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As we forge into 2018, we have yet to see whether exit from the EU will have a detrimental effect on M&A activity. Moreover, will the relative value of the pound make Britain’s prized assets more attractive to overseas companies? It may not be as simple as this but, nevertheless, Boards will need to have the right resources and understanding in place to prepare them for action at a moment’s notice.

Article by Oliver Parry, Director and Head of Corporate Governance for the UK – Morrow Sodali

If 2016 was unpredictable, 2017 was a year of reflection, consolidation and, for academics and journalists alike, an opportunity to look forward. We are all trying to understand more coherently the impact of numerous geo-political issues effecting the UK market, including (to name but a few) Donald Trump and, of course, Brexit. This wasn’t just speculation on behalf of opinion formers. Many things became clearer, especially in respect of Brexit and, to a lesser degree, President Trump. Companies remain optimistic and, despite the prevailing view of many commentators, the market appears to be performing way above expectations. Indeed, according to the UK Institute of directors, business leaders’ confidence in their own firms remains “robust as they look ahead to 2018.” The London Stock Exchange announced at the end of 2017 that 106 companies have floated on its market, raising £15 billion. This is up 63 percent by the number of IPOs and up 164 percent by the value of IPOs, compared to 2016. Additionally (and perhaps crucially) this activity surpassed all other European exchanges, ranking second globally by money raised. If this wasn’t enough to fuel a degree of optimism for 2018, in the third quarter of 2017, the UK witnessed a sizeable increase in the value of successful cross-border and domestic mergers and acquisitions involving UK companies. According to the Office for National Statistics, there were 163 acquisitions involving UK companies worth £86.4 billion in the third quarter, compared with 241 transactions valued at £33.2 billion in the second quarter. Overall, the number of inward and domestic M&A deals has seen an increase since the fourth quarter in 2015, where they have remained above the average recorded since 2010. In contrast, the number of M&A deals remains at around, or slightly below, the average since 2010.

“Culture and employee engagement isn’t just a people issue. Without appropriate buy-in from employees, the rationale of the acquisition or merger could ultimately be derailed and result in much bigger strategic problems down the line”

HR teams are often on the back foot when it comes to the practical challenges and implications of M&As. This isn’t because of a lack of enthusiasm on behalf of the HR team, but rather a question of how involved they are at the top companies. In other words, do they attend board meetings? Should they have a seat at the top table, they can be assured of having a good understanding about the strategic focus of the company and are able, therefore, to plan accordingly. Indeed, HR leads need to be involved as soon as possible once the decision to proceed with a deal has been agreed. In particular, HR directors need to focus on employees, especially where the skills-base was an important reason for the transaction. Aside from trying to create a good cultural fit, there are a number of important practical issues that demand a HR team’s attention. Many of these will need to be looked at before the transaction is complete. However, this is only possible when the function is involved at the beginning. Naturally, this isn’t always possible. Potential suiters often come knocking at unexpected times, usually when you least expect it. An acquisition or a merger can take a company by surprise and a number of things need to fall into place very quickly, both from an internal and an external perspective. It’s not just the bankers and lawyers that have to pull “all-nighters” during crucial stages of the deal. Communications and HR team teams will often be working extremely long hours, under excessive pressure, to make the deal work. Crucially, HR teams need to look at how they can guide individuals through the process, supporting the overall business objectives of the deal and making sure that the day-to-day activity of delivering a product or a service is maintained.

According to Willis Towers Watson, much of this rides on how they achieve those goals. One of the key reasons for M&A failures are “incompatible cultures, inability to manage the target and inability to implement change”. This demonstrates that culture and employee engagement isn’t just a people issue. Without appropriate buy-in from employees, the rationale of the acquisition or merger could ultimately be derailed and result in much bigger strategic problems down the line. Forging companies together is never an easy process. Executive management should consider, from an early stage in the process, how to align the cultures of the organisations, how to communicate and, critically, how to create a long term and sustainable employee engagement programme. The latter is crucial as this often holds the key to implementing a deal successfully. However, the problem for HR leads is that they are often asked to think about these matters at the very last minute, usually when a number of important decisions have been made by the board and the SMT. It is vital, therefore, that HR teams are involved at an early stage. This should involve the establishment of a project team, to manage the integration process, and potentially permitting HR directors to attend board meetings and SMT meetings, when they are not full members. By involving HR directors early in the process, and establishing an employee engagement programme, companies can more easily prevent staff disillusionment growing and demonstrate that people are just as important to the deal as is the financial benefits. Indeed, it is important to note that where one listed entity acquires or merges with another listed entity, asset managers have become increasingly interested with how boards manage, nurture and retain staff. Human capital issues are becoming very important to investors and it’s vital that HR directors and boards consider this for the long term health of the newly formed business.

According to Willis Towers Watson, “One of the difficulties that many HR directors face is how to accurately determine what people are feeling or how two cultures may fit together. The answer is simply to ask employees the questions for which answers are needed.” Leaders cannot just listen to the responses from employees: they need to have posited the right questions in the first place. A crucial phase in any M&A deal is the “due diligence stage” and a culture fit survey can be very helpful to boards and management teams to help strengthen any potential deal. HR directors should have a responsibility here to look at whether there exists a culture synergy between the two companies, identifying areas of strength and, importantly, what companies can do in the short and medium term. It will also identify areas of difference between the two companies. From a HR director’s perspective, this is invaluable as it will help save considerable time and effort in the long term by help the integration and HR teams direct efforts to the potential “problem” areas. The post-merger focus of the HR team must centre on the measurement of the workforce dynamic. This is critical. Surveying staff regularly provides an accurate benchmark and a way of tracking changes over time, allowing them to react and adjust the integration process. By constantly updating the information, elements such as the pace of change, the consistency of message across business units and geographies, as well as overall perceptions of management and how the company is communicating externally can be adapted to match the needs of merger progress.

With considerable uncertainty in the market about what 2018 will have in store for UK companies, it is vital that senior HR leaders begin to think more strategically about what an acquisition or merger might mean for their organisation. HR directors should be preparing for M&A activity in advance, reviewing processes and revising them as needed. As is always the case, early preparation will help avoid costly mistakes and also demonstrate to senior management and boards that they are prepared and capable of playing a leading role in any deal that might come along. As I said, this can happen very quickly! Change will always create uncertainty within an organisation, especially the kind of change that involves the merger of two multi-billion pound organisations. The deal will usually be over in a matter of months, assuming appropriate regulatory conditions are met and shareholders have given the deal their blessing. However, the work doesn’t stop there; HR teams will need to manage that change and, crucially, ensure effective and timely communication with employees. By playing a proactive role here, HR has strategic role in the smooth integration and transition post deal.

www.morrowsodali.com

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