Human Capital Management and the Success or Failure of M&A

November 2010

A report prepared by CFO Research Services in collaboration with Aon Hewitt

Human Capital Management and the Success or Failure of M&A

November 2010

A report prepared by CFO Research Services in collaboration with Aon Hewitt

Contents
Introduction About this report Companies seek growth and competitive advantage through M&A Full integration is the ideal end state in most cases Respondents see room for improvement in human capital related tasks HR and nance see value in eectively managing the HR dimension of deals HR and nance diverge on the extent of HRs participation in M&A, and on the value of HRs participation Does greater HR involvement lead to better M&A outcomes? Respondents call for business focus, in addition to functional perspective, in HRs approach to M&A In their own words: HR and nance executives on realizing M&As full value Sponsors perspective 2 3 3

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HUMAN CAPITAL MANAGEMENT AND THE SUCCESS OR FAILURE OF M&A

Introduction
As the economy begins to show signs of recovery, companies with cash reserves are relaxing their focus on controlling costs and returning to growth strategies. Transaction activity has been on the rise since mid-2009 thanks, in part, to easing economic conditions and attractive valuations. Despite this revived energy and momentum, few companies can aord a transaction that fails to meet its objectives, particularly in an economic environment that remains

somewhat fragile and uncertain. Ample documentation reveals human capital issues as key culprits in failed deals and subsequent nancial woes. In this survey of nance and HR executives, Human Capital Management and the Success or Failure of M&A, we explored how organizations are handling human capital issues related to transactional activity. The results suggest that HR oers unique value and guidance, particularly in relationship to managing and pricing human capital assets, which can signicantly contribute to a successful pre- and post-transformational event.

The results of our research program among senior nance and HR executives suggest that HR offers unique value and guidance, particularly in relationship to managing and pricing human capital assets, which can signicantly contribute to a successful pre- and post-transformational event.

Increase in M&A activity Strong cash positions, attractive valuations, low cost of capital support increase in M&A 6,000 $300

Transactions (#)

4,000

$200

3,000

$150

2,000

$100

1,000

$50

0 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2010 2009 2006 2007 2008 Number of transactions and mean value for announced, closed, or effective mergers and acquisitions worldwide. Source: Capital IQ Q1

$0

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Average dollar volume ($millions)

5,000

$250

About this report In August 2010, CFO Research Services (a unit of CFO Publishing LLC) conducted a survey among senior nance and human resource executives at U.S. companies to examine their views on human capital management in the context of M&A. We gathered a total of 315 survey responses: 47% are from senior nance executives and 53% are from senior HR executives. Respondents work for companies in a broad range of company segments. Annual revenue $500M$1B $1B$5B $5B$10B $10B+ 21% 39% 18% 23%

Companies seek growth and competitive advantage through M&A

Mergers and acquisitions are often viewed as a means to build a competitive advantage. When asked why their organizations engaged in M&A activity in the past two years, respondents report their primary objective(s) as (see Figure 1): Adding complementary products, brands, or service lines (59%) Gaining access to new markets (52%) Capturing market share from competitors (32%) Improving economies of scale (29%) When asked about the success of meeting their primary objective(s), nearly two-thirds (68%) of respondents report that their companies M&A transactions over the past two years have met or exceeded their primary objective(s). Only 13% report that recent transactions have failed to meet expectations. Eighteen percent report that they are either not sure or it is too early to tell whether recent transactions will meet expectations.
Figure 1. Companies turn to M&A for growth and competitive advantage. To the best of your knowledge, which of the following were the primary objectives of your companys M&A transactions in the past two years? Add complementary products, brands, or service lines Gain access to new markets Capture market share from competitors Improve economies of scale Acquire proprietary technology or operating processes Diversify lines of business 32% 29% 25% 18% 17% 11% 6% 5% 59% 52%

Respondent title Finance CFO EVP or SVP of nance VP of nance Director of nance Treasurer Controller Human Resources Chief human resources ofcer EVP or SVP of human resources VP of human resources Director of human resources Human resources manager Other CEO, president, or managing director Industries Auto/industrial/manufacturing Business/professional services Chemicals/energy/utilities Financial services Healthcare/biotech Technology All others 15% 11% 10% 11% 13% 14% 28% 4% 6% 10% 12% 11% 10% 1% 12% 3% 11% 10% 4% 7%

Gain access to professional talent, engineering, or operating expertise Vertically integrate supply chain, production, and/or distribution Respond to competitive or regulatory pressure Not sure/Does not apply

Other 3% 20% 40% 60% Percentage of respondents (Note: Respondents were allowed to choose up to three items.) 0%

Note: Percentages may not total 100% due to rounding.

