Realizing the value of a merger or acquisition is an exercise in complexity. In the past, dealmakers have rightfully focused on value drivers such as retention of important customers and suppliers and integration of critical operations, but one element that today’s boards of directors may neglect is the human side of a deal. It’s an aspect that can sink a deal if mishandled, especially with the unprecedented dynamics of today’s workforce.

Many companies are feeling the pinch from the current talent gap, resulting from new, pandemic-era employee expectations and a glut of openings in the job market, and boards understand how the situation is affecting the hiring and retention of top leaders. Now, that gap has moved organization-wide.

Going forward, boards who want to ensure that their deals will succeed long-term should elevate both pre-deal and post-deal activities that aim to optimize the human elements of a combined organization.

Here are five actions to ensure that your next deal doesn’t miss the human side of mergers and acquisitions (M&A).

Do Your Human Capital Due Diligence

The key to a successful transaction in today’s environment is to conduct due diligence on the people and cultures of both companies with as much rigor as you would on finance or operations.

There must be a heavier focus on people across the organizations. While holding on to top leadership is vital post-deal, many people in technical roles throughout the companies are also flight risks during the transition. Research from the MIT Sloan School of Management found that 33 percent of acquired employees left after one year.

To mitigate risk, dealmakers must consider the real cost of employee turnover in the target company. Who are the critical people at all levels that could head for the door? What are the replacement and onboarding costs to get back to full staff? Just as the cost of turnover will vary across job families and leadership levels, so, too, should the board oversight of plans to mitigate key people risks.

In addition, certain circumstances may create an inherent liability. Acquiring entrepreneur-led companies, for instance, can create a serious challenge for retention. Remove the entrepreneur from the company and, in some cases, you’re removing one of the strongest retention levers. Without the founder, many people will leave to find another start-up or growth company.

The key here is honestly appraising the human value-drivers and risks for the deal. It is the board’s responsibility to ensure its executive team is applying the proper scrutiny.

Remove Acquirer’s Bias in the Deal

Acquirer’s bias often has been a default of the subconscious integration mindset in the past. It assumes that processes, roles, and corporate culture of the acquiring company will subsume the new entity.

This may still be true for some of the more system, process, or technical aspects of integration. But if you apply this thinking across the board to the human beings involved, you have a decent chance of all layers of integration failing. Boards should be pressure-testing this bias by asking: How will assimilation to our culture erode the competitive advantages we’re paying for? Are there elements of the target’s culture we should be assimilating, too? Are there leaders at the target who are better positioned to take the combined entity to the next level?

Here’s a simplified scenario where bias hinders integration: Imagine that a large company with strict vacation rules acquires a Silicon Valley darling with unlimited vacation time policies. If the acquiring company imposes its vacation policies on the acquired company, where do you think the new talent will go once the deal is done? The cost of maintaining or extending the target’s approach to vacation time could be a win-win for everyone with little incremental cost.

Know the Difference Between Acquirer and Target Employee Deals

Each company has its own established employee deal—a stated or unwritten agreement between the organization and its talent. These employee expectations usually involve the company’s brand attractiveness, culture, professional development structures, decision-making authority, promotion navigation rules, leadership access and alignment, and total rewards to the employees.

Leaders should evaluate each area of employee deals from both companies and identify the areas with the largest cultural gaps to design the optimal future state of the new company.

Too often, boards and executive teams fall prey to the “deal honeymoon,” inflating commonalities or synergies while downplaying or ignoring potential risks. The excitement of a deal can easily “rose-color” critical differences in leadership style, decision-making approach, pace of career development, or overarching company culture.

Ultimately, the best approach is to optimize a combined, future-state employee deal, accompanied by an appropriate plan to communicate the vision at launch and beyond. Six months in, if employees are wondering “What’s in it for me?” then your company will be facing retention risk at all levels.

Remember That It’s Never Too Early—or Too Late—to Start Your People Due Diligence

It’s never too early to design what you want the business to be before you get hooked on the lure of the deal. Dealmakers often get overly excited about acquiring the shiny new company and forget the culture and people aspects. Leaders must become self-aware of the impact and complexity of merging cultures.

That said, it’s never too late to address the human side of the transaction. Already well into deal-planning or integration? Don’t despair. Even late in the game, the board can influence critical changes to human elements that will improve change leadership, reduce turnover, and ultimately better support the objectives of the merger or acquisition. And this pivot doesn’t have to dramatically impact timelines.

For example, we worked with a board to implement a short pause in integration planning to execute a sprint evaluation of critical people and culture value-drivers. Just two weeks later, the integration management team was back at work, with critical changes in place to address people risks.

Stay in the Game for All Four Quarters

Most leaders are focused on the first 100 days, but talent is the long game. Boards should maintain adequate oversight of organization and people workstreams beyond the initial months following a change in control, and sometimes for up to two years after the deal closes.

Communication is critical during this timeframe. Leaders should focus on expectation-setting across key people topics. Employees want to know that there are plans for professional development, as well as for promotions and rewards, and they want to know when to expect those events to happen in their careers. Boards play an important role in coaching executive teams to stay the course, carefully tracking to established retention milestones at the 6-month, 12-month, and 24-month timeframes.

Yes, It Is About the People

With today’s real talent gap, the value of most deals won’t originate solely from a bundle of processes and assets. In addition to traditional focus areas, the human aspect of a deal can drive, or put at risk, a considerable portion of expected value. Failing to focus on people and culture during M&A activity can drive loss of top talent and slow value capture.

To avoid this, boards must remind their deal teams that it is all about the people and provide the right oversight to address the human-side of the deal to ensure long-term success.

Matt Campbell is a managing director with Alvarez & Marsal’s Corporate Performance Improvement practice in New York and serves as leader of the group’s Talent, Organization, and People practice. 

Colin Harvey is a managing director with Alvarez & Marsal’s Corporate Performance Improvement practice in Austin and the national solution leader for the group’s Corporate M&A Services.

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