While most companies involved in mergers and acquisitions (M&As) use retention agreements to retain key talent, the companies that are more successful at retention begin the process early — identifying people and tactics — and don't rely solely on money, according to a survey by Towers Watson of 180 companies from 19 countries, including Canada.
And while economic uncertainty has slowed the pace of deal-making in some parts of the world, acquisitions and divestitures remain a viable growth strategy for many organizations. More than one-half of the respondents completed between two and 10 acquisitions over the last two years.
"With successful deal implementation a core priority for many companies, the focus on retention has intensified. In today's business world, companies are often buying skills or relying on an acquisition's key talent to meet critical sales or market goals. The ability to retain the right people can make or break a deal" said Eric D'Amours, leader of M&A services at Towers Watson in Canada.
"Especially when making acquisitions abroad, Canadian organizations increasingly recognize that retaining the right people, with the right skills, in the right roles may mean the difference between success and failure. And despite widespread agreement on the importance of identifying and retaining talent, the complex nature of transactions makes the process that much more challenging — even for those companies with significant M&A experience."
Acquirers that reported greater success at retention included the 44 per cent of respondents who rated their retention agreements as highly or mostly effective at retaining employees during an acquisition and also retained all or nearly all employees through the retention period in past acquisitions.
Companies with successful retention strategies identify which employees they want to target for retention agreements early in the process, found Towers Watson. Almost three-quarters of successful acquirers (72 per cent) determine which employees are asked to sign retention agreements either during the due diligence stage or during the transaction negotiations.
That is twice the number of less successful acquirers (36 per cent) that ask employees to sign agreements during either of those times. And 58 per cent of less successful companies don't ask employees to sign agreements until after the transaction closes.
"Deal-makers that are successful at retaining top talent beyond the transaction tend to implement retention agreements early in the cycle, often as early as when a deal gets underway. Some companies will start determining which employees will help the organization move ahead with the deal, as soon as the due diligence process begins. Of course, the sooner companies are able to identify retention targets, the more thorough they can be in designing an effective retention program," said Brian Reidy, managing consultant at Towers Watson's Calgary office.
While companies with successful retention strategies use many of the same tactics to retain employees as their less successful counterparts do, they also emphasize certain ones to a much greater extent. The majority (92 per cent) of successful acquirers use retention bonuses, compared with just 53 per cent of less successful companies.
Additionally, 74 per cent of successful companies use personal outreach by managers and leaders, three times the number of less successful acquirers (24 per cent) that use this tactic.
"While money is important, it isn't everything. In fact, the most effective retention agreements include not just financial incentives but a mix of tactics, including personal outreach by managers," said Reidy.
Among the key findings from the overall survey respondents:
•Retention agreements are the primary retention vehicle — used by 84 per cent of acquirers and 70 per cent of sellers — with retention bonuses the cornerstone of this approach.
•Roughly two-thirds to three-quarters or more of both buyers and sellers use agreements, chiefly for senior leaders below the boardroom level, key contributors and technical experts.
•Retention bonuses are far more common in North America (reported by 83 per cent of respondents) than either Asia (40 per cent) or Europe (56 per cent); personal outreach by leaders to retention targets shows a similar pattern across the regions.
•Ninety per cent or more of buyers across all three regions use time-based "pay to stay" provisions in their retention agreements, typically stretching from six months to one year post-close.
•Performance-based metrics are less common, but in use at roughly one-half the acquiring companies across the regions, with twice as many (74 per cent) using individual performance goals as using organization-wide performance goals (38 per cent).
•Retention efforts can only go so far. Respondents said that of those employees who leave the organization despite having retention agreements in place, six out of 10 cited the deal as one of the primary reasons for leaving.
"When longer term growth is the driver of a transaction, the success depends as much on effectively managing people and the organizational environment as it does on managing the timing and financials,” said D’Amours. “Whether the growth comes from innovation, sales force or customer service strategies, the execution relies entirely on the talent within the organization. Through being prepared and proactive from a human capital standpoint, business leaders have a tremendous opportunity to step up and influence the ultimate success of a transaction.”