The Key to MA Success

8/6/2019 The Key to MA Success

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The Key to M&A Success

Key Implications for All Corporate Executives


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Merger & Acquisitions: The People Side

As M&A deal values continue to rise (totaling $4 Trillion worldwide in 06,and exceeding $1 Trillion in the U.S. through mid-year 07), industry researchover the last 15 years indicates that 50-70% o all mergers, acquisitions andother corporate transormations do not achieve their desired level o success,primarily due to people issues. The people issues cited include:

key sta losses and the downstream impact o those losses

diculty in attracting talent during and ater the integration

major dips in productivity when the impending deal is announced

culture clashes that paralyze the combined organization

under-estimating compensation and benets exposures

over-estimating synergies and cost-cutting opportunities

Most o the studies indicating those astonishing M&A ailure rates were conductedin the 90s by the likes o McKinsey, Watson Wyatt, Accenture, PwC and Mercer;with both McKinsey and Watson Wyatt each reviewing over 1,000 mergers andacquisitions. To urther break down the phrase do not achieve their desired levelo success the studies ound that roughly two-thirds o companies ailed to reachtheir prot goals ollowing a merger, and less than hal met their cost-cutting goals.


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under-perormed the market by 2.5%(in 1998) and 6.4% (1988). Additionally,KPMG ound that the percentage odeals reducing shareholder value ellrom 53% in 1999 to 31% in 2001.

Perhaps more signicant, a 2002Towers Perrin / SHRM survey o 450senior Human Resource executives atmajor corporations determined a directcorrelation between HR involvement andM&A success. It urther suggested thatthe earlier HR is involved in the process,the greater likelihood o success.

The data in the 2002 Towers / SHRMstudy was quite compelling i notunassailable. HR was involved duringDue Diligence in 72% o the successul

deals and only 39% o those thatailed. During Integration Planning,HR participation among the successuldealmakers was 85%, compared to53% or the unsuccessul companies.

In act, virtually all recent M&A researchshows a growing inclination to involveHR in planning and integrating M&Atransactions, with some organizationseven involving HR in pre-deal targetselection and due diligence activities.David Harding, Bain & Co.s M&APractice Lead, perhaps in an attemptto encourage HRs earlier involvement(i.e., during due diligence) dubbedthe term human due diligence.

Fast orward to similar studies conductedin the last ew years and one noticesthat the trend line is somewhatimproving. While Accentures 2006survey o 400+ corporate executivesreported less than hal o their recentdeals achieving expected cost-savings, a2004 study conducted jointly by Towers

Perrin and Londons Cass BusinessSchool concluded that more M&Adeals are now nancially successul.

The Towers-Cass study o 200+ globaldeals ound companies involved in M&Adeals worth more than $400 millionoutperormed the market by 7.0%. Bycontrast, share perormance o companiesinvolved in similar deals at the same pointin the earlier M&A cycles o 1988 and 1998


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Introducing HR M&A

HR M&A reers to the set o increasinglyormal and well-developed processes andtools or proactively managing the people-related risks and opportunities inherentin M&A deals. These human capital risksand opportunities, discernible in all major

phases o the HR M&A Lie Cycle (HRaspects o M&A Due Diligence, IntegrationPlanning and Integration Execution) arenow universally recognized as the primaryreason why M&A deals succeed or ail.

Note: For the purposes o this white paper, the phasenot included in the HR M&A Lie Cycle that is part o thenormal M&A deal cycle is pre-deal Target Selection.


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The HR M&A practice or discipline area,the actual name o the HR unctionresponsible or ensuring M&A success atcompanies like GE and Cisco, ocuses onthe most complex and intense Workorce

Transition Event (WTE). While someo the same challenges, risks andopportunities are ound in other WTEslike Reductions in Force, Outsourcingand various Company Restructuringscenarios, the stakes are usuallysignicantly higher in the HR M&A arena.

Given that key value contributors,who might leave due to uncertainty,make up a very large portion o dealvalue, and that direct / indirect stacosts typically comprise 70-80%o total operating budget (hence

productivity dips cost millions), itseasy to see why organizations treatM&A events like the most extremeorm o change management exercise.In change management scenarios,organizations look to compress theperiod o de-stabilization ater themajor change is announced in thiscase, an impending M&A situation.

Just to put retention and re-recruitingo key perormers in proper context,according to the American ManagementAssociation, one out o our topperormers leave the company within

3 months o a deal announcement,and 47% o senior managers in theacquired company leave within therst year. Additionally, a Wall StreetJournal article estimated that 50-75%o managers in companies that havemerged plan to leave within threeyears. Causal actors range rom majoruncertainty to perceived loss o reedom,advancement opportunity, status orother job satisers, to the opportunisticsearch rms that descend on mergerparticipants. [Note: Workorce TransitionSolutions, described later in this paper,

have been known to enable the long-termretention o 90% o key employees.]

The most eective change managementprograms attempt to limit or control thenegative allout o the change acrosstwo dimensions: how severe/strongthe negative reaction or dysunctionalbehavior is, and how long the period ode-stabilization or dysunctional behaviorlasts akin to the amplitude or height-- and requency or duration -- o a

statistical curve. It is widely understoodthat in major change management eventthe amplitude (height) o the curve isdirectly impacted by the eectivenesso communications planning and

delivery; and the requency (duration)o the curve is directly impacted by theeectiveness o detailed project planning dening owners, milestone dates,dependencies, risks, success metrics, etc

It ollows rom the above descriptiono how change management is otenconceptualized, that in a lie-changingM&A situation, speed and clarity aretwo o the most important successactors. Slow or unclear communicationsabout the me issues such as job,compensation, location, benets, boss,

etc., or slow execution o integrationtasks resulting in key sta losses and/orproductivity dips, are the cornerstoneso an under-perorming deal.


