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Welcome to Mercer's podcast series on the new shape of work. I'm Kate Bravery, Mercer's advisory and insight leader and today, I'm joined by Jeff black, a partner at Mercer, and our global M&A advisory leader. He's here to chat to me about all things M&A related and specifically to discuss the impact of talent on deal value. Jeff, welcome. It's wonderful to have you on the call today.

Hi, Kate. Pleasure to be here. Thanks for having me.

Wonderful. Well, Jeff, why don't we get right into it, because my gosh, I think last time you and I were together was on a similar podcast back at the end of last year and a lot has happened in the last six months. So why don't we start just with a little bit of context. I'll kick off, as you know, the end of last year, we asked 800 CEOs and CFOs about what they thought would play out in 2023, and they indicated that despite economic concerns, 1 in 3 actually was going to increase their M&A activity.

I think we heard that joint ventures was rising up the list as the preferred deal structure, but certainly I know that's what CFOs are advocating for. A third were actively considering divestitures, and I think the other headline was around more attention to delayed integration of past deals. I think those are all of the topics that you and I were chatting about or we got that study at the end of last year.

How have they played out? What does 2023 start started to look like and some of the things that we now need to be aware of?

Yeah, so as you mentioned, it certainly has been interesting since the last we-- last we chatted. And certainly would have anticipated those two to be the trends, and we've seen bits and pieces of that, but it's probably played out a little differently just because of the market that we're in. There's a lot that's going on. I'd maybe point to two things. One is if you look again, just globally across the markets from a financial fundamental standpoint, you've got just this continued combination of inflation rates that are higher than desired, and that's causing challenges.

You've also got the a lot of the federal banks who are trying to combat that by continuing to increase interest rates, so that's creating a dynamic. And then you already had, because of those things, kind of a lender side conservatism to what they were willing to do in terms of funding deals and lending, et cetera. But you add to that mix some of the recent turmoil in the banking industry, especially in the US and more the, kind of, mid-market banks, and then we've seen it with you know UBS and Credit Suisse as well, that's really you know constricted a lot of the lending market and made it challenging.

If you take that and then add another piece to sort of the market fundamentals really around if you look to the US, the EU, UK, we're seeing it a little bit in different places, in LATAM, I think just from like a governmental standpoint, a lot of concern around antitrust, anti-competitive nature of some of these deals. These really created a challenging ripe market for deals to get done.

Now that being said, deals are still getting done. They are looking somewhat like the trends you said, and I'll maybe just quickly point to a couple of trends that you can you can look at. Ones an industry focus. Like you look at the auto industry, and, sort of, that trying to manage that transition from the combustible engine to more of the electric vehicle sort of view, there are joint ventures going on all over the place.

Some people have multiple joint ventures going on around specifically the same thing of trying to figure out production or batteries or those kinds of things, so we certainly see it playing out at that. The other dynamic that we see driving a fair amount of deals is just, sort of, the look at supply chains, people sort of look to reassess how global they are, can they nearshore some of them.

Then for example, in north America, we're seeing a lot of activity in Mexico as, kind of, the US, Canada and Mexico people, sort of, look to nearshore some of those, and that's driving again, partially some M&A activity to get those productions set up. So we're still seeing deals, not the volumes we were seeing and maybe not what we were expecting, but people are trying to-- trying to manage and figure our way through.

Yeah. Well, with those economic headwinds and market conditions. But it's great to hear that there are deals happening, and interesting to see that joint ventures are on the up. And I'm not surprised around the supply chain disruption. We were recently at the World Economic Forum Growth Summit and looking at supply chain relocation was definitely a big topic.

Yeah.

Of course, both of those have significant people implications, probably even more people implications than typical acquisition work that you've been doing. I'd be curious to hear what are some of the things that we need to keep front of mind in this climate? What are the big takeaways that we need to remember relating to people in deals at this time?

Yeah, it's a great question, and I'd say some of these are fundamentals that quite honestly, whether it's extremely active like it was in 2021 or more of a market that we're in right now, these still hold to be the fundamentals. And again, at the end of the day, when you look at most deals, it is the people and how the people aspect of it is handled and the execution of that, that can have a really a major impact on how successful or how challenging that deal is.

