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5 people challenges to watch out for in an M&A deal

And what to do about them

Mergers and Acquisitions
Mergers and Acquisitions

By Max Wright , Alberto Mondelli , David Hunt and Gabe Langerak | September 24, 2020

Steps buyers can take in the period between deal signing and close to ensure they receive the business (and people) they negotiated for.

The purchase agreement has been signed, important human capital decisions have been made and the close date is set. You can plan for Day 1 now, safe in the knowledge that your new business will be off to a running start.

This is a rare scenario! The period between signing and close is crucial to making sure buyers receive the business (and people) they negotiated for. Prepare yourself for differences in understanding, missed communication opportunities, misunderstood assumptions, issues when transitioning from the deal team to the business team and competing business priorities.

As a buyer, here are five people challenges you need to watch out for, and make sure you are addressing early.

  1. 01

    (Re)Focusing leadership

    The target’s leadership team is a critical issue in any deal and you will hold some discussions with the acquired leadership team during the negotiation. Often these don’t provide enough clarity to the acquired leadership team, creating uncertainty that becomes a distraction to them once the deal is announced.

    The most successful acquirers know they need to take care of the leadership team’s (provisional) employment contracts before the deal is announced so leaders can focus on running the business, including supporting employees, during the transition period. If you can successfully settle the leadership team, they will become your champions for the larger company.

  2. 02

    Retention of key talent

    Acquisition of skills and experience is often a stated deal objective, yet some buyers will wait until they have control to begin talent retention activities. The risk of people leaving begins as soon as the deal is announced. Therefore, an analysis of the retention plans in place by the seller (if any) is the first step.

    The risk of people leaving begins as soon as the deal is announced.

    Do the financial retention plans cover the period beyond Day 1? Usually they don’t, so the talent is at risk as you approach Day 1. Buyers can make conditional retention offers to talent via the seller that covers their future employment after Day 1.

    What about non-financial retention activities? On the personal engagement and career aspiration side, this may be more difficult to achieve pre-close as sellers will restrict access to their talent. But the leadership teams can interact and the target’s leaders should be communicating the deal rationale and enhanced career opportunities available to their best people – crucial for you to keep people beyond the financial retention period. 

    Are you sure you have the right key talent? In many cases, we find that some key talent/roles within acquired organisations only become evident post-close. Keep some budget squirreled away to ensure you have something to offer after Day 1.

  1. 03

  1. Cultural integration

    Considerable research has shown that culture is a top reason for deals failing to achieve their objectives. It’s not because people can’t work together, but because the way of getting things done is different, slowing down or discouraging discretionary effort, productivity and innovation.

    This lack of understanding of how to actually get things done can freeze your organisation on Day 1 and prevent you from serving your customers. It is helpful to have a good understanding of your current cultural strengths and differences so you can identify the potential clashes in advance, having enough time to address them proactively.

    A cultural crossmatch exercise will identify where you have common ground which can be built on, and soften some of the differences. Some common cultural differences that come up early in integration are leadership styles, decision making processes, org design, incentives, communication methods and customer management.

  2. 04

    Buying a carve out

    Many larger acquisitions are structured as a carve out from the seller, with the principle they will operate on a standalone basis at close. But what constitutes standalone for people programs may not be fully defined and often includes some form of transition services agreement (TSA) to make up the difference.

    One of the first key activities in a carve out must be to understand, what is actually transferring and what gaps must have a replacement solution.

    One of the first key activities must be to understand, in a legal sense, what is actually transferring and what gaps must have a replacement solution. These issues may seem mundane but this is where the complexity and potential for integration pain lies.

    There are several questions the buyer should ask:

    • Are benefit plans, compensation systems, payrolls, etc., owned by the legal entity or by a non-transferring parent?
    • How will shared service functions be allocated to the standalone company?
    • Will benefit programs be replicated for the standalone business or will employees remain in the seller’s plans?
    • How will incentive plans be settled based on partial year performance?
    • Will systems be replicated?
    • Are outsourced services continuing or brought inhouse?
  3. 05

    Transferring employees in asset deals

    In an asset deal, the assets transferring to the buyer are defined in the purchase agreement. This usually includes the employees transferring, the applicable employment terms (keep whole agreements are common).

    But that’s where the legal terms stop, which leaves a host of practical questions:

    • Will the employees’ existing labour agreements and employment contracts transfer?
    • Do you, as the buyer, need to make an employment offer?
    • Do employees have the right to refuse transfer?
    • How will differences in employment terms be bridged?
    • Will new compensation and benefit plans need to be established?
    • What will all this cost?

Solutions are not necessary in due diligence, but the risk must be understood.

