Capital Insurance is a long-established (over 100 years) insurance company with its head office in Watford and regional offices in Bristol, Norwich, Coventry, Manchester and Newcastle. Its mAIn areas of business are life assurance, pensions, investment prODucts and asset management (managing pension funds). It has over 1 million policy holders and last year made a net profit of ￡280 million before tax. There are just over 2,000 employees: actuaries, underwriters, claims administrators, investment managers and analysts, marketing, sales and customer service staff and administrative staff, as well as finance, legal, IT and HR professionals. Of these, about 400 are in the life department, 600 in pensions, 400 in asset management and the rest in the various professional and administrative functions. The corporate strategy is as follows:
●Deliver excellent service and performance by putting customers at the centre of what we do.
●Develop our people and culture in line with our values to focus on the customer and enhance our performance.
●Grow our business profitably by developing and marketing better products and by carefully structured mergers and acquisitions.
●Diversify our business to improve profitability and reduce risk concentration.
Capital Insurance is a successful business, which is pleasing the City and its investors by steadily increasing shareholder value. But its business culture is not aggressive. The belief is that the company should succeed by BEIng excellent in everything it does. This means offering good products and services to its customers but it also means a genuine appreciation of the importance of its people and the need to treat them fairly and equitably and to be concerned about their well-being (and to take practical steps in areas such as its family-friendly and work–life balance policies and occupational health). There is a comprehensive and clearly defined learning and development strategy with an emphasis on organizational learning, management and leadership development and a range of blended learning programmes. Performance management processes are working fairly well. A total reward policy has been adopted that includes a company-wide profit-sharing scheme, employee share ownership plans, contribution-related pay (decoupled from performance appraisals) and a career family grade and pay structure. Not everything works perfectly of course and there is room for improvement in some areas, especially learning and development and performance management, but the results of the annual employee opinion survey are encouraging.
The proposed merger
In accordance with its strategy of growth, consideration is being given to acquiring Advance Life. This is one of the most successful of the smaller specialist managers of life funds in the United Kingdom with profits before tax last year of ￡82 million and 250 staff, mainly based in Hemel Hempstead. The growth record propelled by excellent new products has been impressive but it is limited by the financial and management resources required for sustained expansion.
In its message to shareholders, Capital Insurance provided the following rationale for the merger:
●more opportunities for growth in life protection with combined skills (especially in view of the impressive product development and marketing achievements in Advance);
●financial (revenue and cost) synergies;
●economies of scale – less duplication;
●new distribution channels.
The merger and acquisition – preliminary discussions
The financial advisers of Capital Insurance had carried out an initial analysis of possible acquisitions on behalf of the Chairman, Chief Executive and Finance Director (no one else from Capital was invoLVed). Advance Life had already put out some feelers – its management was aware that the future was limited unless it merged. The Capital advisers established that Advance Life was a good proposition and preliminary discussions were held between the chief executives and financial directors of the two companies, brokered by their respective financial advisers. It was agreed at this stage that the full benefits of the acquisition could only be achieved if the life activities of the two companies were completely merged (the fact that their respective head offices were not too far apart was a factor in favour of this merger). A formal approach was then made and due diligence began (due diligence is the process through which a potential acquirer EVAluates a target company for acquisition). The plan was to complete due diligence, reach an agreement and start the integration within six months.
The due diligence programme
As explained by the financial adviser, the due diligence programme would cover the following:
●general corporate matters;
●financial, accounting and tax matters;
●sales and marketing;
●legal and regulatory matters.
The Finance Director who was managing the merger called the heads of functions together to brief them on the parts they had to play in the due diligence programme. They included the Director of HR who reported to the Chief Executive but was not a member of the Executive Board. A checklist of items each of them had to cover had been drafted by the financial adviser and approved by the Finance Director. The heads of functions were also briefed by the Director of Finance and the financial adviser on how they should work with their opposite numbers in Advance.
The Director of HR was told what information she should obtain. This included the following items required by the TUPE (Transfer of Undertakings) Regulations:
●The identity and age of the employees who will be transferred.
●Information contained in the employees’ written particulars of employment.
●Information on any collective agreements affecting the employees that will apply after the transfer.
●Any disciplinary proceedings taken against employees or grievances brought by them in the last two years.
●Any claims brought by employees against Advance in the last two years.
●Any claims that Advance reasonably believes might be brought.
In addition it was agreed that she should obtain the following information:
●the workforce analysed into the main occupations;
●a qualification and skills analysis;
●general terms and conditions of employment – hours of work, holidays, sick pay, etc;
●pension schemes and agreements;
●details of benefits provision;
●the management resources available;
●management contracts and agreements;
●salaries of senior staff and their bonus arrangements;
●any other rights of employees and obligations to them that might be relevant;
●details of HR policies.
