When two companies announce their merger, analysts and investors delight in talking about the synergies of the move, cost savings, increased dividends, sales growth and the greater market share that the resulting company will achieve. Yet few people mention something that is politically incorrect – the resulting cuts in redundant personnel.


Several months can pass between the moment when a company announces a merger or acquisition, and the moment when the process is completed, even if the project remains on course throughout that period. In the case of a hostile takeover offer of a publicly traded company, the two companies share the costs, which involve hiring a team of lawyers to advise them about moves they should take to defend themselves, or to attack, depending on their position. They must also pay the price of any potential media war that can involve mass media, advertising agencies, press trips, and so forth.


Before a merger takes place, there is a well-developed methodology for managing such a move so it has a maximum chance of success. First of all, say the experts, you have to formulate and define your expansion strategy and explain the reasons behind the merger or acquisition. Next, you have to identify the appropriate candidate for your takeover, and analyze the advantages and risks of such a move (including financial costs). The negotiation process is an essential part of the merger; it is equally as important as the integration process itself. It is during this step that managers of human resources play a fundamental role so that the benefits achieved by the synergies are not lost because of duplicate personnel or because some workers were let go in a way that it was more costly than anticipated.


Ceferí Soler and José María Álvarez de Lara, professors at the Esade business school, agree that companies need to assess the value of the intellectual capital of their senior management before establishing a strategic approach of this sort. Managers, they add, can even rely on a mathematical formula in their assessment: Intellectual capital equals the difference between the book value of the company in its balance sheet and its market value. Starting with this data, managers can obtain information about their people, their knowledge, their patents – and go on to create a plan that they will follow.


Valentín Comparte, chief executive of Development Systems, a firm specialized in the integration of markets and people, notes that “mergers and synergy go hand in hand. Nevertheless, getting synergies from any merger depends on how many chairs you move around in the process. It is one thing to merge two companies that have complementary businesses because they need to grow in order to have a dominant position in the market (that is an expansive merger.) It is something quite different to justify a merger on the grounds that you need to optimize processes and personnel; that kind of merger is motivated by efficiency. In the latter case, a merger becomes a fantastic opportunity to rationalize structures and — apart from positioning the new company in the marketplace — an opportunity to take advantage by trimming fat so that you wind up have a very attractive figure.”


After a merger has been completed, you have to act quickly and carry out your strategy. Experts agree that communication is important. Susan Marcos, managing partner of PeopleMatters, a consulting firm, explains says that “one of the factors that has the most impact on the success of the deal involves how people feel about it.” In that respect, it is important to answer these common questions from workers: What is going to happen to me? What job am I going to have? Who is going to be my boss? Nevertheless, Marcos recognizes, “you also have to work on the financial aspects and on the integration of processes for the new company.” Managers should not forget that they “will have to re-recruit the team that is going to be responsible for the resulting merger.” Shortly after the merger process begins, managers need to plan for what the structure of their working staff will look like after the merger is completed. At the same time, they need to create a team of specialists in human resources who can guarantee in record time (less than 100 days) that everyone in the new organization knows what to expect, starting from senior leadership and ending with those positions that are furthest away from the decision makers.


For the merger to come off as planned, employees need to focus on the business and on their customers, not on rumors and uncertainties about their jobs, say the experts. In that regard, Marcos says that to hold on to the talent of both companies, one must focus “on such aspects as structure and flow charts, as well as on evaluation profiles, harmonization of salary structures, redefinition of the corporate culture and, above all, lots of communication.” Soler and Álvarez de Lara note that talent is retained through a process of interviews, previously authorized reports and evaluations about how well various people have fulfilled their goals and those of their departments.


Ana María Pérez Castillo, an attorney at the Sagardoy Abogados law firm, says that workers’ rights to receive information are “a legal imperative.” She notes that companies can take such measures as carrying out internal surveys of professional members on their staff so that they can learn which people are their key workers. They can also resolve the doubts of those people who are involved in the merger process, and pursue a policy of total transparency regarding the information that is provided. They should also communicate all their decisions with as succinctly as possible. They need to evaluate the economic impact of their measures; plan the integration and realization of a new structure; and inform those workers that who participate in the merger process. Nevertheless, managers need to remember that “workers will have to maintain the working conditions that they enjoyed in the company before the merger. They will also continue to be ruled by any collective bargaining agreement that was in effect at the moment when the merger took place,” unless they specifically agree to the contrary, notes Pérez Castillo.


Those Who Are Most Affected


Normally, when there are personnel cuts, “it is the central departments – those that provide essential support — that suffer the most,” notes Marcos. In her opinion, those kinds of jobs “increase in number unnecessarily” because the size of these departments does not depend on the size of the company itself, as it does in the case of manufacturing and commerce. Nevertheless, Marcos recognizes, “It is common to have more problems and generate more noise on the top levels, because flow charts and appointments [to senior] positions tend to be urgent measures.” The positions that are most affected by restructuring are structural positions — department heads and administrators.


Nomparte agrees, and says one of the most delicate positions is regional manager. In such cases, managers can benefit from a good network of contacts, and can take advantage of their knowledge of English to leave the company. Another temporary solution is to arrange for lateral functional moves; this is called “getting kicked sideways.” When it comes to managers who would have the right to receive significant compensation, they can be transferred to another department where they have other responsibilities, in areas where they do not have sufficient experience. This can work as an incentive for them to eventually leave the company. Another similar remedy is called “getting kicked upstairs.” This involves promoting someone to a position in which he does not exercise any executive function. When it comes to senior managers, Nomparte says, “The reality is that companies put more value on the cost of compensation than on the value of performance.” Pérez says that there are occasions in which a company “underestimates the costs of the dismissals that have to be carried out after a merger process takes place.”


