Human Capital Management and
the Success or Failure of M&A
November 2010
A report prepared by CFO Research Services in collaboration with Aon Hewitt
Human Capital Management and
the Success or Failure of M&A
November 2010
A report prepared by CFO Research Services in collaboration with Aon Hewitt
Contents
Introduction 2
About this report 3
Companies seek growth and competitive 3
advantage through M&A
Full integration is the ideal end state 4
in most cases
Respondents see room for improvement in 4
human capital related tasks
HR and fi nance see value in eff ectively 6
managing the HR dimension of deals
HR and fi nance diverge on the extent of 7
HR’s participation in M&A, and on the
value of HR’s participation
Does greater HR involvement lead to 8
better M&A outcomes?
Respondents call for business focus, 10
in addition to functional perspective, in
HR’s approach to M&A
In their own words: HR and 11
fi nance executives on realizing
M&A’s full value
Sponsor’s perspective 13
© 2010 CFO PUBLISHING LLC NOVEMBER 2010 1
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Introduction
As the economy begins to show signs of recovery, companies
with cash reserves are relaxing their focus on controlling
costs and returning to growth strategies. Transaction activity
has been on the rise since mid-2009 thanks, in part, to easing
economic conditions and attractive valuations.
Despite this revived energy and momentum, few compa-
nies can aff ord a transaction that fails to meet its objectives,
particularly in an economic environment that remains
somewhat fragile and uncertain. Ample documentation
reveals human capital issues as key culprits in failed deals and
subsequent fi nancial woes. In this survey of fi nance and HR
executives, Human Capital Management and the Success or
Failure of M&A, we explored how organizations are handling
human capital issues related to transactional activity.
Th e results suggest that HR off ers unique value and guid-
ance, particularly in relationship to managing and pricing
human capital assets, which can signifi cantly contribute to a
successful pre- and post-transformational event.
Increase in M&A activity
Strong cash positions, attractive valuations, low cost of capital support increase in M&A
Number of transactions and mean value for announced, closed, or effective mergers and acquisitions worldwide. Source: Capital IQ
Tran
sact
ions
(#)
Aver
age
dolla
r vol
ume
($m
illio
ns)
2006 2007 2008 2009 2010
0
1,000
2,000
3,000
4,000
5,000
6,000
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3$0
$50
$100
$150
$200
$250
$300
The results of our research program among senior fi nance and HR executives suggest that HR offers unique value and guidance, particularly in relationship to managing and pricing human capital assets, which can signifi cantly contribute to a successful pre- and post-transformational event.
© 2010 CFO PUBLISHING LLC NOVEMBER 2010 3
Companies seek growth
and competitive advantage
through M&AMergers and acquisitions are often viewed as a means to build
a competitive advantage. When asked why their organizations
engaged in M&A activity in the past two years, respondents
report their primary objective(s) as (see Figure 1):
Adding complementary products, brands, or service lines (59%)•
Gaining access to new markets (52%)•
Capturing market share from competitors (32%) •
Improving economies of scale (29%) •
When asked about the success of meeting their primary
objective(s), nearly two-thirds (68%) of respondents report that
their companies’ M&A transactions over the past two years have
met or exceeded their primary objective(s). Only 13% report that
recent transactions have failed to meet expectations. Eighteen
percent report that they are either not sure or it is too early to tell
whether recent transactions will meet expectations.
3%
5%
6%
11%
17%
18%
25%
29%
32%
59%
0% 20% 40% 60%
Other
Not sure/Does not apply
Respond to competitive orregulatory pressure
Vertically integrate supply chain,production, and/or distribution
Gain access to professional talent,engineering, or operating expertise
Diversify lines of business
Improve economies of scale
Capture market sharefrom competitors
Gain access to new markets
Add complementary products,brands, or service lines
Acquire proprietary technologyor operating processes
52%
Figure 1. Companies turn to M&A for growth and competitive advantage.
To the best of your knowledge, which of the following were the primary objectives of your company’s M&A transactions in the past two years?
