The Role of HR in Every Phase of an M&A Transaction

Today’s highly competitive and challenging global environment has created a need for companies to grow and expand to excel and compete with rivals in the same business niches, to grow market share, and to satisfy shareholders. Many companies use mergers and acquisitions (M&A) as a means to strengthen and maintain their positions in the market. M&A is a comparatively fast and well-regulated tactic for a business to expand into new markets, to incorporate new technology into its existing infrastructure, and to innovate.

A merger or acquisition’s success is not guaranteed. On the contrary, a large number fall short of achieving their objectives and goals, which in turn results in rising social costs like lost jobs, loss of income and other company-provided benefits, loss of taxes (local communities), and, last but not the least, loss of employee morale. A successful merger or acquisition avoids those social costs.

While business owners pay much attention toward the financial, legal, and other operational aspects of M&A, those who have already been through the merger process always emphasize the importance of managing the human side to boost the success of a deal. Market and financial factors do contribute towards the success or failure of M&A; however, a substantial number of failures result from the negligence of the key issues and activities associated with human resources (HR). The consequence: Many mergers fail to generate the shareholder value that is expected of them.

Top 2 Reasons for M&A Failure

Cultural differences and lack of planning are the two top reasons for M&A failure. Personnel issues have always been critical to business success, yet they are also neglected. Possible reasons for this oversight include:

  • The belief that employees are hard to manage or interchangeable.
  • The leadership team’s lack of concern with regard to the impact of the M&A upon employees, unions, and the community.
  • Disregard of human resource issues as critical.
  • No framework or plan that can systematically address and manage personnel issues.
  • Complete focus on other M&A activities, such as finance and operations.

Personnel issues crop up at different phases of M&A activity and become most evident during the integration phase following completion of the M&A transaction. Personnel issues arising during the integration phase include:

  1. Retention of key talent
  2. Resolution of issue related to communication
  3. Retention of managers and assigning them to new positions
  4. Integration to two disparate corporate cultures.

Other related issues that also emerge during a merger include how to evaluate and select duplicate managerial talent and determining the continued employment or termination of specific employees or employee positions.

When two companies join, the integration of different corporate cultures mandates that the human resource policies of both companies should be evaluated, revised, or replaced.

HR’s Role in M&A Transactions

How a company relates to its employees and how it manages them before, during, and after a merger or an acquisition sets the tone for a deal’s success or failure. Both companies should thoroughly consider all the implications and consequences of the proposed merger or acquisition.

During this period, HR professionals should advise company leadership on human resource matters, collect relevant data (surveys and other metrics), identify sources of potential conflict between the two companies, develop a strategy to integrate HR practices and cultures after the M&A, and oversee talent-related decisions, such as promotions, layoffs, etc.

HR professionals are also asked to:

  • Attempt to guide the leadership team and upper management from a human perspective as to whether the organizational goals will be upheld during M&A while facing new internal changes.
  • Identify all the facets of both organizations that will be affected the most.
  • Keep communication channels open with employees, while maintaining a delicate balance between disclosure and confidentiality.
  • Deal with the reality of M&A by terminating employees whose services or positions will be redundant in the new organization.
  • Coordinate severance pay issues between the two merging companies.
  • Anticipate litigation (due to M&A) and effectively manage it.
  • Address ethical dilemmas in which the HR may have to remove colleagues’ duplicate positions in the new company.

M&A Phases & HR’s Role

All M&A go through the same stages during which HR can identify and address challenges as they arise.

Phase 1: Identify Potential Buyers

While the company owner seeks to identify prospective buyers, a nondisclosure agreement (NDA) is a prerequisite before confidential information is shared. Despite an NDA not being completely safe, it does offer some degree of legal protection and addresses the need for confidentiality, how much information should be exchanged, and when it should be given to the counterpart.

A company interested in the acquisition will want more information; therefore, HR must use caution and discretion at each stage to understand how much data will stimulate the buyer’s interest without affecting the terms of transaction.

HR’s role: At this point, HR should be involved in communicating the need for NDA, collecting signatures, and maintaining and updating records.

