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Drivers of deal success in global M&A

Posted on from Mercer

As the economic recovery builds momentum in 2014, global M&A activity is expected to continue to increase and some large deals have been rumoured – or already announced – in Europe in Q2 2014. Adam Rosenberg, UK M&A leader at Mercer, shares his insights.

Global success

Overall deal volume is forecasted to rise by nearly 20%, pushing global volume to their highest level since 2008. Getting the full value out of these deals will require immense coordination and depth and breadth of experience — particularly for global transactions, which in comparison to single country deals, are far more complicated, costly, and time and resource-intensive.

Managing risks

Indeed, managing the risks of people integration alone is a highly specialised niche, subject to a myriad of cross-border nuances and complexities. Companies that understand these unique challenges and develop clear strategies to address them will be poised to capitalise on resurging global M&A opportunities and drive deal success. This applies not only during due diligence, which is the first step in trying to identify all of the issues a buyer will face after a deal completes, but also during the post-signing and post-closing integration. This is when most deals are won or lost.

General due diligence objectives

Whether deals are single country or global, and involve one or more countries, a few key objectives are critical to the due diligence process and to reaching a final purchase agreement.

Identify deal-breakers

Early red flags can help prevent a poor deal from getting signed and are typically issues discovered to have such a large financial impact that future profits would no longer provide the return on investment presented in the target company’s financials. For example an HR deal-breaker might be the discovery of a material under-funded pension liability, or executive change-in-control payments. These may be detrimental to the valuation of the company (to the extent they will be financed by the target company instead of the seller) and may also result in the departure of important leadership talent believed to be key to the company’s financial success.

Identify value-changers

While not all-out financial deal-breakers, these operational issues impact profits, cash flow, and the balance sheet, and must be addressed to ensure an accurate valuation model and fair purchase price. HR-related value-changers might be associated with the deployment of talent, compensation and benefit programs, or HR operations.

Mitigate material risks

Once the financial analysis is complete, the buyer needs to identify specific strategies that the seller must implement before closing (usually structured as part of the purchase agreement). This ensures that issues uncovered in due diligence are accurately captured and the precise remedies are defined. Perhaps the seller needs to restructure the workforce (and pay severance) before transfer of ownership or agree not to set up a generous new sales incentive plans before selling the company.

Identify deal-makers

Realistically, these activities can only be performed once the buyer owns the business, but they are critical to ensuring the company runs as smoothly and efficiently as possible and realises the financial synergies from new ownership. These post-signing and post-closing activities include identifying priorities, establishing timetables, managing dependencies, and ushering resources to successfully carve out and stand up, transition, and/or integrate the target company.

Unique HR challenges of cross-border deals

Most companies are very familiar with the technical aspects of managing people in their own country and have reliable processes for dealing with a relatively finite set of issues. anyone that only has own-country experience will face a steep learning curve in addressing the same issues elsewhere in the world, and the complexities grow exponentially when dealing with multiple issues across multiple countries.

Workforce and labor issues

Companies in most countries (with the US as a notable exception) are legally required to provide workers at all levels with contracts that define the specific terms and conditions of their employment. Often these conditions are guaranteed and must transfer to the buyer. However, if the buyer is unwilling to take on the terms of a contract, protracted negotiations or possibly workforce restructuring may result, in turn necessitating the management of numerous details around severance and restructuring.

Organised representation of workers also varies widely around the world. For example, every Brazilian employee — white-and blue-collar alike — belongs to a union; in Italy, every worker is subject to a collective bargaining agreement; and other European countries have works councils — local or site-specific negotiating bodies that represent employees’ interests and are quite powerful. In fact, a German company needs only five employees to form a works council, and management cannot make far-reaching decisions about structure or operations without the agreement of this body.

Most companies are required to provide mandatory minimum severance payments and also must consult or negotiate with employees around the extent and scale of any restructuring. French companies are required to negotiate with works councils regarding how much will be spent on re-training and re-deploying terminated employees; Germany has no mandatory minimum severance, but for a works council or local labor union to agree to the termination of workers, companies must provide employees with re-training, job-placement assistance, and very generous payments.

