Session 3 HRM Issues in Mergers, Acquisitions and IJVs Globalizing HR Core MBA Course

1. Session 3HRM Issues in Mergers, Acquisitions and IJVsGlobalizing HR Core MBA Course Paul Sparrow Ford Professor of International HRM Manchester Business School 19th January 2004

2. Resources • Remember the Disney, ABB and the Lufthansa case studies!! • Schuler, R.S. (2001) HR issues in joint ventures. Journal of International Human Resource Management, 12 (1), 1-52. • Schuler, R.S. & Jackson, S. (2001) HR issues and activities in mergers and acquisitions. European Journal of Management, June, 59-75. • Consult Evans et al book. Chapters 5 and 6 • Randall Schuler, Susan Jackson and Yadong Luo (2003) Managing human resources in cross-border alliances. London: Routledge • Consult the European HR Forum Guide to Managing HR issues on Trustnet for this course

3. Agenda for Session • Role and scope of FDI as an integrative process • HRM issues with International Joint Ventures (IJVs) and International Mergers and Acquisitions as two dominant forms of Cross Border Alliances (CBAs)

4. Forces fuelling Integration through FDI • Industrial restructuring with organizations competing on a global basis • Disposal of assets in non-core businesses to free up capital in areas (e.g. brand or market share) where organization can be in top 5-10 • Opportunities to consolidate and cut capacity in domestic industries • Expansion of core businesses across borders to offer economies of scale

5. Forces fuelling Integration through FDI (2) • Liberalization and privatization processes on a global scale • Changes in stock market rules making friendly mergers more expensive but hostile mergers more possible • Integration of capital markets leading to increased profit motive and consideration given to the mix of businesses maintained

6. Non-equity based CBAs • Investment vehicle assigning profits and responsibilities to parties • Co-operation through separate legal entities each with own liability • Rules to govern allocation of tasks, costs and revenues • Developed quickly to take advantage of short-term opportunities • Examples: build-operate-transfer infrastructure projects, joint exploration, research and development consortia, co-production agreements, co-marketing, or long-term supply

7. Equity based CBAs: International Joint Ventures • Separate legal entity representing partial holdings of two or more parent firms • Headquarters of at least one partner located outside country of JV • Joint control of parent firms • Economic and legal interdependence of parents • Reasons: host government incentivising it as mode of entry, gain rapid access to new markets, learning how to operate in a host country, leverage new technology, reduce costs, share risks • Eg: Covisint – Ford, General Motors, Daimler Chrysler, Nissan and Renault join to manage supply chains using B2B e-commerce. More efficient to create an industry standard and common architecture.

8. Equity based CBAs: Mergers and Acquisitions • Mechanism of organizational evolution and growth • Merger: two partners agree to join operations to form new company of equal partners • Acquisition: one firm buys a controlling or full interest with understanding that the buyer determines how operations run • Majority of acquisitions friendly • Example: Daimler-Chrysler, Chase-J.P.Morgan, McKinsey-Envision, UBS-Paine Webber,SKB-Glaxo,Vivendi-Universal

9. Worldwide mergersValue in $ TrillionEconomist October 1999

10. Ongoing Phenomenon • More than 50% of growth in main industrial organisations is expected to come from M&A and IJVs (The Economist Survey, 1998) • In 1964 there were 52 independent car makers, down to 6 by 2005. Similar consolidation with airline alliances • Cross-border mergers up x10 from 1991-1999, from $90 billion in 1991 to $1100 billion by 1999 (UN data)

11. Three Countries Retain FDI Lead • US, Britain and Germany top three locations for FDI over next five years (Economist Intelligence Unit), China 4th, Netherlands 5th • FDI flows fell from $1.318 billion in 2000 to $781 billion in 2001 • Slow recovery to $1000 billion by 2005 • US receives about 25% of worldwide FDI • FDI in France and Spain worth 3.4% of GDP in France and Spain, 4.8% for UK and 1.8% for US • Steady rise in FDI in China, possibly move to no.2 position after entry into WTO Crooks, E.. (2002) Three countries ‘to retain FDI lead’ Financial Times, 14th March, 410

12. Top Five FDI Inflows Crooks, E.. (2002) Three countries ‘to retain FDI lead’ Financial Times, 14th March, 410

13. Contribution of FDI to National Economies • Foreign firms account for half of Irish employment and two-third’s of its industrial output • The ten biggest industrial multinationals each have annual sales larger than the Australian government’s tax revenues • Technology transfer: 70% of all international royalties on technology involve payments between parent firms and foreign affiliates • Salary enrichment: Wages paid by foreign firms in Turkey are 124% above national average. Workforces expanding by 11.5% a year compared to 0.6% in local firms. The Economist (2000) The world’s view of multinationals. The Economist, Vol. 354, No. 8155, January 29th, 21-22.