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HUMAN CAPITAL MANAGEMENT AND THE SUCCESS OR FAILURE OF M&A

Full integration is the ideal end state in most cases

Respondents report that the usual outcome of most (61%) M&A transactions is full integration, either absorption or transformation. Of those seeking full integration: 51% report that absorptionthe full integration of the acquired company in the dominant transaction partners operationsis the term that best characterizes their companies usual integration practice over the past two years. 10% report that transformationthe full integration of the processes, practices, and assets of each transaction partner to form a new type of companybest describes their companies approach.

Respondents see room for improvement in human capital related tasks

While survey results suggest that M&A often meet or exceed an organizations expectations, respondents also report a potential to do betterparticularly when managing human capital. This study evaluates two dimensions of human capital management: performance on human capital related tasks and eectively pricing human capital factors into deals. Respondents were asked to evaluate their companies performance on a range of human capital related tasks linked to M&A activities over the past two years. Among the top human capital factors respondents point to as in need of improvement are (see Figure 2): Establishing the desired company culture (43%) Establishing, communicating, and measuring performance standards across the combined entity (38%) Pricing human capital assets, costs, and risks into deals (38%)

Only 32% of all respondents report that limited integrationan approach in which partners operate separatelybest describes the integration intent of their companies recent acquisitions. Of those, a majority (57%) conrm that their companies are likely to integrate acquired businesses more closely over the next three years. With respect to integration intent and meeting M&A objectives, the results show that organizations that integrate acquisitions through transformation (just 10% of all respondents) are more likely to report that recent M&A transactions have exceeded expectations (30%) than the organizations that report absorption (15% exceeded expectations) or limited integration (10% exceeded expectations) as their transaction practice.
Results by industry reveal signicant differences The study results show signicant variances in responses across industries. For example: The industry most challenged with establishing the desired culture in the new organization is business/ professional services (56%), and the least challenged is nancial services (30%). When it comes to performance standards, 50% of respondents in the auto/industrial/manufacturing industry said they have room for improvement versus 26% of those in technology. And, with respect to room for improvement in the pricing of human capital assets, costs, and risks into deals, 46% of respondents in auto/industrial/ manufacturing and healthcare/biotech industries see room for improvement, but only 26% of those in technology and 27% of those in nancial services share this view. For more details regarding industry-specic results, please see the Sponsors perspective on page 13.

Analysis of the research results shows that success in managing human capital issues varies by the type of transaction an organization practices (transformation, absorption, or limited integration). Participants whose companies are focused on transformation are more likely to report excellent performance in most human capital related tasks during M&A compared with organizations that focus on absorption or limited integration. For those organizations focused on limited integration deals, results reect the least amount of success and the most reported room for improvement. For example: Thirty-three percent of transformation respondents report that their ability to establish the desired company culture was excellent compared with 8% of those who are focused on limited integration and 16% of those focused on absorption. Thirty percent of transformation respondents report room for improvement compared with 51% of limited integration respondents and 41% of absorption respondents.

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Figure 2. A substantial number of respondents identify room for improvement in their companies performance of a wide range of human capital related M&A tasks. In your opinion, how well did your company perform the following human capital related tasks in the course of its M&A activities in the past two years? Establishing the desired company culture Establishing, communicating, and measuring performance standards across the combined entity Pricing human capital assets, costs, and risks into the deal Developing a human capital strategy for the transaction that aligns with broader deal objectives Addressing the global aspects of workforce integration Ensuring workforce productivity and performance through the transition Communicating with employees (e.g., communications on transition timelines and decision-making rationale) Designing and implementing compensation and benefits programs Identifying and retaining key employees 0% 20% 26% 24% 23% 40% 60% 43% 38% 38% 36% 34% 33%

Percentage of respondents identifying room for improvement

Thirty-one percent of transformation respondents report that their ability to establish, communicate, and measure performance standards across the combined entity was excellent compared with 13% of those who are focused on limited integration and 18% of those focused on absorption. Thirty-one percent of transformation respondents report room for improvement compared with 49% of limited integration respondents and 33% of absorption respondents.

