HR's Make-or-Break Moment
You've finally been invited to the proverbial "seat at the table." Now what?
By Shari Yocum
This is your make-or-break moment, where you'll either forge a strong relationship helping guide many deals to come, or you'll blow it. Having talked to a number of corporate development leaders, their experience with HR M&A ranges from horror stories to those who rely on HR for delivering a tailored well-thought out plan for integrating employees that works. The clear theme that emerged was that HR leaders need to understand where they can add value. Too many HR leaders look at the process through the lenses of clients facing HR. They are used to being gatekeepers, process followers, and keeping everything in a shroud of secrecy. These behaviors, which can help in client facing work, can hinder the process before it even begins. Your role requires the ability to deliver true value according to each deal's specific circumstances.
Many HR leaders welcome the opportunity to be invited to the early stage strategic planning on an acquisition but they aren't sure where to insert themselves or how to provide value. Understanding the first steps of the deal process and where HR can help provide needed guidance is the key.
Before a deal starts, set up time to meet with key players in Corporate Development to understand their focus and needs. Ask them what they've struggled with in the past and where they would like to have more involvement. Use this time to get to know the internal players that you'll be working with on deals. Gain an understanding of their personalities and style prior to being thrown into the heat of a deal. Educate them on your experience and value in the deal process. Share your plans and the key elements that you'll own in the process. Sometimes corporate development tries to do everything in a deal because they don't realize that there are other resources that can help pick up some of the work.
Once you've started to build that relationship, you can start having discussions about potential companies in the pipeline. From an HR M&A perspective, the focus is usually to provide guidance on any potential big challenges if the company chooses to pursue a specific target. For example, would there by union hurdles or excessive costs that would need to be considered? Or would you need to relocate the organization, and is this even feasible? The analysis is on a very high level basis at this point but it helps better assess costs and risks that aren't always incorporated early enough. Do not use this as a time to shoot down the potential target company but rather make them aware of potential challenges and provide workable solutions.
Once a company is selected as a potential acquisition target, a term sheet or letter of intent is drafted. This document is critical in identifying key terms of the deal. It should be used to capture the big ticket items, whereas the definitive agreement can later capture further details. Key focus areas for HR on the term sheet include:
1) Structure of the deal: Is this an asset purchase or are you buying the entire company? From an HR perspective, you will want to understand how the employees will transition over and who will be responsible for the termination of any employees that are not part of the transaction. Also, this is a determining factor on how you will treat benefits upon deal close. Each country has different employment laws that impact severance, carryover of seniority or pensions, or benefits depending on how the deal is structured. Understanding the different impact of the sale on benefits and employee obligations is critical for understanding your costs, timing of employee movements, and eventually, the integration plan
2) Key employees: There will be a section that will allow you to name the key employees or call out an agreed upon number of keys to be named later. These individuals will need to sign as a closing condition. You can always waive this term later but, as a buyer, it is critical to ensure you lock in the talent you need to ensure you gain the full potential of the deal post-close. Typically a deal has 5-10 key employees. Depending on the size of the company, you may create a tier 2 of critical talent, which can encompass a broader set of employees. Typically a company will ask for 100% acceptance of the keys but then maybe, 80-90% of tier 2. However, the differentiator between the two groups is usually whether you have them sign an employment agreement. Most companies will have the key employees sign an employment agreement with a non-compete, whereas the Tier 2 group will get a regular offer letter but with a special retention letter or incentive to ensure they sign.
3) Change in control terms: Today, most executives have terms in their employment agreements that provide special payments upon a change in control of the company. They can be a single-trigger, which means just the change in control needs to take place, or they can be a double-trigger, which means that both a change in control and termination needs to occur to obtain a special payment. Usually, the special payments include pre-defined severance, cash bonus, or acceleration of stock. I recommend negotiating the removal of these terms for any employees moving on to the new company. It's hard to manage individual special terms within a large company so it's wiser to negotiate out and bring the executive over with your standard company terms.
4) Retention pool: Pre-defined funds that will be used to help employee retention. Now's the time to round up the cash needed to help retain critical talent. You can build a retention pool into the deal price by setting aside a portion to be used for the employees. This is a great tactic to help bridge some of the differences between the buyer's price and the target's price. Or you can use the target's outstanding shares to be distributed prior to close. These options impact the deal price so it's critical to work closely with Corporate Development and Finance on the structuring of the retention pool, whether cash or equity.
Identify who will own the decisions on how the retention pool is distributed. Though the target should have some input on the distribution, the buyer should be the decision maker on the retention pool. Many target companies try to use this pool to "reward" employees for past work, whereas the goal for the buyer is to retain critical talent going forward. Make the goal and ownership clear from day one to prevent the wrong messaging and misaligned perceptions.
5) Transaction Payment: How the company is paying for this transaction. It's important to understand what happens to current equity the employees hold. Will this equity be transitioned over or cashed out? This decision could drive the amount of money needed for the retention pool. Many deal makers are only thinking about getting the deal done, but as an HR leader, you need to think longer-term in retaining the employees.
6) Other show stoppers on the employment side: These include items such as requiring the team to relocate, employee reductions prior to close or anything else that is very out of the ordinary that the target will be required to do as part of the transaction. If an item is required in order to do the deal, get it out on the table early. If the item is negotiable or you are open to other options, then save it for the definitive agreement.
The only way to play a key role in the term sheet discussion is by understanding the business needs and by partnering with your Corporate Development team. Corp. Dev. is responsible for managing the business transaction. They do not want an "HR person" telling them what they can or cannot do. You can build this relationship by partnering to share both the pros and cons of the current decisions, and sharing the impact of the decisions, i.e., added costs of one decision vs. another, or the political or internal impacts. If you become a roadblock, they will simply go around you. You also need to be a problem solver. Many HR professionals are good at identifying what you can and cannot do, but they aren't always as strong in finding the best way to accomplish business needs. As you build your credibility over time, then you will be able to more effectively influence the early stage of the acquisition process.
Being part of these early discussions for the term sheet will guide both due diligence and integration planning. Rather than being the recipient of the decisions made in this process, you can help define the trajectory of the deal by playing an integral role in term sheet discussions with your corporate development partners.
Shari Yocum is the managing partner of Tasman Consulting, a strategic M&A human capital advisory firm based in San Francisco.