14. Contribution of FDI to National Economies Stock of inward investment as a % of GDP % of sales accounted for by foreign firms Proportion of exports from foreign-owned firms United States 7% 10% 23% Japan 4% n/a n/a Netherlands 31% n/a n/a Britain 22% 19% 30% Germany 8% 19% 24% France 6% 27% 32%

15. JCB Move Into US: Reality of the role of host country • Georgia is world’s 5th largest economy if a country • Non-unionised workforce (only UAW in GM & Ford at Atlanta) • Head-to-head with Caterpillar • £60 million investment in US manufacturing

16. Negotiation Process • 1 year negotiation process involving Georgia Dept. of Industry & Tourism with JCB top team and suppliers • Visited sites in 8-10 communities that matched parameters, liaised through Brussels office, little negotiation • Interviews with potential suppliers • Narrowed down to 2 US sites: Savannah and South Carolina. Competition between incentive funds • Money can be put into site, infrastructure, sewage etc • JCB offered 450 acre site – Chairman suddenly asks for 1000 acres. Managed to get land under option

17. Negotiation Process (2) • Georgia State View: Site location (suppliers, parts, labour) wins out over incentives • People issues come in early: average costs for job classes, population demographics, trends • Decision criteria (in order): site, labour and quality of life • 5 years worth of tax incentives to reduce the risk/ time to profit. Assume it will take 5 years to achieve profit • Heavy manufacturing attractive because it reaches many sections of local economy • Phone your Governor: Final £1 million negotiation

18. Arguments that FDI leads to Integration of Management • The logic of technology within acquired firms supercedes value orientations and national cultures • Countries are faced with similar business problems in a unified market place - these business pressures will dictate common solutions • International best practice and management education are creating an international management culture • Process of industrial restructuring - driven by mergers, acquisitions, IJVs. The winners’ concepts of HRM will spread

19. The CEO Issues Price Waterhouse Cooper Study 2000

20. Centrality of HRM “Used wisely, HRM activities can transform a lacklustre company into a star performer or facilitate a successful CBA. Used unwisely, they can create havoc or spell doom to an alliance” Schuler, Jackson and Luo (2003) Managing Human Resources in Cross-Border Alliances. Routledge: New York. “Human Resources are too important to be left to the HRM department” view of Merck Cited in Huselid, Jackson and Schuler (1997) Academy of Management Journal.

21. Agenda for Session • Role and scope of FDI as an integrative process • HRM issues with IJVs • HRM issues associated with mergers

22. Useful IJV References Schuler, R.S. (2001) Human resource issues and activities in International Joint Ventures. International Journal of Human Resource Management, . Barkema, H.G., Shenkar, O, Vermeulen, F. and Bell, J. (1997) Working abroad, working with others: How firms learn to operate international joint ventures. Academy of Management Journal. Beamish, P.W. and Inkpen, A.C. (1995) Keeping international joint ventures stable and profitable, Long Range Planning, 28 (3): 26-36 Bjorkman, I. And Lu, Y. (1999) The management of human resources in Chinese-Western Joint Ventures. Journal of World Business, 34: 306-324. Cyr, D.J. (1995) The Human Resource Challenge of International Joint Ventures. Westport: Quorum Books

23. Useful IJV References (2) Doz, Y.L. and Hamel, G. (1998) Alliance Advantage: The Art of Creating Value Through Partnering. Boston: Harvard Business School Press. Hamel, G. (1991) Competition for competence and inter-partner learning within international strategic alliances. Strategic Management Journal, 12: 83-104. Luo, Y. (1998) Joint venture success in China: How should we select a good partner. Journal of World Business, 33(2): 145-166. Pucik, V. (1988) Strategic Alliances, Organisational Learning and Competitive Advantage, Human Resource Management, 27 (1): 77-93. Shenkar, O. and Zeira, Y. (1987) Human resource management in International Joint Ventures: Direction for Research. Academy of Management Review, 12 (3): 546-557.

