8 minute read 20 Jan 2020
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How a new talent mindset can solve the post-merger integration puzzle

EY Americas
By EY Americas

Multidisciplinary professional services organization

8 minute read 20 Jan 2020
Related topics Corporate culture Workforce Capital confidence barometer
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Boards that prioritize employees and culture during their acquisition integration may be better positioned to hit their post-deal targets.

With talent in short supply, many companies rely on mergers and acquisitions (M&A) to secure a workforce that will fuel new capacity for innovation and growth. In the 18th edition of the EY Global Capital Confidence Barometer, 67% of executives surveyed identified talent as the primary driver of acquisitions.

Talent’s role in M&A

67%

of executives identified talent acquisition as a strategic driver for M&A.

Yet, in the subsequent edition of the Capital Confidence Barometer, the percentage of executives identifying talent as a top talent acquisition driver dropped to 19%. On the face of it, this seems surprising given that record levels of employment in many leading economies mean that the war for talent is as fierce as it ever was.

However, when we look deeper into the insights, the reason seems hardly surprising: when asked what their key challenge was when integrating an acquired company, survey executives cited successfully onboarding and retaining talent more than any other issue.

M&A may be a great strategy for acquiring talent — but only if boards have a plan to keep them

M&A deals have proven to be an effective strategy for acquiring the talent necessary to stay ahead of shifting customer preferences, gain competitive advantage and defend against future disruptions.

Yet, boards have paid little attention to a key factor that shapes integration success: employees.

Many organizations traditionally focus deal preparation on financial due diligence, value assessments and setting short-term synergy targets. Their efforts around integration planning, meanwhile, tend to focus on tactics to reduce duplication, maximize efficiencies and — increasingly these days — harness technology and IP from one company for use in the other. They spend comparatively little time and effort in the longer-term aspects that can lead to value creation — and least of all on the human capital, even when acquiring talent is a key driver.

For organizations looking to M&A to fill the gaps in their workforce, the stakes are especially high. EY research reveals that 47% of key employees leave after a major transaction. Within three years, that number has grown to 75%. This represents a painful loss of valuable human capital, and it can come with devastating impact.

Brain drain post-transaction

75%

of key employees leave within three years of a major transaction.

In addition to the loss of organizational experience and capabilities, these departures are likely to negatively affect the customer experience. They also contribute to a loss of momentum. Distracted by the disruption of turnover, the organization may have less capacity and agility to respond to changing customer needs and evolving competition, putting the company’s market position at risk.

What’s more, the financial impact of these workforce shocks can add up, including increased retention incentives, departure payouts, and high onboarding and training costs for new employees. Some calculations estimate the impact of the human capital component to be between 10% and 15% of the total purchase price.

Five ways boards can help to align and optimize their acquired workforce

To improve the outcomes of their acquisitions, boards need a new approach to planning and implementing integration, one that aligns their people to the new organization’s culture and motivates them to unleash their full potential.

Based on our experience with clients across every sector and through hundreds of deals, we’ve seen five ways that organizations improve how they keep the people they acquire.

1. Include Human resource (HR) in deal preparations

HR leaders typically play a limited role in deal preparations. Bringing them in later in the process may prove to be too late for strategic decisions that can help maximize synergy value.

With a new focus on employees as a key enabler of successful integration and post-deal benefits, HR leaders aligned to the potential of the new organization early can help to create meaningful metrics around human capital value.

They can also be well equipped to help identify, understand and articulate workplace culture and motivations; bridge cultures and culture narratives; and provide leadership in building positive employee experiences designed to retain talent.

2. Apply workforce-related metrics that go beyond cost reductions

Despite the significant impact workforce integration has on the overall success of the deal, there are virtually no measures around this factor in deal planning and synergy target-setting, other than to assess this component for the potential of cost reductions.

To map a route to more successful integrations, deal planning should include metrics that assign values to the human capital impact of the deal, along with targets that incentivize strategies beyond cost reductions. After all, if it is measured, it is more likely to be managed.

