Mitigating People Risk in Major Transactions

May 08, 2014

Gerald was head of HR for an international company and had worked his way up from an almost entry level position. He was good at what he did; he knew the company and the industry. He was trusted as a provider of sound advice and he considered, as much as any HR person could, that he was "at the table".

Consequently he knew he should have seen it coming; there were too many closed door meetings between the CEO and strangers; the CFO and VP Business Development taking mystery trips. He'd been distracted with the executive compensation review and a union issue at one of the overseas operations. He hadn't put it all together, he hadn't anticipated and had missed the chance to counsel his colleagues.

That morning he had been "brought over the wall" and on a need to know basis had been informed along with a select handful of other senior managers, that his company had agreed to purchase a significant competitor. He was at first pleased, this was great progress and a deal that had been envisioned for some time, but why hadn't he been included at the outset? Now it was too late, the opportunity to identify people related liabilities that may have affected the purchase price had passed and it was late in the process to plan important post completion tasks. He was disappointed. He clearly hadn't after all, done enough to be truly at the table and his contribution wasn't considered valuable enough to be considered at an earlier stage.

He metaphorically wiped his bloody nose; "it wasn't too late, I can still help mitigate some of the risks and work to ensure a successful integration". But what if we discover people issues that suggest we just shouldn't have bought this company?

Unless you are a company that buys and sells companies regularly, assessing and integrating organizations is not something that the average executive does every day or even every year. Executives are out of their comfort zone in major transactions and it is recognised that they will want to consult with the investment bankers, business appraisers and the synergy experts. But typically HR not considered as important. When they do become involved it is often late in the process, the issues not considered significant enough (or perhaps understood well enough) to be a matter for due diligence and preplanning. Usually it is without the availability of a budget for external experts that will test the HR lead more than other colleagues, undertake important tasks with which they may have had little if any prior experience.  

Gerald was smart enough to know what he didn't know. He didn't integrate companies or assess hard liabilities every day. He was good at identifying threats to culture but not "expert" and for a transaction like this with so much value at stake he needed "expert" insight. He needed an objective guide who had worked on many similar transactions, who was going to identify risks, threats and opportunities that he could fold into the master integration plan. What he didn't want was the sort of help that tried to convinced you that the sky was falling with the aim of generating higher consulting fees. He had heard the stories about fees having no limit when a deal just had to get done! He also wanted a one stop shop; a group of experts that weren't phased at the timing of their involvement, had stood in his shoes, understood all of the inter related aspects of a merger (liability calculation, risk assessment, talent retention and cultural integration). He knew enough to be able to identify high level challenges but did not possess the expertise or the resources to address them quickly.  

At this stage there are three significant missteps that Gerald's company has made in preparing for this transaction:

  1. Not using all available resources - They assumed that HR had nothing to contribute until the deal was virtually done
  2. Damage to Engagement - They omitted to include an important contributor and that ever so slightly, has lessened his engagement and loyalty
  3. Ineffective Due Diligence - They may have exposed their company to liabilities and performance risks that could have been anticipated and avoided

Many acquisitions do not deliver the expectations made to stakeholders regarding synergy with many being out and out failures. Most of the causes are people related.  So why are M&A teams so reluctant to bring HR colleagues into the process at an early stage? Here are two reasons:

  • People issues are so fundamental that top leaders believe that they are at the core of what they do and therefore need little help in this area
  • HR has nothing to add and that it is not strategic - they manage people processes and not the big business issues

Soft Due Diligence

Gerald realised the success his company was currently enjoying was the result of a lot of hard work around culture and engagement. He only knew about the culture at the target company anecdotally. He had been able to recruit a few people over the years and had learned that while the environment was positive it was different. A number of the divisions were going to be merged, including the one that was regarded as the engine room of his company and had contributed most to past profitability. Understanding the culture that was going to be inherited was going to be critical when it came to merging the two functions. Allowing an "us and them" mentality to emerge would take years to correct and the resulting inertia would destroy the identified value in the merger and damage his company's ability to continue to generate profit.

