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HR's Role in M&A: Creating 1 Team from 2 Companies
Experts believe HR should play a key role at each of the four stages in the M&A process—predeal, due diligence, integration planning, and implementation. This article explains this critical issue.
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Compatibility is important in any marriage, including a marriage between two companies. Yet, until recently, the course of most mergers and acquisitions (M&As) went strictly by the numbers. Executives would analyze financial statements to determine whether buying a company would increase market share, add new capabilities, or provide other competitive advantages.
But the reasons for many M&A failures have more to do with people than with money, according to consultant Jeffrey A. Schmidt, author of Making Mergers Work: The Strategic Importance of People, who writes, “About one in five deals is truly successful, half are neutral, and the other half range from modest failure to train wreck.”
A 2001 survey by the Society of Human Resource Management found that only 43% of M&As achieve their goals. Reasons for failure include:
Inability to sustain financial performance
Loss of productivity
Incompatible cultures
Loss of key talent
Clashing management styles
Potential solutions to many of these issues can be sourced to human resources (HR), so it’s no wonder HR managers are playing more prominent roles in the M&A process. But what is HR’s new role and how should HR professionals prepare for it?
Experts believe HR should play a key role at each of the four stages in the M&A process—predeal, due diligence, integration planning, and implementation.
Predeal: Planning For Success
At the predeal stage, the acquirer develops criteria for acquisition candidates and makes a list of targets.
“People, organizational, and cultural issues need to be addressed when scouting acquisitions,” explains Schmidt. “Without HR’s involvement, we’re left to hope the people with a seat at the table are savvy enough to bring that perspective to bear. Typically, they lack the training and the instincts.”
“HR needs to have a vote not to go through with an acquisition because the workforces are incompatible,” consultant Dean A. Black, SPHR, adds. “Trying to mix a staunch union shop with a nontraditional workforce, for example, won’t work. If you force it, there’s going to be war.”
Sometimes financial managers resist HR involvement. Schmidt recalls the chief financial officer of a software company trying to keep the vice president of human resources from participating on the integration team. Working on her first acquisition, the HR pro found that the targeted company had a large underfunded pension liability, which killed the deal. The irony of the HR professional’s finding the target’s financial Achilles heel was not lost on the chief executive officer, who insisted that HR play a key role in all acquisitions from that point on.
Due Diligence: Revealing Reviews
When he became an M&A consultant, Black recalls, he had a three-page checklist of issues HR needed to consider when performing due diligence. Now the checklist is 35 pages long. It includes, for example, a review of labor agreements, benefits, compensation plans, and other documents that might reveal hidden costs.
“I had a recent scenario where the client’s payout of accrued sick and vacation time hadn’t been considered,” Black says. “The company took a $4 million hit. It affected profitability for four years.”
Dennis L. Roberts of Roberts and Company, an HR consultancy, says HR needs to be able to assess risk by looking ahead. HR must answer far-ranging questions, such as: Is the company being acquired highly automated? Where are the skill gaps when two functions are combined? What are the differences in compensation systems? How much debt will the acquiring company take on?
HR also needs to consider the costs of retention and layoffs. “You’re buying human capital,” Black says. “You’ll need to consider everyone in the workforce, and buy them in or buy them out. When you tell someone who is important to your organization, ‘Here’s $100,000 to stay,’ you need to build that into your cost model. If you don’t pay them to stay, you pay them to go. Unless you pay for outplacement services and severance, you’re going to have disgruntled employees.”
The intellectual knowledge that human capital represents is often essential, according to Janice Seo, HR director at Canon Business Solutions-Northeast, Inc., who participated on many integration teams before joining Canon.
“Typically,” she says, “companies being acquired have key strengths that can’t always be valued in dollars. There may be key people you can’t afford to lose. Sometimes in the first year, you need the intellectual knowledge of a president. You have to figure out how to keep the presidents of both companies. That requires tremendous skill.”
