Human Resource Due Diligence within the Context of Mergers & Acquisitions E-Book

Andreas Keller

• Herausgeber: GRIN Verlag
• Sprache: Englisch
• Veröffentlichungsjahr: 2011

Beschreibung

Master's Thesis from the year 2004 in the subject Business economics - Business Management, Corporate Governance, grade: 1.0, University of Strathclyde, language: English, abstract: The process of M&A (Mergers & Acquisitions) represents a predominate form of expansion, growth and internationalisation. In the past, M&A research into the strategic fit producing optimal synergies between two corporations has largely focused on the financial, legal and economic aspects of any prospective deal. Only since the increased awareness of a nearly fifty percent failure ratei has there also been growing consciousness of HR’s significance in this equation, together with the cultural aspects of integration strategies, and the cultural factors for globalisation – in other words, the cultural fit! In global terms, there is increasing acknowledgement and awareness of intellectual capital as a core economic resource, rating the significance of a company’s sum of human capital and intellectual property on a par with physical assets such as equipment, plant and inventories. Empirical evidence suggests that the management of cultural and human factors in a M&A implementation is crucial for smooth integration and overall positive outcome. The project work discusses, investigates, and reports on research into the essentials of human resource due diligence and its cultural aspects in a cross-border integration. It focuses on human resource management and cultural integration during a M&A phase. It also points out specific findings on integration using and intensive HR due diligence approach. The issues of discussions are based on a wide range of literature supported by findings of empirical studies published internationally and the M&A knowledge of the management staff . The project intends to tackle the contrast between pre-acquisition motives and post-acquisition behaviour, and the subtle process of sound integration in terms of HR due diligence in general cross-border M&A. The work will touch on the measurement approaches of the field of human resource accounting (HRA), specifically the stochastic rewards valuation model for M&A, as a tools for the measurement of the value of the ROI on human capital. The discussion on cultural integration includes cultural fit, cultural change and management across national cultures in mergers and acquisitions. Addressing these issues is designed to provide further insights for the two companies in question into the significance of HR due diligence in the run-up to any possible merger or an acquisition of ADMECO AG.