Percentage of respondents (Note: Respondents were allowed to choose up to three items.)
About this report
In August 2010, CFO Research Services (a unit of CFO Publishing LLC) conducted a survey among senior fi nance and human resource executives at U.S. companies to examine their views on human capital management in the context of M&A.
We gathered a total of 315 survey responses: 47% are from senior fi nance executives and 53% are from senior HR ex-ecutives. Respondents work for companies in a broad range of company segments.
Annual revenue
$500M –$1B 21%
$1B–$5B 39%
$5B–$10B 18%
$10B+ 23%
Respondent title
Finance
CFO 12%
EVP or SVP of fi nance 3%
VP of fi nance 11%
Director of fi nance 10%
Treasurer 4%
Controller 7%
Human Resources
Chief human resources offi cer 4%
EVP or SVP of human resources 6%
VP of human resources 10%
Director of human resources 12%
Human resources manager 11%
Other 10%
CEO, president, or managing director 1%
Industries
Auto/industrial/manufacturing 15%
Business/professional services 11%
Chemicals/energy/utilities 10%
Financial services 11%
Healthcare/biotech 13%
Technology 14%
All others 28%
Note: Percentages may not total 100% due to rounding.
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Full integration is the ideal
end state in most cases
Respondents report that the usual outcome of most (61%) M&A
transactions is full integration, either absorption or transforma-
tion. Of those seeking full integration:
51% report that • absorption—the full integration of the
acquired company in the dominant transaction partner’s
operations—is the term that best characterizes their
companies’ usual integration practice over the past two
years.
10% report that • transformation—the full integration of
the processes, practices, and assets of each transaction
partner to form a new type of company—best describes
their companies’ approach.
Only 32% of all respondents report that limited integration—an
approach in which partners operate separately—best describes the
integration intent of their companies’ recent acquisitions. Of those,
a majority (57%) confi rm that their companies are likely to integrate
acquired businesses more closely over the next three years.
With respect to integration intent and meeting M&A objectives,
the results show that organizations that integrate acquisitions
through transformation (just 10% of all respondents) are more
likely to report that recent M&A transactions have exceeded
expectations (30%) than the organizations that report absorp-
tion (15% exceeded expectations) or limited integration (10%
exceeded expectations) as their transaction practice.
Respondents see room for
improvement in human capital
related tasks
While survey results suggest that M&A often meet or exceed
an organization’s expectations, respondents also report a
potential to do better—particularly when managing human
capital. Th is study evaluates two dimensions of human capital
management: performance on human capital related tasks
and eff ectively pricing human capital factors into deals.
Respondents were asked to evaluate their companies’
performance on a range of human capital related tasks linked
to M&A activities over the past two years. Among the top
human capital factors respondents point to as in need of
improvement are (see Figure 2):
Establishing the desired company culture (43%)•
Establishing, communicating, and measuring •
performance standards across the combined entity (38%)
Pricing human capital assets, costs, and risks into•
deals (38%)
Analysis of the research results shows that success in
managing human capital issues varies by the type of transac-
tion an organization practices (transformation, absorption, or
limited integration).
Participants whose companies are focused on transformation
are more likely to report excellent performance in most human
capital related tasks during M&A compared with organiza-
tions that focus on absorption or limited integration. For those
organizations focused on limited integration deals, results
refl ect the least amount of success and the most reported
“room for improvement.” For example:
Th irty-three percent of transformation respondents •
report that their ability to establish the desired company
culture was excellent compared with 8% of those who are
focused on limited integration and 16% of those focused
on absorption. Th irty percent of transformation respon-
dents report room for improvement compared with 51%
of limited integration respondents and 41% of absorption
respondents.