HR also needs to consider the longterm value of the merger. “An effective due diligence process needs to go beyond the obvious,” Schmidt observes. “HR needs to consider what creates long-term value. What is the talent pool, the age of the workforce? HR needs to be able to answer the question, ‘Can we create more value through this combination than we could by remaining independent?’”
Integration Planning: Looking Ahead
At this stage, the HR manager plays the role of project manager, developing plans to combine everything from benefits programs to information systems. Planning can be even more exhaustive than due diligence. Schmidt says he’s used a line-item integration program including more than 20,000 activities.
However, he cautions, “Once the deal is done, everything else pales in comparison with getting the people issues right.” Schmidt adds that HR should be aware of opportunities for improvement. Instead of combining two functions, “there may be an opportunity to make a quantum leap forward,” such as with the purchase of new information systems.
Planning also becomes political, with employees from both companies struggling for power, knowing redundant positions will be eliminated.
“Sometimes you don’t overcome the politics,” Roberts says. “When you do, it’s a function of leadership. The CEO needs to let it be known that each job will be filled by the best person.”
Implementation: Changing Easily
Implementation must take place quickly and appear seamless to customers.
“Change is gray and painful, and it’s something you need to go through day after day during a merger,” warns Seo. “It’s extremely distracting to both businesses, so you don’t want to prolong the uncertainty.”
Because expediency is crucial, Schmidt breaks tasks down into what should be done in the first day, week, month, and year.
“On the first day, management needs to meet face to face with employees,” he says. “Employees have to see and hear them. Management has to address their most pressing questions and concerns. You do not have to have answers for everything, but as answers become clear, they must be communicated. Once employees know commitments are going to be upheld, they’ll begin connecting with the new leadership and the new company.”
During the first week, the combined company needs to mobilize its integration teams, regionally and globally, and communicate decisions. In the first month, the integration team needs to sort out organizational issues. Management should be in place, and employees should be notified of layoffs and changes in policies, compensation, and benefits. Within a year, 80% of all activities should be completed, although technology applications and other final changes may take as long as three years to implement.
Throughout the process, HR should measure and benchmark results, making adjustments where necessary. “You can set up a mechanism for pulse surveys,” Schmidt suggests. “You can get a real-time measurement of what’s going on in the workforce and the degree of acceptance. Based on results, management can take action and keep things under control.”
Frequent, personal communication is also key. “HR has to be on the front lines,” Black says. “You can’t sit in an office and handle it. You have to find out what the rumors are and put them to rest immediately.” He recalls a merger in which an employee who was unhappy about being transferred to a new location started a rumor that the combined company was reducing employee benefits. He estimates the resulting turnover cost the company $5 million.
Doing It All
The good news for HR managers is that M&As give them an opportunity to play a leadership role in the company. The bad news is that much will be demanded of them.
To be taken seriously as business leaders, experts agree, HR professionals will need to learn more. Can HR develop the financial acumen, the communications expertise, and the project management know-how, on top of their HR expertise, to play a leadership role?
Roberts suggests that HR managers spend time finding out what’s important to company leaders and how HR initiatives can help. He recommends earning project management certification, and learning how to identify acquisition candidates, how to integrate companies, and to understand the change management process.
“If you’re seen as a compensation expert who doesn’t know how products are made,” Roberts says, “you won’t be looked at as a full business partner. You need to be credible to the senior executive, so that when you walk into his or her office, you’re seen as someone who can drive the business.”
This article originally appeared in Connections® magazine, Volume III, Issue 3.
Unless otherwise noted, the opinions provided by the authors and the experts answering questions are not necessarily those of Fidelity Investments.
Fidelity Employer Services Company, a division of Fidelity Investments Institutional Services Company, Inc. 82 Devonshire Street, Boston, MA 02109 354052
submitted by: Dean A. Black, SPHR, CPC, CAPM dablack@justaskhr.biz
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