Solving M&A’s Most Critical Challenges: How to Deal with People and Change

Solving M&A’s Most Critical Challenges: How to Deal with People and Change

“Greatness is not in where we stand, but in what direction we are moving. We must sail sometimes with the wind and sometimes against it—but sail we must, and not drift, nor lie at anchor.”                                                                                                                                                                                                     – Oliver Wendell Holmes

Few statements better express the notion that companies must continually evolve in order to not just thrive, but in some cases even survive.  We can all point to companies that, at one point in their lifespan were at the top of their industry but today either no longer exist or are a shadow of their former selves.

The constant need to adapt within highly competitive global markets, makes M&A an attractive and ever more common practice for businesses.  M&A offers the promise of significant growth and competitive advantage, yet the goals of most mergers are often not achieved.   In fact, some studies point to the fact that over 70% of deals fail to achieve the stated objectives.

Understandably, the focus of most deals is on the financial potential of a deal.  Financial data provides clear and predictable insights into the organization.  Without doubt, a solid financial understanding is critical to success. 

However, that is only one aspect that needs to be understood.  One of the foremost reasons for deal failure is something that too many organizations tend to overlook: the impact of human capital on performance and growth.  So-called “people issues” are at times unseen, under-appreciated and potentially un-addressed or addressed too late.

HR plays an incredibly important role in the M&A process because they are, in many cases, the best mechanism to determine the key measure of current and new “talent” – after all, “talent” is a key, tangible component of the deal. 

By fully considering the so-called “soft” aspects of a deal and communicating accordingly, organizations can improve the outcomes of the deal by gaining an invaluable employee buy-in for the new strategic vision.

Integration teams must look beyond the number and involve Human Resource early to help individuals through the process, support the overall business objectives and to make sure all employees continue the day-to-day work of delivering high quality products and services.

Save valuable time and avoid “reinventing the wheel” by engaging individuals, teams and solutions is with the right experience.

EMPLOYEE ATTRITION AND ITS IMPACT

I am struck by the statistic that over 75% of the reason’s employees quit could have been prevented by the employer.  That is staggering. The underlying reasons are often noted as an increase in competition for talent, the fear of job losses leading to a desire to pre-empt a layoff or cultural aspects.

To make matters worse, as companies continue to add jobs in an environment where unemployment is well below 4%, the only recourse is to “poach” talent from other companies – there are simply not enough unemployed workers to fill the open jobs.  U.S. infrastructure efforts and immigration limits further compromise worker availability.

Put into more concrete terms consider the following:  according to the Bureau of Labor Statistics, in 2018 the median annual wage for 40-hour-per-week workers in the United States was $47,788. ~40 million people left an organization in 2018 and if we assume that the cost of turnover is $15,000 per employee, the total cost of turnover for U.S. companies in 2018 was over $615 billion. At the voluntary quit rate of 75%, the controllable cost for U.S. companies is $462 billion.  If turnover is reduced by only 10%, US companies could save $46 Billion.[1]

These are significant numbers and can potentially negatively impact an otherwise performing deal.

TACKING THE EMPLOYEE AND CULTURE CONUNDRUM

To help ensure a better outcome for M&A activity, HR professionals must signal their desire to lead and get involved early in any M&A activity. There is single formula to ensure employees stay motivated after the deal closes, but below are several strategies that teams can adopt to help sustain and increase employee engagement:

 – Address cultural differences

Many organizations tend to focus on the similarities and differences in culture, usually landing on their “own” culture.  The best outcomes come from a focus on the winning combination of cultures to formulate a strategy that works for the new organization.

 – Include the cost of integration

Organizations often neglect to sufficiently estimate the costs of integrating employees and teams in the financial model. As a result, budgets are often not allocated in the optimal manner successfully blend disparate organizations, processes and systems. Human capital experts can help price the deal appropriately so the strategic intent of the transaction is realistic and can be achieved.

 

 

 – Factor in benefits

It’s not just the cost of physical integration that needs to be considered. Buyers also need to evaluate the target organization’s compensation and benefits programs to quantify financial liabilities. These are important consideration to make for the buyer during the purchase price negotiations.

 – Prioritize change management

Change management is a complex process in any organization. For the deal to be a success, there will be a significant allocation of people, time and funds.  There must be clear accountability in the integration process, and all employees should be aware of who holds the authority for strategic decision-making.  Furthermore, by designating certain in-house experts as ambassadors – those who have a deep understanding of the deal’s strategic vision – organizations can create effective centers for change management and communication.

 – Address individual concerns

In the quest for efficiency, unfortunately M&A can lead to job losses. Knowing whether they would have a spot in the new organization early on, is crucial for individuals to be secured in turn to perform. It is also equally important to address any other concerns that they might have – including fear of loss of status, role etc., in the new company.

 – Communicate, communicate, communicate

Communication cannot be emphasized enough. Companies often fail to understand the importance of how they communicate with employees during a merger. Connecting with leadership becomes one of the key drivers of employee engagement during change – people feel safe and motivated when they are in the loop, especially when it comes from senior management. 

 COMMUNICATION IS KEY

Identifying and communicating the reasons for the M&A to the entire workforce is critical. Often employees see change as dislocating and fear loss of status or their job.  Integration teams and HR must be transparent in all forms of communication through the transition period. Most importantly it is important to communicate the intention and necessity of the change, along with emphasizing how it would benefit teams in the long run.  Some actions that can help HR transition the organization smoothly are:

  • Pick and coach an HR M&A leader and a team. The sole purpose of the leader thus selected is to focus on M&A while being sensitive to culture, and focusing on retaining and motivating the employees.
  • Assess both company cultures and find a middle ground. Two companies with different cultures are bound to clash. Once might be driven by sales while one might be driven by innovation. HR must anticipate cultural challenges and take steps to integrate the two cultures.
  • The HR M&A leader and team decides the new organizational structure, who stays and who goes. The transition has to be smooth to ensure that the employees who stay are motivated.
  • Both companies’ compensation, benefits have to be analyzed while framing the new company HR policies.

CONCLUSION

The level of upheaval involved in M&A and the impact on organizations undergoing such change can be substantial. But within this, there exists the opportunity to implement a positive, long- lasting change that can set an organization on a path to significant future success.  For many companies, now is the right, strategic time to bring about change and create new and additional value.  With the right plan and advice, M&A may be an excellent vehicle for evolutionary or even revolutionary change.

Involving the right teams from the start, such as HR and by identifying and assessing the drivers of deal value early, you can ensure that information and opportunities are utilized, and that people related risks and opportunities are identified and prioritized, creating a better working culture and driving increased value for the company.

  [1] Source:  United States Department of Labor, Bureau of US Labor Statistics

Author

Richard A. Martin, Jr

Prakhya Bhat

 

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