Unleashing M&A success

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The M&A paradox

The M&A paradox

Before taking the plungeThere are more Mergers and Acquisitions (M&A) happening than ever before, but the failure rate is at an all-time high. According to Dealogic, collapsed M&A transactions hit record highs by April 2016, with more than a half year left to go.1 Study after study puts the failure rate of mergers and acquisitions between 70% and 90%.2 Researchers have tried to explain those statistics, by analysing the attributes of deals that worked and those that didn’t.

What’s going wrong?It is clear that something is going drastically wrong, and it seems that the same mistakes are being made time after time.

One reason is that the people aspects are overlooked. Organisations spend ruinous amounts of time and money, yet remain hopelessly incompatible. The black and white columns on an accountant’s spreadsheet are far easier to merge than the messy complexity of cultures, systems and processes. And in an increasingly globalised world, those nuances will become ever more important to understand.

1. Dealogic (2016), Global Withdrawn M&A, 01-Jan – 01 Apr2. Christensen et el (2011), The Big Idea: The New M&A Playbook, Harvard Business Review, March

If you don’t get the people side of due diligence right, then imminent failure is the likely result.

Study after study puts the failure rate of mergers and acquisitions at between 70% and 90%2

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Critical success factor: Compliance &A success

Lost in compliance Any workplace culture comes with a complex web of differing terms of employment. It’s a legal minefield. A lot of compliance risks revolve around payroll and failing to address them can open up the organisation to fines, reputational damage and high staff turnover.

Christopher Imm, Private Equity and M&A subject matter expert at ADP advises “Payroll is a critical component in any M&A activity and with the increasing number of transactions having multinational operations the risk and complexity is also increasing. Having any failure or interruption in service in this work stream, could cause potential attrition or turnover within the employee base of the target organisation. One of the biggest risks during any acquisition is turnover within the target organisation. This is knowledge and expertise leaving that organisation at a critical time that is not part of a planned reduction in force. If employees are not being paid on time and correctly, that will have an immediate impact on their perception and motivation for the new organisation going forward as well.”

Understanding the specific HR compliance and legal requirements is essential knowledge for any organisation wishing to remain on the right side of the law during an M&A. With the volume of tax, employment and payment-related regulatory changes continuing to increase, it is becoming more difficult than ever to remain compliant.

Are you on top of the 35,000 global tax and social security changes that take place every year?3

3. PWC (2015) Making payroll pay

HR’s critical factors to M&A successThere are three critical factors to M&A success – Compliance, IT and Culture. But be warned, this is no place for amateurs. Getting these three right requires a depth of experience and expertise.

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“The M&A team must also work closely with IT to understand the technology systems and processes that will need to be merged.“

Consolidate technology

Meshing culture and compliance together isn’t just the job of HR. The M&A team must also work closely with IT to understand the technology systems and processes that will need to be merged. Recent research by Ernst and Young actually called IT “the lynchpin of success” for M&A: “The human factors — merging company cultures, retaining talented staff and motivating new employees — are notoriously difficult to get right. As such, IT is crucial in ensuring that human resources is able to communicate effective progress of the integration to employees, train workers in new areas where needed and manage the most basic functions including payroll and employee benefit systems.”4

HR spends too much time trying to get the right data before they can make decisions or before they can assess the impact of decisions the merger will bring. Not only is time taken up in getting and collating that data, but also making sure that the data is accurate. Consolidating HRIS systems early in the process will provide a true overview of the business’ entire employee data providing HR with the time to analyse it and support the M&A process.

Critical success factor: IT

Communication is the second biggest challenge to success.5 Don’t let poor tools get in the way.

4. Ernst & Young (2011) IT as a driver of M&A success 5. PWC (2012) Communicating change People-focused communication drives M&A integration success

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“Culture eats strategy for breakfast, you can have a brilliant strategy, but if you don’t have the culture that supports the execution of that strategy, you’re going to have a problem.”

David Altman, Managing Director EMEA at the Center for Creative Leadership

Culture eats strategy for breakfastAccording to the reward consultancy firm Willis Towers Watson,6 more M&A deals fail because of unresolved cultural issues than anything else. An EY study found that communication was the third most important item respondents would have approached differently, with 58% saying they could have improved their communication of the progress of integration to stakeholders. A further 20% of executives said that communication would be the area they would improve the most if they were to conduct the transaction again.7

It’s no surprise that communication is an area that can be improved. An integration process affects a wide variety of stakeholders with different interests. Tailoring individual messages to each audience can be complex and difficult to do. Merging two businesses comes down to culture. It’s about bringing together two different groups of people. All the strategy, consolidation and efficiency gains you hope to achieve will only work if they voluntarily and enthusiastically, become one. Leadership and culture can have a profound impact on business results. Yet too many organisations have leaders that simply set the M&A strategy and hope that culture will follow. According to David Altman, Managing Director EMEA at the Center for Creative Leadership “Culture eats strategy for breakfast, you can have a brilliant strategy, but if you don’t have the culture that supports the execution of that strategy, you’re going to have a problem.”9

