Most mergers and acquisitions fail to enhance shareholder value. Graham Pearce warns you not to ignore the people issues.

Most mergers and acquisitions fail to enhance shareholder value. A common reason for failure is that companies concentrate on the legal and financial aspects of the deal, and ignore the people they will need to make it work. Graham Pearce warns you not to ignore the people issues.

Don't leave the people issues until after purchase. They need to be dealt with, fully and carefully, in the due diligence process. Otherwise, you'll probably find that the cost savings, synergies, economies of scale, expansion plans - all of which you'll have factored in to the price - will fail to materialise. Srtarting with the basics, which people are you buying? Most laymen would expect it to be pretty obvious which employees will transfer with the business. On closer inspection, there are usually many questions:

  • What about senior management who spend a proportion of their time working on matters relating to the target business and the remainder of their time working for other companies in the group?
  • How do you propose to treat employees who are currently seconded to the target business from elsewhere in the seller's empire (or vice versa)?

    Almost by definition, senior employees will be in their positions to serve an important business need. Communicating with them at the earliest opportunity can save a lot of harm. Uncertainty can grow rapidly, resulting in departures or demotivation, especially if staff feel forgotten. The seller may also try to poach the best staff from you by moving them to parts of the business that it will retain. Agreeing the list of employees to transfer at an early stage can save arguments or misunderstandings further down the line.

    You need to plan to ensure that appropriate roles exist for, and are communicated to, key employees in the post-deal company. Some key staff could have golden parachutes that they can activate if there is a change of control of the company. If you are to persuade these people not to use their parachutes, you may have to offer a substantial stay bonus.

    HR services and systems
    After completion, you need to take care that the human resources (HR) functions don't fall into disarray. They may rely on hardware and software from their old parent company. The senior HR managers may all remain with the selling company, with only the local HR representatives transferring.

    How will the payroll be handled and how will the human resources databases be maintained? Where necessary, you will find it valuable to agree beforehand that your company will continue to have access to the seller's systems and services for sufficient time to set up your own systems and HR team. Sellers always seem to ask for a lot more to provide these transitional services in cases where the buyer seeks an agreement after the deal is done!

    You will want to reassess training and development needs in the light of the new company ownership. This may take some design and planning and it may well be worth seeking an agreement to continue to use the seller's courses (assuming they are relevant) for a period while this process is under way.

    Consultation and constraints
    Especially in continental Europe, but also elsewhere around the world, you need to take account of consultation requirements. These usually result in a delay between the signing and the effective completion date of the deal. Collective agreements and agreements with trade unions normally transfer with the deal. They may place large financial burdens on your company, especially if you are envisaging redundancies. Factor the cost into the price - or agree a contribution from the seller.

    Agreements may make it difficult to revise terms and conditions in the future, hindering integration with other parts of your business. In some countries, there is very restrictive legislation. For example, in Germany, you are not allowed to change terms and conditions for one year following a transfer under TUPE (Transfer of Undertakings (Protection of Employment) regulations), even if the employees themselves consent to the changes. Also in Germany, there is the strange - from a UK perspective - right of employees to choose to remain with the seller, while retaining rights to redundancy payments, rather than transferring to the buyer. This can cause problems if key staff choose not to transfer.

    Existing insurance
    You should take particular care to make sure that you don't inadvertently invalidate or allow insurance cover to lapse as a result of the deal. It maybe that all you need to do is to meet an obligation to inform the insurance company of a change of employer. It can become more complicated when the company you're acquiring is expecting a claim, for example as a result of a terminal illness. Similarly, there maybe latent claims in the pipeline that wholly or partially relate to service with the employer prior to the deal.

    If the seller is transferring some employees but retaining others in a particular territory, it is often advisable to ask the seller to retain those being transferred within its benefit plans for a certain period. This will provide sufficient time for you to design, implement and communicate new plans for these employees.

    When employees finally cease to participate in the seller's plans, you should make sure that you maintain continuous insurance cover for them. This may be tricky where an employee has a pre-existing condition that significantly increases the chance of a claim. The premiums demanded could be unacceptably high or insurers may refuse cover altogether. In extreme cases, the best solution may be for the employee to remain in the employment of the seller to ensure continued cover.

    High risk areas
    This happened in a recent deal I was advising on. An employee had an untreatable brain tumour and had been given weeks to live. If he had transferred, it was likely that he would have lost his life insurance. Fortunately, the selling company did the decent thing and quickly agreed to keep this employee, without using this as a negotiating point.

    Where insurance forms part of the contractual terms of employment, there is potentially a substantial financial risk if, as the buyer, you are forced to self-insure all of the uninsurable risks that you inherit with the deal. The due diligence process should identify these risks and you should try to negotiate that the seller either retains these risks or agrees to underwrite them by indemnifying you for a period of time after the deal.

    Dangers may exist in new policies (for example medical cover) where full coverage is deferred until after a waiting period, often lasting several months. Another area that is frequently forgotten is employer's liability insurance. Many industrial diseases or injuries, such as asbestosis or repetitive strain injury (RSI), develop over a period of time, often substantial. You should ask for copies of the current and previous Employers Liability policy documents, along with the agreement of the seller that it will allow claims on the policy if it subsequently transpires that any future Employers Liability claims are deemed to relate either in whole or in part to past service.

