Mergers and Acquisitions: Federal
Author: Warren N. Rothman, Blue Prairie Group LLC
- The successful acquisition of or merger with another organization requires consideration of both the financial details and human capital factors. See HR's Role in Due Diligence.
- Due diligence involves assessing the target company's culture core values - decision-making, talent management, communication methods and performance management - to determine culture fit. See HR's Role in Due Diligence.
- During due diligence, HR should assist the company in assessing the transaction's value by identifying, collecting and reviewing information concerning the target's human capital factors, such as benefit plans, workforce demographics, employee relations, compliance and infrastructure. HR will participate in that assessment, in partnership with attorneys, accountants and brokers. See HR's Role in Due Diligence.
- Once the decision is made to complete the merger or acquisition, timely communication with employees in both organizations is critical to address employee concerns and alleviate employee uncertainty. Communication methods may include town hall meetings, online newsletters and Q&A formats. HR should lead those efforts. See Employee Communications.
- Getting the new organization structure in place quickly is important to stabilize the new company. Wherever possible, involve staff from both organizations. See Organization Structure, Staffing, Retention and Layoff Decisions - Post-Merger.
- HR is responsible for monitoring the employment-related decisions associated with a merger or acquisition and ensuring that those decisions are fair and consistent. See Organization Structure, Staffing, Retention and Layoff Decisions - Post-Merger.
Background on Mergers and Acquisitions
A merger and an acquisition are not the same. A merger means combining two or more companies into one company. An acquisition occurs when a company buys all or substantially all of another company's assets, often resulting in the purchaser gaining control over the company selling its assets. In that case, post-acquisition, the purchaser will be the dominant company and the seller will be the subordinate company.
In an acquisition, the purchaser is referred to as the acquirer or the acquiring company, and the company selling its assets is referred to as the target company. In a merger, each company will commonly refer to the other as the target company. Even though a merger seems to imply that both companies will be equals post-merger, it is likely that one company will dominate the other.
Due diligence is conducted prior to finalizing a merger or acquisition. Due diligence is the process of identifying, collecting and reviewing information to determine the risk factors involved in a transaction and also to ensure seamless integration after the transaction has been completed. In a merger, generally, each company will perform due diligence on the other. Generally, in an acquisition, the acquirer performs due diligence on the target company.
If, after due diligence has been completed, the companies decide to move forward with the transaction, the terms of the merger or acquisition will be memorialized in an agreement. That agreement will generally include a description of the assets being purchased, the purchase price and other key details. Once the agreement is signed by both parties and any other preconditions in the agreement are met, the transaction will close.
HR's Role in Due Diligence
HR may positively impact merger and acquisition (M&A) success. To do so, HR should understand risks associated with the target's human capital practices, including compliance, culture and talent. HR should be prepared to address those risks, after the transaction has closed.
As part of its role in the due diligence process, HR should take the follow steps:
- Determine the company's strategic objective(s) for the transaction. For example, is the purpose to acquire new services, obtain hard-to-find expertise or expand into new markets? See HR Strategy, Management and the Law > HR Management > HR as a Strategic Partner.
- Identify critical employment-related information needed to determine if the company's strategic objective(s) can be met. See HR Strategy, Management and the Law > HR Management > HR as a Strategic Partner.
- Assign responsibility for collecting critical employment-related information.
- Partner with attorneys, accountants and brokers to review quantifiable, "hard" employment-related data and more subjective, "soft" cultural information. See HR Strategy, Management and the Law > Labor and Employment Law Overview.
- Complete the information collection.
- Determine whether, from an HR perspective, it makes sense to move forward with the transaction.
By taking those steps, HR will help the company assess the proposed transaction's value.
Typically, HR, in collaboration with attorneys, accountants and brokers, will collect information concerning benefits, workers' compensation, employee relations, infrastructure and compliance. The following types of information should be collected in each category:
- Benefits. Determine if existing health, welfare and retirement plans are competitive, cost-effective and adequately funded by reviewing:
- Summary Plan Descriptions (SPDs);
- Plan documents;
- Administrator agreements;
- Funding levels; and
- Compliance under the Employee Retirement Income Security Act (ERISA).