I like to think about people as really the execution engine of deals. You have a strategy, you have a deal strategy. You have a direction you want to go. It really boils down to do you have the right people, enough of the right people in the right roles, organized in a way where it makes sense, and do you have things aligned from an incentive and just a culture standpoint where you're sort of driving and sending the right behaviors?

So those things are true, again, robust times, not robust times [INAUDIBLE] kind of, what the what the deal is, and it really comes down to sort of this linkage of the business strategy and the operating model and making sure that there's good execution linkage with, sort of, that talent and organization platform so you have in an organization.

I love that point. The people are the strategy execution in deals, and we might come back actually to some of those points around cultural integration because they also came up in the study as areas where HR really, really has some challenges. There's probably one trend that we haven't touched on which also came up in the research which was the sheer number of companies that were delaying planning integration, and I could only imagine that that's probably continued.

I wonder if you wouldn't mind sharing some of the risks with that strategy and what does that mean for HR professionals.

Yeah, and that really is one of the areas as you went back to the beginning, and talked about maybe the different levers that we thought people were going to pull. This is one, joint ventures is another one, but this is one that we're seeing more and more people look to. Makes sense for a lot of organizations and really I think for most, they're looking at it from the view of are there, sort of, some mist or some yet to be captured cost synergies that could potentially come out of these delayed integrations.

So I mean, you asked about risk, I mean, there's always risks whether you immediately integrate something, you delay the integration, you do the integration-- you can go after, there's always challenges with that. And this may sound very basic, but I think the strongest piece of advice that I've give people is whatever you do, make sure that you're doing it intentionally, on purpose and that you really proactively thought about and connected it back to, again, whatever that business deal strategy is.

It has to align and sort of make sense and support. If you're doing something with the people and the operational side, that doesn't make sense with the strategy. That's obviously going to not bode well for how the deal goes forward, but again, back to the people side of things, people will see that and they'll pick up on that, and that can cause a lot of-- lot of extra noise.

Now the one thing that I would say on these delayed integrations, just to put out there, they do have their own set of challenges. If you look at an organization that you know somebody acquired three years ago, and they didn't integrate them or they lightly integrated them, and now they're going to decide to do a full integration, you really have to face the question from a business strategy standpoint that most of the workforce is going to ask which is, hey, the deal is three years ago, why now? Like why does this make sense?

So even if it's not tied to a deal, if it's delayed, if you think that you don't need to have that grounding or that anchor of listen, these are the business reasons that we're doing this and then have everything tied back to that, you really need to rethink that because without that, it really seems like just kind of like this random ask, and again, it's going to be really hard to get people, kind of, focused on board with what you're trying to do.

I agree. And there's so much hitting our people at the moment. If that business rationale or deal logic isn't really clear, I think you'll get a lot of people hoping to kind of wait it out as a being-- as a part of being part of that cultural change. And the culture change aspect, I think, of any deal, post deal is absolutely the most challenging. We see that coming up time and time in our research.

In fact, in our last 2023 Global Talent Trends pulse survey, we had a whole series of questions where we asked HR what are you most concerned about delivering on, and I think the top one was harmonizing cultures, and the second one was maintaining some of our D&I goals post deal because obviously, if you're making a divestiture, if you're making an acquisition, those are the things that are going to change, and yet they very much sit at the feet of HR. What are some of your recommendations for mitigating these risks?

Yeah, I really do think it-- like these are some of the key things that I know culture in general sometimes can get kind of a bad rap. Kind of-- kind of, nebulous and squishy and what does it mean? I think-- I think having a really a practical view on culture, what it means and what it kind of translates into the workforce is really important.

When we talk about culture, it really is, kind of, the spoken and sometimes unspoken or the written and sometimes unwritten sort of rules of how work gets done, what's that work experience like for people in the in the workforce, and if you think about it that way, and obviously if you're taking two organizations and putting them together, there's going to be some differences.

And so recognizing those differences, how you want to sort of align those differences not just to reconcile amongst themselves, but again back to this notion of having that sort of view, and that tie in to from a business strategy and a deal strategy like what are we trying to accomplish when we put these things together, what are we trying to do-- and making sure that everybody's on the same page of what is it you're asking to do behavior wise.

