The M&A Lynchpin: Success or Failure Starts with HR
Written by: Brent Longnecker, Kevin Kuschel, & Jordan Welch
The market for merger and acquisition ("M&A") activity increased sharply in 2014, largely as a result of the abundance of available cash and zero interest rate policies. According to a recent Proxy Mosaic analysis, the US market announced 9,814 deals amounting to over $1.5 trillion in value. Even more surprising is projections point to an uptick in M&A activity in 2015. So, while the desire for M&A is obvious, why is it that more often than not deals end up being considered a failure?
A significant amount of time and effort is put into the front side of every deal, including research, meetings, due diligence, and did we mention the meetings? This process involves specialists from seemingly every business field who each provide an opinion on the different aspects of the deal. However, regardless of the extent of preparation invested prior to closing a deal, it has been proven time and again that the majority of these deals fail to produce long-term benefit to shareholders, with some studies indicating a failure rate of up to 90%. Why is that the case if so much planning and analysis goes into the process?
M&A success or failure can be attributed to any myriad of factors, the most important being:
1) Integration Strategy;
2) Synergy or Compatibility of the Organizations Involved;
3) Company Cultures and People Philosophies;
4) M&A Due Diligence; and
5) Post-Transaction Leadership.
Of these five factors, which are representative of a much larger list, one stands out as the lynchpin: Culture and People, otherwise known as Human Resources. Nearly 70% of failures have been attributed to this often-overlooked matter. While M&A activity naturally puts the focus on a company's operational and financial growth opportunity, it is the people that drive the success of the business through the transaction.
According to a PWC report, the most common complaints of employees following M&A are:
1) Unclear reporting lines;
2) Culture clash;
3) Employee uncertainty;
4) Lack of Training;
5) Leadership; and
6) Lack of Communication.
These are difficult problems to solve and require a thorough assessment of many different factors to help develop a plan which will increase the potential success of integration. The presentation accompanying this article explains methods and processes used to adequately address different HR issues of the two merging companies. We have provided a list of HR's main duties throughout the M&A process and how they are best addressed for success.
1) HR Due Diligence – Too often, HR is brought in late in the M&A process. In order to adequately assess the target company's human capital, HR should be included in tandem with the company's finance and legal due diligence process; this can help ensure employment related issues are assessed and addressed early in the process. Oftentimes, misinterpretation of agreements can lead to surprises late in the process.
2) Change Management – One constant with every M&A is change, and lots of it. HR is the spearhead of managing the changes occurring across the organization. This includes plans from effectively merging leadership styles to ensuring payroll system updates occur in a fluid manner. HR should have a definitive plan and set measurable goals through each phase of the transition.
3) Compensation Program Alignment and Strategy – Compensation is near and dear to every employee, from the executive to the line worker, so a seamless transition is extremely important. When developing a retention plan for key employees, HR should pay to retain people through the transition, but also include performance incentives lasting beyond the close of the deal. Additionally, it is important to establish a plan for integrating the merging companies' different compensation philosophies.
4) Communication – Keeping employees informed through each phase of the integration is essential to a successful transaction. Consistent and continuous communication from the beginning of the M&A process to the end is an effective strategy for motivating employees through the transition.
So while the failure rate is high and despite the high probability of the deals potential for profit, M&A activity continues to grow. Therefore, addressing the main driver of failure is the most efficient way in which to increase the probability for success. Review the accompanying presentation to understand HR's function in this process and how NFPCCmp;A can work to position HR and the company for success.
To read the accompanying M&A presentation by Danielle Jiacomin, Director at NFPCCmp;A, click here.