Vol. 46, No. 6
The degree of HR's participation is directly linked to the success of mergers and acquisitions, a finding that opens new doors for the profession at a critical time.
If you think HR’s role in a merger or acquisition begins when the deal is inked, think again. The earlier HR is involved in the process, the greater the likelihood of success, according to an extensive survey on merger and acquisition activity.
The study, sponsored by the Society for Human Resource Management Foundation and conducted by Towers Perrin, a worldwide consulting organization, found a direct correlation between HR involvement and M&A success.
The survey, conducted last June through September, reflects data from 447 senior HR executives.
More than two-thirds of respondents represented companies with 1,000 or more employees and almost half had revenues of at least $1 billion. Most participants were from North America, but some were from Europe, Latin America and Asia. During the past five years, two-thirds of the respondents were involved in three or more mergers, acquisitions or joint ventures.
Among the key issues the survey focused on were:
- The degree to which the desired synergies driving the mergers or acquisitions had actually been achieved.
- The major obstacles to their achievement.
- The ideal levels of HR involvement at every stage in the M&A process.
- The individual HR competencies needed for the ideal involvement.
Most people who study M&As divide these transactions into four distinct phases: pre-deal (selecting the target); due diligence; integration planning; and implementation. This survey showed that HR involvement was heaviest in the two later phases.
In addition, the survey explored the best practices for HR professionals in M&As. The purpose was to provide a descriptive framework for successful transactions and the ways in which HR can and should participate in the process.
To determine the “success” of mergers, respondents were asked to rate a list of potential synergies according to their level of expectations for their most recent merger or acquisition and the degree to which the synergy was captured. Both measures used a five-point scale. These scores were analyzed to identify the most-intended synergies (rated 4 or 5 on the five-point scale). Of those synergies, the degree to which the intended synergies were achieved was analyzed. Success was defined as achieving a 4 or 5 on the scale for their most intended synergies. Thus, an average achievement score of 4.0 or more on a 5-point scale would indicate success. A score of 3.2 to 3.9 would translate into partial success, and a score below 3.2 (the bottom quartile) would indicate some degree of failure.
Based on achievement of intended synergies, 43 percent of our respondents reported success, and 24 percent of the mergers or acquisitions were failures.
Determining What Drove the Deal
As noted earlier, success in an M&A is determined by the achievement of the desired synergies. The synergies most sought are growth in market share, the primary motive for 82 percent of respondent companies; leadership in industry consolidation, 68 percent; enhanced brand strength and reputation, 55 percent; and reduction in overhead/operating costs, 46 percent.
To determine the synergies that proved to be the most difficult to capture, a “gap analysis” was conducted to quantify the difference between aspiration and achievement. For example, among 82 percent of respondents for whom growth in market share was an important expected outcome of a merger, only 49 percent achieved that objective—a gap of 33 percentage points. For those that intended to achieve leadership in a consolidating industry, the gap was 21 percentage points. And for the companies focusing on enhanced brand strength and reputation, the gap was 22 percentage points.
These sizable gaps were the result of failure to overcome key obstacles. The respondents said the major roadblocks on the route to M&A success were inability to sustain financial performance, 64 percent; loss of productivity, 62 percent; incompatible cultures, 56 percent; loss of key talent, 53 percent; and clash of management styles, also 53 percent. Three of these five roadblocks are clearly related to HR issues and are usually the result of inadequate planning and preparation for the back end of the deal (key HR areas of integration and implementation).
This is consistent with the fact that most respondents, whether successful or not, had little overall involvement in pre-deal activities. However, successful firms were significantly more likely than firms deemed “unsuccessful” to have greater levels of HR involvement in specific pre-deal activities.
There was near unanimity among respondents as to the powerful negative effects of a failure to achieve cultural compatibility. A vice president at a telecom company commented, “So far as our senior management is concerned, culture simply isn’t on the map.” And a senior vice president at a financial services organization said, “HR needs to grab the moral authority over cultural issues—ahead of the merger—by preaching to executives the importance of those issues.”
The research suggests that one reason for the inability of so many acquirers to overcome those obstacles is insufficient planning. Companies that reported failure in the achievement of their desired synergies tended to underestimate those obstacles when developing their M&A strategies. As a former electronics executive put it, “When it comes to people issues, most mergers and acquisitions are incredibly poorly planned by the chief executives.”
Clearing the Hurdles
HR executives were asked to indicate their ideal role in mergers or acquisitions. The majority (65 percent) said that they wanted to be a strategic partner. Executives were then asked to rate the importance of a list of capabilities in achieving that role, as well as their current level of capability. The top five capabilities most needed to achieve HR’s ideal role were:
- The ability to evaluate another company quickly, 89 percent.
- M&A (and general business) literacy and integration know-how, 87 percent.
- Providing advice as to employee sensitivities and attitudes, 86 percent.
- Motivating and retaining critically needed talent, 83 percent.
- Planning and leading complex integration projects, 82 percent.
“Speed is crucial,” said one HR executive of an energy company. “We try to get the first three stages of the deal done in 30 days—the pre-deal, the due diligence and the integration planning.”
As to the need for M&A and business literacy, the former electronics executive offered this comment: “One reason HR executives have trouble getting their recommendations through senior executives and boards of directors is the lack of business breadth that’s typically characteristic of people in HR.”
“Gap analysis” also was used to determine the difference between importance and achievement. Overall, only half of the respondents believe that their HR organizations possess the capabilities needed to play a strategic M&A role. The largest gaps were the ability to evaluate another company (32 percent) and M&A (and general business) literacy and integration know-how (31 percent).
Most respondents cited the importance of the same capabilities, but those at successful firms came closer to achieving those capabilities.