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Table of Contents

Table of Figures

Abbreviations

1 Abstract

1.1 Preface

1.1.1 The company - ADMECO AG

1.1.2 Investor - Nordic Medial Supply (NMS) ApS

2 Introduction

2.1 Issues & Challenges

2.2 M&A Facts

2.2.1 Cross-border M&A Facts

2.3 Context of the Study - Issues and Objective

2.4 Reason for Selecting

2.5 Outline & Structure of Project

2.5.1 Limitation & Focus

2.5.2 External Constraints & Conceptual Limitations

2.5.3 Research Limitations

2.6 Terminology

3 Literature Review

3.1 Introduction

3.1.1 Merger & Acquisition (M&A)

3.1.2 Types of M&A’s

3.1.3 Phases of M&A

3.1.4 Reasons for M&A’s

3.1.5 Cross-border M&A

3.1.6 Cultural Issues

3.1.6.1 Cross-Cultural Differences

3.1.7 Human Resources (HR)

3.2 Due Diligence

3.2.1 Integration Begins with Due Diligence

3.2.2 Human Resource Due Diligence

3.3 Human Resource Accounting (HRA)

3.3.1 Parallels with Corporate Evaluation Method

3.3.2 The Human Replacement Cost Model

3.3.3 Mathematical HRA Models

3.4 Conclusion

4 Methodology

4.1 ADMECO and its transformation

4.2 Objective

4.3 Data Collection Method & Analysis

4.3.1 The Intend

4.3.2 Sources of Data

4.3.3 Measurement Methods

4.3.4 Summary

5.Findings

5.1 New Monetary HRA Valuation Model

5.1.1 Model Description

5.1.2 Naming the New Model

5.2 Interpretation of Results

5.2.1 Economic Monetary Values - An Overview

5.2.2 M&A

5.2.3 Cross-Border HR Issues

5.2.4 Findings on Cultural Issues

5.3 Conclusion

6 Discussions & Recommendation

6.1 Discussion / Comments on Available HRA models

6.1.1 Stochastic Rewards Evaluation Model

6.1.2 Hermanson Model

6.1.3 Lev/Schwartz Compensation Model

6.1.4 Likert’s Model

6.2 Resurgence of Interest in HRA

6.3 The New HRA Model

6.3.1 The New Model

6.3.2 Valuation of the New HRA Model

6.3.3 Testing the New HRA Model Validity

6.4 The Other Simplistic Equations on Human Capital

6.5 The Expert Expertise on M&A

6.6 Cultural Issues

6.6.1 Cultural Awareness and Communications

6.7 Denmark & Switzerland

6.7.1 Trade Barriers

6.8 Recommendations

7 Conclusion

7.1 Human Resource Accounting Model

7.1.1 Future Directions of HRA

7.2 Cultural Conclusion

7.3 Cross-Border M&A

7.4 Communication

7.5 Final Remark

8 Personal Reflections

9 Bibliography / Appendix / References / Glossary

9.1 Bibliography

9.2 Appendices

9.2.1 AppendicesThe Economic Monetary Value Results

9.2.2 Limited Due Diligence (ADMECO AG)

9.2.2.4 Overview of the Accounting Policies & Controls

9.2.3 HR Due Diligence Checklist

9.2.4 Aspects by Country

9.2.5 Commercially Available HRA Software’s

9.3 Glossary

9.4 References

Table of Figures

Figure 1: M&A Activity 1968 to 6/2004 (U.S. & U.S. Cross-border Transactions)

Figure 2: Analysis by deal type (1st half of2004 vs. 2003)

Figure 3: FDI Inflows by Host Region; Denmark vs. Switzerland (1991-2002)

Figure 4: Five-Phase Models

Figure 5: Three-Phase Models

Figure 7: Hofstede's - Power Distance and Avoidance Scale

Figure 8: Communication Process - Four-Phases

Figure 9: Aspects and Fields of Due Diligence

Figure 10: HR Processes (Stages at which HR is being Implemented)

Figure 11: Human Capital (HC)

Figure 12: Illustrates an overview of HRA

Figure 13: Calculation of Discounted Cash Flow

Figure 14: Expected Conditional Value of Staff

Figure 15: Expected Realizable Value of Staff

Figure 16: Description of Stochastic Rewards Evaluation Model Expressions

Figure 17: Flamholtz Model - Determinants of Individual's Values

Figure 18: Likert's Model - Relationship among HR Dimensions

Figure 19: Corporate Human Capital Scorecard (Fitzenz, 2000, p.46)

Figure 20: Expected Realisable Value of Balanced Employee Relations

Figure 21: External Individual Control Factor Equation

Figure 22: Internal Managerial Control Factor Equation

Figure 23: Economic Monetary Values (Stochastic Rewards Valuation vs. New Model)

Figure 24: Mathematical Statement of Model

Figure 25: Corporate Cultural Differences

Figure 26: Organisational Structure (June 2004)

Figure 27: Economic and Financial Data for Switzerland

Abbreviations

1 Abstract

The process of M&A (Mergers & Acquisitions) represents a predominate form of expansion, growth and internationalisation. In the past, M&A research into the strategic fit producing optimal synergies between two corporations has largely focused on the financial, legal and economic aspects of any prospective deal. Only since the increased awareness of a nearly fifty percent failure rate[1] has there also been growing consciousness of HR’s significance in this equation, together with the cultural aspects of integration strategies, and the cultural factors for globalisation - in other words, the cultural fit!1

In global terms, there is increasing acknowledgement and awareness of intellectual capital as a core economic resource, rating the significance of a company’s sum of human capital and intellectual property on a par with physical assets such as equipment, plant and inventories. Empirical evidence suggests that the management of cultural and human factors in a M&A implementation is crucial for smooth integration and overall positive outcome.

The project work discusses, investigates, and reports on research into the essentials of human resource due diligence and its cultural aspects in a cross-border integration. It focuses on human resource management and cultural integration during a M&A phase. It also points out specific findings on integration using and intensive HR due diligence approach. The issues of discussions are based on a wide range of literature supported by findings of empirical studies published internationally and the M&A knowledge of the management staff . The project intends to tackle the contrast between pre-acquisition motives and post-acquisition behaviour, and the subtle process of sound integration in terms of HR due diligence in general cross-border M&A. The work will touch on the measurement approaches of the field of human resource accounting (HRA), specifically the stochastic rewards valuation model for M&A, as a tools for the measurement of the value of the ROI on human capital.

The discussion on cultural integration includes cultural fit, cultural change and management across national cultures in mergers and acquisitions. Addressing these issues is designed to provide further insights for the two companies in question into the significance of HR due diligence in the run-up to any possible merger or an acquisition of ADMECO AG.

Key words: HR due diligence, M&A, cross-border, cultural, HR Accounting

Andreas C. Keller, Hochdorf, August 2004

1.1 Preface

Small medical equipment companies in Switzerland are facing a challenge on two fronts: first, keeping up with a rapidly increasing diversified healthcare market, and secondly, asserting market share despite increased competition within the European and global hospital OR market segment. ADMECO AG growth over the last 10 years has produced a horizontal organisation yet the company has shown a marked inability to realise an overall aim taking it beyond strategy, structure and systems to a framework built on purpose, process and people.

