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Human Capital Management and

the Success or Failure of M&A

November 2010

A report prepared by CFO Research Services in collaboration with Aon Hewitt

Human Capital Management and

the Success or Failure of M&A

November 2010

A report prepared by CFO Research Services in collaboration with Aon Hewitt

Contents

Introduction 2

About this report 3

Companies seek growth and competitive 3

advantage through M&A

Full integration is the ideal end state 4

in most cases

Respondents see room for improvement in 4

human capital related tasks

HR and fi nance see value in eff ectively 6

managing the HR dimension of deals

HR and fi nance diverge on the extent of 7

HR’s participation in M&A, and on the

value of HR’s participation

Does greater HR involvement lead to 8

better M&A outcomes?

Respondents call for business focus, 10

in addition to functional perspective, in

HR’s approach to M&A

In their own words: HR and 11

fi nance executives on realizing

M&A’s full value

Sponsor’s perspective 13

© 2010 CFO PUBLISHING LLC NOVEMBER 2010 1

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2 NOVEMBER 2010 © 2010 CFO PUBLISHING LLC

Introduction

As the economy begins to show signs of recovery, companies

with cash reserves are relaxing their focus on controlling

costs and returning to growth strategies. Transaction activity

has been on the rise since mid-2009 thanks, in part, to easing

economic conditions and attractive valuations.

Despite this revived energy and momentum, few compa-

nies can aff ord a transaction that fails to meet its objectives,

particularly in an economic environment that remains

somewhat fragile and uncertain. Ample documentation

reveals human capital issues as key culprits in failed deals and

subsequent fi nancial woes. In this survey of fi nance and HR

executives, Human Capital Management and the Success or

Failure of M&A, we explored how organizations are handling

human capital issues related to transactional activity.

Th e results suggest that HR off ers unique value and guid-

ance, particularly in relationship to managing and pricing

human capital assets, which can signifi cantly contribute to a

successful pre- and post-transformational event.

Increase in M&A activity

Strong cash positions, attractive valuations, low cost of capital support increase in M&A

Number of transactions and mean value for announced, closed, or effective mergers and acquisitions worldwide. Source: Capital IQ

Tran

sact

ions

(#)

Aver

age

dolla

r vol

ume

($m

illio

ns)

2006 2007 2008 2009 2010

0

1,000

2,000

3,000

4,000

5,000

6,000

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3$0

$50

$100

$150

$200

$250

$300

The results of our research program among senior fi nance and HR executives suggest that HR offers unique value and guidance, particularly in relationship to managing and pricing human capital assets, which can signifi cantly contribute to a successful pre- and post-transformational event.


Companies seek growth

and competitive advantage

through M&AMergers and acquisitions are often viewed as a means to build

a competitive advantage. When asked why their organizations

engaged in M&A activity in the past two years, respondents

report their primary objective(s) as (see Figure 1):

Adding complementary products, brands, or service lines (59%)•

Gaining access to new markets (52%)•

Capturing market share from competitors (32%) •

Improving economies of scale (29%) •

When asked about the success of meeting their primary

objective(s), nearly two-thirds (68%) of respondents report that

their companies’ M&A transactions over the past two years have

met or exceeded their primary objective(s). Only 13% report that

recent transactions have failed to meet expectations. Eighteen

percent report that they are either not sure or it is too early to tell

whether recent transactions will meet expectations.

3%

5%

6%

11%

17%

18%

25%

29%

32%

59%

0% 20% 40% 60%

Other

Not sure/Does not apply

Respond to competitive orregulatory pressure

Vertically integrate supply chain,production, and/or distribution

Gain access to professional talent,engineering, or operating expertise

Diversify lines of business

Improve economies of scale

Capture market sharefrom competitors

Gain access to new markets

Add complementary products,brands, or service lines

Acquire proprietary technologyor operating processes

52%

Figure 1. Companies turn to M&A for growth and competitive advantage.

