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The tricky job of managing people before, during and after an acquisition gets even trickier when a state-owned company is involved.
Eila Rana, CFO Europe Magazine
April 1, 2007
"Send lots and lots of people, very, very quickly," David Davies, CFO of €19 billion Austrian oil firm OMV, recalls was the advice he was given as he wrapped up a meeting in Bucharest with some Big Four audit partners. It was summer 2004 and OMV was about six months away from completing the €1.5 billion purchase of a 51% stake in Petrom, Romania's largest company. Davies was curious to know whether the auditors had any thoughts about the best way for a company such as OMV to manage the acquisition of a state-owned asset.
After all, he says, "we were taking on a monster," and he reckoned OMV might need all the advice it could get. With some 70,000 Petrom staff — nearly 10 times more than OMV — scattered across "120 companies, in 120 locations, with 120 cultures," Davies could see all too well that the sprawling, state-owned behemoth was a force to be reckoned with. It didn't take him long to realise just how sage the auditors' advice would turn out to be.
Well before the deal was closed that December, Davies had been drawing up post-acquisition plans which included more than 100 projects for his own finance and IT teams, most to be completed by 2008, all of which involved the secondment of countless OMV staffers from Vienna to Bucharest, as well as the deployment of legions of external consultants. "Let's just say we've been a major benefactor of the east European consulting industry," says Davies with a chuckle.
Davies insists that the sheer magnitude of Petrom makes its integration a unique challenge. However, OMV and many other companies recently involved in privatisations highlight a critical component of successful M&A, private or public: the need to formulate a winning human-capital strategy. This ranges from basic skills-mapping of the target workforce during due diligence in order to identify synergies to determining whether, or how much, training will be needed to address more complex challenges such as equalising pay and benefits and creating a new work environment that melds the best of both corporate cultures.
But M&A experts point out that it is surprising how often human capital issues are routinely overlooked by corporate deal makers during negotiations or in the early stages of integration. And when it comes to privatisations, these issues may be magnified to much greater proportions than in other deals.
One reason for this, says Rachel Di Vito, a partner with Ernst & Young's human capital division, is that these acquisitions are played out in the public arena — with unions, the media and government scrutinising, and often dictating, how acquirers manage their enlarged workforces.
And for better or for worse, these workforces will be coming from vastly different corporate cultures than their acquirers. "The total cultural shift that a company faces when it moves from the state-owned to the corporate world is one of the two biggest human capital risks in this situation," says Stephan Vamos, head of European mergers, acquisitions and disposals at Hewitt Associates, an HR consulting firm, citing the cost of harmonising employees' terms and conditions as the other top risk. "The inability of a significant proportion of employees to adapt to the requirements of the corporate world is clearly a risk to the profitability of the company."
Them And Us
This is familiar territory for Reinhard Ortner, CFO of Erste Bank. The Vienna-based bank (with €182 billion assets) has had something of an advantage over western rivals in central and eastern Europe ever since its first acquisition in the region in 1998, the purchase of Mezöbank in Hungary.
As Ortner sees it, the turning point for Erste came in February 2000. That's when it acquired 52% of Çeská Sporitelna (CS), the Czech Republic's largest savings bank, as part of a larger national privatisation programme. From Erste's perspective, it was a pivotal deal in its eastward expansion, one that would be used as a template for the integration of a string of subsequent acquisitions in the region.
Yet not everyone within Erste's senior ranks believed initially in the wisdom of the deal. At the time, CS was the largest acquisition in Erste's history, and not just in terms of the amount it paid — nearly 20 billion koruna (€533m). "The bank also had more employees than we as acquirers had in our group," says Ortner. "There was debate about whether we would be able to handle the transformation and integration process." Like most state-run businesses in the region, CS was suffering from years of mismanagement. Erste would be inheriting not only a bloated workforce, but also a bulging portfolio of non-performing loans. In 1999, it reported losses of 4.9 billion koruna on operating income of 20.7 billion koruna, while its cost/income ratio reached a five-year high of 72%.
Ortner, for his part, focused on the positive. CS "fitted perfectly into our strategy" of substantially ramping up its retail presence in the CEE region, he explains. "We define ourselves as a savings bank in Austria. That was the savings bank in the Czech Republic with the broadest customer base and the biggest network of bank branches."
