12
Acquisition in the Banking Sector in the Transition Process to the Market Economy
Introduction
Globalization of businesses has intensified cross-border mergers and acquisitions. More than decade ago mergers and acquisitions became the dominant mode of growth (Adler, 1997). East European transition economies were exposed to cross-border acquisitions after the collapse of the command economy. The financial sector was one of the fields of radical change as in the Soviet command economy there was no role for commercial banking. During the first years of the economic transition many new commercial banks were created but when commercial banking became more mature, concentration processes in this sector began.
This chapter analyses an example of the cross-border acquisition and merger of commercial banks in one of the Baltic countries by a commercial bank from another country at a time when all of the banks involved were quite new institutions. Studies of managers in Estonian companies in the 1990s have pointed out market-driven changes in strategy, organizational culture, leadership style and the mission of their organizations that can be interpreted as the impact of radical transformation factors in that decade (Alas and Sharifi, 2002: 313–331). As a result of its liberal economic policy and rapid privatization, to some extent Estonia was ahead of other two Baltic countries, Latvia and Lithuania, in the second half of the 1990s in developing commercial banking and other market economy institutions. The rapid transition towards a market economy served as a driver of pan-Baltic expansion for the leading Estonian commercial banks. It was for the young managers of these organizations their first experience of cross-border organizational change and human resource management challenges. At the same time the largest new commercial banks in Estonia themselves became acquisition targets for established commercial banks from the Nordic countries.
Human resource management issues surrounding M&As have been the focus of several studies (Aguilera and Dencker, 2004; Zhang et al., 2014). HRM has the potential to play an important role in M&A integration, for example, by reinforcing the new 8HRM system and corporate culture and providing leadership and communication to reduce turnover depending on the chosen integration approach. Weber et al. (2011b, 2012) highlight the links between HRM practices that take into consideration cultural differences, knowledge-based theory of M&A integration and international management.
The aim of this chapter is to explore the possibilities and challenges of using human resource management practices in the implementation of organizational changes, specifically during the cross-border acquisition and merger of banks from two transition economies. We start with an overview of change management and human resources management literature in the context of cross-cultural acquisition and merger processes, then present an analysis of the case of Hansabank, which acquired two banks in Lithuania and then merged these banks into an integrated cross-border corporate structure.
Theoretical framework
Change management and mergers of organizations
Dopson and Neumann (1998) have perceived change as a necessary evil for survival in the context of uncertainty. Organizational change has been often seen as an individual-level phenomenon because it occurs only when the majority of individuals change their behaviour or attitudes (Whelan-Berry et al., 2003). Multiple- interacting changes in a global environment have led to a highly complex, confusing and unpredictable state. At the end of the twentieth century this shifted the focus of the change process from product innovation and technological change to behavioural aspects of change and to attitudes about change in organizations (Bergquist, 1993). Recent decades of globalization and institutional and structural changes in economies have increased the role of cross-border and inter-organizational change management.
Usually scholars analyse such features of organizational change as content, type, structure and process. Armenakis and Bedeian (1999) have divided the research on organizational change into: content research; contextual research; process research; and criterion research. Nutt (2003) combines structure and process. His structural research is similar to content research (Armenakis and Bedeian, 1999), and process research is presented in both typologies.
Although the type of change and the process of change are both important building blocks in any model for dealing with change, there is also a third crucial factor – the readiness to change in the particular organization. The readiness factors act like a bridge between identifying what needs to happen and the activity of implementing the change. Struckman and Yammarino (2003) combine types of change with readiness to change, but they do not take process into account. Therefore, Alas (2007) has developed a model connecting types of change, process of change, readiness to change and the institutional environment as the context of change. When studying change readiness in the context of acquisition and merger, it is important to understand the nature of cooperation and conflict between the organization that is leading the process and the organization that has to adapt to the new situation. Conflict can reflect differences of interests but also stereotypes based on earlier organizational practices. Organizational learning capabilities are essential for organizational change. Disciplines of the learning organization, such as building shared vision and mental models, team learning and system thinking (Senge, 2001), can be adjusted to acquisition and merger processes.
More advanced change management processes that are focused on integration in mergers and acquisitions could improve economic results of such organizational changes. Weber et al. (2009, 2011c) have created the conceptual framework of four main integration approaches: absorption; symbiosis; preservation; and holding. Choices among these integration approaches are influenced by synergy potentials of organizations, by cultural differences and by cultural-specific dimensions that can be either national or organizational. Absorption as an integration approach implies a high level of integration and the lowest autonomy for the local management of the acquired organization. Weber et al. (2009) assume that such an approach can be operational for achieving a high level of synergy only if the level of cultural difference is low. Cultural clash and employee resistance emerge from the desire to keep autonomy rather than impose practices that reflect a very different culture. In this framework preservation is the approach that implies the lowest level of integration and the highest autonomy for the management team of the acquired company. Weber et al. (2011c) conclude that when there is a high level of synergy potential but also a high level of cultural difference, the symbiotic approach to the integration process is selected and the effectiveness of the integration depends on integration activities focused on human resources at the post-merger stage.