To the best of your knowledge, which of the following were the primary objectives of your company’s M&A transactions in the past two years?

Percentage of respondents (Note: Respondents were allowed to choose up to three items.)

About this report

In August 2010, CFO Research Services (a unit of CFO Publishing LLC) conducted a survey among senior fi nance and human resource executives at U.S. companies to examine their views on human capital management in the context of M&A.

We gathered a total of 315 survey responses: 47% are from senior fi nance executives and 53% are from senior HR ex-ecutives. Respondents work for companies in a broad range of company segments.

Annual revenue

$500M –$1B 21%

$1B–$5B 39%

$5B–$10B 18%

$10B+ 23%

Respondent title

Finance

CFO 12%

EVP or SVP of fi nance 3%

VP of fi nance 11%

Director of fi nance 10%

Treasurer 4%

Controller 7%

Human Resources

Chief human resources offi cer 4%

EVP or SVP of human resources 6%

VP of human resources 10%

Director of human resources 12%

Human resources manager 11%

Other 10%

CEO, president, or managing director 1%

Industries

Auto/industrial/manufacturing 15%

Business/professional services 11%

Chemicals/energy/utilities 10%

Financial services 11%

Healthcare/biotech 13%

Technology 14%

All others 28%

Note: Percentages may not total 100% due to rounding.

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Full integration is the ideal

end state in most cases

Respondents report that the usual outcome of most (61%) M&A

transactions is full integration, either absorption or transforma-

tion. Of those seeking full integration:

51% report that • absorption—the full integration of the

acquired company in the dominant transaction partner’s

operations—is the term that best characterizes their

companies’ usual integration practice over the past two

years.

10% report that • transformation—the full integration of

the processes, practices, and assets of each transaction

partner to form a new type of company—best describes

their companies’ approach.

Only 32% of all respondents report that limited integration—an

approach in which partners operate separately—best describes the

integration intent of their companies’ recent acquisitions. Of those,

a majority (57%) confi rm that their companies are likely to integrate

acquired businesses more closely over the next three years.

With respect to integration intent and meeting M&A objectives,

the results show that organizations that integrate acquisitions

through transformation (just 10% of all respondents) are more

likely to report that recent M&A transactions have exceeded

expectations (30%) than the organizations that report absorp-

tion (15% exceeded expectations) or limited integration (10%

exceeded expectations) as their transaction practice.

Respondents see room for

improvement in human capital

related tasks

While survey results suggest that M&A often meet or exceed

an organization’s expectations, respondents also report a

potential to do better—particularly when managing human

capital. Th is study evaluates two dimensions of human capital

management: performance on human capital related tasks

and eff ectively pricing human capital factors into deals.

Respondents were asked to evaluate their companies’

performance on a range of human capital related tasks linked

to M&A activities over the past two years. Among the top

human capital factors respondents point to as in need of

improvement are (see Figure 2):

Establishing the desired company culture (43%)•

Establishing, communicating, and measuring •

performance standards across the combined entity (38%)

Pricing human capital assets, costs, and risks into•

deals (38%)

Analysis of the research results shows that success in

managing human capital issues varies by the type of transac-

tion an organization practices (transformation, absorption, or

limited integration).

Participants whose companies are focused on transformation

are more likely to report excellent performance in most human

capital related tasks during M&A compared with organiza-

tions that focus on absorption or limited integration. For those

organizations focused on limited integration deals, results

refl ect the least amount of success and the most reported

“room for improvement.” For example:

Th irty-three percent of transformation respondents •

report that their ability to establish the desired company

culture was excellent compared with 8% of those who are

focused on limited integration and 16% of those focused

on absorption. Th irty percent of transformation respon-

dents report room for improvement compared with 51%

of limited integration respondents and 41% of absorption

respondents.

