Last year in the US, there were more than 12,000 M&A transactions worth US$3.3 trillion, the highest figure since records began. Yet still 70% to 90% of M&A deals fail. This article suggests a new approach that aims to preserve value from human capital in a way that becomes part of cultural integration.
When you look closely at why M&A deals fail, invariably it comes down to the deal not returning the value it promised, even though the transaction itself was successful in achieving the desired terms.
So, what goes wrong? If we look at the constituent parts that make a company attractive for acquisition, these usually include material assets, intellectual property, and human capital. While most elements are seen in terms of value, people are seen as a cost. And when a deal goes wrong, it often relates to the people element in terms of lost value and failed ‘cultural integration’.
Connecting company valuation to workforce integration
M&A is a fragmented process and there’s typically a disconnect between the financial assumptions made at pre-merger stage, which focus on ‘synergies’ and cost savings, and the practicalities of workforce integration.
Associating critical roles and work activities with financial assumptions in the early deal stage would create a clear bridge to intrinsic human capital value. But leading up to Day 1, the highest priority tasks are usually to make sure everyone has a new email address and everyone gets paid, rather than what people should be doing to make this value tangible.
To address the disconnect, workforce integration needs to begin pre-merger and continue through to the end of the integration program 12 to 24 months later. This should be in addition to monitoring human capital related productivity gains that create value by increasing output while reducing cost.
Mapping roles to work and competencies
However, the data blackout that comes into force once a deal is agreed makes it difficult to access information relating to human capital. Despite this, negotiations with senior leadership take place pre-merger, so in principle there’s scope to begin mapping the most critical roles to company valuation.
Defining human capital in terms of the work and competencies that make up each role and organizing them within a common framework can normalize variations in how similar roles are described between the two organizations.
Not only will this help to quantify and locate value within the combined workforce, but it should improve the personal integration experience for everyone and lead to more effective cultural adjustment, because roles have been clearly defined. This data-driven approach means that decisions will be purposeful and guided by data, rather than being arbitrary and influenced by gut feel and bias.
Preserving value from human capital
Once the link between roles, work, and competencies has been established, the objectives of the integration planning process can be tied to the deal’s financial assumptions. It’s important to create a mechanism that tracks talent retention to preserve value by identifying which skills to protect through incentives.
By the end of the 18 months, the team will be able to report on human capital value in specific terms and the contribution it makes to the financial assumptions of the deal.
The following three steps summarize how to go about doing this:
- Build a centralized, connected view of the merger process, beginning with valuation all the way through to the end of the first year, to provide the through-line that’s going to inform the cost reduction process, as well as the retention and value of the workforce.
- Build human capital into your value creation process during the pre-merger stage by mapping critical roles to a common competencies framework. These can then be used post-merger to recalibrate all roles across the newly integrated organization and inform selection, based on data rather than intuition.
- Identify what data will be available to begin integration planning pre-merger, even if this is limited to a small, isolated section of the workforce (e.g. senior leaders). This will inform the competencies framework, which will be vital post-merger in managing integration of the entire workforce.
Defining cultural integration through position and purpose
If your organization knows it’s likely to make more acquisitions in the future, it would pay to build the foundation for really understanding your workforce now. So that when the company does begin negotiations, it can simply bring the target workforce into that same operational framework, based on role expectations, competencies, and activities.
This way, everyone will be clear on their position and purpose within the new organization, to the extent that this understanding can be considered part of ‘cultural integration’, where culture is defined around ‘value of work’, rather than ‘the way we do things’. We believe this approach can make a significant difference to the success or failure of any M&A deal and will contribute to a supportive work environment.