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HR involvement in M&A process is key
December 15, 2004
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Stamford, Conn. -- Early involvement from a company's human resource experts in assessing the people challenges in a prospective merger, acquisition or other restructuring can significantly enhance the success of any subsequent deal, according to new research from Towers Perrin's HR Services business.

The survey, which involved more than 200 companies in the U.S. and Canada, found that close to 80 percent of mergers and acquisitions completed in the last few years had substantially met key strategic objectives. The reason, in part, is that HR functions now have far greater involvement in the process than in the past -- at earlier stages as well -- and believe they are increasingly well prepared to identify and address the many people issues that arise in M&A transactions. What's more, companies that rated themselves as ready to deal with a broad array of M&A-related people challenges managed the people impact far better than less well-prepared companies in the survey.

Traditionally, HR executives played a fairly limited role in M&A planning and due diligence, becoming more involved at the formal merger integration stage. Today, that picture is very different, according to the survey findings. Close to two-thirds of the participants are involved in M&A due diligence now, and fully three-quarters expect a high degree of involvement in due diligence in future deals. In addition, over a third (36 percent) anticipate involvement in pre-deal planning over the next few years, which should position HR to give valuable counsel to the organization on key people and cultural challenges at the earliest stages of review.

"No matter what the drivers for a particular deal may be, it's important for the HR function to be involved early in the planning process to help define desired workforce outcomes that can be tracked throughout the implementation phase to ensure that the deal delivers the expected results from both a business and people perspective," says Don Lowman, Towers Perrin Principal and Managing Director. "And today, HR is likely to get a seat at the deal table earlier than ever because pension issues, which are always a top challenge in an M&A situation, are more of a concern than ever, given that so many plans are underfinanced at present."

Part of the reason for increasing HR involvement is the need to address people issues quickly and decisively. The survey respondents were very consistent in their view of the most critical issues to deal with in the first three to six months of a merger, acquisition or other restructuring. These included ensuring effective leadership from the top team (87 percent), choosing the top team (85 percent), communicating effectively with employees (75 percent), retaining key talent (65 percent) and aligning the cultures of the respective organizations (47 percent).

The survey respondents were equally clear that these critical issues remained extremely challenging, with cultural alignment deemed the most difficult issue to get right, followed by leadership and employee communication.

"Although experience helps, our survey findings reconfirm what we see time and again; there are no magic bullets for solving the thorniest issues, like leadership, culture and communication,” says Lowman. “The successful companies get it right because they are committed and persistent. They build a well-thought-out plan and follow through on that plan consistently and forthrightly, no matter how tough it becomes. They don't look for shortcuts because they know there aren't any."

Perhaps because of HR's increased involvement in all phases of the M&A process, the survey respondents expressed confidence in their ability to meet a range of both strategic and tactical people-related challenges. Even more significantly, the results indicate that the readier an organization feels, the greater its success in managing certain aspects of the process.

Specifically, only about a quarter (26 percent) of the survey group rated themselves fully ready to meet the broadest array of challenges. And being prepared helps, as 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 an M&A (60 percent vs. 36 percent) and two-and-a-half times as likely to report increases in employee morale and engagement (50 percent vs. 20 percent). They were also significantly less likely to report declines in morale and engagement (28 percent vs. 47 percent); and
  • 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 percent vs. 16 percent), while the other companies are more likely to be classified as lower performers (63 percent vs. 84 percent).

"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 over time on a number of fronts," says Lowman. "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 all those things come together, over time, financial benefits will accrue as well. That's ultimately what it's all about. "

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 midsize 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 fully 88 percent of respondents reporting a merger or acquisition, and somewhat smaller numbers reporting a divestiture or spin-off (57 percent) or a joint venture (40 percent).

 
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