Most respondents report room for improvement in managing human capital programs during M&A activity.
When queried further on the topic of pricing human capital assets, costs, and risk into deals, respondents report that the commonly recognized nancial upside of cost savings through workforce reductionand the equally recognized downside of the nancial cost of retirement obligations and other benets are comparatively well documented and priced into deals, especially among respondents who characterize recent deals as transformative. Survey results suggest a dierent story for other important factors, however. Thirty-three percent of all participants say that human capital integration costs (e.g., the cost of lost productivity and employee retention) and the value of new talent and capabilities were not eectively priced into recent deals, especially for limited integrations, and 25% say the same about human capital risk (e.g., the lack of employment contracts for key employees and collective bargaining exposure).

When asked about the pricing of human capital assets, respondents do not give very high performance marks. Only 13% of transformation respondents report that their performance on the pricing of human capital assets, costs, and risks into deals was excellent compared with only 9% of those that focus on limited integration and 15% who focus on absorption. Thirty-seven percent of transformation respondents report room for improvement in this area, compared with 44% of limited integration respondents and 34% of absorption respondents.

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Figure 3. While finance and HR executives are broadly in agreement on the value of effectively managing various human capital dimensions of deals, HR respondents are slightly more likely across the board to say that effective management greatly contributes to value. Does effective management of the following dimensions of a deal improve companies ability to realize the full financial value from that deal? Effective management of

Assessment and selection of leaders

81% 78% 77% 67% 73% 70% 68% 63% 55% 48% 43% 34% 38% 28% 20% 40% 60% 80% 100%

Employee engagement of the combined workforce

High-performing employees throughout the organization Differences in company culture (e.g., sensitivity to work/life balance, compensation expectations, thriftiness, formality) Compensation and incentive plans (e.g., salaries, bonuses, long-term incentives, benefits) Differences in national or regional culture (e.g., differences in language, etiquette, custom) Differences in staffing strategies (e.g., preference for internal promotion, cross-functional teams, rotating staffing) 0%

HR respondents saying that effective management greatly contributes to value Finance respondents saying that effective management greatly contributes to value Percentage of respondents

HR and nance see value in eectively managing the HR dimension of deals

Across all HR dimensions measured, most respondents in nance and HR agree that eectively managing the HR dimensions of the deal contributes to their companies ability to realize nancial value from transactions. HR executives are more likely than their nance counterparts, however, to say that eectively managing each of these dimensions greatly contributes to nancial results. The dierence in perception is especially evident in matters of national or regional culture, stang strategies, and employee engagement. In some

areas, the gap between nance and HR respondents is more evident. (See Figure 3.) For example, 77% of HR respondents say that eective management of employee engagement of the combined workforce greatly contributes to their organizations ability to realize value from deals, compared with 67% of nance respondents.

Most respondents in nance and HR agree that effectively managing the HR dimensions of the deal contributes to their companies ability to realize nancial value from transactions.

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HR and nance diverge on the extent of HRs participation in M&A, and on the value of HRs participation
With respect to HRs participation in the deal, HR respondents are substantially more likely than nance respondents to say that HR participated to a great extent during each stage of the deal: target identication, due diligence, integration planning, and change management activities. (For more on the value of HRs participation, see the sidebar, Does greater HR involvement lead to better M&A outcomes? page 8.) This gap in perception is particularly prominent in respondents evaluation of HRs participation in the due diligence stage. Forty-four percent of HR respondents say that HR participated in diligence activities to a great extent; only 14% of their colleagues in nance say the same. (See Figure 4.) When it comes to the perceived value of a greater HR contribution to M&A activities, HR respondents are substantially more likely than nance respondents to say that greater HR involvement in a range of M&A activities would have led to better deal outcomes. This gap is particularly prominent with respect to M&A pre-close activities (see Figure 5): Thirty-four percent of HR respondents say that greater HR involvement in target identication would have led to better outcomes, while only 7% of nance executives say the same. Similarly, 45% of HR respondents compared with 20% of nance executives say that greater HR involvement in due diligence would have led to better outcomes. It is also noteworthy that respondents focused on limited integrations are more likely to report that greater HR participation would have led to better outcomes, especially at the integration planning stage. Sixty percent of respondents who characterize their M&A transaction as limited integration say that greater HR participation during integration planning would have led to better outcomes, versus 45% of absorption respondents and 47% of transformation respondents.

