We are in a period of intense business model transformation. Many enterprises are looking to reflect new consumer and competitor realities—and they need to act fast. Mergers and acquisitions (M&A), and other transactions, offer one strategic path to rapid change, so it’s unsurprising that our research shows that 57 percent of business leaders anticipate an increase in deal activity in 2021 and 2022.
Deals, however, are not without their challenges. About half will not be completed, with an even higher number failing to deliver the promised value. There are many reasons for this, but Mercer research released in May reveals a striking fact: 47 percent of deals that fail do so primarily due to a lack of strategic planning and execution rigor related to people risks. The report, Delivering the Deal: The Unrealized Potential of People in Deal Value Creation, was based on data sourced from PitchBook or collected through a survey that captured the insights of over 750 experienced deal leaders from Fortune 1000 companies or private equity professionals.
People as a Revenue Driver, Not Just a Cost Center
The pandemic hammered home how crucial an agile and resilient workforce is to the bottom line, yet many businesses fail to translate the importance of people to deals. Why the disconnect?
Traditionally, when envisioning a deal’s cost and revenue synergies, most leaders think of people only on the cost side—forgetting that it’s people who will ultimately bring any new revenue-driving strategy to life.
For example, if your deal thesis depends on cross-selling the products of two merged companies to increase revenue, you must ensure you have salespeople with the right skill sets, incentives, and understanding of how they need to act differently to deliver your vision. Without this, nothing will change, and your plans for generating new revenue will suffer.
Based on our experience supporting nearly 1,400 deals per year worldwide, we have seen the effects of this people disconnect. For example:
- We stepped in to develop a culture, communication, and change-integration plan and talent retention strategy for a multibillion-dollar deal threatened by employee turnover caused by misaligned leadership and diversity approaches.
- We executed a rapid change management and culture alignment effort in three weeks across 40 countries when the stock value of an acquiring organization was under pressure due to the failure to produce promised synergy targets.
- We developed a new workforce geographic strategy when one company’s deal team did not realize until formal due diligence that the deal hypothesis for a $500 million acquisition did not accurately reflect local works council and dismissal-charge issues.
These examples demonstrate the impact people have on delivering revenue-related deal value and the need to apply the same rigor to people as to other deal aspects. As one business leader told us in our research, “In a deal, people cannot be left to chance. Failure to address pain points in your people strategy can have catastrophic consequences.”
Here are five questions that boards should ask management during any M&A activity to avoid deal failure:
- Are the people opportunities and impacts defined in the deal hypothesis? When examining the benefits of a potential merger, a business leader who thinks of people only as costs is unlikely to anticipate how people might impact theorized revenue synergies. It is critical to move beyond headcount reductions and strategically anticipate how people will need to change their behaviors and what skills are required to deliver this new organization. Too frequently, it is assumed that people will “figure out” what they need to do post-close. But to extract value from the deal, you need to develop an initial people hypothesis and rigorously test and refine that hypothesis into a pragmatic execution plan.
- With what degree of rigor are the people-related impacts represented in the financial modeling? Nearly half of executives told us in our study that workforce impacts were not quantified or built into financial models. This is a significant omission because, in most instances, what is not modeled will not be proactively acted on. Fully understanding and anticipating what is needed from the workforce must be built into your financial model if you’re to deliver as promised to stakeholders.
- How are we assessing people impact during quality of earnings (Q of E) diligence? A seller’s goal is to maximize the company’s financial attractiveness. Frequently, decisions are made to improve the short term without concern for the longer-term consequences. Workforce adequacy and human resources (HR) operations are two areas prone to this thinking. If a seller cuts back on HR delivery, it may destabilize the workforce. The short-term impact on earnings will be positive (lowered labor and function support costs), but the post-close impact will be lasting and negative. A rigorous look at people even during Q of E diligence will create a foundation for deal success.
- How does talent factor into target identification? A good understanding of what talent a potential acquisition brings is just as important as understanding the product portfolio or customer base. Yet, this is often neglected. Creating a process to capture some level of understanding of talent assets when evaluating targets is critical, as this becomes a key input to the initial deal thesis. It is also important for this evaluation to not only be a static assessment of today but also consider the future skills needed to deliver value.
- Do we have a people advisor who can provide on-the-ground execution support? After examining the issues above, you then need a strategic partner focused on all things people. This means an advisor who not only offers strategic advice but also has the on-the-ground resources to execute your vision. By selecting a partner who specializes in talent and applies the same rigor of thought and execution to your deal’s people aspects as you do, you can ensure the people-related elements align to deliver the desired deal value.
Robustly factoring in the people impact, from target identification to deal thesis formation to financial modeling and Q of E diligence, and working with an experienced partner on deal execution can protect the bottom line and realize maximum value from your most important asset—your people.
Jeff Black is partner and global and North America mergers and acquisitions advisory services leader at Mercer.
Excellent observations! Comprehensively assessing the talent pool across the organizations identified for acquisition is often not one of the highest priorities. It is much more difficult to read into the intangibles of culture, motivation, and potential compatibility (or lack thereof) than it is to gauge EBITDA and complimentary market positions. Without properly considering how the acquisition will affect retention and if the cultures are complimentary requires a special set of skills which the M&A leaders should seek out in the Audit department and the Human Resources department. Excellent insights, its always a pleasure reading your posts!