Ellis et al. (2012) discuss a framework of four integration approaches – preservation; absorption; symbiotic; and transformation – and stress that the transformation approach requires significant changes in both previously independent firms as the new merged firm seeks to reinvent itself by discarding old procedures and developing a new culture and routines. Their research is especially focused on large interrelated mergers and acquisitions. Although banks in the Baltic countries are small compared to global corporations, in the banking sector the alignment of structures and processes in order to transform business activities as part of the general transition to a market economy is an important priority.
Advanced human resource management practices are instrumental for dealing with post-merger conflicts. The potential for conflict stems from the tension between both organizational cultures and different national cultures. A knowledge-based view helps to address the post-merger cross-cultural conflict. Knowledge integration capability refers to the ability to handle acquisition by exploiting synergy through resource sharing and the deployment and transfer of resources and capabilities from one organization to another (Weber et al., 2011b).
Creating harmony, synergy and knowledge transfer between partners is therefore an important focus of human resource management in the post-merger context. Losing values and identity can be seen as a threat (Van Dick et al., 2006), especially among groups that have previously had influential roles in the organization that is being acquired. Changing the power structure is inevitable in many acquisitions in order to create new synergies and to increase the efficiency of operations. There is, however, a need to persuade different professional groups that their legitimate interests will be taken into consideration and fair selection and promotion practices will be applied. Curall and Inpeken (2002) and Weber and Diori (2012) have demonstrated that trust is crucial for the formation of cooperative alliances, such as marketing partnerships and joint ventures. It is even more important in situations where independent organizations are merged and the fair selection of managers and employees is a challenge. Buono and Bowditch (1989) argue that a merger or acquisition is ultimately a human process. Therefore, involvement of the HRM function in the M&A process is a matter of humanitarian concern to mitigate grief among those people who have been acquired (Hunt and Downing, 1990). Weber et al. (2012) explain that in the context of mergers and acquisitions, for employees of the acquired firm or the subordinate partner, the period after the announcement of the takeover is a time of intense personal risk analysis, in which they decide whether to leave or stay in the organization. The top management of the acquiring firm may risk opportunistic behaviour if it allows members of the acquired organization a high degree of autonomy without building mutual trust relations.
One important change readiness factor is the leadership and communication strategy of the change leaders. The top management team has an impact on post- acquisition performance of the company and effectively influences the organizational culture (Kiessling and Harvey, 2006). During an acquisition, the position of the former top management team is often challenged. Appropriate communication modes at the right time and in the right place as well as personal examples are among the most important leadership tools in such situation. Weber et al. (2011d), in a cross-cultural comparative study, present evidence that acquirers from Germany, Japan and Belgium have different post-merger communication intensity. In Japan post-merger communication contributes more to the stock market value than it does in Germany because average acquirers from Japan increase post-merger communication more than German acquirers do. Different post-merger communication patterns reflect cultural differences and human resource management practices.
Human resource management and culture in mergers and acquisitions
The term human resource management (HRM) refers to the design and applications of a formal system in an organization to ensure effective and efficient use of human talent to achieve the organization’s goals (Mathis and Jackson, 2002). The concept of HRM gained importance when it became clear that strategic decisions are increasingly related to human resource considerations (Daft, 2006) and HRM has impact on an organization’s strategic capabilities (Fombrun et al., 1984; Wright et al., 1994).
The Michigan model of HRM emphasizes that people are resources, and the utilization of these resources must be closely linked with the strategic objectives of the company (Fombrun et al., 1984). According to the Harvard model, the workforce is the most valuable, specific and critical resource in an organization. Both models connect human resources with business strategy (Beer et al., 1985).
The authors of this chapter define HRM as a set of practices in an organization to ensure the effective and efficient use of human capital to achieve the organization’s goals. Thus, managing human resources has become one of the critical success factors in most organizations. Both the existence of proper personnel and the ways in which people are managed are crucial for achieving competitive advantage. In the current study, the authors analyse how HRM practices could be used in the merger process of two banking organizations in Lithuania, taking into consideration that one of these organizations is already integrated to the group-level corporate structure and the new owners wish to change the organizational culture of the new and larger organization that has been acquired. This provides a good opportunity to understand the role of HRM practices in dealing with cultural differences between organizations in the same country but also with cross-border cultural differences and knowledge transfer challenges between more and less market-oriented organizational cultures.