Don’t make it harder on yourself

Getting your employees support isn’t simple. Any fundamental mistakes in the following areas will make the transfer of employees between organisations even harder:

Payroll continuity

Global payroll coverage and reporting

Legislative compliance

Discrimination legislation

Accrued entitlement

The transfer of employment of foreign nationals

Occupational health and safety issues

Payments of taxes and social insurance contributions

Transfer of employment contract from target company to another employer with different contract terms9

6. Towers Watson (2014), M&A HR Readiness7. Ernst & Young (2014), The right combination: Managing integration for deal success

8. CorporateLeaders and CCL (2016), Leadership for Business Success: Creating a culture that drives performance and innovation9. Baker & McKenzie (2013), Asia Pacific Guide to MERGERS & ACQUISITIONS

Critical success factor: Culture

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10. Ferrer et al (2013), ‘M&A as competitive advantage’, Mckinsey.com, August11. Ernst & Young (2014), The right combination: Managing integration for deal success

Executing integration plan

If only an HR partner was called upon soonerThere’s an M&A anecdote from McKinsey that nicely illustrates how HR Business Process Outsourcing (HR BPO) could help in so many deals, if only it was called upon sooner: “[The] buyer criteria…focused on being one of the most effective operators in the industry, supported by strong IT systems and processes. Executives proceeded with the deal without ever learning that the IT team had a different picture of the eventual end state, and they learned only after close that the two companies’ IT systems could not be integrated.”10

Professional Services firms such as EY advise that bringing in external third parties, such as HR Service providers, can help clients strike the right balance between speed and thoroughness. A recent EY report found that “expertise in the integration process itself was the area in which external advisors were most useful… in the initial phases of an integration process on back-office functions, such as HR, finance and IT.”11

The benefit of having an expert HR BPO provider throughout an M&A deal, for both buyer and seller, cannot be understated says Christopher Imm: “When you look at the challenges of any type of M&A deal, whether it’s a merger absorption or a divestiture stand-up, it’s having the expertise in those different countries to develop a plan to integrate those employees quickly and create standardisation and best practices. It is also about having insight prior to the actual M&A and before the actual transaction closes so that there is a plan of how to quickly absorb or stand-up those employees, not only from a payroll standpoint but from a compliance standpoint. That’s something unique that I would say only an expert partner can provide.”

The value of an HR provider for the buyer and seller cannot be understated.

“Expertise in the integration process itself was the area in which external advisors were most useful.”

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Summary

How to secure your M&A deal with a single integrated HR platform? A single integrated HR technology offering should include:

Practices adoption: Rapid deployment of Human Capital Management (HCM) services

Expenditure avoidance: Lowering Transitional Services Agreement (TSA) exposure and stand-up costs

Duplication avoidance: Multiple internal HR systems that can be replaced by a single, globally recognised system

Organisational streamlining: Global experienced HR team on call to integrate systems whenever needed

Performance realignment: Delineated roles and responsibilities between third party and client

Operational efficiency: Integrated functional areas in a single review with HR, benefits, and payroll

Economies of scale: Increased purchasing power with a single payroll vendor

Data analytics: Thoroughly analysed client data to manage change

Risk mitigation: Expertise to ensure legislative compliance and limit financial exposure

Technology support: The tools and regular software updates needed to successfully support each and every client

“No two M&A transactions are the same,” warns Christopher Imm. “That’s where ADP’s expertise comes in. We have worked beside our clients typically on more than 100 M&A transactions a year, which means we understand the challenges they face. We can help work through, and build a plan specifically around the unique requirements of the deal. If you had a partner in every core functional area that could assist you, you’re going to dramatically increase the success of a merger, acquisition, or divestiture.”

The challenges of any type of M&A deal, whether it’s a merger absorption or a divestiture stand-up, is having the expertise in those different countries to develop a plan to either integrate employees quickly, create standardisation and best practices while eliminating poor, redundant policies or duplicate processes.

M&A

The Merger Integration Services offered by an expert third party helps to reduce HR costs by integrating and streamlining HR processes.

The ADP logo and ADP are registered trademarks of ADP, LLC. All other marks are the property of their respective owners. Copyright © 2016 ADP, LLC.

About ADP’s M&A ServicesADP’s M&A services provides guidance and insight prior to the merger and before the actual transaction closes by developing a plan of how to quickly absorb or stand up those employees. ADP’s background helps you to comply with all the local laws and requirements and that there’s a plan to deal with the unknown items that are going to come up during the transaction.

ADP brings expertise of how to leverage the technology and the systems to make you successful in any location around the world. For more information about how ADP can support you please visit ADP.com.

About ADP (NASDAQ-ADP)Powerful technology plus a human touch. Companies of all types and sizes around the world rely on ADP’s cloud software and expert insights to help unlock the potential of their people. HR. Talent. Benefits. Payroll. Compliance. Working together to build a better workforce. For more information, visit ADP.com.