Be a Master of Mergers and Acquisitions

Economists and venture capitalists are predicting an increase in mergers and acquisitions as the global economy recovers from the worst recession since the Great Depression. In these challenging times, it is important to ensure the long-term success of an acquired organization and to achieve combined strength from a match well made.

HR professionals typically play leadership roles in an acquisition’s core due diligence activity and during the integration process. But another opportunity lies in HR leaders’ early involvement in discussions about talent and culture. During due diligence, information about talent and culture—along with typical assessments of employee benefits plans, compensation programs, employment contracts and policies—can provide insights into the value of a property and its workforce and can increase the likelihood of smooth integration. This is important because studies consistently show that between 30 percent and 70 percent of mergers and acquisitions fail, mainly due to people and culture issues.

Managing the Process

Acquisitions range from complex multibillion-dollar deals to small one-person "acqui-hires." Some deals are completed through private transactions, and others through auctions managed by investment banks. Depending on the size and complexity of the deal, there are typically two major rounds of bidding. These are opportunities for the seller to tell the story of the business and for potential buyers to meet managers and determine their interest.

In the first round, the information is presented at a high level. During later rounds—with fewer interested parties—potential buyers engage in in-depth fact-finding with members of the management team. The investment bank also organizes an online data room of documents for review. This investigation process is called due diligence. After that, buyers present what they conclude are competitive bids, and the investment bank declares a winner. Then, the deal goes to contract; the closing date marks the beginning of integration.

HR professionals’ early involvement presents an opportunity to affect human capital decisions that impact a business’s financial value. HR professionals also play valuable roles in coaching strategy leaders and helping them identify and understand both organizations’ talent and culture issues.

At AMX Corp., a hardware and software solutions company based in Richardson, Texas, seven small acquisitions were completed in 2007-08. "In every one," says Steve Byars, vice president of administration, "HR has had a seat at the table from day one. Organizations are assessed for possible fit and value—not just to make us larger."

David Binkley, senior vice president of HR at Whirlpool in Benton Harbor, Mich., also has experience with several large acquisitions, including acquisitions of Maytag and Philips. It is too late to make decisions about integration after integration has already begun, he says. Whirlpool’s executives "can tell you great integration stories because we had all the information early on to set up the right environment."

Gaining a Role

To get involved as early as possible, know who in your organization reviews potential acquisitions. Most likely, larger organizations will have a strategy team or business development group. In smaller organizations, this responsibility will typically fall to the chief operating officer, chief financial officer, legal department or business head.

Understand your organization’s internal acquisition process, and stay in contact with one of the key individuals. For example, someone in finance or legal may be getting more frequent information and can give you updates. By staying informed, you can form a due diligence team quickly—the moment you know a deal will be progressing.

To learn about the strategy team and your internal process, find out:

What deals are being reviewed.

The criteria for pursuing a deal in relation to business strategy and goals.

Who is pitching the deals and why.

How you can get a heads-up when a deal looks like it may be serious.

The process during "pitch" meetings. Listen for opportunities to learn about a potential acquiree’s culture and inner workings.

In the early stages of a merger or acquisition, there are numerous points of influence for HR professionals. Key decisions include the following: Who will be hired? On what terms? What will compensation and benefits be going forward? What roles will new and existing employees play? Will your company be acquiring liabilities like employment contracts and labor issues?

Contribute to and build on these discussions by asking probing questions and advising others what to ask; preparing interview guides; and analyzing performance reviews, job descriptions, talent management strategies, competency models or hiring profiles, if they are available.

Providing Perspective

Once you’re participating in discussions, offer a meaningful perspective by first gaining an understanding of the purpose of the acquisition. Review the investment memo and internal documents explaining why the transaction is being conducted, its projected return and how that return will be accomplished.

Is the move a:

• Financial acquisition to yield profits or revenue?
• Strategic acquisition to gain market share, new segments, products, technology or customers?
• Troubled acquisition that may result in a "buyer beware" scenario?

Find out what information the strategy or acquisition team members typically ask for. Get a copy of the discovery request list. Review it, and make changes and additions from your organization’s HR perspective.

Look for the HR implications in every action, data point and pattern. Advise the strategy or acquisition team about questions to ask, areas to probe, and examples of what can be discovered outside of payroll, benefits and personnel files.

HR professionals can have an immediate impact by raising basic questions for the acquisition team to answer, such as:

• Who are the key people in the organization being considered for acquisition? Will they be needed after closing? For how long?
• How will your organization identify strong performers?
• What pay will new employees receive, and what benefits will they get?
• What liabilities do the organization’s current benefits plans bring, such as pensions or retiree medical care coverage?
• How will your organization pay new senior executives?
• How will your organization transition employees such as a chief executive officer, a founder and redundant staff?

A critical aspect of your involvement in due diligence is assessing, highlighting and explaining the potential cost and risks associated with human capital. "There are huge people liabilities," says Binkley, who adds that his job as senior vice president of HR is "to make sure we understand them."

HR executives’ roles may include:

• Assessing the cost of benefits plans and comparing them to your company’s plans.
• Making recommendations on what benefits to offer current staff.
• Reviewing employment contracts and compensation commitments for risks and implications.
• Making recommendations about compensation to senior executives and key employees.
• Considering the impact of loss of talent.
• Assessing and making recommendations about talent.

Looking ‘Outside In"

AMX and Whirlpool HR executives describe playing key roles on their project teams and digging for stories that provided insight into the cultures, practices and potential financial liabilities of possible acquirees.