Ahammad et al. (2014) have suggested a conceptual framework that explains the influence of the knowledge transfer on acquisition. This influence is mediated by national cultural differences, organizational cultural differences and employee retention. A knowledge-based view of human resource management activities that enhance M&A performance has also been developed by Weber and Tarba (2010: 205). Zhang et al. (2014) stress the effect of leadership style on talent retention during post-merger integration and use evidence from China when proposing that an authoritative, coaching, task- and relationship-focused approach has a positive influence on talent retention and on effective post-merger integration in the Chinese context. In other cultures the effect of such a leadership style may be different, however.
In his cross-border research, Hofstede (1980, 2001) defined culture as a set of shared values and beliefs as well as expected behaviours. The Hofstede framework for cross-cultural studies includes cultural dimensions of individualism–collectivism, uncertainty avoidance, power distance and masculinity–femininity (Hofstede, 1980). Power distance reflects inequality in the social hierarchy and the relationship with authority. The individualism–collectivism dimension reflects relationships between the individual and the group. Masculinity–femininity is related to distinct versus overlapping gender roles. Uncertainty avoidance relates to the extent to which the members of a culture feel threatened in unknown situations. Research evidence concerning two more cultural dimensions – long-term versus short-term orientation and indulgence versus restraint – has been collected over recent decades (Hofstede et al., 2010). The evolution of Hofstede’s approach from IBM-based research around 1970 to the comprehensive framework that focuses on dimensions at the national level has been described by Minkov and Hofstede (2011). Hofstede et al.’s (2010) research evidence can be used to interpret some differences and similarities between Lithuanian and Estonian management cultures that are relevant for M&A processes. Estonia and other Baltic countries have the lowest power distance in Eastern Europe. The Estonian ranking in this index (global rank 59–61) is the same as the USA’s ranking and one place lower than the Lithuanian ranking. Estonia and Lithuania have equal rankings in the individualism index (global rank 23–26). Lithuania (global rank 43–44) is slightly higher in the uncertainty avoidance index than Estonia (47–49). Estonia is a little higher in the masculinity index (global rank 66) than Lithuania (global rank 70–71).
Weber et al. (2009) point out that the performance of a particular post-acquisition integration strategy should be related to Hofstede’s uncertainty avoidance and individualism/collectivism scores. Successful acquirers from high-level uncertainty avoidance countries try to avoid conflicts and prefer formal procedures. Weber et al. (2009) also refer to earlier research results that show higher power distance tends to lead to an absorption integration approach. In their analysis of mergers and acquisitions Weber et al. (2011d) differentiate between the following dimensions of corporate culture: approach to innovation and activity; approach to risk; horizontal relationship; vertical–hierarchical contact; autonomy and decision-making; approach to performance; and approach to rewards.
Culture is critical in the preparation of organizational change programmes and when anticipating readiness for change. Weber et al (2011a) highlight the role of cultural differences and negotiations in mergers and acquisitions and stress that research efforts should be directed towards the proper selection and training of managers who will be in contact with the members of the foreign negotiating team when planning the acquisition and post-merger integration processes. Corporate culture analysis can serve as a tool for better assessment of cultural differences and enhance the effectiveness of interventions during various stages of the post-merger integration process (Weber and Tarba, 2012). The impact of cultural differences on change readiness in organizations that are involved in M&A activities depends on the partners’ integration efforts. Calipha et al. (2010) present an overview of M&A motives, including external motives, such as growth and globalization, and more internal motives, such as changing business models and achieving synergies. Regional cross-border acquisitions are less ambitious than new acquisitions by banks that already have a global presence, but taking into consideration the short history of commercial banking in the Baltic countries even acquisitions inside the region assume that the acquiring organization will learn new change practices.
Earlier research does not provide enough case-based evidence about M&A-related change management and integration efforts, where all organizations that have direct roles in the change process represent the banking sector of transition economies. We use the case study in order to fill this research gap and reflect both the specific context of cross-border acquisition in the rapidly changing banking sector and the influence of post-merger efforts to overcome cultural, communication and trust barriers by changing human resource management practices.
Hansabank privatizes the Lithuanian Savings Bank
The history of Hansabank (Hansapank in Estonian) dates back to 1 July 1991, when it started operating as a branch of the Tartu Commercial Bank. Hansabank started operations as an independent bank on 10 January 1992. Soviet roubles were still used in Estonia during the first few months of its operation, but in June 1992 a new national currency – the Estonian crown – was introduced. This was an important step in the country’s macro-economic stabilization and in overcoming hyperinflation. However, several commercial banks, including the Tartu Commercial Bank, were unable to adapt to the new macro-economic environment and faced bankruptcy.