Results by industry reveal signifi cant differencesThe study results show signifi cant variances in responses across industries. For example:
The industry most challenged with establishing the • desired culture in the new organization is business/professional services (56%), and the least chal-lenged is fi nancial services (30%). When it comes to performance standards, 50% of • respondents in the auto/industrial/manufacturing in-dustry said they have room for improvement versus 26% of those in technology. And, with respect to room for improvement in the • pricing of human capital assets, costs, and risks into deals, 46% of respondents in auto/industrial/manufacturing and healthcare/biotech industries see room for improvement, but only 26% of those in technology and 27% of those in fi nancial services share this view.
For more details regarding industry-specifi c results, please see the Sponsor’s perspective on page 13.
© 2010 CFO PUBLISHING LLC NOVEMBER 2010 5
Th irty-one percent of transformation respondents •
report that their ability to establish, communicate, and
measure performance standards across the combined
entity was excellent compared with 13% of those who
are focused on limited integration and 18% of those
focused on absorption. Th irty-one percent of trans-
formation respondents report room for improvement
compared with 49% of limited integration respondents
and 33% of absorption respondents.
When asked about the pricing of human capital assets,
respondents do not give very high performance marks.
Only 13% of transformation respondents report that their
performance on the pricing of human capital assets, costs,
and risks into deals was excellent compared with only 9%
of those that focus on limited integration and 15% who
focus on absorption. Th irty-seven percent of transforma-
tion respondents report room for improvement in this area,
compared with 44% of limited integration respondents and
34% of absorption respondents.
Most respondents report room for improvement in managing human capital programs during M&A activity.
When queried further on the topic of pricing human capital
assets, costs, and risk into deals, respondents report that the
commonly recognized fi nancial upside of cost savings through
workforce reduction—and the equally recognized downside of
the fi nancial cost of retirement obligations and other benefi ts—
are comparatively well documented and priced into deals,
especially among respondents who characterize recent deals as
transformative.
Survey results suggest a diff erent story for other important
factors, however. Th irty-three percent of all participants say that
human capital integration costs (e.g., the cost of lost productivity
and employee retention) and the value of new talent and capabili-
ties were not eff ectively priced into recent deals, especially for
limited integrations, and 25% say the same about human capital
risk (e.g., the lack of employment contracts for key employees
and collective bargaining exposure).
Figure 2. A substantial number of respondents identify room for improvement in their companies’ performance of a wide range of human capital related M&A tasks.
In your opinion, how well did your company perform the following human capital related tasks in the course of its M&A activities in the past two years?
23%
24%
26%
33%
34%
36%
38%
38%
43%
0% 20% 40% 60%
Identifying and retaining key employees
Designing and implementing compensationand benefits programs
Communicating with employees (e.g., communicationson transition timelines and decision-making rationale)
Ensuring workforce productivity and performancethrough the transition
Addressing the global aspects of workforce integration
Developing a human capital strategy for thetransaction that aligns with broader deal objectives
Pricing human capital assets, costs,and risks into the deal
Establishing, communicating, and measuringperformance standards across the combined entity
Establishing the desired company culture
Percentage of respondents identifying “room for improvement”
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HR and fi nance see value in
eff ectively managing the HR
dimension of deals
Across all HR dimensions measured, most respondents
in fi nance and HR agree that eff ectively managing the HR
dimensions of the deal contributes to their companies’ ability
to realize fi nancial value from transactions. HR executives are
more likely than their fi nance counterparts, however, to say
that eff ectively managing each of these dimensions greatly
contributes to fi nancial results. Th e diff erence in percep-
tion is especially evident in matters of national or regional
culture, staffi ng strategies, and employee engagement. In some
areas, the gap between fi nance and HR respondents is more
evident. (See Figure 3.) For example, 77% of HR respondents
say that eff ective management of employee engagement of
the combined workforce greatly contributes to their organiza-
tion’s ability to realize value from deals, compared with 67% of
fi nance respondents.
Most respondents in fi nance and HR agree that effectively managing the HR dimensions of the deal contributes to their companies’ ability to realize fi nancial value from transactions.
Figure 3. While finance and HR executives are broadly in agreement on the value of effectively managing various human capital dimensions of deals, HR respondents are slightly more likely across the board to say that effective management greatly contributes to value.