Now you also need to make sure that you have that tied to incentives and other structures and those kinds of things because, if you say one thing, and then you're incenting and rewarding something else, or if again, when you're in front of, kind of, the entire group you talk about a certain set of cultural views, and then when you get into a day to day management you run it very differently, people will pick up on that, and they will align to, kind of, the more direct communication or what things they're, sort of, rewarded around or incented around.

Now you talked about DE&I and one of the things related to culture that's interesting, and again, it's a challenge and something to be aware of is that what we're seeing, there's a lot of components to culture, and it seems like in most deals, people, sort of, will cling to maybe like one or two components of culture as sort of like the representative of the entire culture. We're seeing that more and more with DE&I because of the efforts that companies have put into setting goals, being very transparent and talking about what they're trying to do in that area.

That'll be almost like a cultural marker, if you will, as they're looking at maybe their organization and an organization they're going to merge with or they're being acquired by, et cetera, and they'll make some judgments based on that. Is this a place that I'm going to want to work? And if again, you've not anticipated where those differences are, it is quickly as you can sort of been in front of that and transparent to people of what are you trying to create so that you can apply some of those fears and maybe things that aren't going to change.

And for the things that aren't going to change, make them aware of it, but also know that it's being done on purpose, and again, it ties back to the business strategy. Those are ways that you really have to kind of go forward and sort of navigate through that. But culture is a very, very big impact on kind of deal and deal success.

Really interesting how that's a mark of a people in looking at what is the company joining or how might it change the company I'm currently in and how that might impact how attractive the organization is in the future. It's absolutely fascinating. And you mentioned-- we've talked a little bit about D&I and D&I obviously comes up when we also talk about the World Economic Forum's good work framework which has a whole pillar on D&I.

But that framework which was launched at Davos in 2023-- spoke about a lot at the Rose Summit earlier this year-- is one which encourages companies to be pretty public on some of their commitments around everything from living wage, flexible work policies, how many people you're upskilling and reskilling and it is galvanizing action, and I think it does do some of the things that you talk about around being really clear about where we want to be from a cultural standpoint.

But obviously it has big implications when we do M&A, because your diversity metrics, the number of people that you upskilled, even living wage could all be upended by an acquisition or a divestiture. Would love to hear your thoughts about how HR should be tackling this challenge.

Yeah, and maybe there's a few different kind of layers or ways to look at it. Certainly around this issue if you've got one organization that's made these commitments, been very vocal about the commitments, et cetera. Obviously important to understand whether you're merging, acquiring, whatever that looks like. Is the is the other party-- have they made these commitments at kind of the most base level?

Just because they haven't made those commitments maybe in the same way, doesn't mean that they aren't doing things sort of underneath, and so it'll be important to have a process to start to understand that, but there is that kind of basis of release starting from like the commitment side of things where we've made the same statements.

So that's kind of a start. But if you kind of dig underneath that and you start to look at the pieces, whether it's living wage, whether it's around inclusive benefits, you start getting into pay equity, et cetera, all those things, understanding that and where there's connects and disconnects. But the most base level is making sure that you understand whether there are commitments, is there anything that's an inherited risk in the deal because of the way some of those things are being treated. Obviously there's compliance and there's just other kind of reputational risks, those kinds of things.

So there's, kind m this like inherited risk bucket which you need to look at. As you kind of move past that, then I think you get into some of the things that we were talking a little bit with culture, but it starts to get in if you are going to integrate it, there are integration risks, potentially. If one is looking at this very differently than the other, that certainly going to be an area where, from an integration standpoint, you're going to have to think about that. What's that going to look like? Are you going to give any place? Et cetera.

Same thing from a retention standpoint. We actually see a lot of employees now again, looking at that as a marker of is this a place I am or I'm not going to want to work, and if you're not messaging appropriately what that's going to look like, they will make decisions on if they're going to stay or not stay based on that. So you have kind of those other two layers that work into it.

The other thing I would say is it's not just like nice to know this for those reasons up front. I think the earlier you can understand again, purposefully looking at this and being clear about this way back in diligence is that if there are gaps, and the intention is that you're going to sort of, quote unquote, "catch" one organization up to the other, there's resource and budget issues that go into that, and so that would be something that you would want to have again, clear line of sight to as you're looking at the financial model, pulling together the purchase price, all those kinds of things.

