DEAL MAKING IS BACK. IS HR READY?

DEAL MAKING IS BACK. IS HR READY?

After a few quiet years, merger and acquisition activity is humming again. How well will people issues be handled this time around? A big part of the answer depends on HR. If HR is deal ready, key employees and leaders will be more likely to stay, remaining engaged in making both the deal and the underlying business successful. Peoplerelated savings and opportunities for creating new value are likely to be realized sooner rather than later. But if HR is not ready, employees are more likely to leave, taking industry knowledge and customers with them. Or they may stay and drain productivity as they struggle with uncertainty about the effect of the deal on them. As a result, expected savings and new value are either lost or so delayed that their impact is compromised. There is much that HR executives can do to ensure success. As merger activity gathers momentum, HR must assume an M&A ready stance especially in companies that have not experienced much deal-making activity. HR leaders who have anticipated and planned for mergers who are M&A ready can more easily smooth employee transitions and reactions during and after the deal. As importantly, they can help their organizations preserve client relationships and deliver the boost to longterm shareholder value promised in the press releases. Why talk about this now? Because the consequences of flawed mergers or acquisitions show up quickly in lost productivity, customer defections and stalled stock prices and because HR leaders and their staff are better placed to influence those outcomes than they have ever been before. By our estimation, the average US company now invests the equivalent of 40% of revenues each year in its workforce expenditures that almost always increase whenever turnover increases. The problem is amplified among executive ranks: Research indicates that executive turnover rates are twice as high after a merger as before one even nine years after the deal. 1 The average US company now invests the equivalent of 40% of revenues each year in its workforce expenditures that almost always increase whenever turnover increases. 1 Krug, J. Why Do They Keep Leaving?, Harvard Business Review, 2003. 2

M&A READINESS IS VITAL HR s M&A readiness is especially relevant now because the criticism of deals gone bad is more widespread. At least two-thirds of M&A deals fail to build real long-term value for shareholders. 1 2 More than one-third of surveyed executives who ve done major deals now acknowledge that they got too caught up in the bidding process to do effective due diligence, raising significant questions about the attention given to post-closing integration. 2 3 Such issues take on new importance in today s deal-making climate. M&A readiness for HR is vital because the drivers of the upsurge in deal making are still strong. Foremost among them are plump corporate cash hoards and solid stock valuations, a huge backlog of investment capital among private equity firms, and greater liquidity on the part of the banks. And new and assertive acquirers are appearing on the global stage. HR leaders who have been through a merger or acquisition know they get pulled in many different directions: C-suite executives look to them for strategic advice on the people implications of the merger and to strengthen the alignment between the organization s human capital strategy and its business strategy. Managers seek direction on changes affecting their operations and their staff. Employees expect quick, honest answers to questions about how the deal will affect them, and they look to HR to step up its support for them. HR itself has to decide how it will be managed after the deal, raising hard issues such as in-house versus outsourced activities and shared services versus decentralized operations. Finally, management wants to know how HR plans to manage the change without disrupting day-to-day operations. 2 Why Mergers Fail, The McKinsey Quarterly, 2001 No. 4. 3 Harding, D. and Rovit, S. Mastering the Merger, Harvard Business School Press, 2004. 3

