In any M&A transaction, there are a variety of risks that are associated with human capital. Mercer has recently released a report, People Risks in M&A Transactions (the Report), based on a survey of M&A professionals. It provides an analysis of approximately 450 M&A transactions, and interviews corporate and private equity clients, investment bankers, and M&A advisors. The Report identifies a number of human capital risks that are of concern to those in the M&A sphere.
The top five issues relating to human capital identified by participants surveyed were:
- Employee retention: Retaining employees after a deal has taken place is crucial to the continued success of a company, and this was the greatest perceived risk in the survey. Retaining certain groups of employees can be particularly important. One Corporate Development Executive described that his "biggest risk is retention – keeping the key revenue generators, the key operators, and the client-facing employees".
- Culture and organizational fit/integration: Culture is a crucial but often difficult to identify aspect of a corporation. In explaining what a successful culture was, participants in the research described honest and frequent communication, clarity of purpose, transparent governance, and high collaboration.
- Leadership team: Assessing the quality of management and the executives for the new company was important to many surveyed. This is particularly the case with private equity businesses, where 57% of private equity businesses surveyed identified leadership team effectiveness as the main human resources issue.
- Compensation and benefit levels: This is a matter not only of understanding base pay in the industry and the target company, but also the benefit practices and incentive arrangements in place. Mercer studied 450 transaction assignments from 2015 and the top issues were medical benefits (with over 90% of transactions involving medical benefits issues) and defined contribution retirement plans (with nearly 80% of transactions involving medical issues). While these were the top two issues, there was an array of other issues which came up repeatedly, with nearly a quarter of transactions involving HR compliance, and 18% of transactions involving minimum wage issues.
- Talent-related issues: Closely linked with employee retention, talent-related issues are all very important at the due diligence stage. In fact, when asked what the aspect was the most significant focus of due diligence, 64% of respondents identified talent-related issues. Moreover, talent-related issues do not end at the due diligence stage, and 66% of companies also found this was the most important HR integration challenge post-closing. Assessing talent, making sure it is available, and placing talent are all ongoing issues.
Looking forward, the Report finds that the professionals surveyed expect their most significant HR issue in future transactions to be talent-related. Compensation and benefits were also cited as future concerns, especially for private equity buyers. As such, many of the human capital issues identified are not only crucial to current transactions, but will continue to be a priority in M&A transactions going forward.
The author would like to thank Kira Misiewicz, articling student, for her assistance in preparing this legal update.
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