Phase 2: Engage 3rd Party Service Providers

During this phase, all legal, accounting, regulatory, and technical aspects of the deal are completed. Third party service providers are secured at this time (accountants, lawyers, M&A consultants, etc.). These professionals are critical to the success of the M&A transaction process and responsible for developing the structure and contents of various legal documents.

HR’s role: HR should monitor this phase by interviewing, assessing third party service professionals, and drafting contractor agreements after careful negotiation.

Phase 3: Negotiate the Transaction

Both the companies sign a letter of intent when they come to a mutual agreement about the top issues of the M&A deal. The letter of intent gives a basic understanding of the agreement and binds both parties to confidentiality. Once this document is signed, the due diligence process also begins.

During due diligence, it is vital to read all documents to mitigate nasty surprises. Information about people, culture, employee benefit plans, liabilities, compensation, employment policies and contracts, legal issues, etc. is exchanged during this phase. Both parties must decide how much information they are ready and willing to share. Employees will have more confidence in the M&A deal when they are assured that their interests are being looked after by their company’s HR.

HR’s role: HR examines employee-related policies, programs, and practices to ensure agreement with applicable employment rules and regulations. The HR team should also analyze the acquiring or acquired company’s retirement policy, contribution plans, healthcare benefits, and any other liabilities that it might have.

Phase 4: Sign & Execute the Deal

Assuming due diligence uncovers no material issues and both parties agree to a purchase price and terms, a formal legal agreement is drafted on approval. Once the two companies are legally joined, new workgroups are formed and, unfortunately, redundant employees are terminated. During this time, the combined culture of the new, unified company is established and communicated to all employees.

HR’s role: HR should be involved in designing the new mission and vision statements and oversee revisions to company policies and procedures.

Scope of HR’s Involvement After the Transaction

Creating new organizational policies: In concert with the the employer/business owner, HR must redefine, develop, and communicate the new employee-related strategy to reshape the culture of the newly united company. The developmental strategy should consist of all key operational policies, rules and regulations governing employee behavior, and policies regarding attendance, time-off, harassment, drug test policies, and privacy.

Retaining key employees: Ideally prior to an M&A deal, management should communicate their intentions to retain key talent. This entails conducting confidential interviews with all such key employees before the actual closing deal date. HR should ensure management does not overcommit or oversell to these employees, or they might consider other options.

Recruitment and downsizing: Deciding whom to retain, deploy, or terminate is a significant challenge for the buyer. HR should assess the skills, capabilities, and competencies of all key employees. Once this task is complete, they should proceed with termination or offers of early retirement to select employees or decide not to refill certain vacant positions. Decisions related to the termination of service have always been tough; the way in which such decisions are communicated speaks a lot about the company’s values.

Developing compensation policies: After the merger, HR is tasked to realign disparate payment policies and plans to suit the new company. They may entail creation of a new program altogether to meet the new entity’s goals. Employees at this time will need full disclosure about their compensation. Senior management in new roles will be equally worried about their stock options, special provisions upon retirement, and severance packages. HR is responsible for developing this new compensation strategy which will require complex decision-making and approval from the leadership and board.

Employee communications: When clear, up-to-date information is communicated to employees, it gives them confidence and a sense of control. It also enhances their coping abilities, while reducing the impact of the merger on their performance. HR should keep the following at the forefront for a good communication program:

  • Establish multiple and new routes of communication.
  • Communicate the project’s progress by highlighting things that went well.
  • Create a channel for employee involvement and feedback.
  • Acknowledge the merger will have some issues and commit to identify and resolve those problems.

The Golden Rule

When two companies decide to merge, issues often arise due to variations of culture. Personnel and cultural issues affect all the aspects of the company’s operation. Irrespective of the perceived similarity between two companies, M&A deals never perfectly align corporate cultures.

How corporate restructuring is implemented post-integration matters most. To facilitate as smooth an integration as possible, it’s crucial to be straightforward about what is happening now and what is planned in future.

Before entering any M&A deal, leaders from both sides should thoroughly assess their existing HR systems and staff capabilities. And once these decisions are made, both companies must treat those people affected by the transaction with dignity and respect.

Author Summary

Dan Doran

Dan Doran

Is the Founder of Value Scout, Quantive and the 2019 Exit Planner of the Year. He is a recognized expert and speaks frequently about M&A, valuations, and developing more deliberate value creation strategies.
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