Copyrighted Material. for the HR Professional. Mergers & Acquisitions. Jerry T. Edge, CCP Copyrighted Material

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1 H O W - T O S E R I E S for the HR Professional Mergers & Acquisitions Jerry T. Edge, CCP

2 About WorldatWork The Total Rewards Association WorldatWork ( is an international association of human resource professionals and business leaders focused on attracting, motivating and retaining employees. Founded in 1955, WorldatWork provides practitioners with knowledge leadership to effectively design and implement strategies and practices in total rewards compensation, benefits, work-life, performance and recognition, development and career opportunities. WorldatWork supports its 30,000 members and customers in 75 countries with thought leadership, education, publications, research and certification. The WorldatWork group of registered marks includes: WorldatWork, workspan, Certified Compensation Professional or CCP, Certified Benefits Professional or CBP, Global Remuneration Professional or GRP, Work-Life Certified Professional or WLCP, WorldatWork Society of Certified Professionals, and Alliance for Work-Life Progress or AWLP. WorldatWork Journal, WorldatWork Press and Telework Advisory Group are part of the WorldatWork family Any laws, regulations or other legal requirements noted in this publication are, to the best of the publisher s knowledge, accurate and current as of this book s publishing date. WorldatWork is providing this information with the understanding that WorldatWork is not engaged, directly or by implication, in rendering legal, accounting or other related professional services. You are urged to consult with an attorney, accountant or other qualified professional concerning your own specific situation and any questions that you may have related to that. This book is published by WorldatWork. The interpretations, conclusions and recommendations in this book are those of the author and do not necessarily represent those of WorldatWork WorldatWork. ISBN (Spiral bound) (E-book) No portion of this publication may be reproduced in any form without express written permission from WorldatWork N. Northsight Blvd., Scottsdale, AZ / Fax 480/ Project Lead: Wendy Anderson Editor: Andrea Ozias Design: Deb Shenenberg

3 Acknowledgements WorldatWork would like to thank the original author of this publication, Dennis Shea, for his contributions.

4 Table of Contents Preface...3 Overview...7 Chapter 1: The Role of the HR Professional in a Merger or Acquisition...11 Chapter 2: Preparing to Conduct Due Diligence...15 Chapter 3: Cultural Assessment...19 Chapter 4: Policies, Procedures and Practices...25 Chapter 5: Agreements, Contracts and Understandings...41 Agreements...42 Contracts...43 Understandings...43 Chapter 6: Valuation of Legislated Risk Factors in HR...45 Affirmative Action (Executive Order 11246)...46 Breach of Contract...47 Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA)...47 Americans with Disabilities Act of 1990 (ADA)...48 Employee Retirement Income Security Act of 1974 (ERISA)...49 Equal Pay Act of 1963 (EPA)...49 Fair Labor Standards Act of 1938 (FLSA)...49 Family and Medical Leave Act of 1993 (FMLA)...50 Health Insurance Portability and Accountability Act of 1996 (HIPAA)...52 Mergers & Acquisitions 1

5 National Labor Relations Act (NLRA)...52 Immigration Reform and Control Act of Occupational Safety and Health Act of Age Discrimination in Employment Act of 1967 (ADEA)...55 Title VII Discrimination Complaints and Charges...56 Worker Adjustment and Retraining Notification Act (WARN) (U.S. Department of Labor)...56 Workers Compensation Act (WAC)...57 Chapter 7: Human Resources Measurement Criteria..59 Chapter 8: Globalization...61 Chapter 9: Reporting the Information...63 Chapter 10: Integration Plan...65 Integration Team...67 Communication...67 Conclusion...69 References...71 Glossary...75 Appendix: Integration Issues Mergers & Acquisitions

6 Preface

7 Anormal part of the merger and acquisition process is the assessment of a target organization and the determination of its value. There is a need for a guide for HR practitioners and others who are responsible for the due diligence process associated with mergers and acquisitions. Due diligence is difficult not only because of the number of topics that must be considered, but also because the organizations under consideration for acquisition often are uncooperative or do not disclose enough information. This book integrates the important considerations relevant to a due diligence assessment of an organization s HR function. This approach provides both the head of HR and the CEO with the information needed to make an informed decision with respect to the risk and cost associated with the HR activities, functions and responsibilities as they influence an acquisition s value and price. This book is written principally for HR professionals involved in the acquisition process. It also is useful for anyone seeking to study or understand how to perform due diligence or how to value human resources in organizations. Also addressed are the relatively new areas of knowledge valuation and metrics as indicators of organizational value. The field of knowledge valuation has emerged in the past 10 years from an interesting concept, traditionally justified as goodwill, to one that significantly influences the price of organizations in many industries. While commonly associated with knowledge industries (e.g., Internet-oriented organizations), the realization is that knowledge valuation may now significantly influence an organization s purchase price. When knowledge valuation is coupled with retention agreements for executives and key employees, it becomes obvious how important it is for this factor to be incorporated into the due diligence process. The financial and investment communities are increasingly concerned about the price paid for acquisitions when compared to the value received 4 Mergers & Acquisitions

