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In Practice

The People-First, Bottom-Up Approach to M&A

Amid the COVID-19 pandemic and daily geopolitical chaos, large mergers and acquisitions (M&A) deals have skyrocketed 256% quarter-over-quarter, totaling 3,494 deals globally in the third quarter. The second and third quarters of the year resulted in record-setting measures of private equity volumes, with private equity’s market share ending at 19.7%, an all-time high

Scale, scope and talent pool are the main elements driving transaction decisions for 40% of respondents to a Mercer survey, conducted in September. The current environment — wherein companies being held to higher standards of social responsibility by their own employees and consumers alike — is putting a greater emphasis on getting the workforce issues right when merging or acquiring businesses, and it’s time for business models to transform. 

Successful acquirers are taking a people-first approach and expanding retention programs beyond the C-suite. 

The categories of people-risks in the deals process include retention of key talent, integration of corporate culture and placement of the right talent in the right roles. Successful efforts rest on treating workforce risks in the same early-and-proactive manner as regulatory and tax risks, a mindset also underscored in this report on talent retention.

The organizational change involved in most deals creates additional uncertainty, and without incentives to keep morale and productivity steady, it will lead to employees opting out or becoming disengaged. Successful acquirers around the world routinely manage people with the same rigor and discipline with which they manage balance sheet risk; they concentrate on the following three primary people practices.

Practices of Successful Acquirers

Engage the workforce: The first step is to understand the workforce and define a strategy to build momentum during and after the transition. Change management is the glue that binds the objectives of the deal to the business strategy, leading to long-term value creation. This starts with articulating a vision, engaging the leadership and key stakeholders, and building a robust communications and workforce transition plan with identifiable metrics to monitor adoption. 

Put rigor 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 retain critical talent and drive operational excellence post-close.

Rewards: Aligning rewards — compensation, long-term incentives, benefits, etc. — is foundational to driving behaviors within the organization to unlock true value.

As M&A activity continues, successful organizations cannot risk ignoring the right strategies for talent retention.

A People-First, Bottom-Up Approach Is Key

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 reveals 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% listed “other employees critical for integration” and 35% listed “other employees regardless of critical for integration.” 

In addition, the “where” matters. Mercer’s look at global talent retention practices reveals that a company’s headquarter location and industry can greatly influence talent retention practices, company culture and incentive structures. 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% above the market median. 

A Risk-Transfer Trend to Be Aware of

In the current market, earnouts are becoming prevalent. Earnouts are an incentive arrangement where the seller must meet certain financial goals and critical milestones to receive a part of the purchase price in the future. This allows the buyer to transfer a part of the transaction risk to the seller. Traditionally used to motivate and retain founders, earnouts are becoming increasingly common as a mechanism to navigate the current M&A landscape where buyers expect lower valuations and sellers have yet to recalibrate financial expectations. 

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, successful organizations cannot risk ignoring the right strategies for talent retention. Taking the time to understand the workforce and culture of a new company is imperative, along with recognizing that people execute on what they are rewarded to deliver.

Jeff Black

Partner and Global M&A Advisory Services Leader at Mercer

Jeff Black is a partner and Global M&A Advisory Services Leader at Mercer. With 25 years of experience as a trusted advisor to business leaders, Jeff advises strategic and financial buyers and sellers on global people risks through the full lifecycle of a transaction. A recognized expert in deals, he is a frequent keynote speaker and been widely published and quoted in numerous industry journals and media outlets. 

Kristin Murphy

Global M&A Strategy & Operations Leader at Mercer

Kristin Murphy is the Global M&A Strategy & Operations Leader for Mercer’s Global M&A Advisory Services. She has more than 10 years of experience in human capital consulting and currently advises clients on capturing value and achieving synergies through addressing people risks. Kristin has expertise in business strategy and driving enterprise-wide transformation, workforce strategy, operating model and organization design, change management, and process improvement.

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