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M&A Making the Deal Work | Human Capital

Driving M&A value


through HR integration
Get it right from the start
The evidence is overwhelming: Acquiring structure of the deal, effective timing for key Plan well: Understanding deal structure
companies can neither focus too much nor decisions and milestones, and development and HR’s role
too early on an M&A transaction’s people of strategies to support a smooth What should the “New Co” future state
implications. Chief Human Resources integration. HR leadership also can lead the look like?
Officers (CHROs) as leaders and the Human organization’s efforts to identify potential No two M&A deals are alike – each
Resources (HR) function as a whole play business and human capital risks, and shape transaction’s strategic and HR-related
critical roles in determining whether a the strategy and integration plan. With HR objectives may vary based on many factors.
potential deal realizes its strategic, financial, playing a leadership role from the beginning In general, most M&A transactions fall
and operational goals. As soon as an of the M&A process, it is more likely that the into one of four strategy classifications –
organization begins the M&A process, organization will optimize a deal’s financial transformation, expansion, assimilation, and
HR can share vital business information and operational synergies. add-on – according to deal objectives and
and expertise that may influence the the relative sizes of the acquiring company
identification of potential partners, the and its target (Figure 1).

Figure 1: M&A strategy classifications

Large
Expansion Transformation
Pace: Cautious/Moderate Pace: Moderate
Style: Coordinated Style: Collaborative
Target size Change in key areas Enterprise change
relative
to acquirer Add-on Assimilation
Pace: Fast Pace: Fast
Style: Selective coordination Style: Directive
Minimal change Significant change at target
Small
Low High
Integration

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M&A Making the Deal Work | Human Capital

Transformation: Large target with high Assimilation: Smaller target with high
integration needs (i.e., merger of equals or “fish integration needs (e.g., target is assimilated
swallowing the whale”). into the acquirer’s strategic plans, systems,
In a transformative transaction, significant programs, and culture).
effort is made to consolidate HR systems, Assimilation-focused M&A usually includes
benefit plans, programs, and policies aggressive synergy goals for eliminating
for the newly combined company (“New a certain portion of the target’s systems,
Co”). Typically, executives take the most benefit plans, and redundant resources
effective processes and solutions from (including senior leadership). Assimilation
each organization or implement new, transactions tend to create significant
best-in-class solutions for the combined change management and cultural issues
entity. When executing a large scale for the target organization; however, the HR
transaction, HR leaders may face significant department should not underestimate the
challenges, such as meeting aggressive impact of the transaction on the acquiring
synergy targets for systems, benefit organization.
plans, and redundant resources; gaining
leadership and organizational alignment; Add-on: Small target with low integration
handling employee engagement and needs (e.g., the target is bolted on to the
retention concerns; and addressing cultural acquirer with limited integration).
differences. In a typical add-on transaction, the acquirer
is bolting on a new business that will not
Expansion: Large target with low integration be fully-integrated into the acquirer’s other
needs (i.e., large target that will maintain business. These transactions are generally
separate systems and/or programs with limited very fast paced, with selective integration
integration). between the organizations. It is important to
In a typical expansion-focused transaction, understand and plan for the long-term goals
the acquirer is widening its global footprint of these types of transactions to determine
or adding a separate business that will not the right Human Capital strategy to support
be fully integrated into its other business. the deal.
Some effort may be required to meet
synergy targets for systems, benefit plans,
and redundant resources, including senior
leadership; however, with limited integration,
synergy opportunities also may be limited.
For example, the existing HR organization
may not possess the competencies to
deal with the risks and needs of the new
businesses and/or geographies. In addition,
the expanded organization may need to
rethink its leadership structure, operating
model, and talent strategies, which adds
complexity.

