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With global M&A activity up 32%[1], buyers face a new reality characterized by increased risk, truncated auction timelines, and shrinking access to critical information, according to the first-of-its-kind People Risks in M&A Transactions research report by Mercer, a global consulting leader in advancing health, wealth and careers, and a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC).
As a leading global M&A advisor on people issues to buyers and sellers in corporate and private equity transactions, Mercer based its findings on 851 data points, including survey responses from 323 M&A professionals,78 interviews and analysis of nearly 450 transactions (of which almost 60% were cross-border deals) by Mercer’s M&A Transaction Services Business during 2015. Forty-four percent of firms surveyed had more than 10,000 employees and 38% had revenue exceeding $5 billion (see Figure 1). In addition to HR executives, 57% of respondents were from private equity deal and operations teams, corporate development, finance and operational leadership positions, bringing a diverse range of perspectives to the research.
FIGURE 1: Firms surveyed
Source: PREVIEW: Mercer’s People Risks in M&A Transactions Research Report 2016
More than half (55%) of buyers, including both corporate and private equity, report that talent challenges will remain a significant HR issue in future M&A transactions, with employee retention cited as the number one perceived risk, followed by cultural fit and leadership team concerns (see Figure 2).
FIGURE 2: For buyers, talent is the number one perceived risk in future transactions
Source: PREVIEW: Mercer’s People Risks in M&A Transactions Research Report 2016
Leadership team selection and other considerations ranked as the top HR issue during diligence for survey respondents over the past 15 months – yet only two-thirds conduct formal leadership assessments at this time. With more than one-third of those surveyed now spending more time on HR issues when preparing for divestitures than in the past, Mercer’s research shows that buyers and sellers must respond to the heightened challenges of the competitive marketplace by managing and mitigating people-related risks in order to maximize opportunities (see Figure 3).
FIGURE 3: Sellers find that HR issues require increased focus and attention
Source: Mercer’s People Risks in M&A Transactions Research Report 2016
“Buyers have the opportunity to manage the people spend with the same discipline and rigor as other capital investments, such as property, plant, equipment, R&D, M&A among others,” said Jeff Cox, Co-Leader, Mercer M&A Transaction Services.
Risk tolerance grows as competition heats up
Buyers are facing new complexities as they enter unfamiliar geographies and industries, often enticed by the promise of reduced costs in emerging markets. Nearly 25% of buyers are more inclined to consider multi-country transactions than they were prior to 2014.
Almost 50% of buyers are willing to consider taking on pension and post-retiree medical obligations indicating further risk tolerance. In fact, one in four (23%) of the transactions analyzed over the past 12 months included single or multi-employer pension plans.
On the buy side: Overcoming risks to create value beyond purchase price
Forty-one percent of buyers report less time to complete diligence before making a binding bid compared to the prior three years, and 33% say that sellers are providing less information about the asset for sale. This trend is expected to continue, as companies conducting global (35%) or multi-country (37%) deals anticipate sellers disclosing less information in the future, due to the competitive nature of transactions.
On the sell side: Uncovering new strategies to maximize price
Armed with more than $100 billion in capital, activist investors continue to pressure more companies to unlock value for shareholders. Sellers choosing to divest assets that include defined benefit pension and other long-term employee obligations must navigate pension volatility during the auction process and develop strategies to demystify pension obligations for the buyer, limit downside risk, and maximize exit price.
Mitigating the people risks and maximizing the opportunities
“The root of people risks lies with individuals’ inability to manage uncertainty and change, which can lead to declining organizational performance and loss of transaction value,” said Chuck Moritt, Co-Leader, Mercer’s M&A Transaction Services. “Coupled with the volatility and ambiguity of the current deal environment, these risks can have serious implications for companies and their employees, if left unchecked.”
[1] Thomson Reuters. Mergers & Acquisitions Review (First Nine Months 2015).
ABOUT MERCER
Mercer is a global consulting leader in talent, health, retirement and investments. Mercer helps clients around the world advance the health, wealth and careers of their most vital asset – their people. Mercer’s more than 20,000 employees are based in 43 countries and the firm operates in over 140 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), a global professional services firm offering clients advice and solutions in the areas of risk, strategy and people. With annual revenue of $13 billion and 60,000 colleagues worldwide, Marsh & McLennan Companies is also the parent company of Marsh, a leader in insurance broking and risk management; Guy Carpenter, a leader in providing risk and reinsurance intermediary services; and Oliver Wyman, a leader in management consulting. For more information, visit www.mercer.ca. Follow Mercer on Twitter @MercerCanada.
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