The HR Guide To People And Cultural Problems In M&A Integrations

Introduction

Much research has been done on M&A, many articles written, and many opinions expressed. You'll find some common conclusions: Most deals fail, and people and cultural problems lie at the heart of many of these failures. A statistic most often cited is that 70% of deals fail, meaning that they fail to achieve the goals that drove the business reasons to acquire in the first place. No matter what the true failure rate is, two facts are inescapable:

1. Deals will continue to happen, since most large firms use the M&A option as a component of their overall growth strategy, and
2. pulling off a successful deal, all the way through to integration, is extremely difficult. Any company must beat the odds to succeed.

Corporate executives often recognize this 70% failure statistic. It's become common to regard culture, and the integration of cultures, as one of the major reasons behind deal failure and the most difficult area to get right in combining organizations. While we agree with this sentiment, we also believe that the people and cultural components are so interrelated that they should not be separated in any debate in this area. The people issues by themselves are complex, involving a combination of both hard, quantifiable financial measures and "softer," nonquantifiable measures. It's true that people can be an organization's biggest asset, but they can also be a significant liability (reflected in the financial statements as the overall employment cost, including the cost of all related benefit plans). If employees continue to perform well, they can drive future organizational performance; if they don't, they can be barriers to such improvements.

People also create the underlying organizational culture (without people, an organization, would have no cultural issues to contend with), and these two components taken together transcend all other parts of the organization. Further complications arise because these issues don't fit cleanly into any formulaic approach, and no fail-safe solutions exist that can resolve many of the people and cultural problems.

Given this background, the purpose of this two-part guide is to provide practical considerations for senior managers on thinking through their "people and cultural" strategy in mergers and acquisitions, thereby increasing their chances of pulling off a successful deal. Our hope is that, after reading this guide, management will be able to identify the predictable issues that arise in this area and follow, in sequence, the three practical steps we offer to frame, analyze, prioritize and ultimately resolve the common people and cultural problems in corporate transactions. We'll also supplement the theory by drawing on M&A best practices and by reviewing the deal experiences of many serial acquirers. The second part of this guide will delve into the emerging issues of diversity, equity and inclusion (DEI); environmental, social and governance (ESG); and employee experience and engagement.

Background

Before getting into the people and cultural issues, it's helpful to understand the overall context of deals: how they are put together, what's common to all deals and can be replicated from one deal to the next, and what's dealdependent and varies deal by deal. For the purposes of this guide, we've termed the common themes "universal" and the deal-dependent issues "situational."

Our overarching themes are universal; they can be applied to any deal, in any country. These themes revolve around knowledge — knowing what to do, why to do it, when to do it and how to do it. Meanwhile, in any deal, situational challenges will surface — unique problems that are wholly dependent on that deal's circumstances. But a word of caution: While these themes and concepts can help build knowledge in deal-making, no amount of knowledge can make up for the final piece: having people with the skills, ability and experience to pull off a successful deal, to make the right decisions, to communicate those decisions effectively and to execute them. It's the "can you do it" part of the equation.

In deals, typically, the overall approach, process and contractual agreements signifying the progression of a deal are universal. Key events such as deciding whether the target is a strategic business fit; negotiating the deal price, terms and conditions; and planning for integration are common milestones in all deals. Likewise, there are common strategic steps in attacking the major people and cultural issues; however, how a company is integrated is deal-specific, or situational, and much more tactical in nature. Another caution here: "Tactical" should not be interpreted as "easy."

We'll use the following hypothetical situation to illustrate our concepts: An HR professional has been added to the buyer's team just before the deal is due to be publicly announced. In deal terminology, two of the traditional phases (due diligence and the signing of the sale and purchase contract) have been completed and we're now in the merger planning period, with integration execution to follow. We've assumed that part of our professional's objective is to assist management with the people and cultural issues arising from the deal, along with the normal functional duties HR needs to address in a deal.

Although the situation posed is hypothetical, the client experiences are real but altered to protect the confidentiality of those involved. Setting up this guide in this way allows us to cover the people and cultural issues in a comprehensive and integrated fashion while illustrating the impact of "universal" versus "situational" issues on the deal. Viewing things from the vantage point of the HR professional also enables us to get the perspective of the function that interacts most with the people and cultural problems in deals. Our final assumption is that HR has not been involved in the preceding stages — the reality in many mergers — and that most of the financial issues related to employing people have been covered in the due diligence phase (by the finance team).

The first thing to consider is the composition of the HR team and the role of HR in this process. Ideally, an acquirer will assemble a team with experience in the dealmaking world and expert, on-the-ground HR resources. It also helps to have people who have the confidence and credibility to voice their opinions early enough in any deal to make a difference.

Many of today's leading acquirers did not always work this way, or staff their deal teams with this balance, and therefore fell short of what they could and should have contributed to the deal decisions. Often, companies learn from deals that underperformed, or even failed, that they may need to review their way of doing things and involve HR much earlier in the process as part of their standard M&A operating procedure.

To understand what we mean by "standard M&A operating procedure," most serial acquirers have a corporate M&A team that runs the overall process, business development teams (headquarters-based and possibly embedded in major business units), and regional and local functional resources and expertise to support the effort. This is truly a global approach for many companies, but the best companies aspire to operate as one team when evaluating deals. Ideally, HR forms part of the corporate M&A team responsible for understanding the overall process and goals, deciding when to bring in specialists and local HR resources, or progressing the work themselves. If a deal actually closes, how companies manage the integration depends on a variety of factors, such as the global nature and complexity of the deal and the expertise available at that moment. But typically, the overall intent is to appoint an integration leader to manage the subsequent integration.

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.