Figure 4. HR executives are substantially more likely than finance executives to say that HR participated to a great extent in a variety of M&A activitiesin particular, activities associated with M&A planning. To what extent did the HR function at your company actively participate in the following activities during M&A transactions in the past two years? Integration and change management Integration planning 64% 39% 55% 32% 44% 14% 14% 6% 0% 20% 40% 60% 80%

Due diligence

Target identification

HR respondents saying that HR contributed to a great extent Finance respondents saying that HR contributed to a great extent Figure 5. HR respondents are substantially more likely than their counterparts in finance to say that greater HR participation in M&A-related activities would have led to better deal outcomes. In your opinion, would greater HR involvement in each the following activities have led to better deal outcomes (i.e., fewer surprises, smoother transition, greater value), or not? 59% 41% 58% 41% 45% 20% 34% 7% 0% 20% 40% 60% 80%

Integration and change management Integration planning

Due diligence

Target identification

HR respondents are substantially more likely than nance respondents to say that HR participated to a great extent in a variety of M&A activities.

HR respondents saying that greater HR involvement would have led to better deal outcomes Finance respondents saying that greater HR involvement would have led to better deal outcomes Percentage of respondents

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Does greater HR involvement lead to better M&A outcomes? A majority of survey respondents conrm that greater HR involvement in post-close activities would lead to better outcomes in M&A. In an effort to determine whether a positive relationship between HRs engagement with M&A and deal outcomes is revealed elsewhere in the survey data, responses were segmented according to the contribution HR teams made throughout the M&A process and compared with reported outcomes of deals completed in the last two years. This analysis reveals a positive and consistent relationship between HRs involvement in M&A activities and the results that companies achieve through their acquisitions. Approximately one-in-ve respondents whose HR teams participated to a great extent in target identication, due diligence, integration planning, and change management activities afrm that their deals have exceeded expectations. Conversely, when HR contributes very little or not at all to these activities, respondents are consistently more likely to say their deals have failed to meet expectations, as shown in Figure 6 (opposite). The research results also show, however, that HR is more likely to be involved in post announcement activities such as integration planning and change management than in target identication and due diligence, which occur before a deal closes. The positive relationship between HR involvement and M&A outcomes appears in deal pricing as well, according to the survey data. Segmentation of this studys results reveals that companies that had a substantial contribution from HR in pre-close activitiespresumably before nal deal terms were settledare more likely to have priced human capital factors into their deals effectively, as shown in Figure 7 (below). Finally, the contribution of an HR function that is especially engaged with M&A activities is associated with higher performance on human capital related M&A tasks. Across all the stages of M&A activityfrom target identication and due diligence to integration planning and change managementcompanies with HR groups that participate in these activities to a great extent report excellent performance in human capital related M&A tasks. Examples of such tasks include developing human capital strategy and new-company culture, identifying and retaining key employees, and designing compensation and benet programs.

Figure 7. When HR participates to a great extent in pre-close activities, human capital factors are more likely to be priced effectively into deals, say executives. HR involvement in pre-close activities compared with the pricing of human capital factors in deals HR participation in target identification Human capital integration costs (e.g., cost of lost productivity, employee retention cost) 25% 13% 15% 41% 39% 50% 28% 38% 11% 14% 18% 8% 27% 12% 12% 43% 42% Value of new talent and capabilities

HR participated to... A great extent Some extent Very little or not at all

40% 29%

23% 10% 16% 9%

36%

0%

20%

40%

60%

80%

100%

0%

20%

40%

60%

80%

100%

Very effectively priced into the deal

Somewhat effectively priced into the deal

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Figure 6. Respondents who say HR participated to a great extent in M&A activities are more likely to report that recent transactions have exceeded expectations in meeting their primary objectives. HR involvement in M&A activities versus deal outcomes HR participated to... A great extent Target identification Some extent Very little or not at all

19% 16% 14%

56% 57% 53%

13% 6% 15%

13% 21% 18%

A great extent Due diligence Some extent Very little or not at all

21% 15% 8% 45% 55%

62% 13% 22%

7%

10%

18% 26%

A great extent Integration planning Some extent Very little or not at all A great extent Some extent Very little or not at all 0% Exceeded expectations

19% 12% 9% 18% 10% 9% 20% Met expectations 41% 40% 50% 43% 54%

58% 12% 23% 61% 15% 22% 60%

12%

12% 22%

26% 10% 24% 28% 80% 100% 11%

Integration and change management

Failed to meet expectations

Not sure/Too early to tell

HR participation in due diligence Cost savings through workforce reduction Human capital risk (e.g., lack of employment contracts for key employees, collective bargaining exposure, etc.) 7%11% 13% 14% 17% 21% 28% 16% 8% 44% 33% 32% 41% 22% 25% 9% 15% 27% 27% 19% Financial cost of retirement obligations, health plans, etc.

