Businesses still botching the people side of M&As


It really shouldn't be a hard one to get your head around. Yet more than eight out of 10 European businesses are still throwing away billions of Euros each year through poor management of mergers and acquisitions, in particular failing to stop key talent from walking away and allowing morale among those left behind to fall through the floor.

Research by HR consultancy Hewitt Associates has argued that poor people management is at the heart of what most commonly goes wrong when it comes to M&As.

Overall, the European M&A market remains pretty moribund, with research firm Zephyr reporting a 72 per cent decline in activity in the year to April and a 65 per cent decline between March and April.

Yet there are some signs of things may be at least bottoming out. A survey of private equity firms, law firms and investment banks by the Association for Corporate Growth and Thomson Reuters has predicted we might see an increase in strategic M&A by the end of 2009, with more than half those polled believing M&A activity could gain steam this year across industries.

Construction and petroleum firms are also reporting increased interest in M&As, with some Continental European constructions firms even predicting a possible boom in activity, albeit not until late 2010.

The Hewitt survey polled 96 international companies, covering deals in excess of $568 billion over the past two years, and 40 European companies that were involved in deals worth $296 billion.

When asked to gauge how effective their approach had been, it found an astonishing eight out of 10 European companies said they had failed to meet their key transaction goals.

More than nine out of 10 of all the companies polled had cited human capital issues, such as cultural fit and leadership selection, as the primary reason for this failure.

Hewitt calculated that poor people management could erode the total value of a deal by as much as 5.6 per cent to 12.8 per cent, with the loss of key talent and the pain of a longer integration process the main factors.

On this basis, it concluded that European companies had potentially lost up to €12.5 billion over the past two years alone, purely as a result of poor management during and after transactions.

Stephan Vamos, European practice leader, corporate transactions and transformation, at Hewitt Associates said: "Companies cannot afford to ignore the human element of deals. This has been an established fact for some time but it still continues and by doing so, companies are costing themselves millions and limiting the potential success of a deal before it has even closed.

"Mastering the more complex aspects of due diligence and integration will be vital for companies as these are the most powerful drivers of deal value," he added.

With early signs emerging of new M&A opportunities after months of inactivity, this was an issue companies could ill-afford to ignore, he stressed.

European companies also lagged behind their global counterparts when it came to making effective use of HR during the due diligence and integration process.

In fact, just seven per cent of European companies admitted to frequently involving HR in the process of target selection, compared with a global average of 36 per cent – and a finding that is raises serious questions about whether European HR departments are failing to punch at their weight.

Just a quarter European companies involved HR in drafting the employee section of the sale or purchase agreement, against a global average of 43 per cent, it added.

And, while just under half of European companies did involve HR in the integration planning phase, this compared with a global average of nearly three quarters.

"Human capital is frequently considered the poor relation in negotiations and due diligence during deals, with many companies merely paying lip service to HR," said Vamos.

"Most companies involve their HR function as an after-thought, by which time it can often be too late to prevent serious people issues arising. If deals are to be successful, the issues surrounding human capital need to be a vital consideration at the earliest stages of discussions," he added.

Retention of key employees was a core M&A challenge and one that could quickly erode the value of a deal if it was got wrong.

Yet more than a third of the European companies polled said they had seen an increased rate of attrition post-deal.

Furthermore, a quarter noticed that, if poorly managed, key talent was inclined to leave the company more quickly post-deal than non-critical employees.

"Managing the more concrete HR tasks associated with integration, such as retaining and engaging the critical talent, is an easier feat than successfully integrating disparate groups of people and getting them to work together. However, therein lies the key to success," emphasies Vamos.