Does effective management of the following dimensions of a deal improve companies’ ability to realize the full financial value from that deal?
Effective management of…
28%
34%
48%
63%
70%
67%
78%
38%
43%
55%
68%
73%
77%
81%
0% 20% 40% 60% 80% 100%
Differences in staffing strategies (e.g., preference forinternal promotion, cross-functional teams, rotating staffing)
Differences in national or regional culture(e.g., differences in language, etiquette, custom)
Compensation and incentive plans (e.g., salaries, bonuses, long-term incentives, benefits)
Differences in company culture (e.g., sensitivityto work/life balance, compensation expectations,
thriftiness, formality)
High-performing employees throughout the organization
Employee engagement of the combined workforce
Assessment and selection of leaders
HR respondents saying that effective management greatly contributes to valueFinance respondents saying that effective management greatly contributes to value
Percentage of respondents
© 2010 CFO PUBLISHING LLC NOVEMBER 2010 7
HR and fi nance diverge on the
extent of HR’s participation in
M&A, and on the value of HR’s
participation
With respect to HR’s participation in the deal, HR respon-
dents are substantially more likely than fi nance respondents
to say that HR participated to a great extent during each stage
of the deal: target identifi cation, due diligence, integration
planning, and change management activities. (For more on
the value of HR’s participation, see the sidebar, “Does greater
HR involvement lead to better M&A outcomes?” page 8.) Th is
gap in perception is particularly prominent in respondents’
evaluation of HR’s participation in the due diligence stage.
Forty-four percent of HR respondents say that HR partici-
pated in diligence activities to a great extent; only 14% of their
colleagues in fi nance say the same. (See Figure 4.)
When it comes to the perceived value of a greater HR contri-
bution to M&A activities, HR respondents are substantially
more likely than fi nance respondents to say that greater HR
involvement in a range of M&A activities would have led
to better deal outcomes. Th is gap is particularly prominent
with respect to M&A pre-close activities (see Figure 5):
Th irty-four percent of HR respondents say that greater •
HR involvement in target identifi cation would have led
to better outcomes, while only 7% of fi nance executives
say the same.
Similarly, 45% of HR respondents compared with 20% •
of fi nance executives say that greater HR involvement in
due diligence would have led to better outcomes.
It is also noteworthy that respondents focused on limited
integrations are more likely to report that greater HR partici-
pation would have led to better outcomes, especially at the
integration planning stage. Sixty percent of respondents who
characterize their M&A transaction as limited integration
say that greater HR participation during integration planning
would have led to better outcomes, versus 45% of absorption
respondents and 47% of transformation respondents.
HR respondents are substantially more likely than fi nance respondents to say that HR participated to a great extent in a variety of M&A activities.
Figure 4. HR executives are substantially more likely than finance executives to say that HR participated to a great extent in a variety of M&A activities—in particular, activities associated with M&A planning.
To what extent did the HR function at your company actively participate in the following activities during M&A transactions in the past two years?
Figure 5. HR respondents are substantially more likely than their counterparts in finance to say that greater HR participation in M&A-related activities would have led to better deal outcomes.
In your opinion, would greater HR involvement in each the following activities have led to better deal outcomes (i.e., fewer surprises, smoother transition, greater value), or not?
6%
14%
32%
39%
14%
44%
55%
64%
0% 20% 40% 60% 80%
Target identification
Due diligence
Integration planning
Integration andchange management
7%
20%
41%
41%
34%
45%
58%
59%
0% 20% 40% 60% 80%
Target identification
Due diligence
Integration planning
Integration andchange management
HR respondents saying that greater HR involvementwould have led to better deal outcomes
Finance respondents saying that greater HRinvolvement would have led to better deal outcomes
HR respondents saying that HR contributed “to a great extent”
Finance respondents saying that HR contributed “to a great extent”
Percentage of respondents
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Does greater HR involvement lead to better M&A outcomes?
