Maximising value with the ‘soft’ side of M&A


Financier Worldwide Magazine

October 2019 Issue

Pre, pending and post M&A deal, issues such as finance, IT systems and operations tend to receive the lion’s share of dealmakers’ attention. Less consideration, if any, is given to a transaction’s softer side, specifically, people and culture.

As understandable as it is for dealmakers to focus on tangible aspects in their quest to enter new markets, develop new products and accelerate customer growth, ignoring a deal’s intangibles has the potential to significantly undermine value.

“Almost every M&A study since the beginning of time has consistently determined two key findings: culture matters, and acquirers are generally quite bad at managing culture,” affirms M&A Partners in its study, ‘Maximising M&A deal value through culture’.

According to the study, “out of approximately 15 categories considered ‘essential’ for due diligence, culture ranked last in terms of the percentage of acquirers’ actually conducting this type of inquiry pre-close”. The study also notes that 77 percent of acquirers considered themselves poor, very poor or average at effectively managing people and culture issues during M&A.

“Buyers typically prioritise hard assets over soft because it is simply easier for them to do so,” says Alan J. Castillo, a transaction advisory services principal at BDO. “With hard assets, integration activities tend to be consistent from one transaction to another, whereas integration activities for soft assets can be very specific to the transaction.”

Further testifying to the importance of people and culture in M&A is the 2018 Mercer report – ‘Mitigating Culture Risk to Drive Deal Value’ – which notes that 43 percent of global M&A transactions experienced serious culture issues that caused deals to be delayed, terminated or purchase prices negatively impacted. In addition, 67 percent experienced delayed synergy realisation due to negativity surrounding culture issues.

The report, which features the views of 1400 M&A professionals based in 54 countries, reveals that ‘how leaders behave, not just what they say’, is the number one driver of organisational culture for 61 percent of respondents, with practitioners valuing governance, decision-making processes, communication style and transparency particularly highly, at 53 percent and 46 percent respectively. In addition, Mercer states that 30 percent of transactions fail to ever achieve financial targets, due to culturally-related issues such as productivity loss, flight of key talent and customer disruption.

“If the global deal-making community intends to drive economic value for shareholders in M&A transactions, our research is crystal clear: culture matters,” says Jeff Cox, global M&A transaction services leader at Mercer. “When looking to transform the workforce for the future of a newly formed organisation, simply ignoring culture is not an option.”

Additional evidence as to the benefits of people and culture is provided by Protiviti in its ‘Guide to Mergers and Acquisitions’, which contends that merging entities often forget that culture matters and fail to get people issues right. “There will always be cultural and people issues to address,” states the guide. “As human capital is critical to the success of any acquisition, the name of the game is winning hearts and minds.

“Identifying, motivating and incenting the requisite talent for success is a key driver of deal value, as it results in retention of the people who make the business work,” continues the guide. “The people who will be especially critical to post-integration success must be embraced early and given some insight into the future – and what their place in that future likely will be.”

Indeed, positioning the intangibles of people and culture high on the M&A priority list means dealmakers will be well-placed to avoid post-deal integration pitfalls and, ultimately, maximise value.

Building blocks

An M&A transaction is a significant change event requiring parties to have a sound understanding of the relationship between people, culture and business outcomes. From the get-go, merging entities need to have the building blocks in place to ensure no value is lost due to poor soft assets integration.

“Culture, people and processes are critical,” says Myles Suer, head of global enterprise marketing at Dell Boomi. “A poor organisational culture can kill an M&A deal, particularly if it involves a digital transformation. If you cannot solve people and process challenges, then no amount of technology will save an enterprise. Chief information officers (CIOs) have told me that problems occur in M&A when throwing money at technology becomes easier than changing culture, people or business processes.”

Engaged employees remain positive, energised, motivated, focused and resilient. They are also more likely to do their best work and can become the newly merged organisation’s most passionate advocates.

According to Baker Brand Communications, there are 10 ways dealmakers can help employees embrace the changes and opportunities afforded by an M&A transaction, and achieve successful integration and value creation: (i) expand due diligence; (ii) identify culture change owners: (iii) develop a comprehensive communications plan; (iv) talk about what people want to know; (v) define and demonstrate clear leadership – at all levels; (vi) communicate clearly, honestly and often; (vii) focus on customers and other important stakeholders; (vii) convey tough decisions in a timely manner; (ix) execute focused, well-planned initiatives; and (x) manage and diffuse resistance.

When such values and practices are working in harmony, a newly merged entity can foster a strong organisational culture that aligns its people and mobilises them to constructive action, notes the Baker analysis. Furthermore, engaged employees remain positive, energised, motivated, focused and resilient. They are also more likely to do their best work and can become the newly merged organisation’s most passionate advocates.

However, despite these propensities, dealmakers can be slow to facilitate them. “Too many M&A deals start by keeping companies separate and then figuring out who or what to keep,” opines Mr Suer. “This creates operating efficiency but does not deliver the accelerated accretive results expected. The M&A transition team needs to consider how to onboard and offboard employees effectively, so that they can retain the people they need.”

