Foreword by Andrew Chilvers
For ambitious companies eager to expand into overseas markets, often the
conventional route of organic business development is simply not fast enough. The other option to invest in or buy a business outright is far quicker but often fraught with unforeseen dangers. And even the biggest, most experienced players can get it badly wrong if they go into an M&A with their eyes wide shut.
If you search for good and bad M&As online the Daimler-Benz merger/acquisition with Chrysler back in 1998 is generally at the top of most search engines on how NOT to undertake a big international merger. Despite carrying out all the necessary financial and legal measures to ensure a relatively smooth deal, the merger quickly unravelled because of cultural and organisational differences. Something that neither side had foreseen when both parties had first sat down at the negotiating table.
These days the failed merger of the two car manufacturers is held up as a classic example of the failure of two distinctly different corporate cultures. Daimler-Benz was typically German; reliably conservative, efficient, and safe, while Chrysler was typically American; known to be daring, diverse and creative. Daimler-Benz was hierarchical and authoritarian with a distinct chain of command, while Chrysler was egalitarian and advocated a dynamic team approach. One company put its value in tradition and quality, while the other with innovative designs and competitive pricing.
Titi Awe discussed The Art of Deal Making: Using External Expertise Effectively as part of the Employment chapter.
What advice can you offer international clients on harmonising employment practices and culture following a merger or acquisition in your jurisdiction?
Harmonising employment practises and culture after a merger or acquisition is critical to the deal’s success because a lack of harmonisation can result in the loss of key employees and, as a result, customers. Section 96(3) of the Federal Competition and Consumer Protection Act provides that in the case of a large merger, the primary acquiring company and primary target must each provide a copy of the notice of that merger in the prescribed manner and form to:
a. any registered trade union that represents a substantial number of their respective employees; or
b. the employees concerned or their representatives, where no such registered trade union exists.
This is to ensure employees are put on notice on the intentions of the merging companies. We advise the following in harmonising employment practices:
Employee retention: Under Nigerian law, employment contracts are personal in nature, so they cannot be transferred from one employer to another without the employee’s consent. Therefore, what is most common is absorption – the target company simulates the acquiring company’s culture.
Communicating with employees is a fundamental part of a successful integration. Use different communication channels (emails, intranet, etc) to keep employees from both companies informed at all times as lack of communication creates uncertainty, leading to lower employee engagement levels. Answering questions builds transparency and trust.
Cultural Survey and assessment tools can be used to measure the culture of an organisation, but these can be time consuming, and the heat of deal making usually precludes the opportunity for this. The most widely used approach to managing cultural issues is to define a set of desirable cultural norms and then encourage employees to adopt these.
Change management: Creating a change management team with employees volunteering to be the liaison officers between, management and other cadres of employees helps communicate the change.
Do you have a best practice for incorporating collective bargaining agreements, employee benefits and pension scheme provision into the deal making process?
It is essential to determine if the target company is part of a union. Where the target company is part of a union, Collective Bargaining Agreements (CBAs) between the union and the employer typically exist. CBAs usually include clauses imposing an obligation to consult with the unions in the event of restructuring and make provision for the length of notice required, as well as sanctions for failing to consult with the union.
Nigerian law does not provide for severance pay. Therefore, it is up to the employer and employee to agree it in the employment contract. Many employment contracts provide that upon termination or resignation, employees shall be entitled to a certain amount of severance pay and other benefit schemes and redundancy pay. These payments are usually borne by the target company. Therefore the acquiring company should review the employment contracts to ascertain if payments become due upon termination or resignation and where they do, the acquiring company must ensure that the target honors the payments before the conclusion of the deal, to reduce payouts and financial burden post-termination.
When there is an M&A, employees are usually left at the mercy of the acquiring company, which may decide to layoff workers, terminate their existing employment contract and pay them off or retain them with welfare packages less favourable than employees had with the target company.
Our law imposes an obligation on every employer with five or more employees to contribute to its employees’ retirement savings account under a pension fund scheme with an administrator of their choice. An acquiring company will be required to continue such payments.
Incentivisation and retention of senior management is important to ensure stability and continuity post-deal. Any examples in which you have achieved this effectively?
Employee retention is considered the fundamental tool that triggers organisational growth, survival and performance. Retention incentives have long been considered an antidote for potential employee attrition during a merger or acquisition. Most M&A financial models include a retention plan line item, and the cost that is included as employee retention is often considered part of the “cost of the deal.” Financial remuneration alone will not rebuild long-term employee trust. The company must regain employee trust. Otherwise, once the retention incentives are paid, employees may consider other employment opportunities. Subsequently, the retention incentives, if not extended or renewed, might have only created a temporary stability. Employers need to retain their employees because they need to retain their intellectual capital, the client relationships that have been fostered and the business focus that allows the organisation to continue to operate effectively. Retention of senior management, however, can create a more conducive environment for the employees on the lower cadre, and further create trust sand stability in the new organisation.
In order not to lose key talents and senior managers, the acquiring company can take steps to retain talents. Examples include:
a. Executives can be selected before closing or immediately thereafter. Managers then can be selected by executives, considering targets and the future state operating model.
b. Retention bonuses can help to keep people on board during difficult transitional months. Retention programs add to integration costs, but is usually more cost-effective than recruiting new personnel.
c. Uncertainty around roles and reporting lines is one of the most commonly cited frustrations leading to attrition after mergers. Making clear personnel decisions and communicating them definitively can reduce the risk of losing top performance employees who became frustrated with uncertainty.
Top Tips – To Keep Your People Happy During The M&A Process
• Communicating with employees about the changes that will be ongoing and what is to be expected upon full transition. Also create a channel for employees to communicate and ask questions, as it gives them reassurance.
• Create a change management initiative. More attention must be paid to the human side of the deal.
• Undertake a culture audit to help with merging the cultures of the companies to ensure a smooth transition post-deal.
• Retention incentives are an important part of any merger or acquisition.
• Understand the needs and goals of critical employees so retention efforts are well-aligned to those individual needs.