- Workers' Compensation. Determine if the target's workforce is stable and engaged or vulnerable to union organizing, or, if unions exist, determine the status of union-management relations, by reviewing:
- Recent claims history (including current liabilities); and
- Administrative processes.
- Employee Relations. Determine if the target's work force is stable and engaged, vulnerable to union organizing or, if unions exist, the status of union-management relations, by reviewing:
- Employee turnover data (both the rate and reasons);
- Feedback and action plans from employee satisfaction surveys;
- Collective bargaining agreements (CBAs); and
- Employee handbooks and any written departmental or division policies.
- Infrastructure. Determine if recordkeeping and practices meet legal compliance and control standards by reviewing:
- Payroll processes and recordkeeping;
- HR information systems (HRIS);
- A cross-section of employee personnel records, including employee personnel files and medical files;
- Any investigation files maintained by the target's HR department;
- I-9 records; and
- Personal health information (PHI).
- Compliance. Determine legal exposure by reviewing:
- Independent contractor use;
- Timekeeping procedures (including overtime calculations);
- Job descriptions for accurate employee classification under the Fair Labor Standards Act (FLSA);
- Compliance with federal and state employment laws; and
- Pending and recently resolved employment-related complaints.
Carefully reviewing that objective information enables the acquirer (in an acquisition) or the target (in a merger) to:
- Determine the employment-related statutory and regulatory risks associated with the transaction;
- Address issues involving inactive employees (i.e., on leave); and
- Assess whether any reasonable accommodations will be required after the transaction and the nature of any such accommodations.
HR's value-added role in due diligence also involves leading the assessment of "soft" factors (i.e., culture fit). Assessing the target's culture fit involves this two-step process:
- Specifying the acquirer's culture baseline (i.e., values, leadership style, employee development, decision-making and communications); and
- Conducting a gap analysis to determine risks associated with differences between the companies' cultures.
In conducting that gap analysis, HR should:
- Identify the target's core values, beliefs and principles as well as how these are practiced on a day-to-day basis, and understand how things get done in the target, how decisions are made (e.g., centralized or decentralized) and the communication flow;
- Understand the target's recruiting and onboarding processes (including such key metrics as time to fill openings), existing succession planning and commitment to talent development, and identify any gaps in the breadth and depth of key staff across as many levels as possible; and
- Understand if there is a culture of accountability and pay for performance, including how goals are set, how performance reviews are completed and whether remuneration (base salary, bonuses and/or equity awards) is linked to goal-achievement.
Ultimately, the decision to move forward with a transaction will be based on the transaction's financial potential and risks associated with all aspects of due diligence. If there are significant cultural differences between the companies, but the financials and other risk factors point to moving forward, HR should determine:
- How to bridge any cultural gaps post-merger;
- The human and financial resources needed to bridge cultural gaps; and
- Whether the human and financial resources expended will significantly diminish the transaction's financial benefits.
Acme Insurance Inc., a large international insurance company, is interested in acquiring Acme Brokerage Inc. to fill a market void. Acme Insurance Inc. is a values driven organization and wants to ensure that it and Acme Brokerage Inc. are culturally compatible before moving forward with the acquisition.
Mary Smith, Acme Insurance Inc.'s HR Director, hired a consulting firm to perform a gap analysis regarding culture fit. The gap analysis revealed cultural risks that could jeopardize successful post-merger integration, including Acme Brokerage Inc.'s approaches to talent development and employee accountability. Mary requested a meeting with Acme Insurance Inc.'s Chief Financial Officer (CFO) and Chief Executive Officer (CEO) to discuss those risks. Mary also wanted to discuss a few other HR-related compliance risks her team discovered during their due diligence.