24. Risks in IJVs • Surveys by McKinsey and Coopers & Lybrand 1996 suggest 70% of IJVs fall short of expectations • Loss of autonomy and control causing inter-partner conflicts and alliance instability • Risk of possible leakage of critical technologies (appropriability hazard) or asymmetric appropriation of invisible benefits (learning) • Differences in strategic goals leading to cumbersome decision-making processes and inflexibility • Local partners becoming global competitors after developing skills and technology from alliance • More susceptible to governmental regulations and interventions restricting ownership, location choice, procurement, distribution, compulsory exports or profit repatriation

25. Reasons for Failure ASK YOURSELF, HOW MANY OF THESE REASONS CAN BE REMOVED, MITIGATED OR MANAGED BETTER WITH BETTER HRM AND INSIGHT INTO OB?

26. Reasons for Failure: Establishment • Partners do not clarify respective goals and objectives • Negotiating teams lack IJV experience • Realistic feasibility study/ due diligence is lacking • Lack of clarity about capabilities of the partner • Partners fail to learn about each other • Impact of venture on parent organization misjudged

27. Reasons for Failure: Development and Implementation of IJV • One partner learns faster than another, reducing dependency • Managers cannot work together • Partners renege on promises • Partners fail to trust each other • Partners fail to learn from the other • Markets disappear • Technology not as good as expected • Competitive forces change

28. Reasons for Failure: Advancement of IJV • Unwillingness or inability of parent to learn from IJV • Lack of appropriate organizational structure, managerial roles or leadership • Lack of adjustment to progressing life cycle stages of IJV development • Unwillingness or inability of IJV to learn from its parents • Unwillingness or inability to transfer knowledge to parents or share with parents Beamish and Inkpen, 1995; Harbison, 1996, Evans et al, 2002

29. Role of Learning • Learning and Knowledge sharing & transfer gaining ground as motivation for IJV • Knowledge, skills and resources that cannot b internally produced in timely or cost-effective manner • Mechanism for acquiring skills from partner – combination of complementary assets creates unique learning opportunity • Operational knowledge: technology, processes, production, marketing skills, relationship-building expertise • Managerial knowledge: leadership, HRM, efficiency, industrial experience, financial skills

30. Solutions • Inter-firm trust (reducing protectiveness), knowledge complementarity (stimulating learning and transfer) and reciprocal needs (solid basis for continued collaboration) • Behaviours and styles of managers reflecting ability and willingness to learn – suspension of control, cultural awareness • HR policies that support knowledge flows, sharing and transfer, reward risk-taking and flexibility • Similar qualities of both partners to avoid asymmetric learning capability, instability and partnership dissolution • Inherent in nature and organization design of the IJV • HR needs therefore permeate several stages of the IJV process

31. Potential HRM Problem Areas in IJVs • Differences in desired and actual staffing levels • Promotion blockages for direct recruits • Conflict of loyalties • Limited delegation of decision-making authority • Complex decision-making processes • Communication difficulties • Dissatisfaction with compensation from parent companies

32. Typical OB issues reported in European IJVs • Communication • Decision-making • Structure • Performance standards • HRM tools/ techniques • Identity • Psychological contract

33. Four Stage Model of HR Issues FORMATION Identifying reasons for formation Planning utilisation of benefits Selecting a manager for new business development Finding potential partners Selecting partners Understanding control, building trust, managing conflict Negotiating the arrangement

34. Four Stage Model of HR Issues DEVELOPMENT Locating IJV and dealing with local community Establishing the appropriate structure and control systems Getting the IJV management team

35. Four Stage Model of HR Issues IMPLEMENTATION Establishing the vision, mission, values, culture and strategy Developing the HRM policies and practices Dealing with unfolding issues Staffing the IJV

36. Four Stage Model of HR Issues ADVANCEMENT Learning between partners Transferring new knowledge to parents Transferring new knowledge to other locations

37. Example: Ferranti-Thomson Sonar Systems IJV: Context • Thomson CSF French-owned and largest non-US international defence electronics company • Entered number of joint ventures within Europe e.g. Ferranti Sonar Systems, Pilkington Optronics and Link Miles in UK and Philips’ businesses in Holland, Belgium and France • Sonar systems business has a strong Ferranti corporate culture - heartlands of Ferranti territory in NW of England • Previous owner - US ISC had been involved in major fraud

