HR perspectives on disruptive M&A
In today’s competitive environment companies face a choice: self-disrupt and thrive, or stay passive and lose market share. Companies are seeking to capture innovation-led growth; tapping into technology, consumer behaviour and cross-sector convergence through acquisitions. Whether it is through the acquisition of guerrilla brands, digital capabilities, AI and analytics capabilities or through convergence across sectors, the M&A landscape has never involved such complexity. In Deloitte’s future of the deal report 2018 we found that in 2017, nearly 60% of disruptive technology acquisitions were done by non-technology companies.
So what does this mean for HR? Acquiring digital assets can present cultural and integration issues that organisations have not previously had to tackle. HR are being asked some tough questions like:
- What capabilities and culture do we need as a parent organisation to be able to acquire digital assets?
- How should we change our traditional approaches to acquisitions and integration to support digital acquisitions?
- How do we preserve the culture and ways of working in the entity that made it so valuable?
- How much should we integrate the digital asset?
- How do we keep incoming employees engaged during the acquisition?
Key capabilities to thrive
We believe that there are a number of key capabilities that companies must have to thrive in the world of disruptive acquisitions. Disruptive acquisitions typically involve smaller entrepreneurial businesses where the valuation is less tangible and growth less certain. People and organisations need to be ready to embrace failure, which challenges the flexibility and agility of thinking of the leadership team. From a people perspective this means having the right leadership mind-set with a greater appetite for risk and the ability to balance short and long term objectives. This needs to be supported by the right talent, operating model and incentives to scale disruptive opportunities and transform the core business.
How can HR rise to the challenge?
We know from experience that HR are often not the first to be invited to the M&A table, but it is ever more important that HR are brought in to discussions early on in the process. There is a clear role for HR to play before any acquisition is even contemplated in order to build the appropriate capabilities into leadership assessment, development and incentive initiatives.
At the early strategy stage, HR need to ensure that they have the right capabilities to interact with the strategy and deal teams to test whether the organisation is capable of becoming a good corporate parent and an attractive acquirer for a potential target.
HR also needs to look to its own internal structures, processes and policies and understand how it can adjust its own approach to integration, retention and culture to bring a more flexible mind-set to disruptive acquisitions. For example, employees from smaller, more agile organisations may struggle to adjust to rigid policies and structures, which may create a lack of engagement and retention issues.
How can we be a good corporate parent?
Digital M&A turns traditional due diligence on its head. Due diligence typically focuses on understanding the financial structure and risks within the target. In the disruptive environment due diligence should instead start by examining the question of whether the acquirer is capable of being a strong corporate parent.
Traditional approaches to cost synergies may in fact kill the value of the acquisition, and the savings gained from synergies need to be balanced with the value that could be lost by trying to achieve them. For example, achieving savings by putting the target company on to HR systems may bring with it the constraints of pay and grading structures that kill the culture of small and collaborative teams, unhindered by the constraints of hierarchy.
To stand alone or not to stand alone
To preserve the value of the acquired organisation, many companies are starting to assess each acquisition against a maturity matrix, which considers the extent of integration against the innovation aims of the acquisition. This might mean that more acquisitions remain stand alone, perhaps with a plan to bring closer integration over time as the acquisition matures.
Keeping an acquisition stand alone is not issue free however. Companies must think about how diversity targets can be managed, the impact on HR risk, the impact on corporate values and behaviours, and the increased administrative burden. Forward thinking HR functions will look to the corporate strategy to understand the role of M&A within the organisation. They will develop their own strategy and approach to support the organisation to realise value through acquisitions.
Deliver the promised returns
Finally, the building blocks of a successful acquisition require a considered plan to manage communications and engagement of the target employees, being open and honest about changes that might be coming down the line.
The temptation to send out Day 1 communications providing assurances that nothing will change is a promise that can rarely be kept. The importance of understanding all the changes that might take place in the future cannot be overstated and equipping leaders with the tools, messages and support to manage the changes will be vitally important. Put in place individuals to help the target navigate the organisation that they have joined and they will deal with the non-negotiable bad news early.
And finally, being clear on the measures of success and using analytics to provide insight will enable the organisation to continually review what is, and isn’t, working well and adjust its approach for the future.
The blog is authored by Carole Grant-Garwood, Associate, Human Capital M&A, Deloitte and Helen Carney, Senior Manager, Human Capital M&A, Deloitte