Founded in 1981, the company missed the point for effective diversification, failing to tailor new products (e.g., service-based products) to meet customer needs. The service line has not been widened to explore ways of penetrating new market areas with, for instance, asset management based services for hospital providers. Similarly, neither has the product portfolio been broadened to incorporate sales tools that, for example, replace standard contracts with risk sharing ones.

Additionally, ADMECO has not shown itself able to effectively communicate and reinforce its plan to achieve strategic resonance. The company lacks the resonance between the speed of domestic and international market changes and the speed of management response. Rapid market changes in the past did not culminate in the company radically repositioning itself internationally.

Against such a background, it is doubtful whether the present corporate outlook can guarantee long-term sustained "fast profitable growth" for their business. ADMECO’s CEO, Pierre van den Wildenberg[2] recognises that the increased struggle for competitive advantage nowadays makes it almost essential to join forces.

1.1.1 The company - ADMECO AG

ADMECO AG[3] is a small medical device company offering concepts and solutions for the hospital market, in particular, operating theatres and clean room environments. Its strategy is based on factors such as market penetration, the patent status of products, the regional location of their major customers, their financial strengths, and the resources the company can bring to bear on changing market opportunities.

1.1.2 Investor - Nordic Medial Supply (NMS) ApS

Nordic Medical Supply (NMS) is a Danish owned company and a subsidiary of Scandinavian Medical Group (SMG), a leading medical device company supplying products and services to the hospital market in Scandinavia (Denmark, Norway, Sweden, Finland), Russia, and Iceland. NMS was established in 1999 and, together with Zimmer Scandinavia, is a subsidiary of SMG.

2 Introduction

2.1 Issues & Challenges

In the nineties, the number of domestic as well as cross-border mergers and acquisitions had grown significantly before it dropped after 2001. The growth was mostly based on an expanding economic environment and bullish stock markets. The increasing importance of information technology (IT) at the end of the nineties did not just trigger a boom on the NASDAQ, it also led to overall improving share prices, hiking the value of such companies as they matched market capitalisation. In this process, shares took on an ever more prominent role as a currency in M&A deals - with the result that some deals took place without any detailed long-term planning or any clear structure of pre- and post-merger integration, or how to align corporate cultures.

In general, classic due diligence covers risks from the current state and potential future state of the M&A. However, this provides only for a somewhat limited remit. Some of the soft areas of a M&A cover the “human” side of business relations, i.e., feelings and/or values, which are traditionally only taken into account too late during during process term. For example, there may be interpersonal conflicts and / or cultural differences between the acquiring and acquired management which could lead to postmerger failure if the deal actually goes through.

During a M&A, pertinent questions are: Which key people must be retained and which core areas of competence are crucial and need to be kept? What are the corporate cultural discrepancies between the companies? What losses in productivity or personnel defections could they cause? What would this cost the company? (Galpin et al.,2000,p14)?

Generally, the classic due diligence approach ignores the conflict management issues. Empirical evidence suggests that the assimilation of different corporate cultures and values poses conflicts. Therefore the ADMECO and NMS recognise the importance of its human capital and its importance of HR due diligence within the evaluation, the pre- or and postmerger phase.

2.2 M&A Facts

The M&A deals for the 1st half of 2004 are significantly higher as against the same period last year and the second half of 2003 (ZEPHYR, 2004[4]). The number of deals rose by 62% for the same period last year in North America. Europe and Asia are up by similar amounts of 45% and 46% respectively. Africa is in the red for the same period, facing a deal value change of -46% and -85% for the Middle East. The numbers show that North America is pulling away from Europe - a prerequisite of a vibrant M&A market, as Ed Mountfield at ZEPHYR points out, is a vibrant US market. The financial (banking, insurance) sector still dominates, with 277Ό09 or 16.3% of the total. However, the computer and internet service market is very active sector, suggesting a convalescing market after 2001, the year the bubble burst. Globally, for the 1st half of 2004, the combined figures for Europe and North America give a majority of 76% in numbers of deals and 83% for deal values. The U.S. and U.S. cross-border activities are illustrated in Figure 1 (source: www.mergerstat.com - as of 10. July, 2004 - value is the base equity offered).

