Is your Total Rewards team ready to handle 2020 M&A activity?
2020 Total Rewards Due Diligence Considerations for M&A Activity
The past few years have seen a large amount of M&A activity in the marketplace with last year coming in with one of the strongest showings over the last decade. Depending on who you ask or what you read, 2020 is shaping up to again be a strong year of activity, albeit, on somewhat of a lesser scale than 2019. The two leading reasons for a lower forecast in 2020 are the still uncertain China trade tensions and political uncertainty of an election year. On the more optimistic side of this argument for why M&A activity will remain at a high point are reasons such as historically low unemployment, solid economic growth, solid corporate earnings and the fact that the US economy performs well in election years. To that end, there are still a lot of companies moving forward with plans for M&A activity with analysts citing reasons such as companies wanting to get deals done before any potential economic downturn and/or the need to help offset slow organic growth.
So, 2020 is shaping up to be another year that HR leadership and teams are going to have sharpen their pencils and conduct due diligence across their companies programs regardless of whether you’re on the acquirer or target side of deals. A large part of due diligence and one that has large sweeping impacts are the assessments and evaluations of compensation and benefits programs, keeping in mind that comp and benefits are typically most companies’ largest expenses in a given year. So, the pressure is on Total Rewards leaders and experts to ensure they do their homework in outlining all policies and programs while in the due diligence phase of an M&A.
Experience Matters Having spent the last 20 years in human resources and with a majority of them in total rewards functions in roles from analyst to the Head of Total Rewards and Compensation functions; I’ve personally been involved with 8 different M&A’s across different industries and of all sizes. At first, you don’t know what to expect. But, after you have one or two under your belt, you feel like a pro and it becomes much easier. And, with that experience, comes knowledge and insights that help you identify critical pieces of work and a unique perspective on how to conduct due diligence for total rewards during an M&A.
Phases of an M&A Most M&A’s have a phased approach or process, which is strictly followed for regulatory and legal reasons. If you’re not familiar with the process, don’t worry, that’s why your company hires an investment banking firm to advise them in addition to slews of attorneys and other specialty advisory firms. In its basic form, an M&A process can be broken down into 10 primary steps:
1. Acquisition Strategy 2. Acquisition Criteria 3. Target Search 4. Acquisition Planning 5. Valuing and Evaluating 6. Negotiating 7. Due Diligence 8. Purchase and Sales Contract 9. Financing 10. Implementation
For the purpose of this article, I’ll focus on Step #7 or Due Diligence and only from an HR/Total Rewards perspective.
Key Considerations as a Total Rewards Leader Tasked with Conducting Due Diligence
As you can see from the chart below, a sound due diligence process makes up 11% of total reasons why a successful M&A transaction will occur. When you translate the impact that percentage has on the overall value of an M&A, mistakes can be costly, which underscores the importance of conducting a thorough due diligence process. Most Important Reason in Achieving a Successful M&A Transaction* * Analysis courtesy of Deloitte: “The state of the deal: M&A trends in 2019
HRs Role in an M&A In addition to just being sound practice, the involvement of key HR leaders such as CHRO’s and Heads of Total Rewards functions, is critically important for a couple of BIG reasons. First is the identification of synergy opportunities, meaning those opportunities where the acquirer and target are already closely aligned in either policies, programs, practices, or total rewards philosophies. Where synergies exist, it helps expedite the due diligence process and goes a long way in ensuring a smoother integration.
Next is the ability to assess potential financial and operational risks well enough in advance so they can be called out and renegotiated if necessary/possible as identification of significant costs in terms of executive agreements, golden parachutes, equity costs or hidden compensation payout triggers can impact the valuation of the deal.
Total Rewards Checklist in Due Diligence
As with any large process, total rewards due diligence can take on a life of its own and go from something very straight forward to something resembling the construction of the Hubble space telescope (not literally, but you get it…it can get complicated).
So, a best practice in going about your process while in due diligence is to begin by creating a list of all your own policies, practices and programs in order to self-assess and identify potential problem areas or limitations in your own shop.
Next, conduct a thorough side-by-side of both companies programs to help identify similarities, differences and gaps on either side where one company may offer something the other doesn’t currently have. The purpose in the gap analysis is so you can have a discussion and/or make an informed decision on one or the other companies programs for adoption or termination. By going through the side-by-side, you’ll also be able to create your go forward plan because it’ll help you understand the complexity of change, potential timing for any changes and cost implications.
At a high level, a Total Rewards practitioner or leader should conduct and capture the following information during the due diligence phase:
Inventory of all existing compensation and benefits plans and programs on both sides (acquirer and target)
Inventory of all vendors and contracts
Identification of key differences in policies, programs and practices for both compensation and benefits programs and for the acquirer and target
Identify any needs/requirements during the transition such as employee retention agreements, incentive compensation in process, employee job leveling, grades, titles and pay structures, executive compensation and agreements, severance and retention plans.
Conduct your gap analysis
Begin making your “go-forward” plan by defining or at least outlining your thoughts on your future state total rewards strategy and philosophy
Remember, in an M&A scenario and as the saying goes, Slow is smooth. Smooth is fast. Don’t rush. Take the time you need to flesh out all relevant information under due diligence. The devils in the details and you’ll have to get used to being in the weeds throughout the process. It may be painful while in it, but with any process, it will end. If you’ve done a great job, you’ll be able to see the fruits of your labor when the deal settles! Rick Harman is a career human resources leader and total rewards expert. He’s worked in the field of HR for the last 20 years at some of the world’s largest global companies in a variety of roles and currently as the Head of Talent Acquisition & Strategic Projects for a 9,000 person global healthcare company serving the Pharmaceutical and Biotechnology industries. Additionally, Rick serves as the Owner and President of a private Human Capital Consultancy in Wilmington, Delaware, Acute Consulting LLC.