Leading through transition:
Perspectives on the people side of M&A
Anatomy of Acquisitions
A guide to Human Resources
Management contributions in the
early phase of a buy-side transaction
Mergers, acquisitions, spin-ins, spin-outs, divestments,
joint ventures, and strategic partnerships each represent
business transactions outside a company's normal course
of business. A fundamental problem exists in every
transaction for human resources (HR) practitioners on the
frontline: they contribute too little to the transaction at the
point in time where they would add the most value. The
objective of this article is to put transaction activities and
HR management accountability into a practical context so
that HR practitioners can more effectively engage, accept
accountability, and contribute to the transaction process
from beginning to end.
There are seven flags outlined here that indicate where the
effectiveness of the HR contribution is compromised and
five points for HR organizations to consider when building
competency in nontraditional business transactions. This
is not intended to be a detailed review of the HR process,
but rather an overview of a portion of the transaction
process rarely viewed by HR practitioners. There are many
nuances and specifics beyond this discussion that should
be explored by any HR practitioner beginning a project.
1. & 2. A transaction project presents unique HR
challenges to both the buying and selling companies.
If an HR team is unaware of a strategic gap in the
company, then consider this red flag number one. If
the HR team does not know how the people strategy
incorporates nontraditional business requirements,
consider this red flag number two.
HR Accountability
Confirm your people strategy accommodates or recognizes
the potential for nontraditional business relationships.
Acquisitions, joint ventures, and strategic partnerships will
demand similar competencies to complete the transaction
effectively, but the people strategy will differ significantly.
3. Once a business team has settled on a business
transaction as the solution to the problem, searching
for a suitable target ensues. If the project is a surprise
to the HR team, this would be red flag number three.
HR Accountability
Know the labor market in which your target competes for
talent. Alert the HR team, shared services teams, and other
HR stakeholders with the potential of a significant project
that will test their individual capabilities, as well as the HR
organization's standard operating practices.
4. Target company identification is usually based on
technical or market factors that close the strategic gap
in the existing company's product or market strategy.
A preliminary valuation and one-sided assessment
of the target begins, and will conclude, when the
company is comfortable, economic value is established
for the target, and certain terms of an agreement are
accounted for (i.e., the negotiation strategy is under-
stood). If the HR team does not have an educated
guess at all human capital value drivers with the target
before taking a recommendation to the corporate
board, consider this to be red flag number four.
 HR Accountability
Know your target, its leaders, and their interests and
motivations. Know what it will take to retain intellectual
capital, restructure the company, integrate infrastructure,
and quickly establish new employment relationships.
At this point, HR infrastructure is not on the radar. Stay
out of the details and work to the business case. Do not
wait for a formal due diligence period. Later this article
outlines where all of the groundwork for key decisions
that determine 80 percent of the transaction's value will
be determined, before you reach formal due diligence and
negotiation.
5. The company takes its recommendations to the
proper corporate body to get approval to move
ahead with economic issues, terms and conditions,
and other unique considerations.
HR Accountability
Economics will include such factors as the value of the
transaction to employees, the value of any retention to
be applied to employees, the rationale for such a value,
executive compensation issues, employment relationships,
restructuring, impacts to the existing HR infrastructure, etc.
If the approving corporate body does not have visibility to
these costs, consider this red flag number five.
6. The company's recommendations are approved.
The company may now approach the target and
begin to implement its negotiation strategy. An
outcome of early negotiations is a Letter of Intent or
a similar document and an agreement that the two
parties will negotiate exclusively for a specific period
of time. If the HR team is still out of the loop at this
point in time, consider this red flag number six.
Know your target, its leaders, and their
interests and motivations.
HR Accountability
As noted earlier, 80 percent of the groundwork for key
decisions is laid before a formal due diligence period. A
Letter of Intent may propose the disposition of things like
employee stock options, employee benefits, treatment of
executives, restructuring, employment agreements, and
the disposition of any unique items, such as change in
control agreements, promissory notes, or acceleration of
equity. There may be some administrative items included
here, such as protections under IRS Section 280G(a) and
some covenants regarding confidentiality and maintenance
of standard operations in the time period between
negotiations and due diligence.
7. Upon agreement of the terms, both parties
will agree to a formal due diligence process. This
will be completed in the period of exclusivity.
Concurrent with due diligence will be a variety of
critical negotiations.
HR Accountability
As a contributor to formal due diligence, HR validates all
of the preliminary work already underway in the project
analysis, identifies potential risk to the business plan,
identifies liabilities, formalizes an integration framework
for HR infrastructure, engages communication efforts, and
provides organizational stability for the company.
As a contributor to negotiations, HR will define the
employment characteristics for the new team and its
executives allocate and structure retention funds, conduct
a pro forma restructuring of the company, set terms
in the purchase agreement around the disposition of
employee equity, treatment of employees postclosing,
representation and warranties by the target, covenants to
guide operations between signing the deal and closing the
deal, and other unique characteristics that arise as a part
of the deal.
If HR is evaluating only potential risks and liabilities in the
infrastructure of HR services, consider this red flag number
seven.
As due diligence concludes and negotiations are
completed, the project will be publicly announced, but will
not be complete until several weeks or months later when
the necessary administrative and legal obstacles are closed
and the negotiated value of the deal is transferred from
the acquirer to the target.
2
 Key take aways

1. Loose documentation of processes 4. Facilitate and lead integration processes

Focus on what is important and how you get there.
Do this with a Corporate Development person or your
business unit management team. Find experienced
HR teams to benchmark against. There are different
models for different types of transactions and
corporate styles.
2. Develop acquisition competency throughout the
HR organization
If you have a shared services platform, find a resource
that you can draw on as needed and be confident that
you understand each other’s requirements in terms of
flexibility in the mainstream systems.
3. Build an HR acquisition toolbox
Build a template for your positions in preliminary
evaluations, negotiations, structure of contracts,
integration plans, communications, restructuring,
executive arrangements, retention, etc.
Act as a single point of accountability for HR
integration. Line HR must take ownership and
accountability for the results of the integration, solve
problems, handle the unique deals and surprises, and
lead change. The tendency is to abdicate functional
integration activities to other people and spread the
accountability too far. This will most likely result in a
loss of credibility for the Line HR person.
5. Resource projects properly
Transactions are the most intense work most people will
ever do. Find people who have tolerance, judgment,
open minds, an ability to solve problems, and who are
generally fun and interesting. Once you find them, align
them to you and reward and recognize them beyond
their expectations. You will almost certainly work them
harder than you anticipate.

Contacts
For additional articles from the Leading through
transition: Perspectives on the people side of M&A,
please visit www.deloitte.com/us/peoplesideofM&A.

Kevin Knowles
Principal
Deloitte Consulting LLP
Human Capital
+1 469 951 1732
keknowles@deloitte.com

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