HR's involvement helps companies identify and address people issues
Unlike many mergers of the late 1990s, deals completed in the past few years appear to be paying off, according to new research. And that research puts the credit for that success at the doorstep of the HR department.
The study, conducted by consulting firm Towers Perrin, suggests that many companies are paying attention to the lessons learned in the 1990s and are going into merger and acquisition deals with a different approach, paying more attention to the people and culture issues than in the past.
Canadian companies, however, are generally less-ready for these deals, and this may be bad news for the success of future mergers and acquisitions in Canada. The survey, which involved more than 200 companies in the United States and Canada, found that close to 80 per cent of mergers and acquisitions completed in the last few years in both countries had substantially met key strategic objectives.
HR has greater involvement in deals
The main reason cited is that HR functions now have far greater involvement in the process which means companies are better prepared to identify and address the many people issues that arise in mergers and acquisitions.
“The people issues used to get very little attention until after the deal was finalized,” said Michael Ternosky, a principal with Towers Perrin in Toronto. “Now we're seeing HR come aboard earlier, and get involved in the pre-deal and due diligence stages. This is making a real difference in whether or not the merger succeeds. Unfortunately, there's some evidence that Canadians are still not paying enough attention to these people issues early on in the deal.”
People issues are a top priority
The survey respondents identified the most critical issues to deal with in the first three to six months of a merger, acquisition or other restructuring. The top five challenges were:
•ensuring effective leadership from the top team;
•choosing the top team;
•communicating effectively with employees;
•retaining key talent; and
•aligning the cultures of the respective organizations.
On the critical issues, Canadian companies are less likely to indicate readiness on many fronts. For example, Canadian respondents are significantly more likely to indicate that the top issue (ensuring effective leadership from the top team) is somewhat or extremely challenging (81 per cent compared to 63 per cent of U.S. executives).
Detailed HR due diligence is considered somewhat or extremely challenging by 84 per cent of Canadian participants, versus 59 per cent of U.S. respondents. Conversely, U.S. respondents are significantly more likely to recognize cultural alignment as a critical issue than Canadian respondents (50 per cent vs 24 per cent).
“These issues are not easy, and there's no magic bullet,” said Martine Ferland, managing principal for Towers Perrin in Montreal. “I suspect that some of the differences we see in Canada are a result of the fact that there is a higher volume of (merger and acquisition) deals in the U.S., and so those companies have more experience in managing mergers. The good news is that Canadian companies can learn from the U.S. experience, and get HR involved earlier in the process to help manage these people issues properly.”
HR is ‘readier’ than ever
Perhaps because of HR's increased involvement in all phases of the merger and acquisition process, survey respondents expressed confidence in their ability to meet a range of strategic and tactical people-related challenges.
Even more significantly, results indicate that the readier an organization feels, the greater its success in managing certain aspects of the process.
Specifically, about a quarter (26 per cent) of the survey group rated themselves fully ready to meet the broadest array of challenges. And this group differed from the rest of the respondents in two respects:
•They managed the impact on people more effectively. The fully ready respondents were almost twice as likely as others to report increased employee productivity following a merger or acquisition (60 per cent versus 36 per cent) and two and a half times as likely to report increases in employee morale and engagement (50 per cent versus 20 per cent). They were also significantly less likely to report declines in morale and engagement (26 per cent versus 47 per cent).
•They were higher performers overall. An analysis of respondents’ financial performance, as measured by three-year total shareholder return relative to their relevant industry averages, showed that the fully ready companies are more likely to be classified as higher performers (37 per cent versus 16 per cent).
“While this finding doesn't mean readiness in itself can lead to improved financial performance following a deal, it does suggest that readiness on the part of HR can make a difference on a number of fronts,”said Ferland. “Think of it as a virtuous circle: A well-prepared HR team gets involved early, identifies the challenges and puts the right plans and processes in motion. Then it's in a position to act quickly at the right time by communicating the business rationale and vision, helping keep the right people, maintaining employee engagement and focusing people on doing their jobs well. When these issues are managed properly, the merger has a much higher chance of succeeding financially.”
About the study
The survey, HR Rises to the Challenge: Unlocking the Value of M&A, was conducted in the summer of 2004 and involved 201 HR and business executives in medium and large North American companies. Almost all of the companies in this survey have been involved in some level of deal-making in the past three years, with 88 per cent reporting a merger or acquisition, and somewhat smaller numbers reporting a divestiture or spin-off (57 per cent) or a joint venture (40 per cent).
