By Rose Canonaco, Senior Analyst and Consultant, Client HR Services
The significance of people-related issues in mergers and acquisitions is often underestimated but can be a major contributor to deal failure. Without considering HR matters early on, information vital to the favorable outcome of the integration can be missed or underutilized. According to a recent Harvard Business Review article, up to 90% of acquisitions fail to achieve desired results. Other studies have shown similar results. “People issues” are largely to blame.
When it comes to driving value creation in M&A transactions, the people-side of the business matters. A comprehensive look at critical HR functions, analyzing human capital, identifying and mitigating people-related risk, retaining key employees and determining the compatibility of policies and practices can drive a successful integration. Of significant importance, but often overlooked are talent assessment and retention, communication and culture. And yet, they can be paramount to reaching the overall growth targets of the deal.
Talent Assessment and Retention Assessing the talent of the target company can have substantial impact on the combined organization’s future-state. This assessment must go beyond just the executive team. The leadership team should be assessed, but so should the employees in key functional areas who may be essential throughout the integration process and beyond. According to a recent study by a multinational professional services organization, turnover of employees in acquired companies nearly doubles in the two years following an acquisition. And as we know, it is typically the most competent employees who are among the first to leave. Therefore, talent assessment criteria need to be defined, and key employees throughout the company identified so that there is not a loss of vital knowledge. Buyers should develop effective retention strategies and analyze the bench strength of the emergent organization. They should consider the repercussions to the new entity if several key employees decided to leave. What risk, if any, does that have on the ongoing functioning and governance of the enterprise? Retention strategies must be developed and implemented for companies to fully realize growth and cost-savings targets and drive value creation.
Communication Similarly, it is essential for buyers to develop a robust communication strategy. And it shouldn’t just be about announcing the deal. It should be proactive, ongoing and thoughtful communication that manages expectations, facilitates change management, and allows employees to understand the process and how they will be impacted. Some changes may be extensive, so buyers need to communicate as frequently and transparently as possible. When there is a lack of communication, employees will fill the void, and usually with the worst-case scenario. It’s important to get ahead of this and let employees know how the sale will impact them personally from Day 1 post-close, and beyond. One of the best and most effective ways of mitigating risk on the people-side of the business is by developing and implementing an effective communication strategy.
Culture Conflicting corporate cultures can derail a transaction and threaten post-merger objectives. Integrating two separate businesses is hard. And culture is difficult to define. It can be seen in the beliefs and values of an organization, the management practices and working norms, the policies that may or may not be outlined in a handbook, the degree of hierarchy in the organizational structure, or the way that decisions are made. It has an overarching influence on how the work gets done. It is intangible, evolves over time, and cannot be forced. That’s why it’s so important to identify differences in culture early on and outline how they relate to and support the strategic priorities of the deal valuation. This begins by having a good understanding of both cultures, which can then allow leaders to cultivate an effective integration.
Don’t Leave It to Chance
What is the most critical take-away about managing the people-side of an M&A transaction? Buyers need to plan effectively from the start to fully realize growth and cost-savings targets and achieve expected results. The benefits of conducting HR due diligence early are considerable. At its most basic, it helps buyers avoid the most obvious pitfalls. But it goes deeper than that by potentially allowing them to realize expanded revenue growth through achievement of synergy targets and goals; improve productivity and profitability through increased employee retention and engagement; and drive value creation through intentional change management, effective cultural integration and talent retention.
Let’s face it, people issues crop up throughout the M&A process, but are typically most evident during integration, and by then it may be too late. Don’t be blindsided by what may be perceived as non-financial or non-critical risks. Everything comes with a cost.
A successful deal starts and ends with your people. Increase your potential for success by considering the human capital issues early on. Focusing your efforts there can be impactful in maximizing overall growth targets.
Miller Cooper has the resources you need to beat the odds. If you are interested in learning more about the role HR due diligence plays in M&A transactions, reach out to our HR Due Diligence consultants. We can assist you in assessing potential risks, developing plans to mitigate them, and support the people-side of your business throughout the transaction process. We are both consultants and implementers. We offer customized analysis and individualized consultative services to meet your specific needs and support a seamless transition.