8 Ways to Achieve a Winning People Strategy During M&A

Whether it’s your first, second or 50th deal, when it comes to addressing people in mergers and acquisitions (M&A), the unexpected can often happen. Limited data, aggressive timelines and different organizational cultures, to name a few, can lead to sudden and significant challenges, even for the best laid plans. The last thing you want is for one area of the integration to cause a delay in the deal’s close or, even worse, the failure to meet deal commitments and strategic objectives. Yet, people issues — from leadership style to total rewards — can be responsible for a failed deal either at the onset or post-integration.

The people aspect of M&A is hard to get right. Perhaps this is because people are complicated and related challenges cannot always be solved by a simple formula or templated solution. These challenges require an understanding of business strategy and practical knowledge of how HR programs and processes work to effectuate change.

“As demand for talent soars, companies continue to use M&A transactions to acquire critical talent and shore up their own skills gaps,” comments Perry Papantonis, partner, Human Capital Solutions, Aon. “It is therefore important for firms to ensure they are prepared to address key people challenges that emerge before, during and after a deal is closed.”

According to Aon’s M&A Risk In Review 1H 2022 report, more than two-thirds of companies are expecting global M&A deal numbers to increase over the next 12 months; that includes 38 percent who anticipate an increase of more than 5 percent. The technology, media and telecommunications (TMT) sector is cited as the most prolific in making deals, with financial institutions, life sciences and healthcare sectors also high on the list. While M&A has ebbed and flowed due to economic and geopolitical uncertainty, the bigger picture shows an active market, coupled with an abundance of capital in the system for both corporate and private equity to fund deals. Key drivers include the need to transform capabilities and innovate, supply chains, digital transformation and disruption, and talent shortages caused by the Great Resignation.

HR professionals need to be knowledgeable and ready to address key people challenges that emerge before, during and after a deal is closed. As you think about how critical your role is to the deal’s success, are your firm’s people strategies prepared to succeed? Every project is unique; however, what deals do have in common is their likelihood of falling into the same pitfalls that risk derailing parts of the deal.

To address these common challenges, businesses should consider these best practices for a winning people strategy during M&A.

Pitfall #1: Organizational design and talent planning

Companies often do not realize the significant planning that can occur pre-closing, even in deals that are highly scrutinized from a regulatory perspective.

Best practice: Use the “sign to close” period as a starting point for the organizational and talent planning process. Consider broad talent assessments as part of the integration to understand the skill levels of acquired talent. Effective and aligned organizational design is crucial to successful integration of the transferring business entities and helps to identify synergies. If not addressed proactively, companies could experience closing delays, talent attrition and lower employee engagement.

Pitfall #2: Financial considerations

A lack of defined benefit pensions, change-in-control and other transaction-related payments can have a material financial impact on the deal, both on company valuation and future cashflows.

Best practice: Ensure the HR team reviews the people assumptions contained in the financial model. These often significantly understate costs and timing for people-related items, like retention program design and compensation and benefits programs. Manage headcount synergies, one-time costs and ongoing savings centrally using a consistent process that’s driven by HR across all functions.

Pitfall #3: Total rewards

Without an appropriate total rewards analysis, companies will miss a huge opportunity to identify excess costs and streamline spend. Not understanding where the synergies are in your total rewards packages and processes — which help address any gaps and inconsistencies — could prove to be costly.

Best practice: Develop a compensation philosophy for the combined organization going forward and clear non-negotiables for harmonizing total rewards practices. For example, what is the extent to which the design, cost and timing of certain benefits and incentives will change once the deal is approved?

Take this time to also review the impact of pay equity on decisions to mitigate legal risks and ensure integration decisions don’t inadvertently create an unfair pay gap.

Pitfall #4: Retention

A key risk is failure to retain and integrate talent, which is one of the typical stated goals of an acquisition. Far too often, companies fail to effectively include top talent in the due diligence process. Ensuring employee engagement is also crucial in keeping those with their foot out the door satisfied and less likely to leave.

