The problem occurs more often than anyone involved with mergers and acquisitions cares to admit. Countless hours are devoted to making the deal a reality—bringing the organizations together, working through setbacks, hammering out the legal details. And yet, time after time, the most critical component of any M&A effort is put on the backburner or worse, ignored altogether.
Despite what so many executives will admit, it’s the management of each company’s workforce—the people that make the companies go—that ends up being the forgotten cornerstone of a successful integration.
Often, leadership will get so caught up in the minutiae of the deal that they’ll forget how disruptive, confusing and sometimes terrifying mergers and acquisitions can be for employees at both companies. People spend a majority of their waking lives at their workplace and suddenly, those 40-plus hours a week are turned upside down as they’re thrust into a new situation at a new company or with a new group of colleagues. And for middle market companies going through M&A especially, the confusion is even more amplified.
Understanding the challenges of workforce transitions
What is this new company like or what will it be like? Is their job safe? Should they just look for a new job now to avoid getting laid off in the future? What about culture or policy differences? How about benefits? Will those change? What is the new management like? The concerns go on and on. And with the amount of middle market M&A action that occurred in 2016 and continues through 2017, and the fact that a significant portion of recent M&A motivation and activity has come in the form of access to new markets – which is typically riskier and leads to plenty of culture and style clashes – many of those concerns are rightfully justified.
In fact, it is estimated that around 70 to 90 percent of all M&A fail to achieve what it is they set out to do. This astounding failure rate is attributed to many factors, but most often to workforce-related aspects, including incompatible cultures, high workforce turnover, disparate management styles, low employee motivation, poor communication, lack of trust in leadership and uncertain long-term goals. There is also no true guarantee a person’s job will still exist following a merger or acquisition (especially when companies don’t do the requisite workforce planning early on), so as a result, approximately 30 percent of employees can be deemed redundant once a deal goes through. Simply put, without a proper workforce plan and strategy in place, chaos can, and often does, ensue.
Tips for managing a workforce through the M&A process
Working for a company whose main business is people, we’ve executed and been involved with quite a few workforce transition strategies for many mid-market organizations over the years. Whether at our clients, or our own at Yoh, which has acquired three companies over the past 18 months, we’ve seen the good, the bad and the ugly. And, believe me, we’ve made some of these same mistakes.
What’s important to note is that these tips and considerations should be implemented for both companies during a merger or acquisition. Especially for middle market entities that may not have the level of existing infrastructure as big businesses have, organizations must bring certainty and normalcy to employees’ lives as soon as possible. However, because the acquisition process is typically carried out in relative secrecy, some of these considerations will have to be explored and assessed by senior leadership, specifically, if possible, by HR. If they can’t be accomplished before the transaction, they should be addressed as soon as possible after the transaction is public.
Here are our suggestions for what to do to ensure a smooth workforce transition during M&A at each interval:
Before the transaction or right after the announcement:
1. Start planning before you think you should start planning
Leaders should be thinking about how any merger or acquisition would affect their workforce even before any conversation with a potential buyer or partner begins. Whatever sort of discovery and due diligence leadership would undertake when examining a potential acquisition, a company should conduct on itself before all else. How will any merger or acquisition affect my employees and their families? What should I communicate to them and when? Can we make sure the details of the transaction are done in a way that benefits the shareholders, executives and all employees?
Initial, high-level, planning should occur with key individuals as soon as possible as details are being addressed and the announcement is made. Employees will have questions the first day or even hours after the announcement.
2. Communicate, communicate, communicate
Once the transaction is public, proper communication is essential. This includes information on:
- The benefits to each company of the transaction—and showing that the decision was made not simply to boost bottom lines.
- The vision and culture for the new company or how the acquired company will fit into the current structure.
- The progress of the integration or merger and the future timeline of events, including any anticipated hiccups or problems that will be identified and addressed as early as possible.
- The opportunities for employee involvement, feedback and room for growth.
Above all else, employees just want to hear the truth, whether good or bad. Avoid saying general things like “everything will be fine” or “this is going to be great for everyone.” Rather, speak about specific aspects you do know. While certain situations will require saying “I don’t know yet” or “those details haven’t been decided,” honesty and constant updates will help minimize the impact of the integration on employees’ performance.