Measurable factors may include human resources investments and operations, total rewards, labor relations and negotiations, organization design and talent strategy, employee experience as well as necessary investments in change and cultural management.

With the powerful analytics tools that are now available, identifying and assessing financial values and potential change impact are more easily at hand than ever.

3. Align and articulate a new shared purpose

Successful acquisitions occur when there is alignment of purpose. Founders are more enthusiastic about the potential upsides of a merger, and key employees are more likely to endorse it. However, the power of purpose is too often overlooked in favor of more conventional integration preparations.

In addition to financial diligence, boards and their leaders should invest in identifying the purpose and value proposition for both organizations pre-deal, starting with a clear understanding of the purpose of each entity and then seeking alignments. The ability of leadership to articulate purpose can have a dramatic impact on employees’ willingness to adapt to the new culture and unleash their full capabilities to fulfill it – to the benefit of both customers and the business.

4. Be intentional about culture

Every organization has a unique workplace culture, even if some are more intentional than others. The culture often reflects the unique personality and motivations of its people, while anchoring their focus and actions to specific outcomes, such as quality, innovation, brand building or outstanding customer experiences.

Leaders of successful integrations take time to understanding the existing cultures of the two organizations. They also take one additional critical action: they step back and assess what kind of culture will best support success and growth for the new organization.

Being intentional about the choice of culture that best suits the business and its objectives, and then identifying where the two existing cultures do and do not reflect that new culture, will help leaders close the gap.

They are then better able to make strategic decisions around new operating processes and structures, rewards, new leaders and more, minimizing culture collisions and more successfully reinforcing the new culture throughout the organization. Not only is the organization better focused in its decision making and strategic activities, it is better able to retain key employees. Employees are more likely to stay in a culture that has clear purpose and a vision that is connected to their daily experiences.

How EY can help

Culture, talent and leadership

Demographic shifts and new technologies are changing how, why and where people work and the requirements and expectations of the workforce. To secure the skills they require, organizations need a new approach to attracting, developing and inspiring their workers.

Read more

Purpose and culture will help get your best talent on board, but it is the actions and behaviors within the organization that will keep them there.

5. Choose leaders who embody the new culture

Being intentional in articulating the organization’s purpose and culture also requires that boards consider leadership choices that align with those critical elements in business success.

Often, there is a temptation to select a balance of leaders, representing each of the merging organizations. This only works if these leaders understand the vision and skills that align to the new entity. Deals fail when leaders cannot or will not adapt to the new organization, favoring the “old” pre-deal ways. Inevitably, they are unable to meet the new challenges, and equally important, unable to inspire others to do so. Frustrated by this leadership dissonance, key employees leave and a cascade of departures usually follows.

The key for boards is to emphasize the need for leaders to be champions of connections across silos and functions and of the collective cooperation that will give rise to new innovations, efficiencies and improved customer experiences throughout the new organization.

When boards prioritize people, human potential can soar

Under constant pressure to deliver against a wide array of financial performance metrics and to meet synergy targets within 12-18 months, executives rarely have an appetite for discussions around culture and workforce engagement. They may ask, how can we afford to spend time talking about culture and interpersonal connections when we have hard targets to meet?

And yet the numbers don’t lie. Deals fail because organizations are paying insufficient attention to workforce engagement and cultural integration. A staggeringly high number of CEOs are fired. Talent investments are squandered.  With so much riding on these deals, the question they should be asking is: how can we afford not to?

When boards prioritize employees — through purpose, culture, leadership and connections — and deploy technology and automation as tools to support their capabilities, that’s when the true human potential for agility, creativity and innovation can soar, and integrations can realize their full impact. And organizations can achieve the synergy targets designed to chart a new course for growth.

Summary

Despite healthy market conditions for mergers and acquisitions, a shockingly high percentage of deals fail to achieve the synergies they had promised. Boards that prioritize employees and culture during their acquisition integration may be better positioned to hit their post-deal targets.

About this article

EY Americas
By EY Americas

Multidisciplinary professional services organization

Related topics Corporate culture Workforce Capital confidence barometer
Upvote