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M&A Making the Deal Work | Human Capital

HR’s role in an M&A transaction with getting its own house in order. The redesigning HR systems and services. A
Regardless of deal structure, it is imperative acquirer should not only perform due strategic HR implementation plan should
that HR leaders be members of the diligence on the target, but also conduct a take into account, among other things,
leadership team that is identifying synergy self-assessment to understand the issues the leading practices for the combined
opportunities, assessing potential financial and limitations of its own HR systems organization (including cost analysis)
and operational risks, and developing and processes: Has the acquirer closed and an understanding of the supporting
deal terms. By involving HR early in past deals that have not been integrated? infrastructure (e.g., communication, culture,
the transaction lifecycle, the function’s Does the current transaction provide the leadership, staffing, etc.).
executives can provide analysis and insight opportunity to fully integrate past deals
to help achieve the following deal objectives: or improve current processes? Can the In developing a strategic integration
acquirer’s systems and processes (e.g., HRIS strategy, the HR team should address the
Pay the right price for the business and Payroll) scale to integrate the target? following priorities:
being acquired These are just a few of the potential issues •• Redesign or harmonize HR policies and
•• Provide input on the purchase agreement facing HR in any deal. procedures
–– Inventory all existing compensation and
•• Assist with performing due diligence and Using a side-by-side, global and country-by- benefit plans and programs for both the
identifying and quantifying integration country comparison of the acquirer’s and acquirer and target, including service
risks target’s similarities and differences (e.g., providers/vendors used; identify key
•• Help to mitigate identified risks structure, demographics, compensation differences (compensation, health and
and benefit plans, and HR policies, systems welfare, retirement, paid time off [PTO],
•• Capture people-related integration costs and processes), the HR integration team can etc.).
develop an effective integration strategy. –– Identify transitional incentive and
Achieve growth and cost-saving targets This should include guiding principles, retention needs, including:
•• Retain key employee populations estimated complexity, timing, and costs, and »» Broad-based compensation and
potential synergies and dis-synergies. employee job leveling
•• Maintain employee engagement and
»» Incentive compensation – short-term,
morale Based on the transaction’s size and scope, long-term, equity, and other programs
•• Stabilize and optimize the workforce as well as the acquirer’s current state, the »» Executive compensation and
deal team should also determine if this employment agreements, as needed
•• Assist with quantifying one-time costs and is an opportunity for HR transformation. »» Retention and severance plans.
ongoing savings Whether it’s a change in culture, systems –– Define future-state global total rewards
•• Enable productivity improvements implementation, or a harmonization strategy and philosophy
of HR policies, procedures or benefit –– Perform gap analysis against the
•• Help to restructure the business plans, M&A transactions can provide the inventory of existing benefits
opportunity to upgrade or transform the plans to determine plan design
In addition to providing input to the deal way HR supports the overall business. recommendations by country–
team, the acquirer’s HR organization This may include adopting the acquirer or including cost implications and vendor
will need to immediately execute on the target’s HR practices; combining the best requirements.
HR integration strategy – and this starts approaches from each organization; or fully

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M&A Making the Deal Work | Human Capital

–– Develop strategy to harmonize HR –– Define relocation strategy, policy, vendor RFPs), including interfaces with
policies and procedures, including and costs, including expatriate general ledger (GL) systems and other
performance management and training responsibilities. enterprise resource planners (ERPs).
and development. –– Identify HR interventions to support –– Estimate HR synergy savings and
–– Develop communications strategy for organizational design (e.g., talent any dis-synergies from migrating to
changing compensation and benefit management priorities: job design, consolidated HR operations, technology,
plans, policies, and procedures (e.g., performance management, leadership and vendors (HRIS, payroll, time and
Frequently Asked Questions [FAQs], development, learning and training, attendance, learning management,
Summary Plan Descriptions (SPDs), career mapping, succession planning). recruiting, etc.)
employee handbooks, intranet sites,
etc.). Obviously, there is a lot to consider from
•• Harmonize and/or transform HR
an HR perspective when developing an
operations (payroll and HRIS systems,
effective integration strategy. By taking a
•• Manage talent shared services, etc.)
leadership role from the beginning of the
–– Develop detailed, future-state –– Develop country-by-country inventory of
transaction, HR will be able to influence
organizational structure in collaboration current payroll operations, vendors, pay
and gain a thorough understanding
with business leaders. calendars, HR data management, and
of the deal’s goals and objectives and
–– Review the future-state organizational HRIS tools/systems, including time and
develop an effective short- and long-
structure and staffing model based on attendance systems and shared services
term integration plan that aligns with
deal objectives and adjust as necessary. support structure.
and supports the organization’s overall
–– Review the current employee census –– Identify country-specific data privacy
efforts.
against the future-state staffing laws that impact payroll function and HR
model and organizational structure data management.
to determine where talent gaps or –– Coordinate with the legal department
redundancies exist. on legal entities and country-specific
–– Define the talent assessment and payroll registration process, and with
selection criteria, considering existing the finance department on banking and
quality, productivity, and responsiveness general ledger requirements for the
measures. payroll function.
–– Assess the selection process, including –– Develop high-level integration roadmap
title/band mapping process and for HR operations, technology, and
relocation opportunities. vendors.
–– Identify global employment issues –– Determine implementation timing
including unions, works councils, and any required Transition Services
transfer of Undertakings (TUPE), Agreements (TSAs), including service
acquired rights, notice requirements, delivery requirements and costing.
and potential redundancy payments. –– Develop and implement go-forward
–– Identify potential reductions in force, HRIS/HR operations approach (HR
including severance costs. people, processes and technologies, and

