The Strategic Importance of People

This excerpt from "Making Mergers Work: The Strategic Importance of People" argues that strategic people management is as crucial to a successful merger or acquisition as a sound strategy and fair valuation.

Thursday, February 1, 2007
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Mergers and acquisitions (M&As) -- from high-tech companies to traditional manufacturing and services businesses -- have captured headlines for a decade. Many companies expect a merger or acquisition to provide the scale of operations, resources and capabilities, financial strength, and broad market reach necessary for growth and long-run competitiveness. And yet, study after study concludes that even well-conceived deals often fall short of their promised benefits.

It is not simply bad strategy nor paying too much to complete a deal that causes failures. Rather, when M&As fail, it's frequently because of people or related issues. Key managers and scarce talent leave unexpectedly. Valuable operating synergies evaporate because cultural differences between the companies are not understood or are simply ignored. Cuts in pay or benefits programs create ill will, which reduces productivity. Management doesn't communicate its business rationale or its goals for the new company, and employees flounder in the ensuing confusion. The list goes on and on.

The seeds of success (or failure) are sowed well before the merger or acquisition is made public. Acquirers that fail to do the homework in formulating strategy and in due diligence almost always make mistakes in selecting partners and negotiating deals. For example, they don't consider cultural issues early in discussions. They don't address the ways in which the two companies' managements will work harmoniously. Too little attention is paid to identifying and keeping high-performing, high-potential employees. These mistakes will eventually come back to haunt the new company and its management.

Beyond such mistakes, once a deal is consummated virtually everything pales in comparison to the strategic importance of people management. Indeed, the consequences of a deal that flops are huge for shareholders, employees, customers, and communities alike. The implication is clear: Strategic people management is as crucial to a successful merger or acquisition as a sound strategy and fair valuation.

Over the past few years, a stream of new studies has added to the extensive literature on the successes (or failures) of M&A, particularly the giant combinations. Most of these recent studies expand upon earlier work that shows the majority of deals under-perform -- some in spectacular fashion -- relative to the synergies and benefits their architects had promised and to the average performance of peer groups or the stock market as a whole. Each new study asks again the obvious question: With such a high failure rate, why do chief executive officers (CEOs) and boards of directors continue to pursue M&As?

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The overwhelming evidence provided by M&A studies supports two incontrovertible answers. First, companies pursue M&As fearlessly -- sometimes for good reasons and sometimes for bad ones -- and will probably continue to do so. Second, M&As are risky strategic initiatives with people and cultural aspects that, if not handled well, can doom the deal. In short, M&As require exceptional wisdom, insight, sensitivity, perseverance, and planning to succeed. Good old-fashioned luck also helps, especially when it comes in the form of a strong equities market.

Making Mergers Work: The Strategic Importance of People, a Towers Perrin/SHRM Foundation project, was edited by Towers Perrin's Jeffrey A. Schmidt and published by the Society for Human Resource Management, copyright 2002.

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