Although 2017 was a year filled with political and economic uncertainty, according to Unquote data the UK hit its highest level of buyout activity since 2007 with private equity firms completing 919 buyouts, up 19 per cent year-on-year. Yet as these deals continue to be announced, we also saw a number of withdrawn M&A deals. In fact, according to financial markets platform Dealogic, the UK saw eight deals valued at over £3.7 billion withdrawn in 2017. While there are many reasons associated with why a deal may not go through, including objections from regulators, negotiation errors and other external factors, another main reason is due to a lack of strategic fit, typically because the acquirers and target companies have different corporate cultures and there has been less than optimum communication between the parties.
According to leading management consultants Bain&Co, business leaders overwhelmingly cite people, culture, change management and communication as the primary reasons for integration failure. Given much of the issues are people-centric, it is essential that human resources (HR) are fully invested in the process and the management of both organisations consider the implications of the proposed deal prior to any agreement.
HR typically plays a pivotal role in a deal’s outcome, and for good reason. A motivated workforce that is aligned with the rationale for organisational change will significantly improve the success rate of a merger or an acquisition. HR is there to support, coach and advise staff who might otherwise be ambivalent towards a deal. Management should ensure their HR teams are working closely with both organisations involved in the deal; failing to do so can seriously diminish the chances of a deal’s success and can be the difference between a good or bad investment.
Cavendish Corporate Finance have identified five tips on how senior leadership can successfully manage their team through a merger or acquisition.
Establish a vision, prepare a strategy
Bringing together two separate firms can take a lot of organisation and planning to ensure that both companies are able to hit the ground running. Creating a new vision about the direction your firm is taking is the starting point and will allow the two business to be more effectively integrated as they are working towards a common goal.
Building or refining a strategy can be a lot of work and a roadmap will help to identify the people, processes, and expenditures required for the kind of transformation you’re undertaking while also ensuring all stakeholders are on the same page. For firms of all sizes, a phased approach that emphasises goals and milestones will help to keep your business organised and on track while allowing you to correct errors and be agile throughout the process.
Manage company cultures
Before any deal is agreed, it is important to ensure there will be a strong cultural fit between the two firms. Failure to address culture during M&A deals can impact a company’s performance in subtle ways, including delayed integration due to cultural inhibitors, a decline in productivity and innovation, employees feeling alienated when confronted with the culture of the buyer and the departure of key talent which can lead to gaps in the organisation.
According to a McKinsey report titled ‘How the best acquirers excel at integration,’ business leaders understand the importance of assessing and managing culture during M&A, but many apparently do not feel equipped to make culture-related strategic decisions. According to one study, 54 per cent of leaders believe that neglecting to audit non-financial assets such as organisational culture increases the danger of making the wrong acquisition; however, only 27 per cent of them made cultural compatibility a priority during due diligence.
For cultural change to be sustainable, senior management must work with their teams through issues that arrive throughout the deal’s lifecycle; starting before the deal is announced, throughout the process and making it a priority once the deal is complete. By recognising cultural differences and applying a structured, objective approach to work through the barriers created by misaligned cultures, merging entities may mitigate the risks of a culture clash on the way to a successful, value-generating integration.
Confirm the management structure
While it is of vital importance to integrate existing management into the new organisation, oftentimes the management team will also undergo a restructuring. In either case, it is imperative that this happens prior to the completion of the deal. Successful firms will strengthen the management team before the closing and will begin these changes months ahead of time to mitigate potential teething problems. Later on in the deal’s life, successful firms tend to bring in external support in the form of consultants that are used to complement management and drive further success.
Middle management should also play a central role during a merger or acquisition. It is often that during a transaction, teams rely too heavily on senior leadership when middle managers could have significant benefits on the process. Throughout an M&A transaction, middle managers help to keep employees focused on their job and on execute the company’s strategic plan. In turn, this works to stabilise and benefit the organisation and sustain their performance over the long term.
When transitioning through an M&A deal, it is important to retain senior leadership so that their expertise remains a valuable resource to the new firm. One of the ways to do this is to incentivise management through retention bonuses or equity stakes that they will receive after staying with the firm for a set number of years after the deal closes. This will help to ensure the firm survives the difficult transition period and it can often be the difference between a successful transaction or not.
Communicate and collaborate
Having a well-planned communication strategy in place is critical in the M&A process. Comprehensive and effective communication involves providing information on all aspects of the deal and final outcomes, including the vision for the new company, the nature and progress of the integration and the anticipated benefits, and the outcomes and rough timelines for future decisions.
Human resources plays an integral role here, helping to communicate clear, consistent and up-to-date information that will give employees a sense of control by keeping them informed, but also will work to improve the coping abilities of employees and minimise the impact of the integration on performance.
Another situation management teams should be prepared for are information leaks, where information is disseminated widely to key audiences prior to the planned release date. Consider introducing a ‘leak strategy’ that includes advanced preparation of messaging and template materials, such as news releases, spokesperson statements and customer emails. This will help you to control all messaging and respond quickly to any rumours that may arise.