7 ways HR can be instrumental in a successful merger and acquisition process
By Ian Kirkpatrick, UK Associate Director Global PMI Partners
For a leadership team looking to boost performance or “jump-start” growth, acquiring, or merging with another business can be an enticing option. But realising the value of a transaction is typically easier said than done. While a deal may stack up on paper, when it comes to the execution and subsequent post-merger integration, costly mistakes can be made.
So why can things go wrong? Three key factors for HR Teams to consider:
- inadequate focus on value creation;
- a struggle to retain key staff and fuse two different organisational cultures; and
- incompatible management styles.
As a result, an erosion of clarity, trust and engagement is typically at the heart of the issue when mergers and acquisitions fail. The Human Resources (HR) team plays an essential role in collaborating with leaders to overcome these challenges and successfully navigate the transition journey.
Among the most important steps HR teams can take include:
- Know what and who you are acquiring
Success begins in the due diligence stage of the process. Typically, vast sums of money, time and resources are spent assessing the financial performance and potential of the organisation. Less focus is placed on the human side of the equation and what it will take to successfully bring people from different workplace cultures together.
Understanding the organisation’s leadership strengths and development needs is fundamental. So too is having full appreciation of the values and behaviours leaders typically bring to their roles. Form a view of what it will take for people in leadership to have a positive influence on integration. Identify key influencers, for example, who have the power to enable or derail the sense of confidence and therefore engagement people feel.
- Know what success looks like
Creating a unified culture, and team, begins by understanding what success looks like. Take deliberate steps to create a clear and compelling vision of the cultural environment that will enable the newly formed team to thrive. Identify what aspects of each organisation’s culture remain important to collective success and which need to change.
Be honest and yet sensitive about aspects of culture that have enabled success to date, and those that need to change for the new organisation to achieve its full potential. This means ensuring key elements of organisation design, at all levels, includes core aspects of a target NewCo culture.
- Plan to succeed
HR plays an essential role in not only determining whether, or not, a particular transaction is a wise investment, but also in understanding the transition steps that will be essential to enabling success. Take the time needed to understand not only the scope of the change ahead, but also the implications for individuals and teams.
Understand the ways in which the merger or acquisition will impact upon career paths, reporting lines and the makeup of teams, for example. Never underestimate the extent to which people can become unhappy at work simply because they no longer get to work with the people that they used to. Remember, most people move on because they no longer enjoy the culture, their manager, or their colleagues.
Ensure incentivisation arrangements are linked to current and future expectations of performance, and ideally, for relevant leaders and staff, include integration, as well as BAU, objectives.
- Listen and respond
No matter how well considered your integration plans, people are likely to respond in unexpected ways. At every step along the integration journey, listen to understand. All too often organisations focus on telling people how things will be, rather than listening to what people on the team believe will make the biggest difference.
Be careful to listen to all of the voices on your new team. It can be easy to perceive some people as negative or simply resistant to change. Despite their emotional and at times counterproductive approaches, those you perceive as the biggest roadblocks to success can in fact offer valuable insights to what is required to smooth the path ahead.
- Coach leaders to coach
Take a hands-on approach on supporting leaders to, in turn, coach their people through change. Among the most important ingredients of success is clarity and accountability. Help leaders to set clear expectations and hold people accountable to the standards of behaviour and performance the new organisation needs.
Guide leaders to be respectful of people’s insecurities and fears of the unknown while, at the same time, expecting that they work through their concerns and “get on the bus.” While people may experience a sense of loss in the merging of their organisation with another, focus on their ability to engage with the new world and be a part of a successful future.
- Understand the business commercially – become “organisational”
All too often Human Resources is accused of not understanding the commerciality of the business, whether that be the P+L, product offering or customer profile.
It is essential that understanding the business top to bottom is a given, providing much needed trust through large scale change. For an integration programme, this means that your HR, People & Culture workstream should not just worry about the HR function, but should be providing much-needed support across all other business functional workstreams on all people and culture related topics and issues.
- Understanding and designing appropriate ‘earn outs’
One of the keys for all acquirers is to ensure that they have effectively planned their people strategies, which are linked to the value drivers underpinning the deal value drivers and integration strategy. Earnouts and other retention measures need to be considered carefully in the light of the balance of risks inherent in driving future growth and business success.
Rehena Harillal, an Associate Partner and head of HR, People & Culture Capability at Global PMI Partners says:
“Many serial acquirers who are used to buying founder-led businesses have usual start points for the creation of their earnout agreements, and these typically include: type of agreement, performance targets, term of the earnout (typically 1-3 years), earnout formula, distribution of earnout payments, and form of payment. These type of earnout agreements can also be included as part of a retention and/or risk mitigation strategy for key executives in a corporate acquisition scenario, both on the buy and sell side.
The most common earnout metric we have seen used is a multiple of prior 12 months adjusted EBITDA or equivalent as this is more clearly linked to the valuations agreed by buyer and seller than other measures, such as revenue, synergies and other business metrics. In some cases, individuals may also retain an equity stake in the acquired company to further incentivise performance. To be effective, regular, and precise tracking of all earnout measures is important, which in some cases also require independent audit/review of the earnout report.
Earnouts, however, can be difficult to design, as they are inherently based on future performance and predictions, and one essential consideration is the anticipated integration strategy. Where target acquisitions are left to operate standalone, albeit with some back-office integration, such as finance systems, it can be easier to measure and track. The more integrated into the acquirer the target becomes, the more difficult it is to assign accountability and ownership, linking back to appropriate earnout clauses.”
Sangeeta Mistry, a former Reward, Compensation & Benefits specialist at Global PMI Partners, now at one of our Clients, Sinch, adds:
“Culture is probably the biggest risk for earnouts and typically founders who may not be suited to corporate life will leave post earnout. If all senior leaders on earnouts with similar time frames can potentially lead to a mass exodus if the acquiring company hasn’t planned effectively in the meantime, which can be a significant risk at the end of earnout period. We have also seen situations where founders are protective over staff whilst still in position so therefore make it harder to plan for any restructuring and/or replacements. However, earnouts can be a very successful retention tool, with very few leaders leaving prior to the end of an earnout, which provides key leadership stability during the initial transition period post-acquisition, ensuring a smooth handover.”
Lesley-Ann Kenrick, a senior HR, People and Culture specialist at Global PMI Partners adds:
“Often the new management will want to build their own future and having the old one around can be a distraction at best and destructive at worst, especially if they are ‘big’ characters and cannot easily give up the reigns, so judging when handover takes place requires some thought and balanced against the risks. If management are to be engaged to meet the earnout objectives, then both the hard and soft aspects of this measurable achievement need to be communicated and visualised for the manager. It is key for the leadership team to keep those objectives on track, clarified and visualised as the business moves and evolves.
One final risk to watch for is the potential disenfranchisement of managers who do not get a bonus – up until that point they felt good about their value and contribution to the business, which may then be impacted – you can end up doing more damage with this than is achieved by the bonus to the bonused manager.”
Ian Kirkpatrick is a UK Associate Director for Global PMI Partners and has over 25 years’ experience in the FMCG arena as Logistics and Supply Chain Director before taking on a wider remit including HR Director and CPO roles in SME’s, Blue Chip and Global organisations. As a Fellow of the Chartered Institute of Personnel and Development and a Fellow of the Chartered Institute of Logistics, Ian has been instrumental in large scale M+A activity over the past 15 years.