If culture assessment is completed at all in the pre-offer phase it is usually cursory, with only visible characteristics identified. Deeper analysis can help identify the causes for the way individuals feel about their employer.  Organizational culture is formed and maintained through many channels but in particular leadership style, communication, terms, conditions and benefits of employment, performance and development. Analysis of these and other features will not only identify the culture but also the types of individuals attracted to the organization.

This analysis should be addressed early and before any attempt at merging respective teams is attempted. The analysis needs to be timely and factor in the impact on attitude and engagement of the announcement of the merger. Being acquired will do much to affect confidence and commitment particularly if the businesses have been fierce competitors. The sense of loss will need to be repaired and quickly with a vision of the new opportunity.

Gerald was informed that the pre-offer analysis had identified the functional leaders in the new company and that these were all protected by retention arrangements that would allow time to assess their contribution to the newly merged businesses. Gerald new however that it was not the top team that caused employees to do what they were good at every day. Spattered throughout the organization there were going to be five, seven or ten managers or supervisors who were the true influencers of employee behaviour and engagement who were likely not covered by retention arrangements, who would be most affected by a merger and who right now, were likely feeling neglected and were vulnerable. Until his company had had the opportunity to have a long look "under the hood" and understand how this business really worked it was going to be critical to identify and keep these individuals in place as long as possible. That process would need to start now.

An independent voice inserted into this process can be an advantage. Key employees in the target organization may not want to risk opening up so early to their potential new boss which may be particularly difficult if they were sworn enemies only a few short weeks earlier. An anonymous interview or survey process could help quickly identify cultural indicators, levels of engagement and key contributors without appearing threatening.

Gerald suddenly remembered the organization's people in the international operations in the US and France. So often left out of the communication process for normal business matters they would for sure have been overlooked with detailed explanations of the synergies about to unfold. Did the acquired business have operations in these or other countries too? How would the type of transaction be interpreted in these markets? What was the importance of these markets to the new strategy? Gerald did not have the resources to timely manage the communications and risk assessment let alone manage the message in a way that was culturally sensitive in the context of the local market.

Out of sight out of mind is how satellite operations often feel when HQ is involved in a merger. Attention and focus is centered around the top teams in the home offices. This can be at odds if the merger rationale anticipates growth from international expansion. Some of the individuals that Gerald is keen to identify will be local office managers in key markets. Retention arrangements may need to be very different in those markets because of employment or tax law differences. To be effective they will need to be tailored to local needs. Understanding how local employment law protects employees will be critical as well as understanding the rights and obligations that are triggered. Most of all ensuring that a consistent message is shared with local employees using the appropriate terms in the local language.

Hard Due Diligence

Gerald was confident that whoever had completed the pre-offer assessment would have ticked off all of the important people liability boxes related to severance, benefits etc . These were unlikely to be deal breakers but in aggregate may have represented a bargaining chip in settling the purchase price.  

He was also confident that no one had looked at the opportunities from combining employee risk. The new scale would present more choices in risk management and result in cost reductions.

He was absolutely certain that no work had been done on understanding and transitioning compensation incentives, re-orienting employment agreements, transferring and extending insurance coverage, the consequences of inherited retention agreements, budgeting of same and scheduling their expiry dates into the talent management plan. As he walked back to his office the to do list became longer and he thought how better prepared he would have been had he been included earlier. No wonder so many transaction fell down on the people issues.

Generally, the primary goal of an acquisition is to capture a substantial opportunity and no one is likely to do a better job of that than the architects who identify the deal, usually the top leadership teams. But often in their eagerness to create value companies overlook the down side and how these risks might be reduced.

Challenges will increase as the organizations get closer together and will be compounded if integration is not planned and the hurdles anticipated. Important acquisitions don't happen every day and therefore there should be no hesitation in involving external HR expertise. This is a small investment compared to the value at stake if it is not done well. Involve your internal expert and if necessary provide a budget to dive deeper with external expertise to identify potential productivity risks and where opportunities exist. 

M&A practitioners talk about the 100 day rule within which organizational change needs to happen if the damaging consequences of inertia are to be avoided. Left any longer and perceived injustices will linger and will do more to undermine engagement and create value destruction than any structural deficiency.

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