40% 29% 18% 44% 44%

42%

52% 45% 45%

31%

8%8%

14% 14% 12% 24%

0%

20%

40%

60%

80%

100%

0%

20%

40%

60%

80%

100%

0%

20%

40%

60%

80%

100%

Not effectively priced into the deal

Not sure/Does not apply

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Respondents call for business focus, in addition to functional perspective, in HRs approach to M&A
Finance and HR executives alike conrm that developing HRs planning, leadership, and technical capabilities would improve HRs ability to contribute to the success of M&A: Sixty percent of all respondents conrm that developing the leadership capabilities of HR executives would greatly improve HRs ability to contribute to M&A.

Nearly as many respondents say the same about HRs ability to collaborate with line-of-business management on organizational design (58%), their level of business sense/deal acumen (56%), and their knowledge of business processes (55%).

HR respondents are even more likely than their nance counterparts to say that developing general business skills would improve HRs contribution to M&A. Sixty-six percent of HR respondents say that developing the leadership capabilities of HR executives would improve HRs contribution to M&A; 54% of nance respondents say the same. (See Figure 8.)

Figure 8. HR respondents are even more likely than their finance counterparts to confirm that developing general business skills would improve HRs contribution to M&A efforts. In your opinion, to what extent would further developing the following capabilities improve your HR functions ability to contribute to the success of M&A transactions? 66% 49% 66% 54% 66% 45% 63% 49% 61% 48% 57% 35% 54% 36% 53% 37% 0% 20% 40% 60% 80%

Ability to collaborate with line-of-business management on organizational design

Leadership capabilities of HR executives

Business sense/Deal acumen

Analytical capabilities (e.g., identification, analysis, and reporting on human capital metrics to monitor progress) Knowledge of business process

Due diligence/Investigative capabilities

Project planning/Project-management capabilities Capabilities to address global human capital issues

HR respondents saying that developing this skill would contribute greatly to HRs ability to contribute to M&A Finance respondents saying that developing this skill would contribute greatly to HRs ability to contribute to M&A Percentage of respondents

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In response to a series of open-ended questions, many nance executives urge their counterparts in HR to claim a seat at the M&A table. Get involved in the process from day one. Push for continued involvement throughout the process, urges the CFO of a large wholesale/retail trade rm. (It should be noted, however, that many more HR executives call for nance to draw more on HRs expertise. For more on open-ended responses, see the sidebar, In their own words.) On the other hand, HR executives who participated in the survey encourage their peers in nance to consider the human capital dimensions of value closely when evaluating transactions, and to call on HR for help in documenting the full range of human capital costsand gainsin potential deals. Require a business-savvy contribution from HR in the due-diligence processand commit to the legitimate incorporation of [HRs] input in cost calculations, writes one HR executive from a large healthcare company. Pull HR into deals much earlier in the process, writes a vice president of human resources from a large manufacturing rm. HR can help identify red ags and other questions that can impact the price that you should oer. [HR can also help] highlight things to pay attention to during due diligence and during integration, the vice president continues. Many HR executives, it should be noted, caution their counterparts in nance to favor a hardheaded view on potential transactions, particularly when it comes to human capital synergies. Read the story behind the numberstrends and patterns, past successes or failures[and] convert information and data into business insights that can be leveraged to make the buying decision, writes a director of human resources for a large company. During due diligence, besides the data given by the prospect, do independent research. At all stages in the process, ask: Whats the compelling business case for the prospect to be acquired by us? What synergies can be derived? Are they based purely on past performance, or future potential, or both? the director writes. At the same time, however, HR executives urge their peers in nance to look beyond nancial data as they evaluate prospects. In my experience, few deals are purely nancial, says a chief human resources ocer at a large manufacturer. Companies make and sell things, and they use people to do it. So getting a detailed sense of how an acquired company has made its value, and why it is worth the price youre paying, will [help] you make better decisions.

