Human Capital key success factor for M&A deal execution

22 March 2016 Consultancy.uk

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. 

The survey

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.

Global M&A activity by type

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, 

top priorities for M&A HR.

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.

external advisors

External advisory
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.

assessing talent

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.

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8 tips for successfully buying or selling a distressed business

18 April 2019 Consultancy.uk

Embarking on the sale of a business is one of the most challenging experiences a management team can undertake. Even serial dealmakers acknowledge that the transaction process can be gruelling, exposing management to a level of scrutiny and challenge through due diligence that can be distinctly uncomfortable.

So, to embark on a sale process when a business is in distress is twice as challenging. While management is urgently trying to keep the business afloat, they are simultaneously required to prepare it for scrutiny by potential acquirers. Tim Wainwright, an experienced Transactions Partner with Eight Advisory, says that this dual requirement means sellers of distressed businesses must focus on presenting their business in a way that supports buyers in identifying value, whilst simultaneously being open about the causes of distress. 

According to Wainwright, sellers of distressed businesses should focus on eight key aspects to ensure they are as well prepared as possible:

  • Cash: In a distressed situation cash truly is king. Accurate forecasting and day-by-day cash balances are often required to ensure any buyer is confident that scarce cash reserves are under proper control. 
  • Equity story and turnaround plan: Any buyer is going to want to understand the proposed turnaround strategy: how is the business going to enact its recovery and what value can be created that means the distressed business is worth saving? Clear presentation of this strategy is essential.
  • The business model: Clear demonstration of how the business model generates cash is required, with analysis that shows how financial performance will respond to key changes – whether these are positive improvements (e.g., increases in revenue) or emerging risks that further damage the business.  Demonstrating the business is resilient enough to cope with these changes can go a long way to assuring investors there is a viable future.
  • Management team: As outlined above, this is a challenging process. The management team are in it together and need to be consistent in presenting the turnaround. Above all, the team needs to be open about the underlying causes that resulted in the distressed situation arising.  A defensive management team who fail to acknowledge root causes of distress are unlikely to resolve the situation.

8 tips for successfully buying or selling a distressed business

  • Financing: More than in any traditional transaction, distressed businesses need to understand the impact on working capital. The distressed situation frequently results in costs rising as credit insurance becomes more difficult to obtain or as customers and suppliers reduce credit. Understanding how these unwind will be important to the potential investors.
  • Employees: Any restructuring programme can be difficult for employees. Maintaining open communications and respecting the need for consultation is the basic requirement. In successful turnarounds, employees are often deeply engaged in designing and developing solutions. Demonstrating a supportive, flexible employee base can often support the sale process.
  • Structuring: Understanding how to structure the business for the proposed acquisition can add significant value. Where possible, asset sales may be preferred, enabling buyers to move forward with limited liabilities. However, impacts on customers, employees and other stakeholders need to be considered.
  • Off balance sheet assets: In the course of selling a distressed business, additional attention is often given to communicating the value of items that may not be fully valued in the financial statements. Brands, intellectual property and historic tax losses are all examples of items that may be of significant value to a purchaser. Highlighting these aspects can make an acquisition more appealing.

“These eight focus areas can help to sell a distressed business and are important in reaching a successful outcome, but it should be noted that it will remain a challenging process,” Wainwright explains. 

With recent studies indicating that the valuation of distressed business is trending north. With increased appetite from buyers who are accustomed to taking on these situations, it is likely that more distressed deals will be seen in the coming months. “Preparing management teams as best as possible for delivering these will be key to ensuring these businesses can pass on to new owners who can hopefully drive the restructuring required to see these succeed,” Wainwright added.