But Erste faced two major issues with CS: one of quality, the other of quantity. In terms of quantity, "it was clear from our due-diligence analysis that we would have to downsize," he says, noting that CS had 16,000 employees, compared with Erste's 6,000. And quality? That was cultural. CS was no different from any other state-owned, "almost monopolistic" institution with roots in communist Europe. In other words, customer service was essentially non-existent, as was any sort of sales-driven culture among managers.
Of the two, the quantity issue was relatively easy to address. First, he says, "whatever one might think about the previous management, they had already reduced the headcount in the years before we bought the bank. So there was a clear expectation inside and outside the bank that a foreign, listed company would continue to trim down the number of employees." That helped make working with the local unions more straightforward. Second, the Czech economy at the time was doing well, so "there was a good absorption capacity in the market." Finally, the cull was conducted across many small, unprofitable branches, so "it was not one massive lay-off in one location, which makes it easier for people to find a new job and reintegrate."
Quality, meanwhile, was going to be much trickier to control. Although only a stone's throw away from each other, Erste and CS couldn't have been further apart as far as culture was concerned, from work ethics to incentive structures. Erste needed to close the gap quickly.
This goal required a deliberate process. Erste's due-diligence team identified areas at the Czech bank that needed fixing. The result was a series of 23 projects and numerous sub-projects — some short term, others long term and each co-led by department heads from CS and their equivalents from Erste. The quick wins were important. "One hundred quick measures for the first 100 days signalled to employees, customers and the outside world that something was changing," says Ortner.
An underlying theme of those changes was tackling CS's reputation for lousy customer service. Along with ongoing training programmes, other measures in Erste's plan of action included monitoring service at individual branches using customer feedback surveys, appointing a customer ombudsman team — a first in the Czech Republic — and increasing accountability by developing a bonus programme based on hitting both financial and non-financial targets, including customer-satisfaction levels.
Today, says Ortner, CS has more than 5m customers — out of a population of 10.5m that means "every second Czech citizen has a relationship with us", and the bank has made steady improvements in customer satisfaction.
Old Habits Die Hard
As M&A experts note, cultural issues that aren't ironed out quickly can escalate and weigh down company performance long after a privatisation is completed. Ask Margaret Ewing. When she left publicly listed Trinity Mirror to join UK airports operator BAA as its new finance director in 2002 — 15 years after its privatisation — she found an organisation clinging to the past.
For starters, she recalls being struck by a strong sense of public duty among staff, most of whom had worked with BAA before its privatisation and "felt huge pride in their organisation." That in itself wasn't such a bad thing.
At the same time, however, Ewing could see that BAA's staff also needed to balance that sense of public duty with a "private company, shareholder-focused strategy." That wasn't happening on several levels. A case in point was capex management. "When I joined, the concept of ROI for each capital project was simply not considered," she says. "The fact that we weren't making a sensible return or the fact that you might make that investment more cost-effective really wasn't thought of."
One way that Ewing began changing the culture in finance was to transfer routine reporting and other basic processes to a shared service centre in Glasgow, which had been set up before she joined. That left her with an immediate finance team based around two new roles: business performance managers and decision support managers.
Ewing admits that she had to adjust her own expectations about how much, and how fast, BAA was capable of turning the corner. For example, although only two of the 200 finance staff were union members, Ewing had to consult with the three unions recognised by BAA when she wanted to reorganise finance. She also had to get agreement from every line manager who worked with the finance function.
Beyond finance, there was a lot of other, belated post-privatisation work to be taken care of. "Fifteen years down the road from privatisation, there was a huge amount of excess resource at the middle-management level that needed to be removed from the organisation," she says. But as she notes, although civil service and government compensation packages tend to be relatively low in terms of basic salary, the pensions and other benefits can be very significant. "When you try to take headcount out, the cost of removal can be quite prohibitive," she notes. "You try to do it as much as you can by attrition and natural wastage. And you try to do it by economies of improved efficiency. At the end of the day, you have to take the risk and address the issue head on." Hence a programme announced in 2005, of 700 redundancies over the next few years.
