M&A activity was hot across 2015, with 2016 projected to be another bumper year. Getting the integration process right, especially in a speedy environment in which buyers have little time to do adequate due diligence before the sale date, is becoming more and more difficult while continuing to be as important as ever. According to a new report, integrating human capital aspects into pre-deal processes is an important contributor of transaction success.
As the number of M&A deals hit new heights in terms of value and volume, sellers are becoming more dogged about their company's vitals while buyers are more focused on getting in before a competitor. Consequently, full due diligence and deal transparency is becoming more difficult to achieve.
According to a new report by Mercer, titled ‘People Risks in M&A Transactions’, the consulting firm finds that not only are due diligence processes coming under pressure from the need for speed, too often are human capital related aspects excluded from the analysis. The cost to integration, and hence to bottom-lines, can be considerable.
To gather data on the trends, the consulting firm ran a survey of M&A professionals, held interviews with a range of experts from private equity and corporate M&A clients, as well as performed desk analysis of more than 450 M&A transactions.
The survey involved 319 employees working for a wide range of company sizes, from fewer than 500 to more than 10,000 – with a mean of 18,214 employees. The mean annual revenue of the companies where the respondents work is $4.9 billion. The majority of respondents are not HR, while industry and consumer discretionary make up the largest industry segments, at 23.8% and 26.2% respectively.
Boom year for M&A
2015 was a boom year for strategic M&A activity, with deal value up more than $1 trillion on the previous year, lifting it to a value of more than $3.7 trillion. Cross-border deals too saw increases, up nearly $0.5 trillion. In total, M&A transaction value hit $4.7 trillion in 2015, up from $3.5 trillion the year previous and $2.6 trillion in 2013.
The research finds that global M&A activity at an all-time high comes with drawbacks for buyers, who face a new reality characterised by increased risk, truncated auction timelines, and shrinking access to critical information. 41% of buyers surveyed report having less time to complete due diligence before making a binding bid compared to prior years, and 33% say that sellers are providing less information about the asset for sale. Buyers, the report finds, are also more often enticed by cross-border acquisitions, the report finding that 25% of buyers are more inclined to consider multi-country transactions than they were prior to 2014.
The report further finds that up to 50% of buyers are willing to consider taking on pension and post-retiree medical obligations. In addition,
People for success
The result of less time spent on due diligence and less information about the asset, in combination with the growing internationalisation of deals, means that more and more buyers (55% of those surveyed) are concerned that talent challenges will remain a significant HR issue in future M&A transactions. The biggest concern relates to employee retention, followed by cultural fit and leadership team concerns such as selection, skills/ capabilities, and attraction and retention.
The study finds that the majority of companies (54%) draw on advisors during comprehensive due diligence. Within the private equity sphere almost 90% of firms engage external advisors during the diligence phase compared to 43% for corporate businesses. The results, the consultancy suggests, are a reflection of the increased familiarity corporates have with a particular industry as well as having more internal functional resources, whereas private equity businesses look for outside help in an industry with which they are less acquainted.
The demand to enter into deals quickly within the sellers’ market, means that some buyers are engaging advisors later in the process to minimise broken deal fees. But by short-changing the diligence process, buyers ultimately may be doing themselves a disservice by taking unnecessary risks.
Employees remain a key component of any business, they are largely responsible for on-the-ground delivery of the business plan, profit, and revenue growth. According to the report, people risks remain top of mind for both buyers and sellers, including such pain points as employee retention, cultural integration, leadership assessment, compensation and benefit levels and overall talent management. Therefore, an important aspect of due diligence is learning about the key talent associated with businesses involved in a deal. Formal talent assessments provide that insight. The use of advisors to run talent assessments also varied considerably among those surveyed. According to the report, 35% of those surveyed do not conduct talent assessments at all, while 56% have an in-house talent assessment process.
“Both buyers and sellers tell us they need rich data, unique insights and practical guidance to maximise transaction value and reduce people-related risks. The goal of our research is to enable business leaders, inside and outside of the HR function, to make more informed people decisions in the current challenging global deal environment.” says Jeff Cox, Mercer’s global M&A transaction services leader.