Less convinced of dealmakers’ disregard for people and culture during M&A is Richard Naish, a partner at Walker Morris LLP. “People and culture are rarely sidelined during an M&A process, with it being more likely that they are considered earlier on in the discussions between deal teams,” he says. “The key difference is that we do not see any formal diligence workstreams being carried out by external advisers on culture, in contrast to diligence on tangible assets.”

Integration and alignment

Once an M&A transaction is complete, dealmakers will understandably be anticipating the fruits of their labours. However, industry studies indicate that over two-thirds of all M&A transactions fail to deliver expected business outcomes. In addition, almost half of executives leave within the first year, and three-quarters leave within the first three years. Productivity has also been shown to plummet by around 50 percent.

“Many M&A deals fail because they were ill-conceived or because of an inability to execute,” suggests Mr Suer. “It is essential that businesses ‘stick to the knitting’. Most importantly, M&A investments should be focused on organisations whose business capabilities play together. Remember, business capabilities, processes and people are key. With these in hand, organisations can focus upon achieving the technical synergy needed for business synergy and then cost reduction.”

Of course, in order to facilitate a successful M&A transaction and avoid post-deal disappointment, there has to be an M&A project integration plan – a set of policies and procedures outlining how the acquiring and acquired companies will be combined in order to achieve the goals of the deal. In turn, a proven methodology – ideally focusing on tangible and intangible assets in comparable measure – will define integration steps so that merging entities’ personnel can see the work ahead as logical and achievable, helping align expectations and replacing employee scepticism with optimism.

While it is important to ensure the leaders of the acquired company are on the same page, it is just as critical, notes the Protiviti guidance, to engage quickly the personnel whose work and knowledge contribute to the company’s success. If they are not treated well financially, if they fail to fit into the combined entity from a cultural standpoint, if they are not provided opportunities to participate in leadership and managerial capacities within the post-acquisition organisation, or if they fear their futures are in doubt, they are likely to depart.

“People and culture should not be overlooked or underestimated when it comes to the realisation of synergies and improved financial performance,” asserts Mr Naish. “While senior management will likely drive and manage any integration process, many deals can stand or fall based on the proper integration of teams across all levels of both the buyer and the seller. This integration and cultural alignment needs to start at the very top, where those standards are set.”

Crafting an M&A playbook

A carefully crafted M&A playbook that considers both soft and hard assets can help ensure that all deal value drivers, regardless of which type of asset they are dependent on, will be sufficiently analysed, planned for, measured and executed.

In its ‘M&A Playbook: A Valuable Guide to a Winning Strategy’, Mercer states that people and culture issues need to be addressed with the same priority and diligence as the financial aspects of a deal. “Preparing an M&A playbook before it is in the throes of a transaction can help an organisation to achieve full shareholder value and long-term benefits,” adds Mercer.

According to Mr Castillo, the following activities should be part of any organisation’s M&A playbook: (i) include integration as an embedded part of due diligence; (ii) prioritise deal value drivers in integration planning; (iii) establish an integration team structure that maintains focus on the deal value drivers and measures success; and (iv) address day one priorities related to soft assets, such as employee experience and communications, and hard assets, such as financial reporting and compliance.

“In any transaction, the buyer’s integration strategy and priorities need to be aligned with the deal rationale and focus on the deal value drivers,” adds Mr Castillo. “In today’s economy, talent and corporate culture can often be significant assets for a company. For example, for many technology companies, their culture is an important component of their brand and their ability to attract the best talent.

“The retention and utilisation of such soft assets are important value drivers in a lot of transactions and should be a focus of the integration because the realisation of target synergies is dependent on them,” he continues. “Buyers that ignore soft assets during the M&A process risk deal failure.”

According to the Protiviti guide, reductions in operating costs lead to the loss of the ‘functional experts’ that are essential to executing the business plan post-merger – a shortsighted move that serves to lessen management’s credibility, impact the revenue and cost synergies identified as part of the merger rationale, and even jeopardise deal completion.

The criticality of people and culture

Although hard assets are likely to remain the focus of M&A transactions going forward, it is clear that respecting the softer people and culture aspects of a deal is also critical – the integration of which stacks the odds in favour of a merger’s long-term success.

“All M&A projects look good on paper,” notes Mr Naish. “However, it is imperative that people and culture are considered. Are the merging entities culturally aligned? Do they hold the same values? How are people valued and managed? These questions, and others, must be asked early on. Organisational values are increasingly important to those entering the workplace, and are seen by some as ranking ahead of financial rewards when assessing whether or not to apply for a particular role.”

Likewise, Mr Cox is in no doubt as to the essentiality of soft assets for M&A success. “Dealmakers can mitigate M&A risk and drive deal value by putting culture at the centre of business transformation,” he says. “Culture is an organisation’s operating environment. It defines it, allows effective change of business strategy, and can provide a platform to attract and engage the right talent.”

With M&A activity expected to remain robust over the coming years, despite the headwinds gathering to disrupt the space, leveraging the soft assets of people and culture will be key to maximising shareholder value. That said, dealmakers targeting ‘perfection’ by focusing on the softer side of an M&A transaction would do well to remember that people are imperfect, therefore there can be no such thing as a perfect culture.

© Financier Worldwide


Fraser Tennant

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