Human Capital Risk in M&a - CFERF Study - August 2012

7/27/2019 Human Capital Risk in M&a - CFERF Study - August 2012

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HUMAN CAPITAL

RISK IN MERGERS

AND ACQUISITIONS


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HUMAN CAPITAL RISK IN MERGERS AND ACQUISITIONS: 2012

ACKNOWLEDGEMENTSWe grateully acknowledge the eorts o our survey respondents and our orum

participants who took valuable time away rom their day jobs to participate in

this work. We are particularly grateul to our research partner, Towers Watson,

without whom this study would not have been possible.

Christian Bellavance

Vice President, Research and Communications

Financial Executives International Canada

Copyright 2012 by Canadian Financial Executives Research Foundation (CFERF).

No part o this publication may be reproduced, stored in a retrieval system or transmitted

in any orm or by any means, electronic, mechanical, photocopying, recording or

otherwise, without the prior permission o the publisher.

This report is designed to provide accurate inormation on the general subject

matter covered. This publication is provided with the understanding that the author

and publisher shall have no liability or any errors, inaccuracies, or omissions o this

publication and, by this publication, the author and publisher are not engaged in

rendering consulting advice or other proessional service to the recipient with regard

to any specic matter. In the event that consulting or other expert assistance is required

with regard to any specic matter, the services o qualied proessionals should be

sought.

First published in 2012 by CFERF.

1201-170 University Ave.

Toronto, ON

M5H 3B3

ISBN# 978-1-927568-00-2


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CONTENTS

Executive summary / 2

Research methodology and demographics / 5

M&A processes and governance / 6

Due diligence phase / 13

Planning phase /16Implementation phase / 21

Conclusion / 27

Appendix A: Demographics / 29

Appendix B: Forum participants / 32


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EXECUTIVE SUMMARYMost Canadian senior nance executives who participated in a recent survey on mergers

and acquisitions say their recent M&A transactions were at least somewhat positive, but

only a minority characterize those transactions as true winners.

Only one out o ve executives who had been involved in mergers or acquisitions during

the past ve years, and who responded to a survey by the Canadian Financial Executives

Research Foundation (CFERF), said their recent transactions were very successul. This

stands in contrast to hal the respondents, who were more circumspect, stating that

overall, their recent transactions were only airly successul. (The remainder said their

transactions were either not very or not at all successul, or they did not know.)

Although the judgement o the success o the transactions is sel-reported by the

nancial executives, the survey respondents based their answers on the metrics

they used to determine the success o their transactions. Seven out o 10 measured

revenue growth, and three out o ve measured both prot margin growth and

specic synergies other than cost reduction. Nearly hal included the retention o key

talent in their metrics. Thereore, the companies rated their past transactions using

quantitative data.

The study also identied a number o key practices used by the most successul

companies that organizations may want to consider when embarking upon an

M&A project.

Although only a minority o respondents said their recent transactions were very

successul, this did not seem to deter survey participants rom uture attempts. The

vast majority (more than 80%) o survey participants said they were at least somewhat

likely to do another M&A in the next 24 months. Thereore, the strategies used by the

most successul companies are likely to be o interest to all to better the chances o

organizations reaching their intended goals. The most successul companies will also be

interested to see what theyre doing right.


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This study, sponsored by Towers Watson, attempts to pinpoint and highlight what

these highly successul companies did dierently in their M&As rom a human capital

standpoint. What methods, practices, processes or procedures did they use during due

diligence, pre-deal planning and later integration o sta? Both an online survey and an

executive round table research orum were used to collect data and insights on human

capital risk in M&A rom CFOs and other senior nance executives.

The research ound that most companies with a recent history o very successul

transactions shared a set o specic strategies that were dierent rom other respondents.

1. Very successul companies used these M&A processes and governance policies:

Identied integration managers

Communicated approval authority early in the deal process Updated periodically their internal M&A processes and tools

2. During the due diligence review o human capital matters, very successul

companies:

Established a timeline o events

Sought out specic human capital related synergies

Had a summary description o their own cultural attributes Established stang needs and a selection process

Had pre-determined opening positions on how employee programs and policies

would be integrated

3. During the integration planning stage pre close, beore Day One, very successul

companies:

Put a process in place to monitor employee attitude and engagement

Had an integration plan template available beore Day One (date o deal closure)

Had a plan in place to help employees cope with changes

Created a planning template or process to address a list o integration issues

post closing

EXECUTIVE SUMMARY


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4. During the implementation stage Day One and beyond, very successul

companies:

Improved access to learning and development opportunities or their employees

Used communication plans and employee surveys to address cultural dierences

Had mentoring programs in place

Were less impacted by the loss o key talent or executives Used tactics such as requent communication rom leadership to boost employee

productivity

Human capital risk stands out as an area that requires attention when an organization

enters a period o transition and a mood o uncertainty emerges amongst sta. While

it may seem that employees at an acquired company, or example, would eel more

uncertain than sta rom the acquiring organization, workers rom the latter are notimmune to apprehension about how the transition will aect them. Companies must

thereore be aware o a myriad o potential human capital risks beore even entering a

due diligence process.

Based on the strategies outlined above, it appears that the companies which were most

diligent about planning, using tools such as timelines and planning templates, well

beore the integration stage, will be best positioned or a successul M&A. Its thereoreclear that an early assessment o key actors including issues such as corporate culture,

talent retention, harmonization o compensation, benets and other programs must

be undertaken during the due diligence stage, not ater Day One.


