Foreword by Andrew Chilvers
For ambitious companies eager to expand into overseas markets, often the conventional route of organic business development is simply not fast enough. The other option to invest in or buy a business outright is far quicker but often fraught with unforeseen dangers. And even the biggest, most experienced players can get it badly wrong if they go into an M&A with their eyes wide shut.
If you search for good and bad M&As online the Daimler-Benz merger/acquisition with Chrysler back in 1998 is generally at the top of most search engines on how NOT to undertake a big international merger. Despite carrying out all the necessary financial and legal measures to ensure a relatively smooth deal, the merger quickly unravelled because of cultural and organisational differences. Something that neither side had foreseen when both parties had first sat down at the negotiating table.
These days the failed merger of the two car manufacturers is held up as a classic example of the failure of two distinctly different corporate cultures. Daimler-Benz was typically German; reliably conservative, efficient, and safe, while Chrysler was typically American; known to be daring, diverse and creative. Daimler-Benz was hierarchical and authoritarian with a distinct chain of command, while Chrysler was egalitarian and advocated a dynamic team approach. One company put its value in tradition and quality, while the other with innovative designs and competitive pricing.
Rachida el Johari discussed The Art of Deal Making: Using External Expertise Effectively as part of the Employment chapter.
What advice can you offer international clients on harmonising employment practices and culture following a merger or acquisition in your jurisdiction?
Although decisions to embark on M&A deals are generally based on commercial and financial calculations and models, the reality is that the human factor can make or break any deal regardless of how good it looked on the numbers alone. Studies show that one of the most important causes of deal failure is cultural and employment practices integration. Identifying commercial, financial and legal risks in the due diligence phase and strategising towards the mitigation thereof post-closing is a – if not the – key element of any M&A deal. The human factor and its impact on the success of the deal is not often enough qualified as a key element in the early stages of deal preparations. One of the reasons for that is probably that securing successful integrations of cultural and employment practices comes with a set of challenges of its own – one of them being time constraints. It is difficult to grasp culture and practices in models and it takes time to understand the human dynamics that form a company’s implicit culture. In the high pace and pressured reality of the deal-making process attention on the integration of culture and employment practices consequently often falls off the priority list, despite it being a key factor in a deal’s success. Any company that is engaging an M&A deal is well advised to factor in the human element at an early stage. Make sure that the project team includes an HR representative at strategic level and include employment law experts who can work closely with the corporate law team.
Do you have a best practice for incorporating collective bargaining agreements, employee benefits and pension scheme provision into the deal making process?
Planning and timing start from the end goal and then work backwards. This also applies in relation to the question of how to incorporate collective labour agreements, employee benefits and pension scheme provisions into the deal making process. The legal implications towards these important employment conditions are dealt with differently in an asset deal versus a share deal. For instance, if the intent is full integration of all employment terms and conditions post transfer/closing, an asset deal may be your best option. Any challenge though can be solved, and one can work towards any preferred end-goal in any structure but make sure to consider your options beforehand. Firstly, if you want to harmonise employment terms and conditions, make sure to do it as soon as possible. If feasible, start working on harmonisation and the potential need of a reduction in workforce before the actual merger/effective date of the deal. The outcome thereof can impact the terms and scope of the transaction and consequently the purchase price too. Secondly, it is crucial to determine how and if the works councils and/ or trade unions are involved and to factor in reasonable time to follow the legal formalities of these consultation processes, primarily as part of the deal making process, but clearly also in view of a smooth integration roadmap after the deal is done. Companies that approach harmonisation not only from a legal and financial angle but also integrate the human aspect and the impact on employee engagement tend to achieve their goals more effectively with minimal pushback.
Incentivisation and retention of senior management is important to ensure stability and continuity post-deal. Any examples in which you have achieved this effectively?
From a business and investor’s perspective a transaction is typically perceived as a positive matter. From the employees’ perspective it is often experienced as a highly uncertain and threatening ordeal. It is important to acknowledge these differences in perception and to put in the effort to gain the employees’ buy-in and support for the transaction. One of the tools to retain key employees (and their knowledge and customer relationships) is offering them a retention plan to secure a good level of business value and business continuity. Having experienced several M&A processes and retention plans in practice, the costs of these plans related to their benefit is not rarely out of balance. In hindsight, it often appears that too many employees are qualified as ‘key-employees’, and the duration of the retention period is often too long. Selecting the key-employees is not an easy exercise, but despite the pressure of the deal-making process it needs to be done with a realistic analysis of the business needs and the notion that money alone does not create true employee loyalty or commitment to the new organisation’s goals. It will require effort and (human) attention towards the overall staff to secure their trust and a willingness to provide assurances about job security and a clear vision on the shared future goals that at minimum the critical employees can commit to. Although there is no one-size-fits-all solution because different deal structures call for a different approach to retention schemes. Best practice retention plans typically focus on a very small group of employees – generally senior management and critical employees in the business/product line – and apply for one year maximum.
Top Tips – To Keep Your People Happy During The M&A Process
• Communicate proactively. Employees want to know where they stand. It is better to under-promise and over-deliver than the other way around.
• Take employee input – individually or through consultation bodies such as the works council and trade unions – and their interests seriously. Implement fair and transparent processes during the deal-making process and post-merger integration, including grievance procedures.
• Appoint a senior HR professional dedicated to coordinate and manage the cultural integration process. Factor in enough time (i) to analyse the current cultures (ii) prepare a communication plan and (iii) strategy towards the desired culture and practices post-closing.
• Ensure that top management is visible and approachable during the process and post-closing. Prevent a war on power by introducing shared standards for both legacy companies in terms of leadership, decision-making, company values or branding, remuneration policy and key business units or segments.