The sustainability of employees (and people practices) is under scrutiny by stakeholders who are prepared to unflinchingly hold business leaders to account on this key issue. The sustainability and effectiveness of corporate people practices is therefore a major factor in the success of any M&A deal.
The stakes are high: pre-deal commitments related to human capital (HC) disclosures or the World Economic Forum’s (WEF) Good Work standards can lead to unforeseen liabilities for the buyer and costly integration and harmonization processes. Critical talent could end up walking out the door if the M&A process is not well managed. This means that if a business is unable to effectively identify potential inherited risks, plan for integration or assess the cost impact of these issues, a deal can end up on shaky ground.
Deal success therefore hinges on retaining key talent and getting alignment on the people issues and behaviors that support the deal’s long-term objectives. It’s crucial that people risks are prioritized. This is a powerful way to ensure that M&A deals achieve their full value in the longer term. The other top priorities for dealmakers throughout a transaction should be operational stability, retention of customers and clients, and a bespoke value-creation roadmap, along with all associated due diligence.
Getting the people dimension of M&A deals right has never been more critical. Our 2022 Executive Outlook found that a third of executives planned to increase their M&A activity in 2023, and that one in two were accelerating the integration of new businesses into their firms.
The importance of Good Work issues
In the last few years, the need to be more intentional about the “social” aspect of the environment, social and governance (ESG) issue has come to the fore. The SEC in the US has recently increased its HC disclosure requirements, while many companies in Europe will need to comply with the new sustainability requirements expected in 2024. A good focus on this issue makes it more likely that new companies will thrive post-deal. This is where HC requirements, sustainability disclosures and commitments to Good Work come into play. The World Economic Forum’s (WEF’s) Good Work Framework (GWF) offers guidance for making commitments around a set of core objectives linked to the future of work. These include paying a living wage, tech accessibility and flexible working, alongside employee health and well-being and skills.
In addition to providing guidance on setting core and extended goals, the GWF also provides metrics and processes to help companies track and report on their progress against their commitments. The GWF is fast becoming a go-to tool for evaluating the sustainability of a company’s people practices. It can also act as a litmus test for investors keen to understand a company’s suitability for M&A activity.
When engaging in corporate development activities, it is vital to know which commitments have been disclosed publicly (and any inherited risk associated with upholding said commitments). This knowledge can impact the value and success of a deal. Whether by choice or in-line with regulations, it is therefore imperative that Good Work commitments are accounted for throughout the deal process.
The price tag of commitments
ESG issues and their related business commitments have a dollar, brand and cultural value, meaning the price tag can be significant. There’s a cost to honor said commitments, and there’s a cost to brand perception if you don’t. Being unable to balance the books in light of these promises could see a business facing the challenge of critical talent leaving, which would have a knock-on effect on client satisfaction and investor confidence.
Mergers, acquisitions and divestitures have clear repercussions for a company’s ESG commitments and Good Work goals. These commitments and goals might include:
- Ensuring at least a living wage for all
- Enabling all workers to benefit from flexibility
- Safeguarding total well-being
- Ensuring that the workforce diversity reflects the operating market
- Providing accessible upskilling and reskilling for the entire workforce
When done well, these commitments and goals will all reflect a firm’s values, and ultimately become a fundamental part of how the company does business and cares for its people. But, what might the implications of these commitments and goals be for a M&A deal? Let’s take a look at some potential scenarios.
Say the acquired company has made a commitment to pay living wages across both its business and its supply chain. A merger needs to address this expectation and understand the cost of meeting this pledge. Consistency will be a factor and the following questions will need to be asked:
- Will that commitment be expanded to the buyer’s supply chain?
- What is the best approach if the buyer and the business it’s acquiring have the same organization(s) in their supply chains?
- What is the plan if discontinuation is necessary?
- Do expansion plans incorporate this directive?
- Have actions such as pursuing future acquisitions or increasing wages in other parts of the business been costed into the equation?
Consider the scenario where a company has set a target to upskill 10,000 workers by a certain date or has disclosed its gender pay gap. A restructure, retrenchment or divestiture could change the feasibility of meeting these targets or widen existing pay gaps (if certain populations are disproportionally impacted by cuts). This makes it important to address the following:
- Does the goal need to change due to the deal?
- If so, how should this be managed?
- What readjustments are realistic and within budget?
- Are all executives aware and indeed on board with any human capital disclosures or public commitments to stakeholders?