Results by industry reveal signifi cant differencesThe study results show signifi cant variances in responses across industries. For example:

The industry most challenged with establishing the • desired culture in the new organization is business/professional services (56%), and the least chal-lenged is fi nancial services (30%). When it comes to performance standards, 50% of • respondents in the auto/industrial/manufacturing in-dustry said they have room for improvement versus 26% of those in technology. And, with respect to room for improvement in the • pricing of human capital assets, costs, and risks into deals, 46% of respondents in auto/industrial/manufacturing and healthcare/biotech industries see room for improvement, but only 26% of those in technology and 27% of those in fi nancial services share this view.

For more details regarding industry-specifi c results, please see the Sponsor’s perspective on page 13.


Th irty-one percent of transformation respondents •

report that their ability to establish, communicate, and

measure performance standards across the combined

entity was excellent compared with 13% of those who

are focused on limited integration and 18% of those

focused on absorption. Th irty-one percent of trans-

formation respondents report room for improvement

compared with 49% of limited integration respondents

and 33% of absorption respondents.

When asked about the pricing of human capital assets,

respondents do not give very high performance marks.

Only 13% of transformation respondents report that their

performance on the pricing of human capital assets, costs,

and risks into deals was excellent compared with only 9%

of those that focus on limited integration and 15% who

focus on absorption. Th irty-seven percent of transforma-

tion respondents report room for improvement in this area,

compared with 44% of limited integration respondents and

34% of absorption respondents.

Most respondents report room for improvement in managing human capital programs during M&A activity.

When queried further on the topic of pricing human capital

assets, costs, and risk into deals, respondents report that the

commonly recognized fi nancial upside of cost savings through

workforce reduction—and the equally recognized downside of

the fi nancial cost of retirement obligations and other benefi ts—

are comparatively well documented and priced into deals,

especially among respondents who characterize recent deals as

transformative.

Survey results suggest a diff erent story for other important

factors, however. Th irty-three percent of all participants say that

human capital integration costs (e.g., the cost of lost productivity

and employee retention) and the value of new talent and capabili-

ties were not eff ectively priced into recent deals, especially for

limited integrations, and 25% say the same about human capital

risk (e.g., the lack of employment contracts for key employees

and collective bargaining exposure).

Figure 2. A substantial number of respondents identify room for improvement in their companies’ performance of a wide range of human capital related M&A tasks.

In your opinion, how well did your company perform the following human capital related tasks in the course of its M&A activities in the past two years?

23%

24%

26%

33%

34%

36%

38%

38%

43%

0% 20% 40% 60%

Identifying and retaining key employees

Designing and implementing compensationand benefits programs

Communicating with employees (e.g., communicationson transition timelines and decision-making rationale)

Ensuring workforce productivity and performancethrough the transition

Addressing the global aspects of workforce integration

Developing a human capital strategy for thetransaction that aligns with broader deal objectives

Pricing human capital assets, costs,and risks into the deal

Establishing, communicating, and measuringperformance standards across the combined entity

Establishing the desired company culture

Percentage of respondents identifying “room for improvement”

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HR and fi nance see value in

eff ectively managing the HR

dimension of deals

Across all HR dimensions measured, most respondents

in fi nance and HR agree that eff ectively managing the HR

dimensions of the deal contributes to their companies’ ability

to realize fi nancial value from transactions. HR executives are

more likely than their fi nance counterparts, however, to say

that eff ectively managing each of these dimensions greatly

contributes to fi nancial results. Th e diff erence in percep-

tion is especially evident in matters of national or regional

culture, staffi ng strategies, and employee engagement. In some

areas, the gap between fi nance and HR respondents is more

evident. (See Figure 3.) For example, 77% of HR respondents

say that eff ective management of employee engagement of

the combined workforce greatly contributes to their organiza-

tion’s ability to realize value from deals, compared with 67% of

fi nance respondents.

Most respondents in fi nance and HR agree that effectively managing the HR dimensions of the deal contributes to their companies’ ability to realize fi nancial value from transactions.

