Multiple factors contribute to success in merger and acquisition (M&A) transactions — and many involve getting the right people into the right jobs. Unless the deal involves nothing more than physical assets — which is the exception to the rule of acquisitions in today’s global business world — the acquirer will need talented, high-performing individuals at all levels in order for the deal to reach its full potential.
Consequently, it is critical to assess the target company’s human capital with the same rigor that is applied to the assessment of pension liabilities, inventories, financial statements, and other significant assets. If we agree that people are ultimately a company’s most valuable asset and largely responsible for income generation and revenue growth, identifying and managing people risks and opportunities usually account for the difference between M&A success and failure. In many cases, however, acquirers know very little about the human capital — at least not initially — that may soon be part of their corporate families.
M&A transactions always trigger decisions about individuals. A merger, for example, often produces redundancies; suddenly there are two CFOs, two customer service VPs, and so on. The question is: Who should go and who should stay (even if in a different role)? In an acquisition, the acquirer must determine whether incumbents from the target are the best people for the job, given the objectives of the new organization. Talent assessment addresses this important issue. For each key position, talent assessment aims to answer these questions:
Talent assessment can be completed at any time, but the more information an acquirer has before signing a letter of intent or closing the deal, the better. For many practical reasons, however, this almost never happens. Time is insufficient. Data from the target are spotty or unavailable. Or the target will not give access to its key people. As a result, a big part of talent assessment tends to be done after the closing, when the acquirer has full control.
Thus, organizations should do whatever they can to overcome these barriers as early in the deal as possible. While a full, formal assessment may not be possible in the early stages of a deal, many actions can be taken to begin the assessment process and get an early read on people and potential deal risks that allow for an early determination of whether to proceed with the deal or walk away. These include observing behavior during management presentations and meetings, reviewing CVs provided in the data room, conducting internet searches (or “desktop” research), and conducting informal operational or functional meetings as part of the due diligence process.
The target’s deal team can begin compiling a list of business, leadership, and other behavioral attributes that begin to tell the story of whether a key or critical employee will fit into the go-forward organization or destroy the deal. Figure 1 describes the assessment approaches and tools that can be utilized for a systematized approach to talent assessment that will ensure thoroughness and save valuable time. In our experience, there are five steps in the process.
Always begin with the objectives of the deal and expectations for the new organization. Talent, after all, must be measured against its potential to fulfill those expectations. A clear understanding of business objectives should guide the assessment. For example, is quick turnaround of the business needed, are growth objectives very high, or is the acquisition in a stable environment that will need little change?
The next task is to define the success criteria required by the business objectives. Those criteria typically involve skills, knowledge, behaviors, experience, values, and — for executives — leadership ability and strategic thinking. For example, to fill the CEO position at a target company, it is important to determine:
Culture is an important part of this step. The acquirer should define the workplace culture it wants its key people to embrace and demonstrate through their behavior. In many instances, acquirers want people whose values are compatible with their culture. They know that conflicting values will make for a bad corporate relationship and impair the deal.
In this step, the assessment moves from the general to the specific, documenting the success criteria for each position in terms of job scope and responsibilities; required skills, know-how, and behaviors; and experience the ideal candidate brings to the table. Based on conversations with the acquiring company or hiring managers, the assessment team identifies the level of responsibility and job requirements for the target roles. From this it identifies the requisite skills, knowledge, and abilities necessary to carry out the role requirements to their fullest extent. In addition, the team examines what experiences have helped other successful individuals in the past that are relevant to the current situation. This enables the creation of a robust, defensible, and detailed description of the requirements of the target roles.
The first three steps set the stage for the detailed work that follows, gathering whatever relevant data are available on candidates for each key position. The goal is to give decision-makers the information they will need in selecting the best people for each role. These data are gathered by interviewing the board (in the case of CEO talent assessment), hiring managers, or others involved in the acquisition and by gathering any past performance information that is available. For executive and director/manager positions, the typical selection criteria include leadership ability and leadership style, alignment with the culture of the new organization, potential for future personal development, cognitive ability, and motivation. For professional positions, selection criteria are more geared around specific skills and experience in the job; thus, assessment is heavily weighted toward professional competency, work history, past performance, and future skill-development potential.
The results of the assessment are presented in detailed reports to decision-makers, who use them for review and selection. The quality and extensiveness of these results go a long way toward ensuring the full value of the deal.
Indeed, M&A transactions are full of risks and opportunities, and many of those reside in the target company’s human capital. Because of this, it is essential to thoroughly evaluate key and critical talent with focus, rigor, and honesty, beginning as soon as possible and continuing throughout the deal phases. The consequences of getting people decisions wrong could be the difference between winning and losing in the marketplace — something no company should risk in today’s highly competitive market and volatile economic environment.
|Chuck Moritt (Washington DC)
Senior Partner, M&A
+1 202 331 5296
|Linda Gookin (New York)
+1 212 345 6374