Employees are the No. 1 asset
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Often overlooked, employees can make or break the success of an M&A transaction.
M&A transactions fail for many reasons, however it’s a shame when they fail because of issues like talent clashes or talent retention, which are preventable. Everyone has witnessed these failures time and time again.
Look no further than Alcatel and Lucent’s $13.4 billion merger in 2006, which hit the skids because it was plagued by cultural clashes between the French Alcatel and U.S.-based Lucent. The company struggled from then all the way until it was acquired by Nokia in 2016. Microsoft’s purchase of aQuantive for $6.7 billion in 2007 is another example. The deal led many execs and skilled employees to leave the company.
The number of deals that don’t pan out are endless and there’s no question there is a disconnect between what buyers want to happen and what is reality. According to research conducted by SourceMedia’s research department on human capital management strategies, 79 percent of participants say retention of key employees is a top initiative while 41 percent say downsizing and employee selection is a top initiative. That said, new owners often fail to communicate properly and look beyond the C-Suite when it comes to retention.
“Many M&A deals fail to meet their intended outcome because of culture and personnel issues. There is a wealth of evidence demonstrating why it’s important to pay closer attention to these issues, yet they frequently get cast aside,” says Jordan Birnbaum, Vice President and Chief Behavioral Economist at ADP.
Birnbaum believes one reason that complex situations such as personnel changes get pushed aside is because they are not measurable and most high achievers like to work on challenges that have quantifiable outcomes. “There isn’t the same pay off to solving complex people problems because you can’t easily measure what those changes mean to bottom line outcomes,” says Birnbaum.
Martha Bird, Business Anthropologist with ADP, says another problem is that leaders fail to spend the time to understand the talent and the culture of the acquired company and its employees. In fact, Bird says just calling the people who work at a company “talent” collectively makes it seem abstract. “Talent are the people and these people are doing a collection of different things and then there is a culture that comes down from management and then there are subcultures created by these people. Some of the subcultures are geographical, others are created by department, and some are both. The point is it’s less about overarching words like talent and culture and more about different behaviors and how you can begin to understand those behaviors and adapt,” says Bird.
Additionally, while the C-Suite folks usually receive most of the attention, it’s just as important, if not more important, to pay attention to all the employees — a mistake often made by acquirers. “The rest of the folks are the ones you want to keep. They are earning their paychecks and showing the investors the returns. It’s not the hero that comes in to save the village, it’s the villagers who are the heroes. They will make or break the storyline,” says Bird.
In order to address complex people issues, it is first necessary to understand them. According to one landmark study, Understanding the Human Side of Merger and Acquisitions, by Myeong-Gu Seo and N. Sharon Hill from the University of Maryland, there are six common theories to explain employees’ psychological and behavioral responses to M&A related organization change. The theories include (a) anxiety theory, (b) social identity theory, (c) acculturation theory, (d) role conflict theory, (e) job characteristics theory, and (f) organizational justice theory. Each theory identifies distinct sources of problems that frequently emerge during M&A organizational change processes, predicts their psychological and behavioral effect on employees, and suggests relevant prescriptions to address the problems. The core elements of each theory are summarized in Table 1.
Birnbaum says these theories are incredibly helpful to understand. “If anxieties can be anticipated, they can also be counter-programmed. Understanding the psychology of M&A also provides a roadmap,” he says.
What’s more, there are things acquirers can do to help make the transition successful. “When an M&A deal happens there will be change and people often feel alienated. There are meaningful ways to facilitate conversation and create a place where open discussion is valued. Most of the time people are afraid they will lose their voice and then with little or no communications, people start to imagine their differences are much greater than they are in reality, which often leads to turmoil,” says Bird. “It comes down to transparency and putting yourself in their shoes and treating employees the way you want to be treated. It seems easy, but often gets lost in the shuffle. When this happens we risk becoming disconnected from our own sense of humanity.”
Actions buyers should take to be successful:
Communicate with everyone at the acquired company immediately and frequently. Address the employees on day one. Messages are always better delivered from someone whom employees feel connected to. The longer fears and rumors are not addressed the more real they become.
Commit to fairness. People care about organizational justice. You can’t convince everyone their job is safe if that’s not true. But you can explain why the company will be making the decisions it does, and make sure those decisions are consistent. Employees want to be sure employers are being fair across the board. It will assuage fear.
Give employees a voice. Employees who have a role in reshaping the company feel much more ownership and pride in their work going forward. Their commitment level often deepens, leading to sustained engagement and performance.
Don’t underestimate how long change will take.
Human tendency is to underestimate how long anything will take. When there are emotions involved (as is the case with organizational changes) changes take even more time to be embraced.
Many acquirers struggle with these issues and they turn to a trusted advisor for help. With a team dedicated to private equity, ADP’s experts help new owners with everything from analyzing and assessing a team to putting together a detailed growth trajectory that’s attainable. “We give buyers the information they need to understand what issues they may face from a human capital standpoint and how to navigate them successfully. Many times, human resources departments are struggling to run a quarter mile and they are now being asked to run a marathon,” says Jason Favreau, Vice President at ADP. “It’s too much to ask them to sort out all the personnel issues that arise with an acquisition. We can do the heavy lifting and free up the core team up for more important tasks.”