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Why HR Due Diligence Matters in M&A

Savita Iyer | May 18, 2016

Mergers are rarely a uniting of equals. They almost always consist of a dominant company absorbing another, not-as-strong entity — a fact that in and of itself poses monumental challenges.

But while there are many reasons why a potentially strong deal can ultimately weaken, one of the most important factors that can undermine a merger is the human aspect. Failure to take personnel — leadership as well as rank-and-file employees — into account and failure to properly understand the cultural peculiarities in which they operate has brought many a strong deal to its knees.  Experts believe that mergers will continue to fail unless acquirers pay the same amount of attention to the “people factor” as they do to other important parameters such as synergies, complimentarity, cost savings, and market dominance.

The human element has become even more important in an era of increasing cross-border M&A, where many companies are setting their sights on attractive targets beyond their shores that could really enhance their global wherewithal.

For example, Anheuser-Busch InBev’s proposed acquisition of SAB Miller, which regulators have yet to approve, seeks to capitalize on growing beer consumption in Latin America and Africa, and stagnating markets in the U.S. and Europe, while food security was the rationale behind the acquisition of Smithfield Foods by China’s Shuanghui International. But these and other deals can very quickly come undone if an acquired company’s workforces aren’t supportive or aren’t supported properly.

Indeed, there are all kinds of ways things can go wrong, from low morale to the fleeing of top performers, to other, subversive activities. If workers are less productive due to morale issues or top performers jump ship, the value of the acquisition can drop a lot after the fact due to the loss of human capital.

Experts recommend that acquirers take a proactive, people-first approach at the outset of a transaction, to avoid or mitigate risks like low morale, diminished performance, the flight of key talent, and even revenue and profit loss, all of which can undermine a good deal. By prioritizing people and HR issues, and integrating them as an essential part of their deal strategy and planning, companies can significantly improve their chances of success — particularly if they do this quickly and efficiently and at the outset.

Those who have been privy to their acquisitions praise companies like General Electric and HSBC for always prioritizing people. Long before any of their deals have closed, sources say that personnel on both sides of the deal know what the combined organization will look like, who will have a job and who won’t, and what sort of compensation packages will be given.

Working out these sorts of details saves time, energy, and money, and contributes to peace of mind all around. Prioritizing the human element also allows an acquiring company to identify the important people in the firm they’re acquiring — people who may not necessarily be on the charts, but who play a critical role in holding that organization together. These are the people who should be involved in the integration effort; finding them requires (regulation permitting) a thorough grassroots-type due diligence.

Undertaking this HR due diligence is as important as financial due diligence and the more cosmetic-type issues, such as discrepancies between payment and insurance plans. It’s an effort that will allow survivors of the merger that their new leadership team is both credible and caring.

But HR due diligence also has a more esoteric, psychological side to it that should be keenly managed, if companies want to get things right. Take the issue of “survivor’s guilt,” for example. People who keep their job post-merger may be relieved, but also feel badly for their colleagues who were let go, maybe even resenting an acquirer for having paid no regard to faithful employees. Managing these sorts of issues is also key to deal success and may require, beyond logistical steps like balancing out redundancies between acquirer and acquired, the input of a team of experts.

The good news is that in recent years, more companies have been getting things right on the people front, which would indicate that in the U.S., companies are learning how to better merge cultures, or avoid mergers when cultural considerations prove too formidable to move forward. Many are also paying heed to understanding the workforce cultures and broader cultural context of companies they acquire in other jurisdictions.

But experts believe there’ll be challenges to come when companies from new global heavyweights like China and India begin to flex their muscles and make global acquisitions, and realize that Western companies are also difficult, if not impossible, to integrate without cultural understanding.

Axial is the deal network for the middle market.

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