How TALENT Stacks Up as a Deal Driver: Talk of talent acquisitions and shifts in employee retention strategies provide clues as to what buyers really think about the target’s personnel

Addressing rumors that his company was on the prowl to acquire smaller competitors, Cisco Systems Inc. CEO John Chambers asserted that the firm would be interested if the acquisitions “added engineering talent it could not find elsewhere.” Emphasizing the importance of a target’s workforce, he added that Cisco would not buy a rival router company unless the engineering staff came with it. “Fifty really sharp engineers can bring a product to market quicker than 500 can, so if ever there is a talent acquisition that makes sense to me in the market, I don’t hesitate,” he said recently at a conference in New York. Using deals to acquire skilled workers isn’t a new concept. During the technology boom years of the mid- to late 1990s, companies, especially those in labor-tight technology markets, used acquisitions to secure talent. They acquired workers en masse, since coaxing them individually away from other firms would have been too time consuming; for buyers, speed was critical, given the fleeting life cycles of their products. The Cisco chief could not be reached for further comment, but his statement sparks an interesting question: How does talent stack up as a deal driver today? In times like these when unemployment is fairly high, there is an abundance of skilled workers to fill vacant positions, and companies increasingly are outsourcing functions overseas, how much value does a buyer really place on a target’s workforce? Companies traditionally have made acquisitions to gain access to new markets, products, or services; a new customer base; or intellectual property assets like patents or trademarks. Outside of industries like management consulting or temporary staffing, where acquisitions long have been done largely to gain people, it’s not often that acquiring companies single out the target’s workforce as a key asset, as a Xilinx Inc. senior executive recently did in commenting on his company’s acquisition of Triscend Corp.: “The significant talent and technology at the core of Triscend will strengthen our efforts in the embedded processing space, accelerating future development of embedded solutions and speeding our market ramp in this important emerging market,” he stated. While rarely specified in deal press releases as a prime acquisition driver, a target’s human capital is a vital part of any organization, and the future success of the company rests with that skilled group of workers, says Moira Donoghue, senior consultant in m&a consulting services at Mercer Human Resource Consulting. But she says that although employees’ value may be implicit, “the reason they don’t get mentioned much is that the real audiences for the releases are analysts and investors, who are interested in the financial implications of the deal.” That may well be the case, and it would explain why references to “employee redundancies”and “headcount reductions” often pop up in deal announcements. Building on Donoghue’s point, Dave Kompare, a senior consultant in the Corporate Restructuring and Change Group at Hewitt Associates, says that the clients he has worked with have not “specifically targeted employees.” Rather, he adds, “they tend to look at a prospective target and say something like, Here’s a company that has taken a business idea, a business process, or a product and has been able to access the market or develop a customer base in ways that we haven’t been able to do.’ If you think through what the target company does, what my clients are really saying is that the company’s employees have made the company what it is today. The value of the business is almost inherently tied to the value of employees’ contributions.” Bursting of the technology bubble virtually halted talent acquisitions, although Chambers’ comment is evidence that the concept may still have some life in it. Human resources experts, though, are quick to note that the strategy of buying a workforce rather than building one can be a risky, not to mention expensive, undertaking that can backfire in the buyer’s face. The task of blending the merging companies’ employees can be daunting, and culture clash can quickly erode deal value. It’s hard enough to integrate the two companies’ systems and structures, but if their business styles and work atmospheres are different, meshing the personnel will be difficult. For starters, many deals, unfortunately, sink on the stormy seas of employee resistance. Buyers often have to face the fact that the target’s workers may resent the deal simply because it represents change. Also, regardless of whether or not a deal is billed as a talent acquisition, the buyer’s own employees may stew if they perceive that target personnel are receiving special attention. The result of employee resistance – decreased productivity, reduced loyalty to the company, and diminished trust – can significantly undermine the value the buyer is expecting to get from the deal. And in cases where the merging companies had been rivals, the acquirer is saddled with the added burden of trying to turn former adversaries into co-workers who will work harmoniously together. However, contention between the two workforces can easily jeopardize the cooperation that the buyer is counting on to make the deal successful. Superstar Fizzle Syndrome Even if the buyer clears the resentment hurdle it may make the mistake of assuming it will enjoy the same levels of ingenuity, creativity, and productivity from the target’s key people that made them attractive in the first place. Acquiring a target’s “superstars” but disrupting the dynamics that allow them to shine can be a deadly mistake, says Patrick Donohue, the Human Capital Advisory Services’ national lead principal for m&a services at Deloitte. “Acquirers may buy a business loaded with sharp people who are used to working in a collegial environment with shared focus and shared loyalty. Buyers certainly want to capture that dynamic, but even if they do everything right in the integration it would not be unusual for them to come back later and say, We thought those guys were going to be superstars and they just sort of became citizens of our company. We had high hopes and we figured into the premium that these people would be absolutely fantastic. Something happened to them after we acquired them that sanded off their edges.’ That’s a real risk, and it can happen in both a consolidation deal or a convergence deal,” he asserts. Kompare agrees, adding that the success of a target’s staff lies not just within the individual employees but within their entire work environment. “The real value of those people comes from their working environment, the way teams of employees worked together, and how they interacted with people in other departments in the firm,”he states. “It’s not so much that you change the individuals when you acquire them but you change the environment that has allowed them to be successful.” New Priorities in Retaining Talent Employees are responsible for developing the unique products and services that make their company competitive, and they require special attention during a deal, which must take into account the important contributions of the employees that make the target worth buying in the first place. Some degree of employee redundancy is to be expected in any merger or acquisition. But because of the critical role played by the employees, the buyer must quickly determine which employees will be retained for the combined entity, says Henry Rothman, a corporate partner in the New York office of the law firm of Jenkens & Gilchrist Parker Chapin. During the boom years, “when lots of deals were being done and money was flowing in a different way than it is now,” acquiring companies were very generous in handing out stay bonuses and other incentives to retain employees, says Patrick Donohue. Today, leaders of mergers and acquisitions have matured beyond that philosophy to a new level of sophistication. There is still a continued emphasis on retention but it’s much more strategically focused, and, if it’s done properly, it’s tied to the primary objectives of the deal,” he says. The aim, he adds, is to identify the key people “who have a disproportionate impact on the economic value and economic success of the deal.” According to Kompare, acquiring companies no longer assume that all employees will be eligible for retention bonuses. “Now they are being more strategic about targeting eligible employees. That change is a reflection of the overall economic environment; where it used to be hard to fill positions when employees left it is now much easier because the talent pool has opened up considerably.” When people jump ship during a merger or acquisition, they take with them experience, proprietary knowledge, and valuable connections and relationships they’ve cultivated in the industry and leave behind unfinished projects, a learning curve, and decisions to be unraveled, notes Gabor Garai, a partner in the Boston office of the law firm of Epstein, Becker & Green. Savvy buyers will think long and hard about the experience, know-how, and competitive edge that the target’s employees provide before deciding who will go and who will stay with the merged entity. “When you have people who’ve proven that they’re good, you really want to keep them, and do not want to have to fill their spots with new, generic people. You have to pick out who the absolute keepers’ at the company are and make sure they are adequately rewarded,”says Nate Lentz, CEO of Verticalnet Inc., the Malvern, Pa.-based provider of strategic sourcing and supply management software. In discussing his company’s recent acquisition of Tigris Corp., in which, he contends, “90% of the value was in the people,”he says the deal team put a lot of thought into retention planning, considering “senior-level executives all the way down to the junior levels of the core consultants who drive a lot of the revenue.” Donohue adds, “It’s generally a very expensive and career-risky mistake to treat the target’s employees like commodities. You need to be very tactical in ensuring that you retain the individuals or groups of individuals that are most important to the success of the company. You can let go of the wrong few people and then have a great portion of your deal value evaporate. I work with clients to make sure they look once, twice, and three times at this issue.” Another factor to consider when mapping out a retention strategy is the longevity of employees’ skills, says Kompare. What are valuable skills in today’s market may not be valuable in a few years because of the rapidly changing nature of technology, he adds. “If someone is proficient in SAP, that might not be a long-term skill. If SAP continues to be a significant technology, more people will become skilled in it and you’ll have a larger talent pool to choose from down the road. If SAP takes a back seat to Oracle or other technologies, doing long-term retention for SAP folks doesn’t make sense.” Another thing that has changed over the past few years is that companies are becoming more sensitive to the fact that factors other than money, such as job satisfaction, career development, job recognition, reporting relationships, and career advancement opportunities are just as effective, if not more so, in retaining good employees. “There is a role for financial incentives but another employer can easily buy out’ a stay bonus,” says Moira Donoghue. “What tends to be effective in employee retention is resolving the uncertainty that a deal creates for workers. The faster a company can say which employees have a job, what their pay and benefits will be, who their supervisors will be, and where their jobs will be located, the less likely employees will be to leave.” Copyright 2004 Thomson Media Inc. 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