ASSESSING YOUR M&A READINESS HR s effectiveness during any merger or acquisition is rooted in its: Understanding of deals and the deal process Ability to reinforce relationships between managers and employees Skills in project management, change management and integration Technology capabilities Ability to supplement its capabilities and skills during critical periods HR s M&A readiness is also a function of how well it can field effective processes for securing institutional knowledge, ensuring compliance, leveraging electronic communications and managing recordkeeping. So how can HR departments become truly M&A ready? In our experience, it is important to follow a structured three-step process. Step 1: Assess your deal needs. This initial step calls for answers to some fundamental questions: What s the expected volume of deals? How complex are the deals that are most likely to happen? How did HR perform on prior deals? What did it do well? What should it do differently? Is there the capacity to take on added work? HR leaders should revisit the organization s business priorities and gauge how well HR plans and programs currently address those needs. How effectively are compensation, benefits and career programs meeting business objectives? How easily can those programs accommodate newly acquired businesses perhaps very different types of businesses? Will an acquisition require rethinking the current total rewards philosophy, program design or administration? Do you understand your compensation and benefits programs around the globe? Do you know your company well enough to analytically compare it to a target company culture? Step 2: Get ready for potential deals. Again, the best starting point is to ask a few key questions. How would HR respond if it had to conduct due diligence or integration planning tomorrow? Would it have the tools, processes, structure, capabilities and capacity to do the job well? What s missing? What s the most efficient way to fill the gaps quickly? How effective is HR at organizational change and employee engagement? HR s M&A readiness is... a function of how well it can field effective processes for securing institutional knowledge, ensuring compliance, leveraging electronic communications and managing recordkeeping. HR leaders need to re-examine how comfortable they are with current programs that have particular M&A significance, such as retention, severance and change-in-control. And they should prioritize potential actions based on the value each will deliver and its ease of implementation. The result will be an action plan for improving M&A readiness. 4

Step 3: Get started on specific deals. As a deal comes together, the first critical move for HR leaders is to ensure that they can accurately and completely articulate the business rationale and context for the transaction. Otherwise, HR risks not being clearly aligned with the deal strategy. Do HR managers understand how their planning and decision making should be shaped by the environment and success measures for the deal, the strategy and actions for executing it, and the barriers that can derail it? If not, how will HR fill the gaps to stay aligned with corporate activity on the deal? There must be a clear understanding of the post-merger integration model: how the units and divisions will or will not come together, the speed at which the integration will proceed, what cost savings are expected from HR plans and programs, and who will report to whom. With that understanding, HR can determine whether it has the resources and skills to manage not only the work on a specific deal on a tight schedule, but also the HR duties of the expanded organization after the deal closes. M&A READINESS IN ACTION Let s look at the approaches taken by the HR teams of several Mercer clients that carried out detailed M&A readiness assessments. GETTING SMART ABOUT M&A This multinational technology company s M&A experience was limited, but its management had committed to the board, shareholders and Wall Street that it would more than double revenues in three years. The growth goal could not be achieved organically; the company had begun short-listing acquisition targets in North America, Europe and Asia. Understanding that significant global growth would require a ready HR function, the company set out to build up the M&A capabilities of its HR staff. How would HR respond if it had to conduct due diligence or integration planning tomorrow? HR worked with Mercer to conduct M&A training for managers in the seven countries identified as target acquisition areas. A training program was customized to the business context so that the interactive case studies, specific M&A tools and skill-building exercises for each step of the deal (pre-deal strategy, due diligence, integration planning, integration and organization engagement) were real to the managers in terms of their actual roles and responsibilities. 5

By the end of the training, the HR staff had common M&A vocabulary and processes. They understood their respective roles and the pace and stress of M&A work, and they had a sense of confidence and camaraderie across geographies. During the training, the head of corporate development provided testimonials about HR s influence on deal success, opening an important dialogue between the two functions about HR s expanded M&A role. IMPROVING POST-MERGER PROCESSES This experienced acquirer a global manufacturer with a history of 15 to 20 acquisitions per year saw the quiet time between deals as an opportunity to improve its post-closing integration processes. Although previous acquisitions generally were viewed positively, there were frequent complaints about the redundancy and timeliness of HR s work. HR staff also expressed frustration with what it perceived as the inefficiencies of its own processes. The project began with a joint review of current processes by a Mercer consulting team and the HR staff responsible for integration of employee and executive compensation, retirement benefits, and health and group benefits, as well as the HRIS/payroll systems. Because the company considers HR staff at acquired companies to be customers of those processes, some HR staff from the most recent acquirees were interviewed for their perspectives. This experienced acquirer... saw the quiet time between deals as an opportunity to improve its postclosing integration processes. The review identified opportunities in several key areas. Some were basic process improvements that stood to generate millions of dollars in savings over the course of future acquisitions. Others involved opportunities to accelerate integration of some programs, also with meaningful cost savings. Simplifying processes for example, substituting coordinated activities for previously duplicated work and designing an efficient handoff from due diligence to integration led to opportunities for new tools to be shared across work areas. The HR staff charged with integration responsibilities could now focus less on process challenges and more on opportunities that foster integration; their processes could now help them meet their responsibilities rather than hinder them. Finally, the company was able to eliminate many sources of irritation between its HR staff and their new HR colleagues at acquired companies. 6

