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Merger suicide: How to stop M&As going wrong by retaining key executives

Published on Saturday, 21 Mar 2015
Publicis CEO Maurice Levy (left) and Omnicom CEO John Wren shake hands on a proposed merger of the two advertisers in 2013. The US$35bn deal was called off less than a year later partly due to differences over who should fill key roles. Photo: Bloomberg
Massimo Borghello
Head of M&A services, Towers Watson, Asia-Pacific
Bob Partridge
Asia-Pacific Private Equity Leader, EY

Good corporate communication and proactive HR departments are key to keeping essential employees after deals

There are few businesses whose success is not built on the skills and judgement of their key personnel. That is why losing such essential staff from a recently acquired company can be so frustrating, and costly. 

However, the results of Towers Watson’s “2014 Global M&A Retention Study” show that even if initial deals can be struck to hang on to highly valued staff, this does not always result in their long-term commitment. 

“The survey was conducted to try to understand what employers do to retain staff during a transaction and how effective they are,” explains Massimo Borghello, head of M&A services for Towers Watson, Asia-Pacific. “The study covered around 250 organisations in 14 countries. To participate, you had to have recently gone through an acquisition, and in this acquisition you needed to have executed retention agreements.” 

While 59 per cent of Southeast Asian respondents said that of those employees that had signed a retention agreement, over 80 per cent stayed for the full retention period, only 29 per cent reported that same level of retention one year later. 

Borghello says figures such as these play a significant role in determining the way in which an acquisition is viewed. “While 88 per cent of high-retention companies said their transaction was successful, only 67 per cent of low-retention companies said their transaction was.”

This is particularly true in Southeast Asia, where 52 per cent of companies said the key reason for undertaking M&A activity was the need to acquire talent and new capabilities.

“People have told us in our surveys that they use cash bonuses most often in retention agreements, and these do seem to be the most effective way to stabilise the situation for a period of time. But there is a second layer to this. The people who are failing with their retention policy are not winning hearts and minds. 

“It is important to not just throw money at people, but also engage them with what the new company is about, what role they can play within it, and how that impacts their career.”

The study also found that in Southeast Asia, 75 per cent of those employees who left before the end of the retention period gave the changing nature of the organisational culture as their primary reason.

“We see culture as a shared set of values, beliefs and behaviour that effectively define how work gets planned and executed in a company,” Borghello says. “It influences a lot of things, like how information is shared, how decisions are made, what type of authority people have, what is rewarded and how important customers are.”

Disaffection with a changing culture can often arise from the quality of corporate communication and from the new balance between authority and autonomy.

“Communication is absolutely key,” Borghello says. “If you do not communicate, then people will make up their own messages. There can be confusion around the issue of layoffs, or who will get certain jobs, and when that confusion is left unresolved for a while – people start thinking this is not the sort of company they want to work with. 

“When it comes to authority, you may have had certain decision-making powers, say, in the pricing offered to clients. You have to know what you can do or how you can get approval if it is outside your limit, then suddenly the culture changes to one where you have to go through lots of extra steps to do that, or you might just have much less authority than before. 

So what can businesses in the market for an acquisition do to achieve the best possible outcome? “One driver of success is starting early,” Borghello says. “While the financial and legal teams are conducting due diligence and settling terms, the HR department can already be studying the similarities and differences between the cultures of the organisations and beginning to plan for their integration. But you can only do this successfully if you really know and understand your own culture – what your company’s values are and how things work within it. So it is both a hierarchical and a bureaucracy issue.”

Borghello says the success of the transaction also depends on a speedy alignment of the leadership of the two parties involved, and on a degree of flexibility. “If you’re taking over a much smaller company, your strategy from day one as the new owner may be to completely integrate it. What is most important then is that you let them know what your culture is, straight away. On the other hand, if you’re buying a very successful unit, you might keep them standalone.”

Bob Partridge, Asia-Pacific private equity leader at global professional services firm EY, agrees on the importance to an acquisition of an early understanding of differing business cultures.

“It is a critical part of a successful merger, which can be compared to a marriage,” he says. “The pre-closing due diligence period is the chance for the parties to ‘date’ or take each other for a ‘test drive’ – to test how suitable they are for a combination, both culturally and strategically. Equally important is the communication plan the businesses develop to notify their staff – not just key staff – before the deal closes. 

“They should put in place processes to educate staff about the acquirer, and what the new merged entity means for staff in their careers.”

Partridge adds that companies engaged in a merger need to go beyond retention bonuses to motivate key staff.

“They should consider introducing post-closing metrics that drive the right behaviour to help the merged entity succeed, including helping to migrate the old culture to the new culture. So many M&A deals fail because even though key executives were retained, they were not ‘on board’ for migrating to the new culture. The most successful deals involve engaging key executives pre-closing about how to merge the two cultures.”

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