It should also be noted that an unsuccessful merger can have a major impact on employee well-being. For example, it could see the number of stress-related workplace incidents spiraling. This will have an impact on a company’s ability to meet its targets to, for example, reduce year-over-year stress-related illnesses, or its ability to extend health coverage. In fact, research from the Swedish House of Finance shows that deals increase the likelihood of employees experiencing depression by 8%. Moreover, the likelihood of employees being admitted to hospital increases by 5% due to the extra pressure they face during and after deals.
Now, consider a company that has committed to flexible working for all its employees, in line with the WEF’s first Good Work standard. The following questions need to be considered:
- How will flexibility apply to skill workers?
- What does flexibility mean in terms of increased benefits for various part-time working arrangements?
Flexibility will need to be modeled into the merger plan in terms of how part-time work, job shares or remote schedules will evolve as the makeup of the workforce changes. If this is not done properly, it could negatively impact the new company and also any future acquisitions and mergers.
Mitigating risk through due diligence
Issues of the type discussed above might not immediately be picked up in the due diligence process, which increases the risk exposure for all parties. The key to avoiding this risk is to follow a proactive process (within preliminary due diligence) to understand the target company’s philosophy and the “baseline” commitments that have been made. This will involve looking at issues that include:
- How the business wants to manage its workforce.
- How vocal it is about its commitments.
- Its approach to delivering a workforce culture aligned with future of work aspirations.
It is vital to find out what commitments have been made and disclosed, and where the executive team of the target company is focused. This is the first step that must be taken before the financial implications of business commitments can be assessed and factored into the deal price.
From risk to reward
Many progressive companies are on a Good Work journey because they want to be ahead of the curve on legislation and HC disclosures for their employees, who they consider as key stakeholders. Upholding Good Work standards therefore goes beyond just disclosures and commitments.
As this movement gains traction, Good Work goals (and all related future-orientated activities) are becoming employee expectations. Consider, for example, how many potential employees now ask about flexible working in an interview, or use review sites to research diversity at senior levels of the business they are interested in. Good Work brings the following benefits:
- For sellers, Good Work positions your business as a hot commodity bursting with potential. In the eyes of the investor, it signals both people and business sustainability.
- For buyers, a company that is upholding Good Work standards can offer better integration, synergy and ultimately value creation.
- For talent, this is one indicator of a progressive company that cares about its people.
In this context, a M&A deal represents an opportunity for leaders to define their ambitions for their employees more clearly, and for them to ensure that the new post-deal company remains attractive to future talent. Getting this right will increase employee retention, trust, productivity and engagement. It will also enhance brand value and customer respect, and ultimately lock in deal value.
Conversely, failure to properly take on board HC disclosures or Good Work commitments at the start of the deal process can result in:
- Low or unequal pay
- Benefit packages that aren’t fit for purpose
- A fall in workforce diversity
- Uncertainty surrounding skills and future employability
- A resulting loss of talent down the line
- A major brand risk
It is important to note that Good Work standards or HC disclosures alone don’t increase retention and value. Success in this area comes from having:
- The right focus and understanding
- A plan to implement the necessary commitments or standards
- The determination to make progress on an ongoing basis, whether you’re keeping, changing, or replacing HC disclosure or Good Work targets
- Effective change management, progress metrics and transparent internal communication
These will all help maintain deal value and enable a smooth transition that upholds and takes forward the values of the target company.
Promote fairness on wages and technology
|Ensure at least a living wage for all
Provide flexibility and protection
|Enable all workers to benefit from flexibility, where possible and appropriate
|Safeguard total well-being at work
Drive diversity, equity and inclusion
|Ensure that the workforce profile reflects the operating market
Foster employability and learning culture
|Provide accessible upskilling and reskilling for the entire workforce
Value alignment: dollars, disclosures and demands
As highlighted above, a key part of the due diligence for any M&A deal must involve a clarification of the financial costs of any Good Work commitments and HC disclosures. Ensuring that this becomes part of your due diligence will:
- Ensure you won’t have to figure out these costs after the deal price is set, which could mean that the agreed deal price is not optimal.
- Provide you with a model by which to assess sustainability (whether business, people or environmental) in a consistent way.
- Enable you to assess the resources and budgets you need early on.
The first step in this process is an assessment of any documented commitments that have been made in ESG, board, integrated or other company reports. This review should include pinpointing what communications have been shared with partners, investors and employees.