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Common HR M&A Mistakes

There is a plethora o potential workorce-related mistakes thatcan occur in all three phases o the HR M&A Lie Cycle. During DueDiligence, the acquiring companys poor planning and due diligencecan result in inadequate nancial reserves and provisions or risksthat were not discovered or improperly evaluated (e.g., under-undedpension plans). During the Integration Planning phase, separationdecisions can be made without applying consistent, legally deensiblecriteria. It is also during this phase that employees are waiting (not verypatiently) to have their me issues addressed. Key sta deectionsis oten the result o not even attempting to address some o the

uncertainties during Integration Planning and even during the DueDiligence phase vis--vis those key employees who are privy to whatis occurring. Finally, during Integration Execution, loss o productivityand customer service delivery can easily occur due to a lack o speedand eciency in dealing with the overall integration process.

The bad news is that any o these common mistakes could result inan under-perorming or ailed M&A deal. The good news is that all othese common mistakes are largely avoidable with the right attentionto Human Capital issues during all phases o the HR M&A Lie Cycle.


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Technology Advances in HR M&A

Data warehouses and OLAP (On-LineAnalytical Processing) tools, whenapplied and managed correctly, have thepotential to allow acquiring organizationsto model dierent integration andseparation action scenarios. However,it is only in the last ew years that anew category o HR Technology calledWorkorce Transition Solutions - hasemerged which, unlike OLAP tools, does

not require heavy, time-intenstive andcostly IT or business analyst support [ona very sensitive M&A project]. Thesenew modeling and HR M&A decision-support tools are congured to refectcompany-specic business rules, decisioncriteria, assumptions and/or policies.

The underlying data model used inWorkorce Transition Solutions isspecically designed to track andreport on all projected costs associatedwith dierent separation/integrationscenarios, including severance, early

retirement costs, outplacement,retention bonuses, other specialpayments or compensation guarantees,adopting the richer o two employeebenets plans, accrued vacation,etc. Transparent decision criteria,including perormance, potential, skillsand competencies can also quickly beapplied across workorces. Additionally,inormation related to total basesalary remaining vs. base salary beingeliminated (with and without overhead)can also be calculated and provided.


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A market-leading Workorce TransitionSolution called Decision Manager,oered by Vurv Technology, includesthe unctionality to systematicallyapply user-dened decision actors - orseparation and re-deployment criteria- to the merged population (maskingacquiring company i appropriate). Thetool then evaluates all headcount andcost outcomes, as well as potentialadverse impact and other EEO complianceissues based on the actors and criteriaapplied. There are documented caseso merging companies saving $80-100million in payroll costs when using thesemodeling tools and making quick, butinormed and deensible decisions. Theautomatic generation o packages andletters is also included in Vurvs Solution.

Perhaps a more subtle, but comparablyhigh-impact capability oered by Vurvssolution is that employees earmarkedor re-deployment automatically getadded to the candidate database withinVurvs Recruiting Solution. Moreover,separated (ormer) employees wouldbe noted in the talent pool (recruitmentdatabase) to prevent hiring themback at perhaps a higher rate.

The benets o leveraging these new

capabilities cannot be over-stated,whether its in the area o key employeeretention, or signicant payroll costsavings associated with addressingredundancies, or legal cost avoidancedue to applying consistent decisioncriteria and evaluating potential EEO

exposure. As a concrete example, a ewrecent mega mergers have occurredin the Telecom industry. One o thoseM&A deals, Cingular and AT&T Wireless(120,000 employees), used the toolsetdescribed above, and experiencedzero EEO compliance issues.


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Conclusion

As CEOs and Boards remain undeterredrom deal-making, largely becausesuccessully executed deals createshareholder value ar beyond whatcompetitors can achieve, they are moreand more apt to involve HR in planningand executing these M&A transactions.Successully answering the call involvesapplying the combined wisdom o all whopreceded on the same HR M&A journey, inaddition to detailed integration planningand project management, eective riskidentication and mitigation, and practicalbut high-impact change managementand communications programs. Finally,some o the new advances in technology-based tools or HR M&A support shouldbe given serious consideration.


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About the Author

Steven Goldberg is an independent management consultant with 25 yearsexperience in HR Systems and Operations, including developing tools andprocesses to support multiple global and domestic M&A cycles. Ater co-launchingan HR M&A unction or a major industry consolidator in the U.S., he co-ounded aboutique consultancy called HR M&A Solutions. More recently, Steven headed-upHR Product Strategy or PeopleSot and two other HR Solution companies; andhas also ocused on HR and Recruitment Outsourcing. Steven has an MBA with aspecialization in HR Management. His articles and citations appear in AcquisitionsMonthly (UK), Forbes and the Australia Financial Review.

[email protected]

About Vurv

Vurv is a leading provider o on demand talent management sotware. With a complete product suite or recruitment, onboarding,perormance, succession, compensation and workorce transition management, Vurvs sotware is used by more than 2,000 companiesover 2.5 million users around the world. Vurvs workorce transition and separation management solution, Vurv Optimize, provides decisupport, automation and compliance or workorce integration and restructuring events as well as oboarding employees on an ongoinbasis. Handling mergers and acquisitions, outsourcing events, retirement programs, reductions in orce, ordinary course terminations avoluntary separations, our application enables aster, more eective and auditable decisions around retaining, redeploying or separatinemployees. Customers include Cingular, Lucent, Washington Mutual, American Airlines, Johnson & Johnson, amongst others.

www.vurv.com


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