Figure 3. While finance and HR executives are broadly in agreement on the value of effectively managing various human capital dimensions of deals, HR respondents are slightly more likely across the board to say that effective management greatly contributes to value.

Does effective management of the following dimensions of a deal improve companies’ ability to realize the full financial value from that deal?

Effective management of…

28%

34%

48%

63%

70%

67%

78%

38%

43%

55%

68%

73%

77%

81%

0% 20% 40% 60% 80% 100%

Differences in staffing strategies (e.g., preference forinternal promotion, cross-functional teams, rotating staffing)

Differences in national or regional culture(e.g., differences in language, etiquette, custom)

Compensation and incentive plans (e.g., salaries, bonuses, long-term incentives, benefits)

Differences in company culture (e.g., sensitivityto work/life balance, compensation expectations,

thriftiness, formality)

High-performing employees throughout the organization

Employee engagement of the combined workforce

Assessment and selection of leaders

HR respondents saying that effective management greatly contributes to valueFinance respondents saying that effective management greatly contributes to value

Percentage of respondents


HR and fi nance diverge on the

extent of HR’s participation in

M&A, and on the value of HR’s

participation

With respect to HR’s participation in the deal, HR respon-

dents are substantially more likely than fi nance respondents

to say that HR participated to a great extent during each stage

of the deal: target identifi cation, due diligence, integration

planning, and change management activities. (For more on

the value of HR’s participation, see the sidebar, “Does greater

HR involvement lead to better M&A outcomes?” page 8.) Th is

gap in perception is particularly prominent in respondents’

evaluation of HR’s participation in the due diligence stage.

Forty-four percent of HR respondents say that HR partici-

pated in diligence activities to a great extent; only 14% of their

colleagues in fi nance say the same. (See Figure 4.)

When it comes to the perceived value of a greater HR contri-

bution to M&A activities, HR respondents are substantially

more likely than fi nance respondents to say that greater HR

involvement in a range of M&A activities would have led

to better deal outcomes. Th is gap is particularly prominent

with respect to M&A pre-close activities (see Figure 5):

Th irty-four percent of HR respondents say that greater •

HR involvement in target identifi cation would have led

to better outcomes, while only 7% of fi nance executives

say the same.

Similarly, 45% of HR respondents compared with 20% •

of fi nance executives say that greater HR involvement in

due diligence would have led to better outcomes.

It is also noteworthy that respondents focused on limited

integrations are more likely to report that greater HR partici-

pation would have led to better outcomes, especially at the

integration planning stage. Sixty percent of respondents who

characterize their M&A transaction as limited integration

say that greater HR participation during integration planning

would have led to better outcomes, versus 45% of absorption

respondents and 47% of transformation respondents.

HR respondents are substantially more likely than fi nance respondents to say that HR participated to a great extent in a variety of M&A activities.

Figure 4. HR executives are substantially more likely than finance executives to say that HR participated to a great extent in a variety of M&A activities—in particular, activities associated with M&A planning.

To what extent did the HR function at your company actively participate in the following activities during M&A transactions in the past two years?

Figure 5. HR respondents are substantially more likely than their counterparts in finance to say that greater HR participation in M&A-related activities would have led to better deal outcomes.

In your opinion, would greater HR involvement in each the following activities have led to better deal outcomes (i.e., fewer surprises, smoother transition, greater value), or not?

6%

14%

32%

39%

14%

44%

55%

64%

0% 20% 40% 60% 80%

Target identification

Due diligence

Integration planning

Integration andchange management

7%

20%

41%

41%

34%

45%

58%

59%

0% 20% 40% 60% 80%

Target identification

Due diligence

Integration planning

Integration andchange management

HR respondents saying that greater HR involvementwould have led to better deal outcomes

Finance respondents saying that greater HRinvolvement would have led to better deal outcomes

HR respondents saying that HR contributed “to a great extent”

Finance respondents saying that HR contributed “to a great extent”


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Does greater HR involvement lead to better M&A outcomes?