Planning the integration
The Finance Director set up a small working party to plan and implement the integration. It consisted of himself, the Director of Life Assurance Operations, the Director of HR, the Head of Legal Affairs and the Head of Marketing and Public Relations. The working party would be assisted as necessary by the company’s financial advisers and solicitors.
The Chief Executive and the Director of Life Assurance Operations of Capital agreed that if the acquisition negotiations reached a satisfactory conclusion, the latter would head up the integrated life division. It was also agreed that in the first place, the existing life operations of Advance (products, sales and claims processing) should be managed as a separate entity but that insurance services such as actuarial and underwriting should be merged. This meant that new product development would also be merged. In the longer term, all aspects of life operations would be completely integrated. It was agreed that the organizational implications of the merger would have to be discussed with Advance as part of the negotiations. The Director of HR was not involved in these decisions but she was informed in confidence of what they were.
Action taken by the HR Director
The HR Director noted the reference to ‘economies of scale, less duplication’ in the message to shareholders and pointed out to the Finance Director that a major ‘TUPE situation’ could create all sorts of legal problems. For example, she checked with the CIPD website (the Employment Law at Work section) which stated that: ‘A dismissal of an employee by either the transferor or transferee because of the transfer will be automatically unfair unless there is an economic, technical or organizational (ETO) reason entailing changes in the workforce.’ As far as she knew there would be no ETO reason that could be invoked in this situation and this should therefore be taken into account when considering the arrangements for merging the two life departments. However, she emphasized that she was not a legal expert and that the TUPE Regulations could cause considerable complications. She therefore strongly advised that the opinion of the partner at the company’s solicitors who was responsible for employment law matters should be consulted. This suggestion was agreed by the Finance Director after discussing it with the financial adviser. The latter recommended that an indemnity should be negotiated with Advance for any costs arising from the financial impact of claims resulting from the application of TUPE.
The HR Director then concentrated on the other aspects of the due diligence process. She delegated the task of obtaining the detailed information to her HR Services Manager who would be able to obtain help as required from members of his staff. Exhaustive but friendly discussions were then held by the HR Director with the Head of HR at Advance to plan the due diligence programme, but also, and importantly, to obtain some insight into any people issues that might affect the merger other than those arising under TUPE.
She was aware, again from the CIPD (its mergers and acquisitions toolkit), ‘that extensive research has shown that perhaps only one-fifth of mergers and acquisitions add to shareholder value. Many of the reasons for this can be traced to people issues and to the lack of early involvement of people management expertise’. She had also come across the following model of critical integration issues produced by the Mercer Consulting Group that emphasized the importance and difficulty of stabilizing the organization and addressing key employee issues.
In her initial discussion with the Head of HR at Advance, the Director of HR at Capital focused on cultural issues that might affect the success of the merger. She briefed the HR Services Manager of Capital on the need to summarize the main HR policies and practices of Advance, to establish any differences in terms and conditions that would have to be dealt with during integration and, incidentally, to gain some understanding of the Advance culture and employee relations climate. The information she collected would need to satisfy TUPE considerations and she asked him to liaise with the company’s solicitors on this aspect of due diligence. The HR Director cleared with the Chief Executive that the HR Services Manager could be told, again in confidence, of the proposed organization of life operations.
It was clear to the HR Director of Capital that there were a number of significant differences in the areas covered above between Capital and Advance. If the issues likely to arise from these differences when assimilation takes place were not addressed, bearing in mind that staff from the two companies would be working alongside one another in the same establishment, then the success of the acquisition could be seriously prejudiced. She decided therefore that she should alert the Chief Executive to the potential problems, with suggestions on what needed to be done about them in the short and longer term. She was aware of the obligations set out in the TUPE Regulations for transferors and transferees to inform and consult with transferred employees and that it was therefore necessary to develop a strategy for consultation and communication. She was also aware that it would be necessary to prioritize her proposals so that immediate problems could be focused on first.
Knowing the way in which the Chief Executive operated, she appreciated that she would have to make out a convincing business case for any significant recommendations she made, especially those that might potentially reduce the financial advantages it was hoped the acquisition would produce. Unfortunately, she was heavily involved in TUPE at the moment but progress had to be made. She was confident the HR Services Manager had the ability and knowledge to draft such a report, which would be a very good developmental assignment. She suggested to him that it should be based on the information presented above, analysing any problems, suggesting how they should be dealt with, recommending the programmes and priorities involved, making a business case for any significant changes in HR policies or terms and conditions of employment, dealing with any employee relations issues and outlining a consultation and communication strategy.
You are the HR Services Manager and your task is to draft this report. You can add supplementary information to the case study, provided the essence of the case is neither changed nor undermined. The effect of the TUPE Regulations need not be covered specifically (assume that this is being done by the HR Director) but you may wish to refer to any possible implications of TUPE that could affect your analysis and recommendations, especially those referring to consultation and communications.
