Candido Consulting Group Inc.

Insights

Insights from Candido Consulting Group

In Acquisition Mode? Make HR a Priority.

This article was originally published on TechVibes.com

In the tech world, where fast-changing businesses look to tap into new markets and lead disruption through innovation, the pace of acquisitions has been blistering.  Many have been successful but, as even some of the largest tech mergers in history have shown, these unions don’t often have happy endings. And while there can be many reasons for this – incorrect assumptions around synergies and revenue generation, for instance – more often than not it comes down to one common factor.

When in acquisition mode, due diligence is a critical first step. Yet one aspect of this, which is consistently overlooked, is in fact the lifeblood of most companies – its people.

Aside from the probable culture shock that you’ll need to work through, there are financial implications of not taking a full view of the human resource picture including liabilities, current policies and cultural fit that could cost you more than you bargained for.

So what can you do to avoid unwanted surprises? For starters, there are several areas that fall within human resources that will require close analysis. These include the cost of any current or pending obligations to the employees such as vacation, bonus and telecommuting, as well as any cultural and financial implications of making HR changes to existing policy. A thorough review of all senior management contracts will often reveal important details and entitlements that may not be discovered until it’s too late. Additionally, make sure you have a good grasp of Canadian labour law. This will be especially relevant for a US company that’s venturing into the Canadian market, as the laws between the two countries have significant differences and implications.

Common Reasons for Failure

As many as 90 per cent of mergers and acquisitions fail to achieve strategic and financial objectives, according to a 2011 Harvard Business Review article, The New M&A Playbook. The reasons are often due to HR-related factors such as incompatible cultures and uncertainty regarding the future.  More recent research from the past five years suggests this is still the case and most M&A’s fail due to people and cultural issues.  Other factors include:

·       Lack of shared vision

·       Leadership clash

·       Loss of key talent

·       Poor communication

·       Poor integration planning and poor management processes in general

The period up to and immediately after a merger or acquisition is the most critical, as this is when employees are most likely to consider their personal situation and best interests. The longer the period of uncertainty, the more attractive any alternatives become. Key employees are often targeted directly by competitors and recruiters, and losing these employees can seriously erode the value of the transaction. At the same time, ensuring a good cultural fit between the two companies is critical, yet one of the most neglected areas of analysis.  Consider if – and how– the cultures can be integrated. 

Consider your obligations

When it comes to HR policies and employment practices, many senior leaders, especially business owners, don’t know what they don’t know and this can easily get them into trouble.  For example, I have come across situations where the new business owners unexpectedly found themselves with millions of dollars in liability because they didn’t think they were responsible for vacation accrued under previous owners they wanted to eliminate a bonus plan, only to be told the plan was not discretionary, and tried to increase the work week from 37.5 to 40 hours per week, with no salary adjustment.

Employees will have signed an employment agreement with their current employer, and they are bound by those terms and conditions, and current HR policies.  The new employer is also bound by these same terms and policies, so if employees currently enjoy a more lucrative vacation allowance, higher base salaries, bonus potential, etc., these terms must be honoured. 

If you want to change the terms and conditions of employment, the employees will need to sign a new agreement, for which they must receive a financial consideration such as a salary increase or one-time bonus payment.  For this reason, it is wise to review current agreements to understand what the terms and conditions of employment are during the due diligence phase of the acquisition.  A lot of information can be gleaned from reviewing contracts and executive compensation plans but don’t stop there.  Review the policies, employee handbooks/personnel manuals, benefits packages, as well.

Doing so will also provide insight into the culture of the organization and help you understand the work environment supported by those terms and conditions, and give you a better sense of whether there is a fit.

 

 

Implications of HR changes

The implications of making changes to the existing culture can be significant.  If the employees are used to a liberal work environment (short work week, telecommuting opportunities, generous vacation policies) then they are not going to react well to changes that will eliminate these benefits, especially if they are attached to the current management group.  If these types of changes are necessary, it’s advisable to initiate a carefully staged culture change process to reduce the potential fallout.

 

Of course, HR changes also come at a financial price. For example, you’ll need to factor in severance costs for non-compliant or downsized employees, or those costs associated with having employees sign new agreements. Additionally, if employees don’t like the changes being made, morale usually suffers and this often results in a drop to productivity, which can affect the bottom line.

 

Ideally, you want to employ a methodology to assess the company culture, skills inventories and competency assessments.  A cultural scan will identify similarities and differences between values, management styles and approaches.


Lay of the land
A common mistake I see when foreign companies acquire businesses in Canada is that executives are not sufficiently aware of the labour laws, or assume they are not enforceable. In fact, the labour laws in the Canadian market regulated, either federally (government, transportation and telecommunications industries) or provincially, and have significant differences from those in the US. The laws even vary among provinces. Not understanding these can have financial liabilities and even lead to the failure of the acquisition.

 

It’s advisable to get specialized legal advice around employment and labour issues to better assess any risk areas and minimize liabilities, especially when dealing with foreign transactions. This can range from wages and terminations to non-compete agreements, union collective bargaining, immigration matters and discrimination issues.

 

As a new business owner, you want to be sure that you are purchasing something of value that will enhance the current business, but also that employees will be excited about the new company.  Ensuring both of these things takes work – and a focus on the people behind the numbers.

 

 

 

 

 

 

 

Sarah Turnbull