A majority of survey respondents confi rm that greater HR involvement in post-close activities would lead to better outcomes in M&A. In an effort to determine whether a positive relationship between HR’s engagement with M&A and deal outcomes is revealed elsewhere in the survey data, responses were segmented according to the contribution HR teams made throughout the M&A process and compared with reported outcomes of deals completed in the last two years.

This analysis reveals a positive and consistent rela-tionship between HR’s involvement in M&A activities and the results that companies achieve through their acquisitions. Approximately one-in-fi ve respondents whose HR teams participated to a great extent in target identifi cation, due diligence, integration planning, and change management activities affi rm that their deals have exceeded expectations. Conversely, when HR contributes very little or not at all to these activities, re-spondents are consistently more likely to say their deals have failed to meet expectations, as shown in Figure 6 (opposite). The research results also show, however, that HR is more likely to be involved in post announcement activities such as integration planning

and change management than in target identifi cation and due diligence, which occur before a deal closes.

The positive relationship between HR involvement and M&A outcomes appears in deal pricing as well, accord-ing to the survey data. Segmentation of this study’s results reveals that companies that had a substantial contribution from HR in pre-close activities—presum-ably before fi nal deal terms were settled—are more likely to have priced human capital factors into their deals effectively, as shown in Figure 7 (below).

Finally, the contribution of an HR function that is especially engaged with M&A activities is associated with higher performance on human capital related M&A tasks. Across all the stages of M&A activity—from target identifi cation and due diligence to integration planning and change management—companies with HR groups that participate in these activities to a great extent report excellent performance in human capital related M&A tasks. Examples of such tasks include develop-ing human capital strategy and new-company culture, identifying and retaining key employees, and designing compensation and benefi t programs.

Figure 7. When HR participates to a great extent in pre-close activities, human capital factors are more likely to be priced effectively into deals, say executives.

HR involvement in pre-close activities compared with the pricing of human capital factors in deals

HR participated to...

0% 20% 40% 60% 80% 100% 0% 20% 40% 60% 80% 100%

A great extent

Some extent

Very littleor not at all

Very effectively priced into the deal Somewhat effectively priced into the deal

HR participation in target identification

Human capital integration costs (e.g., cost of lost productivity, employee

retention cost)

Value of new talent and capabilities

25% 50% 11% 14%

13% 41% 28% 18%

15% 39% 38% 8%

27% 40% 23% 10%

12% 43% 29% 16%

12% 42% 36% 9%



Figure 6. Respondents who say HR participated to a great extent in M&A activities are more likely to report that recent transactions have exceeded expectations in meeting their primary objectives.

HR involvement in M&A activities versus deal outcomes

HR participated to...

9%

10%

18%

9%

12%

19%

8%

15%

21%

14%

16%

19%

41%

50%

61%

43%

54%

58%

45%

55%

62%

53%

57%

56%

22%

15%

10%

23%

12%

12%

22%

13%

7%

15%

6%

13%

28%

24%

11%

26%

22%

12%

26%

18%

10%

18%

21%

13%

0% 20% 40% 60% 80% 100%

Very little or not at all

Some extent

A great extent


Some extent

A great extent


Some extent

A great extent


Some extent

A great extent

Exceeded expectations Met expectations Failed to meet expectations Not sure/Too early to tell

Targetidentification

Duediligence

Integrationplanning

Integration and change

management

0% 20% 40% 60% 80% 100% 0% 20% 40% 60% 80% 100% 0% 20% 40% 60% 80% 100%

Not effectively priced into the deal Not sure/Does not apply

HR participation in due diligence

Cost savings through workforce reduction

Human capital risk (e.g., lack of employment contracts for key employees, collective

bargaining exposure, etc.)

Financial cost of retirement obligations, health plans, etc.