From the very beginning, Hansabank employed only young people, excluding those with Soviet banking experience. It became the norm to fill vacancies through internal competition, which offered very good career opportunities for bank employees. An emphasis was placed on integrity and openness. The chairman of the board, Hannes Tamjärv stated: that the bank had ‘managed to bring together decent and honest people guided by pure common sense’. By 1994, Hansabank had become the biggest bank in Estonia; and by 1995, the biggest in the Baltic states. By the end of 2004, the net annual profit of Hansabank Group was €182.8 million.
In 1996, Hansabank shocked the Estonian public by acquiring the eighth-largest bank in Latvia, Deutsche Lettische Bank (DLB). Then, in January 1998, Hansabank (1,200 employees) announced its plan to merge with another Estonian bank, Hoiupank (2,000 employees). Hoiupank had operated in the Soviet command economy as a savings bank but had gone through restructuring to become a commercial bank after its privatization in the early 1990s. The merger would result in the creation of the biggest banking group in the Baltic states. Yet it would be some time before the merger could be finalized because Hoiupank wanted to choose the new bank’s president – a condition that was unacceptable to Hansabank. Hoiupank officially ceased operations in July 1998, but the merger of the two banks was not completed until June 1999, when their databases were combined. The merger was carried out on the basis of a plan devised by the international consultancy company McKinsey. All positions in the new bank were disclosed for open competition and employees from both banks were invited to apply. Hansabank’s management viewed this as best practice and continued to use the approach in their later cross-border acquisitions.
On 17 October 1998, Sweden’s Swedbank acquired €93.9 million of shares in Hansabank, which at that time was the biggest foreign investment in the Estonian economy. Acquisitions and business expansion processes were therefore taking place on three levels: as Hoiupank was merging with Hansabank, and Hansabank was expanding its operations to the other Baltic countries, Nordic banks started to acquire significant stakes in Hansabank and other leading Estonian banks.
At the end of 1999, by which time preparations to expand activities into Lithuania had already been under discussion for a year and a half, Hansabank finally received a banking operation licence from the Bank of Lithuania and became the first bank to offer banking services in all three Baltic states.
The new bank in Lithuania was named Hansabankas. Hansabank employed a Lithuanian citizen as CEO, whose first task was to form a team to start the new bank from scratch. He was assisted by a Hansabank employee from Estonia, who helped him to implement the ‘Hansa best practice’ strategy and launch a major recruitment campaign. Hansabankas was founded in July 1999 and by the end of 2000 it had achieved 3 per cent market share of savings and loans in Lithuania. It had four branch offices, nine cash dispensers (ATMs) and 12,000 clients, with 1,800 using the firm’s internet bank, hanza.net. The headquarters was on the main street of Vilnius – Gedimino Street. The bank was integrated into the internal communication system of Hansabank Group and the corporate culture of its employees was comparable to that of Hansabank. Most of Hansabankas’s employees were under thirty years of age and almost all of them had already obtained or were still studying for a degree. However, Hansabankas was viewed as an Estonian bank in Lithuania, and its presence in the Lithuanian banking landscape was quite limited when compared with Hansabank’s profile in Estonia.
These acquisitions led to the foundation of the Hansabank Group, which included the commercial banks in Estonia, Latvia and Lithuania, and the Hansa Capital Group, which had subsidiaries that offered leasing and factoring services in Estonia, Latvia, Lithuania and Russia, as well as Hansabank Markets. Hansabank Group had its own intranet-based internal communication system and the working language of the group was English. Furthermore, in each country the group had its own communication system in the local language, which enabled knowledge sharing about the group, local affairs and work information. The information technology in the enterprises of the Hansabank Group was among the most advanced in Eastern Europe. The group had a facilitating corporate culture, where relations between superiors and subordinates were more like those of partners. Hierarchical barriers were also lowered by the adoption of a personal approach among managers to their subordinates.
To become equally strong in all three Baltic countries, on 1 June 2001 Hansabank privatized the Lithuanian Savings Bank (Lietuvos Taupomasis Bankas; LTB). On 2 October 2000, Hansabank had presented its takeover bid to privatize the Lithuanian Savings Bank, and on 29 December 2000 the Lithuanian State Property Fund started privatization negotiations with Hansabank. A survey showed that Lithuanians had not expected Estonians to privatize their savings bank (a cultural issue), but had rather been looking for a ‘strong foreign investor’ from Western Europe.