According to Soler and Álvarez de Lara, “It makes sense that you can have an imbalanced staff. You have an overabundance of machinists, engineers, administrators and technicians, but you almost never have too many sales people.” One way to avoid cutting the wrong staff at lower levels is to win the trust of the director of manufacturing and wind up getting first-hand information about each of his employees.


When a company does not promptly make the right decisions about reorganizing and cutting personnel, a possible result is that “people focus their attention on areas unrelated to producing results for the company; they don’t focus on the customer or on service or productivity. Time is spent on talking about rumors; about ‘what is going to happen to me’ – and who has been fired, and so forth. All of this distracts people and reduces productivity,” says Marcos. “The customer immediately finds reasons that justify going out and buying from competitors.”


Common Mistakes


One of the most common errors that companies commit, says Marcos, is “doing a poor job of due diligence, focusing only on financial and marketing aspects without considering possible barriers and problems that result from integration of [corporate] cultures and, more generally, without considering problems of human capital.” In her opinion, “You have to reward speed above precision.” Another problem, she adds, is that companies move slowly when it comes time to putting their personnel integration plans into effect.


Experts agree that the most common and most important error in managing human resources during mergers is a failure to communicate (within the company and to the outside world). When your desired goals have not been achieved, it is better to let people know that fact and assure people that management is working on these problems, rather than remain silent. Another problem is that some companies don’t have any one on their staff who coordinates the integration [of merged companies]; they permit earlier initiatives to exist, even though they are not covered by the values of the new organization.


According to a statement by the law firm, “In many cases, companies do not worry about getting to now the fundamental philosophy that prevails in the company that they are going to acquire. And, at times, they throw out human resource policies that are much more advanced than their own.” Corporate culture can also be a determining factor. That is precisely one of the arguments that Arcelor has used in order to avoid the hostile takeover offer launched by Mittal Steel, and to defend a merger with Russia’s Severstal.


Marcos explains: “Before the deal takes place, it is absolutely essential to analyze those cultural aspects that can make integration either difficult or can provide support for it. Once those aspects are identified, you can decide either not to move forward (because culture is something that is very hard to change; it has a lot of inertia). Or you can work out a plan. Some companies decide to impose their own culture, while others opt to take advantage of the opportunity to define a new cultural concept. Others decide to let the previous cultures co-exist. The chances of succeeding in such cases are quite slim, except when the acquisition does not involve any need for integration — for example, when two companies that have very different goals forge a new group that is diverse.


Soler and Álvarez de Lara say that cultural differences are “inevitable.” They say that it is a serious error to ignore such differences when it comes time to design the marketing strategy and the corporate image of the company that results from a merger. Nomparte adds that “the only thing that can ruin a merger is personal differences among its senior managers, not the cultural differences within the staff.”   Companies, Nomparte notes, “will need to define the culture of the new company. It is best for all levels of the organization to be involved. That process should involve defining the company’s values and how they are reflected in the everyday conduct of the staff. This should involve setting up tangible policies that support the development of the new culture and the professionalism required for achieving the strategic goals of the plan.”


Less Traumatic Restructuring


“In this kind of process, there are always winners and losers,” says Marcos. “But it is very important not to prolong the agony. Most of all, it is important to show respect and appreciation for those people who leave, both in emotional and financial terms. You cannot neglect the image this projects for the company among its customers and in society in general. For her part, Pérez says that personnel restructuring initiatives “are always complicated processes that have a big emotional impact.” However, she recognizes that there are measures “that permit us to try to soften that impact. The new company has to carry out a policy of total integration, so that its workers do not continue to consider themselves to be workers of their company of origin.  Another possible way to soften the negative impact of personnel cuts is “to plan the outsourcing of some of the company’s services, giving the best opportunities those workers that were going to leave,” says a report produced by Sagardoy Abogados.


The key to reducing traumas is to continue to support the entire communication process. This means more than merely telling people about the company’s plans and the future of each work position. It also means informing people, always in a transparent way, about how the process is proceeding, and resolving the doubts of those employees who have them; not just the doubts of management.


The European vs. Anglo-American Models


These rules of behavior apply to companies around the world, whether or not they behave according to the Anglo-American model or that of continental Europe. Experts agree that, in both cases, the same fundamental problems arise when there is a merger because the processes [involved in a merger] are very similar. Soler and Álvarez de Lara say that, while there could be slight cultural differences when it comes to the goal of the merger, those differences should have no impact on the policy of Human Resources managers.


Pérez agrees but notes that there are differences in the way small enterprises behave. “Spanish labor law is very protectionist when it comes to workers, and the cost letting workers go is much higher than other countries in our environment.” This is a fundamental fact that has to be considered when it comes time to cutting staff. In the case of international mergers – and possibly in the case of [the merger of] Spain’s Ferrovial and BAA, the British airport management firm – the fixed costs that are projected can rise significantly if people fail to take into account the legal differences in each country. Nevertheless, she says that large-scale mergers “taken on the costs as a part of the process, within a brief time, they make a profit from their investment.”


Marcos says that General Electric provides a perfect example of how to carry out the process of integration. GE has even developed its own methodology, which is “very complete and systematic, and which has been bringing success to all of its acquisitions for many years.” On numerous occasions, Jack Welch, GE’s former CEO, explained that making personnel cuts was unavoidable. However, Welch is always calling on and speaking with each person, so that people know about what will happen in the future in the company for which they are working.