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Of all the resources a company has, people remain its most important asset. This has become clearer than ever in the current climate, marked by the consequences of the pandemic, the ongoing shortage of skilled workers, and rising interest rates. To survive in such a challenging environment, many business leaders and investors are turning to deals. However, a lack of focus on people carries significant risks during corporate acquisitions and divestitures, as well as during employee transitions (Mergers & Acquisitions, or M&A).
In a survey conducted by Mercer1, 47 percent of respondents stated that an insufficient focus on human factors during a deal is the main reason for the failure or delay of such processes. Significantly, in financial modeling, personnel risks are adequately taken into account in only 44% of cases.
These figures alone paint a stark picture and make it clear that the timely identification of HR risks should play a central role both in determining the purchase price (e.g., pension risks) and in the subsequent integration (e.g., realizing synergies and employee retention).
Mercer’s research and its experience supporting nearly 1,400 transactions per year all point to one thing: putting people first. Traditionally, employees are viewed as a cost factor, and therefore the value they bring to a business is also recorded on the cost side. What is often overlooked is that employees are the vehicle for revenue. The right leadership team, the right skills, and the right understanding of corporate goals are factors that increase the value of a business. Yet these aspects are frequently neglected in deals.
HR Risks Are High
The complexity of deals and the pressure to succeed are increasing, yet HR risks often remain largely unaddressed. The survey results show that, on average, nearly half of all deals fail. The main reasons, accounting for an average of 47%, are primarily employee-related risks (e.g., retention of key employees).
All too often, HR issues such as leadership, culture, etc., are not prioritized and are not even part of the due diligence process. This often has far-reaching consequences for the deal. Impacts include, for example, having to adjust the original integration plan or failing to meet financial targets.
What could be the priorities for HR strategy in deals?
In every transaction, the due diligence phase is the ideal time to address risks related to the workforce. Nevertheless, respondents indicate that HR issues are not addressed until later, during negotiations. In so-called “red flag” statements, which signal the presence of unresolved risks in a deal, HR risks are often overlooked.
However, as with tax and regulatory issues, it would be best to prioritize human aspects from the very beginning. The impact that employees are expected to have on revenue and cost synergies should be articulated in assumptions. Respondents cite the following focus areas as particularly relevant:
1. Leadership alignment
2. Alignment of corporate culture
3. Retention of key employees
4. Long-term HR obligations
Conclusion for a Successful Deal
Deals are conducted to create value in the form of revenue and cost synergies. The structure and form of deals may vary, but the bottom line is value creation. This value creation is jeopardized if important human factors are not strategically and proactively taken into account from the very beginning.
A common mistake we observe among executives is viewing employees solely through the lens of cost synergies and headcount, rather than considering their role in driving revenue growth and executing business strategy. A comprehensive change management roadmap should identify the skills and talents needed to get there. It should make it as clear as possible that certain positions or skills will be needed during the transaction and communicate the plan for those employees and skills.
It is important to lead with empathy and treat all parties with the greatest possible gratitude and respect—both those who will keep their jobs and those who will not. A poor acquisition and integration process can lead employees to seek a fresh start outside the organization.
Having a shared vision and value proposition requires a shift in the way you think, collaborate, invest in employees, and tell the story. “Who we are as the new organization” must come from top leadership early and often and be strategically cascaded down through all levels of leadership.
In the most successful acquisitions, the combined organization retains the capabilities embodied in the “critical talent” of both organizations. As the new organization develops a unique identity, transparent communication about the future enables critical talent to thrive. Ensuring security for these critical talents by being open about the challenges, risks, and the future will be the decisive factor in the success of the newly combined organization.
Footnote
1 The survey included 750 experienced deal professionals from Fortune 1000 companies or private equity firms. Sixty-seven percent of respondents were at the executive level or higher, with titles including, but not limited to, CEO, founder, CFO, COO, SVP, and board chair. Respondents had diverse backgrounds, including deal advisors, business developers, investment bankers, management consultants, lawyers, strategists, HR professionals, and operations specialists.