8 in return. Others in the investment community also criticize the size of executive employment and compensation agreements. The incorporation and consideration of knowledge valuation in the due diligence process provides a solid foundation on which to base retention and performance provisions of executive compensation agreements. While acquisitions of organizations for customer base, contracts or market position are quite common, acquisitions and mergers for the organization s talent base or intellectual capital will become more common. This is due to a pervasive and continuing shortage of talent in the 21st century. Many organizations in the industrial era considered employees or people as costs to be minimized or eliminated through time and motion studies, reengineering, outsourcing or staffing reductions. The net result of these efforts: A short-term reduction in operating expenses but higher longterm operating costs due to lower morale, inefficiencies and the significantly higher cost of finding, hiring, training and deploying new talent. Some organizations now believe that talent is such a significant business asset that they acquire other organizations just for the talent to sustain and grow their business. Ultimately, business is about people. All organizations can purchase the same equipment, systems or access to markets and customers. Access or ownership of technology is not a distinguishing success factor it just raises the bar for entry to the marketplace. The one true competitive advantage any organization has over the competition is its people the human resources of the organization. The increasing drive toward globalization also means the due diligence process needs methods and processes to assess where potential acquisitions are at relative to world-class performance. This book introduces the use of metrics in the due diligence process as a way to assess both current and potential world-class performance. The use of organizational metrics also allows quantitative comparisons and assessments of potential acquisitions, as well as of existing enterprises within the organization. Mergers & Acquisitions 5

9 Overview

10 America Online Inc. s breathtaking $183-million deal to purchase TimeWarner in 2000 to date, the biggest merger in history has cast a spotlight on merger and acquisition (M&A) activity in the 21st century. The deal s biggest impact could be that it paves the way for similar mega-marriages between new economy and old economy powerhouses, in this case linking Northern Virginia s high-flying technology corridor with old-line Hollywood. There also is a sense of déjà vu about the current state of corporate mergers, acquisitions and divestitures, most notably a revival of 1980s-style pairings involving hostile takeovers, leveraged buyouts and jumped deals through which a third company challenges a particular initial bid. The pace of these and other M&As continues to accelerate in today s global environment. Merger activity has increased steadily since 1980, with about 1,000 worldwide deals reaching the $100-billion mark in 2000, up from roughly 300 such deals involving $30 billion in the mid-1980s, according to figures compiled by Salomon Smith Barney and Thomson Financial Securities Data. In the first quarter of 2007, U.S. acquisitions were up 21 percent from the previous year. According to research firm Dealogic, there was $428.9 billion worth of domestic deals and $1.13 trillion globally. However, behind the headlines and compelling research lie incredibly difficult tactical and strategic pursuits that HR and benefits professionals need to understand and execute. Their early involvement is critical, and often can mean the difference between success and failure. Indeed, research shows that at least half of M&As will fail or fall short of expectations within the first few years for a variety of reasons, including an inability to rectify cultural differences and people practices. Organizations also are spending more than expected on transactions because of unaddressed people issues, according to a Hewitt Associates survey of global companies that had recently undergone an M&A. 8 Mergers & Acquisitions

11 These issues take on even greater importance given the role of total rewards in helping attract and retain top talent in a tight economy, allowing organizations a leg up on competitors. Today s mergers involve much more than the exchange of physical and financial assets. The essential difference in M&A activity during the past 20 years and the present is that organizations are now highly focused on acquiring human capital. The challenge, of course, is to grow the organization by motivating and retaining the best and brightest employees amid increasing worldwide talent shortages. It is important to realize that a merger is not a singular event. Rather, it is an unfolding process that may last several years, requiring a delicate balance between the need for a speedy resolution and thoughtful, deliberate action. This booklet serves as a practical guide for HR professionals responsible for mergers and acquisitions from the human resources side of the business. Research shows that at least half of M&As will fail or fall short of expectations within the first few years for a variety of reasons, including an inability to rectify cultural differences and people practices. Mergers & Acquisitions 9