Corporate merger success rates are going up because HR leaders are being brought to the table sooner and playing a bigger role, according to a new study from HR consulting firm Towers Perrin.
In the late ’90s many business executives believed the best way to grow was through merger, said Michael Ternosky, a principal with Towers Perrin. “But a lot of people learned it was a tougher way to make money than they thought.”
After a sharp decline in merger activity in 2000, interest has been increasing steadily, according to the report,
HR Rises to the Challenge: Unlocking the Value of M&A
. But business leaders have been more thoughtful, more careful and more analytical in recent years, said Ternosky. Most importantly they are no longer underestimating the HR implications.
“Traditionally, HR came to the party relatively late in the process — typically after a deal was announced — and had limited, if any, involvement in pre-deal and due diligence stages,” states the report.
In a similar study conducted in 2000, Towers Perrin found just 39 per cent of HR people had any significant role in due diligence, despite this being the stage when key compensation and liability issues are considered.
“Today, by contrast, 62 per cent of our respondents said they’ve been highly involved in due diligence for recent deals. And fully three-quarters expect to be highly involved in this phase in future deals,” states the report.
“People are smarter now,” said Ternosky. “They went through merger mania of the ’90s and they got their fingers burned a little bit because many of those mergers weren’t successful. So they are paying more attention to people issues.”
Even at the pre-planning stage, when leaders are just starting to explore the possibility of a deal, HR leaders are being brought in, said Ternosky. “Going back five years or so, HR was rarely brought in at that early stage. Everyone just thought we can bash these two groups together and we can make this work,” he said. “We learned that is not the case. People now know that to ignore the people issues you are doing it at your peril.”
David Guptill, vice-president of HR at construction materials giant, Lafarge Canada, said they learned their lesson years ago. Today Lafarge probably does four or five small acquisitions a year in Eastern Canada alone, he said. “And I am usually one of the first people to know about a potential acquisition.”
Why? Back in the mid ’90s, Lafarge made several small acquisitions that seemed to make sense from a financial perspective, he said.
“We have benchmarks for pricing equipment that allows us to benchmark that almost to the nickel.” Just by looking at the value of the hardware, the deal made sense. But in the construction materials industry, hardware is not a strategic advantage. Strategic advantage comes with great customer service, he said.
“The drivers who delivered the product were very poorly trained, they had terrible safety records and the managerial talent was not very managerial,” he said. “The employees simply could not fit into our system where customer service is king.”
Lesson learned, Lafarge changed its due diligence process to get HR involved early and often to capture as thoroughly as possible the value of the human capital involved in a deal. It is not helpful to get obsessed with precise values of human capital, but there are some things that absolutely have to be measured and evaluated, he said.
Training, for example, is a very good indicator of the human capital value of the new organization. So looking at training programs, both qualitatively and quantitatively, is an important step in Lafarge’s due diligence.
And though red flags raised during HR’s due diligence likely won’t scuttle a deal on their own, spotting the problems early allows HR to develop strategies and tactics for correction. “If it is a weak operation culturally, you need to get the Lafarge people in there. You get the local manager out and move a Lafarge manager in there to move that culture up.”
In the past few years, Hewlett-Packard’s HR department has had a great deal of practice with mergers and acquisitions, said John Cross, vice-president of HR.
“We do have some pretty slick processes in place because it is an almost continuous challenge,” he said. He added that the company probably averages close to a new deal every couple of months.
The frequency of the deals has produced an HP team that specializes in completing the HR due diligence when a possible deal is announced.
“You better have people experienced in due diligence work or you are just not going to be savvy enough to understand what you are getting,” he said. This is particularly true in compensation and benefits areas. It is important to understand how salaries match up and how benefits compare. Pension liabilities have become an increasingly important factor. In late 2001 and early 2002, HP was in discussion with CIBC to take over the bank’s stake in what had previously been a joint venture between the two.
“CIBC said they won’t do the deal unless we set up a DB (defined pension) plan that matches the bank’s DB plan. And we had gotten out of the DB business three years earlier.” That is a huge proposition and HR needs to be ready to explain and interpret exactly what that means to the acquiring company.
HR is seldom the group that kills a deal, but it certainly has a huge impact on pricing the deal, he said. Pay structure, pension liabilities, anything to do with the cost of the people have to be included in the bid. “You have to do a realistic interpretation of what it will cost to hold on to key folks and then you have to price retention strategies into the deal.”
Once the deal is done, Cross and his team use Microsoft Planner to draft a comprehensive plan that lists every possible detail for the team to consider before the merger takes effect.
For example the plan has to include merging all of the data elements of the new employees. How will new employees map into existing structure? How will they be assigned employee numbers? Can their employee files be processed through a mass upload? How will their existing ranking scheme be merged? “It goes on and on. It is micro-managing, but it needs to be in the plan,” he said.
Meanwhile at the strategic level, “you have to be worried about retaining the people you want to maintain. And sometimes the hardest people to retain might be the most senior people. And then you have to get the cultures aligned to get those people motivated and stimulated.”
When HP took over Compaq, most employees recognized the two had very different cultures. People felt HP had an efficient process-driven system that was maybe a little slower, whereas Compaq had a reputation for being quick but not as controlled as HP. “You get their people in the room, you discuss things and let them vent. Then you work through the differences,” he said.
It took about a year for people to let go of their old affiliations and to stop talking about how things used to be done, and instead accept the way things were in the new organization.
But even with this experienced HR team and an efficient process for responding to mergers, sometimes that all gets thrown out the window, he said. In one instance, Cross and his team had just one week to sign off on a deal. It was only about 27 employees, but it was an entire company. “We just had to pull out all the stops. Make some high-level decisions and make some guesses,” he said.
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