Text Version of the Interview
People Focused M&A
When I first started working on M&As, I could barely use the word culture in a room and be taken seriously. So I ended up couching it in terms like operational readiness or operational preparedness. Now I can actually use the word culture and have leaders take us seriously.
There’s been a profound shift where practitioners are moving away from focusing on just the financial aspects of the deal. People are becoming the greater focus on the business world, and I’m excited to see that happening.
That's not to say that the financial pieces aren't important. We can't pay people without making money. But It's really good to see that things are becoming more balanced.
Beginning the End State Upfront
One of the companies that I've worked for did a really great job of pulling in the IMO lead and all of the functional leads into pipeline review conversations.
As an HR, it was great to see what was on the minds of our corporate development leaders, the kinds of targets they were looking at. And understand where I could add value to the conversation.
One previous deal that I had was buying a small firm for global expansion purposes. When we looked at the final projections of where they wanted to grow this business, it turned out that there weren't enough people in that particular country to staff the jobs that we needed staff there.
So knowing what the end-state was and having me pulled in before we even reached out to that target company so that we could look at the talent realities was really critical.
I also think it's really helpful to build out the OKRs so that everybody in the transaction understands why we are doing the deal and what is required.
Leading with Values
Culture is something that requires leaders from both sides of the deal to be involved. We want to make sure that the target company leaders understand where things are going, and it's better to do that as early as possible.
Sometimes you do need to play your cards very close to the chest, but when it's appropriate to share that information, you really want to enroll and enlist the leaders on both sides to have that conversation. And it is easier if you understand the culture of the other side.
We hear a lot about an organization’s values. But we have to take a step further because values can sometimes look good on paper, and sometimes they even have the same words.
Take winning for example. Everybody wants to win. The first company defines winning as cutting margins to increase customer count. If the second company considers winning is only if they can maintain margins, you will have culture shock. And that will affect how the integration goes with your go-to-market team.
I was also in a situation where there was some significant cultural misalignment in the deal and the acquired CEO was really surprised at some of the changes that were going to be made post-close. And he was pretty vocal about it.
He started sabotaging the integration work and whispered to the employee's ears. Some of those key influencers ended up finding different jobs and leaving, and the deal really lost value because that acquired leader was not on board even though the value statements looked almost identical on paper.
I like to get involved as early as possible, just because I think I have an opportunity to make a difference and understand what we're trying to do with the acquired company, and what kind of change will be required of the employees as they go from company A to company B.
So the earlier you can pull the team in that's going to be responsible for making those changes, the better.
There are a lot of ways to do diligence before the LOI is even signed. There's a lot of publicly available information out there on a lot of organizations. You can take the time to go hunt around sites like Glassdoor. You will also learn a lot just by looking at their Yelp reviews.
And if they've got customer-facing offices, check how they treat customers. Media interviews that founders have given to the media can be really helpful as well.
I remember a situation where we were acquiring a founder-led company. And when I looked at where the founder was doing interviews, he was a serial entrepreneur. He had set up a number of small businesses and all of his media interviews were on a different business than the one that we were requiring.
Our value proposition required him to stay in place and lead for a year. But based on the media that we were seeing, that’s not likely to happen. So we made different choices and started understanding his motivation and values.
Deal Structure - Integration - Risk Management
We tend to talk about diligence in terms of confirming the financials or viability of products. But a big part of diligence is shifting to looking at the viability of the integration plan.
Knowing what the integration plan is early on can make an enormous difference because if you understand how they sell now and how you want them to sell post-close, you can understand the risk of moving people from point A to point B and you can put your mitigations into place.
It can also make a big difference with the communication plan. One of the things that I've seen go terribly wrong or terribly right in a deal is how employees are communicated with on day one.
Telling people that they’ve just been acquired will result in a feeling of unease and uncertainty. Understanding who you're talking to can really help shape the communication plan.
- Who's the messenger?
- How are you going to communicate with them?
- How often are you going to communicate with them?
So while you might want to start off with a typical way of doing things, you can continuously iterate that process and come up with some tweaks to it. And sometimes you need to throw the whole thing away and start over if it looks like it's just not going to be workable
But the diligence process and thinking about where you're going to be headed in integration can make just all the difference in the world.
A cross-functional team is almost always required, it's not just HR. HR folks are good at getting people on their benefits and payroll, but a lot of the employee experience is shaped by things that are managed by IT.
Like the computer that they will be working on. So we have to partner with IT. I've got to partner with tax. I've got a partner with the finance team. Depending on how the organization is set up, there might be a shared services model.
There's a lot of different groups that need to get involved just to deliver on the employee experience.
Identifying and Retaining Key People
I have a very interesting experience with this. The very first deal that I did with the training wheels off, I got overconfident as we crushed the announcement meeting. When we were about to celebrate, my phone started to blow up.