AS Hansapank and the Lithuanian State Property Fund signed a purchasing contract on 23 April 2001 for the purchase of 90.73 per cent of AB Lietuvos Taupomasis Bankas shares from the Republic of Lithuania. On 15 May, the Bank of Estonia confirmed the purchase of LTB, which was followed by a corresponding confirmation on 24 May by the Board of Competition in Lithuania. The contract became effective on 1 June, which was also the first day, according to the privatization contract, that the managers and employees of Hansabank were allowed to enter LTB and become acquainted with the actual situation in the bank. Up till then, Hansabank had relied on the privatization documents. On 5 June 2001, there was an extraordinary meeting of LTB shareholders and they elected a new council for the bank. On the same day, the new council appointed a new board. Hansabank set the ambitious goal of integrating LTB into the Hansabank Group in just one year. By then, the new Hansabank Group member was expected to be showing a profit.
LTB had been prepared for privatization for several years, but for various reasons all of the previous attempts had failed. The management had been replaced several times. Although the last management of LTB had taken significant steps to reorganize the bank into a modern financial institution, it was still trading at a loss. At the end of 2000, LTB had about 150,000 clients, with the majority of them private; 402 branch offices; and 70 cash dispensers. It had also issued approximately 100,000 bank cards. Its offices were not integrated into a unified network and the level of information technology was poor – even the exchange rates on the boards were changed twice a day by hand. The bank did not have any marketing strategy; every region and office provided information about its own activity independently. The interiors of some branch offices looked like savings banks from the Soviet period. However, although the use of graphics and the bank logo were ineffective and did not follow any rules, the spontaneous recognition of the bank in the Lithuanian market was almost 100 per cent. The bank had not formulated any values that would have enhanced brand equity. The employees felt that the key to its wide recognition lay in the fact that LTB was the largest and oldest bank in the Lithuanian market and that its branch offices, which were in almost every town and village, were easily accessible. Another factor could have been that all transactions in LTB were carried out without any service fee and all deposits were guaranteed by the state.
At the moment of the merger, Hansabankas in Lithuania employed 150 employees who were loyal to their employer, Hansabank Group. They were young and had a very strong team spirit. The values of the Hansabank brand – quality, innovation and vitality – were often quoted. LTB at that time employed 3,500 people across 15 regions, with the majority of them long-term employees from the former Soviet period. At the beginning of the privatization process, one teller celebrated her fortieth anniversary of working in the same office. When Hansabank’s plan to privatize LTB became known, the personnel manager of the bank called all of the branch office human resource managers into his office. He told them that the young, English-speaking, well-educated Hansabank would immediately lay off every LTB employee who was over forty-five, did not speak English and did not have a degree. The only people in LTB who met all of these criteria worked at headquarters, so the personnel manager’s assessment generated considerable fear and opposition towards the new owner.
The management practices in LTB were rather bureaucratic. There were rumours that documents were considered valid only if they had seven signatures and were sealed. All decisions were made by the board of the bank, so it took weeks to reach one. All tasks had to be passed down the hierarchical structure. If somebody needed to see a manager, they often had to wait for hours in the presence of the secretary, behind the manager’s closed office door. The bank had established its own code of practice, which guaranteed some managers and employees more rights than others. The higher management had a twenty-four-hour service of personal drivers and security personnel, and they could use prestigious Lithuanian holiday resorts owned by LTB on preferential terms and conditions. These status symbols were important. The bank organized sports days twice a year, but only a selected circle of people were invited to these events, even though they were ostensibly organized for all personnel at the local regional level. The office of the chairman of the board was a three-room apartment – including a bathroom – furnished with antique furniture. In the opinion of the new owners, this office could have accommodated at least three families. Meanwhile, the offices of ordinary personnel had not been refurbished for years, the ventilation was insufficient and there were no air-conditioners. The offices of the management, on the other hand, were in much better condition and were sufficiently equipped. The corridors of the offices were painted in dark colours and the offices sealed with massive dark wooden doors.
Although LTB had been prepared for privatization for years and had been restructured several times, there was little internal distribution of information. People had to put the picture together on their own from bits and pieces they could gather. Word-of-mouth was the most common means for the dissemination of information. The channels of internal communication included: faxes for disseminating managerial decisions and other official documentation; an internal postal system; and an unofficial intranet page. The intranet was accessible only to head office employees and was mainly used for exchanging personal messages, such as purchase, sale or exchange notices, birthday congratulations and photos of events. Only one person could upload such information. Email was accessible in the headquarters and in the head offices of some regions, but it was practically unused and not considered an official channel of communication.