Even further, acquiring talent during an M&A — often referred to as acquihires — comes with many challenges. These include articulating clear integration strategies, ensuring strong culture fits, addressing pay gaps that may arise and an increasing chance for overall loss of employee engagement.

Best practice: Design a multi-tiered retention program with guiding principles in advance of actual deals. A multi-tiered program is often designed for executives and critical talent at the top, who may get a retention package that is 100 percent of base plus bonus. This is followed by a second tier of next-level critical talent who may get 50 to 75 percent of base salary over one to two years, and so on. This type of retention program can be rapidly deployed and accurately budgeted in the context of actual deals.

To ensure retention and individual attachment to the new organization, acquihires should also have a strong belief and acceptance of the organization’s goals and values, eagerness to work hard and desire to remain a member. Companies can achieve this through establishing strong cultural alignment, leadership roles, re-examining flexibility and exiting policies and developing holistic retention bonus packages.

Pitfall #5: Employee experience

The absence of cultural alignment is one of the biggest causes of failed deals.

Best practice: Determine and articulate to employees the different cultures of the two organizations and what the desired combined culture will value. For example, if one organization allows remote working and limited meetings and the other organization requires employees to work in the office and meet in person to make decisions, how will those two approaches be reconciled? Who is responsible for making that decision and how will it be messaged to employees?

After day one post-M&A, deploy a change and communication plan that helps to embed your go-forward culture in a tangible way for all your people so they are clear on what is expected of them and how they can live your culture in their day-to-day work.

 

Pitfall #6: HR operations

Not having payroll and a strong HR infrastructure in place from day one can prevent employees from getting the job done.

Best practice: Develop a clear roadmap for the interim and future-state HR operating model, including the HR information system, payroll, compensation and benefits administration, recruiting and performance management. If an acquired entity will not go live on all systems on the first day, what interfaces or integrations are most necessary?

Support the development of transitional services agreements that are typically in place until the entity can set up their own HR infrastructure. Then develop the headcount or staffing model required for business operation, as well as the process flows to integrate all HR activities.

Pitfall #7: Employee and labor relations

Without an aligned approach and accompanying communication strategy, companies could end up missing vital deadlines and fail to realize synergies.

Best practice: Capture legal entity and employment transfer strategy/requirements by country as early as possible, including notice and consultation requirements and timing. To avoid delays, it is critical to engage with employee representative bodies in locations where required. Information and/or consultation with employee representative bodies are mandatory in certain European countries to conclude the employee transfer process. Therefore, it’s essential to prepare high-level employment considerations and country legal requirements, including necessary notification and consultation early in the process.

Pitfall #8: Project management

Project mismanagement is catastrophic and can affect workstreams that relate to the people strategy — from missed due diligence risks to delays in onboarding employees. This results in business disruption.

Best practice: Establish and communicate the governance model, who is accountable for different tasks, guiding principles and people success metrics early on in the process. Identify and track key milestones, decisions, issues and risks, and the most significant interdependencies (e.g., legal entity formation and transfers, systems integration, employment transfers).
Establish regular meeting cadences with workstream leads and ensure teams are established for success. Be sure to also consistently drive horizontal workstream efforts related to change management, communication and other cross-cutting concerns.

Next Steps

Failing to prepare for the future, even if the future is unknown, is a major disadvantage. Your firm will always be behind the curve. The people side of M&A doesn’t always get the attention it deserves until it’s too late. Iceberg issues can potentially reach the surface and affect the transaction at any time. However, organizations that adopt certain best practices, including proper due diligence, a strong project management office (PMO), experienced M&A resourcing such as carve-out issue mapping — which lays the basis for completing deals on time and giving new entities the best chance of success — will be better positioned to realize a successful deal.

For an industry outlook of M&A, read our article: The Business of Mergers and Acquisitions: An Industry Outlook. 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]