It turns out that one of the key people, who was a developer that had written all of the source code for the company that we had just picked up, was very pissed. He did not feel like he was being valued in that transaction.
And to be real, he wasn't. I was with a firm that really looked primarily at the C-suite as the key people. And in this case, we had missed the guy who was probably driving most of the value in that transaction. He had made the thing that they were going to go sell.
But if I had gone and talked to my technical team and had pulled everybody together, we would have caught him. We would have understood that this person was a key player and drove a lot of the value.
So one of the things that I do from now on is a post diligence huddle. This is where I bring everybody together on the deal team and ask two questions:
- Who are we going to need to keep on board if we're going to take this company from point A to point B?
- What are we going to break when we bring this company from point A to point B?
It’s important that you put steps in place so you don’t miss any of this in the future. It's on the acquirer to really understand what it is that you're wanting to buy. And had I asked better questions to my colleagues, I would have understood better who those people were.
You want to make sure that there's that culture fit that everybody talks about.
I have a friend who applied for a job that went through the interview process, and he was offered an opportunity to talk with several employees who were already there so that they could ask those cultural questions. Am I going to fit into this company?
That's a really great approach to transition from the way that we recruit people off the street to the way that we share information with the target company. It's very transparent. It's very honest.
Obviously, we need people who are under the tent to have those conversations. But being able to go in and talk with the leaders at the target company and explain to them:
- Who you are
- What you do
- These are our non-negotiables
- This is how we would like to integrate you
It allows them to really understand what the future plan is. Especially for founder-driven companies, those are their baby. And if we can tell them how we're going to take care of their baby, it just makes an enormous difference in terms of cooperation.
They will help us avoid stupid mistakes because they want to make sure that it's as successful as possible. If they're not armed with the information to do that, we're really not setting them up to help us.
If you've never sold a company before or never been acquired before, it can be really a surprising experience.
You think it's going to go one way, but the reality of it is sometimes not that way and trying to give folks a realistic preview of what they might expect or the emotions they might experience.
M&A Operating Model
Your book is actually fantastic talking about how to do agile M&A well. One of the things that I see is with the change management piece. We want to get everybody on the same page, but you can't change everything at once.
Just like you can't set up the operating model all at once. There are things that need to happen before you can get from point A to point B with your operating model. And I think you've got to pull everybody together.
Bring all the cross-functional workstreams and talk about the next 30, 60, 90 days plan and how you need to tweak things because we are learning more information on an almost daily basis once we really get into the organization.
So having those standup meetings are really critical because new information might change the way that we manage our priorities. And as we accomplish certain milestones or benchmarks, we have to hold retrospectives and try to understand what it is that we could have handled a little bit differently.
I also like to get out in front of that with the post-mortems. Anticipate and understand what are the possible things that could go wrong. And again, as we gain more information through the integration process, I think we need to be having those conversations more and more often.
If you're outsourcing empathy to the HR department, you may have a problem. Because it can't just be us having empathy. It really has to be the entire organization that has some empathy for the acquired employees.
Being acquired is one of the most difficult things that people will go through in their careers. Ask the people that you know if they’ve ever been acquired, if they have, most of the time, it's not going to be a great story.
I was asked a while back what my first experience in M&A was, and it wasn't when I became the HR guy on a deal.
The first time I was acquired, all they did was change the name on my paycheck and I got a new email address.
The second time I was acquired in the same job, it upended everything. I had a brand new baby at home. My wife had a full-time job with two young kids and they laid out my new compensation package. They changed my bonus structure in such a way that I was worried about paying my rent.
So I ended up moving across the country to find a comparable job.
And I'll never forget the way that manager delivered that. Laying somebody off or delivering bad news is never easy. But had he shown just a little bit of empathy, I think that it would have been a much easier experience for me and my coworkers.
Because when I talked to my coworkers, they had the same experience. And within a few months, none of that initial team was there. I walked away with a million-dollar book of business. Several of my co-workers walked away with a million-dollar book of business and that company lost value right away.
I and my co-workers lost our careers. The company lost millions of dollars in reliable revenue. Nobody really won because there was a real lack of empathy and how that was handled.
And even if people stay around, you want their hearts, you don't just want their hands. So you really have to have empathy and be able to answer those core questions from the employees.
- Can I feed my kids?
- Can I pay my rent?
They don’t really care about your strategy at this point in time. They care about what they're going to have to go tell their spouse when they get home.
And then on the upside, a happy workforce is a productive workforce, and a productive workforce is a profitable workforce. Keeping people relatively happy means the business is going to be more successful.
The last point that I would like to make about empathy is to keep in mind that the acquired team is coming into the new organization all at the same time. They're learning new processes, they're learning new ways of doing things.
