M&A best practice 2013

by External03 Apr 2013

A company’s ability to successfully retain critical talent during a merger & acquisition has become a significant determinant of overall deal (and company) success, writes Christine Deveney.

According to Mercer’s recent survey of M&A Retention and Transaction Programs, retaining critical talent can often directly impact the overall success of a M&A deal and is therefore top of mind for organisations going through the process. 

According to survey findings, almost two-thirds (62%) of deals completed by participating organisations over the past three years used retention programs. Typically organisations determine whether a retention program is necessary early in the due diligence process then determine eligibility as the close of the deal approaches.

Retaining employee engagement can be a huge challenge while a transaction is mid process.  Employees worry about their job security, career prospects and can become distracted by the changes and uncertainty taking place around them. Planning a clear and effective retention strategy prior to the deal taking place can be fundamental to success and another opportunity for HR leaders to have a demonstrable impact on the bottom line. 

Global benchmarks

To help better understand the tools used to retain critical talent, Mercer analysed information from 42 organisations around the world actively engaged in mergers and acquisitions; reviewing critical data from over 70 global deals. Specific attention was given to the extent retention incentives and transaction bonuses are used to retain talent. 

The findings reveal when companies adopt a retention program, executives essential to long-term success are eligible for retention incentives in 70% of the programs, compared to employees critical for the short term success of the integration who are eligible in just 53% of the programs. However, within Australia and New Zealand, only 29% of organisations indicated a retention incentive plan is in place.

Understanding the deal you are making

When developing retention strategies, it’s important leaders gauge the type of deal taking place and assess the skills of the people involved. The approach has to be both people-driven and deal-driven.  Key issues to consider:

 

  • If the merger results in redundancies due to overlapping capabilities across the two organisations, the focus may be on retaining employees critical to integration only
  • In an acquisition of a start-up, the focus may be on retaining entrepreneurs who have critical skills
  • In a divestiture, the seller’s focus may be on retaining key management through deal closing, rather than over the long-term
  • In an acquisition of a smaller rival, the focus may be on retaining customers and a smaller group of key talent

 

Mercer’s research reveals transaction bonuses are less likely to be provided across the workforce of companies involved in M&A deals, with priority given to executives other than the CEO (42% of deals), deal team members (33%), as well as the CEO (31%).

One size does not fit all

There is no one-size-fits-all when creating retention incentive programs. While many plans share certain characteristics, retention plan design varies depending on the deal size and complexity, type of deal, industry sector, region and whether the transaction is cross-border.

We believe it’s critical to look beyond market benchmarks to examine the unique needs and context of the individual deal, key issues include:

 

  1. Examining whether a retention plan is critical to deal success
    1. Will the business be negatively impacted if key employees leave?
    2. How does the deal impact the employment situation?
    3. Do other ongoing HR programs encourage retention?
  1. Evaluating the population for a strategic retention program
    1. What impact will the individual have on either integration success or long-term performance?
    2. Is there a likelihood the individual will leave pre or post-deal

      3.    Determining the award sizes for retention program participants
                   a. What is the total plan cost?
                   b. Is the award meaningful to the employee and sufficient where a competitor cannot easily buy out the award?
                   c. Should different roles have different award levels?

  1. Clarifying conditions for payment: Pay-for-stay or Pay-for-performance?
    1. Consider synergy milestones for executives leading post-merger integration work-streams
    2. Or deadlines for function heads to ensure stand-alone capabilities in a divestiture situation.

 

Organisations must first review their acquisition strategy and what non-financial retention mechanisms are in place to determine if a retention incentive plan is needed to protect against critical employee flight risk.

If a retention incentive plan is deemed necessary, key design considerations include: which employees should participate, how much they should be awarded, payout timing and structure, performance conditions, and overall plan cost.

More detailed findings from the survey will be presented at a webcast on Thursday April 11. Mercer’s M&A leader in the Pacific Market, Christine Deveney and Tim Nice, Mercer’s Executive Remuneration leader in the Pacific Market will discuss the results, implications, and lessons for organisations engaged in M&A deals.

About the author

Christine Deveney is the M&A Business Leader, Pacific, Mercer

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