Mergers and acquisitions (M&As) are ways businesses can consolidate companies or assets to gain competitive advantages, stimulate growth, gain access to the best talent and/or resources, increase market share and attain a higher level of competition. While mergers and acquisitions are similar in some ways, there are a few major differences. Mergers combine two separate businesses into a single new legal entity with one common owner and management. An acquisition is when one company is fully absorbed into another usually by purchase, and the acquiring company assumes control of the operations and assets of the acquired company. After the economic downturn of the pandemic, mergers and acquisitions reached historic highs. Several market intelligence platforms such as CapIQ and Refinitiv reported $5.1 trillion worth of M&A transactions in 2021, up from $3.8 trillion in 2020 and the highest level since 2015. It’s likely 2022 will continue to see increased M&A activity through year end. While much attention is paid to the legal, financial and operational elements of M&As, HR issues are often overlooked putting the whole transaction at risk of failure. David Kidd, partner at Egon Zehnder, reflects on the importance of HR to successful M&As:
Many mergers do not create the shareholder value expected of them. The combination of cultural differences and an ill-conceived human resource integration strategy is one of the most common reasons for that failure. Given the well-publicized war for talent, I am constantly surprised by how little attention is paid to the matter of human capital during mergers.
It cannot be overstating the critical role HR plays in M&As. Both business transactions involve complex processes that affect all aspects of an organization, and perhaps most importantly, its employees. When involved at the onset and throughout the integration phase, HR can serve as a valuable resource for strategic planning and disseminating critical information.
Due diligence is an inevitable part of the M&A process and involves gathering and analyzing critical data and information so those involved in the deal fully understand where each party stands. Due diligence has historically meant the collection and evaluation of concrete data such as facts (contracts, employment agreements, marketing plans, etc.) and figures (balance sheets, financial statements, projections, etc.). What about the significance of people issues in M&As, or, in other words, the human side of things? Those involved in the deal must understand the organizations’ cultures, employees’ roles and capabilities and how the transaction is going to affect all employees. Gathering and analyzing “people data” or conducting “soft” due diligence has become a growing trend; it’s contribution to a successful merger or acquisition undeniable. Here are ways in which HR manages soft due diligence.
Employee Demographics and Organization Structure
It’s essential to have a thorough understanding of employee demographics and organizational structures for both the acquiring and target companies. Data that needs to be collected includes an employee count, job titles and descriptions and employees’ ages, salaries and work locations. An accurate and current organizational chart is key for determining functional reporting relationships. It’s also important to understand the physical office layout as that will likely change during restructuring.
Benefits and Compensation Structures
It’s a time-consuming but critical task to research and compare benefit offerings in the wake of a merger or acquisition. Which company has the more robust benefit offerings? Do huge disparities exist between the companies’ benefit plans? Will the employees of the target company be required to switch to the acquiring company’s benefits or vice versa? What costs are associated with the target company’s benefit plans? When considering these questions, close attention should be paid to what employees could view as a reduction in benefits they currently enjoy. Brokers can assist in perhaps replacing one benefit reduction with a gain in another benefit area. Handling retirement benefits can be particularly challenging when dealing with questions concerning defined benefit/contribution plans, vesting and over/under funding of plans. Depending on the circumstances of the transaction and the existing compensation structures of each party, HR must equalize disparate compensation policies or create an entirely new structure that meets the goals and needs of the new organization. Benefits and compensation will be at the forefront of every affected employee’s mind once the deal is announced so timely and frequent communication with employees about changes is paramount.
It’s important to know whether there are any employee lawsuits pending against the target company and whether the target company engages in practices that potentially violate federal and/or state employment laws. Common areas of litigation that should be investigated include wage and hour and employee benefit issues, misclassification of employees, leave issues (e.g., FMLA and USERRA) and integration of affirmative action plans and immigration compliance procedures. Varying state employment laws can be problematic and lead to legal issues particularly in this age of remote work where employees may work in several different states. The legal team should ensure it’s clear who is liable for any potential claims that occurred before the transaction through the seller’s representations and warranties and an indemnification clause.
One of the most difficult consequences of M&As is managing redundancies in the workforce and determining who will be reassigned or laid off. To mitigate liability, it’s helpful to have a formal process accounting for objective factors such as experience, performance and seniority when deciding who stays and who is laid off. Arbitrary lay off decisions may lead to claims of discrimination based on age, gender, race or another protected class. Of importance is also the Worker Adjustment and Retraining Notification Act (WARN Act) that may be triggered if a large number of positions are eliminated. The WARN Act requires an employer to provide written notice to employees in advance of covered mass layoffs. Most state laws differ on what number of layoffs trigger the notice requirement and how much notice is required so it’s critical to check the laws of the states in which positions will be eliminated.
Integration of Corporate Cultures
One of the top challenges in M&A transactions is integrating corporate cultures between the two entities involved in the transaction. Even though cultural similarities may exist, there will always be a degree of misalignment in the beliefs that guide and influence all actions in an organization. Assuming the two cultures will merge seamlessly or forcing one culture on the target company can be a crucial mistake that could derail the deal. A better approach is to merge the two while honoring the fundamental goals of the merger or acquisition. A starting point is to identify and preserve the most important elements of each company’s culture. This can be done through focus groups to determine what’s important, valued and unique to both organizations. Once the deal is on the table, it’s easier for each company to work together openly to ensure a more seamless cultural transition. It’s helpful for the acquiring company to spend time learning about the targeted company’s values and behaviors through onsite meetings and visits. Important cultural elements to note and consider range from remote work policies to appropriate office attire to organized corporate social events. Once an announcement is made about the transaction, other tools such as employee surveys can be used to further drill down on cultural issues and norms with employee input. When leaders from both companies analyze the data from an employee survey, they can identify areas of cultural similarities and differences, define values of the new company and expectations for behavior and develop a plan to move both organizations to the new culture.