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RESEARCH METHODOLOGY AND DEMOGRAPHICSHuman capital risk in M&A 2012 was prepared by CFERF and sponsored by Towers

Watson. It comprises the results o an online survey o executives, which was conducted

between February 8 and March 23 o 2012, and was completed by 78 respondents. 72%

o respondents worked in nance, while 10% worked in HR, 8% were CEO or COOs, and

the rest worked in other departments.

O the survey participants, 85% were involved in an M&A in the past ve years, and 15%

were not. Nearly hal o all participants had made three or more acquisitions in the last

ve years. More than eight in 10 said their company was either somewhat or extremely

likely to make an acquisition in the next two years. For more demographic inormation,

please see Appendix A.

The results o the online survey were complemented by insights obtained during anexecutive research orum held in Toronto on March 7, 2012.

RESEARCH METHODOLOGY AND DEMOGRAPHICS


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M&A PROCESSES AND GOVERNANCEHUMAN CAPITAL RISKS

Diering leadership styles emerged as the most signicant human capital risk aecting

the value o transactions. Eight in 10 respondents identied this issue as a leading actor

aecting value (Chart 3). The companies with the best track record o successul M&As

were most likely to cite leadership style and views as actors aecting the value o their

transactions.

Diering leadership styles: diering opinions

We dont buy egos. Egos are expensive. Theyre dicult to coddle. Its all about how

they built the business 20 years ago. And most o them are on earn outs anyway, and theyre

hal asleep on their way out, and they are already thinking about their second career. When

we make acquisitions, we make sure the leaders have stars underneath them, and we go

right to them. We nd that entrepreneurs that want to go, tend to do succession planning.

We keep the people that do the work; the people that have attachments to clients.

Derek Petridis VP Finance, Shikatani Lacroix Brandesign

An acquired company

headed up by a ounder

or entrepreneur with a

signicantly dierent

leadership style rom

the buyer appears to

present a challenge. I

the acquirer wants to

retain the leader or his

or her knowledge o

the business, then the acquiring company must work to accommodate and integrate

the dierent leadership style. I the ounders knowledge is not critical to the uture othe integrated company, the survey results and the insight gathered at the executive

roundtable indicate that the leader o the acquired entity should be transitioned out.

Even i six in 10 survey respondents indicated that the loss o key executive talent

was a major actor aecting the value o their recent transactions, it appears that the

departure o a leader doesnt necessarily have a negative impact on the retention o

key executives. For example, the most successul companies in an M&A were least likelyto be impacted by the loss o key talent or executives, indicating that those companies

worked to identiy and retain key

executives early in the process.

(See the due diligence section o

this report.)

Theres a constant over-emphasis on how important some individuals might be

rom a knowledge base and its always overestimated. I theyre not going to be

part o your strategy or the next ve years, they need to go as quickly as possible.

Laurie Tugman Former Chie Executive Ocer, Marsulex Inc.


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M&A PROCESSES AND GOVERNANCE

Unless they are at the age where they really want to go play gol,

entrepreneurs sit until their non-compete clause is over and very oten start anew business in competition with the one they sold. So you might as well get

rid o them early on, so that they nd some other non-competing business to

do versus starting the exact same one when the non-compete is over.

Amit Loomba Director & Team Leader, Commercial Banking, CIBC

signicant actors aecting value, including cultural dierences (cited by 75%o survey respondents) and dierences in compensation levels (43%). Several executives

observed that although there may be additional costs to incur harmonization such as

benets and IT systems, its important that these components be addressed quickly to

create a successul, cohesive unit.

The study ound that

the problems with

integrating sta were

also signicant or very

Compensation and benefts

Theres a cost to integration. There are all sorts o costs that youve got to incur and theres a resistance to paying or these,

whether its a change in the accounting system or the benets plan. The human element, the impact on strategy and

culture, or example, are way underestimated in terms o why these elements need to be addressed as quickly as possible.


38%

Don't know/

too early to tell

Not at all successful

Not very successful

Fairly successful

Very successful19%

50%

12%

15%4%CHART 1: BASED ON

THOSE METRICS, HOW

SUCCESSFUL HAVE

YOUR TRANSACTIONS

BEEN OVER THE LAST

FIVE YEARS?


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For some companies, its important to keep the ounder as long as possible, even i just

or a transition period, to reduce the risk o loss o corporate knowledge and to maintain

continuity in leadership. Ive always worked in companies with strong entrepreneurial

leaders, notes Bob Rollwagen. And dealing with this leadership style was a big issue.

The rest o it can generally come in hand ater that. We never lost a ounder o an

acquired company because our ocus was: We need to get this guy onboard. We canunderstand his style. We need to gure out where hes going to t into our leadership

Cultural dierences

Even over short geographical distances, integration can be challenging. With a previous company, we were based in

Vancouver and the acquired entity was located on Vancouver Island where it had three or our oces. Integrating the

diferent cultures and processes was dicult. Youd think a small body o water wouldnt make such a diference, but itended up being signicantly challenging. Id say it was an eye opener or us.

Brad Cruickshank Chie Financial Ocer, Dueck GM

What we ound with several acquisitions that

some people dont understand acceptable conduct,especially i youre dealing with government contracts.

We got burned once. Unortunately its

easier to get a business license than it

is to get a dog license. You dont know

who the heck youre dealing with

sometimes. So you just have to be

Very thorough in your due diligence.

Frank Hunaus Chie Financial

Ocer, Ebco Metal Finishing LP

Sometimes, people leave because theyre very demoralized and dont

eel engaged anymore. I you havent kept them inormed and part o

the process, youve likely lost their engagement and productivity. This

translates into a huge risk. One needs to ocus not only on the people thatyou want rom the acquired company, but also the key talent you want

to retain rom within your own organization. It has been my experience,

that the lack o attention, particularly, to the all-stars within your own

company, has been one o the top reasons why M&As arent successul.

