A winning people strategy is key during mergers and acquisitions

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Is your people strategy blocking your path to a successful M&A transaction? Global professional services firm Aon reveals 8 steps to successfully navigate human capital issues during a merger or acquisition

Are your firm’s people strategies positioned for success? While every project is unique, there are some common pitfalls that all deals risk falling into

Parvathy Sree, AmTrust Financial Services

businessmen shaking hands after a successful merger meeting

The people side of M&A doesn’t always get the attention it deserves until it’s too late. Iceberg issues can potentially reach the surface and affect the transaction at any time

Parvathy Sree, AmTrust Financial Services

Pitfall #6: HR operations Not having payroll and a strong HR infrastructure in place from day one can prevent employees from getting the job done. Best practice: Develop a clear road map for the interim and future-state HR operating model, including the HR information system, payroll, compensation and benefits administration, recruiting and performance management. If an acquired entity will not go live on all systems on the first day, what interfaces or integrations are most necessary? Support the development of transitional services agreements that are typically in place until the entity can set up their own HR infrastructure. Then develop the headcount or staffing model required for business operation as well as the process flows to integrate all HR activities. Pitfall #7: Employee and labour relations Without an aligned approach and accompanying communication strategy, companies could end up missing vital deadlines and fail to realise synergies. Best practice: Capture legal entity and employment transfer strategy and requirements by country as early as possible, including notice and consultation requirements and timing. Consultation with employee representative bodies is mandatory in certain countries to conclude the employee transfer process. Therefore, it’s essential to prepare high-level employment considerations and country legal requirements, including necessary notification and consultation, early in the process. Pitfall #8: Project management Project mismanagement is catastrophic and can affect workstreams that relate to the people strategy –from missed due diligence risks to delays in onboarding employees. Best practice: Establish and communicate the governance model – who is accountable for different tasks, guiding principles and people success metrics – early in the process. Identify and track key milestones, decisions, issues and risks, and the most significant interdependencies (eg, legal entity formation and transfers, systems integration, employment transfers). Establish regular meeting cadences with workstream leads and ensure teams are established for success. Be sure to also consistently drive horizontal workstream efforts related to change management, communication and other cross-cutting concerns.

Pitfall #5: Employee experience The absence of cultural alignment is one of the biggest causes of failed deals. Best practice: Determine and articulate to employees the different cultures of the two organisations and the values of the desired combined culture. For example, if one organisation allows remote working and limited meetings and the other organisation requires employees to work in the office and meet in person to make decisions, how will those two approaches be reconciled? Who is responsible for making that decision, and how will it be conveyed to employees? After day one post-M&A, deploy a change and communication plan that helps to embed the organisation's go-forward culture in a tangible way for all employees so they are clear on what is expected of them.

Pitfall #2: Financial considerations A lack of defined benefit pensions, change-in-control and other transaction-related payments can have a material financial impact on the deal, both on company valuation and future cash flows. Best practice: Ensure the HR team reviews the people assumptions contained in the financial model. These often significantly understate costs and timing for people-related items like retention program design and compensation and benefits programs. Manage headcount synergies, one-time costs and ongoing savings centrally using a consistent process that’s driven by HR across all functions. Pitfall #3: Total rewards Without an appropriate total rewards analysis, companies could miss a huge opportunity to identify excess costs and streamline spend. Not understanding and addressing any gaps and inconsistencies in total rewards packages and processes could prove costly. Best practice: Develop a compensation philosophy for the combined organisation and clear non-negotiables for harmonising total rewards practices. For example, what is the extent to which the design, cost and timing of certain benefits and incentives will change once the deal is approved? Take this time to also review the impact of pay equity on decisions to mitigate legal risks and ensure integration decisions don’t inadvertently create an unfair pay gap.

Pitfall #4: Retention A key risk is failure to retain and integrate talent, which is one of the typical stated goals of an acquisition. Ensuring employee engagement is crucial in keeping those with their foot out the door satisfied and less likely to leave. Acquiring talent during an M&A – often referred to as ‘acquihires’ – comes with many challenges. These include articulating clear integration strategies, ensuring strong culture fits, addressing any pay gaps and maintaining employee engagement.

Pitfall #1: Organisational design and talent planning Companies often don’t realise the significant planning that can occur pre-closing, even in deals that are highly scrutinised from a regulatory perspective. Best practice: Use the ‘sign-to-close’ period as a starting point for the organisational and talent planning process. Consider broad talent assessments as part of the integration to understand the skill levels of acquired talent. If organisational design is not addressed proactively, companies could experience closing delays, talent attrition and reduced employee engagement.

M&A is hard to get right because people challenges are not easily solved by a formulaic solution, and they require an understanding of business strategy as well as practical knowledge about how HR programs and processes create change. Are your firm’s people strategies positioned for success? While every project is unique, there are some common pitfalls that all deals risk falling into.

THE SUCCESS of a merger or acquisition deal often comes down to people strategies. Even with the best-laid plans, challenges ranging from limited data and aggressive timelines to different organisational cultures can lead to significant roadblocks throughout the M&A process. So, HR professionals need to be knowledgeable and ready to address people challenges that emerge before, during and after a deal is closed. In M&A, the unexpected can happen and often does happen, causing delays or, worse, failure to meet deal commitments and strategic objectives. People issues can be responsible for a failed deal, either at the onset or post-integration.

Best practices for a winning people strategy during M&A

62%

of companies consider culture, employee value proposition, and diversity and inclusion key to a successful talent strategy

Source: Aon’s Eighth Global HR Pulse Survey, January 2022

Best practice: Design a multi-tiered retention program with guiding principles in advance of actual deals. For example, executives may receive 100 percent base salary plus bonus and next-level critical talent may get 50 to 75 percent of base salary. Acquihires should have a strong belief and acceptance of the organisation’s goals and values, eagerness to work hard and desire to remain a member. Companies can achieve this through establishing strong cultural alignment, providing leadership roles, re-examining flexibility and exiting policies, and developing holistic retention bonus packages. It is crucial to keep an open mind about introducing change. “Clear communication is key, as is the identification of any legacy issues, including workforce structure and compensation,” says Maggie You, head of people advisory at Aon’s Asia-Pacific Human Capital Solutions practice.

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Aon plc (NYSE: AON) exists to shape decisions for the better – to protect and enrich the lives of people around the world. Our colleagues provide our clients in over 120 countries and sovereignties with advice and solutions that give them the clarity and confidence to make better decisions to protect and grow their business. To receive Aon’s latest commentary, research and analysis straight to your inbox, subscribe to Aon’s Asia- Pacific Insights Newsletter.

Next Steps

The people side of M&A doesn’t always get the attention it deserves until it’s too late. Iceberg issues can potentially reach the surface and affect the transaction at any time. However, organisations that adopt certain best practices, including proper due diligence, a strong project management office (PMO) and experienced M&A resourcing such as carve-out issue mapping – which lays the basis for completing deals on time and giving new entities the best chance of success – will be better positioned to realise a successful deal. For an industry outlook on M&A, read Aon’s article: The Business of Mergers and Acquisitions: An Industry Outlook. If you have any questions about people issues during M&A, please contact Aon.

Talent strategy considerations

Source: Aon’s M&A Risk in Review 1H 2022

of global survey participants identified Asia- Pacific (excluding Japan) as the most attractive region for M&A over the next 12 months

54%

Asia-Pacific M&A

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