This case is primarily about the general HR implications of an acquisition, not about dealing with TUPE Regulations, although, of course, the latter cannot be ignored and for those interested in pursuing the employment law aspects the full impact of TUPE could be included as part of the task. The main point of the case is that HR was not involved in the initial discussions and when they were brought in, the acquisition had gained a momentum that was difficult to stop. It is possible that if a full HR evaluation had been carried out at an early stage, either the acquisition might not have gone ahead or at least a different decision could have been made about merging the two life departments – they could have been kept as separate business entities. However, this would have removed most of the synergistic benefits the acquisition was intended to achieve.
For the purposes of this case it should be assumed that the acquisition is going ahead and it is the role of HR to make the best of what seems on the face of it to be a bad job. The issues are fairly straightforward, ie:
●The difference in culture, which means that the people from the two companies will probably be uncomfortable bedfellows; it could therefore inhibit effective collaboration in product development and in the future growth of the combined forces.
●The difference in management style, which may not matter too much in the shorter term if whole Advance departments with their managers are retained intact, but could cause difficulties in merged departments such as actuarial (new product development) if Advance managers are put in charge, as they might well be (this is one of the strengths of Advance).
●The difference in organization structure.
●The difference in terms and conditions – hours, holidays and sick pay.
● The fact that Advance employees were generally paid more than their Capital equivalents and had an entirely different type of pay structure.
●The inadequate performance appraisal scheme in Advance, which was coupled to performance pay.
●The lack of any comprehensive approach to learning and development at Advance.
However, although easy to identify, these differences, especially those concerned with culture, management style, organization and pay, may be more difficult to remedy. Culture change is a long haul. The differences in levels of pay may be difficult to deal with in the shorter term (and this is when the most damage to the benefits expected from the merger can take place). The terms and conditions of employment would almost certainly have to be equalized in line with those at Capital, but that would increase operating costs.
It is important therefore that the proposals should be prioritized and include a programme for implementation as well as a business case for any additional expenditure. It is just possible that the Head of HR Services may come to the conclusion that these problems are so intractable that the acquisition should not go ahead or at least the life departments should not be merged. But he would have to make a very powerful case for doing so. The management of Capital has got the bit between its teeth and will not easily be deterred. For the HR Director to make this recommendation would take considerable courage as well as incontrovertible evidence.
Nancy Napier notes from her research that the following HR developments typically take place in acquisitions in which activities are merged, as in this case. These include:
●Human resource planning – wide-ranging replacements of target or partner staff or significant development efforts to encourage their integration.
●Pay – this is the area in which changes are most likely to be made because they are tangible, affect all employees and are more technical in nature, allowing specialists to examine them and make recommendations.
● Training – this can be important: employees from the acquired firm may have difficulty in learning and applying different systems, but the length for each major phase of a merger can vary significantly and trainers must guard against training done too early, before the merger becomes effective, which may cause frustration and a need for retraining.
Extensive research has shown that the following common (mostly negative) reactions typically take place amongst the employees of the acquired firm:
●widespread anxiety and stress;
●concern about job security;
●fear of decline in status or career prospects;
●feelings of being ‘sold out’;
●a sense of loss both in a general sense and the specific loss of control over one’s career, autonomy and organizational identity.
Other problems include an increase in unproductive work time, and greater turnover and absenteeism.
Elina Antila comments that in recent years HR managers have been encouraged to play a more strategic role in their organizations, especially in mergers and acquisitions. The challenge in making mergers and acquisitions work is the management of people:
The role of HR is very demanding because HR needs to integrate its own practices and, moreover, needs to perform two other roles simultaneously: a strategic role for company-wide integration and a support role for business unit transaction.
Her research was conducted in three Finnish international industrial companies and took the form of interviews adopting a ‘triangulation’ approach, ie using multiple sources of information. She concentrated mainly on issues concerning integration.
In the first case study company, the head of HR was quoted as saying:
When the due diligence process itself has been conducted well it is already like integration in a way. However, if due diligence has been badly conducted or ignored then integration starts with the work that should have been done already.
The intensive work in the integration phase was described by an HR manager at the same company as follows:
After the deal has been closed we discuss with the target company’s HR people and work out how we can integrate the two different cultures… We inform them who we are and how we work and what our company values are, not just in HR but in general. We further analyse the target company’s resources and help them (the target organization’s HR people) with what they need and give information. Of course we try to commit people and integrate the new structure by inviting them (new employees) to join our training programmes.
In the second case study it was stressed that a communication plan is an integral part of the process. The Head of HR also remarked that:
You can’t necessarily say when integration is completed. There are companies that have entered into acquisitions where after 20 years different organization cultures still exist.
He noted that it was best to divide integration into sub-projects with separate goals so that achievements can be measured for one goal before moving on to the next one.
In the third case the importance of mapping and evaluating the target company’s key employees was emphasized: ‘We define the key people and keep them from walking out of the door’. An HR manager said that: ‘Communication is always a BATtle between employer and employees, between rumours and information. Openness and honesty are the key issues.’