More Than Numbers: The Central Role of Human Capital in M&A

 

Mergers and acquisitions (M&As) are often seen as strategic moves to gain market share, improve financials or unlock synergies. Dealmakers in a transaction tend to focus on the financials as well as the due diligence process. What can often be overlooked is the crux of what makes a business successful – human capital.

It is the people in an organisation that drive innovation, operational efficiency and value post-transaction. According to Aon’s Global Risk Management Survey, failure to attract or retain top talent is ranked number four globally of top risks. Insufficient attention paid to workplace and employee issues, and a lack of understanding of employee culture, leadership transitions, compensation and benefit structures can result in the failure of M&As, divestitures or carve-outs in the medium to long term.

Human capital refers to the economic value of a worker's experience and skills. Diving deeper, human capital is made up of assets like education, training, intelligence, skills, health, and other intangibles such as employee loyalty and punctuality. Managing the human capital aspects of a transaction, starting with due diligence, is key to success post-transaction. It is therefore crucial to start by quantifying and managing risks and liabilities in relation to people programs within an organisation to deliver on deal and meet business objectives. Importantly, corporate and employee goals need to align. To affect this, change management and communication strategies need to be adopted and integrated early in the deal cycle. In a competitive employment landscape, ensuring a holistic and integrated approach to total rewards to attract, retain and motivate talent is vital.

Managing Human Capital Value Creation through the M&A lifecycle

There are three key people considerations to ensure that corporate and employee goals are aligned to mitigate any risks in the transaction and optimise an investment:

• Ensure the right leadership and talent are in place at the right time.
• Develop and deploy a comprehensive change management and communication strategy focused on optimising the employee experience, successfully retaining talent, and driving cultural alignment.
• Drive performance outcomes by taking an integrated approach to the design of the total rewards strategy, philosophy, and programs.

The first step in ensuring optimisation of human capital in an M&A lifecycle commences with human capital due diligence. This includes a comprehensive assessment of personnel-related risks such as identifying current salary scales, examining employee policies, jurisdictions in which employees are located, as well as compliance and employment laws in these jurisdictions. An analysis of hiring and promotion processes and leadership continuity plans alongside a keen understanding of the headcount makeup play a key role in driving the success of a transaction. Consideration of compensation structures, long-term employee benefit obligations, rewards structures, severance payouts and an analysis of key executive agreements could circumvent any unforeseen challenges during integration efforts.

Proper diligence can lead to reduction in costs and facilitates smooth integration processes, as opposed to an organisation spending more resources and energy on remediating any unfavourable consequences from a lack of strategy in human capital.

The time period between signing and completion of a transaction is also critical. The preparation for set up and the transition process between signing and completion and ultimately implementing and operating the company post-closing should include a 100-day plan which communicates post-closing expectations and monitors the optimisation of transition processes. This 100-day plan should address the critical issues detected in the earlier diligence process and should function as a communication strategy to address employee concerns post-merger.

Key Factors Leading to a Smooth Transition

Key factors of success in a holistic human capital M&A approach should include financial consideration/tracking of synergies, pension/retirement plan including long-term employee benefit obligations, the total rewards structure, as well as executive, broad-based and sales compensation, and in some cases equity conversion. In specific cases, retention and severance packages could help in a smooth transition of the business. Some of these will require significant industry benchmarking which the company may not have and would require third party expertise. Aon’s depth of research data and analytics in this area, can help provide a third party perspective.

In some jurisdictions, employee and labour relations especially employment law and employment transfer to other or new legal entities present challenging circumstances. Key to that is maintaining employment terms and conditions of employees being transferred, understanding the labour law and relevant relationships to maintain with the relevant authorities or unions, employment and human resource policies and global mobility policies as much as possible. Where this is not possible, it is important to be transparent and communicate clearly and show that reasonable efforts have been taken to maintain a smooth transfer of employees from one legal entity or business unit to a new entity or business unit. Crucially, communicating clearly and showing that efforts have been made to ensure proper benchmarking alongside industry or jurisdiction-specific standards would come a long way in generating goodwill amongst employees.

In an uncertain post-transaction environment, it is important to maintain some semblance of stability for employees involved which requires culture and leadership alignment. In this regard, human resource operations play an integral part in a smooth organisation structure change. This includes a stable service delivery model, human resource systems and administration as well as a payroll system which minimises the impact of the transaction on employees. Especially in an environment where organisation structure changes, companies should put an emphasis on talent retention as the risk of losing talent is at its highest. Robust strategies need to be implemented to retain key employees and appointment holders – this includes implementing criteria for the assessment and selection of such talent, examining workforce analytics, as well as considering whether an employee-focused evaluation process in terms of employee interviews and surveys is necessary.

Carve-Outs in Asia: An opportunity and a challenge>

Carve-outs are increasing in Asia as global corporates scale back on international exposures in today’s economic and political climate. Both sellers and buyers are now seeking to maximise value whilst preventing delays and execution risks – these can be navigated with adequate preparation and the use of integration tools alongside transaction advisory relating to human capital.

Whilst the new dawn of a carve-out could create exciting opportunities for buyers and employees, the disruptive nature of such processes can be a highly unsettling period for employees. Buyers are advised to invest time and resources into developing robust people strategies that support the retention of key employees. Failure to align the employee value proposition with organisational purpose and growth could create a culture war and jeopardise any successful integration.

Numerous case studies demonstrate that early engagement in the human capital aspects of the carve-out can help increase the success of the transaction. In some cases, value creation starts even before completion as the buyer has the ability under the sale and purchase agreement (SPA) and local labour legislation to make decisions that benefit the new organisation prior to completion. Starting early provides cost efficiencies and strong financial benefits. In fact, it allows parties to consider in advance, any legacy liabilities which need to be managed post-carve out. Not managing all aspects of human capital can result in delayed completion or a staged completion situation where each country needs to meet the required SPA and local law requirements.

Human Capital: The Untapped Resource for Value Creation

Human capital is often neglected during the pre-sale process by sellers. However, some sellers are now embracing how they can tap on human capital to create value prior to a sale, enhancing the attractiveness of a carve-out or a sale to potential buyers. Likewise, some buyers now choose to invest in human capital value creation by placing importance on energising the workforce. This can provide an edge in negotiating a transaction with sellers.

Many buyers underachieve their stated transaction objectives because of inconsistent approaches to human capital in the M&A management process. Even when human capital is not the focus in due diligence, there is still significant untapped human capital value creation opportunities post-due diligence and post-transaction. A robust human capital M&A strategy with a carefully orchestrated and considered approach starting from the due diligence process through to post-transaction would significantly enhance and not erode the value of the transaction.

For additional information about Human Capital M&A, contact:

Lee Xianwei
Head of Aon M&A and Transaction Solutions, Asia
xianwei.lee@aon.com

Blossom Lim
Growth Leader, Aon M&A and Transaction Solutions, Asia
blossom.lim@aon.com