M&A Post-Merger Integration
Once the deal is executed, HR continues to play a critical and strategic role in post-merger integration. There are numerous administrative tasks to complete such as drafting new HR policies and procedures, updating organizational charts and job descriptions and benefits administration. Two key areas in which HR is instrumental in facilitating a smooth post-merger integration is in the retention of key employees and staff communication.
Retention of Key Employees
An organization is only as good as its people. In some cases, the whole point of a merger or acquisition is to gain access to highly skilled employees. Identification and timely placement of key employees is a critical factor in beginning the stabilization process post-merger. Failure to do so creates uncertainty, fear and internal competition potentially leading to the loss of valuable employees. Acquisition team members should gather performance reviews and interview third parties with knowledge of employees’ track records and work styles. Much can be learned from simply spending time with counterparts in the target company to get a sense of whether he/she will be a good fit for the new organization. Leadership should communicate its intentions to key employees as soon as legally feasible in the merger process, conducting confidential meetings with key employees pre-closing if possible.
Once key employees are identified, the challenge is to retain them. Some executives may have an ownership stake in the company that could result in a big payout post-merger, making retirement or resignation a desirable prospect. Others may feel unsettled, resentful or anxious after the merger and opt to leave for a different opportunity. Further complicating matters is when leadership wants to retain some employees long term and others for only a few months or years. In all these scenarios, transparency is the best approach. Leadership should tell employees exactly their hopes, whether it’s for the employee to stay for a few months to aid in the transition or for the long haul, and provide incentives to encourage agreement. One approach is to offer retention packages or bonuses to key employees. One way to manage this process is for business unit heads and HR partners in each organization to compile a list of the top 2% of critical talent in each unit based on performance, critical roles and those with high potential for future success. HR, the CEO and integration team leader then decide who among the 2% should be offered a retention bonus based on the impact and likelihood of each employee’s departure. Non-monetary incentives are also helpful. An employee who is told of his/her value to the new company and its growth is more likely to remain.
A merger or acquisition can cause fear, uncertainty and anxiety for many employees. Employees wonder if they will be a part of the new organization, and if so, in what capacity. Questions surrounding compensation and benefits will be at the front of employees’ minds. HR must ensure a well-planned, thoughtful communication strategy is in place from the beginning. Plans and decisions can never be overcommunicated during a merger or acquisition. Even when news is bad, it should be delivered expeditiously with care and concern for those affected. While the urge to sugarcoat or downplay bad news may arise, transparency and honesty is key. It’s ok to say, “We are not yet sure how to answer that.” It’s better to be straightforward than to potentially give employees inaccurate information. Clearly communicating up-to-date information will stall or even stop the rumor mill and give employees a sense of control over their situation. Some ways in which to develop a solid M&A communication plan include:
- Identify all audiences. There are many stakeholders in a merger or acquisition, all needing different types and levels (macro, micro) of information. Identifying these groups and the proper way in which to communicate with them is a critical step.
- Provide notice to employees who will remain and who will not as soon as possible. Terminated employees should be given departure information on severance terms, COBRA and outplacement services quickly and respectfully.
- Develop a multi-channel communication approach. News can be delivered through multiple channels such as video, town halls, written documents/letters, newsletters, group meetings, intranet and face-to-face. A comprehensive communication strategy will employ multiple communication channels to ensure information is widely disseminated.
- Formulate a compelling story. Employees are less interested in corporate profits than how a merger or acquisition will affect them personally. It’s important to craft a reason for the transaction that resonates with employees, making their buy-in more likely. Will the deal lead to more opportunities for professional development? Will the new organization offer better benefits? Are there ways in which the deal with enhance corporate culture? Focusing on and relaying a positive message should energize and retain key employees.
- Anticipate and answer employee questions. Answers to FAQs can be posted on the company’s intranet. Employees should be encouraged to direct further questions to their manager or HR.
- Provide regular (at least weekly) updates. Keep employees in the know by highlighting transition projects that are proceeding well and by action items on the horizon.
- Reassure employees that challenges will arise and be addressed expeditiously.
Communication is essential to a successful transaction and post-merger integration. Consistent and reliable messaging can alleviate fear and anxiety and help facilitate cohesion between two new workforces.
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News of a merger or acquisition is usually about improved finances, streamlining services and staff and higher returns for shareholders. What’s often overlooked is the transaction’s impact on people who lose their jobs or who find themselves working in a completely new environment among new faces and leadership. Employees accustomed to one set of corporate values that drive every aspect of their professional lives may have to work in a completely new corporate culture with different norms and customs. Change is stressful and arguably no business transaction results in more change than a merger or acquisition. HR is a vital resource during a merger or acquisition, but such transactions require a level of HR sophistication possibly missing in some organizations. Smart HR consultants are well experienced in supporting an organization from the initial talks of a merger or acquisition through a successful post-transaction integration. If your company is positioned for a merger or acquisition or possibly has been through a reorganization and encountering some rough patches, call Smart HR today for help.