Most M&A deals fail to deliver value because they don’t focus on the workforce issues. Know the red flags, and call out people risks early.
Understanding the people issues and risks before and after a merger and acquisition (M&A) deal often comes second to evaluating an asset’s potential for value and growth. According to our research, the driver of deal shortfalls in 47% of M&A deals is inadequate focus on workforce issues throughout the deal process.
People risks and human resource (HR) problems are often neglected during the deal process even though the workforce is the delivery vehicle for revenue and growth. However, the areas that matter in deals get included in the financial modeling, and people risks are only sufficiently reflected in this modeling 44% of the time.
Our experience in supporting nearly 1,400 deals every year points to one thing: people. Traditionally, talent has been considered an expense, and, therefore, the value people bring to M&A models is on the cost side of the ledger. The right leadership team, the right skill sets and the correct understanding of organizational goals — supported by change management — drive deal value. In many cases, the people risks are viewed as items that will “get figured out” or be dealt with after Day One.
Noticing the red flags
There are often red-flag statements in deals that signal the presence of unresolved workforce issues. These statements do not explicitly call out people risks. Instead, they suggest that significant misalignment of goals and misinterpretation of messages among the workforce are likely.
For example, phrases such as “this is a merger of equals” can imply that nothing needs to change in the company and that people should continue what they were doing and how they were doing it, even after the deal is made.
Saying “We’re not going to change anything” ignores the fact that the situation has already changed — there is new ownership.
“We’re only getting rid of what doesn’t work and keeping what does” may seem great in theory, but no two people will agree on what does not work in practice. The presence of subjectivity gives license to each person to create and execute their own agenda and is fraught with challenges.
And finally, “Our people are smart. They’ll figure out what needs to get done” typically implies that leadership will leave many issues unaddressed, hoping they’ll work themselves out, rather than having a communicated execution plan.
None of these statements explicitly reference people issues. Still, far too often, they indicate a lack of proactive identification of potential HR problems and strategic planning for how to mitigate such issues. Business leaders need to recognize the impact people have on both deal cost and revenue.
Intervention in practice
The unrealized potential of people in deals is not just hypothetical. Below are a few real-world examples of how a deal was jeopardized by a lack of proactive planning and execution — and the interventions that helped put these deals back on track:
- A multibillion-dollar deal was jeopardized by turnover related to misaligned leadership and diversity approaches in two merging organizations. These issues were not included in — and therefore not identified during — due diligence. This situation necessitated creating culture, communication and change-integration plans quickly and practically. Additionally, a targeted retention strategy slowed the turnover and signaled how key issues would be addressed.
- In another situation, the risk of missing a headcount cost synergy target put the stock value of the acquiring organization at risk. The advisor responsible for executing these actions lacked the resources and subject matter expertise to achieve the plan. Over three weeks, an on-the-ground presence across 40-plus countries was needed to complete the project. Taking this step ensured that the promised cost savings and timing of those savings were delivered.
- And finally, the deal thesis for a $500 million acquisition failed to consider the local works council and dismissal-charge elements — issues impacting timing and cost savings. Unfortunately, people issues weren’t part of the early deal thesis conversation. It wasn’t until the formal due diligence phase — after signing the letter of intent — that these items surfaced, requiring the rapid formulation of an alternative geographic approach.
The way forward
Global, US and Canada M&A Advisory Services Leader