Lorne Hartman, Ph.D., Founding Principal, Psybase Network Inc.
Contact: Psybase Network Inc. | 905.764.2696
From a Speech given by Dr. Hartman on Human Capital Due Diligence During Mergers & Acquisitions
THE MERGER ARENA Whats going on?
Deals! Lots of deals. High priced acquisitions of fast-growing start-ups. Marketing alliances between old-media giants and new media innovators. Industry consolidators who are hell-bent to go big or go home.
Whether its to gain access to new channels of distribution or to new products or to new skills and capabilities, or just to satisfy the analysts, deal-making is booming. Its a trend that shows no signs of falling off the screen any time soon.
Yet in the middle of this boom in merger activity, many studies of have now shown that, despite some successes, the overall record is decidedly unimpressive. Some failures are due to poor strategy, bad timing and/or inadequate due diligence. In many of the failures, however, faulty implementation is the reason. Even good deals will fail if they are poorly managed after the merger.
Hence, my track into the merger arena as a change management consultant.
CHANGE MANAGEMENT Focus on implementation
For ten years between 1988 and 1998, my merger experience had been almost exclusively in helping with the post-closing implementation effort (e.g., transition team support, facilitating a shared understanding of the go-forward strategy and structure, integrating cultures, talent selection, organization alignment, re-forming teams, survivor support workshops, measurement and communications, etc.).
My merger clients include brand-name companies in a mix of businesses that operate primarily in traditional segments like consumer products (e.g., Hostess Frito-Lay and Campbell Soup), pharmaceutical firms (e.g., Bristol Myers Squibb and Glaxo Wellcome) or financial services (e.g., CGU and ING).
And almost all of my assistance during this ten year period (88 to 98) has been with the implementation of the merger the actual integration effort and not in the due diligence phase (i.e., before the deal is done).
In the last few years, however, since 1998, Ive had an opportunity to work with a number of clients that were looking to develop a core competence around mergersspecifically with reference to the effective integration of acquisitions. Each of these clients is in a different segment of the marketplace, yet each company believes it will live or die by how well they do deals.
DOING THE DEAL The new economy
In each case, the firm was committed to a strategic course of action that demanded a high volume of transactionsjoint ventures, partnerships and a lot of acquisitions. These clients in the last two or three years represent the first opportunity that Ive had as an organization consultant to offer input into the deal-making process rather than just the post-deal implementation.
In some cases, doing business has always been about doing deals. And many of the old rules of deal-making from the industrial era about knowing if you can trust the folks across the table, about preparing for a negotiating session still apply. But in the new economy, in the information age, there are a number of new requirements as well.
To start with, things (i.e., plant and equipment) arent what they used to be. In the old economy, the most valuable assets have gone from solid to soft, from tangible to intangible. Instead of plant and equipment, companies today compete on ideas and relationships. Assets come in the form of patents, knowledge, and people.
And this doesnt apply only to new, dot com start-ups. All companies today are looking to leverage the power of the internet or experimenting with net-enabled ways of doing business.
TODAYS REQUIREMENTS Speed, Volume and Vision
Theres a clear sense that speed is a necessity. Today deals get done in weeks (and sometimes even in days).
There seems to be a need to partner with a lot more companies than I would ever have imagined.
And in some new economy businesses, particular the internet business, its much more difficult to assess value. More so than in some businesses, all that youre buying is people. So shared vision and personal rapport are necessary conditions for success.
I will share with you the approach and methodology employed with three clients that I am working with currently, each of which wants to develop a core competency around deal making. Why?
Well lets examine the organizational and human capital issues they are trying to assess in the due diligence process.
First, they want to determine strategic fit. An example of a process to conduct an HR Practices audit will be illustrated to show how strategic alignment can be assessed as part of the due diligence effort.
Second, they want to know in advance whether and how the two cultures will mesh. A methodology employed by one client as part of their due diligence process, called control self-assessment, will be described.
