Do leaders matter in M&A transactions? Intuitively, of course they do; company leadership is universally understood to be a critical part of a deal’s success or failure. After all, along with looking at synergies, financials, product and service outlooks and so on, assessments of potential strategic acquisitions also include an assessment of the target’s leadership team.
But how much does leadership matter? In one Willis Towers Watson survey on human capital issues in M&A, acquirers rated “influencing the effectiveness of senior leadership” as the biggest difference between very successful and less successful deals.
Source: Willis Towers Watson M&A pulse survey
Additionally, employees rank leadership as the first- or second-most important driver of employee engagement in companies undergoing significant changes according to the results of another Willis Towers Watson study.
Willis Towers Watson Global Workforce Study
To some degree this depends on the deal objectives. For example, operating an acquired company independently without any integration is different from combining the acquiring and target companies into a best-of-both organization.
This roadmap, simplified from one which we created for a client, provides a starting point for the tasks and decisions to consider during an acquisition:
*Note that executive compensation is intentionally not addressed in detail here but is an important topic in its own right.
Necessarily generic, this roadmap should be adjusted to the unique circumstances of each deal, but there are a few general principles we can consider:
Usually sooner is better than later when identifying the new leadership team. Take the example of a financial services company that purchased a competitor’s business unit and needed to select a new combined leadership team. The target leadership team knew that a few of them might be needed in the new company, but most would likely be let go.
Usually sooner is better than later when identifying the new leadership team.
Consider the impact to the acquired business if the financial services company had waited until after deal closed to appoint the leadership team or begin a selection process. Leaders are worried and distracted, and these feelings flow through to customers and employees — and ultimately business performance. In the roadmap in Figure 3, the selection and appointment process for the top team finishes at the time of deal sign and announcement.
How you retain leaders requires an assessment of the departure risk and coordination of different retention measures. In the case of a construction and engineering (C&E) firm entering a new region, retaining the existing leadership team was vital to operating the target and identifying new growth avenues. As part of its letter of intent, the C&E firm included a retention payment budget as part of its offer, with the way it was distributed to leaders and key employees being mutually decided. This was in addition to the earnouts the target leadership received as part of the sale.
Thirty percent of senior leaders are asked to sign retention agreements before deal signing, according to Willis Towers Watson’s 2020 M&A Retention Survey. Another 22% are asked to do so at deal signing. In the roadmap in Figure 3, in addition to financial incentives, communication and engagement is highlighted between sign and close. In the same survey, more than 50% of companies found personal outreach by leaders, participation in integration activities and enhanced career opportunities to be effective non-monetary tactics to retain senior leaders.
Source: Willis Towers Watson’s 2020 M&A Retention Survey
Before the deal closes, the acquiring company can influence business performance via the target company’s leadership team. In the case of a chemicals company that bought a carveout business, a long period between sign and close was required to allow the seller to complete the carveout process. A new organisation design combined with internal recruiting from the parent company was required.
The chemicals company knew that if the members of the target leadership team had their immediate needs met, they quickly would be open to learning and partnering on the future vision of the new owner. Business performance was less likely to suffer while they waited for deal close, and more favourable carveout decisions might be achieved. Just prior to deal sign, the chemicals company appointed all executives to roles via employment contracts conditional on close with — new compensation and retention plans incorporated.
Buyers can address leadership retention risk through clauses in the SPA. In the case of a financial services company buying into a new country, retaining the existing management team was vital to gaining a sustainable foothold in a new market. The company named the retention of key executives as a condition precent to deal close, along with an 80% threshold for retention of direct reports to the executive team. Although they took positive actions to engage the target leadership team early, this provided a backstop if leaders and talent did not see a future with their proposed new owner.
Every deal is different, but these are some of the common leadership issues that are addressed in acquisitions. Do you disagree, or have a different experience?