How Solving for the People Side of the Equation Maximizes Transaction Value
Authored By: Jennifer Ayres / Contributions By: Samantha Collins
Too often, companies determine their M&A strategy based on an assessment of the gaps their business currently faces, or the growth opportunities that they envision. Ideally, both elements will play a role in laying out the strategy and will usually include an assessment of capability, geographic advantage, intellectual property, technology assets, etc. The business case for M&A is often developed around products, services, and financials. However, planning for a truly successful integration of business entities also requires a lens that considers the people side of the equation for both the acquiring company and the target company.
People – From the Acquirer’s Point of View
A critical consideration for an acquiring company is to do an internal assessment of their human resource capability and capacity to effectively integrate the business. It is critically important to consider the cross-functional implications and interdependencies in an acquisition as doing so can highlight areas where a company is not resourced properly to support the integration work. A large global pharma client recently expanded the scope of their M&A integration team to intentionally assess the resourcing required; they realized that inadequate resources would lead to disruption and value leakage thus diminishing top-line results of the acquisition. An internal capabilities assessment will reveal the depth, knowledge, experience, and capacity that your team has to effectively absorb new integrations and adjustments and provide insight into the preparations that can be made.
People – From the Acquiree’s Point of View
The people side of M&A can make or break a deal in the end. There is an all too common story that appears in the Harvard Business Review about an American Pharma company that acquired a British Pharma company. When the American Pharma company declared that employees of the British Pharma no longer needed to wear neckties so they could appear more “friendly”, they did not understand the culture of the British company who’s employees embraced the necktie as a symbol of professionalism and respect. They would have social outings at the end of a workday where removing the necktie was a further symbolic expression that it was time to have some fun and unwind. Overlooking this small detailed started to create an irreparable rift as not only did the British employees refuse to remove their neckties, but their female colleagues started to wear them creating an even more visual divide between the companies. Two years later, the marriage ended.
When employees learn about a deal, they immediately think about what it means for them. Unless your purpose for the acquisition is to “shelf your competition”, do not underestimate the profound impact an acquisition can have on people’s self-identity. An early indicator of success is linked to how well and how quickly trust is established between the two parties. Earning that trust requires a thoughtful approach to caring for the pre-existing culture. Although each culture will require a unique approach, some basic steps in building a plan can serve as the foundation for both.
5 Tips to Realizing Value of an M&A with a People-Focused plan
1. Do Cultural Due Diligence
Make it part of your overall due diligence plan to consider the culture of the company you are acquiring. Leaders of both organizations should openly share salient characteristics of the people, what policies or practices are commonly accepted, as well as existing management styles. A simple google search has plenty of M&A failures resulting from a clash of cultures. Richard Parsons, former Chairman and CEO of Time Warner, said of the failed $350 billion AOL-Time Warner merger in the New York Times: “I remember saying at a vital board meeting where we approved this, that life was going to be different going forward because they’re very different cultures, but I have to tell you, I underestimated how different.”
2. Develop a Culture Integration Plan
Once the cultural assessments of both companies have been completed, consider the strengths and weaknesses of both. Document and agree on specific changes that both companies will make as part of the integration. This can include formal changes like policy changes to performance management metrics or informal changes such as how the company approaches social gatherings and even the form that executive presence takes.
3. Get Buy-In
Often overlooked in any change event is the importance of communication. It is not enough to simply explain what is happening, you must also explain the “how and why” it is happening and the impacts it will have across both organizations. Use the event as an opportunity to create a new vision for the company and how you will become stronger together. Emphasize the strengths of each company by creating a compelling narrative that resonates with both companies. Reinforce it by supporting management with talking points for their teams, create a “culture council” to manage messaging, and develop all-important feedback channels. Communicate early and be transparent in your communications. Left with limited information, people will fill in the gaps with misinformation, creating worry, anxiety, and needless distractions on top of the tactical risks evident with any M&A event. Consider creating an employee promise that balances the employee’s needs (compensation, career advancement, purpose of work, etc.) with the organizational objectives while creating excitement on what a united future will bring.
4. Reinforce First Impressions
It probably goes without saying but first impressions set the stage for your new employees on how the new world will look post-M&A. Therefore, spend some time building a people-focused plan to manage expectations from deal announcement to Day One and beyond that creates excitement and momentum yet is grounded in delivering on the fundamentals. Pave the way for sustainable value realized from before the transaction occurs through the realization of your long term goals. A good Day One plan focuses first on establishing business stability with extra attention given to commercial operations, customer impacts, employee experience, and communications. However, once the euphoria of Day One begins to fade, the real work beings. This is where the effort put into your integration plan will pay off.
5. Cultivate Patience
“Buying companies demands patience…. You have no idea how long it can take.” says Shigenobu Nagamori, CEO of Nidec. Mr. Nagamori, sometimes known for caring more about his employees than his investors, is responsible for nearly 60 acquisitions over the years and culture is careful consideration in the process. He is known as a maestro of M&A who never had to lay off employees even when an acquired company was struggling. “Instead of cutting payroll and selling off assets, Nagamori goes into the company, gets to know managers and employees, have meals with them, and builds relationships and trust. Only then, he said, does he make suggestions on how people could work more efficiently…. Such simple exercises translate into higher morale and higher productivity, he said.” (New York Times)
At the end of the day, it is the people that makeup and run an organization. Even when a company is largely operated by robotic automation processes, there is still a human behind it somewhere. As humans, we need to feel a sense of value and purpose that manifests in the form of a culture. How you cultivate that culture will determine how your people behave and hence, drive value for your customers and your organization.
Jennifer Ayres and Samantha Collins are partners at Concinnity.