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Post-merger integration: the people challenge

For many reasons, surprisingly few M&A transactions achieve the results hoped for by investors. Could that change if dealmakers were more aware of the need to manage the complex employment issues that inevitably arise before and during integration?

Despite all the long planning that goes into preparing an M&A transaction, a remarkably small number actually end up producing the hoped-for results. Indeed, some estimates suggest that as few as 20% of deals achieve the benefits a buyer was banking on. There are, of course, many reasons for this low success rate. But it is undoubtedly true that one major factor is the lack of awareness that goes into planning for and managing the complex employment issues that inevitably arise when two organisations come together.

If handled badly, such changes can damage productivity, erode employee engagement, delay value creation, damage relationships with customers and clients, as well as market reputation/position and, in extremis, lead to expensive legal procedures and even strike action.

If handled well, the exact opposite is true. Planning and managing the employment, human resource and people integration aspects of any transaction will, therefore, always be critical to the success of a deal. This is particularly the case where the transaction impacts across a number of different jurisdictions where you have to manage not only different legal and regulatory requirements, but also different cultures and employee consultation requirements.

Allen & Overy’s bespoke employment restructuring online tool – covering 35 different jurisdictions – is a useful resource for mapping the different legal requirements that will need to be met in completing a cross-border deal.

But the transaction team needs to devoteequal, if not greater, resources to understanding the cultural differences of the markets it is targeting and fully focus on achieving best practice, whether or not that is a requirement of the local law. The key message here is clear: even if common standards do not apply, common sense should.

Careful planning at every stage

At every stage of the transaction – before, during and after – the team needs to ensure that both short- and long-term employment issues are taken fully into account along with other leading concerns, whether economic, regulatory or tax-related.

Creating a balanced team with the right levels of expertise in all these areas is essential. Too often, investors – particularly those from less regulated markets such as the U.S. and the UK – skimp on addressing the people issues. They can end up paying a heavy price for regarding them as something that can be mopped up later.

Where employment issues are concerned, detailed forward planning is a must. Even the structure of the deal will have an impact on the post-deal integration strategy and the legal requirements that will apply.

These will tend to be less onerous in a share deal where the identity of the employer does not change. But if the deal is structured as an asset sale, more difficult issues arise. EU countries insist that existing employment terms are safeguarded when assets change hands. Some non-EU countries, such as Singapore, Canada and New Zealand, offer similar protection to some employee groups.

The importance of being open

Effective employee communication during the deal and in any subsequent reorganisation is essential, not optional. Transactions and restructurings are notoriously anxious times for employees. Speculation is rife; uncertainty abounds. Poor communication can be a damaging drag on morale, performance and motivation and disrupt a smooth transfer of ownership.

We have seen examples where poor communication has caused major problems both in markets that are heavily regulated, such as Belgium, as well as in markets where regulations are perceived to be less strict, such as China.

So, it is important both to meet local legal requirements on information and consultation and to build a system of internal communications that allows employees to express worries and have their say.

Nowhere is this more important than when the main purpose of the transaction is to acquire and retain people with sought-after skills in the target company – often a priority in IT transactions, for instance.
If redundancies follow a deal, it is important to think about those who face severance and those who will stay. The latter group will make judgements about you as an employer based on how you handle that process. If there is a loss of trust, this can easily persuade key personnel to vote with their feet and look for a job elsewhere.

But getting the timing right for informing and consulting is a tricky process, not least in EU jurisdictions where the
law insists on proper communications with works councils (both local and any European Works Council (EWC)) and other local representatives. Some countries – Germany, France and the Netherlands, for example – apply stricter rules on works council consultations and the process can be more drawn-out. Even in less strict regimes, Poland for instance, investors should expect the process to take up to two months.

But coordinating the process on a crossborder deal is even more complicated, particularly if there is a danger of news leaking out. Employees never appreciate hearing news of a deal or a restructuring second-hand through the press or on the commercial grapevine. The same applies in those jurisdictions such as Germany, France, Luxembourg and Spain, where the law insists on some redundancy programmes being supported by a detailed social plan, offering those laid off proper severance rights and opportunities to be retrained and redeployed.

That makes it essential to draw up a careful timeline for the communications strategy, with early notification built in. It is vital, too, to ensure that the message being given in different countries is always consistent, delivered by people who know the business case inside out and can give clear answers to employees and their representatives.

Retaining key people

Strategies for retaining key people post merger vary widely from market to market. In some, notably the U.S., the emphasis is often on short-term financial incentives, even though section 409A tax regulations, brought in after the Enron debacle, mean that these can potentially fall foul of the law if not structured correctly.

But often, a more subtle and long-term approach can pay bigger dividends. In our experience, there is no ‘one-size-fits-all’ option. Diverse groups of employees require diverse approaches.

But it is worth remembering that employees will most likely want assurances that the new business has a strong and sustainable strategy, well thought-through growth plans, and that it offers them reasonable long-term job security. Financial incentives are important, but are unlikely to be enough on their own. Again, effective communications here have a very high value, yet it is a value that all too many investors fail to recognise.

Striving for best practice

This is a complex area of the law. The best approach is to go beyond pure focus
on legal compliance by building strategies that also take full account of differing cultural expectations and market standards in human resource planning.

The overall goal is to achieve best practice in tackling the people challenges. More often than not, that offers the very best guarantee that a transaction will achieve the wider commercial benefits that were intended.

The second edition of ‘The Big Think’, a briefing paper from Allen & Overy’s global Employment practice, will investigate these issues in greater detail.

This will be available from mid-May at www.allenovery.com/thebigthink



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