40% 42% 7%11%

29% 44% 13% 14%

18% 44% 17% 21%

28% 41% 22% 9%

16% 44% 25% 15%

8% 33% 32% 27%

52% 31% 8%8%

27% 45% 14% 14%

19% 45% 12% 24%

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Respondents call for business

focus, in addition to functional

perspective, in HR’s approach

to M&A

Finance and HR executives alike confi rm that developing

HR’s planning, leadership, and technical capabilities would

improve HR’s ability to contribute to the success of M&A:

Sixty percent of all respondents confi rm that devel-•

oping the leadership capabilities of HR executives

would greatly improve HR’s ability to contribute to M&A.

Nearly as many respondents say the same about HR’s •

ability to collaborate with line-of-business manage-

ment on organizational design (58%), their level of

business sense/deal acumen (56%), and their knowl-

edge of business processes (55%).

HR respondents are even more likely than their fi nance

counterparts to say that developing general business skills

would improve HR’s contribution to M&A. Sixty-six

percent of HR respondents say that developing the leader-

ship capabilities of HR executives would improve HR’s

contribution to M&A; 54% of fi nance respondents say the

same. (See Figure 8.)

Figure 8. HR respondents are even more likely than their finance counterparts to confirm that developing general business skills would improve HR’s contribution to M&A efforts.

In your opinion, to what extent would further developing the following capabilities improve your HR function’s ability to contribute to the success of M&A transactions?

37%

36%

35%

48%

49%

45%

54%

49%

53%

54%

57%

61%

63%

66%

66%

66%

0% 20% 40% 60% 80%

Capabilities to address globalhuman capital issues

Project planning/Project-managementcapabilities

Due diligence/Investigative capabilities

Knowledge of business process

Analytical capabilities (e.g., identification,analysis, and reporting on human capital

metrics to monitor progress)

Business sense/Deal acumen

Leadership capabilities of HR executives

Ability to collaborate with line-of-businessmanagement on organizational design

HR respondents saying that developing this skill would contribute greatly to HR’s ability to contribute to M&AFinance respondents saying that developing this skill would contribute greatly to HR’s ability to contribute to M&A



In response to a series of open-ended questions, many

fi nance executives urge their counterparts in HR to claim

a seat at the M&A table. “Get involved in the process from

day one. Push for continued involvement throughout the

process,” urges the CFO of a large wholesale/retail trade

fi rm. (It should be noted, however, that many more HR

executives call for fi nance to draw more on HR’s expertise.

For more on open-ended responses, see the sidebar, “In their

own words.”)

On the other hand, HR executives who participated in the

survey encourage their peers in fi nance to consider the

human capital dimensions of value closely when evaluating

transactions, and to call on HR for help in documenting the

full range of human capital costs—and gains—in potential

deals. “Require a business-savvy contribution from HR in

the due-diligence process—and commit to the legitimate

incorporation of [HR’s] input in cost calculations,” writes one

HR executive from a large healthcare company. “Pull HR into

deals much earlier in the process,” writes a vice president of

human resources from a large manufacturing fi rm. “HR can

help identify red fl ags and other questions that can impact

the price that you should off er. [HR can also help] highlight

things to pay attention to during due diligence and during

integration,” the vice president continues.

Many HR executives, it should be noted, caution their coun-

terparts in fi nance to favor a hardheaded view on potential

transactions, particularly when it comes to human capital

synergies. “Read the story behind the numbers—trends

and patterns, past successes or failures—[and] convert

information and data into business insights that can be

leveraged to make the buying decision,” writes a director of

human resources for a large company. “During due dili-

gence, besides the data given by the prospect, do indepen-

dent research. At all stages in the process, ask: ‘What’s the

compelling business case for the prospect to be acquired by

us? What synergies can be derived? Are they based purely on

past performance, or future potential, or both?’” the director

writes.

At the same time, however, HR executives urge their peers

in fi nance to look beyond fi nancial data as they evaluate

prospects. “In my experience, few deals are purely fi nancial,”

says a chief human resources offi cer at a large manufacturer.