During the meeting, Mary explained the cultural risks and compliance issues. Mary also explained that, despite those risks, Acme Brokerage Inc.'s overall culture was still compatible with Acme Insurance Inc. Acme Insurance Inc.'s CFO and CEO determined that the transaction was financially attractive and decided to move forward. However, based upon Mary's assessment, Acme Insurance Inc. allocated additional resources to post-merger integration and developed an aggressive post-merger integration strategy.
A potential transaction will typically be preceded by a quiet period. During the quiet period, details of the transaction must not be discussed publicly, particularly in the case of publicly traded companies because transaction-related information may affect the parties' stock prices and, consequently, the final transaction valuation.
During the quiet period, senior executives may decide to disclose transaction details only to certain key employees. That group of key employees will usually include the entire HR department or, alternatively, just senior members of the HR department. HR personnel should refrain from sharing confidential transaction details with anyone, even other employees, until the company's lawyers or senior executives inform otherwise. Before then, even an inadvertent slip with a co-worker, friend or family member could jeopardize the transaction and result in criminal penalties. Therefore, HR must exercise extreme caution when discussing the transaction with any curious employees.
After the quiet period, HR should take the lead in ensuring that there is a designated spokesperson to manage outside inquiries. The designated spokesperson is typically an in-house communications or public relations staff member, or HR itself. At times, an outside public relations firm is engaged.
After the details of the merger or acquisition are public, HR's role is to understand the nature of the transaction and agreement regarding information-sharing between the companies. At this point, HR should lead implementation of appropriate employee communication methods. An important rule of thumb is that the employees should hear about the transaction from the company first rather than through traditional media outlets or social networking sites. That is critical to maintaining the employees' trust during what could be a very uncertain period - a risk that HR needs to proactively manage.
The following approaches to employee communication should be considered:
- Status-update meetings involving senior leadership (town halls), on a regularly scheduled basis;
- Conference calls, particularly for a geographically dispersed organization;
- Updates posted on the organization's intranet;
- In-house email "Transition Update" newsletter (including a Frequently Asked Questions section composed by the organization and - possibly - a section for employees to submit questions); and
- Dedicated 800-number for employees to record questions for response by the organization. It is best to not have the phone answered by a live person, given the risk of incorrect or misinformation being provided unintentionally. All responses to such questions should be vetted by HR (and others, such as legal) before they are sent.
Organization Structure, Staffing, Retention and Layoff Decisions - Post-Merger
A "merger of equals" rarely works. In an acquisition, the acquirer will be in charge, and in a merger, one company will likely dominate the other. In most cases, the dominant company, with support from its HR department, should take the lead in stabilizing the new organization and making key structure and staffing decisions. Once the transaction has been finalized, but even before the closing, the dominant company needs to move quickly to identify the key people to be retained, the redundant functions to be eliminated and any holes in the organization that would need to be filled from the outside.
Maintaining workforce stability is critical for the new organization to succeed. HR should lead development of appropriate compensation, retention incentives and termination arrangements, which should be consistent with the final merger or acquisition agreement. The following approaches should be considered, where appropriate:
- Long-term keepers. These incentives apply to employees who the company wishes to retain on a long-term basis. For those employees, it may be appropriate to pay short-term retention bonuses, payable on or close to the effective date of the merger or acquisition. Those retention bonuses should be paid in addition to the employees' base salaries, bonuses (annual and long-term) and, if appropriate, equity in the new organization. The annual and long-term incentives would be preconditioned on the employees' performance in their post-merger roles. If appropriate, employment contracts may also be provided.
- Short-term keepers critical to an effective transition. These incentives apply to employees who the company wishes to retain during the transition period, but who will not have long-term positions within the new company. For those employees, it may be appropriate to pay short-term retention bonuses, payable upon the merger effective date, together with meaningful retention bonuses payable on the employees' designated termination dates. For retention periods exceeding six months, the retention bonuses may be made payable in increments (for example, 25% at three months, 25% at six months, 50% on last day worked).