Vicki Nishimura VP Corporate Controller, Prism Medical Ltd

In my experience the area where we had the most diculty was

with the culture. You agree on certain things, identiy key people,

but i the cultural integration is not there, it can be very dicult.

Carl Gauvreau President at Gauco Inc. and ormer CFO,Hartco Inc.


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METRICS: DETERMINING SUCCESS

O the survey participants, 85% were involved in an M&A in the past ve years, and

15% were not. Most survey respondents painted at least a somewhat positive picture

o their recent transactions. The executives surveyed said the transactions were either

airly successul (50%) or very

successul (19%). 16% were

not very successul, not at allsuccessul. The remaining

companies said they did not

know or it was too early to tell.

See Chart 2.

About one-third o survey respondents measure success metrics six to 12 months ater

the close o transaction, while another one third do this 12 to 24 months ater the close.Very ew (8%) begin beore six months have passed and similarly, very ew (5%) wait 36

months or more.

The most common metric used to determine success is revenue growth (69%), ollowed

by the achievement o specic synergies other than cost reductions (63%), ollowed by

prot margin growth (62%). See Chart 3.

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I its not working out, we want to hear it. We want eedback,

because we have a people business. We want them to tell uswhere we ailed.


team, and then really ocus on that, because he will then infuence substantially all the

other aspects.

But other nance executives said that they actually encouraged the departures o the

ounders or CEOs at the companies they acquired, and this or a number o reasons. For

instance, they didnt want to go through the trouble o coddling the entrepreneurial

ego, they view ounders as expensive to keep around, and eel that these individuals

might not be as productive and engaged as they were when they owned the company.

Employee engagement or productivity was seen by 67% o respondents as a signicant

or very signicant actor aecting the value o transactions.


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Despite the mixed results with regards to past success, the vast majority (more than

80%) o survey participants were optimistic about uture transactions, stating they were

at least somewhat likely to do another M&A in the next 24 months.

Finance is oten at the helm when it comes to taking the lead on the M&A process.

Nearly one-third o respondents said nance had primary responsibility, while 38% said

it was the CEO/COO. However, HR was more likely to take the lead on assessing and

mitigating the human capital risks (37% mentioned HR rst, compared to 26% or the

CEO/COO). Only 18% said nance took the lead on assessing and mitigating human

capital risks (Chart 3).

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

Other risks

Dierences in pension

and benet programs

Labour relation situation

Loss of key talent

or executive

Dierent alignment of

compensation programs

Inappropriate skills set ofmanagers or key employees

Employee engagement

or productivity

Cultural dierence

The leadership

style or views

100%

79%

83%

80%

82%

66%

74%

72%

50%

50%

54%

47%

48%

40%

42%

33%

79%

58%

27%

23%33%

20%

29%

8%

8%

13%

27%

Not very successful or not

at all successful companies

Fairly successful

companies

Very successful

companies

CHART 2: HOW DIDTHE FOLLOWING

HUMAN CAPITAL

RISKS IMPACT

THE VALUE OF

YOUR RECENT

TRANSACTIONS?


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0% 10% 20% 30% 40% 50% 60% 70%

Other

No formal metrics used

Employee productivity

Employee engagement levels

Share price increase

Amount of cost reduction

Retention of key talent

Prot margin growth

Achievement of specic synergies

other than cost reduction

Revenue growth 69%

63%

62%

45%

44%

26%

26%

21%

6%

8%

CHART 3: WHAT

METRICS ARE

TYPICALLY USED

TO DETERMINE

THE OVERALL

SUCCESS OF YOUR

TRANSACTIONS?

At Quebecor World, oten the acquisition was structured at a higher level, and there was no documented

consideration given to human resources. There was a lot o diligence on contracts, on nance, but not enough

on human capital. People in charge o integration had to resolve all the issues. Finance was responsible or

identiying risk and providing valuation. Many times the human capital risk is not well identied and actored

in those evaluations. I there is a risk, it should be identied by nance so it is properly taken care o in the

valuation model and also in the integration plan.

Carl Gauvreau Principal, Gauco Inc and ormer CFO, Hartco Inc.


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HR was cited as being primarily responsible or assessing and mitigating the human

capital risks in the context o M&A at 37% o companies. Only one in ve companies

said nance bore the primary responsibility. According to one orum participant,

however, its not important which department per se is in charge, as long as one senior

person is overseeing the key details and managing the various moving parts. You

need someone in there that can bring all the pieces together, whether that is your

integration team or whether its the Chie Financial Ocer, notes Mark Donaghy. It

doesnt really matter, as long as somebody has recognized that there is a potential

issue out there and somebody has to bring it together. It can be any o the key leaders,

but somebody better take responsibility or it.

In our organization, once the deal is nal, an integration team is put together which would include HR andoperations. The key actor with respect to human capital in our organization is operations. 90% o our workorce

is the ront line employees. Operations takes over the integration, as well as building the relationship with human

capital, in hand with HR. Our operations across the country are unionized, as a result we are likely to encounter a

situation where a decision must be made based on the scope and terms o the agreement in regard to which union

will represent the membership. HR has a key role, but overall, its operations which oversees the integration.

Hani Ladha VP Financial Planning & Operations Support, G4S Cash Services (Canada) Ltd.

The person responsible is the CEO or the person reporting to him or

the project. And generally, the measurement done aterwards was:Have we accomplished the business reason or the acquisition?