38. Ferranti-Thomson Sonar Systems IJV: Communication • Different nationalities and expectations led to doubling of effort and volume of communication • National culture influence: French high power distance means they expect to communicate with boss, not delegated manager • High uncertainty avoidance means French non-executive managers want 10 year plan and more detailed analytical data in reporting

39. Ferranti-Thomson Sonar Systems IJV: Decision-Making • Style differences: French follow informal agenda, decisions made behind closed doors • French business-lunch tradition • More passing of important information • Financially orientated and IT-led Management Information Systems • French implanted finance director • More strategic role for U.K. Chief Executive • Delegated operations and authority given to senior managers

40. Ferranti-Thomson Sonar Systems IJV: Structure • Differing exposure to internationalisation based on functional business logic: finance, sales, marketing and personnel first • Some rationalisation of overlap functions e.g. sales channels • Potential synergies in research and design slow to materialise. Rely on secondments • Largest structural impact driven by break up in size - more important than national factors

41. Ferranti-Thomson Sonar Systems IJV: HRM Tools • Broader range of quality standards • Some sharing of French training resources - global education perspective • Strong sector networks for transfer of tools and techniques • Shift in recruitment policies to new competencies • Otherwise localised conditions for pay, pensions etc

42. Ferranti-Thomson Sonar Systems IJV: Identity and Psychological Contract • Strong links with local community • English language communication, technical journals, Ferranti link • Only 25 out of 400 learn French ! • Shrinking defence industry, some rationalisation • Long term future seen with large French company • More international travel, more attractive job design increases satisfaction • Fashionable, leading-edge, customer-attractive image

43. Are the HRM issues in IJVs the same across all regions? • NO ! • Considerable study of Chinese – US, European or Japanese combinations

44. Continuing Boom in China • Economy growing by about 8.5%, urban income up by 8% a year since 1998 • Industrial production up by 16.3% • Imports up by 40.5% • Fixed asset investments (roads, railways, homes, factories) up by 31.4% • Foreign investment up by 30% eg. Ford investing $1.5 billion to expand production • Vehicle sales up by 30% first nine months 2003, passenger car sales up by 69% • But capacity to make 2.7 million cars is +1 million over consumer purchases. Excess capacity could be +2.3 million by 2005 Business Week (2003) China: Is This Boom in Danger? November 3rd. Data from National Bureau of Statistics

45. Chinese Potential “…Management must develop fast as the wave of westernisation sweeps on, a wave that will plainly engulf all state enterprises with global potential from banking to airlines” • Air China has five times the catchment area of its US counterparts, with Boeings and Airbuses operating from Beijing and Xian, and new airports nearly complete • China produces 1.4 million cars annually, though German, Japanese or US in origin • Tsing Dao Haier Group produces domestic electrical goods, sales of $1.9 billion, emerged from pack of 200 suppliers, absorbed 18 SOEs in 1998 alone. Export a third of output, generate a third from overseas manufacture

46. Chinese Potential “…The smart money must be on Chinese management joining the 21st century. When it does, western business will face some interesting challenges… if the wagon really rolls, the Japanese challenge will be replayed - but multiplied tenfold” Robert Heller ‘Wake up call for the sleeping giant’ Management Today, March 1999, p.29

47. Establishment of Joint Ventures in China • Joint ventures controlled through choice of mechanism: Chinese partner usually a state-owned and closely regulated enterprise • Rate of foreign investment fluctuated, but on upward trend • Accelerated 1989-91: Negotiated funds represented 64% of previous 10 year period • By mid-1993 accounted for 25.1% of total exports • 167,500 registered foreign-funded enterprises by end 1993

48. Objectives of Chinese Partners • Absorb foreign capital, advanced technology and management skills • Gain better access to export markets • Some limited motivation of autonomous local Chinese managers to increase salaries, operating privileges • Shorter term profit orientation of Chinese partner (tax revenues for district, underwrite SOEs)

49. Objectives of Foreign Partners • Access to Chinese Economic Area markets • Avoidance of protectionist barriers • Expansion into new markets • Pre-empting entrance of competitors • Securing a resource or basis for production not found elsewhere in such favourable conditions • Access to new/ cheaper labour • Materials or transportation routes • Host country investment incentives

50. Source of Tensions In Chinese IJVs • Conflicts between goals of partners for the IJV • Tensions over level of control of policies and practices • Adjustment and learning problems between developed and developing countries • differences in national culture • differences in formative experiences of political-economic systems • business understanding • technical expertise