"We look from the outside in for early flags to begin exploring. We look at reputation in the community. We talk to vendors. We look at any public information," says AMX’s Byars. His team "walks around the office and kicks the tires discreetly. We listen to chatter, observe the environment. … We also listen to what other members of the team have to say. We look for the people issues behind the issues. For example, if the finance representative says the organization is slow to pay bills, we wonder what that means from a values or ethical standards point of view."

David Henigan, director of human resources at AMX, notes that "every company has its own due diligence list—and you build on that as you learn more. You can’t be too rigid in the process. Be flexible and listen."

In early discussions, one of the HR professional’s focuses should be on talent. The assessment at this point is less about formal process and more about observations and interactions. For example, if the purpose of the acquisition requires retaining special talent, look for trigger points, such as early payout of bonuses, that may incent key employees to leave. Also consider whether key employees are equity holders who will be enriched by the transaction and may not have incentive to stay with the combined organization. In addition to analyzing data and observing the dynamics of the management team, seek intelligence from vendors, search firms and former employees.

HR due diligence is "detective work," says Robert Rigby-Hall, senior vice president and chief human resource officer at the Lexis-Nexis Group in New York City. "It is amazing how much other information you can glean if you network [and] talk to friends of friends, search firms, ex-employees, suppliers. Many of them can give you information to piece together like a jigsaw puzzle."

Another area of focus for the HR professional during this stage is assessing the ability of the acquiree’s team to meet new expectations. Is the team appropriately resourced, and does it have the right people? Ask your management group about the requirements that will be placed on the team. What will it take to deliver on these new expectations? What volume of work is currently managed? Ask about the workflow and current roles. Identify critical roles by asking about special skills, and identify less-essential roles by matching them with jobs that currently exist in your own organization. Ask questions about what business areas need more help, investment and assistance or where employees seem stressed or stretched, as well as what workgroups are high-performing. Use this information to align teams and make them stronger. Look beyond the surface for subtleties and nuances, such as repeated references to a single person, group or department.

Also during this stage, HR professionals can be critical in keeping the focus on the strategic goals of the acquisition. Sometimes, people involved want the deal to happen so badly that they overlook the acquisition’s fit with the business strategy. Such "deal fever" is one often-cited reason for the failure of mergers and acquisitions.

Other reasons for failure include "an inability to keep those leaders who are key to the acquisition’s success, not having a clear integration strategy or an inability to translate an acquired company’s value into the core business," says Donald Welsko, SPHR, senior vice president of HR in Risk Solutions at LexisNexis in Alpharetta, Ga.

Binkley points to an acquisition that Whirlpool executives walked away from early on because the culture was not a good match: "There were attractive pieces to that deal, but the cultures were not a fit. … Our values were so different."

Performing core due diligence activities well can establish HR professionals’ credibility, allowing them to then focus on organizational development aspects. Understanding your company’s cultural values and the role they play in the organization’s success will enable you to develop your company’s ability to assess acquisition candidates based on those characteristics.

Binkley describes how Whirlpool assessed talent throughout the due diligence process leading up to and following the close of the Maytag deal: "We had an in-depth understanding of how talent aligned and how it was assessed. We had mapped our processes and had a common language. We went through the organization layer by layer."

The HR team had reviewed change-of-control agreements that allowed key talent to leave. "We held formal interviews," Binkley says, "and asked people about their interests, mobility, and allowed them to ask questions." Placement decisions were based on individuals’ aspirations and the organization’s needs.

Improving Integration

Early HR involvement and a robust discovery process will help prepare your organization for integration. As a best practice, many companies form integration teams separate from the acquisition or due diligence teams. HR professionals can provide leadership by identifying potential members and forming the integration team. Then HR serves as the common thread between due diligence and integration.

"At LexisNexis Group, no acquisition plan moves forward without an accompanying integration plan. Part of the integration plan includes the appointment of an integration manager, someone who shepherds the process," says Rigby-Hall, who adds that the plan includes "success measures. We review each acquisition against those success measures several times a year to ensure performance against goals. As a result, most of our acquisitions are on target."

During the final stages of due diligence, the HR team should prepare a memo about the data it has reviewed. Include implications for leadership, integration of functions and jobs, and cultural differences. These can strongly influence the decision to pursue a property.

If your company offers a bid and it is accepted, the information you have gathered and analyzed will be invaluable during the integration process.

"It would have been impossible to have had a good deal and as successful an integration without the front-end heavy lifting done by the HR team," Binkley says of the Maytag acquisition. "Just impossible."

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Linda Tepedino is vice president of human resources at Consumers Union, publisher of Consumer Reports, in Yonkers, N.Y. Muriel Watkins is president of MRW Consulting in Guttenberg, N.J.

Web Extras

• SHRM toolkit: Mergers & Acquisitions
• SHRM Article: A Fitting Role (HR Magazine)
• SHRM article: M&As Make a Move (HR Magazine)
• SHRM article: Mergers & Acquisitions: Making a Merger Work (HR Magazine)
• SHRM article: Culture Management and Mergers and Acquisitions (Case study)
• SHRM video: Steve Clark, chief of benefits planning & strategic design for Deere & Co., discusses lessons learned by the organization relating to mergers and acquisitions.
• Study: Dangerous Liaisons (Hay Group)
• Table: Points of HR Influence
• Online Sidebar: What to Look for in the Data Room
• Online Sidebar: Sample Discovery Request List