5 M&A HR Issues to Focus on for Long-Term Success04 November, 2014
Smart managers on both sides of a deal know that successful mergers are not just about financial wins, but are a result of merging the intellectual capital of both organizations. This means effectively channeling the skills and enthusiasm of employees and streamlining the way in which the new business operates so that it can rapidly overcome hurdles, clearly define new roles and capitalize on synergies.
In short, success depends on aligning the people, organizational and cultural assets of the new entity. Once a deal is inked, nothing is more important to a successful outcome than effectively managing these human resource issues.
But long before the M&A process begins you, as a selling company, have a tremendous opportunity to increase deal value and success rates. When a due diligence team approaches your company they will be very interested to know how your people, policies and agreements will eventually align with the new entity. Is your HR department up to this level of scrutiny?
Following are 5 tips to address the human side of a merger and avoid the cultural pitfalls that can result in reduced value.
#1 Practice Good Hygiene
For most big acquirers questionable ethics or compliance lapses are simply not tolerated. This is the number one HR issue that will chill, if not completely kill, a deal. So, practice good corporate hygiene. Build a solid foundation for your company and keep it clean. When a due diligence team scrutinizes your company they’ll want to know:
- Are you in compliance with local labor laws?
- Do you treat hourly workers in compliance with the Fair Labors Standards Act? Who’s exempt? Who’s not exempt? Who may be overtime eligible?
- How are contract workers treated? Are they really employees in disguise?
- How are workers outside the United States treated? Are you compliant in those environments?
- Are all your employee agreements up to date and signed?
Maintain stringent standards, keep good records and keep them up to date. Often diligence timelines are compressed, so it’s vital to have a well-organized virtual data room available to the buyer so everything they want to see is readily available to them.
#2 Have a Good Attitude
M&A negotiations can be tense; they can be confrontational, but remember that at the end of the day the person on the other side of the table is someone you will most likely have an ongoing relationship with.
Keep in mind that it’s not an exit for the buyer—it’s a beginning. So, by all means, ask for what’s important to you and do your best to get what you want, but realize that there’s an end to every negotiation, and when the deal is done you’ll most likely be moving forward with the buyer into a new synergy. As such, the buyer will be carefully watching your behavior during negotiations to assess whether you’re someone they can work with in the future.
What the acquiring company wants—and needs—is people in the acquired company to be evangelists for the acquired product. They need you to be a fruitful member of the new entity. By exhibiting inflexible behavior during negotiations you’re sending a strong message about what your behavior will be in the future and that you may not be an asset they need.
#3 Just Take Your Fair Share
Your company undoubtedly has many contracts or agreements that contain Change of Control provisions which trigger when your company is sold. Change of Control provisions can be found in employment offers, equity documents, stock grants, or can even be stand-alone agreements. Because they are often sprinkled throughout an organization, they can become difficult to identify and articulate to a buying company.
One of the first HR questions that an acquiring company will ask during a diligence session will be, “What types of Change of Control agreements have you made with your employees, and where can I see them?”
In anticipation of that question, you should identify, track down and organize your Change of Control agreements in a virtual data room, so they are available for easy review.
During this review (preferably before) evaluate whether these agreements are appropriate. Buyers understand that employees need protection, but some Change of Control agreements, especially “single trigger,” are basically rewards to employees at the close of a deal and are not at all aligned with the buyer’s interests. Buyers are interested in employee retention; they’re interested in employees who are focused on advancing the synergies of the new company, not those who are focused on what’s going to trigger their Change of Control benefits.
Remember, Change of Control benefits are easy to dole out, but can be very painful to renegotiate when a buyer finds them inappropriate.
#4 Share Employee Information Carefully
Most sellers are aware of the risks involved with sharing employee information during the M&A process. The concern is that if too much information on employees is provided to the buyer and the deal falls through, there’s nothing to prevent the buyer from going directly to those employees with offers.
The best practice is to stage the sharing of employee information as the deal evolves. This is where a virtual data room becomes very helpful.
Start with aggregate data—total salary, average salary, head count by location, head count by function, etc.
Then, as a buyer demonstrates more interest, move to blinded data. This might be a list of all employees by function, including salaries, benefits, work locations, and any other data a buyer might require, but void of personally identifiable information.
Lastly, provide full employee data, but only when the buyer has proven their commitment to the negotiation and this level of information is necessary for the deal to go forward.
#5 Don’t Gossip
Due to the confidential nature of M&A deals, business owners can sometimes be torn over when to inform employees of a potential sale. It can be tempting to be transparent, but news of a business sale can adversely affect employee morale and productivity. Employees may begin to operate in a climate of uncertainty, wondering if they will keep their job, if their pay will be affected, if their boss will change, or even if they want to work for a larger company. This is why most business owners choose not to inform employees of a sale until the ink is dry.
In reality, however, it’s difficult to keep the M&A process undisclosed to everyone. It’s more common for business owners to inform key staff members of the negotiations because they need their expertise during the deal process. These select staff members are typically employees that the buyer intends to keep as part of the new managerial team and who are essential for fulfilling due diligence requests during negotiations.
In the event that the news is leaked among employees that a deal may be in progress you need not confirm nor deny anything. Your best defense is to simply state, “It is our policy not to comment on M&A at this company.”
As more dealmakers realize that today’s M&A deals are just as much about achieving operational synergies as they are about achieving financial success it becomes more critical to focus on the human side of deal making in order to maximize value and achieve sustainable business success.
For more on managing the human side of M&A, watch our webinar: The Seller’s Guide to M&A HR, by Brian Moriarty, VP of MADO (Mergers, Acquisitions, Divestitures & Outsourcing), Hewlett-Packard.