Foreign businesses eager to get a toehold in China without going through the bureaucracy of starting from scratch are increasingly looking to mergers and acquisitions to gain a quick presence in the market. The number of M&A deals in China jumped to 169 in the second quarter, up 225% on the first three months of 2008, according government statistics.
But as with all opportunities in China, M&A deals are not without their risks. For every successful merger in China there are another four failures, and those failures almost always can be traced to problems with people.
“Value is defined by people and their relationships,” said Garry Wang, head of Greater China M&A advisory services for HR consulting firm Mercer. “People and relationships are basically your business.”
Planning the details of how two workforces will become one takes time and careful evaluation. Wang counsels companies to strategize the incremental steps of an HR strategy before the final deal is struck.
Into the mix
For foreign companies joining up with Chinese firms, HR issues during a merger aren’t only a matter of numbers. The typical challenges of melding organizational cultures, identifying and retaining key workers and developing a model for the new company are compounded by China’s unique cultural and legal climate. The first issue is getting on the same page, culturally.
“Foreign companies often make the mistake of thinking Chinese culture is the same across the board,” said Wang. In fact, regional differences and individual personalities can confound even the most seasoned expatriates in China. Wang added that well-known Chinese concepts such as “face” and guanxi (relationships) vary in meaning depending on where you are in the country.
Post-merger, creating trust in new managers – especially if Chinese employees are working under a new set of foreign managers – can take time. In addition to building trust and respect, managers will need to communicate a new corporate message. Throughout this potentially stressful period, HR managers should take a pro-active approach in considering the needs and concerns of their new employees and conduct regular diagnostics.
However, there is a danger of managers pushing a new message or corporate culture too hard.
“Companies that have the audacity to think that they can somehow ‘change’ or ‘conform’ an employee to fit in with their corporate culture when there’s obvious discord will create even more disharmony by trying to press the issue,” said Scott Stalker, who worked as an HR consultant in China between 2003 and 2007.
Team-building exercises and regular training in the home company’s message can help integrate staff post-merger.
“Outside activities, drinking and hot pot dinners can all be very important in building rapport among workers,” said Warren Bock, a consultant with Scandic Sourcing, a consultancy that advises foreign firms coming to China.
But the hard truth of a merger or acquisition also means that not everyone employed at both companies will be around for hot pot dinners. It is an anxious time for managers and employees alike. HR managers are in a position to help ease the stress during the change and reassure employees about the new direction of the company and their own careers.
Unfortunately, it remains true that those responsible for HR are often the last to know when a deal will take place.
Mercer’s Wang believes a common merger misstep is not bringing in HR professionals soon enough. Often, HR considerations are not raised until after the merger has been carried out, forcing managers to pick up the pieces.
When foreign HR professionals do get to the negotiating table, they may find themselves pushed to the periphary in staffing discussions with their Chinese partners. This is because HR remains an underdeveloped area in many Chinese firms’ corporate cultures. Few Chinese HR professionals have received training that would prepare them for a transition as large as a merger. Most see their jobs as mainly administrative – sorting payroll and paperwork.
“The HR head of a typical Chinese company is essentially the founder, and he personally picks people he likes and feels comfortable with,” said Dr James Song, CEO of HR consultancy Waterville. “So much of [a workforce’s] cohesiveness is maintained by emotional ties.
“If you ask me what HR is like for a typical target company, the answer is: there is none.”
Regardless of which company’s HR team takes the initiative in the post-merger period, there is much work to be done. Identifying and retaining key staff members through a merger is a critical task for HR managers. Employees with technical training, leadership experience, and language skills are in limited supply and high demand. Turnover, especially among young employees, is notoriously high. Managers will need to consider offering incentives, training and a clear career trajectory for those employees they wish to keep.
Wheat and chaff
At the same time that desirable employees can be difficult to retain, a company acquiring another may find itself saddled with less-desirable workers who are nevertheless difficult to dismiss. In extreme cases, the acquired company may have retired workers who still need be paid for up to 20 years, said to Matthew Durham, a Shanghai-based labor lawyer with Simmons & Simmons.
Under labor contract law, an employee’s contract cannot be terminated without due reason, and the burden of proof lies heavily with the employer.
From the outset of negotiations, HR managers need to work with senior management to identify and troubleshoot these potential problems. These are the first steps to rasing the bar for HR in China.
“This is the time to introduce international [HR] best practices in China,” said Song. “I think they’re ready.”