M&A Activity (U.S. & U.S. Cross-border Transactions)

Figure 1: M&A Activity 1968 to 6/2004 (U.S. & U.S. Cross-border Transactions)

In Europe France, Sanofi-Synthelabo SA acquired Aventis SA to 100% and is one of a top M&A deals in progress as of June 21, 2004, with a deal value of €55.3 billions. Telefonica Moviles SA (Spain) has a top cross-border deal in progress for 100% assets of BellSouth Corp. Latin American - rated at €4.6 billions.

Not every M&A deal is a 100% acquisition, an analysis by deal type is illustrated in Figure 2[5]

Figure 2: Analysis by deal type (1st half of2004 vs. 2003)

2.2.1 Cross-border M&A Facts

According to a PR released by UNCTAD, the global foreign direct investment (FDI) flow in 2003 remained flat, at €535 billion as against €534 in 2002[6], after 2001 and 2000 experienced two consecutive declines down from €676 billion and €1.15 trillion respectively. As UNCTAD points out, the continuing low value and numbers of cross-border M&As (the key drivers of global FDI flows) contributed significantly to the downturn.

Boosted by signs of an improving global economy in early 2004, UNCTAD predicted FDI flows bouncing back this year as investor confidence grows, M&A transactions recover, and corporate profitability increases.

As research has shown, patterns of M&A activity tend to reflect managerial assumptions on and perceptions of the similarity and compatibility of different national cultures and business styles (Gersten et al.,1998,p10) . Such research has found that given a choice, Northern European countries such as U.K., Sweden, and Denmark would prefer to enter business partnerships with other North European and American organisations. The figure below depicts the FDI Inflows by host region relevant for this project (www.unctad.org).

Figure 3: FDI Inflows by Host Region; Denmark vs. Switzerland (1991-2002)

2.3 Context of the Study - Issues and Objective

The purpose of this project is to investigate the evaluation of HR due diligence to achieve effective integration between two culturally different companies - in this instance, the Swiss company ADMECO AG and the Danish investor NMS ApS. One of the main reasons why mergers & acquisitions fail can be found in the “staff’ factor or human resource management (HRM). The issues this project intends to tackle will cover the contrast between pre-acquisition motives and post-acquisition behaviour, and the subtle process of sound integration in terms of HR due diligence and the cultural fit in general.

The Danish investor, Kim Hafstrom [7] believes that conducting HR Due Diligence allows the parties to understand associated employee issues and sees this as a significant and important step in ensuring the success of an organisation, in particular of a M&A. HR Due Diligence is not just used to evaluate an organisation, but also the actual sale/merger and the post-sale/merger in the period of change during the phases of a pre-sale/merger. It ensures:

all information is obtained on employment liabilities/costs, hence reducing the risk of employment litigation.

management teams are audited on qualifications and the teams reviewed that will be integrated and work together to make it a success.

disruption to the organisation is minimised in the area of possible employment disputes.

space is left to focus on the daily business tasks ahead.

business transitions are run as smoothly as possible.

an atmosphere of positive external PR in relation to customers, distributors, suppliers and the media is created.

2.4 Reason for Selecting

The business reasons for choosing this project are:

The real opportunity to allow me to determine the strategic, cultural fit between the crossborder integration of ADMECO & NMS for the investor.

The chance to establish the general determinants- the key success factors of HR due diligence during the M&A process.

The use of analytical, mathematical models to analyse ADMECO’s operations in terms of HR due diligence and its cultural fit with NMS.

The need for NMS to understand the cultural difference and position itself in this changing market environment.

The academic reasons for choosing this project are:

The intention to use HR due diligence as a valuation instrument, a mathematical model for M&A - identifying methods to measure integration as well as human success.

To discuss the significance of HR due diligence for the overall success of an M&A transaction, and in particular the cultural aspects of cross border M&A transactions.

To apply and test the methods of M&A in a real life case.

To analyse the individual determinants, the factors influencing the qualitative and quantitative deployment of HR due diligence.

The opportunity to use many of the MBA tools in addition to MPIO, including Finance, and Operations, and electives such as Power & Organisations and Organisational Ethics.

The desire to gain an insight into the real value of HR outcomes (both of analytical and process-oriented approaches) in terms of the M&A process.

2.5 Outline & Structure of Project

The report will contains four parts:

1.Abstract/Introduction & Context: The abstract will be the outline of the general field of HR due diligence along with a detail introduction of the particular M&A context of the study. It establishes the concept of due diligence and the focus of HR due diligence in the context of a M&A setting, and also provides a definition of the terminology used.

2. Part 1:

Literature review - This review offers an insight into the relevant M&A literature as it relates to the field of HR due diligence and provides a critical discussion of it. Furthermore, it will show how existing studies have influenced the area, critically comparing different sets of literature & authors, and relating findings to similar work.