The next step is to carry out a gap analysis on existing commitments to understand what delivering on them may entail. Key questions at this stage might include:
- How is the acquired business tracking against its existing commitments to investors and its workforce? For example, is the business making good progress on its net zero emissions target? How many workers are fully flexible in the context of ‘flexibility for all’? Pinpointing how far the business is on its journey, and how this compares to its public statements, will steer budget planning and timelines.
- What is the timeline for meeting certain goals and are these goals realistic? For example, the company may have pledged to pay a living wage to all employees by 2025, or to achieve gender pay parity by 2030. Knowing the challenges ahead and the work needed to achieve them will be key to the overall analysis.
- What are the differences between the merging organizations in terms of their values and progress on commitments? For example, what is the gender balance across companies and how will this have an impact on gender pay ratios? Is one company stronger in terms of its investment in skills, or in terms of access to benefits or flexible working? What expectations have been set? Are there philosophical questions to address relating to company values and visions? Misalignments in these and other areas carry risks. They could derail the achievement of parity goals. NB: if the differences are large, then honoring commitments and bringing the merging organizations into alignment may require significant investment.
- What is the potential for risk or friction? For example, if there’s a mismatch in the approach to Good Work between the merging organizations, then this may create problems and risks in areas such as employee retention, compliance and reputational integrity. Assess whether there any points of friction between the two companies (such as culture clashes or differences in flexible working philosophies) that need addressing. Learning more about the other organization to anticipate any risks or friction points, will make for a smoother merger and ensure better risk mitigation. A significantly mismatched culture may be a sign that a merger isn’t the best route.
These questions can help with the formulation of a strategy for both the cultural and physical integration of the merging companies. It is important to understand:
- What you’ll need to address to reach the closure of the deal.
- What HC issues you’ll need to consider in the relation to the “post Close +90 days” stabilization period.
- The differences between the transition/stabilization period and the optimization period.
- That proactive assessment and action will be needed to drive both the transition and optimization phases of the post-deal process.
- How you will clearly communicate any updates to disclosures or commitments to all stakeholders. This will be essential if you are to get everyone on the same page and aligned to the new vision.
Post-integration success depends on a strong foundation that must be built in the due-diligence phase. Any “cracks” or uncertainty in the foundations of the deal will only become a bigger fissure that will need to be fixed post-close. The challenge, however, is that 30% of HR leaders don’t feel ready to proactively identify and mitigate diversity, equity and inclusion (DEI) issues or ESG concerns in the early stages of a deal, as our 2023 Global Talent Trends research found. It is therefore important to get a handle on these issues before they become critical.
Stabilization: setting the stage
The post-sign stabilization phase sets the stage for future success, but it can be a balancing act between tackling immediate strategic decisions (surrounding compliance, reputations and any commitments that do not align with the deal thesis), and planning for what commitments will be required as the process moves closer to the optimization period.
As mentioned earlier, defined plans are needed for both the stabilization and optimization stages. While they won’t be the same, there should be some linkage between them: a clear connecting thread running through both. The post-deal alignment of values and commitments is a great first activity for any newly formed executive team.
Addressing any employee concerns head-on at the stabilization stage can build the confidence of stakeholders in the decisions that have been made as part of the M&A. The converse is also true. In fact, our Delivering the Deal research showed that 47% of the deals that fail do so due to a lack of strategic planning and execution rigor related to people risk.
It is important to put the essentials in place at the stabilization stage. Key points to consider include:
- Maintaining attractive compensation and reward packages: a strong reward offer encourages staff to remain with the newly merged business. This maintains the value of the deal by retaining knowledge and skills within the company. Expectations, whether formal or informal, will have been set in both companies. Being aware of this can help with future planning.
- Aligning on flexible working: companies should make sure that any new policies provide employees with the flexibility to make choices about the way they work. Changes should be clearly communicated, especially if the merger means that a new flexible working policy will be introduced or that pre-deal flex options will be pared back. Be mindful of the impact of the any changes to flexible working practices on DEI issues.
- Unlocking career progression opportunities: employees will want to have at least the same level of opportunity in the combined organization as they had before. If positioned correctly, a M&A can accelerate internal talent mobility, enhance employees’ progression paths and strengthen employee retention. In particular, large organizations have the potential to broaden the career horizons of employees joining from smaller entities.
