Mergers & Acquisitions: HR is integral to success - CLONE
A successful merger or acquisition is reliant on synergy. Working towards the same purpose requires the buy-in of everyone involved. As such, a cultural and complementary strengths-based fit is crucial. Essentially, it is an exercise in captivating the hearts and minds of people on both sides of the deal. As the people function, HR is crucial in ensuring this is achieved.
Although overall deal values are down by 50%, compared with this time last year, there is still activity in the UK M&A market. While we’re not seeing the mega deals that fuelled the 2021, £356billion, post-pandemic-bounce-back high, deal volumes indicate that this activity is predominantly in the lower value, sub-£10million, SME space. (i)
The relatively high cost of borrowing, challenges around accessing finance, and low-growth mean businesses remain cautious. However, there is still value to be realised. Whether because of the need to streamline or raise capital, in a challenging environment it is expected that divestitures will keep the market moving, end of this year into next. This will offer cash-rich organisations advantage and opportunity.
In a buyers’ market, sellers will need to be circumspect around the value of their business and prepare carefully for any sale. Chartered Tax Advisor, Phil Mitchell, Director of Gloucestershire-based Harbour Key, works with angel investors and as a Growth Hub mentor. He explains: “We are seeing the due diligence phase taking longer, the exercise being one of the most intense review processes that a business will experience. Those who have taken time to prepare fare better, achieving higher value.”
This on-the-ground insight is mirrored by Gary Partridge, MD of award-winning, Cardiff-based Lexington Corporate Finance, who also points out that: “The use of earn-outs will become more prevalent to close value expectations.” As such, while overall values may not decrease, we will see the use of performance contingencies being structured into an increasing number of the deals being struck.
Challenging environment or not, the key value drivers remain the same – access to new markets, reducing competition, the shoring up of supply chains, or for growth and transformation. M&As also help organisations address the well-documented talent gaps in the market. Acquiring game-changing technology talent, for example, means the sector is still the prominent driver of M&A activity in the UK, accounting for 27% of the market in the first half of 2023. (ii)
The current cost of borrowing undoubtedly increases risk. However, as we have seen, earn-outs will go some way to mitigating this.
Traditionally, businesses have focused their due diligence around the financial, legal, and operational aspects of any deal. However, ‘25% [of CEOs] cite a lack of cultural cohesion and alignment as the primary reason integration efforts fail.’ 95% of them would ‘describe cultural fit as critical to the success of integration’. As such, cultural alignment must also be a key part of the due diligence process. (iii)
This is easier said than done, however. Culture can be somewhat nebulous. Like a scent or flavour, getting to its essence is not always straightforward. But, to integrate two companies successfully, it is essential.
Anthropological approaches broadly define culture as a way of life or being, derived from values and beliefs passed down from generation to generation. Similarly, in the business world, culture is the outworking of an organisation’s vision, values, and purpose. It can be intuited from the sometimes inherent, sometimes implicit, behaviours of its people.
The complexity comes when there is a breakdown between the aspirational rhetoric of a business and its day-to-day actions. There may be clarity around the culture from the marketing department’s messaging, but is it being reflected in the way the work gets done? Is the culture embedded? How do you know?
How can HR help?
Because it involves people, their behaviours, and change, it is critical that any M&A activity involves HR from the beginning. As the people function, HR must have a seat at the strategic decision-making table. From carrying out an exploratory cultural audit to defining the purpose and then executing the integration plan, HR will be critical to its success. If increasing numbers of deals are contingent on earn-out structures, then people and performance will be key in realising maximum value for both parties.
Progressive organisations understand the importance of purpose. They understand that today’s consumers and employees expect more. Increasingly, people are seeking out the organisations that align with their own values, those that do business in a way that reflects the kind of world they want to live in.
Every organisation should have a clearly defined purpose. When two organisations come together it is imperative that there is synergy in the mission. Redefining and reinforcing that purpose will become the North Star under which the new organisation will culturally align.
That is not to say that everyone must be the same. Diversity and difference are important components in any corporate mix. What is required is complementarity.
The most successful organisations play to their strengths. Exceptional performance begins with accurate insight. What do the people of each organisation bring to the table? Strengths-based assessment and profiling will tease this out, identifying what is great about each, and building on these strengths. Going in with the intent to collaborate, ‘lean-in’ and learn from one another, rather than making assumptions and imposing predetermined prescriptions will set the tone. Engagement is key.
Leading through change
Leadership will be integral to this. Successful outcomes will be dependent on leaders who can create open, honest environments that encourage people to have a voice and where they feel genuinely heard. This requires your leaders to be curious and to listen, to be vulnerable and self-aware enough to acknowledge that they don’t have all the answers. Developing a profound understanding of what is actually happening on the ground will be a collaborative, human endeavour. It is a bottom-up approach where the direction of travel is set collectively because everyone is trusted and empowered to do the job they were employed to do.
An organisation is only as good as its people
Whether it is identifying key talent for retention and defining roles and relationships in the new world or minimising disruption and maintaining productivity and performance during the process, HR will be in the thick of it.
M&As have different implications for different groups of people. For change to be successfully implemented, it means engaging meaningfully with them all, including those who will be losing their jobs. It means managing anxiety, acting quickly, legally, and with transparency and fairness. Necessarily, the people function must be a driver.
Beyond the soundness of the economics and specific value drivers, it is imperative senior leaders also explore the cultural fit of any M&A activity they pursue. This is inevitably a people-focused endeavour. Mitigating risk in this way is critical at a time when borrowing costs are relatively high and economic growth has flatlined. People issues can be the difference between a successful integration or not. Whilst not all SMEs will have an established in-house people function, HR expertise will be crucial in ensuring organisational synergy, enabling the maximum value from any merger or acquisition to be achieved.
6 November 2023