When the board of Hansabank Group decided to merge Hansabankas and LTB, they decided to use the merger of Hansabank and Hoiupank in Estonia in 1998 as a template to follow.
The local Hansabankas staff did not have sufficient resources to merge the two banks, so a new team of managers, trainers, communicators and personnel staff was formed and sent to Lithuania to carry out the process of integration. They expected to be on site in Lithuania for three or four months. This ‘Estonian task force’ of specialists and managers was given training prior to their mission. The training sessions had to shape the attitudes of the integration team so they would not feel like integrators but rather as part of a cooperative international team in which the majority of members were Lithuanian. The sessions also focused on the topic of cultural differences – how to communicate with the Lithuanians, which ice-breaking topics would be best, and so on. For instance, asking about family and children and showing a genuine interest in the private life of the communication partner can be a very good technique for bringing people together. The training sessions therefore emphasized the importance of approaching counterparts from a human rather than a rational perspective. Managers learned to differentiate between active and passive resistance, mitigate the straightforward approach of Estonian business culture, double-check that the tasks they had to implement had been understood, and assess the importance of recognition and feedback. It was considered crucial to use face-to-face communication in such a complicated situation involving different cultures. In order to integrate LTB, Hansabank created executive committees in key areas, such as IT, human resources, public relations and communication, retail banking, risk management, leasing, factoring and e-banking.
Challenges of the post-merger integration process
One critical area in the preliminary integration plan was the development of Lithuanian managers in such a way that they would be able to implement the Hansabank Group culture in the new merged bank. Therefore, the key question was how to support the management of change by using human resource management. At the same time more advanced internal communication was needed to inform people about the desired culture. The aim of the internal communication was to create in the minds of the employees of Hansa–LTB an image of the new owner as an open-minded, trustworthy and honest employer that was ready to help the employees manage the process of change. All communication had to correspond to the core values of Hansabank Group and express respect for people from different cultural backgrounds.
A major challenge during the merger of Hansabankas and LTB was explaining one of the basic principles of communication – first pass information to your own personnel and only later to the public. This principle had to be apporved at management level. It was essential that nobody was in a preferential position when it came to accessing information (e.g. from Hansabankas or from any enterprise in the Hansabank Group) and the same information would reach all the employees at the same time. The role of internal communication was to help the managers to set up a comprehensive communication plan and specify their management function. The new owner, Hansabank Group, and its values were introduced via all channels of internal communication, mainly using real-life situations as examples. Representatives of Hansabank Group also followed the principle ‘walk the talk’: they socialized with employees and worked hard when necessary. Personal chats between employees, managers and personnel staff were also extremely valuable. At the same time it was emphasized through the sophisticated information technology of the Hansabank Group that the employees of LTB would benefit from training opportunities, open communication and the transparency of personnel and payment policies as essential elements of the new human resource management practices.
According to the code of practice in Hansabank Group, everybody in the organization should address each other with the personal, informal ‘you’, which reduces barriers between management levels and makes communication more open. However, this informal form of address might be problematic in an organization with a more traditional culture. Indeed, in Catholic Lithuania, and especially in LTB, which had previously been dominated by an autocratic culture, the principle was strongly resisted at first. There were no communication problems at the level of top management, but other employees and managers found it difficult to practise the new form of address in their day-to-day communication with colleagues and subordinates. Such informality was interpreted as disrespectful, so it was agreed that it would be introduced gradually, depending on the readiness of the staff.
Human resource management and internal communication functions worked as the sources and transmitters of information that supported organizational changes. The Personnel Department, as the source of information, identified problems, then the Internal Communication Department started to look for and propose solutions. For instance, the Personnel Department found that the Lithuanian employees felt uncomfortable because of uncertainty over merger-related changes, so the Communication Department commissioned a psychologist to write an article for the internal newspaper about people’s reactions to change. Similarly, the Personnel Department discovered a need to disseminate more information about the next steps in the post-acquisition merger process and the Communication Department offered ways to satisfy this need. For instance, the Personnel Department wanted to let people know how job vacancies would be filled, so the Communication Department issued a special newsletter which gave an overview of all the vacancies and the terms and conditions for competition for these positions. A special information telephone line was also introduced to answer employees’ questions, and the internal newspaper and intranet published the contact details of important members of the Personnel Department. Frequently asked questions and answers were published in the intranet’s hotline directory.
The task was to introduce the Lithuanians to the personnel and management culture of Hansabank Group and the practice of job evaluation interviews and competency patterns with the aim of implementing the group’s management culture within LTB. This was not easy because the differences between the cultures of Hansabank and LTB were substantial. On the other hand, it was advantageous that Hansabankas, athough a smaller organization than LTB, already enjoyed a positive working culture and the Lithuanians could see that it was successful.
