Authors: Andrew Malahowski Al Phelps Chris Schickling
After a temporary slowdown of mergers and acquisitions (M&A) activity during the height of the pandemic, the volume of buying, selling and consideration for selling has more than rebounded. Deals are getting bigger and so is the focus on talent.
Low interest capital on the buy side and high valuations on the sell side make M&A deals especially attractive. Inevitably, the pendulum will swing the other way at some point, so firms are moving forward to close deals in a timely fashion. Uncertainty about the future of estate tax and corporate minimum tax rates may also be prompting some businesses to cash out.
Talent acquisition as a key motivator
Product synergies or gaps are still the principal drivers of M&A activity. However, in a job market rife with workforce shortfalls, people and the specialized knowledge they offer have become a top incentive. They are so essential, in fact, that firms now buy entire organizations to access desired talent.
Norms for where and how employees work, reset by COVID-19 over the past two years, have combined with new ways of doing business to create a new marketplace reality. Digital transformation is contributing to M&A activity as organizations pivot to match the speed of evolving customer needs. Merging with or acquiring firms that provide needed technological capabilities or expertise is often the quickest way to fill gaps and keep pace with rapid change.
Business globalization also fuels this trend. Buying and selling products and services outside the U.S. remains the status quo, now bolstered by the rapid growth of remote employees who can work anywhere in the world. Under these circumstances, merging with or acquiring businesses that can handle operations in select non-U.S. locations makes sense for many organizations. And bringing employees with cultural savviness and language skills into the fold is particularly important for deals that enable international expansion.
M&A best practices
A readiness strategy underpins M&A processes at 25% of organizations, but significantly fewer consider it well-defined (9%). Most have no strategy and no plans to implement one (65%).* Although approaches to pursuing a merger or acquisition differ, awareness and use of well-established best practices can generally help guide a better course of action.
1. Engage in meticulous discovery and due diligence processes
Avoiding shortcuts during the discovery and due diligence phases helps ensure smooth progress during the entire deal cycle. While verifying that processes and documentation are in good order has always been key for both buyers and sellers, extremely high valuations make it essential for buyers to have a complete grasp of the risks. The common challenge of sorting through legal, contractual, financial and HR data to find relevant information for making valid assumptions and informed decisions is often taxing. But it is fair to say that reliable results qualify such detailed scrutiny as critically important.
To assess the seller's modus operandi, a review of the company's values and general HR policies early on can be indicative for buyers. A more rigorous analysis then follows. This process evaluates current benefit plan costs and the forecasted cost at close, self-insurance or other liabilities, claims reserves and established savings, benefit plan reporting and disclosure, and obligations under the Consolidated Omnibus Budget Reconciliation Act. Other compliance issues and liabilities may also apply. On the retirement side, understanding financial concerns, compliance with safe harbor requirements and pension liabilities is vital.
HR technology is also a major consideration. An organization may have a rudimentary program but whether or not it can support growth is worth assessing — and may validate an investment.
2. Carefully consider the terms of the agreement, using broad input
An optimal M&A process hinges on the involvement of all relevant parties, from planning to conducting due diligence and handling the deal after it is done. This process includes clearly establishing who is in charge and when they need to exercise their authority. Because benefits are significant in executing a merger or acquisition, HR's involvement at or near the start of the deal cycle helps ensure coverage of employee-related matters.
A potentially successful deal begins with a formal agreement that must be properly structured and thoroughly reviewed. Once signed, it becomes the indelible and indisputable map for the transaction. The inherent conflict of buyers seeking flexibility through generalities and sellers preferring the limitation of specificity often complicates agreements. A common misstep in M&A transactions is making the agreement without buy-in from all stakeholders in each organization, notably HR and benefits leaders.
3. Harmonize total rewards with intention and collaboration
Industry benchmarking provides insight into how the current salaries and benefit plans of each organization compare. In particular, aligning compensation with industry standards is important for attracting and retaining talent. Where lags occur, potential adjustments — such as one-time salary increases — may be warranted to keep the seller's employees on board. Bringing rewards up to standard is part of the total equation and may require an additional investment.
As soon as possible, the buyer will want to determine which benefit plans employees will use going forward. Keeping their own in place requires deciding whether a transition period should apply or the change becomes effective immediately. This timing is important, including how quickly a plan can be implemented, because it impacts the timeline of the entire transaction.
Typically, organizations bring the acquired employees onto existing benefit plans upon closing (53%). But 35% maintain the seller's benefit programs on a temporary basis such as a defined transition period. It is uncommon to benchmark and implement new benefit plans (9%) or continue the seller's benefit programs indefinitely (4%).*
When harmonizing plans, employee preferences and desires are practical considerations that must be balanced with cost and compliance. M&A can significantly affect the cultures of buyer and seller alike, but efforts to preserve and merge the best of both can be impactful. In an environment where talent is coveted, it helps to engage employees in the decision-making process to the extent possible. Surveys provide a useful tool for understanding employees' values and prioritizing time and resource investments.
Brisk M&A activity arose from an unprecedented conjunction of low borrowing costs and high interest in keeping up with the pace of business. In a market like this, it is important to balance the urgency to remain competitive with a thorough transaction process that accounts for the input and buy-in of all key stakeholders. That is where M&A best practices come in. They guide the successful harmonization of workforces — fortifying the go-forward strategy to ensure that combining organizations achieves the sought-after outcomes.