A majority of survey respondents confi rm that greater HR involvement in post-close activities would lead to better outcomes in M&A. In an effort to determine whether a positive relationship between HR’s engagement with M&A and deal outcomes is revealed elsewhere in the survey data, responses were segmented according to the contribution HR teams made throughout the M&A process and compared with reported outcomes of deals completed in the last two years.
This analysis reveals a positive and consistent rela-tionship between HR’s involvement in M&A activities and the results that companies achieve through their acquisitions. Approximately one-in-fi ve respondents whose HR teams participated to a great extent in target identifi cation, due diligence, integration planning, and change management activities affi rm that their deals have exceeded expectations. Conversely, when HR contributes very little or not at all to these activities, re-spondents are consistently more likely to say their deals have failed to meet expectations, as shown in Figure 6 (opposite). The research results also show, however, that HR is more likely to be involved in post announcement activities such as integration planning
and change management than in target identifi cation and due diligence, which occur before a deal closes.
The positive relationship between HR involvement and M&A outcomes appears in deal pricing as well, accord-ing to the survey data. Segmentation of this study’s results reveals that companies that had a substantial contribution from HR in pre-close activities—presum-ably before fi nal deal terms were settled—are more likely to have priced human capital factors into their deals effectively, as shown in Figure 7 (below).
Finally, the contribution of an HR function that is especially engaged with M&A activities is associated with higher performance on human capital related M&A tasks. Across all the stages of M&A activity—from target identifi cation and due diligence to integration planning and change management—companies with HR groups that participate in these activities to a great extent report excellent performance in human capital related M&A tasks. Examples of such tasks include develop-ing human capital strategy and new-company culture, identifying and retaining key employees, and designing compensation and benefi t programs.
Figure 7. When HR participates to a great extent in pre-close activities, human capital factors are more likely to be priced effectively into deals, say executives.
HR involvement in pre-close activities compared with the pricing of human capital factors in deals
HR participated to...
0% 20% 40% 60% 80% 100% 0% 20% 40% 60% 80% 100%
A great extent
Some extent
Very littleor not at all
Very effectively priced into the deal Somewhat effectively priced into the deal
HR participation in target identification
Human capital integration costs (e.g., cost of lost productivity, employee
retention cost)
Value of new talent and capabilities
25% 50% 11% 14%
13% 41% 28% 18%
15% 39% 38% 8%
27% 40% 23% 10%
12% 43% 29% 16%
12% 42% 36% 9%
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© 2010 CFO PUBLISHING LLC NOVEMBER 2010 9
Figure 6. Respondents who say HR participated to a great extent in M&A activities are more likely to report that recent transactions have exceeded expectations in meeting their primary objectives.
HR involvement in M&A activities versus deal outcomes
HR participated to...
9%
10%
18%
9%
12%
19%
8%
15%
21%
14%
16%
19%
41%
50%
61%
43%
54%
58%
45%
55%
62%
53%
57%
56%
22%
15%
10%
23%
12%
12%
22%
13%
7%
15%
6%
13%
28%
24%
11%
26%
22%
12%
26%
18%
10%
18%
21%
13%
0% 20% 40% 60% 80% 100%
Very little or not at all
Some extent
A great extent
Very little or not at all
Some extent
A great extent
Very little or not at all
Some extent
A great extent
Very little or not at all
Some extent
A great extent
Exceeded expectations Met expectations Failed to meet expectations Not sure/Too early to tell
Targetidentification
Duediligence
Integrationplanning
Integration and change
management
0% 20% 40% 60% 80% 100% 0% 20% 40% 60% 80% 100% 0% 20% 40% 60% 80% 100%
Not effectively priced into the deal Not sure/Does not apply
HR participation in due diligence
Cost savings through workforce reduction
Human capital risk (e.g., lack of employment contracts for key employees, collective
bargaining exposure, etc.)
Financial cost of retirement obligations, health plans, etc.