“Companies make and sell things, and they use people to do

it. So getting a detailed sense of how an acquired company

has made its value, and why it is worth the price you’re

paying, will [help] you make better decisions.”

In their own words: HR and fi nance executives on realizing M&A’s full value

We asked senior fi nance and HR executives to share their advice on how to price human capital factors into deals effectively, and how to realize the full value of their com-pany’s acquisitions.

Below, we document respondents’ advice—in their own words.

Think beyond fi nance fundamentals to the “soft” costs of deals.

“Generally speaking (since every M&A is likely to be unique), valuing a target company merely on its existing fi nancials can be a grave mistake. Once acquired, the target company’s results could be signifi cantly different because of myriad reasons and should be taken into account during the valuation process.”

“Don’t underestimate the cultural aspects of an international acquisition—they could have unforeseen costs.”

“Consider the cost in productivity due to lost expertise that results from layoffs.”

“Sweat the small stuff. Seemingly benign integration decisions can have major productivity repercussions if they’re not thought through carefully. Changing programs that carry high emotional impact (T&E, benefi ts, titles, etc.) can have a bigger impact than you might imagine.”

“Be realistic in the fi nancial projections in factoring upfront productivity losses due to the disruption the deal brings within the acquired target.”

HR should get more involved early on.

“Get to the table any way you can...if not before the potential targets are identifi ed, at least early on in the process of evaluating and closing the deal.”

“HR needs to be assertive in making sure they are in on the planning from the inception of the M&A. HR plays a major role in communication and change management.”

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“Gain your place on the negotiation table by understanding the ‘hard’ benefi ts, and how the ‘soft’ aspects of the deal can be impacted by HR.”

“Take an assertive role in helping M&A leaders in measur-ing the intangible risks and liabilities to changing culture and human capital dynamics.”

“Ensure you are building the relationships necessary to be at the deal-pursuit table....In most cases, the HR implica-tions will not be deal breakers, so approach the work from the perspective of how to help the deal happen in the best way possible.”

…but HR needs to build its skill set to earn that seat.

“Think outside of your function and look at overall business need. You should be tied to the hip of the operations, business development, and fi nance teams. Integration planning should be done at due diligence.”

“Too often, we are seen as passive implementers of some-one else’s ideas. Too often, we are.”

HR leads the way through the post integration jungle.

“HR needs to see itself as a leader, not as a follower, with respect to integration of people and the cost of doing an integration.”

“Get the best HR people you have to focus on M&A support. The merger of cultures and learning how this works in the enterprise is a major undertaking after an acquisition.”

“Set clear human capital key performance indicators, linked to strategy, to be tracked post close. KPIs should be both lagging and leading indicators.”

Reward talent and revise compensation plans during integration.

“The people aspects are always key to any transaction. The key is to take the best of both companies so you don’t lose people in the process. While this sounds relatively easy, it’s hard to do on both sides.”

“Do not assume the target-company leadership has the same enthusiasm for the company post-acquisition, especially as the culture and procedures are integrated. Keeping the key people motivated and on board is crucial to achieving performance.”

“Do not part with institutional knowledge holders too soon. Until the new management is fully cross-trained, removing long-term employees who are vessels of institutional memory is very risky.” “Do a complete assessment of the leaders of the business you are acquiring.”

Communicate with employees.

“Communicate, communicate, communicate...not only with the new employees of the target company but also with legacy employees.”


Sponsor’s perspective

Human Capital Management

and the Success or Failure of M&A

Th is has been a long, cold period for global M&A activity, with

deals having free fallen from $3,383 billion in 2007 to $1,607

billion in 2009. By comparison, the dip in 2002 reached just

$1,016 billion (Source: Dealogic and Robert W. Baird & Co.

Incorporated M&A Market Analysis).

So, as the economy hints at recovery, larger organizations that

have stockpiled cash over the past several years are anxious to

capitalize on attractive valuations to jumpstart their growth

agendas. Market leaders are now moving quickly, keenly inter-

ested in how to maximize their return on investment and avoid

the common pitfalls of poorly executed transactions. Th eir

focus? Human capital.