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M&A Making the Deal Work | Human Capital

HR value impacts: may reveal potential “deal killers” in these HR operations-related risks: This is a
Integration and transformation areas, as well as other factors that could bit of a catch-all topic, but it can still be
During an M&A transaction, HR significantly hamper the long-term success significant. It is critical that an acquirer ask
professionals are often expected to work of the transaction. Some of these key the target about the number of open Equal
across the enterprise to drive significant discoveries include: Employment Opportunity Commission
synergies through headcount reductions. (EEOC) claims, active employment
This traditional view of HR’s role is often Executive leadership risk: An acquiring litigation, current Office of Federal Contract
overstated and, in some cases, myopic. company’s HR and executive leadership Compliance Programs (OFCCP) audits, and
When two organizations are combining, should partner to review the target’s current Department of Labor investigations.
operations are often complementary development and succession planning A preponderance of these issues can
rather than redundant. Sometimes, these for the C-suite and other executives. This provide significant clues as to the target
organizations also have optimized their analysis can identify if there is significant company’s HR’s governance, its position on
administrative functions to the point risk or weakness in the governance of risk avoidance, and its corporate culture.
where the additional scale of the combined the business. Also, many executives This area tends to be “feast or famine”: In
organization does not provide much have “change of control” clauses in their most cases, there are no significant issues,
opportunity for synergy realization. That is employment contracts that can drive large which would seem to indicate a properly
not to say that HR cannot drive value in a cash outlays upon deal close. In addition to managed HR risk position. When trouble is
transaction; however, HR should understand risk and cost identification, C-suite analysis uncovered early, however, the acquirer may
the value that can be realized through both can help the acquirer’s leadership team be better-positioned to mitigate or avoid
traditional and non-traditional means. The determine priorities for organizational associated risks and costs.
key is to dig deep from the beginning of the changes at deal close.
transaction and follow through well beyond NOTE: It is very important to involve internal
deal close. HR operating model misalignment: or external employment legal counsel during
Does the target have multiple HRIS or these activities to ensure that the analysis is
Deeper diligence: HR-driven value in payroll systems? Has it executed a number accurate and follows all legal guidelines.
pre-close planning & preparation of acquisitions but not had the time or
Prior to an M&A transaction, both acquirer resources to do a full HR integration? Finally, M&A team members should
and seller routinely conduct thorough Does the target have multiple HR business acknowledge that human capital
due diligence. This process is vital for partner structures, or multiple shared opportunities and risks exist in every deal,
the acquirer to fully realize the strategic service centers? How many benefits regardless of scope. Giving HR an active
expectations set forth in the initial deal programs does it have? Bottom line, there voice early and often during a transaction
valuation, and is critical for the seller to are many reasons why misalignment may may lead to significant cost savings and a
determine that the acquirer is viable and exist in an HR model, any of which could reduction in employee-related risks.
capable of executing the transaction. sidetrack successful deal execution. An
Given that many deals are executed to acquirer should assess challenges and
gain operational economies, market risks early to determine the potential
share, technology, or geographical scale, cost of misalignment and proactively
due diligence often centers on meeting develop a strong integration roadmap.
regulatory requirements, financial This assessment also might highlight
statement implications, and basic business potential delays in achieving some of the
functionality. There are significant HR- deal’s strategic, operational, and financial
related value drivers in this diligence phase, targets, and influence the overall deal price
such as analyzing retirement funding (the accordingly.
lack of which could add significant costs at
deal close), and proper valuation of health
and welfare plans. Thorough due diligence