Bob Rollwagen Consultant and retired CFO, Metro Waste

Paper Recovery

Its ultimately the deal guy that bears the primary responsibility. I thats the CEO, then its usually the CEO with thehelp o HR, or whatever experts hes got with him on the team. Its usually nance thats running the overall process, but

ultimately, I havent seen nance as necessarily the deal person. Ultimately its the CEO thats going to own that to make

sure that the people side o it is dealt with, and its going to t in with the overall HR philosophies and policies.

Laurie Tugman Former CEO, Marsulex Inc.


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DUE DILIGENCE PHASE

Companies which reported that their recent M&A transactions were very successul led

other companies in three areas when it came to due diligence review o human capital

matters. The vast majority (87%) o the very successul companies reported having

a timeline o events available prior to the due diligence review. Fewer than six in 10

companies in the less successul categories reported having timelines. See Chart 4.

DUE DILIGENCE PHASE

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

Summary of internal capabilities and

geographical reach for labour relations

List of documents to review and data to

request for each country of interest

Summary of internal capabilities

and geographical reach for

employee communication

Inventory of human capital

issues related to asset purchase

vs. stock purchase deals

Side-by-side comparison table

pre-populated with the description

of your existing programs

Standard terms for sales and purchase

agreement related to employee programs

Timeline of events

Summary description of your own

organization's cultural attributes

Pre-determined opening position

on how employee programs

and policies will be integrated

Specic human capital related

issues or synergies to look for

Inventory of programs, policies

and systems to be assessed



Fairly successful

companies

Very successful

companies

80%

79%67%

80%

69%

58%

60%

44%

17%

60%

44%

8%

59%

87%

58%

53%

38%33%

53%

31%

25%

47%

59%

42%

47%

38%

33%

33%59%

50%

27%

26%17%

CHART 4: PRE-DEAL

PREPARATION: WHICH

OF THE FOLLOWING

ITEMS ARE AVAILABLE

PRIOR TO THE DUEDILIGENCE REVIEW IN

RESPECT OF HUMAN

CAPITAL MATTERS?


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Eight in 10 successul companies reported having specic human capital related issues

or synergies to look or, compared with seven in 10 airly successul companies, and only

six in 10 unsuccessul companies.

Finally, very successul companies reported they had already prepared prior to the

due diligence stage an inventory o programs, policies and systems to be assessed.

About the same number o airly successul companies reported having this, but ewer(67%) unsuccessul companies.

It was interesting to note that when it came to reviewing a checklist o items during

the due diligence process, 80% o the least successul companies said they looked at

opportunities or cost reduction, while only 67% o the very successul companies did

this. Successul companies were more likely to review individual employment contracts

(80%) and legal and statutory constraints to make changes (80%).Another important due diligence activity which was identied was the process o

identiying key executives to retain, an activity cited by 87% o very successul and airly

successul companies. In comparison, only 58% o the least successul did this. Similarly,

very successul and airly successul companies identied key talent to retain (87% and

85%, respectively) while only 58% o less successul companies did this. Establishing a

retention strategy was seen as important by 80% o very successul companies, while

only 67% o airly successul and least successul companies established one. Finally,

eight in 10 very successul companies established a stang needs and selection process

during the due diligence review, while only 56% o airly successul companies and 25%

o the least successul companies did this.

When investigating cultural compatibility during the due diligence phase, it can be a

useul idea to ask the seller to initiate an employee cultural survey. The results can be

sent directly to the buyer or the representative, allowing the buyer to assess the culturalt and the cultural risks within the organization. I the buyer is not able to get the

employees on board immediately ater the transaction, then it may pose what orum

participant Howard Johnson, managing director o Veracap Corporate Finance Ltd.,

termed a transition risk to the organization. Such a survey benets buyers concerned

about cultural mist as a cause o poor integration.


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According to Johnson, its incumbent on the buyer to encourage the seller to acilitate

cultural due diligence. The savvy buyer is going to ask: How will you help us get comort

around cultural integration? Oten times that will encourage the seller, who wants to

receive a better price and better terms, to bring their key employees to meetings and

make them part o the sale process, Johnson said. Otherwise, the seller knows theyre

not going to get a deal done. Johnson suggested buyers may choose to mitigate

employee risk by not paying ull value

or the target company up ront, and

structuring a deal so that part o it is

contingent on uture results. In some

cases, buyers might allocate a portion

o the purchase price directly to key

employees as a pay to stay bonus.

DUE DILIGENCE PHASE

The guys making the decision, the CEO, the team

leader, the VP Finance, they need to understand the

culture theyre working with. And they need to have

that down solid when they put it in their plan.

Bob Rollwagen Consultant and retired CFO,

Metro Waste Paper Recovery

We would initially meet with the key person, and nd out who the

people are reporting to them. Once weve identied the individuals, we

would just try to have discussions. They may not necessarily want the

less senior staf to know that theres a possibility o acquisition, so its

hard getting access to those individuals.

Oliver Hls Vice President and Controller, Corporate

Accounting, Ameresco Canada Inc.


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PLANNING PHASE

Organization is important to a successul integration. All very successul respondents

(100%) said they had a planning template or process available to address a list o issues

post closing. This compared to 87% o airly successul companies and only 58% o the

companies which reported their most recent M&A transactions were the least successul.

See Chart 5.

The majority o respondents also said they had a communication strategy process ortemplate available, geared toward the integration period (87% o both very successul

and airly successul companies). In comparison, only 42% o the least successul

companies had a communication strategy process or template available beore Day One.

