Deal Making Is Back. Is HR Ready?*

By By Doug Brown and Moira Donoghue who can be contacted at www.mercerconsulting.com 

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After a few quiet years, merger and acquisition activity is humming again. How well will people issues be handled this time around? A big part of the answer depends on HR. If HR is “deal ready,” key employees and leaders will be more likely to stay, remaining engaged in making both the deal and the underlying business successful. People-related savings and opportunities for creating new value are likely to be realized sooner rather than later. But if HR is not ready, employees are more likely to leave, taking industry knowledge and customers with them. Or they may stay and drain productivity as they struggle with uncertainty about the effect of the deal on them. And as a result, expected savings and new value are either lost or so delayed that their impact is compromised.

There is much that HR executives can do to ensure success. As merger activity gathers momentum, HR must assume an “M&A ready” stance – especially in companies that have not experienced much dealmaking activity. HR leaders who have anticipated and planned for mergers – who are “M&A ready” – can more easily smooth employee transitions and reactions during and after the deal. As importantly, they can help their organizations preserve client relationships and deliver the boost to long-term shareholder value promised in the press releases.

Why talk about this now? Because the consequences of flawed mergers or acquisitions show up quickly in lost productivity, customer defections, and stalled stock prices – and because HR leaders and their staff are better placed to influence those outcomes than they have ever been before. By our estimation, the average US company now invests the equivalent of 36 percent of revenues each year in its workforce – expenditures that almost always increase whenever turnover increases.

The problem is amplified among executive ranks: research indicates that executive turnover rates are twice as high after a merger as before one – even nine years after the deal.

1. M&A readiness is vital HR’s M&A readiness is especially relevant now because the criticism of deals gone bad is more widespread. At least two-thirds of M&A deals fail to build real long-term value for shareholders.

2 More than one-third of surveyed executives who’ve done major deals now acknowledge that they got “too caught up” in the bidding process to do effective due diligence, raising significant questions about the attention given to post-closing integration.3 Such issues take on new importance in today’s deal-making climate.

3. According to MergerStat, 2004 was “a year to remember” for US and European deal makers alike: in the US, the number of M&A announcements climbed by almost 15 percent and cumulative deal spending soared by nearly 44 percent to more than $775 billion – the highest numbers since 2000.

4 While 2005’s deal-making pace to date doesn’t match last year’s zest, it continues to make headlines.

5 M&A readiness for HR is vital because the drivers of the upsurge in deal making are still strong. Foremost among them are plump corporate cash hoards and solid stock valuations, a huge backlog of investment capital among private equity firms, and greater liquidity on the part of the banks. And new and assertive acquirers are appearing on the global stage.

China’s Lenovo recently bought IBM’s PC operations, for example, and Indian steelmaker Mittal Steel last year bought US-based International Steel Group. As of July 2005, French liquor company Pernod Ricard had obtained regulatory approval to buy Allied Domecq, and Holland’s VNU is acquiring US health care data provider IMS Health.

HR leaders who have been through a merger or acquisition know they get pulled in many different directions:

>> C-suite executives look to them for strategic advice on the people implications of the merger and to strengthen the alignment between the organization’s human capital strategy and its business strategy.

>> Managers seek direction on changes affecting their operations and their staff. Employees expect quick, honest answers to questions about how the deal will affect them, and they look to HR to step up its support for them.

>> HR itself has to decide how it will be managed after the deal, raising hard issues such as in-house versus outsourced activities and shared services versus decentralized operations.

>> Finally, management wants to know how HR plans to manage the change without disrupting day-to-day operations.

Assessing your M&A readiness

HR’s effectiveness during any merger or acquisition is rooted in its

>> understanding of deals and the deal process;

>> ability to reinforce relationships between managers and employees;

>> skills in project management, change management, and integration;

>> technology capabilities; and  

>> ability to supplement its capabilities and skills during critical periods.

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