Rethinking the People Costs of Mergers and Acquisitions

Rethinking the People Costs of Mergers and Acquisitions
Mergers and Acquisitions

05 of 11

This insight is part 05 of 11 in this Collection.

August 18, 2023 9 mins

Rethinking the People Costs of Mergers and Acquisitions

Rethinking the People Costs of Mergers and Acquisitions Hero image

People-related costs are an increasingly significant priority for dealmakers and it’s vital they’re accurately assessed if a deal is to be successful.

Key Takeaways
  1. Although the economic landscape is volatile, people issues remain an essential component of mergers, acquisitions and divestitures.
  2. It is crucial to accurately assess potential liabilities to prevent deals from falling apart. Be realistic about pension costs and operational synergies to inform decisions.
  3. HR and finance departments should partner closely to accurately assess people-related costs throughout the entire deal cycle.

Any merger, acquisition (M&A) or divestiture is already a challenging and complex process for finance and HR professionals. With the current volatile economic climate, managing the people-related costs of a major transaction requires additional considerations when performing due diligence on a potential acquisition target.

Be Realistic About People Costs During a Major Transaction

Throughout the deal cycle, “people issues” have grown in importance. In Aon’s 2023 Risk in Review report, 98 percent of survey respondents said that talent acquisition, retention, culture and leadership are key areas of focus for their deal teams, with more than half identifying people issues as a significant topic.

Dealmakers will need to consider the people-related financial pressures that could arise from a transaction:

  • Increasing costs place additional pressures on deal viability. Understanding and testing the expected costs of cultural integration and headcount savings assumptions is vital.
  • Carve-outs bring unique challenges from a financial perspective. For instance, it is important to analyze how current benefit costs for a larger organization might change when applying to a subset of the employee population. In Europe, M&A carve-outs and spin-offs are on the rise.

Businesses at all stages of the deal cycle are also exploring solutions to build robust and sustainable retirement structures. For sellers, leveraging structures such as pooled employer plans (PEPs) and master trusts can help businesses demonstrate proactive pension risk management, lower costs and sustainable financial provisions — boosting deal terms and investment appetite. For buyers, a target company or acquisition with well-managed pension structures is easier to assess and forecast, helping dealmakers make better financial decisions.

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Pooled arrangements, such as the Aon PEP in the U.S. or master trusts in the UK and Europe, allow organizations to access economies of scale that may not otherwise be available as a smaller organization.

Liz Dolan
U.S. RET Partner, Wealth Solutions, Aon

During a transaction, dealmakers will need to:

  • Quantify people-related financials, liabilities and opportunities to support pricing considerations and overall de-risking
  • Optimize total rewards investment
  • Enhance deal synergies/accelerate synergy realization

Deal Shapers or Deal Breakers?

Volatile markets and high inflation make it even more important to accurately assess potential liabilities (i.e., future costs) in transactions and understand the risk exposure associated with them. These can be identified during the due diligence process, along with other uncovered items — known as deal shapers or deal breakers.

Deal shapers are items that could impact the price of the deal or should be considered in the purchase contract, such as representations and warranties that sellers might be asked to provide. Deal breakers are items that, if realized, might impact the economic viability of a deal, leading the buyer to consider walking away altogether.

Deal Breakers

Within HR topics, one potential deal breaker could relate to defined benefit (DB) pension plans. Without the right knowledge and experience to effectively assess pension risks in an M&A process and determine how to manage DB plans post-acquisition, bidders can walk away from transactions. DB pension plans are more than an employee benefit — they represent a material liability on the company’s balance sheet. Funding positions of DB plans have changed materially during 2022 and 2023, along with their management regulations. When determining the impact of a DB plan on a business valuation, it’s important to consider up-to-date assessments of underfunded pension plans, with a strategic view of how to manage these plans post-acquisition.

M&A deals often have complicated pensions elements, especially when it comes to legacy DB schemes. Some liabilities may exist off the balance sheet, such as U.S. multi-employer (union) pension plan exposure and certain termination indemnities. And although pension plans have a significant financial impact on M&A deals, they are often addressed too late in the deal lifecycle. Careful preparation can limit or mitigate financial risk of pensions on a deal and move them out of the deal breaker designation. Solutions such as de-risking or buying out pension plans can be used.

“While the financial risks and regulatory requirements around such plans are important not to overlook, there are lots of innovative risk-transfer solutions available to effectively manage the risk exposure these pose to companies after an acquisition,” says Matthew Richardson, a partner in Aon’s Wealth Solutions practice in the U.K.

Deal Shapers

When it comes to deal shaper issues, HR teams can add significant value to help achieve the best outcomes. These include items that might not impact the nature of the deal agreement, but must be considered for integration planning purposes, such as:

  • Culture, change management and labor relations
  • HR programs, policies, payroll and HR information systems
  • International employment terms for global M&As
  • Operational synergies, ranging from the cross-selling of products to the rationalization of product portfolios. Headcount reduction1 continues to be one of the most direct approaches in delivering efficiency

Best Practices for Managing Deal Shapers

HR professionals are often excluded from many aspects of M&A work due to outdated — and incorrect — views of their function being solely administrative. However, they can provide immense value throughout the entire deal process.

  1. HR leaders should partner closely with the finance department. They should be vocal with deal teams and prepared to articulate value early in the deal cycle. Both HR and finance are working toward the shared goals of higher workforce performance, upholding efficiency and profitability. It is beneficial for everyone involved if there is a strong collaboration from the start.
  2. Ensure the HR team reviews people-related assumptions contained in the financial model, as these often significantly understate costs and timing for retention program design and compensation and benefit programs.
  3. Manage headcount synergies, one-time costs and ongoing savings centrally using a consistent process that’s driven by HR across all functions.

When organizations don’t strategically manage and align people, programs and liabilities, their ability to deliver on deal objectives is threatened. Raise people issues early in the deal process and ensure they fairly reflect the complexity of the deal for the best chance of long-term success.

M&A tools like Aon's TransAction Manager™ are key to improving HR's ability to manage people-related costs during large scale complex transactions by accelerating organizational integration and managing synergy capture processes.

If you have questions about people issues during M&A and want to speak with a member of our consulting group, please write to [email protected]

General Disclaimer

This document is not intended to address any specific situation or to provide legal, regulatory, financial, or other advice. While care has been taken in the production of this document, Aon does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the document or any part of it and can accept no liability for any loss incurred in any way by any person who may rely on it. Any recipient shall be responsible for the use to which it puts this document. This document has been compiled using information available to us up to its date of publication and is subject to any qualifications made in the document.

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