- Individuals to be terminated. For employees who will be terminated due to the transaction, the company may consider severance payments, payable on the employees' designated termination dates and outplacement career transition support.
It will be critical to structure the new organization in a timely manner. HR will assume a critical role to ensure that staff from both organizations are considered and will monitor employment decisions for potential disparate impact discrimination. HR should also monitor termination decisions for large groups of employees and facility closings to ensure compliance with all Worker Adjustment and Retraining Notification (WARN) Act provisions. As decisions are approved, the affected staff should be timely apprised and provided appropriate paperwork (including a termination notice or a retention agreement and, if applicable, a severance agreement).
HR's Role in Leading Post-Merger Cultural Integration and Continuity
In a post-merger or post-acquisition situation, it is critical to eliminate uncertainty quickly. The key is to communicate, communicate and communicate. That means sharing bad as well as good news because a void in communication causes employees to assume the worst and the rumor mill to become more pervasive. Management loses control of the messaging as well as credibility.
- Be sure that employees in the acquired company hear from their former leaders. The way their leaders are treated will be the perceived model for how the rest of the organization will expect to be treated.
- Visibility of the new leadership team to the entire organization is important so that consistent messaging is delivered. All employees in the post-merger organization will be wondering "What's in it for me?" and leadership needs to offer a compelling message.
- It is acceptable to respond to some questions with, "We really don't know yet." However, commit to a time to respond and, then, deliver.
It is appropriate to form a transition team to ensure that employee-specific items are addressed. Led by HR, the team should, to the extent possible, include members from both organizations. Each member of the transition team should have clearly defined roles, responsibilities and accountabilities. The transition team focuses on the areas identified during due diligence, such as:
- Benefits. Agree on common plans and costs, administrator transitions and timing (for example, for next calendar year). See Employee Benefits > Benefit Planning and Design.
- Workers' Compensation. Combine administrators and ensure return-to-work programs are in place. See Risk Management - Health, Safety, Security > Workers' Compensation.
- Employee Relations. Develop and timely introduce a common employee handbook, while continuing with extensive communication efforts. See Employee Management > Employee Communications. Consider administering an employee survey to establish a baseline to track trends against, but only if there is a commitment to use the data and conduct regular follow-ups (annually should be sufficient in the first few years).
- Infrastructure. Combine payroll vendors and HRIS systems. See Payroll > Payroll Solutions.
- Compliance. Review pending employment-related claims and assist company lawyers with handling those claims.
- Talent. Prioritize filling open positions, merge background check vendors, renegotiate fees with outside recruiters, update new employee orientation and onboarding, and update all training programs. See Recruiting and Hiring > Overview - Avoiding Legal Landmines in Recruiting and Hiring.
- Employee Accountability. Update and communicate the new organization's core values and employee expectations, and incorporate that information into an updated performance management and rewards structure.
Acme Housing Co. and Acme Residence Corp., nationwide providers of senior housing, merged into a new publicly traded company. Neither company was publicly traded before the merger. However, both companies were owned by the same large private equity firm.
While not a merger of equals, the HR team from Acme Housing Co., the subordinate organization, was to be dominant post-merger. Joe Brown, Acme Housing Co.'s Chief HR Officer, was asked to lead the transition and integration.
Joe organized a team representing both companies and ensured the team represented all necessary HR functions, e.g., benefit managers, compensation specialists, generalists. Joe requested that the team meet by conference call every Monday morning during the three-month transition. Joe developed a work plan identifying tasks, individuals responsible for completing each task and deadlines. Joe asked a team member to take meeting minutes and to update the work plan based upon the minutes. During the Monday call, the team reviewed the work plan and ensured that each team member was held accountable for their tasks.
When the new company officially went public, all benefits had been combined and announced, a new HRIS finalized and implemented, and an equity plan put in place. With the help of attorneys and consultants, all new compliance measures for public companies (e.g., Sarbanes Oxley, Board compensation committee disclosure) were in place.
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