The least successul companies also appeared to be lagging when it came to having an

integration plan template while 80% o companies with very successul M&As reported

having one available beore Day One, and 69% o those in the airly successul categoryhad one, only 42% o the companies with the least successul M&A transactions reported

having one.

Plans to helping employees cope with change were included in the integration plans

o most companies who had track records o success in M&As. It was mentioned less

requently by companies who had a history o transactions deemed airly successul

(54%) and by only 42% o companies with the least successul track records in M&As.

Unortunately most organizations leave integration planning as the last step in their M&A process, whereas it should

be one o the rst things considered. When a buyer rst looks at a target company, they should ask two questions: (1) is

it a strategic t; and (2) can it be integrated efectively? I the answer to either o those questions is no, the buyer should

walk away. When it comes to integration planning, the best practices Ive seen are those companies that even beore

the deal closes, have developed a comprehensive 100 day plan which specically addresses in onerous detail all o the

initiatives that have to be taken. A lot o those have to do with people. Whos going to talk to the employees; what is thecommunication strategy. Its not just the employees o the target company, its also the buyers existing employees, many

o whom may be sensitive or nervous. I theres going to be some transitional pain in terms o layofs or undamental

changes, its best to address those early, and treat people airly. That will give the buyer a better chance o successul

integration, as opposed to trying to cover it up and thereore sufering what usually are unintended consequences.

Howard Johnson Managing Director, Veracap Corporate Finance Limited


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PLANNING PHASE

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

Change management plan

template or activities

Preferred approach to renew

external contracts on Day 1

Preferred approach to ensure

payroll is active on Day 1

Employee announcement

process to acquired employees

Integration plan template

Employee announcement process

to your existing employees

Communication strategy

over integration period

List of issues to address post-closing



Fairly successful

companies

Very successful

companies

100%

87%

58%

87%

42%

80%

85%

75%

87%

80%

69%

42%

80%

77%

67%

53%

44%

33%

47%

33%

17%

40%

46%

25%

CHART 5: BEFORE DAY ONE: WHICH OF THE FOLLOWING PLANNING

TEMPLATES OR PROCESSES ARE AVAILABLE BEFORE CLOSING INRESPECT OF HUMAN CAPITAL MATTERS?

Ive been in a very closed-of position o observation o a large public company that had a strong

personality and three acquisitions ailed. And they ound out up to three years aterwards. It wasa result o their culture just not allowing the other companys culture to work.

Bob Rollwagen Consultant and retired CFO, Metro Waste Paper Recovery


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Successul companies do several things dierently when it comes to making decisions

around stang and preparing their M&A team responsible or human capital. For

instance, integration managers are identied in 73% o companies with very successul

transactions, but this was done by only 42% o organizations with transactions deemed

not very or not at all successul. Similarly, approval authority and approval thresholds

are communicated early in the deal process in six in 10 companies with very successul

transactions, compared to one in three o the least successul companies. See Chart 6

or comparisons.

0% 10% 20% 30% 40% 50% 60% 70% 80%

Contingency plans for team

members' day jobs are developed

Periodic education/refresh sessions are

provided to team members (at least onesession was provided over the last 12 months)

Approval authority and approval thresholds are

communicated early in the deal process

Roles and responsibilities that each teammember will play are clearly articulated

Teams are staed based on size

and incidence of potential deals

Decision makers on human

capital matters are identied

Integration managers are identied

73%

64%

42%

67%

79%

60%

60%

58%

38%

42%

62%

58%

60%

33%

15%

27%

33%

51%

7%

21%



Fairly successful

companies

Very successful

companies

CHART 6: REGARDING

GOVERNANCE AND

STAFFING OF YOUR M&A

TEAM RESPONSIBLE FORHUMAN CAPITAL RISKS,

SELECT ALL ACTIVITIES

THAT APPLY TO YOUR

ORGANIZATION:


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In addition, 73% o very successul companies said the M&A team responsible or human

capital risks used basic project management processes and planning templates in their

transactions, compared to 67% or companies with airly successul or transactions and

only 45% or those that were least successul. See Chart 15.

PLANNING PHASE

0% 10% 20% 30% 40% 50% 60% 70% 80%

Toolkit describing the objective,

processes, reporting templates and

tools at each phase of the deal

eRoom or equivalent project

collaboration software

Formal synergy monitoring process

applicable to human capital

Pre-dened engagement rules

with established network

of external providers

Value drivers or synergies related

to human capital matters

Post-mortem assessment to

review successes, challenges and

opportunities for improvement

Periodic updates of internal

processes and tools

Basic project management processes

and planning template

73%

67%

55%

73%56%

55%

67%

56%

18%

33%

41%

13%

18%

27%

13%

28%

27%

45%

7%

21%

27%

7%

18%

18%



Fairly successful

companies

Very successful

companies

CHART 7: WHICH OF THE FOLLOWING PROJECT MANAGEMENTPROCESSES AND TOOLS ARE AVAILABLE TO YOUR M&A TEAM

RESPONSIBLE FOR HUMAN CAPITAL RISKS?


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The companies with a history o success in M&As were more likely to have a Project

Management Oce identiy human capital risks and plan mitigation strategies. Similarly

the most successul companies were more likely to ensure deliverables were on track or

completion by the intended due date. The most successul companies were also more

likely to have a PMO which dened and managed the scope o the project. See Chart 8.

Integration

Youve got to communicate and measure productivity. You want employee programs harmonized in the

rst ew months. As ar as employees are concerned, it should be known Day One what youre going to do,

and youre going to do it as quickly as possible. Culture takes a lot longer than anybody ever thinks.

