address is how quickly to move in melding the two companies. The disadvantage with a slow approach is that it tends to dissipate momentum and enthusiasm. Worse yet is the cost of lost talent as key executives and managers bail out because of uncertainty about personal job security. Usually, the best talent is the first to go.

In addition, delays can dilute the financial benefits of the deal. Lost productivity due to performance problems among staff involved in a merger has been estimated to be a minimum of 15 percent, averaging 30 percent and ranging up to 50 percent. There is a time-limited "window of opportunity" in which to implement the integration plan. Failure to move quickly can be fatal. Merger caveat: "Snooze you loose!"

The personal impact of a merger inevitably will involve some (painful) loss of control. There is increased focus internally and much more uncertainty. Until people know if they have jobs, for example, it may be difficult to focus on customers.

Differences in culture and management style — the formality of procedures, the adherence to job descriptions, the structure of communications — can have a significant bearing on outcome. Additional challenges in a merger include selecting the best talent, supporting employees through the transition period and facilitating the building of new teams.

CGU GROUP CANADA (AVIVA): CASE STUDY

Many of the merger risks identified above were evidenced in the worldwide merger of Commercial Union and General Accident in 1998. Valued at US$6.7 billion, this transaction involved two UK based insurance companies. The combined entity called CGU ranked as one of the world’s largest insurers and marked another step in the accelerating consolidation of the industry. Then, only two years later in May of 2000, CGNU was formed through the global merger of CGU and Norwich Union to create the world’s 7th largest insurance group. It has worldwide premium income and investment sales of 28 billion and more than 200 billion in assets under management.

Just prior to these two worldwide mergers, here in Canada, General Accident was in the middle of integrating Canadian General, a transaction valued at Cdn$700 Million, which at the time created Canada’s largest property and casualty insurer. And then subsequent to these worldwide mergers, CGU acquired the Canadian subsidiary of GAN, a Paris-based insurance company. Today in Canada, after four mergers in five years, CGU has assets of 5.5 billion and annual premium income in excess of 2.2 billion.

Louella Eastman, the Senior Vice President of Human Resources describes the integration challenges in the merger of Commercial Union and General Accident in a recent interview:

    "Senior executives on both sides saw the merger as an excellent strategic move for the business, for shareholders and for employees. The combined entity had the potential to be the biggest and the best so long as cost savings were achieved, people were able to let go of the past and learn how to operate in a new, more competitive culture with more formal structure and centralized decision making. Both organizations had strong people in Canada and the two were almost a perfect fit: some overlap in brokers, little overlap in branches; both UK based companies with Commercial Union disciplined in financial controls whereas General Accident’s (Canadian General) strengths were in doing acquisitions and in being entrepreneurial and responsive to brokers.

    "The foundation for the merger thus identified, change management professionals were retained and a strong emphasis on communications set the stage for success. Early in the integration process, change management workshops were conducted which included at the front end an organizational sensing focus group to assess current climate, key concerns and critical issues impacting on employees following the merger. Reactions ranged from stress and insecurity to mistrust and feeling disregarded by senior management because of a lack of information around the integration plan. Participants expressed fears concerning job security, relocation and losing the company culture they had enjoyed so far. But they also expressed the hope that speed and fairness would prevail in all announcements and processes impacting on employees. They suggested faster and more frequent communications, more face-to-face meetings with senior managers, and equitable selection and outplacement programs as a means of alleviating some of the concerns."

A staffing process based on a competency model was developed. HR representatives facilitated staffing meetings with integration teams using the selection process and supporting tools.

The Executive Committee worked with an external facilitator to assist them in defining a new vision and values as well as an operational plan that would leverage key value-drivers in the merger. Town Hall sessions (co-lead by two Executive Committee members) were held in every location across the country to launch the new post-merger vision and values.

Both pre- and follow-up communications were addressed via Q&A hot lines on e-mail and telephone. Early on, employee information kits were distributed to all staff.

The plans for integration could and did change as the process unfolded based on feedback from employees. Accordingly, the communication effort needed to be ongoing, dynamic and flexible. Alignment of compensation and benefits (integrating reward systems) was intentionally delayed for a year in order to ensure clear understanding and support for the new performance culture.

Outplacement consultants helped to design and implement the severance program. This included a training session for all senior managers on how to conduct the termination interview and communicate with employees.