Human Capital Management and the Success or Failure of

M&A provides insights into the organizational issues and hu-

man capital programs that have the biggest impact on M&A

success. Th e study shows that identifying and retaining key

talent, factoring human capital integration costs into the deal

model, and HR involvement in integration and change manage-

ment activities can all be correlated to better deal outcomes. It

also highlights some of the toughest challenges in M&A activity

including aligning company culture, engaging key talent, and

integrating total rewards. Moreover, it sheds new light on HR’s

key role in realizing the fi nancial value of transactions.

A comparison of HR and fi nance leaders’ responses tells us

that HR executives have not yet stepped up to own the human

capital factors that are critical to a deal. HR professionals can

add signifi cant value to the success of a transaction, beginning

with due-diligence, assessing culture, forecasting human capital

expenditures, and evaluating top talent.

Perceptions on how well HR achieves this today vary, accord-

ing to the survey. Th e results also suggest that HR executives

are expected to better understand their industries and strategic

direction and translate that understanding into actions that are

tailored to the deal. Supporting this view, a plurality of respon-

dents say that while full integration is the desired end-state,

they often start with a more limited integration. In addition,

participants that focus on limited integrations believe that

greater HR involvement during integration-related activities,

such as integration planning and change management, would

have led to better results. Moving from point A to point B

requires a slightly diff erent or more dynamic HR strategy and

programs to accommodate diff erent states of integration.

We also see that variances in responses across industries add

another dimension to the strategy involved in shaping the deal.

For example, the professional services industry shows the great-

est room for improvement when it comes to establishing cul-

ture, employee retention, and compensation and benefi t plans

for newly merged organizations. Similarly, healthcare/biotech

and manufacturing have the greatest room for improvement

when it comes to pricing human capital elements of a deal.

In summary, both fi nance and HR executives acknowledge

the importance of human capital to the success of M&A. HR’s

challenge is to seize the opportunity to own the organizational

and human capital elements of a transaction while providing

guidance and counsel to the line managers and deal profession-

als. Th is requires three critical imperatives for HR:

HR must understand the strategic rationale of the 1.

deal and translate that strategy into operational,

organizational, and human capital implications that

make the deal work.

HR must partner closely with line-of-business man-2.

agement and other functional leaders to provide a

well-integrated environment for employees in order

to retain the talent that is critical to the deal’s success.

Finally, HR must lead—providing a business focused 3.

point of view for how all human capital elements,

ranging from organizational culture to HR programs,

can be leveraged to optimize the value of the business

combination.

We believe this is HR’s time to shine through value creation and

fi nancial results in a long-anticipated, fast-paced deal environment.

For more information about this research or how Aon

Hewitt can assist with your transaction needs, please contact:

Mark Arian, EVP & Practice Leader, Corporate Transactions

Aon Hewitt; 212.441.2034; [email protected]

Mark Oshima, SVP, Corporate Transactions

Aon Hewitt; 949.608.6409; [email protected]

Kurt Ewen, VP, Corporate Transactions

Aon Hewitt; 312.381.4126, [email protected]

Human Capital Management and the Success or Failure of M&A is published by CFO Publishing LLC, 51 Sleeper Street, Boston, MA 02210. Please direct inquiries to Jane Coulter at 617-790-3211 or [email protected].

Aon Hewitt funded the research and publication of our fi ndings, and we would like to acknowledge Mark Oshima and Ken Oehler for their contributions and support.

At CFO Research Services, Sam Knox and Celina Rogers directed the research and wrote the report.

CFO Research Services is the sponsored research group within CFO Publishing LLC, which produces CFO magazine.

November 2010

Copyright © 2010 CFO Publishing LLC, which is solely responsible for its content. All rights reserved. No part of this report may be reproduced, stored in a retrieval system, or transmitted in any form, by any means, without written permission.

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