3. Consider working with a consulting firm or talent management company with extensive knowledge of M&A transitions
For a middle market M&A especially, consultants and talent management firms can provide key insights and support the heavy burden on HR. As an objective observer, they can ensure employees are treated fairly, make sure both companies are taking the proper steps in the M&A process, and no stone is left unturned. Consultants can also offer valuable help in assessing the skills, capabilities, motivations and potential of employees from both companies and give guidance on which employees should be retained, transferred, and which should, unfortunately, be let go.
During the transaction:
4. Actually listen to employees
Just as important as it is to communicate to your workforce, it’s equally as important to listen to them throughout the process. Face it—employees are going to be anxious and perhaps even a bit angry during a transition. Discuss that anxiety with them. Talk to them about how they’re feeling and what they think would make the process better or smoother. And speaking of “facing it,” it’s also important to meet with employees in person whenever possible. An email memo, or faceless conference call is no substitute for meeting them in person and seeing the concern on their faces.
5. Make culture integration a priority
According to SHRM, culture issues and clashes were found to be the cause of more than 30 percent of failed M&A integrations. This number is probably on the low side. Integrating style differences and redefining the culture and corporate values of a new company is a key component of any integration process. By defining the new company’s or existing company’s culture, employees will be more motivated to achieve the corporate vision and understand what their role and responsibilities are in making that vision come to life.
6. Assess benefits plans and anticipated policy changes
For big business acquisitions, the process for benefits transitioning is pretty standard—the smaller company joins BigCo’s benefits program. But for middle market M&A, the process is somewhat murkier.
Most likely, HR will be required to link different employee benefits into a single program that fits the newly formed organization. It also may mean discarding existing plans altogether and starting over. From paid time off and FLMA considerations to 401(k) contribution plan differences and more, creating or merging benefits plans is a complicated issue—and one employees are likely to be concerned about.
Additionally, leadership must be clear on the policies, rules and people-related strategies that will guide the organization moving forward. This should include policies that dictate employee conduct and workplace expectations, including things like vacation days, attendance, harassment, drug testing policies, privacy expectations and beyond.
After the Transaction:
7. Manage new compensation strategies
Deciding how employees’ compensation differences in a merger will change is a decision that should be assessed and made as early in the process as possible. Will salaries and compensation remain the same? Will new employees be paid according to the standards of the acquiring company? Will all employees undergo a compensation review? For performance-based roles, it’s important to understand any changes to commission plans and payment of bonuses as well.
8. Respect and assist departing employees during retention and downsizing decisions
An unfortunate side effect of any merger or acquisition is the departure of redundant employees and other workers deemed non-critical. Once decisions have been made about who needs to stay and who will go, the organization must act quickly to notify those individuals and, if possible, offer assistance with gaining new employment. This goodwill can help ease the burden of getting let go through, essentially, no fault of their own.
9. Be realistic about the timing of changes
While integrations fail for many reasons, sometimes a basic cause is unrealistic demands to implement changes too quickly or for simply financial reasons. Every CEO or CFO would like to see savings and “synergies” happen quickly, however, if this is at the expense of current or incoming employees, the long-term consequences could be significant. Whether it’s hiring help to facilitate the changes, or creating pragmatic timelines that allow employees to understand what’s happening, good communication and the time to execute those communications are critical to success.
10. Be empathetic and continue to communicate clearly
Remember: this is an extraordinarily stressful time for employees, and sometimes, it takes a number of different methods of communicating before the information truly sinks in. Throughout the transition, it helps to hold group meetings, have individual meetings, communicate through the corporate intranet, detail information on company newsletters, distribute company-wide memos and send information home. Clarity and consistency are what’s most important.
One last caution: Remember that assumptions made and information gathered during due diligence is preliminary. Until you get under the covers and talk to employees it’s important to realize you may not have the full story.
Mergers and acquisitions fail for many different reasons. Some companies merge when they shouldn’t; others are acquired for all the wrong reasons. But the most important factor in ensuring any middle market M&A transaction is successful depends on one key thing above all else—the employees responsible for driving the new business forward.
Matt Rivera serves as vice president of marketing and communications for Yoh and is responsible for overseeing all aspects of Yoh’s marketing and brand communications.