In today’s white-hot M&A environment, it pays to slow down to finish first. Whether a merger, acquisition, carve-out, or stand-up, today’s M&A transactions face increasing pressure. Global merger and acquisition activity are at an all-time high and buyers, whether public or private, face a new reality characterized by compressed auction timelines, reduced access to critical information, and increased risk. Although it’s clearly a sellers’ market, sellers are not immune to the risks posed by this volatile deal environment. Many are under pressure to generate new shareholder value and quick returns, or they are involved in the sale of companies with complex operating models.
In this environment, buyers and sellers alike increasingly recognize that the human capital aspects of running a business are fundamental to driving return on investment.
When evaluating a deal, buyers are not just looking at product, customers, and access to markets; they are also looking at the quality, effectiveness, cost, and ROI of human capital.
Human capital is a primary driver of value, as well as of risk, in a transaction’s success. This understanding is critical in helping organizations anticipate and avoid people risks in M&A transactions, which can impact the business being acquired in one or more of the following dimensions: strategic, financial, and operational.
People risks in this category result from a lack of coordination between the people strategy and the business strategy which can lead to declining organizational performance and loss of transaction value. They take the form of employees defecting, underperforming, or failing to make needed behavior changes to successfully support the new business. The root of people risks in M&A transactions lies with individuals’ inability to manage uncertainty and stay productively focused on changing, often higher, standards of performance.
Financial risks relating to human capital, identified during due diligence, can be material and critical components of the business valuation. For example, compensation and benefit compliance issues, defined benefit pension liabilities, retiree medical program liabilities, the Affordable Care Act (in the US), employment tax implications, global requirements, labor relations issues, employment contracts, and potential employee transition/RIF/severance implications. Taken together, these factors have both obvious and sometimes hidden financial implications that must be fully accounted for.
There are other hard costs associated with a merger or acquisition, including the failure to realize the synergies identified in the investment thesis. These involve tough decisions about people, compensation, benefits, and structure. Identifying and quantifying synergies is often difficult but executing them on schedule is the real challenge.
Achieving operational excellence requires the right organizational structure as well as a go-forward HR operating platform that will enable the buyer to differentiate its business and attract and retain the best talent. Operational issues, left unchecked, can slow decision-making and destroy morale. These include the HR function’s ability to execute on the basics, including payroll, benefits administration, onboarding, compensation management, and cultural integration.