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Flexible integration, HR’s guide to more effective M&A

Mergers and Acquisitions
Mergers and Acquisitions

By Steve Allan | October 21, 2020

Leading acquirers are increasingly using flexible integration models to protect the target company’s workforce and talent.

We liked the target so much we bought it… and then we changed everything about it.

Many large organizations buy smaller, more nimble and innovative targets, and then bury them under a mountain of big-company processes so that the spark that made the target successful in the first place is snuffed out.

The best acquirers, however, have learned from these missteps. Looking back at their past deals, they ask themselves:

  • Did it work out as we planned?
  • What should we have done differently?

These honest self-reflections have revealed that too frequently an attempt to buy talent and skills failed in the longer term. As one serial acquirer put it, “We used to buy them, then crush them; it was madness.”

Leading acquirers are increasingly alert to these risks and support flexible integration models, which aim to protect the target company’s workforce and talent, while recognizing that some integration and change is inevitable.

Flexible integration aims to protect the target company’s talent while recognising that some change is inevitable.

Many smaller companies have grown from a handful of key early employees and have developed their own ways of working. In some organizations, these ways of working can look and feel very similar to scaled down versions of big corporate systems, while in others they may have maintained a collegiate “move fast and break things” mindset from their earliest start-up history, with minimal process and informal structures.

At some point, large corporations looking to acquire people, innovation or technology that are central to their future growth become aware of the most successful of these smaller companies. As these larger companies consider these acquisitions, the HR professional is at the forefront of asking two key questions:

  1. If we buy this organization, who are the key people, and how do we retain them?
  2. How do we bring this organization into our structure without burying it under our processes?

This article will focus on answering the latter question (for insights into talent retention practices see our materials here.)

What does flexible integration mean?

Flexible integration is a process where an acquirer will make a deliberate decision around how closely a target company will be included in the buyers’ policies, rules, governance and programs, and in what areas will the new acquisition be left alone to make their own decisions. These decisions then go on to form the blueprint for the integration of the target and provide clear guidelines for how much operational independence an acquired company will retain and for how long.

For example, an acquired business may retain the freedom to make its own decisions on how employees below executive level are measured and rewarded but be obligated to follow the new owner’s policies and rules around compliance and diversity.

How does an acquirer define the ‘right’ balance of integration vs separation?

Leading serial acquirers have developed an approach to find the balance between integration and independence. In general, this starts from a recognition that big-company processes exist for a reason, and that without active intervention every function is likely to say that while they recognize the need not to change everything at the target, “their” processes are important.

Serial acquirers have developed an approach to find the balance between integration and independence.

Left without a champion in integration planning, an acquired business may be forced to adapt to the buyer’s organizational design principles, leadership processes, talent selection approach, pay benchmarks, grading structure, benefit platforms, HR information systems (HRIS) platforms, recruitment policies and so on; and this is just in the HR domain, a similar story holds sway across other corporate functions.

Suddenly an innovative start-up enterprise may be unable to find new talent or reward success without navigating complex bureaucratic hurdles.

Suddenly an innovative start-up enterprise may be unable to find new talent or reward success without navigating complex bureaucratic hurdles.

The best serial acquirers ask themselves a series of questions that build on what they learned during due diligence and management interviews; and they use the deal process to challenge themselves on the answers, and to arrive at practical answers that reflect deal goals:

  1. What existing HR policies and procedures must we impose on the target during integration?
    • These will be absolute must-haves, not simply the nice-to-haves and the hard-to-cope-without. For example, the list could be limited to core items under the heading of compliance and financial reporting.
    • There may be almost no HR-related topics on this list, or where they are, may be limited to matters of leadership rewards and equity
  2. From a human capital perspective, what are the defining features of the target business that support success (i.e. where is their “secret sauce”)?
  3. Of these defining features, which ones align to deal goals and the anticipated integration approach (i.e. which are the important ones that we should try not to break)?
    • These are the items that HR transformation needs to nurture and defend from being overrun by the buyer’s model.
    • Once this question is answered, buyers can consider how practical this is and what concrete steps they need to take to achieve it.
  4. Are there features of the target business that support success but do not align to the planned integration approach (i.e. important ones that may be damaged without intervention)?
    • The HR leadership then needs to push back and understand whether these really are important to how the target operates, whether they really will be changed, to what end and at what cost.
    • The result of that debate then feeds into a change in the integration approach, a key focus area for the change management process or, in a worst-case scenario, into a red-flag warning to the deal team.
  5. The buyer would then expect all other elements of the target’s operating model to conform to the buyer’s way of operating unless doing so would contradict the findings of steps three and four above.
chart shows defining features of the target business that support success
Refining the integration strategy

