As M&A People Risk Soars, Unlocking Deal Value Depends on Retaining Talent
In spite of the daily geopolitical chaos—be it North Korean military threats, Brexit, Chinese banking reforms, Japan’s corporate governance challenges, the Brazilian political crisis or daily turbulence in Washington—corporate mergers and acquisitions are alive and well.
In comparison to 2016, results from the first half of 2017 are showing some noticeable shifts. To name a few, global M&A volume is down 4 percent, but deal value is up 2 percent; the value of China’s outbound transactions has dropped by 49 percent and the value of cross-border deals has increased by 9 percent. Activists are now targeting and disrupting companies in North America, Europe and Japan; private equity fundraising has reached record highs; and the average earnings before interest, tax, depreciation and amortization (EBITDA) multiples on exit are at record high levels globally (15.3x).
Consistent with our research findings from last year, buyers continue to take greater risks, operate with much less information, invest in new geographies, and deploy unprecedented levels of capital in leveraging cheap debt and credit.
In taking a broad view of business and industry around the world, we see that one common denominator drives deal value: people. In our experience advising on more than 1,200 deals annually, we see clear evidence that buyers who consistently drive exceptional operating results have a disciplined process for identifying, engaging, and motivating key talent. This is underscored in Mercer’s Flight Risk in M&A: The Art and Science of Retaining Talent.
In researching the people aspects of mergers and acquisitions to learn about emerging trends through the lens of deal experts, we shared insights that highlighted people-related transaction risks and introduced practical strategies and solutions to help deliver economic value.
Still, both the buyers and the sellers we polled needed specific data and a process to help them identify and retain key talent during transactions. Our research pinpoints specific actions that both buyers and sellers can take to hedge flight risk, engage key talent, and drive an affordable retention plan as part of an M&A transaction.
In today’s environment, where capital is abundant and cheap, the opposite is true for talent. Top performers are expensive to replace. And buyers are vulnerable to the flight risk of key talent in most transactions. The organizational change involved in most deals puts people on edge, and without an added incentive to stay focused, it can result in them opting out or becoming disengaged. Successful acquirers around the world routinely manage their people assets with the same rigor and discipline with which they manage balance sheet risk; they concentrate on three primary people practices to drive value:
Engage the workforce. The first step is to commit to an investment in change management communications. This starts with defining a culture that is tangible as well as assigning decision-making rights, risk management, accountability, and governance.
Practice event management around retaining top talent. Retention programs are viewed as insurance policies to hedge against flight risk in transactions. By applying the right framework, buyers and sellers can effectively lock down critical talent and drive operational excellence post-close.
Align rewards with behaviors. Aligning total rewards (compensation, long-term incentives, benefits, etc.) is foundational to driving behaviors within the organization to unlock true value.
Successful acquirers are taking a people-first approach, and expanding retention programs beyond the C-suite.
People-First, Bottom-Up Approach is Key
We also uncovered some key insights that are important to call out because they were quite different from the last time we looked at retention in M&A back in 2012.
One significant finding is that successful acquirers are taking a people-first, bottom-up approach when designing retention programs. They’re not first budgeting for retention and then distributing to employees—the typical top-down process; instead, they’re focusing on talent first and making sure retention is designed with a focus on key employees.
This bottom-up approach also revealed another significant trend: Retention programs are expanding outside of the C-suite. In fact, when asked about retention bonus eligibility outside of senior management and the C-suite, 70 percent listed “other employees critical for integration” and 35 percent listed “other employees regardless of critical for integration.” This last figure is up 150 percent from the level found in Mercer’s related research report published in 2012.
In addition, the “where” matters. Mercer’s look at global talent retention practices revealed that a company’s headquarter location and industry can greatly influence talent retention practices. These nuances need to be understood and taken into account to avoid talent flight and to ensure the right level of expenditure. Buyers and sellers need to be aware of certain industries that pay financial incentives that vary greatly from the norm. For example, globally in the technology sector, buyers fund individual retention bonuses for all levels on average at 49 percent above the market median. From a geographic and business/cultural perspective:
- United States – Foreign buyers often feel they must “overspend” on talent retention to compete against domestic acquirers—especially if the domestic rival is publicly listed and can offer equity as part of the program. This need to overspend is also driven by the fact that typically retention bonuses and payouts in the U.S. are the most generous in the world, no matter where the acquirer is located, and the second in the world in prevalence (76 percent) behind Japan.
- Canada – Buyers often feel that the talent retention program in the U.S. should cover all of North America—this is a mistake. Canadian payouts tend to be much more modest, and therefore a distinct Canadian program should be developed that relies on local benchmarks and talent assessments. Prevalence is also much lower than in the U.S. (63 percent versus 76 percent) but still common.
- UK and Europe – European buyers are slightly less inclined than American buyers to offer financial incentives (67 percent). Among European buyers, 41 percent are offering retention bonuses to employees outside of senior management who are critical to the company’s long-term success—specifically those with key client or supplier relationships or with knowledge about essential IT systems.
- Asia – Across Asia, buyers clearly see the need to use financial incentives, particularly for deals “outbound” from their home markets (94 percent). A good example is Japan, where 89 percent of buyers report offering retention programs, the highest single-market prevalence level reported. Acutely aware, however, of their shortage of management skills outside of the domestic market, Japanese buyers tend to retain local management in overseas acquisitions for at least one to three years. This singular focus on senior management is important, but it can obscure the long-term retention goal of identifying and developing future leaders.
Successful buyers have elevated their retention strategies from an art to a repeatable science. The results are tangible and clear—increased productivity, engagement, owner-like behaviors on the part of retained employees, and accountability. As M&A activity continues its global race toward value, successful organizations cannot risk ignoring the right strategies for talent retention.