The HR Practitioner’s Guide to Mergers & Acquisitions Due Diligence

A lot of research organizations and even folks around the world of M&A believe that deal teams do not put enough emphasis on the people aspect of M&A deals at the right time. Many HR practitioners get involved in the deal after the announcement, and they are playing catch up. If you bring in HR late in the deal, there will be limited options and opportunities to do mitigation and planning. 

You need the right people and the right roles at the right time. Joining us to discuss the importance of HR participation in M&A due diligence is Klint Kendrick, Chair of HR, M&A roundtable. He will also be sharing his book: the HR Practitioner's Guide to Mergers and Acquisitions Due Diligence. 

“If you're pulling HR in after you announced the deal, then you're missing a lot of opportunities to help realize deal value earlier on in the process.” - Klint Kendrick

Collaboration is Key

One of the biggest problems in the M&A industry is people usually work in silos. Teams do not talk to each other enough, so interdependencies tend to get missed. One of the things that you can do is to perform a post-diligence huddle. It is a sit down with everybody who is part of the deal team to answer two questions:

• Who are the people that we need to retain? 
• What are the things that we’re going to break when we pull them into our organization?

As an HR practitioner, you have to trust that the corporate development team has done a phenomenal job of ensuring that the acquisition will make money. Your job is to support the assumptions they’ve made and look for things that could derail that deal thesis from being met from an HR perspective. 

For you to do this, you need to be able to partner with other functions and work closely with them. Everyone needs to have a shared understanding of what the final integration model looks like and be highly collaborative. Only then will everyone understand how each other’s workstream will affect the entire deal outcome.  

Major HR related risks

1. Financial Risk

These are things like pension liabilities or retiree medical plans that may be underfunded. There are other times where labor standards violations are present, and there would be massive back wages that are owed.

2. Operational risk 

Find out how the target company recruits talent and how it will change once you acquire it. It can be a huge deal if the target company has a high turnover rate and requires speed in acquiring talent. 

3. Compliance risk 

These are the things that will end up in government violations that will result in penalties. It has a lot to do with the integration plan because if you are planning to lay off people post-deal, there are certain rules that you need to adhere to avoid penalties. You also have to look at the employee terms and conditions, non-competes, and non-solicits. 

4. Leadership risk 

We have to do a better job of assessing leadership in the target company. Poor leadership can create morale and retention problems. 

5. Culture risk 

This is where you should look at how changes in the way the work is done will be affected after you’ve combined the two companies. It is important to preserve the ability of the company to deliver products and services to its customers.

6. HR risks

You should take care of your function, look at the basic blocking and tackling of how they pay people and benefits, and integrate the records’ HR system. 

Losing Key People

HR-related risks are rarely deal-killers, which is probably why most people keep ignoring HR issues early in the deal. More often than not, losing key people is the worst thing that could happen when you ignore HR issues. 

But losing key people could also lead to more significant issues that people may realize. This is referred to as the triple-bump. The first bump happens when you announce the deal, and you end up losing all your A-players. If you don’t have retentive mechanisms in place and there’s not much communication, they will take care of themselves because they are high in demand. 

What happens next is your B-players end up trying to fill the A-players’ shoes. Your second bump happens when your B-players become demoralized and unmotivated; they end up underperforming themselves. 

So now you’ve lost your A-players and your B-players, and your third bump happens when you’ve acquired a bad reputation and can’t recruit new talent because of everything that has happened. So losing your key people can lead to an even bigger problem. 

Conclusion

HR related risks are often ignored, but it can actually have a massive impact on the deal. There are 6 major HR related risks that can result in penalties and key people walking away from your company. You need to collaborate and mitigate these risks early in the process.