The outcome of this decision-making process is then a clear understanding, for each human capital element, from rewards to culture and beyond:

  1. What are the key similarities and crucial differences between the buyer and the target?
  2. How fundamental are these to the deal, and what is the cost, or opportunity, of change?
  3. As a result of that what is the intention to integrate immediately, later, selectively or never?
  4. And how does our integration plan explicitly support that?

The role of the HR M&A lead

Successful dealmakers include an HR leader within the deal team who has a clear mandate to ask these questions, to challenge the answers and to ensure that the people element of the deal is rational and consistent with the stated business goals of the deal.

Successful dealmakers include an HR leader within the deal team who has a clear mandate to ask questions and challenge answers.

Importantly, this HR M&A lead is empowered, and expected, to speak up where they see misalignment with goals or across the deal workstreams. While the role and M&A-credibility of this strategic HR lead is a differentiator for successful serial dealmakers, it is generally something that even the best acquirers only came to appreciate over time, as they reviewed past deals and learned the same lessons on multiple occasions.

This strategic HR M&A lead needs to:

  • Work with and persuade other functions that not imposing corporate processes on a new acquisition is not only worthwhile, but is a crucial support for the deal strategy despite the extra administrative effort or complications to governance controls this implies.
  • Understand the implications of this and ensure that the due diligence process is sufficiently robust as to allow sensible and practical decisions to be made early in the integration planning effort. Due diligence needs to be much more than a financial and legal process.
  • Stay the course as the deal moves from planning to implementation and provide ongoing support for the acquired business to remain different by design.

How a global technology company integrates acquisitions

One of the world’s largest serial acquirers focused in the technology industry completes a constant stream of acquisitions every year, from smaller innovative talent-acquisition focused deals to larger, often consumer facing, deals. Its deal team has a clear process to confirm its integration approach based upon deal objectives and business strategy.

The decision-making process starts from an assumption that compliance processes are automatically on the list for integration to the buyer’s approach. The team then states that all other processes are expected to migrate to the buyer’s approach unless there is a compelling business reason not to, and the team actively looks for factors that would support limited integration.

For example, the deal at hand may be very different if it focuses on a new customer base, market segment or product area within which the buyer has little expertise, or is built on a desire to invest but hold separate in anticipation of a future spin-off or sale, for example.

In those cases where the team decides to adopt a limited integration approach, the buyer then asks, which specific aspect of our HR policies do we still want to bring to the target, and are we doing that at close or later, and why? In practice, this list may be limited to key topics such as executive compensation and stock-based rewards and minimal integration of human resource information system data and is built with the collaboration with the target business leadership.

By working with the target in an open collaborative manner and making decisions based upon the deal goals, the buyer aims to ensure that both sides understand the compromises that are necessary and that changes are made (or not made) intentionally and in support of the longer-term strategy.

Reality for most deals

For most transactions, the reality is that the acquired business will ultimately move onto the buyer’s way of operating. Much of the work of the HR deal team is then focused on what this means and how to promote the required changes in the acquired business without adding unnecessary process and without disengaging the core talent that is being bought.

For most transactions, the acquired business will ultimately move onto the buyer’s way of operating.

For those deals where the target is very different from the buyer, and the value of the deal rests in nurturing and protecting those differences, the HR M&A lead needs to be proactive and present a business case based on the strategic deal rationale and business goals, which in turn will allow HR to argue for a different way of doing things in those areas where it matters most.

While the story of Goldilocks is a fairy tale, the pursuit of an integration approach that is not too much, not too little but just right is a reality in the most complex deals. Every deal is unique and there is no universal answer, but by being a strategic deal partner and being clear on the objective for any given transaction, HR M&A leads can help drive deal success by understanding where integration is unhelpful, where it is necessary and where it can add value.

Author

Head of Human Capital M&A

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