    Harmonising benefits
    You will need to harmonise remuneration and benefits, especially where transferring employees will be working alongside your existing employees. This is very difficult to achieve successfully without incurring overall increased costs or upsetting the workforce. Take care not to cherry pick the best bits of both packages. Inevitably, there will be some areas where some employees are worse off and you must communicate this carefully. It's important not to miss the opportunity to overhaul the pay and benefits programme to make sure it fits with your company's needs.

    You will need to revise any part of the remuneration package that involved shares of the seller. Bonus plans, executive share option plans, SAYE plans etc, all fall within this area. If you wish, it may be possible to use your equity but this may not be a practicable solution if your shares aren't quoted.

    Terms relating to employees' performance targets may become meaningless after the deal or relate, at least in part, to the overall performance of the seller. It's important to set relevant performance targets and monitoring processes that are in line with your strategy and objectives.

    Where possible, you should identify any employees who will not have a role in the enlarged company at an early stage. It may be possible to negotiate redeployment for all or some of these employees elsewhere within the seller's business so that they are released prior to the transfer taking place, or for the seller to pay all or a proportion of the severance costs incurred for a stated period after completion.

    The cost of making employees redundant is likely to vary dramatically from country to country, as is the time required to give them effect. In many countries, it will not be possible for you to choose which employees will suffer redundancy. You may be obliged to observe

    the principle of last in, first out, as in Sweden, or the special protection given to over 55s as in Germany, for example. There are also groups of protected employees in many countries, such as those with disabilities, those on maternity leave and the works council representatives.

    In order to reduce uncertainty, it's desirable to implement any restructuring quickly. Having said that, it is also vital that you don't lose sight of the need to remain profitable and to develop the business in accordance with the long-term corporate strategy. All too often, a company's eyes are taken off the ball as it becomes too internally focused following the deal. You must give any working parties clear objectives and reporting deadlines. Using outside consultants should help to make sure that internal politics do not influence the recommendations unduly and that you keep the internal time taken to a minimum.

    I've listed communication last because it doesn't generally form part of the due diligence exercise. However, you do need to give some thought to the communication programme during the due diligence stage. As soon as the deal is announced, regular and informative communication will be essential to keep employees on side. As far as possible, you should seek two way communication so that you can take problems or concerns on board without delay. A good communication programme will also strengthen corporate branding and help establish the company culture. You should take particular care not to accidentally increase employees' expectations or rights by using loose or ambiguous wording or by articulating plans that haven't yet passed through the obligatory consultation channels. Your style of communication - its clarity, accuracy, transparency, trustworthiness - sets the tone for your future dealings with your new workforce.

    Key activities for success
    Global research by KPMG International found that 83% of corporate M&As fail to enahnce shareholder value and identified six key activities that make a deal successful. The 'soft keys' (people issues) had a measurable effect on shareholder value.

    "More than eight out of ten deals fail to enhance shareholder value because of poor planning or execution or both, yet, by contrast, most of the executives interviewed (82%) believed their deals were successful," said Donald C Spitzer, US national partner in charge of the Global Financial Strategies5" practice of KPMG LLP.

    In the report, Unlocking shareholder value: the keys to success,

    KPMG identified three "hard keys"

  • these are the pre-deal business activities that had a tangible impact on the ability to deliver financial benefits:
  • synergy evaluation (business fit)
  • integration planning
  • due diligence The three "soft keys" - human resources issues that must be examined even before a deal is announced - were:
  • management team selection -reducing organisational issues created by uncertainty makes companies 26% more likely to improve shareholder value
  • cultural issues - resolving these makes a company 26% more likely to succeed in adding value
  • communications with employees, shareholders and vendors - if effective, these are 13% more likely to enhance value.

    Review and planning

    Separate research into M&As commissioned by KPMG UK Consulting showed that 53% of respondents did not carry out a post-transaction review to assess formally the success or otherwise of their transaction.

    Of those that did, the majority (54%) focused on the cost of completing the transaction.

    Only 22% reviewed staff/organisational structures (including redundancies, relocation and integrating personnel) and 21% reviewed marketing and communications (to customers, shareholders and trade unions).

    lust over one in ten (11%) reviewed the IT aspects and corporate culture/ management. The research suggested that:

  • management culture, human resources and information technology are principal issues arising in the course of an M&A deal. All, especially IT, require more advance planning
  • human resources strategy tended to be identified at the stage of developing a post-merger plan (39% of respondents), although 17% left it until implementation of the post-merger plan.
  • Graham Pearce is a senior consultant at William M. Mercer.

    UK heads Europe in M&A deals
    A Commerzbank Global Equities' report, Global Consolidation, says that the UK retained its position as the most active country in Europe in 1999 in terms of M&A deals, second globally only to the USA.

  • The US continues to be the favoured partner of the UK in terms of cross-border M&A activity, although t+ie report predicts more EMU/US deals in the future as US companies use the UK as a stepping-stone to break into core continental European markets.
  • The value of all M&A deals, involving UK companies as bidders or targets (including domestic deals), was US$7o6bn in 1999 - up 200% from 1998*5 figure of $234bn.
  • The UK is the leader in Europe for hostile bids, with Acquisitions Monthly estimating that two thirds of all hostile bids in Europe are driven by the UK.