M&A research from Cass Business School highlights the importance of keeping the target company’s key staff at the heart of the takeover deal

The merger and acquisitions Research Centre at Cass Business School, London, recently completed a study that provides insights into what distinguishes successful dealmakers, covering all stages in the M&A process. 

The study showed, among other things, that speedy leadership shake-ups are the secret to M&A success. It found higher rates of success among acquirers who rapidly appointed top teams at their targets while also retaining a large proportion of operational staff. This article discusses the link between the results of the study and the importance of focusing on key staff during the integration period, clearly showing the risks associated with neglecting these so-called soft issues. 

The recently released study, Successful Dealmaking, is based on the results from two recent projects conducted by MBA students at Cass, including primary and secondary data. 

One focused on a sample of 70 large transactions completed by US and UK acquirers between 2007 and 2011, comparing those that have successfully created shareholder value with a matched sample of those in which shareholder value has been destroyed since the completion of the transaction. 

The second project was a collection of primary data, using a survey of 31 professionals, focusing on their views of the role of human resources in M&A transaction success. This was complemented by seven in-depth interviews.

The prevailing rhetoric around M&A transactions is that most deals fail to deliver on their strategic promise or on lifting shareholder value. Certainly, the facts support this view, with numerous studies showing that dealmaking is far from a straightforward exercise. In fact, it could be argued that it is one of the riskiest strategies in which a corporate entity can engage. 

There has, however, been some improvement in this regard. In the past, the failure rate of M&A deals has been as high as 70%, according to many studies. More recent studies have suggested a success rate of between 40% and 50%. Despite this improvement, why do so many still fail?

The exhaustive list of reasons is too long for this article, but difficulties around the integration of cultures and alignment of staff and strategy in the post-deal process come high up that list. 

Indeed, the commonly used metaphor of a forced marriage springs to mind, certainly from the point of view of the target firm’s workforce. Most employees will have no knowledge of the deal until the announcement day and little or no input into the structure of the post-merger combined firm, so motivation is often lost. 

The Cass study on what makes acquirers successful highlights three issues that distinguish the good deals from the bad, and they all relate to focusing on staff, namely: the speed at which staff are dealt with and retention of personnel; focusing on HR issues early; and clear communication. 

Staff retention

We found that successful acquirers were quicker to remove and replace the senior executive team, but also much more focused on the retention of operational staff. Retention rates for operational personnel were more than 60% for successful deals, compared with just over 40% for failed deals. 

It is likely that failure to retain such staff would result in operational disruption, revenue loss and further loss of employees. M&A targets’ top management teams – chief financial officer and chief
executive officer – experience higher turnover post-completion and, here, the higher retention rates are instead found in the sample of failed acquirers. 

When companies are subject to a takeover, clear communication about the reasons for the deal is an important way of ensuring staff understand and accept the significant changes happening around them. Equally important is the united front of the management team, clearly demonstrating a will to work towards the new strategic goals. The top managers from the target firm – often the founders of the business – are arguably more likely to suffer from inertia and can be set in their ways.

Focusing on HR issues 

The management of people through an M&A process is generally one of the most difficult areas to get right. However, the Cass study demonstrates that HR issues are possibly the most important factor determining the success or otherwise of a deal. 

Companies with a greater focus on HR – measured by the existence and use of an HR committee at board level – are more successful acquirers, the study found. There was more than twice the number of HR-specific committees in the success group than in the failure group, and about a quarter of successful deals had more HR focus. Only one in 10 of the failed deals had this.

Yet despite the importance of people management throughout the deal process, there is evidence that many companies do not involve their HR teams early enough. The second project, Reasons for M&A Transaction Success, is based on a survey of 31 HR and non-HR executives. It found that less than 10% of companies involve HR at the targeting stage, but more than 80% include the team at the integration stage. 

However, most of the executives interviewed suggested that having HR involved at the earliest stage possible was important and beneficial to a deal’s success. Indeed, when asked whether the problems faced by organisations post-deal could or should be resolved by HR, 93% of respondents said at least some of them could be – as long as HR matters were managed better or the teams were more involved in deals. 

Clear communication 

While there will always be an element of uncertainty in any M&A transaction, clear communication should result in less disruption of day-to-day activities. The results of the Cass study show that two-thirds of acquirers in the success group shared more detailed information in public announcements about their plans, compared with just a third in the failure group. 

In addition, deal-killer chief executive declarations – such as “We will communicate more about the merger when we have more information to share” or “It is too early in the deal to begin planning” – were more common in the public announcements made by acquirers in the failure group. This links in with the previously mentioned point about strategic intent – when the rationale for a transaction is less clear, communication is much harder.

The importance of clear, detailed and honest communication around the announcement of a deal is often overlooked in dealmaking. Clear communication can be viewed as an extension of significant pre-planning, which should make the intent of the transaction more straightforward, both to understand and articulate. 

Failing to provide clear directions for internal and external shareholders at the beginning of a deal is clearly shown in this study to have a negative impact on deal performance. 

Anna Faelten is deputy director of the M&A Research Centre at Cass Business School. She has consulted for the UK government’s Department for Business, Innovation and Skills on the economic impact of M&A in the UK and was also editor of corporate finance publication Deal Monitor. 

The full report Successful Dealmaking can be found at www.cass.city.ac.uk/marc

Expert insight: What makes a successful M&A?

From experience, I could not agree more with the conclusions in the article that successful M&A deal-making is down to three main factors, all of which focus on staff.

But although it is important to understand the factors that lead to successful M&As, it is as important, if not more, to recognise which factors prevent corporate mergers from creating value following a deal.

As the article points out, the failure rate of M&A deals remains significantly high, at 50% or more. More worryingly, however, some M&As have resulted in a loss of value. For instance, some studies have cited that 10% of reputational damage arises from unsuccessful M&A.

The M&A failure rate is high for many reasons, but one clear pitfall is that corporates neglect to harmonise business culture following a deal. Some of the potential consequences of such failures are a high turnover rate, and unsatisfied and disgruntled staff – a negative M&A outcome that I refer to as ‘brain drain’ – namely, the loss of key members of staff who provide value to the business as well as the necessary knowledge and skills.

M&As certainly fell victim to this pattern before the recession. Back then, corporates were concerned only about growth and were making deals without taking the correct steps to ensure that stakeholder value would not be compromised. In the financial sector for instance, M&As were being entered into all the time. 

In banks and law firms, dedicated units were set up to manage M&A deals and some would push clients into pursuing deals in order to make money, but little thought was given to how business cultures would be integrated and how the restructure would be communicated to employees. The outcome was several M&As that could not deliver on their strategic goals or, worse, a business that lost its value in the eyes of its stakeholders, clients and customers. 

The situation has improved, however. As the article suggests, the M&A failure rate, which was once as high as 70%, has now reduced to about 50%. What this tells us is that businesses are becoming aware of the factors leading to failure.

But more needs to be done to address the issue and businesses should wake up to the importance of those three factors: speed of execution and retention of personnel; placing HR issues in focus early; and the importance of clear communication.

Carl Leeman, chief risk officer, Katoen Natie