Headcount can be a very poor indicator of deal complexity, particularly when the workforce is distributed unevenly across countries. While seemingly counter-intuitive, depending on the location and the specifics of the transaction, operations with relatively small numbers of workers can cost more time, money, and effort than operations in other countries with much larger headcounts.

Benefits issues

Social security, tax systems, and labour laws look vastly different from one country to another and drive very individualised benefits practices. In the Netherlands, while social security benefits are relatively poor, there is a thriving employer pension-fund industry with great sophistication around funding, financing, and investing. Indeed the Netherlands was often seen as one of the best examples of how to provide benefits to a wide and diverse workforce until more recently when benefits have even been reduced in some cases. Conversely, France’s social security system, which includes a mandatory employer component, is very generous and picks up the slack from a lack of supplemental retirement plans.

The mandatory or discretionary nature of benefits continues to evolve and morph around the world, and acquiring companies need to stay abreast of current policies. For example, a company making an acquisition into the US would need to understand that under healthcare reform, most employers now need to provide minimum affordable medical coverage to the majority of full-time employees. In addition, many countries have mandatory retirement arrangements, such as retirement or termination indemnities, creating defined benefit balance sheet liabilities that can negatively impact a deal even though they are not technically classed as a “defined benefit” pension plan.

Culture greatly affects how information is gathered, how comprehensive it is and how what is said and done is received and interpreted – we see many businesses providing large volumes of paperwork and expect buyers to find the pertinent issues themselves. Others will provide almost nothing and expect management meetings to provide all relevant information.

With multinational transactions, these issues multiply exponentially, making the deal much more challenging and potentially problematic given the differences not only between businesses but also across geographies and in many cases language differences further complicates matters. Ironically, many companies are so focused on the financial aspects of the deal that culture is never really addressed. There have been a number of failed high profile deals in the last decade where culture was seen to be one of the critical factors. Culture and people related issues are quoted as one of the main reasons that deals fail to deliver value – when asked, over half of the executives involved in deals stated that organisational cultural differences were some of the most significant issues faced in managing deals1.

If there is no validation of how companies do business, how they make decisions, and how they are influenced by cultural differences, a seemingly good deal can turn disastrous.

Culture greatly affects how information is gathered, how comprehensive it is and how what is said and done is received and interpreted – we see many businesses providing large volumes of paperwork and expect buyers to find the pertinent issues themselves. Others will provide almost nothing and expect management meetings to provide all relevant information.

With multinational transactions, these issues multiply exponentially, making the deal much more challenging and potentially problematic given the differences not only between businesses but also across geographies and in many cases language differences further complicates matters. Ironically, many companies are so focused on the financial aspects of the deal that culture is never really addressed. There have been a number of failed high profile deals in the last decade where culture was seen to be one of the critical factors. Culture and people related issues are quoted as one of the main reasons that deals fail to deliver value – when asked, over half of the executives involved in deals stated that organisational cultural differences were some of the most significant issues faced in managing deals1.

If there is no validation of how companies do business, how they make decisions, and how they are influenced by cultural differences, a seemingly good deal can turn disastrous.

Drivers of global deal success

Many well-intentioned companies set their sights on a global acquisition but have no idea what they want to achieve by doing so. First and foremost, the buyer must have a clearly defined business strategy that provides a sound rationale for the deal. If the company is trying to make HR determinations about which programmes to keep or what kinds of headcount changes to make, and lacks a guiding strategy to inform those decisions, then the effort is doomed to fail.

To be successful, companies need HR knowledge and expertise both at a strategic level to guide the buyer through the transaction, and at the tactical level to navigate the challenges and pitfalls of global transactions. In addition, they must be willing to invest in dedicated project management — a value-added skill that takes time, money, and resources, and is essential to the high degree of coordination required for complex multinational deals.

As the environment for cross-border deals continues to improve, companies that have deep knowledge of countries’ unique operations and cultures, a clearly defined global strategy, and proven expertise in executing complex multinational transactions will be well-positioned to capitalise on worldwide M&A growth opportunities.

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