by Tom Allen
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An M&A strategy might make perfect sense on paper, but the core driver – people – can easily be ignored. While for many organizations hard facts relating to revenue and costs lie at the heart of the deal rationale, the less tangible, human-side of M&A can be equally as important. Indeed, in today’s era of M&A, intangible assets (people, knowledge, etc.) can be the driving force behind value creation – Google, Facebook and Dropbox’s talent-driven "acquihire" M&A activity in recent years is testament to this.
Intangible issues such as those relating to people are labeled as “intangible” since they are difficult to quantify, measure and deal with. They are often an after-thought to the minutiae of spreadsheet detail, yet it is imperative that the human side of M&A is not ignored, since it is one of the key components to value creation. People, communication and culture-fit are identified as the most critical factors to M&A success, but seemingly the most difficult to get right.
While for many organizations hard facts relating to revenue and costs lie at the heart of the deal rationale, the less tangible, human-side of M&A can be equally as important.
In a 2015 study conducted by Mercer (the world's largest human resources consulting firm) of over 300 M&A professionals, covering close to 450 M&A transactions (~60% of which were cross border), 55% of buyers (with over half being private equity and operations teams, or in corporate development, finance and operational leadership positions) cited overcoming people issues as a significant hurdle to the overall success of M&A transactions. Employee retention was given as the number one issue, followed by cultural fit and leadership team concerns. Leadership team selection and similar considerations ranked as the most critical issue of HR due diligence – yet only two-thirds of those surveyed reported conducting formal leadership assessments during HR due diligence (Source: www.mercer.com).
Evidence therefore suggests that, to maximize deal value, those undertaking M&A projects must devote sufficient time and resources to managing and mitigating people-related risks across both due diligence and post-merger integration.
Have the Difficult Conversations Early
Employee retention can be a challenge when it comes to M&A – many employees perceive a deal as a threat. Characteristically, many deals are associated with retention issues – often as a result of negative beliefs held by employees (rather than extreme rounds of lay-offs). Negative views can be held due to uncertainty over the future of the organization's future direction, job security, perceptions of leadership credibility and a sense of confusion attributed to a lack of effective communication.
Communicating with employees and creating a culture in which they can succeed, post-deal, are both fundamental to successful integration and value creation. M&A often leaves employees and management feeling left in the dark and anxious about what the future holds. Poor communication from the top filters down and can prevent managers possessing the necessary information to answer questions asked by employees. In most cases, it is inevitable that many employees will be left questioning how a deal will affect them, what support they will receive throughout the integration process and whether a role in the new organization will exist for them at all. Ultimately, lack of communication can promote uncertainty and trust issues – therefore having a detrimental effect on employee engagement and retention.
The following best practice principles can be followed to reduce the likelihood of retention issues becoming apparent during the integration phase of an M&A project:
- Provide sufficient access to information – for instance, management should communicate why the deal is advantageous and ensure that the message resonates with employees;
- Monitor workloads – during the integration process employees are often required to take on additional workloads. It is imperative to ensure that employees feel they can cope and know where the support channels are in times of need;
- Provide opportunities for on-going learning and professional development – the cost of human capital attrition can far outweigh the costs of training and development. Furthermore, such initiatives give the message that employees are valued;
- Meet regularly with employees via one-on-one meetings or departmental catch-ups. Discuss with employees how they are coping in their new role and with the increased workload;
- Provide tangible performance management objectives and incentivize key talent;
- Encourage employee focus groups;
- Provide sufficient managerial support – managers can be role models and play a critical part in the retention of employees during the integration process;
- Develop employee engagement surveys to monitor employee sentiment of the deal.
A balance of support, goal-setting, access to information and the provision of opportunities for on-going learning and professional development can support the message that employees are valued.
Keep Information Channels Open
A lack of information over whether employees will keep their jobs is likely to engender fear in employees. This can easily create a negative atmosphere of distrust of management and unhealthy competition for jobs (employees may sense that their co-workers or counterparts from the other organization may be stealing their jobs). This can bring about annoyances, resentment and generally result in employees being less effective in their working practices during the critical integration period.
To overcome the above, management must not only be provided with adequate information relating to the deal, they must be trained on how to deliver it. They must learn how to coach others and convey a sense of empathy when it comes to the feelings and well-being of their staff. They must learn about change management and how to deal with resistance (which is an inevitable part of integration). Employee productivity can often dip where staffing decisions are being made. The fear of making a mistake and being exposed can stifle creativity and efficiency, for instance, as employees become increasingly cautious.
Once the integration process is underway, an organization can easily forget to take stock and check its progress. It can be challenging to redirect the integration process, but it is essential to do so to achieve the desired outcome – thus, communication is key.
The Art of Communication
The art of good communication lies in keeping the balance between addressing fears and instilling the vision for the future of the organization. It is important at this stage to bring out the narrative around the deal, how it came to be and how it will ultimately be beneficial.
- Be clear on whether the deal represents a merger or an acquisition;
- Articulate the vision/mission and goals, and be consistent in the message. Avoid wasted time where employees speculate as to what is happening – potentially leading to loss of morale and productivity;
- Translate the message to different parts of the organization if necessary – the language used in communicating to the finance team is likely to differ from that used in addressing IT;
- Seek objective feedback from employees;
- Set clear timetables and ensure employees know what they are accountable for and to whom;
- Consider outside help from external advisors/consultants, if necessary;
- Design team and assign leaders who can be used as sounding boards during the integration process.
Communicating the message of M&A is an art - it may be necessary to translate the message to different parts of the organization.
Managing People: Risks & Opportunities
During the integration process, it is essential to keep employee turnover low for both business continuity and to realize the intended benefits of a deal. Additionally, the financial implications of recruiting new employees can be significant. Perhaps most fundamental, however, is that failure to retain employees can result in a loss of knowledge/attrition of human capital and have a damaging effect on overall operations. This is likely to have a domino effect further along in the organization and exacerbate the negative sentiment of an already disenfranchised workforce. Companies considering M&A should therefore adopt a long-term vision to talent retention.
HR are seldom involved with the appraisal of target companies as part of the M&A process. However, if they are not privy to the M&A strategy and the appraisal of talent and culture in the early stages of deal formulation and due diligence, they will have to play catch-up during the integration process. This will inevitably result in the need for a reactive approach to solving problems, which could have been avoided with some up-front work. Accordingly, HR should work closely with other parts of the organization to ensure staffing decisions are made with strategy in mind. This can help in retaining key talent (for instance, via the alignment of pay and benefits).
During the integration process, the selection of employees will be made in context to the operational requirements of the new organization. If layoffs are made too hastily, human capital can be lost. Paradoxically, the process of recruiting new employees (or even re-recruiting ex-employees) can cost significantly more than retaining original employees.
Management often fail to consider how little control they have over the success of an M&A strategy. While they, shareholders and stakeholders will advocate the deal rationale and put in place the factors necessary for the deal to cross the line (via a costly due diligence and integration process, etc.) it is ultimately the people at the grass-roots level of an organization who must do what is asked of them for a deal to be successful. Taking the time to consider the human-side of M&A is therefore critical to maximizing the chance of deal success and value creation.