Laurie Tugman Former CEO, Marsulex Inc.

CHART 8: PROJECT MANAGEMENT OFFICE (PMO): SELECT ALL THAT APPLY

IN RESPECT OF YOUR PMO RESPONSIBLE FOR HUMAN CAPITAL MATTERS:

Project Management Oce (PMO): Select all that apply in

respect o your PMO responsible or human capital matters:

Identiy risks and plan mitigationEnsure the deliverables are on track or completion by intended due date

Have representation at critical decision-making sessions

Dene and manage the project scope

Perorm other activities not listed above

Very

successul*

Fairly

successul*

Not very or not

at all successul*

80%80%

70%

70%

10%

76%67%

70%

61%

30%

60%60%

70%

50%

30%


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IMPLEMENTATION PHASE

Companies with a history o greatest success in M&As were more likely to review or

harmonize benets programs in the rst two years ater closing. 93% o companies

which were very successul in past transactions did this, compared to only 58% o

companies with the least success in past transactions.


Two merger stories

Our company merged with another company. Our company was doing extremely well in the

market and had very generous benets programs and being the leader within the merger we

opted to provide them with the same benets that we had which were as good as theirs. Ater a

thorough due diligence o the business and their compensation/benets plan, we concluded we

could migrate them to our plans at a better price. We had all our group benets at 100% coverage

on general dental and health programs and large lietime coverage or items like crowns andbraces. They also had a RRSP employer sponsored plan. Again we had the better plan. We merged

the two. We roze salaries until certain employees lined up with other employees. We continued

to ofer generous benets and we did not have a lot o downsizing and as the business was

slowly being restructured, the merged employees looked at it as an opportunity to rene their

skills. As most o this merger was led by nance, which was also responsible or HR, benets and

administration, I can say the merging o the two cultures was done smoothly.

In a merger o three companies, the smaller companies were charged or shared-services

larger ees than they used to pay or payroll processing, benets administration, retirement plan

administration, IT services. They paid substantially more or less leading to very disgruntled

employees. The mandate was to do the reorganization at all costs but people were not

considered. On a long-term basis this approach has signicantly afected the success o the North

American companies as it is said that the success o companies is mostly attributable to howengaged and happy employees are.

Interviews with senior fnancial executives


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Using a communication plan and employee survey to assess cultural dierences were

strategies more likely to be used by companies with the most success in M&As. For

instance, 79% o very successul companies used a communication plan, and 64% used

an employee survey, compared to only 45% and 55% respectively, o the least successul

companies. See Chart 9.

0% 10% 20% 30% 40% 50% 60% 70% 80%

Executive survey

Change management plan

Managers training

Focus group meetings

Employee survey

Communication plan

Not very successful or notat all successful companies

Fairly successfulcompanies

Very successfulcompanies

79%

69%

45%

64%

50%55%

57%

47%

27%

50%

36%

36%

29%

33%

27%

14%

28%

18%

CHART 9: CULTURE:

WHICH OF THE

FOLLOWING

APPROACHES DO

YOU USE TO ASSESS

AND ADDRESS

CULTURAL

DIFFERENCES

DURING THE

INTEGRATION

PERIOD?



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0% 10% 20% 30% 40% 50% 60% 70%

Other activities

Stretch assignments

Relocation opportunities

Train managers

Retention bonus

Promotions

Improve access to learning and

development opportunities

Use of mentoring programs

Clarify career paths



Fairly successful

companies

Very successful

companies

60%

60%

53%

40%

40%

40%

20%

20%

7%

59%

33%

31%

21%

64%

26%

31%

33%

9%0%

9%

27%

45%

18%

27%

45%

55%

27%

CHART 10: TALENT RETENTION: WHAT ACTIONS ARE USUALLY

IMPLEMENTED TO ADDRESS KEY TALENT OR EXECUTIVE

RETENTION DURING THE INTEGRATION PERIOD?




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Talent retention strategies such as clariying career paths, mentoring programs and

improving access to learning and development opportunities were more likely to be

used by companies with the highest success rates in previous M&As. (See Chart 10)

For instance, 60% o very successul companies used mentoring programs, while only

18% o the least successul companies did so. Vicki Nishimura, o Prism Medical, has

used incentives such as retention and stay bonuses to keep key employees during past

transactions. It is essential to keep the business operating and to do so, we have learned

that unless you have the engagement and more importantly, the trust o employees,

then no matter what you do, youre not going to have a successul integration. Eective

communication helps promotes this trust. Its listening to their concerns, responding

and monitoring them, which will gain their trust, she said, adding a combination o

various measurement and perormance tools were used to track employee engagement

and productivity.

According to Derek Petridis, o Shikatani Lacroix Brandesign, the key incentive or most

employees is nancial, so the company oered prot sharing to new employees post-

acquisition. All this other stu is great, but at the end o the day, people go to work or

money, he said.

During the integration

period, requent

communication rom

leadership was a tactic

commonly used by

companies with a very successul track record in M&A (93% o very successul companies,

compared to 74% o airly successul ones, and only 58% o not very successul

companies). See Chart 11. One orum participant wondered how to communicate when

sta retention decisions have not yet been made. How do you keep the communication

transparent when post acquisition you do have some secrecy about who to keep, who

to let go, and how to avoid creating a dicult atmosphere or the rst 100 days. Most

o the time I think people are let to survive on their own and they dont understand

whats going on. They are trying to survive and a lot were just leaving beore the buyers

Put yoursel in the seat o the employees and ask yoursel the question: Whats in

it or them? Whether its cash or something else, thats really the core question.

