Risk Management

HR Case Study: Should You Tell Them They’ll Be Laid Off?

A CEO tells why HR should "work hand-in-hand" with finance in a merger.
David KatzJuly 23, 2001

You’re a chief executive officer who knows that the acquisition your company’s about to make will probably result in layoffs.

Your big problem is that you’ll need those workers for almost two years before you plan to let them go.

Do you level with them about the situation?

D. Keith Grossman, CEO and president of Thoratec Corp. who faced this choice thinks his story has a moral: Involve human resources officials early in the M&A process.

To be sure, that message is gaining momentum. Studies by Towers Perrin and Deloitte & Touche both make the point that lack of early attention to human-capital issues can be a recipe for M&A failure .

But Grossman goes further than most top executives in getting HR involved in mergers. When Thoratec began its due diligence on a possible acquisition of Thermo Cardiosystems in midsummer of last year, Grossman got HR involved in the strategy sessions.

More than that, Grossman actually insists that Thoratec’s HR vice president, Beth A. Taylor and the CFO, Cheryl D. Hess, “work hand in hand” on a merger, with finance and HR acting as checks on the other function.

If you look at the acquisition strategy of most companies, “the earlier you get in the process the more it’s skewed to finance and less to HR,” the CEO says.

But “if you don’t involve HR in the validation of assumptions, you’re making a mistake.”

At Thoratec, “HR couldn’t go out and spend a lot of money without working with finance,” he says. But finance, on the other hand, shouldn’t “make assumptions about cost of labor and cost of benefits [in a contemplated merger] without talking to HR about it.”

In fact, questions about how to handle the new workforce were crucial in Thoratec’s recent acquisition of Thermo.

In February, Thoratec, a company that makes medical devices used prior to heart transplants and in connection with open-heart surgery, completed its acquisition of Thermo, a competitor.

But before the deal was announced in October 2000, Grossman says, he and other Thoratec executives knew there was a good chance that the company would eventually close Thermo’s Woburn, Mass., manufacturing plant and merge it with Thoratec’s existing Pleasanton, Calif., plant.

While fewer than 20 people were laid off at the time of the merger (most, but not all of them Thermo employees), 100 people, nearly all of them from Woburn, are likely to lose their jobs when the company moves its manufacturing to California late next year.

“In our business we are dependent on a small number [of] very significant employees,” the CEO says, noting that because of the extensive research and years of clinical trials required for its products, employees are often involved for years on projects.

Adding complexity to the company’s employee-retention strategy were the regulatory obstacles to the merger. If the two plants were making auto parts, Thoratec could have acted quickly, notifying employees a relatively short time before they were to be laid off, reasons Grossman.

But the company must get approval from the Food and Drug Administration before it can merge the two plants—a process that could take nearly two years, he says.

FDA regulators “have to validate that you can make the same part in the same way [in Pleasanton] that you can in Woburn,” according to the CEO.

The need for such validation limits the way the company can pursue mergers and how well it can succeed in the post-merger period. “We can’t sneak up on a company,” Grossman says, because “we need cooperation and participation” in the lengthy post-acquisition period.

Thoratec also couldn’t talk to Thermo’s management team before the deal was closed about which employees to retain, because the Federal Trade Commission felt the deal might produce undue market domination. Grossman says it took time and considerable effort to convince FTC officials that the two companies make products that serve different kinds of heart patients.

With the regulatory issues looming, Grossman knew beforehand that the plant consolidation and the likely future layoffs could make for a bumpy post-merger period. The risk was that the Woburn workers who were crucial in the transition might want to leave quickly if they knew that their jobs were in jeopardy.

“It was a logical question,” the CEO says now. “Why tell them at all?”

But, after the acquisition was announced in October, Grossman did choose to tell employees that Thoratec was looking to close the Woburn plant and that layoffs were likely. It did that because “the credibility of the new management team was strong currency” for the workers it was trying to retain, and questions were bound to arise, he says.

“We chose to say it early, the CEO says, “and spend the money” to retain the Thermo [employees]until the plant closing.

HR’s involvement thus grew more essential. “A good HR department is going to force the general manager to communicate more and more and more,” Grossman says. “People are starved for information in this process.”

HR, which became heavily involved in the communication effort after the deal was announced, took over leadership of the integration after the company announced June 13 that there would be a late-2002 closing and a workforce reduction, according to Grossman.

In addition, HR was heavily involved in framing the two-tiered retention strategy the company used to keep those new employees it planned to lay off and those it knew it wouldn’t.

Both groups got stock options shortly after the merger was announced in October. They were an alluring incentive to stay.

As it turns out, the stock, priced at about $9 a share when the options were granted, has already doubled to around $18. For those people the company has told it wants to keep, the options would vest in four years. They will also receive a regular company bonus.

For employees the company plans to lay off after the closing, options will vest in a year and a half. In addition, the company is paying those workers cash installments in order to stay. Grossman did not want to say how much the company is paying out in its cash retention program.

When Grossman joined the company in 1996–long before the merger was conceived–he decided he wanted a top-flight HR department with a strong M&A backgrounds.

When he arrived, HR was “a second-rate function,” under the wing of the CFO, primarily handling benefits and payroll matters, Grossman says. But he later upgraded the HR chief position to a vice presidential role. The HR vice president reports directly to him and has a much more strategic role in the company.

While Grossman’s elevation of HR to near-parity with finance is currently unusual, human capital’s star is definitely rising among corporate M&A strategists.

If the current economic downturn continues and layoffs persist, more and more CFOs might find HR officials checking their work when their companies are thinking about a merger.

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