· 7 min read · Features

A human view of M&As


HR has a crucial role to play in mergers and acquisitions, from start to finish

It’s a well-known fact that a substantial number of mergers and acquisitions fail to deliver – the rate of failure hovers at 50-70%. While the key mistakes are understood, ranging from poor due diligence, overpayment and post-merger integration tensions – often taking their roots in business leaders’ hubris and weak corporate governance – too little attention is paid to the role of HR.

HR is often neglected in due diligence and valuation. Similarly, acquirers pay little heed to post-merger tensions that might arise, resulting from emotional trauma, attrition and demotivation, winner-loser syndrome, productivity loss and network dismantling. Such tensions make the post-merger integration process derail, weakening the acquirer’s ability to extract value from the target. Lastly, acquirers tend to overlook the difficulties in blending their own workforce with external workforces from multiple acquisitions, with the risk of becoming fragmented and chaotic.

Raising HR red flags

Learning to raise HR red flags throughout the M&A process is a crucial skill to create value out of an acquisition. When acquiring firms anticipate too many HR tensions arising, they should seriously question whether making the acquisition (‘buy’) is the right path to obtain the skills or scale they need, compared with

internal development (‘build’) or partnering (‘borrow’). In my study of 162 telecom firms with my co-author Will Mitchell, we found only 27% succeeded in extracting the value from their target’s capabilities, while 80% of them had initially chosen M&A over alliances or licensing to get exclusive access to those capabilities.

Getting majority control of a target is often not the most effective way to stir people towards collaboration. A process of sequential engagement with an external partner should also be considered as a valuable path for accessing that partner’s talents in a more flexible and less costly manner.

My research and experience with M&A executives and business leaders suggest most HR issues are neglected, or simply ignored, with the financial view led by the investment bankers, chief financial officers and CEOs dominating the process. But paying little attention to human capital is short-sighted. In the longer term, all the value has to be created once the deal is closed: either by leveraging the knowledge embedded into people (the intangible assets) or, even in asset-backed industries, by reaching combination benefits through people’s willingness to ensure a smooth integration. As I explore below, HR is key across due diligence, valuation, post-merger integration and corporate development balance.

1. HR in due diligence

Overlooking the human capital element in due diligence can lead to misleading conclusions as most value creation will hinge on how complementary merging firms’ skills are and on values compatibility through mutual respect and a meritocratic integration process. Of course, acquisitions come in multiple forms, ranging from ‘exploitation’ to ‘exploration’ ones.

At first sight, the latter seem to be more risky, notably when it is about making a platform acquisition to refresh the core – like traditional publishing firms acquiring native internet firms to develop their digital capabilities. Information asymmetry is high between target and acquirer, with the latter having a wide knowledge gap to close before being able to assess the true value of people’s capabilities.

Although the knowledge gap is smaller in exploitation acquisitions, acquirers are more confident about their knowledge and tend to underestimate differences in values, skills and motivations between the two companies. Firms can be in similar industries but hold very specific views and business models, shaping mindsets and values and attracting certain types of people through a natural self-selection process. Information asymmetry will hurt not because of knowledge constraints but a poor appreciation of those subtle differences between the firms – along with an implicit ‘alignment’ or ‘full absorption’ model to be deployed in the post-acquisition phase.

The acquisition of Ernst & Young Advisory by French IT consultancy Cap-Gemini is an example of two firms in the same field but with different cultures and processes. This eventually led to a high attrition rate of E&Y consultants following the acquisition.

When acquirers are at odds assessing the nature, quality and complementarity of human assets, they should take action to reduce information asymmetry in order to avoid buying a ‘lemon’. Bringing functional experts, deepening ties, lengthening due diligence or considering lighter resource combination might be solutions.

2. HR in valuation

Assessing the value of the target firm’s tangible and intangible assets is a perilous exercise. It involves predicting the future under conditions of information asymmetry, external turbulence and time pressures.

In particular, most intangible assets, such as customer relationship, reputation and ability to innovate derive from a single source: human capital. Assessing the value of human capital, while factoring the risk of not being able to fully mobilise people following the acquisition, is a daunting task. Even more daunting is the fact that this task is often carried out by accountants and bankers, who rarely, if ever, give proper consideration to human capital.

The most experienced acquirers such as Cisco, Essilor and GE have developed best practices to carry a more holistic valuation of their targets by involving their operational people throughout the M&A process in order to capture the softer aspects, including cultural fit, vision compatibility and identification of key talents.

It is easy to make mistakes about the individual value of key people. Often we underestimate the extent to which the value of a key person – such as a pre-eminent scientist or a star analyst – depends on the supporting team and the company culture. An outstanding scientist in a small company who must now spend more time complying with reporting systems at the larger, acquiring firm will become less productive and may leave in frustration.