Peter Lane Former SVP Finance and Administration at Canadian Tire

Corporation Retail Division



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or people o the other company even picked out who are the key people. Other orum

participants agreed it was best to communicate with sta up ront as quickly as possible.

CHART 11:

EMPLOYEE

PRODUCTIVITY:WHAT ACTIONS

ARE USUALLY

IMPLEMENTED

TO IMPROVE

EMPLOYEE

ENGAGEMENT

AND

PRODUCTIVITY

DURING THE

INTEGRATION

PERIOD?

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

Other talent related activities

Review disability and absence data tounderstand cause and develop solution

Improve well being programs

Clarify career paths

Improve access to learning and

development opportunities

Review pension and

benet programs

Use of team building techniques

Use of mentoring programs

Train managers

Ongoing communication on the

vision of the merged organization

Collect employee feedback

on a periodic basis

Social activities

Review compensation programs

Frequent communication

from leadership



Fairly successful

companies

Very successful

companies

93%

74%58%

73%

54%67%

73%

51%25%

67%

67%

60%

60%

47%

47%

33%

33%

27%

13%

7%

0%

0%0%

56%

51%

38%

33%

49%33%

33%

25%

33%

8% 41%

26%25%

28%

21%17%

15%8%

0%



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CommunicationAccountabilities amongst all the people that are going to be

going in to work on the integration o the company should

be clearly dened. Unintentional misinormation can be very

damaging. I youre in there and youre working on something

on IT and somebodys asking you about something thats HR

related, dont assume. Dont guess. Say heres the person totalk to in HR, and perhaps have an employee hotline.

Cli Truax Director, Financial Services & Regulatory

Aairs, Hydro One Telecom Inc.

Talent retention

There are two types o buyers the direct competitor, which

oten employs a slash and burn approach, and assesses risk rom

the perspective o employee lawsuits. And then you have the

platorm buyer, which is interested in generating incremental

revenue by leveraging the target companys product and service

oferings, employees and customers. The risk to the platorm

buyer is erosion o intangible value, or goodwill. Intangibles suchas brand names or proprietary technology tend to remain intact.

The greater risk relates to employees and customers, which are

inextricably intertwined. In a privately-held business, goodwill

oten resides in the owner. I they receive a large payment at

closing, they might leave soon ater or become disengaged. In

some cases there are a handul o key employees who have strongcustomer connections or technical knowledge. The buyer needs to

identiy key people, relationships, and knowledge that would be

dicult to replace, particularly i they let or a competitor.

Howard Johnson Managing Director, Veracap Corporate

Finance Limited

Talent retention

Talent retention is no diferent than beore acquisition. I

you had low turnover because youve got good HR programs

and policies, and you do all o these things, youll have low

turnover post-acquisition, because you should have a good

reputation. Whats your organizations brand when it comesto people? Are you known as a place where people want to

work? Thats going to be known Day One, and youre not

going to change that with an acquisition.

Laurie Tugman Former CEO, Marsulex

Culture

We did an acquisition in Quebec. There were

cultural and language barriers. So you

try to have open communication until

the employees rom Quebec phone the

HR director, who happens to be locatedin Toronto. Well, they speak French and

this person speaks English. So theyre

both rustrated. Employees arent getting

the answer and the director is rustrated

because he or she, even though willing, cant

communicate efectively.

Oliver Hls Vice President and

Controller, Corporate Accounting,

Ameresco Canada Inc.

CONCLUSION


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CONCLUSION

Human capital risk stands out as an area that requires attention when an organization

enters a period o transition. Even as a company contemplates involvement in an M&A,

any preliminary activity will have a ripple eect on employees. This brings with it risks

and responsibilities to manage those risks.

Along with ensuring a potential acquisition is a strategic t, companies must assess

whether the company is a candidate or successul integration in areas such as corporateculture, being able to retain key talent and harmonization o employee programs.

Companies must be aware o a myriad o potential human capital risks beore even

entering a due diligence process. Beore their next transaction, organizations should

assess how ready they are to identiy and address human capital risks.

When stang and preparing their M&A team which will be responsible or humancapital, companies should identiy an integration manager, and equip the team with

project management processes and planning templates.

When undertaking due diligence, organizations would benet rom using a pre-

prepared o list programs, policies and systems to be assessed, an estimated timeline

o events, and they should seek specic synergies in human resources. Due diligence is

also the time to establish and prioritize a retention strategy, which should include stepsto identiy and retain key executives and other key talent. The retention strategy orms

part o a greater overview o stang that need to be addressed during due diligence.

Organization and planning tools continue to be critical when planning or integration.

Again, a template or process should be used to prepare and prioritize issues to be

addressed ater the deal is closed. An integration plan including plans to help

employees cope with change and a communications strategy to convey the plansshould also be ready beore Day One.

CONCLUSION



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Q

Based on the strategies outlined above, it appears that the companies which were

most diligent about planning, using tools such as timelines and planning templates,

well beore the integration stage, will be best positioned or a successul M&A. Its

thereore clear that an early assessment o the likelihood o integration success must be

undertaken at the due diligence stage, not ater Day One.

During implementation, companies should review and harmonize benets programswithin two years ater closing. Communication by leadership should be a priority.

When managing cultural integration, tools such as a communication plan, employee

surveys, ocus group meetings and manager training can be employed. Some methods

o supporting talent retention during implementation include clariying career paths,

mentoring programs and improving access to learning and development opportunities.