- Streamlining processes: we are living in a time where simplicity rules, so it is important to streamline processes and integrate systems in response to any post-deal restructuring, job changes or layoffs. Taking a person-centric view of what it’s like to work for the post-deal firm is key to enhancing the experience of its employees.
- Addressing job security concerns: a M&A may leave employees unsure about job security, including what the change will mean for company governance and the nature of their roles. Reconfirming Good Work commitments is therefore important. Companies should be upfront about what they value and where they are headed. A clear understanding of these issues should have been gained during due diligence. Proactive communication should then be undertaken with employees to remove uncertainty. Even if there will be adjustments to any original commitments, it is better to show that these changes are part of an intentional plan, rather than leaving employees guessing about what lies ahead.
Optimization: Getting into the swing of things
Optimizing the deal involves adopting or integrating clear goals aligned to the WEF’s Good Work standards into the new business entity or entities. Post-close, it is usually people issues that dealmakers raise as the biggest barriers to value creation. This includes the retention of key employees (19%), leadership alignment (19%), culture alignment (19%), and productivity (8%), as laid out in our Delivering the Deal research.
Ensuring successful integration involves bringing executive teams together to (re)define the new company’s ESG ambitions and to reformulate any other HC disclosures or Good Work commitments. This work will help attract and retain employees: young people in particular are keen to contribute to matters relating to sustainability in their jobs. They gravitate to employers that deliver on Good Work commitments, which is a win-win for both parties.
Focus on organizational culture and productivity as you execute your long-term HC strategy:
- Enable workforce participation and champion inclusivity to enhance organizational culture.
- Consider how workers are represented as new tech is being rolled out and change plans are formulated (this is a component of the WEF’s Good Work Framework).
- Interact with the workforce and understand what they truly value. To reach out to employees, consider the use of pulse surveys, digital focus groups and live interactions.
- Assess past behavior to understand what employees care about and what they expect from their employer.
- Drive productivity by adopting technology in a responsible and ethical way to create value.
- Consider how a digital-first mindset is being cultivated alongside your integration plans. Take this opportunity to rethink how work is being done today and where automation and different work models could improve efficiency in the future.
In the WEF’s Future of Jobs 2023 report, it is estimated that 85% of organizations identify the increased adoption of new and frontier technologies, and the broadening digital access, as the trends most likely to drive transformation in their organization. It is no surprise that executives surveyed for our Executive Outlook cited increasing automation as the top priority when it comes to maintaining efficiency and profitability.
How Mercer can help
- Clarify public commitments and reputational matters with the target firm
- Assess the anticipated skills and gaps in the target firm
- Implement due diligence to audit values and commitments across both firms
- Calculate financial liabilities and brand opportunities
Stabilize (post-sign to post-close +90 days)
- Diagnose Good Work commitments/goals and calculate opportunities
- Align stakeholder commitments through executive workshops
- Establish a communications strategy
- Agree success metrics
- Harmonize benefits
- Reinvigorate flexible working
- Work design analysis for enhanced productivity
Embracing stakeholder capitalism by making good on public and internal commitments is the way forward. The WEF’s Good Work Framework can guide successful and equitable M&As by avoiding common pitfalls associated with the workforce and/or brand risk. In turn, discussions around values and commitments at the executive level can accelerate integration and maximize value creation.
In a nutshell, the value of a deal is evolving. To properly calculate deal value, the cost to uphold or extend commitments or disclosures needs to be fully accounted for. Ultimately, the new company should benefit from the cultural and brand lift associated with these commitments. This benefit can be realized in just five overarching steps.
Five practical ways to uphold cost, risk and operational stability in M&A activity:
1. Assess the Good Work practices of target companies against your own.
2. Evaluate where the target company is positioned regarding Good Work standards. Assess how sustainable its business, people and environmental aspects will be when it is impacted by the M&A. This work is especially important in the due diligence phase.
3. Develop a comprehensive people strategy. This should start with the merging company’s philosophy and values and how these are translated into stakeholder commitments.
4. Focus on integrating the cultures of the merging companies. Ensure that all employees are on the same page in terms of the new company’s vision, purpose, business aims and working norms.
5. Put the right reporting metrics in place to stay on track with HC disclosures, Good Work and ESG commitments on a day-to-day basis. Ensure that progress on sustainability goals is discussed regularly and that moving this forward is woven into all relevant business planning activities.