Third, they want to determine the quality of the workforce with particular reference to strategic competencies needed given the go-forward business requirements. A talent assessment protocol was developed for a client that allowed for objective, management evaluation of individual performers and selection decisions for key jobs.
FIRST LEVEL SCREENING CRITERIA Strategic Fit
In the case of one client, an internet company, with most of their deals, theres not a lot of financial information for analysis. There isnt a stable earnings growth to project into the future. They are not buying oil wells or factories.
They are buying an opportunity, eyeballs, and people. That forces them to become a good reader of a companys people and its culture. They look for people who are committed and hard working, who have the same vision and goals as they do.
They are not interested in dealing with people who are looking to check out and who see them as their ticket to retirement. The people they deal with have to be the builders going forward.
So, what we did was to help think through their core assets and their core desires in terms of vision, mission and values and what that meant in terms of the characteristics of an ideal partner. The business requirements, the "must see" attributes, set the foundation for the acquisition criteria.
ASSESSING STRATEGIC FIT HR Practices Audit
The first step for this organization was a consideration of the target companys strategy and determination of the degree to which it matched their strategy. As a definition, simply put, strategy is the approach chosen by an organization to achieve success or a competitive advantage.
We shared with the client a number of different strategy typologies that have been proposed in the literature and that have been found to be empirically sound. In addition, the different strategy models considered were ones that had been used previously to study the link between business strategy and specific HR practices.
The client selected a model that distinguished between two basic strategies one in which the organizations primary strategy is to protect the firms existing market share and concentrate on what they currently do and how to do it better (the "defender" strategy). The second strategy emphasizes growth these firms continuously look for new ideas and new products to introduce (the "prospector" strategy).
Six HR areas were identified (i.e., work flows, staffing, employee separations, performance appraisal, training and compensation), each with strategic options that correspond to the two basic strategy types. We described the approach taken by the client organization to each of these areas and showed how it related to the strategy.
Take the area of training, for example, where the practices congruent with a defender strategy emphasize specific on-the-job training on an individual basis. Meanwhile the training practices of my client, consistent with a prospector strategy, tended to emphasize off-the-job, team-based training of a more general nature.
A template was created for use by the due diligence team to characterize the target/partner candidate in terms of each of the 6 HR areas. Information on the strategic fit in terms of business focus (i.e., how we will compete) and HR practices was integrated with other data from the due diligence effort.
SECOND LEVEL SCREENING CRITERIA Organizational Culture
In the case of one client, an insurance company, they want to be able to move aggressively to make things happen and to quickly determine during the pre-acquisition phase whether there is a good cultural fit and to identify potential business and cultural barriers to integration success.
They employ a process that allows them to conduct a situational appraisal in which they identify and group the biggest strengths and biggest obstacles that will impact their ability to achieve merger objectives. They look for opportunities to build on strengths and determine the risks of not taking action to minimize problems or obstacles.
They then conduct a control appraisal in which they rate 46 indicators of control in each of the following areas:
During the negotiation phase, they want to begin to discuss the key indicators and what action various integration teams can take to improve the ability to achieve merger objectives.
THIRD LEVEL SCREENING CRITERIA Talent
The third client is a business-to-business service company with branches across the country.
Since their acquisitions are a way of hiring a lot of people, they also want to have a good audit of the bench strength that they are acquiring.
The assumption is that if they do an assessment of the folks at the top of the house, this will be representative of the talent pool across the organization.
A strategic job analysis identified four skill sets that were "make or break" in terms of this organizations ability to meet merger objectives.
Members of the due diligence team were trained to conduct behavior event interviews that that allowed the client to quickly and accurately profile senior executives in terms of their strengths and weaknesses vis-à-vis these skill and ability dimensions.
RETAIN EXISTING TALENT Communications
In addition, they want to make sure that the entire talent pool, both their existing employees as well as the employees of the target company, dont jump ship. So the integration plan targets the existing employees as well and a strong communication plan is the cornerstone.
The first phase of the communication plan needs to address the period from announcement to closing with specific reference to what
LESSONS LEARNED Best Practices in Workforce Integration