We see these issues failing to be addressed at due diligence and it comes as a surprise that a material deal risk (employees don’t transfer) or cost (expensive T&Cs must be bought out) comes up later. Early identification of the issues is critical and requires local expertise to understand the nuances in local laws. Solutions are not necessary in due diligence, but the risk must be understood.

Hot topics for buyers

Buyers in certain jurisdictions need to be aware of particular issues. Here we put a few under the spotlight.

Europe: Pensions

HR has a love/hate relationship with pensions and pension plans – we need them to ensure our employees are looked after and remunerated fairly, but they’re tremendously complex and different the world over. This is especially the case in Europe, where many legacy defined benefit (DB) plans still exist and can cause big headaches on acquisition.

Europe is not one country – different countries within the continent have their own pension systems and different ways of funding those plans.

Some examples to note – the multitude of unfunded pension plans in Germany, as past acquisitions have often not been able to be harmonised; or the cash balance plans in Switzerland, where an organisation reporting under US GAAP may be required to report a company liability, whereas one reporting under IFRS would not!

But that’s not all; we have insured pension plans (like those in Belgium), which guarantee part of the returns, but not all the returns required to be covered – thereby retaining an employer liability. The Netherlands has collective defined contribution (DC) plans, in which employees are guaranteeing each other’s pension and the employer’s contribution is fixed on a periodic basis. In the UK there are plans that can constitute DB and DC elements; you could be liable for a so-called section 75 debt, if you’re part of a multi-employer plan and are looking to exit this or carve out part of the population.

At times this has meant that possible changes will temporarily be put on hold by the acquirer. This is a mistake as it increases the harmonisation costs and the momentum regarding the decision whether the current pension commitment should be applicable is lost as is the opportunity to review the pension plan as part of the full employee value proposition. 

United States: Health plans

In the US, company sponsored health insurance is very common. In many cases these programs are not sponsored by the actual legal entity included in the transition but by a parent company. That means these programs will often not transfer to the seller as a part of the closing activity. In many cases, you may not be able to enter into a TSA agreement with the seller to cover all items.

Large companies may self-insure health plans or have other custom financing arrangements. If you didn’t look at this in due diligence, make sure you understand the financial impact now. Solutions could include enrolling the employees in your own plans or standing up new plans for the acquired group. Both scenarios have challenges that need to be addressed and thought through to ensure a smooth and effective transfer on Day 1. The successful transition of these programs will be key to ensuring employee engagement going forward.

Asia: Talent retention

This is the number one issue we see in preparing for deal close in Asia. The talent market in many Asian countries is generally tight; adding in the disruption of an acquisition can squeeze this even further as employees take the opportunity to consider their career options.

Willis Towers Watson’s Global M&A Retention Study found that, globally, 79% of acquirers using retention incentives retained at least 80% of targeted employees for the full retention period. In Japan, this was 100% of acquirers, but in China it was less than 40%.

How should a buyer identify key talent for retention? Our data and experience overwhelmingly point to the target’s leadership team as the best source of information. From there, you must decide on the retention risk, award design and time period. More broadly, if you are acquiring through an asset deal, this is a red flag for retention.

In many Asian countries, there is no automatic transfer of employment for an asset deal. In some countries, employees know they may be paid severance from the seller if they refuse to transfer. This puts the buyer in a difficult negotiating position if the employees have in-demand skills and can find a job easily elsewhere. Companies may have to budget for a transfer incentive close to the severance payout value to encourage a smooth transition of the workforce.

Latin America: Culture

In Latin America, cultural differences should be considered when planning integration efforts. Communication is more effective when delivered face-to-face, and people tend to prefer oral to written communications. Also, time is not money. People like to take their time to make decisions and do not appreciate a “straight to the point” approach.

Communication is more effective when delivered face-to-face, and people tend to prefer oral to written communications.

Regarding the regulatory environment, labour laws and court systems protect the employees, and acquired rights can be a barrier to a swift integration. Unions are strong in some countries, to the point of getting involved in discussing employee benefits and compensation in large deals.

Compensation and benefits packages can be complex and rich in benefits and perks, both mandatory and market practice. Subsidiaries of foreign multinationals tend to be compliant with local legislation, mandatory provisions and tax contributions, but some local and family-owned businesses may have “creative” ways to manage these issues (e.g., contractors, split payroll, outsourcing).

In addition, unrecognised or “hidden” liabilities may be present (e.g., change in control agreements with executives, post-retirement medical obligations, and unpaid legal indemnities). You should allow above average integration planning time in this region.


Director – Mergers & Acquisitions, Asia Pacific

Senior Director – Mergers & Acquisitions, Latin America

Senior Director – Mergers & Acquisitions, North America

Senior Director – Mergers & Acquisitions, Western Europe

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