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M&A Making the Deal Work | Human Capital

Keeping the lights on throughout may cause disruptions in downstream Separate cleanly. Creating and executing
integration: HR’s value as a business HRIS and payroll systems. It may sound a consistent and concise severance
steward obvious, but ensuring that everyone process can drive significant value during
As explained in this paper, strategic HR in the new organization receives an integration. HR can strengthen employee
leadership can provide significant value error-free, first post-close paycheck goes trust and protect the company’s reputation
during the M&A lifecycle. However, a a long way in helping employees at all by implementing a separation process
number of tactical HR actions, when levels settle in to the new organization. that meets local legal and regulatory
proactively implemented, can also add requirements and is guided by firm
business value by “keeping the lights on,” Headcount synergies milestones, clear communication, and strict
particularly during integration. As stated earlier, a well-known HR rigor.
responsibility during M&A is facilitating the
HR Day 1 focus areas realization of headcount synergies. Often
While Day 1 is a significant milestone in a this is seen as identifying and eliminating
new company’s life, it typically requires few, organizational redundancies. For many
if any, noteworthy HR operational changes, companies this is where the exercise begins
such as benefits integration or payroll and ends. However, strong HR leadership
adjustments. That said, employees who are can transform the pursuit of headcount
joining the new organization are likely to synergies from a pure cost play to true
have questions and concerns that HR can organizational alignment. There are a
help to address. Important HR Day 1 focus number of ways that HR can add business
areas include: value during this process:
1. Clarifying leadership structure:
Facilitating organizational design Understand retention. Well-planned
changes that become effective Day retention strategies can have significant
1 means going beyond the typical impact and make every dollar paid count.
announcement of who is in what HR staff should understand who the key
leadership position. Using meetings and employees are, why they should be retained,
select strategic materials, HR should aid and what it will take to make retention
employee understanding of what the meaningful.
new leadership roles might mean down
and across the organization, therefore Match the organization structure to
alleviating some anxiety. the business model. HR should work with
2. Managing and communicating C-suite executives and department heads to
change: HR should work with match the expanded organization structure
Communications, Marketing, and other to the combined company’s operational
functions at both the acquirer and target needs. The degree of alignment between
companies to develop and communicate operations and organization structure
a change management strategy and directly drives optimal cost reduction and
implementation plan for Day 1 and operational efficiency.
beyond. The plan should address
reporting structure changes, process Select talent wisely. Talent selection is
redesign, technology changes, corporate fertile ground for inconsistent decision-
branding, and more. making among hiring managers and senior
3. Striving for zero “breakage”: HR, IT, executives. HR can help to drive logical,
and other departments should strive business-based employee selection by
to make sure that any Day 1-related optimizing the process design, extracting
changes do not “break” existing systems. the right data, and providing consistency
Even limited organizational changes throughout the hiring process.

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M&A Making the Deal Work | Human Capital

HR integration Communicate clearly and often. HR synergies and HR integration synergies