APPENDIX A: SURVEY DEMOGRAPHICS


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CORPORATE STRUCTURE

POSITION TITLE

Other

Private

Public (including a

subsidiary of a public

company)

49%

43%

8%

Other

Chief Accountant

Owner/Founder

Controller

VP Finance

CFO

1%4%

4%

Human Resources

Director

4%

50%

17%

10%

10%



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INDUSTRY CLASSIFICATION

0% 5% 10% 15% 20%Other

Educational services

Health care and social assistance

Agriculture, forestry, shing and hunting

Accommodation and food services

Information and cultural activities

Administrative and support, waste

management and remediation services

Transportation and warehousing

Wholesale trade

Other services (except public administration)

Utilities

Construction

Retail trade

Mining, quarrying, and oil and gas extraction

Finance and insurance

Manufacturing

Professional, scientic and technical services

5%

5%

5%

3%

3%

1%

1%

1%

1%

6%

6%

8%

8%

12%

13%

19%

3%



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ANNUAL REVENUE

EMPLOYEES

More than 3,000

1001-3,000

501-1000

251-500

1-250

38%

8%15%

22%

17%

$1 billion or more

$500 - $999 million

$250 - $499 million

$50 - $249 million

Less than $50 million

28%

27%10%

14%

21%



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APPENDIX B: FORUM PARTICIPANTS

Forum Chair:

Michael Conway Chie Executive & National President, FEI Canada

Moderators:

Christian Bellavance VP, Research & Communications, FEI CanadaEric DAmours Account Director & Canada Leader, Mergers & Acquisitions, Towers Watson

Toronto Participants:

Mark Donaghy VP Finance & General Manager, SciAn Services Inc.

Oliver Hls Vice President and Controller, Corporate Accounting, Ameresco Canada Inc.

Howard Johnson Managing Director, Veracap Corporate Finance Limited

Hani Ladha VP Financial Planning & Operations Support, G4S Cash Services (Canada) Ltd.

Peter Lane Director & Treasurer, Mood Disorders Association o Ontario

Amit Loomba Director & Team Leader, Commercial Banking, CIBC

Vicki Nishimura VP Corporate Controller, Prism Medical Ltd.


Bob Rollwagen Consultant and retired CFO, Metro Waste Paper Recovery

Clif Truax Director, Financial Services & Regulatory Aairs, Hydro One Telecom Inc.


APPENDIX B: FORUM PARTICIPANTS


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By telephone:

Brad Cruickshank Chie Financial Ocer, Dueck GM

Mina Fung Controller, Radiant Communications Corp.

Carl Gauvreau Principal, Force5 inc.

Frank Hunaus Chie Financial Ocer, Ebco Metal Finishing LP

Observers:

Laura Bobak Senior Writer, FEI Canada

Melissa Gibson Communications & Research Manager, FEI Canada

Martine Sohier Account Director Towers Watson



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THE CANADIAN FINANCIAL EXECUTIVES RESEARCH FOUNDATION CFERF is the

non-prot research institute o FEI Canada. The oundations mandate is to advance the

proession and practices o nancial management through research. CFERF undertakes

objective research projects relevant to the needs o FEI Canadas 1,800 members in

working toward the advancement o corporate eciency in Canada. Further inormation

can be ound atwww.eicanada.org.

FINANCIAL EXECUTIVES INTERNATIONAL CANADA FEI CANADA is the all industry

proessional membership association or senior nancial executives. With eleven

chapters across Canada and 1,800 members, FEI Canada provides proessional

development, thought leadership and advocacy services to its members. The association

membership, which consists o Chie Financial Ocers, Audit Committee Directors and

senior executives in the Finance, Controller, Treasury and Taxation unctions, represents

a signicant number o Canadas leading and most infuential corporations. Furtherinormation can be ound at www.eicanada.org.

TOWERS WATSON is a leading global proessional services company that helps

organizations improve perormance through eective people, risk and nancial

management. With 14,000 associates around the world, we oer solutions in the areas

o employee benets, talent management, rewards, and risk and capital management.

Further inormation can be ound at www.towerswatson.com/canada-english/

CANADIAN FINANCIAL EXECUTIVES RESEARCH FOUNDATION
http://users/saygoodthings/Documents/CFERF%20studies/Microsoft/ID%20Drafts%20-%20MSFT/ITI%20final%20June%202012.pdfhttp://users/saygoodthings/Documents/CFERF%20studies/Microsoft/ID%20Drafts%20-%20MSFT/ITI%20final%20June%202012.pdfhttps://www.towerswatson.com/canada-english/http://www.microsoft.ca/https://www.towerswatson.com/canada-english/http://users/saygoodthings/Documents/CFERF%20studies/Microsoft/ID%20Drafts%20-%20MSFT/ITI%20final%20June%202012.pdfhttp://users/saygoodthings/Documents/CFERF%20studies/Microsoft/ID%20Drafts%20-%20MSFT/ITI%20final%20June%202012.pdf


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CORPORATE DONORS:

GOLD $10,000 +:

Husky Energy Inc.

Manulie Financial Corp.

SILVER $5,00010,000:

Agrium Inc.

Imperial Oil Ltd.

BRONZE $1,0005,000:

Canadian Western Bank Group

FinEx Group

Nexen Inc.

OTHER DONORS:Marsulex Inc.

General Electric

FEI CANADAS RESEARCH TEAM:

Michael Conway Chie Executive & National President

Christian Bellavance Vice President, Research & Communications

Laura Bobak Senior Writer

Melissa Gibson Communications & Research Manager


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Toronto, ON M5H 3B3

T 416.366.3007F 416.336.3008

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