Assessing current resources without clearly understanding their origin can also be misleading. If a target mainly pursued organic growth, then most of its value was probably created via R&D, marketing and other functional resources. But if the target firm has grown through external sourcing, the acquirer will need to retain the key dealmakers and people who are good at scanning external resources. I have witnessed multiple cases in hi-tech deals where the acquirer offers generous retention packages for the scientists and engineers, while neglecting the key people from corporate development in firms where innovation has mainly come via partnerships and acquisition deals.

When acquirers face high uncertainty in their valuation of human capital and the respective contribution of target members to a company’s performance, they often end up with a wide range of valuations. They should then strive to narrow this range, through longer due diligence, deeper relationships with the target and stronger participation within the target’s ecosystem or, eventually, by considering lighter modes of collaboration, such as alliances or partial control, to start with.

3. HR in post-merger integration

Employee willingness to co-operate is a critical success factor for post-M&A, notably in acquisitions where the primary purpose is to leverage skills, knowledge and contacts. Many HR tensions that arise following the deal announcement can be alleviated if the acquirer can clearly map the integration process and manage the motivation of key people at both firms.

Acquirers need sufficient integration clarity to determine the major milestones and reduce anxiety, stress and demotivation. The worst outcome for employees is to be left with a leadership void, broken communication and career uncertainty.

Knowing what to integrate is only part of the battle. Acquirers also need to know how to govern integration. This includes identifying and retaining key people. Much of the value of acquisitions is embedded in people: sometimes single individuals, but often teams of people in a design group, manufacturing plant, sales and marketing group or other functional area. If too many key people leave, the acquirer will struggle to gain value.

The retention challenge for people at each company has two elements. First, the acquirer must identify the key people. Second, it needs to create incentives to retain them, at least until skills have been transferred.

Exploratory acquisitions that offer entry to new technical, product and market space often involve targets with skills the acquirer does not yet understand. Too rapid integration could damage employee motivation, but the acquirer cannot allow such acquisitions to function fully independently if it wishes to gain the value of their resources.

Instead, exploratory acquisitions should involve focused interactions that become deeper over time. For instance, Johnson & Johnson typically allows targets of exploratory acquisitions to operate quasi-independently for a year or more while it moves people from its own company in. As soon as J&J has achieved sufficient understanding of the technical and market opportunities, it begins a process of business reconfiguration that often leads to the disappearance of the once-independent target. Again, the key point here is to understand the relevant time horizon and to engage in appropriate integration activities over that.

Over-centralised control can harm co-operation between target and acquirer and destroy the value of the resource combination, yet insufficient control misses opportunities to create value. If the acquirer anticipates not being able to integrate properly, it should consider less integrative options such as licensing, an alliance or partial acquisition.

4. HR in corporate development balance

An acquisition should be seen as one deal within the broader context of the firm’s corporate development activities portfolio (encompassing acquisition programmes, alliance deals, equity investments and internal development projects). The acquirer must assess whether it has the resources and integration skills necessary to manage an acquisition.

Integration challenges become even more severe when the acquirer embarks on an aggressive acquisition programme, stretching the company organisationally and financially. Integrating target firms that are part of an aggressive acquisition programme requires extra efforts to avoid fragmentation and financial fragility. Firms that undertake multiple acquisitions too quickly and lack time to digest them risk corporate bloat. If they continue with their pace of acquisitions unchecked, they will surpass their limits and, eventually, flounder.

When companies are already overloaded with multiple acquired businesses, they should have the discipline to walk away from a new acquisition opportunity to digest what they have already gobbled and build back their organic growth. If an opportunity is too good to be ignored, they can also consider keeping an option on it through a process of sequential engagement.

Conclusion: revisit the M&A decision

Acquisitions are valuable tools when the acquirer’s strategic goals require new resources and skills and it can define a viable integration path for retaining and motivating key people. If the acquirer lacks the skills to do so and anticipates substantial HR impediments around assessing, pricing, retaining, motivating and blending human talents, it should step back and may be better off revisiting previously rejected growth models.

One effective approach is to break the M&A into staged steps, beginning with an alliance or a minority stake and progressing to full acquisition only when the threat of uncertainties has been resolved. The French food multinational Danone took a staged approach when it acquired the US organic dairy producer Stonyfield Farm. Danone entered a joint venture with Stonyfield in 2001 as a minority partner to learn about the company, the organic market segment and to check the compatibility of the two firms’ leadership teams. In 2003, once the leadership of the two companies had established trust, Danone faced fewer concerns about motivation and moved to a majority interest.

For firms willing to explore new business or technology domains, or distant geographic markets, I encourage potential acquirers to consider a process of sequential engagement with the external partner. When facing issues such as high information asymmetry or high risk of attrition and demotivation, potential acquirers could save a lot of time and resources by engaging with external partners in a flexible and less threatening manner, instead of playing the unwanted predator.

Laurence Capron is Professor of Strategy at INSEAD where she holds the Paul Desmarais Chair in Partnership and Active Ownership and is Director of the Executive Education Programme on M&As and Corporate Strategy.