29 March 2010 #Employment
Mergers and Acquisitions (M&A) have been a current topic within HR and Employment Law for a long time now but the last ten years has seen far greater opportunities opening up for companies (including private equity funds etc) to make that "transforming" acquisition or merger with a rival which will deliver major financial benefits and enhance shareholder value. Of course it is a well known fact that more than 60% of mergers/acquisitions fail to achieve their planned objectives. One major contributory factor in this has been the failure to pay sufficient attention to the people aspect of this type of change.
Globalisation, by definition, encourages companies to expand overseas and in so doing so they often see an acquisition as a quick and cheap route to achieve this. But for medium sized companies who do not have the resources of the so-called multi-nationals, the first or subsequent overseas acquisition can be a daunting prospect. Recent press speculation suggests that we can expect increased M&A activity involving Indian and Chinese companies rather than American and Japanese ones. The HR aspects of such changes would need very careful planning and handling. The cultural divide between US and UK companies for example has not been that great and although there are considerable differences in the respective legal systems, the acquisition of UK companies have tended to go smoothly. At least until the recent battle for Cadbury and the now notorious Kraft commitment to keep open the Cadbury site near Keynsham, scheduled for closure by the existing management. Whether this type of behaviour is a one-off, genuine misunderstanding or the foretaste of more controversial closures remains to be seen. However there is a positive contribution that HR can and should make to these major transformational projects which can yield mutual benefits to the company and staff at the same time.
Analysis of M&A must take account of the very different national understanding of the implications. Within Europe, although covered by an overall Employment Law framework, France, Germany and the UK, for example, have very different ideas about what is acceptable M&A activity and what should be resisted. The European view that acquisitions should always be consensual means that the views of staff should have been taken into consideration before the event. The defence of certain key companies and industry sectors, as being of "national importance" infers that where a merger/acquisition is approved that staff should accept the changes provided they are not put in any detrimental situation. However if acquisitions by Indian and Chinese companies are further encouraged then the enormous cultural differences, the lack of any but the most basic of employment laws, as in India, or very convoluted state control, as in China, will make future M&A cases more complex.
In UK Employment Law, M&A activity is subject to TUPE (Transfer of Undertakings - Protection of Employment). The original TUPE regulations in 1981 were updated and developed in TUPE 2006. This series of regulations is viewed in two, very different, ways by the private as opposed to the public sector. Private sector companies view the regulations, which basically carry over existing employment contracts unchanged between the transferor and the transferee, as a potential hindrance but one which can be handled later without too much difficulty. While in the public sector, TUPE transfers are the subject of considerable debate and the acquisition of TUPE rights to be fought for and defended at all costs. This divergence of views about TUPE has something to do with public sector standards and the way the regulations were introduced, but may also be partly due to far greater Trade Union membership levels in the public sector. Over the next five years, as the pressure is applied to reduce public expenditure, it is highly likely that many services currently undertaken in the public sector will be outsourced and such contracts will require TUPE 2006 to be fully taken into account.
One of the major additions to the TUPE Regulations introduced in 2006 is the requirement to provide transferring employees with the chance to join a replacement pension scheme with comparable terms including matched contribution rates up to 6% of basic salary. There are special provisions for public sector employees in relation to pensions.
So what can HR contribute to making a success of M&A? The early involvement of someone with HR knowledge and expertise is very important. An information gathering exercise (called "due diligence") should be undertaken before the merger/acquisition/outsourcing is agreed. Potential transferees have a legal right to request information about employees transferring with the business - their contracts, costs and any liabilities to/with them. A surprising number of M&A take place without HR due diligence taking place. It need not take long and should be integrated with the financial, legal and commercial due diligence which is always undertaken. There is a list of sample TUPE information which transferees should seek from the transferor in an appendix to the Guidance Notes on Commercial Contracts in the TUPE section on Employment Buddy (www.employmentbuddy.com) where there is also a useful fact sheet on TUPE. Information obtained should be analysed against your current practices and any major differences considered. Transferors cannot hide behind the Data Protection Act 1998 to refuse to disclose such information required under TUPE. If anything is unclear then supplementary questions should be raised with the transferor. If these remain significant then warranties and indemnities can be given or received in the final contract for sale or transfer.
It is a common cry from transferees that they wouldn`t have bought the company if they had realised just how complicated and costly the contracts of employment were. If HR due diligence has been completed at the right time, in sufficient detail, there should be no excuse for this attitude. Indeed in the current climate, the existence of major shortfalls in pension provision is a critical issue in several potential M&A. Expensive acquisitions have failed to complete because of such issues leaving the transferee with a large bill for a failed attempt.
If HR has been involved from the start and has identified all the major employment cost issues and planned their resolution then M&A can be completed with confidence. Staff in the transferring organisation will usually respond positively to this type of confidence by the leadership of the acquiring/transferee company. Early communication at the time of the transfer is very effective (first director on site on day one). The detail of future plans need not be given but a welcome and optimism can bring enormous value, way beyond any cost. In this respect, smaller companies taking over parts of a large multi-national can lead to an improvement in employee relations by the very fact that they seem to want the plants/businesses. It is surprising how negative some staff become when their factory/office/business has been out up for sale or transfer as "non-core".
Emotions can and do run high during protracted M&A battles. Obviously the financial, legal and commercial issues will take precedence over the people issues. However compelling the financial or commercial case, a takeover will not succeed if key individuals are not motivated to make the new arrangements work. Those key individuals can be at any level in the business and it is not always the case that there are many other qualified and more motivated people just waiting to take their places. Rectifying these problems, although possible, can be costly. Kraft may rue the day when they failed to deliver on their commitment and dismissed many knowledgeable and experienced staff at Cadburys near Keynsham.
Forbury People Consultant
0118 953 3996