The Art of the Deal
Mergers and acquisitions are at an all-time high, along with recognition of the importance of addressing the related people issues surrounding such deals.
By Julie Cook Ramirez
Global mergers-and-acquisitions activity has reached a fever pitch. Up 32 percent in 2015, worldwide mergers and acquisitions totaled $3.2 trillion through the end of September, according to Thomson Reuters' Mergers & Acquisitions Review. By year's end, deal volume was projected to top $5 trillion, marking the second time it's exceeded $4 trillion since 2007, says Jeff Cox, senior partner and co-leader of M&A Transaction Services in the Chicago office of Mercer.
While the focus has traditionally been on physical assets, brand equity and intellectual property -- such as patents, logos and trademarks -- a growing recognition of the value of the workforce has organizations paying greater attention to the importance of people issues when engaging in a deal.
"Buyers are becoming more attuned and sophisticated in understanding that the people aspects of running a business are fundamental to driving their return on investment," says Chuck Moritt, senior partner and co-leader of M&A transaction services in Mercer's Washington office. "When they're looking at a deal, they're thinking, 'I'm buying customers, products, and access to markets, but I'm also buying people. So what's the cost of those people? What's the ROI of those people? How do I ensure I'm maximizing the ROI of those people?' "
Increasingly, buyers are entering new and unfamiliar geographies and industries, says Cox. That not only heightens the need to retain valued workers, it raises new complexities related to labor laws and local customs and ways of doing business.
Seeking to help organizations better understand and address the most critical people issues faced by both buyers and sellers, Mercer undertook a survey of 323 M&A professionals representing both buyers and sellers. In addition to HR executives, 57 percent of respondents were from private-equity-deal teams and operations, finance, corporate development and operational-leadership positions. Those findings were supplemented with insights garnered from 78 interviews with corporate and private-equity clients, investment bankers and M&A consultants, along with analyses of nearly 450 M&A transactions by Mercer's M&A transaction services business during 2015.
The report makes it clear that people issues are top-of-mind for dealmakers as M&A activity booms: Fifty-five percent of buyers said they expect talent challenges to remain a significant HR issue in future M&A transactions, with employee retention cited as the No. 1 perceived risk, followed by cultural fit and leadership concerns.
The talent risks in M&A transactions primarily stem from workers' inabilities to manage uncertainty and embrace change, according to the Mercer report. That can lead to declining organizational performance and the loss of transaction value. Poorly executed integrations, failure to consider culture and organizational fit, and lack of clarity in employee communications are prime examples of people risks that can severely undermine deals and destroy value.
With these factors in mind, it's not surprising more than one-third of those surveyed said they are spending more time on HR issues when preparing for mergers, acquisitions and divestitures than in the past.
"Organizations need to think about the diligence around their talent decisions with the same rigor they use for their products, their operations and their customer decisions," says Patrick Shannon, a San Francisco-based partner in Mercer's talent practice. "There are processes, tools [and other] things to help facilitate those decisions."
On the buyer side, Mercer's recommendations include using skills inventories and competency assessments to assess leadership and key employee capabilities; evaluating HR service, delivery and design needs; understanding the market competitiveness of rewards and leveraging total-reward programs to attract and retain the right talent; and mapping out a clear culture, communication and change-management plan.
Meanwhile, Mercer advises sellers to document a clear talent-management or staffing plan; evaluate critical employee groups that influence key customer relationships and important operating initiatives, and consider a retention program to minimize any pre-close exits.
Mary Cianni, global head of M&A advisory services for New York-based Willis Towers Watson, agrees with Mercer's findings. Rather than waiting for a merger or acquisition to be in the works, however, Cianni recommends HR leaders set out to "clean up [their] own house in advance of any deal activity." This is particularly crucial for organizations that have grown through acquisition to be a global company and may already be struggling to get their arms around data on people in different locations, she says.
"We are surprised . . . many times [after] we ask for headcount, by country, how challenging it may be for an organization to produce that data," says Cianni.
Likewise, organizations often struggle with many different compensation and benefits programs, resulting from multiple global mergers or acquisitions. By consolidating plans and vendors, organizing HR systems and "cleaning data," Cianni says, organizations can help ensure a more seamless integration in the event of a deal, resulting in better retention, productivity and performance and, ultimately, driving a more successful deal.
Organizations may recognize the importance of addressing people issues in a merger or acquisition, but Cox says they have some serious catching up to do if they are going to apply the same level of rigor to people decisions that they do to the other aspects of the deal-making process.
"It's amazing how many companies have enormous data and insight and direction and calculated predictors on what levers to push with regard to customer behaviors," says Cox. "They have their Ph.D on the customer side, but when it comes to the way they can impact behavior internally and ultimately predict what's going to be delivered to their customers, they are in first grade."
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