40% 42% 7%11%
29% 44% 13% 14%
18% 44% 17% 21%
28% 41% 22% 9%
16% 44% 25% 15%
8% 33% 32% 27%
52% 31% 8%8%
27% 45% 14% 14%
19% 45% 12% 24%
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Respondents call for business
focus, in addition to functional
perspective, in HR’s approach
to M&A
Finance and HR executives alike confi rm that developing
HR’s planning, leadership, and technical capabilities would
improve HR’s ability to contribute to the success of M&A:
Sixty percent of all respondents confi rm that devel-•
oping the leadership capabilities of HR executives
would greatly improve HR’s ability to contribute to M&A.
Nearly as many respondents say the same about HR’s •
ability to collaborate with line-of-business manage-
ment on organizational design (58%), their level of
business sense/deal acumen (56%), and their knowl-
edge of business processes (55%).
HR respondents are even more likely than their fi nance
counterparts to say that developing general business skills
would improve HR’s contribution to M&A. Sixty-six
percent of HR respondents say that developing the leader-
ship capabilities of HR executives would improve HR’s
contribution to M&A; 54% of fi nance respondents say the
same. (See Figure 8.)
Figure 8. HR respondents are even more likely than their finance counterparts to confirm that developing general business skills would improve HR’s contribution to M&A efforts.
In your opinion, to what extent would further developing the following capabilities improve your HR function’s ability to contribute to the success of M&A transactions?
37%
36%
35%
48%
49%
45%
54%
49%
53%
54%
57%
61%
63%
66%
66%
66%
0% 20% 40% 60% 80%
Capabilities to address globalhuman capital issues
Project planning/Project-managementcapabilities
Due diligence/Investigative capabilities
Knowledge of business process
Analytical capabilities (e.g., identification,analysis, and reporting on human capital
metrics to monitor progress)
Business sense/Deal acumen
Leadership capabilities of HR executives
Ability to collaborate with line-of-businessmanagement on organizational design
HR respondents saying that developing this skill would contribute greatly to HR’s ability to contribute to M&AFinance respondents saying that developing this skill would contribute greatly to HR’s ability to contribute to M&A
Percentage of respondents
© 2010 CFO PUBLISHING LLC NOVEMBER 2010 11
In response to a series of open-ended questions, many
fi nance executives urge their counterparts in HR to claim
a seat at the M&A table. “Get involved in the process from
day one. Push for continued involvement throughout the
process,” urges the CFO of a large wholesale/retail trade
fi rm. (It should be noted, however, that many more HR
executives call for fi nance to draw more on HR’s expertise.
For more on open-ended responses, see the sidebar, “In their
own words.”)
On the other hand, HR executives who participated in the
survey encourage their peers in fi nance to consider the
human capital dimensions of value closely when evaluating
transactions, and to call on HR for help in documenting the
full range of human capital costs—and gains—in potential
deals. “Require a business-savvy contribution from HR in
the due-diligence process—and commit to the legitimate
incorporation of [HR’s] input in cost calculations,” writes one
HR executive from a large healthcare company. “Pull HR into
deals much earlier in the process,” writes a vice president of
human resources from a large manufacturing fi rm. “HR can
help identify red fl ags and other questions that can impact
the price that you should off er. [HR can also help] highlight
things to pay attention to during due diligence and during
integration,” the vice president continues.
Many HR executives, it should be noted, caution their coun-
terparts in fi nance to favor a hardheaded view on potential
transactions, particularly when it comes to human capital
synergies. “Read the story behind the numbers—trends
and patterns, past successes or failures—[and] convert
information and data into business insights that can be
leveraged to make the buying decision,” writes a director of
human resources for a large company. “During due dili-
gence, besides the data given by the prospect, do indepen-
dent research. At all stages in the process, ask: ‘What’s the
compelling business case for the prospect to be acquired by
us? What synergies can be derived? Are they based purely on
past performance, or future potential, or both?’” the director
writes.
At the same time, however, HR executives urge their peers
in fi nance to look beyond fi nancial data as they evaluate
prospects. “In my experience, few deals are purely fi nancial,”
says a chief human resources offi cer at a large manufacturer.