WRITING AN M&A PLAYBOOK FOR HR Another experienced acquirer had traditionally followed the investment model retaining leadership of the acquired companies and keeping most of their HR programs in place after the deal. With a 20-year history of dozens of stand-alone acquisitions, this company came to see significant opportunity in integrating many of its operations to support cross-business sales, product development and people growth. HR was asked to support the opportunity through integration of people programs and the HR function itself. Future acquisitions would now follow an assimilation model. HR decided to better define its M&A approach by developing a companywide resource to be used by HR. Working with Mercer, HR leaders documented a detailed acquisition strategy, mapping the company s preferred approach to deal terms and integration activity around dozens of HR plans, programs and policies. The strategy became the basis for an integrated set of processes, roles and responsibilities organized around key deal phases and activities. Effectively a playbook for HR s role in M&A deals, the resource was supported by more than two dozen tools, many developed specifically for this company s needs and preferences. One example: HR now has a formal M&A ready organization structure so that when a deal is coming together, HR can staff a nimble, accountable team whose members already know their roles and responsibilities and how they should work with each another. HR can staff a nimble, accountable team whose members already know their roles and responsibilities and how they should work with each other. The next step was to prepare HR teams across the company to use the new resource. This meant a customized training that blended the playbook with technical M&A training. The result is an integrated approach to HR roles that is efficient, effective and widely accepted by HR and management alike. In fact, as other parts of the company learned about the new HR resource, it became a model for how to improve deal tactics in those areas as well. A LITTLE SELF-EXAMINATION MAY BE IN ORDER: Is HR truly a strategic partner? Is our HR house in order, with effective compliance processes and reliable and easy-to-access information? Does HR understand the M&A process both generally and how it is carried out within our company? Will HR s technology withstand the pressures of a merger or acquisition? Does HR have a network outside the organization that can help provide additional support during the intense M&A period? 7

LESSONS LEARNED While the HR leaders of all three companies pursued different approaches to M&A readiness, they all made well-defined and modest investments (relative to deal size). They did this to develop the staff, processes and tools needed to ensure quick, effective responses to the deal team s expectations and to make the most of human capital contributions in future transactions. Each group of leaders also made sure they asked business executives, managers and employees what was expected from HR during and after the merger. That way, they greatly improved their chances of setting the right priorities for change and of getting the funding and resources needed to make the changes happen. They also made full use of third-party facilitators to help resolve internal conflicts, push for consensus and learn how other HR organizations become M&A ready. We don t deny that competing demands make it tough for many HR executives to focus on M&A preparation before a transaction is announced. But it s time for them to do much more to make their operations M&A ready. Alert HR leaders, recognizing their role in helping manage corporate risks, are already moving in that direction. Given the expected pace of deal making worldwide, M&A readiness is no longer just a nice theoretical idea. It s a necessity. Assessing deal needs How did HR perform on prior M&As? What did it do well? What should it do differently? What should it do more of? Less of? Focus on HR s Governance practices/standards Talent Work processes Technology Structure Sourcing strategy Getting ready for a possible deal Typical activities: Acquisition strategy Training M&A playbook of processes and tools Roles and responsibilities (generic or specific) M&A team structure Starting on a specific deal Typical activities: Business context discussion Integration planning (built off acquisition strategy) Project management methodology and tools Team structure and escalation process/standards 8

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