The creation of the new structure
In order to inculcate the new culture, a new structure was created and all personnel had to apply for the new positions. The employees of Hansabankas and LTB applied for jobs in the newly merged bank under the same terms and with the same requirements. The fair selection of employees was monitored by a committee comprising representatives from both banks. This committee approved all decisions and checked that the candidates from both banks had been duly considered, scrutinized the reasons for each successful candidate’s selection, and ensured that inter-bank politics had not been involved. They had to fill in a form on these points for every selection that was made.
The top manager of the Lithuanian bank was appointed by Estonians. He then selected the members of the executive board. The remaining positions within the bank were available through open competition, overseen by the fair selection committee. At first, the committee was chaired by an Estonian, but later she was replaced by the Lithuanian head of the local Personnel Department.
The management of the merged Lithuanian bank was ostensibly assembled on the basis of LTB and Hansabankas. However, in practice most of the positions were filled by employees of Hansabankas, with only a handful going to (younger and achievement-oriented) LTB managers. The new management was seconded by the integration team in all fields of activity. Every member of the new board had a ‘shadow’ in the person of an integration team member. In practice, the inner circle at the table during a meeting would consist of Lithuanians, with another circle of Estonian ‘shadows’ – consultants from the integration team – sitting behind them. Prior to each meeting, the Lithuanian manager would discuss all of the issues on the agenda with his/her ‘shadow’. During the meeting, the Lithuanians would discuss these matters among themselves, but the consultants were constantly ready to offer advice, if necessary. The entire process of training the management and Personnel Department took place in the form of a consultancy.
Developments in the field of human resources management
The integration plan dictated that the personnel manager should be found within Lithuania, although the Estonian human resources team also had an essential role to play because it was its job to join the two staffs together, select the best candidates and ensure fairness. However, no suitable candidate for the position of personnel manager could be found in either of the two Lithuanian banks. Hansabank Group representatives were looking for a person with experience in commercial banking and extensive knowledge of contemporary human resource management. Therefore, it was necessary to send a team from Tallinn to handle the situation during the critical initial stage of the post-merger integration. It remained in Lithuania for the whole summer and consisted of the personnel manager, the personnel development manager, a personnel development specialist and a personnel information technology specialist. Its first task was to fill the position of personnel manager. The successful (external) candidate was a personnel consultant from a consultancy company. Meanwhile, the existing employees of the Personnel Department remained in their positions. Once again, a ‘shadow’ system was employed, with the new personnel manager overseen by a member of the integration team. This practice could be compared to mentoring, although it was rather more subtle than that. Besides offering guidance to the Lithuanians, it aimed to make them feel as if they were managing the whole system themselves. This was one reason why the Estonian Hansabank integration team remained in Lithuania for only a few months – they did not want to undermine the authority of the local management in the eyes of the Lithuanian employees.
On the first day, the four personnel experts from the integration team arranged a meeting with the employees of the local Personnel Department. None of the Lithuanians spoke English, so all of the material they had prepared in English had to be translated into Russian. However, the Estonians had already forgotten most of the Russian they had learned at school because they had been used to working in English at Hansabank for several years. They just about managed to make themselves understood in their broken Russian during the meeting, but emphasized that the working language of the new bank would have to be English.
No members of staff lost their jobs due to their poor grasp of English. On the contrary, language courses were initiated and everybody who needed to use English in his or her work was encouraged to enrol. A compromise could always be found. In the other enterprises in Hansabank Group, only management was required to have a working knowledge of English. All the channels of internal communication continued to use Lithuanian. Only the common lines of group communication (internal newspaper and intranet) were accessible to the Lithuanians in English. Therefore, knowledge of English was an advantage, whereas information about ‘how things are done in the group’ was presented solely in English.
The Estonian personnel experts stressed to the Lithuanian Personnel Department staff that they had come to help and have a look at how the integration should be carried out. To aid trust building, the Estonians went bowling with the local personnel employees in order to get better acquainted with them. Unfortunately, though, the local personnel employees exhibited old Soviet attitudes, so it was felt they could not be appointed to key positions in the new organization if it were to survive at a time of rapid transformation in the increasingly competitive commercial banking environment. On the other hand, the integration team did not want to replace the whole department, so the employees had to be motivated to adopt new ways of thinking and working practices. The Estonians wrote an article for the internal newspaper, which was edited by members of the internal communication team. In this they highlighted the work of the local Personnel Department, praised them and encouraged them to try even harder.