“Companies make and sell things, and they use people to do
it. So getting a detailed sense of how an acquired company
has made its value, and why it is worth the price you’re
paying, will [help] you make better decisions.”
In their own words: HR and fi nance executives on realizing M&A’s full value
We asked senior fi nance and HR executives to share their advice on how to price human capital factors into deals effectively, and how to realize the full value of their com-pany’s acquisitions.
Below, we document respondents’ advice—in their own words.
Think beyond fi nance fundamentals to the “soft” costs of deals.
“Generally speaking (since every M&A is likely to be unique), valuing a target company merely on its existing fi nancials can be a grave mistake. Once acquired, the target company’s results could be signifi cantly different because of myriad reasons and should be taken into account during the valuation process.”
“Don’t underestimate the cultural aspects of an international acquisition—they could have unforeseen costs.”
“Consider the cost in productivity due to lost expertise that results from layoffs.”
“Sweat the small stuff. Seemingly benign integration decisions can have major productivity repercussions if they’re not thought through carefully. Changing programs that carry high emotional impact (T&E, benefi ts, titles, etc.) can have a bigger impact than you might imagine.”
“Be realistic in the fi nancial projections in factoring upfront productivity losses due to the disruption the deal brings within the acquired target.”
HR should get more involved early on.
“Get to the table any way you can...if not before the potential targets are identifi ed, at least early on in the process of evaluating and closing the deal.”
“HR needs to be assertive in making sure they are in on the planning from the inception of the M&A. HR plays a major role in communication and change management.”
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“Gain your place on the negotiation table by understanding the ‘hard’ benefi ts, and how the ‘soft’ aspects of the deal can be impacted by HR.”
“Take an assertive role in helping M&A leaders in measur-ing the intangible risks and liabilities to changing culture and human capital dynamics.”
“Ensure you are building the relationships necessary to be at the deal-pursuit table....In most cases, the HR implica-tions will not be deal breakers, so approach the work from the perspective of how to help the deal happen in the best way possible.”
…but HR needs to build its skill set to earn that seat.
“Think outside of your function and look at overall business need. You should be tied to the hip of the operations, business development, and fi nance teams. Integration planning should be done at due diligence.”
“Too often, we are seen as passive implementers of some-one else’s ideas. Too often, we are.”
HR leads the way through the post integration jungle.
“HR needs to see itself as a leader, not as a follower, with respect to integration of people and the cost of doing an integration.”
“Get the best HR people you have to focus on M&A support. The merger of cultures and learning how this works in the enterprise is a major undertaking after an acquisition.”
“Set clear human capital key performance indicators, linked to strategy, to be tracked post close. KPIs should be both lagging and leading indicators.”
Reward talent and revise compensation plans during integration.
“The people aspects are always key to any transaction. The key is to take the best of both companies so you don’t lose people in the process. While this sounds relatively easy, it’s hard to do on both sides.”
“Do not assume the target-company leadership has the same enthusiasm for the company post-acquisition, especially as the culture and procedures are integrated. Keeping the key people motivated and on board is crucial to achieving performance.”
“Do not part with institutional knowledge holders too soon. Until the new management is fully cross-trained, removing long-term employees who are vessels of institutional memory is very risky.” “Do a complete assessment of the leaders of the business you are acquiring.”
Communicate with employees.
“Communicate, communicate, communicate...not only with the new employees of the target company but also with legacy employees.”
© 2010 CFO PUBLISHING LLC NOVEMBER 2010 13
Sponsor’s perspective
Human Capital Management
and the Success or Failure of M&A
Th is has been a long, cold period for global M&A activity, with
deals having free fallen from $3,383 billion in 2007 to $1,607
billion in 2009. By comparison, the dip in 2002 reached just
$1,016 billion (Source: Dealogic and Robert W. Baird & Co.
Incorporated M&A Market Analysis).