Combining two HR functions is not easy; integration often brings a significant arrive on time and in the expected
sometimes, it may be the most prolonged amount of change for employees and amounts. In other words, HR developed
portion of post-deal integration. While the their dependents. The biggest stumbling and implemented its plan so smoothly that
overall concept is not necessarily complex, it block in this scenario is lack of information. the integration was a non-issue and the
requires flawless execution. HR Integration Rumors, innuendo, frustration, and even expected value was created or exceeded.
value is driven in a few straightforward ways: anger can quickly fill the vacuum created
by no information. Even if there is little of
Identify the value. What are the goals of significance to share at a particular point in
the integration? What value is realized by the integration process, telling people when
combining vendors and systems? What are they can expect an update may be all it takes
the risks? All of these questions will help to assuage fear and reduce misinformation.
shape the HR integration’s strategy and Bottom line: have a plan, communicate the
purpose, and help the new organization plan, and execute the plan.
achieve its expected value.
Test, test, and test again. Testing is a
Do it once, do it right. Just because an critical yet frequently overlooked step in
organization can integrate one part of the HR integration. By creating a robust testing
HR function quickly doesn’t always mean plan for HRIS, payroll, benefits, and other
that it should. Minimizing the number of processes, HR leaders can help to deliver an
times a “change” occurs and having clear issue-free integration.
milestone dates when multiple changes
will take place may help the HR team The value of boredom
avoid integration burnout and employee When is employee boredom a good thing?
confusion. When it happens during HR integration.
By providing consistent processes, clear
Sweat the small stuff. Effective HR communication, and goal alignment, HR
integration, specifically HRIS, payroll, and can make sure that employees know what
benefits cutovers, requires paying great to expect and when, so they can focus their
attention to the smallest details. Payroll attention on their daily responsibilities.
deductions, payroll tax registrations, Boredom means that employees who are
garnishments, reporting relationships, transitioning out of the organization are
transition of deductibles and out-of-pocket treated with respect and transparency.
(OOP) maximums, and payback of 401(k) Boredom means that no one misses a
loans are just a few examples of incredibly paycheck or a payroll deduction. Boredom
detailed items that – when not properly means the day after benefits integration
managed – can produce significant an employee walks into a pharmacy and
disruptions and costs. When it comes to HR obtains their child’s medication without
integration, no detail is too small. issue. Boredom means all people-related

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M&A Making the Deal Work | Human Capital

M&A as a catalyst for HR pipeline (acquisition, development, and


transformation succession) is fractured and does not have
The amount of upheaval involved with M&A- a clear line of sight through the employee
generated HR integration can be substantial. lifecycle. An acquisition could add scale
For many organizations, navigating this and momentum to jump-start a program
level of change can seem overwhelming, to optimize the talent pipeline. Integration
but within that transition, momentum versus transformation is a sliding scale
for longer-lasting change can be created. of possibilities. Executives should select
Take, for example, a CHRO who has been the area(s) where the most value may be
seeking opportunities to reduce HR costs realized, create a compelling business case
by moving transactional HR activities into for their decision, and move forward with
a shared services environment. During purpose.
project planning, the CHRO’s company
acquires another business of substantial Arrive early, work the room
size. The initial priority would appear to If HR is not involved from the beginning of
be completing the transaction prior to the M&A process, information vital to the
the HR shared services transition. From a transaction and subsequent integration
strategic perspective, however, using the may be omitted or underutilized. By
transaction as a change agent to merge both understanding and assessing the value of
organizations into an HR shared services specific deal drivers, HR can help to identify
environment could create more value for the and prioritize people-related strategies,
deal and the new company. Additional value risks, and opportunities, and express
an organization can realize by transforming potential options to the leadership team
HR during an M&A transaction includes: in relation to deal terms and objectives.
Arriving early and working the room during
•• Accelerating and increasing cost synergy
an M&A transaction can elevate HR’s
value realization
role to one that will create value for the
•• Reducing the “us” versus “them” cultural organization well beyond Day 1.
dynamic as both organizations move into a
new model together

•• Leveraging deal budgets to accelerate


optimization of the new HR model

•• Avoiding perpetuation of outdated


or inefficient policies, processes, or
technology.

There are many levers that executives may


pull to help turn M&A HR integration into
HR transformation. Understanding the
current state of each HR function is critical
in selecting the areas of greatest potential
impact for the function and the organization
as a whole. For instance, perhaps the HR
operating model is optimized but the talent

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Contacts

Mike Fuchs
Principal
Deloitte Consulting LLP
mfuchs@deloitte.com

Tom Joseph
Principal
Deloitte Consulting LLP
tjoseph@deloitte.com

Cliff Mansfield
Senior Manager
Deloitte Consulting LLP
clmansfield@deloitte.com

Tom Seliga
Senior Manager
Deloitte Consulting LLP
tseliga@deloitte.com

Matt Usdin
Principal
Deloitte Consulting LLP
musdin@deloitte.com

About the Deloitte M&A Institute


The Deloitte M&A Institute is a community of clients and practitioners focused
on increasing the value derived from M&A activities, powered by Deloitte’s M&A
Services capabilities. The Institute serves as a platform to build connections,
showcase thought leadership, and accelerate experience and learning for those
involved.

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public accounting.

Copyright © 2017 Deloitte Development LLC. All rights reserved.

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