Detailed description of change management assistance with the implementation of the merger falls into a number of key areas:

    Setting Direction

    In setting the direction for the merger, the new Executive Committee needed to engage in a process of strategy development, a process that was facilitated by a consultant. First, the team confirmed their understanding of the key operational initiatives that were the significant value-drivers in the deal. Critical success factors associated with each initiative were identified. In the process, executives learned about each other’s culture and core competencies as a foundation for defining a post-merger vision and values from which flowed a set of effort priorities.

    In this way, the new Executive Committee got a head start in learning how to function as a team while driving a well-planned and successful alignment. More importantly, the team running the business determined the ideal post-merger culture for the combined entity and articulated clear principles for how business was to be conducted going forward. There was on-going support for the leadership team that included individual executive coaching to provide support and guidance to each executive in embracing the new leadership challenge with clarity and confidence.

    Setting Up Teams

    Task forces had been formed to champion integration action planning for critical functions and primary value-driving initiatives. These teams involved senior managers from both organizations working on specific merger issues. Several of these were facilitated by consultants to ensure that they were not being undermined; for example, by power struggles, conflicts, personal agendas, and turmoil.

    Achieving Structural Integration

    One of the key issues in the aftermath of a merger is achieving integration at the structural level. A change management consultant assisted senior executives in moving quickly and effectively to establish a new organizational structure. Each executive developed a mission statement for their function aligned to the new vision and mission. Key performance measures for the unit were identified and critical jobs determined. Each executive then presented their proposed functional design to the entire Executive Committee. Cross-functional issues were discussed and new partnerships (within each unit, between units, and with external stakeholders like the provincial regulators) were defined in order to implement the merger mandate. The Executive Committee then defined skill requirements for the key jobs in each function and identified candidates from both companies who should be considered for these jobs.

    Assessment and Selection

    Third party consultants conducted Behavior Event Interviews with each candidate to ensure that talent selection be based on reliable and objective (i.e., fair) information. Each executive then presented their final structure to the Executive Committee, with recommended key job candidates named in the boxes. The presentation included a review of each individual’s assessment results — strengths, weaknesses, and development needs vis-a-vis the skill requirements for the job.

    Change Workshops

    Change management consultants delivered a series of workshops that all employees could attend. These change workshops were designed to use the natural ability of people to come together as a group and provide support for one another while at the same time identifying problems and issues in the merger. Some of the problems represented "low-hanging fruit" that could be easily picked off by groups within the workshop. Other problems were outside the reach of the participants in the workshop and were fed back to the Executive Committee for their review and action.

In looking back, five years later, there is some good news and some learning. Again, Louella Eastman’s comments prove to be most instructive:

    "Overall, there were two periods – the first period involved four integrations in four years followed by the second period, the past year (2001-2002), where we have focused on creating one company/one culture, with a shared vision and purpose. This article focuses primarily on the key events in the first period of integrations where the focus was to build one infrastructure and remove costs.

    Today, our business portfolio is better focused with lines of business and distribution channels where we have a competitive advantage. We sold off some ancillary portfolios (e.g., the life book), made some acquisitions (e.g., GAN) and have better leveraged our brands (e.g., Pilot). We’re much more flexible, we react quicker and are more customer-focused than we were at the time of the merger. As a result, in this past year we have experienced substantial improvements in the combined operating ratios for both our Traditional Multi-Lines (Personal and Commercial policies through brokers) as well as Volume Distribution (direct) and have successfully launched several new non-risk products and services.

    "Two major learnings stand out after having been through a series of successive integrations with four mergers in four years: First, we underestimated employees’ needs for communication; for information. There are always more questions than answers, and the rumor mill really gets cranked up to fill the gap. The first move in stabilizing the new organization is to communicate relentlessly. And the second key learning is that culture change is a long-term process. It takes several years, in our case almost five years, to really stabilize the system, create one company (one culture, vision, purpose) and embed changes in organizational culture."

Compelling evidence in support of investing heavily in addressing people issues in M&A are revealed in the most recent climate survey at CGU Canada. With a response rate above 89%, a majority of employees believe that post-merger efforts are achieving the vision, demonstrating the values, and delivering the culture. For example, "91.6% state that they have a stake in CGU’s success". Proof positive that mergers can lead to successful results if you attend to key people processes.

Contact: lorne.hartman@psybasenetwork.com | Phone: 905.764.2696 | Toll Free: 866.854.5753