The last thing you would want to do is not realize these things because of the other risks I mentioned, but also not realize it until post close and then have to go back and ask for a bunch of money to try to kind of gap fill on it when you could have anticipated it. So there's definitely things that need to be built into the process, especially for those organizations who have made very public commitments to make sure they understand the alignment and how they want to address within misalignment.

Absolutely. Your comments earlier about D&I being a cultural marker I think really fits here as well. Many organizations have been looking at female reproductive rights or same sex benefits. I mean, have you got different philosophies on that that's going to send quite a clear message, but also, you're absolutely right ensuring that there's that affordability modeling done as well so that the structural risk, retention risk, integration risks are mitigated upfront is going to be absolutely key.

Gosh, this landscape gets more complicated as-- [LAUGHTER]

Fun times. Fun times.

It definitely has been a move-- a moving target but isn't it wonderful, Jeff, that you and I are sitting here, and we're talking about these metrics that maybe sit within the S of ESG or are sitting in people's sustainability because at the same time as talking about some of the financial metrics of the deal logic and the cost synergies, I think that's really exciting.

Jeff, we are unfortunately coming to end my time, so my final question to you today is let's say we're sitting here three years from now, as we look back on this period that we have just said has been frothy and then flat, and now looking completely different, what do you think would be some of the lessons that we've taken away from what some are calling this post-pandemic period?

Yeah. So I think maybe alluding a little bit to what you were just talking about like if you think about just the difference in the conversation we were just having, some of that is a little bit of what has come out of COVID. I do think, sort of, the-- I'll call it the people agenda, if you will, in most organizations, in the c-suite, that's much more elevated than it was pre-- pre-pandemic.

So I do think some of that has sort of planted the seeds. I think the things to kind of build on related to that to echo just a couple of things that I said earlier on, I think it really does kind of go back to, kind of, reinforcing two key-- key elements. One is again, having this, kind of, people component, if you will, as part of any deal thesis that you put together and part of that's around talent, what do you need, how much do you need, are you going to be able to get it and retain it.

But there's an element around this notion of behavior, the different behaviors you're going to need out of the workforce, how are you going to make that happen. But that needs to be set early on when you first start looking right, so that it sort of flows throughout the process. So I think that's one. The second, again, is sort of taking that as an input and making sure that there's appropriate, I'll call it, execution linkage between that kind of business deal strategy, and the operating model and then how are you going to link and then execute in the in the talent platform.

I think those two things kind of building on where the importance of people is sitting in most organizations now, I think those really will be the things that sort of change. And a few years from now, we would hopefully be having a much different conversation hopefully about the market too, but a much different conversation about again, kind of talent and people and skills and sort of how they fit, and they deliver value in deals.

Well, Jeff, every time I speak to you, we have a completely different conversation, and you say the same thing, so I'm sure--

Now I do that.

The only thing I would say is your mantra on you've got to put people first and how talent really does make or break a deal I think is the one constant. I took a few notes for myself only because we also do deals, so I always love you having on because I get to learn more. Some of the things are just reminders for me are have a look at the prior deals we have and see whether we do need to look if there's further cost synergies we should be capturing and if we do go down that route, make sure that the business rationale for doing it now is really prominent.

You mentioned there again about the operating model and the talent platform model. That's the landscape that's been evolving quite a lot and we could take the opportunity of an M&A or a divestiture to maybe do that a little bit more different than in a in a more agile way, so I think that is really exciting. You mentioned about-- I love that phrase earlier-- we've got to be practical about the squishy culture, I think you said that cultures can be squishy.

And I think some of your tips there were really important. Focus on the EX for the actual people, acknowledge that there might be real differences between the cultures and have that conversation and reinforce it with incentives. I think that's really good advice there. And you just closed out there with as we start to put people at the heart of our deals, looking at how we ensure it's sustainable, and we might embrace our ESG goals and good work give us an opportunity to feed some of that into our metrics and keep our eye on that prize as well.

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So Jeff, thank you so much for all those insights today. I will love to have you back, and you can tell me it's all changed in six months time. It's been wonderful to chat today. Listeners, thank you for tuning in. Again, if you're interested in this topic, or others associated with the new shape of work series, please do visit our interview series on mercer.com. Thank you, everybody. Have a great rest of day. Thank you again, Jeff.

Thank you.