The new personnel manager, who had been recruited as part of the integration process, employed a new training manager and emphasized the importance of training. All of the Personnel Department staff were engaged in the process of recruiting new employees, which turned out to be a new experience for them and therefore called for special training. The training sessions were not carried out by the Estonians, but subcontracted to a Lithuanian company, which was chosen by the new Lithuanian personnel manager. He also introduced a new vision of personnel management and encouraged workers with outdated views to learn new methods and see things in a new light. In addition, the Hansabank competency model was introduced.
Employees attended many meetings that aimed to introduce the values and goals of the new bank, and highlight integrity and trust. In order to stress the importance of transparency, the Lithuanian managers’ old oak doors were replaced with glass doors.
Conclusions
The current chapter has discussed human resource management and leadership during a merger process. The largest Estonian bank, Hansabank, purchased a large Lithuanian bank, LTB, and started to integrate it into the Hansabank Group. Transformational change was required within LTB once the purchase was finalized. The main focus of the chapter has been on the changes that were made to the organizational culture of LTB. The activities of the Personnel Department were key success factors that helped to improve the management of the Lithuanian bank and achieve the desired organizational culture. The post-merger integration type in this case was a combination of absorption and symbiosis, when using Weber et al.’s (2009) framework. Symbiosis elements were present in the attempts to facilitate participation of LTB staff through transparent recruitment and open communication channels. Absorption elements were apparent in the implementation of quite rapid cultural changes reflecting Hansabank Group core values and in the transformation of business and communication practices in the acquired organization. Transformation features discussed in Ellis et al. (2012) were in this case driven by the strategic goals of the Hansabank Group to change existing processes and culture in a newly acquired subsidiary in order to improve its competitive position in the rapidly changing Baltic banking environment, where Hansbank itself was acquired by the more established Swedbank.
Hofstede et al. (2010) pointed out some cultural differences between Estonians and Lithuanians that were taken into account during the post-merger integration process. Differences between Hansabank Group’s and LTB’s respective corporate cultures were, however, more important than differences between the Estonian and Lithuanian national cultures. Hansabank Group represented a new organization that was founded in the market economy. By contrast, LTB to a large extent represented the organizational culture of a command economy.
As the Hansabank Group had previously acquired Hansabankas, the Lithuanian employees of LTB had greater trust in the process of integration than might otherwise have been the case. The new corporate culture was accepted much more readily because it was introduced and spread primarily by Hansabankas’s Lithuanian staff, rather than by Estonians from Hansabank Group. However, the integration team from the Estonian headquarters also played an important role in this process.
There was no opportunity for a systematic pre-merger assessment of change readiness in the acquired Lithuanian bank. While it is generally rather complicated to acquire internal information during pre-acquisition negotiations, preliminary information was available only from interviews with top managers and from public surveys that were unrelated to the bank itself. It was therefore impossible to make a detailed integration plan before the privatization deal was signed. When the merger process began in earnest, it was crucial to reduce the psychological stress of the employees at both of the banks and the leasing company. This stress was due to the decision to privatize and the news that had filtered out about the merger. In order to provide the employees with the information they needed, it was first essential to create effective channels of internal communication.
The acceptance of change and participation in the actual process of change starts within the staff themselves. It is possible to learn how to cope with change and the likelihood of success is greater if people appreciate the need for flexibility and have the ability to act fast. Nothing changes for the better until people develop a positive attitude. Therefore, in any process of change, it is essential to know what is going on in people’s minds and what emotions they are experiencing. Successful management of change is based on taking action according to uniform principles – everyone involved must move in the same direction. Internal communication can help managers to establish a uniform plan of communication and allow them to monitor the process from a distance. The different phases of change require different approaches and emphasis. If the people involved in the process of change are able to contribute to the process, they will accept the new situation more readily. In any case, it is better to have the necessary information and direction instead of suggestions and to make the process as transparent as possible.
To conclude, the activities of the local Personnel Department, such as transparent recruitment and top management team development, were key success factors that helped to improve the management of the Lithuanian bank and achieve the desired organizational culture.
Limitations of the present case study are related to the impact of a specific historical context of transition to the market economy and specific features of the banking sector. It is difficult to differentiate in such a case between the influence of personal priorities or competencies in the change team and general practices in such post-integration programmes. At the same time, the case demonstrates a successful integration programme between organizations that were involved in the rapid transition towards a market economy. The banking sector is still partly state-owned and heavily regulated by state authorities in many countries, and the global financial crisis has increased state involvement in the banking sectors of even advanced market economies. This case study can be used for further international research into mergers and acquisitions that are influenced by privatization and deregulation of the banking sector.
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