How can HR people attain business literacy and the other core capabilities needed to achieve full partnership in the M&A process? On-the-job training is certainly important. The more deals you’re involved in, the more skills you’ll develop. But a strong educational background and professional training are at least equally valuable.
Getting in at the Beginning
The survey bears out the well-known and (among HR people) widely lamented fact that their overall involvement in mergers and acquisitions is mostly limited to the two phases at the back end of the deal: integration planning and implementation. In the opinion of our respondents, they should be involved in all four stages.
The HR executive of the energy company said, “Typically, our company invites HR to sit at the table very early in the process. We have a lot of credibility because of the number of deals we have done and the value that HR has put forward during those deals.”
In the pre-deal phase, HR people were substantially involved (a 4 or 5 rating on a 5-point scale of involvement) 21 percent of the time in successful M&A transactions. That’s not a high percentage, but it compares quite favorably with the 12 percent substantially involved figure reported by HR people involved in unsuccessful M&As.
A senior VP at a retailing organization described an acquisition about which she had major reservations: “The head of the operating division that was championing this deal was annoyed at my attitude and did his best to keep me out of all the meetings to plan the deal. In most cases, I wasn’t even notified. But I wouldn’t let up. I walked into those meetings unannounced, and I set forth my reservations. I told them about the risks involved. But rather than taking a negative attitude, I said, ‘Let’s figure out right now how to deal with those problems during the integration process.’ My persistence—and the important points I made that nobody else had noticed—earned me a seat at the table as a full and value-adding member of the deal-making team.”
During the due diligence stage, HR people were substantially involved in 72 percent of the successful deals and only 39 percent of those that failed. One respondent related that in one potential transaction, the chairman was surprised to learn that the ratio of retirees to active employees was 7 to 1 at the organization they were about to acquire. Those retirees were all drawing benefits. “Management clearly hadn’t thought through the pension funding implications of those demographics,” the interviewee said. “The moral here is that HR can help to do critically focused due diligence.”
The vice president of a plastics company offered this formula for success: “To be an effective part of the due diligence team, you need to understand your own business very well, as well as the overall business strategy and the specific HR issues. You need to understand why your company does things the way it does, and then you need to learn why the target company does things the way it does. This gives you the complete picture.”
The following approach was recommended by a vice president of HR at a manufacturing company: “I’ve learned from my experience in M&A that it’s important to interview senior management of the acquired company as soon as possible to establish a sense of their leadership. In addition, it’s a good idea to make a list of the other company’s best practices and your own, and then compare the lists for similarities, differences or things that the other company might be doing better.”
In the implementation phase, successful companies reported 87 percent HR involvement, compared to 73 percent for those that failed. One HR professional recommended an approach he finds particularly useful: “Most changes should be spaced out evenly, but takeaways should all be done at once, if possible.”
A Look at the Future
Eight of 10 respondents (81 percent) employed by companies with success in M&As said that top management is confident that their HR function is fully prepared to support successful integration. For companies in unsuccessful mergers and acquisitions, management’s confidence level in HR’s ability to deal successfully with M&A integration issues is only 50 percent.
The professionals we interviewed offered some ideas about HR priorities for future M&A activity. They agreed that the most important task is defining the integration philosophy, process and timeline at the earliest possible date. Other important priorities cited were optimizing the effect of communications, mapping cultural differences, aligning HR policies, securing resources, resolving organizational issues at the outset and defining a rewards strategy.
The most appropriate role for HR, everyone agreed, is as a strategic business partner. “But in order to accomplish this,” said a senior vice president with an aircraft manufacturer, “HR professionals need to spend more time talking with operating management than they do with each other.”
Another key role mentioned by many respondents was serving as an adviser to executive management. The integration manager at a software company said, “The best way for HR to contribute to M&As is to be viewed as an internal consultant.”
Winning a Seat at the Table
While the survey supports a needed role for HR in M&As, HR still needs to win a seat at the table in these deals. This involvement should cover all phases. As the compliance and integration manager at a technology company said, “I codified and standardized methods and procedures for HR due diligence. This demonstrated that I was a value-added contributor and got me a seat at the deal table.”
HR especially needs to get involved in overcoming the obstacles of incompatible cultures, low productivity and the inability to manage and implement change. But—again as our respondents told us—HR must develop broader skills to win that coveted place at the table.
The most important of those capabilities is business literacy. As the senior vice president of the aircraft company said, “HR must understand M&A economics and know how to dig out the information necessary to analyze whether there are significant people issues that could compromise those economics. If HR demonstrates competencies of that kind, executive and operating management will knock down their door to get them involved throughout all stages of the M&A process.”
HR is currently at a crossroads. Several trends—web-based technology, the growth of HR outsourcing and the consolidation of major industries—are threatening the future of the traditional transaction-driven HR function. These trends make it vitally necessary for HR to seek new, more strategic opportunities for performing the people-related functions that are the profession’s birthright and its very reason for being.
Mergers and acquisitions present a superb opportunity for HR to demonstrate its strategic value. If HR professionals can demonstrate that their unique set of skills can make the difference between success and failure in M&As, the profession will occupy a stronger position than ever.
For almost any corporation, a merger or acquisition is a major gamble—sometimes with the company’s entire future at stake. If HR can demonstrate its value in this high-stakes game, the entire profession will be strengthened. HR professionals will move up in the management structure, occupying key positions as advisers to the people who make the vital decisions.
Jeffrey A. Schmidt is a managing director at Towers Perrin, a worldwide consulting firm that focuses on M&A and HR issues. Survey results were collated and analyzed by Jessica Saban-Francis, the firm’s director of research.