Benefits strategy calms waters after international takeovers

Using benefits strategically can help to create harmony in an organisation after it has been taken over by an international firm, says Jenny Keefe

Case Study: Banco Santander Central

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UK businesses are going under the hammer with international firms acquiring these assets at a rapid rate. Already this year, French company L’Or»al has bought The Body Shop, Dubai Ports has acquired P&O, and German group Linde is in the process of taking over industrial gases firm BOC. And, as foreign businesses continue to buy into the UK, a new type of HR expertise is becoming essential: the ability to merge two, often entirely different, benefits cultures.

It’s a process that goes far beyond the realms of language barriers as aligning pay and benefits is one of the key challenges for HR following a takeover. Employers must be in it for the long haul. According to Mercer Human Resource Consulting’s 2005 survey Getting HR ready for a merger or acquisition (M&A), a quarter of firms rank harmonising pay and benefits among the toughest tasks following a M&A. And with stakeholders and trade unions to get on board, merging benefits can take years.

The job is made more difficult by the fact that investors, particularly those new to the country, can face something of a culture shock. David Wreford, a principal at Mercer, says: “The fact that a buyer is from overseas is not much of an issue because that business will often already have businesses in the UK. “[But] where we do tend to see a problem is when overseas firms buy into the UK for the first time. There are different expectations of benefits plans in other countries.

They look at benefits such as company cars and holidays in the UK, and see levels higher than they’d normally expect.” He adds that it’s never too early to think about benefits. “As part of due diligence, before any acquisition we would do an analysis on remuneration as far as the acquirer is concerned, and build up a benchmark which includes ‘this is what you do’, ‘this is what the market does’ and ‘this is what you want to do’. Typically, it will think about benefits before they even start the merger.”

So how do employers set about aligning perks? Where there is foreign ownership, HR is charged with creating a delicate balance between keeping a unified organisation and respecting local customs. Piero Morosini, author of the book Managing complex mergers, says: “The ability to create a strong common glue between the joining companies is the most important reason behind the success of an international M&A.

Common benefits are an important element in creating this, especially when they are applied on a consistent and global scale. “Benefits must be standardised across local markets so that no executive feels they’re being penalised. In fact, to make a consistent set of HR policies is in itself a good test of global cooperation after an M&A.”

Yet Cary Cooper, professor of organisational psychology at Lancaster University, explains employers should be wary of going in with guns blazing and standardising benefits. “In any acquisition or merger, it’s a very stressful time so people can suffer during those periods and feel job insecurity. Remember, if one of the first things you do is take one of those benefits away you’re worsening the situation because [staff] think worse is to come. “If you’re involved in a takeover from abroad, the best way to ease the M&A is to ensure that the existing benefits are kept, but that new ones are added.

This will make people think ‘maybe we are working for an even better company’.” He adds that organisations need to resist the temptation to cut perks. “What some companies do is say ‘it has to be standardised across the company’. If any American company takes over a British company, for example, it depends how international it is. If it hasn’t got a vast amount of experience it will tend to say it’s not worth the hassle of keeping the original benefits.” Susan Cartwright, chair of the British Academy of Management, confirms: “What is always clear is that employee groups do make comparisons and obviously would like to see the maximum benefits negotiated and get very upset if anything is taken away.”

Company cars are often one of the first casualties of a takeover. “Company cars are a highly-emotive issue, although perhaps less so given tax changes. It is very rare in French companies for employees to have company cars, therefore, a French acquirer may not see the logic in having UK employees with company cars – a clear cultural clash,” she says. So, on the one hand, you want to create a unified, global group, and on the other, keep cherished perks in place.

Flexible benefits plans can be a way of finding a golden mean, explains Mercer’s Wreford. “We’ve done a number of projects where flexible benefits was a solution. It’s a very powerful tool. The beauty of flex is that you are blurring the lines between pay and benefits, and encouraging people to look at the total reward package. “There are two approaches: one is to say that both sets of employees continue with an underlying entitlement to the [package] they already had, with certain core benefits, and the other option is to be completely flexible. So if a company has good healthcare cover but no company cars, but the newly-acquired company has cars but no healthcare, you can allow them to sacrifice one to take the other,” he says.

Another common stumbling block is pensions. “For foreign companies acquiring in the UK the issue of pensions is very important and something they really do need to do their homework on,” says Cartwright. A case in point was Icelandic group Baugur’s takeover of the UK’s Big Food Group (BFG) in 2004.

The entire deal was put on hold until Baugur agreed with BFG’s pension trustees that it would continue to fund its pension deficit in the event of a change in control. Earlier that same year, however, Permira’s offer for WHSmith fell through because the German venture capitalist couldn’t agree to protecting pension payments for the retailer’s retired workers. Not all possible changes are so dour. If employers are concerned about staff retention after the takeover, bonuses can be a powerful incentive. “I have come across practices whereby acquirers offer employees a loyalty bonus if they stay with the acquired company for 12 months.

This is a strategy for ensuring the retention of key people with the view that, in staying, they will also be exposed to the new culture and will then grow to adopt it,” says Cartwright. Employees can also gain in the pay stakes. A 2006 study American takeovers of British firms: Good news for wages by Holger Gˆrg and Sourafel Girma of Nottingham University found that, far from losing out after a foreign takeover, employees could see their salary jump. The study found that employees from domestic firms taken over by US rivals received wage bonuses of up to 13% in the two years following the takeover, while acquisitions by Asian companies raised wages by up to 7%. In contrast, however, takeovers by EU competitors had no such effect.

Finally, it is worth noting that benefits issues can be symptomatic of a wider culture clash. “I think it is fairly typical for clashes in mergers between employee groups to focus on hygiene issues [such as] the car park [or] the benefits as these issues are often used as vehicles to express cultural differences and as a means by which acquired employees can express their distinctiveness,” concludes Cartwright.

The facts

Foreign takeovers of UK companies. According to the British office of National Statistics, overseas buyers spent £52bn on UK acquisitions in 2005, twice the level of the previous year. Foreign takeovers span several sectors. To name but a few, companies which have recently gone under the hammer include: mobile phone operator O2, which was sold last year to Spain’s Telefonica; glass maker Pilkington, purchased by Japan’s Nippon Glass; and Abbey, which was acquired by Banco Santander Central Hispano of Spain. A 2005 YouGov/Sunday Times poll found that 69% of people are concerned about UK companies falling into foreign hands. Only 25% said they were unconcerned by this.

Case Study: Banco Santander Central

Spain’s largest bank, Banco Santander Central Hispano, opted for the if-it-ain’t-broke-don’t-fix-it approach after acquiring Abbey in 2004. Since then, Abbey has continued to offer local benefits to local people.Paul Lomas, HR director, says Banco Santander Central Hispano made no attempt to standardise perks across regions. “The strategy was to better align with UK competitive practice rather than an attempt to harmonise on a global basis. “Our approach was to set up standalone local benefits so specific challenges due to the takeover were relatively few,” he explains. Since the takeover, Abbey has added a raft of new perks. These include: a childcare voucher scheme, partnership shares, holiday trading, discounted retail vouchers, a new cut-rate mortgage for staff, and a healthcare scheme. But Lomas adds that there were some hitches along the way. “We faced some minor specific issues around managing employee share schemes where Securities laws in the parent’s home market are different from the UK.”