So, as the economy hints at recovery, larger organizations that
have stockpiled cash over the past several years are anxious to
capitalize on attractive valuations to jumpstart their growth
agendas. Market leaders are now moving quickly, keenly inter-
ested in how to maximize their return on investment and avoid
the common pitfalls of poorly executed transactions. Th eir
focus? Human capital.
Human Capital Management and the Success or Failure of
M&A provides insights into the organizational issues and hu-
man capital programs that have the biggest impact on M&A
success. Th e study shows that identifying and retaining key
talent, factoring human capital integration costs into the deal
model, and HR involvement in integration and change manage-
ment activities can all be correlated to better deal outcomes. It
also highlights some of the toughest challenges in M&A activity
including aligning company culture, engaging key talent, and
integrating total rewards. Moreover, it sheds new light on HR’s
key role in realizing the fi nancial value of transactions.
A comparison of HR and fi nance leaders’ responses tells us
that HR executives have not yet stepped up to own the human
capital factors that are critical to a deal. HR professionals can
add signifi cant value to the success of a transaction, beginning
with due-diligence, assessing culture, forecasting human capital
expenditures, and evaluating top talent.
Perceptions on how well HR achieves this today vary, accord-
ing to the survey. Th e results also suggest that HR executives
are expected to better understand their industries and strategic
direction and translate that understanding into actions that are
tailored to the deal. Supporting this view, a plurality of respon-
dents say that while full integration is the desired end-state,
they often start with a more limited integration. In addition,
participants that focus on limited integrations believe that
greater HR involvement during integration-related activities,
such as integration planning and change management, would
have led to better results. Moving from point A to point B
requires a slightly diff erent or more dynamic HR strategy and
programs to accommodate diff erent states of integration.
We also see that variances in responses across industries add
another dimension to the strategy involved in shaping the deal.
For example, the professional services industry shows the great-
est room for improvement when it comes to establishing cul-
ture, employee retention, and compensation and benefi t plans
for newly merged organizations. Similarly, healthcare/biotech
and manufacturing have the greatest room for improvement
when it comes to pricing human capital elements of a deal.
In summary, both fi nance and HR executives acknowledge
the importance of human capital to the success of M&A. HR’s
challenge is to seize the opportunity to own the organizational
and human capital elements of a transaction while providing
guidance and counsel to the line managers and deal profession-
als. Th is requires three critical imperatives for HR:
HR must understand the strategic rationale of the 1.
deal and translate that strategy into operational,
organizational, and human capital implications that
make the deal work.
HR must partner closely with line-of-business man-2.
agement and other functional leaders to provide a
well-integrated environment for employees in order
to retain the talent that is critical to the deal’s success.
Finally, HR must lead—providing a business focused 3.
point of view for how all human capital elements,
ranging from organizational culture to HR programs,
can be leveraged to optimize the value of the business
combination.
We believe this is HR’s time to shine through value creation and
fi nancial results in a long-anticipated, fast-paced deal environment.
For more information about this research or how Aon
Hewitt can assist with your transaction needs, please contact:
Mark Arian, EVP & Practice Leader, Corporate Transactions
Aon Hewitt; 212.441.2034; [email protected]
Mark Oshima, SVP, Corporate Transactions
Aon Hewitt; 949.608.6409; [email protected]
Kurt Ewen, VP, Corporate Transactions
Aon Hewitt; 312.381.4126, [email protected]
Human Capital Management and the Success or Failure of M&A is published by CFO Publishing LLC, 51 Sleeper Street, Boston, MA 02210. Please direct inquiries to Jane Coulter at 617-790-3211 or [email protected].
Aon Hewitt funded the research and publication of our fi ndings, and we would like to acknowledge Mark Oshima and Ken Oehler for their contributions and support.
At CFO Research Services, Sam Knox and Celina Rogers directed the research and wrote the report.
CFO Research Services is the sponsored research group within CFO Publishing LLC, which produces CFO magazine.
November 2010
Copyright © 2010 CFO Publishing LLC, which is solely responsible for its content. All rights reserved. No part of this report may be reproduced, stored in a retrieval system, or transmitted in any form, by any means, without written permission.