Unlike folks that come in off the street who are surrounded by people who’s been there for a while, these folks are coming over with no support. It's a big group. They're all lost in the woods together. I guarantee you that everybody is preparing for the worst-case scenario.
Oftentimes, leaders on the acquired side have months to adjust to this because they were the ones who sold the company. So a lot of times they have a hard time empathizing as well.
We have to do everything we can to give them information, to help them feel secure, and to just really honor their dignity as human beings can make an enormous difference.
How to Encourage Empathy
I learned something from a great finance leader and this was management by walking around. And he literally just walked the floor and check in with people.
And one of the things that I learned from him was that the person that most employees trust the most is their direct manager. It's assuming they have an average relationship with them.
So he went in and he started with the middle managers. He would often ask them how were they doing and start a conversation with them.
That can really help us to understand where the people are and where we might need to change things. Also, it gives an opportunity to address some myths that have come up in the acquisition.
They might think that they are all going to get fired, so you can clear that up if it's not true. If it is true, you can calm them down and tell them that you will be helping them find new jobs. We can have conversations like that to make the buyer seems less like monsters.
Integrate as fast as possible
If you know that a change is going to happen, disclose it as early as you can. I realize that you have to choose a level of transparency. It may not be appropriate to share everything at the announcement meeting. But as early as possible, you want to rip that bandaid off.
I was with a company for a while, and what would end up happening is we would bring everybody over and we would essentially keep the sales commission plans exactly the same for about a year.
And then they left after 12 to 18 months after they were acquired. It’s shouldn’t be a surprise because they'd already gotten used to leaving things the way they are.
And certainly, there will be people who would have left early on if we change their plans up front, but that would have given us an opportunity to backfill them with other people, to pay them to stick around for a while and transfer some knowledge about those key accounts.
Maybe even make some visits and find a way to financially incentivize them to stay around longer and help manage that transition. But instead we just kind of left that bandaid on and then we ripped it off a year down the road and it is almost always disastrous.
It usually takes a couple of months for people to get over the shock and to settle into a new way of doing business. And if you're going to start to change things after they've settled in, you end up keeping them in a constant state of turmoil.
Like what's coming next, what's coming next, what's coming next? And we create just this insane amount of anxiety.
And rather than being focused on the job at hand and trying to be productive, they're so busy managing their uncertainties.
And I do think this is one of the areas where we do have to be a little bit careful with an agile methodology. If every time we learn something new, we're changing the employee experience, it could be really disruptive to the employees.
So understanding what we think that end state is going to be, communicating it clearly, and then working as quickly as possible to get to that end state so that the employees are in one long period of change, instead of multiple shorter bursts of change.
It just makes it more likely that we're going to keep those employees and keep the value in the deal.
I've been part of acquisitions of a number of distressed companies, where the employees have already been through a lot of changes.
The company keeps trying to pivot, find new customers and find ways to tweak the product so they're more marketable, so the company can stay afloat. You add all of that experience to acquisition and people are already emotionally exhausted by the time you get them.
And one of the most compassionate things that we can do is tell them the changes that are coming up and were going to get there as quickly as possible.
Just because an organization has been through a lot of change doesn't mean that they've been through that change well.
Tools to Assess Culture
There are a ton of culture assessment tools out there. But the most important thing to remember is whichever tool you use, you have to understand that you need a very realistic understanding of your own culture, as well as the culture of the target company.
You have to have your own house in order and then use those same dimensions of culture to look at the target company. There's a lot of different tools, a lot of different ways of looking at culture.
But you have to remember the fundamentals:
- How do they communicate?
- Who gets to make decisions?
- Is it a directive culture or a collaborative culture?
So a lot of different things that I've seen work, but understanding those differences really is the key critical part of that.
My biggest takeaway is to think about the people as early as possible.
Not all M&A involve people. But if there are people involved, really think about the people upfront and think about how much of the value of that organization is really being driven by the people, and apply an appropriate level of effort and attention to make sure the people side of things are managed.
We’ve all seen the numbers. 70 to 90% of deals fail to meet their financial objectives. That's a lot of value wasted. So think about the people upfront. Think about it early. And really it's a team responsibility.
Culture is about how we do things and we do things through people for the most part. So you wouldn't outsource that to your HR department. There's not a lot of us in HR who are operational experts. Everybody has got to be participating in those conversations.
A lot of times, especially in larger organizations, the culture at top 5, 10, 15 people and the culture on the floor with the people doing a lot of the work lower down in the organization are night and day different.
We can learn a little bit from the folks at the top of the house. But a lot of our culture change initiatives have to happen at the bottom of the house too. And what we do at the top and what we do at the bottom sometimes do not mesh at all. So we're going to have to change as we get more information from people at different levels in the organization.