But addressing the issues head on sometimes met with resistance, pitting the new regime against the old. That was the case when Ewing brought in a number of new recruits from the private sector to work alongside pre-privatisation managers with a view to injecting more commercial expertise into operations. "The reaction was mixed," she says. Some managers felt threatened, while others liked the idea of management teams that were a combination of "old and new blood."
Ewing — who left BAA when it was taken over last year by Spanish construction group Ferrovial, and is now vice-chairman of Deloitte — remembers that "there was a period initially when I believe the CEO [Mike Clasper] and myself felt as though our authority was extremely limited because our instructions or requests were not being implemented within the business. 'They mean well, but they do not understand this business and therefore we will do what we think is right to protect them from making mistakes' was a common, very well meaning reaction."
But Ewing stood her ground. "It took time, constant, quality communication and encouragement for the organisation to realise that change was required and would be good for the business...For those who were not convinced, they either self-selected to leave (the majority), or they found themselves in different positions (where their influence was limited), or were asked to leave."
Reporting For Duty
At Petrom, OMV's Davies had weeks, not years, to make a number of changes. As he recalls telling his staff, "Task one: please don't tell me that things need fixing, and please don't ask me to wait two years for the numbers, because we closed the deal in December 2004, and from the first quarter of 2005, you're coming in as part of the reporting of the group." But given that finance at Petrom "was never run like it would be at a western company" and that the reporting needed to be done under US GAAP (and later IFRS), hitting the reporting deadline was "easy to say, hard to execute."
Davies' biggest human capital concern at the time was one of resourcing. Finance at Petrom — with 2,500 staffers — was as sprawling and as decentralised as the rest of the company, divided into 120 autonomous units, each with management accounting systems of variable quality.
It was clear to Davies that he'd have to import his own crew, not only to meet the reporting deadlines but also to tackle the bigger issues such as setting up a shared service centre and rolling out a single ERP system. Hence, a "compilation" team from Ernst & Young was brought in to produce the first set of financial statements, while he set up a separate team — made up from his own staff and Cap Gemini consultants — "to work on 'this is where we need to be.'"
But what about the OMV finance staffers? When he first presented the integration plans back in Vienna — requiring many of them to relocate to Bucharest — he wondered whether he was going to face a mass rebellion. But he was in for a surprise. Staff were enthusiastic, particularly OMV's younger managers, who saw it as a great career opportunity that would help them move up the ladder more quickly. After all, "rarely in your life do you have a chance to go in to a company the size of Petrom and radically transform it," Davies says.
From a human-capital perspective, Davies reckons he'll have a better idea of how successful Petrom's radical transformation has been further down the line. It'll take a few more years, he says, "before you visit OMV and Petrom and aren't struck by the fact that you have two different organisations." Until then, OMV has a monster on its hands.
Additional reporting by Janet Kersnar
Eila Rana is a senior writer at CFO Europe.
In An Ideal World
It's reassuring that a piece of research from Hewitt Associates, a HR consulting firm, published earlier this year shows that many companies are giving human-capital management — long overlooked in the deal-making process — the attention it deserves around negotiating tables. Hewitt found that more than three-quarters of 57 European companies it recently polled address HR risks — ranging from leadership gaps to the costs of harmonising salaries and benefits — during the due diligence process.
But there's a problem with Hewitt's research: it's based on the assumption that companies are granted adequate access to their target's human-capital information. That's often not the case during privatisations, says Rachel Di Vito, a partner in Ernst & Young's human capital division. In a recent deal she worked on, the acquirer found it difficult to estimate post-merger staff-related costs because the target wouldn't release its contracts, citing data protection concerns.
There are other reasons why state-owned targets aren't forthcoming with critical HR information. One is that the deals often take place in a highly political environments, so deal makers are more guarded than usual about releasing potentially sensitive, or damaging, information. They also simply might not have the information, says David Davies, CFO of Austrian oil and gas company OMV. That was the case when OMV acquired Petrom, Romania's state-owned oil and gas company, in 2004. Like many state-owned behemoths, he says Petrom didn't have a reliable asset register, let alone detailed data on its 75,000 employees.
But if companies can quantify and address even some of the human capital risks in the deal process, the rewards can be significant, insists Stephan Vamos, European head of mergers, acquisitions and disposals at Hewitt. The benefits he cites include lower transaction risks, accelerated integration and better employee performance.