In their own words: HR and nance executives on realizing M&As full value We asked senior nance and HR executives to share their advice on how to price human capital factors into deals effectively, and how to realize the full value of their companys acquisitions. Below, we document respondents advicein their own words. Think beyond nance fundamentals to the soft costs of deals. Generally speaking (since every M&A is likely to be unique), valuing a target company merely on its existing nancials can be a grave mistake. Once acquired, the target companys results could be signicantly different because of myriad reasons and should be taken into account during the valuation process. Dont underestimate the cultural aspects of an international acquisitionthey could have unforeseen costs. Consider the cost in productivity due to lost expertise that results from layoffs. Sweat the small stuff. Seemingly benign integration decisions can have major productivity repercussions if theyre not thought through carefully. Changing programs that carry high emotional impact (T&E, benets, titles, etc.) can have a bigger impact than you might imagine. Be realistic in the nancial projections in factoring upfront productivity losses due to the disruption the deal brings within the acquired target. HR should get more involved early on. Get to the table any way you can...if not before the potential targets are identied, at least early on in the process of evaluating and closing the deal. HR needs to be assertive in making sure they are in on the planning from the inception of the M&A. HR plays a major role in communication and change management.

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HUMAN CAPITAL MANAGEMENT AND THE SUCCESS OR FAILURE OF M&A

Gain your place on the negotiation table by understanding the hard benets, and how the soft aspects of the deal can be impacted by HR. Take an assertive role in helping M&A leaders in measuring the intangible risks and liabilities to changing culture and human capital dynamics. Ensure you are building the relationships necessary to be at the deal-pursuit table....In most cases, the HR implications will not be deal breakers, so approach the work from the perspective of how to help the deal happen in the best way possible. but HR needs to build its skill set to earn that seat. Think outside of your function and look at overall business need. You should be tied to the hip of the operations, business development, and nance teams. Integration planning should be done at due diligence. Too often, we are seen as passive implementers of someone elses ideas. Too often, we are. HR leads the way through the post integration jungle. HR needs to see itself as a leader, not as a follower, with respect to integration of people and the cost of doing an integration. Get the best HR people you have to focus on M&A support. The merger of cultures and learning how this works in the enterprise is a major undertaking after an acquisition. Set clear human capital key performance indicators, linked to strategy, to be tracked post close. KPIs should be both lagging and leading indicators. Reward talent and revise compensation plans during integration. The people aspects are always key to any transaction. The key is to take the best of both companies so you dont lose people in the process. While this sounds relatively easy, its hard to do on both sides.

Do not assume the target-company leadership has the same enthusiasm for the company post-acquisition, especially as the culture and procedures are integrated. Keeping the key people motivated and on board is crucial to achieving performance. Do not part with institutional knowledge holders too soon. Until the new management is fully cross-trained, removing long-term employees who are vessels of institutional memory is very risky. Do a complete assessment of the leaders of the business you are acquiring. Communicate with employees. Communicate, communicate, communicate...not only with the new employees of the target company but also with legacy employees.

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Sponsors perspective
Human Capital Management and the Success or Failure of M&A This has been a long, cold period for global M&A activity, with deals having free fallen from $3,383 billion in 2007 to $1,607 billion in 2009. By comparison, the dip in 2002 reached just $1,016 billion (Source: Dealogic and Robert W. Baird & Co. Incorporated M&A Market Analysis). So, as the economy hints at recovery, larger organizations that have stockpiled cash over the past several years are anxious to capitalize on attractive valuations to jumpstart their growth agendas. Market leaders are now moving quickly, keenly interested in how to maximize their return on investment and avoid the common pitfalls of poorly executed transactions. Their focus? Human capital. Human Capital Management and the Success or Failure of M&A provides insights into the organizational issues and human capital programs that have the biggest impact on M&A success. The study shows that identifying and retaining key talent, factoring human capital integration costs into the deal model, and HR involvement in integration and change management activities can all be correlated to better deal outcomes. It also highlights some of the toughest challenges in M&A activity including aligning company culture, engaging key talent, and integrating total rewards. Moreover, it sheds new light on HRs key role in realizing the nancial value of transactions. A comparison of HR and nance leaders responses tells us that HR executives have not yet stepped up to own the human capital factors that are critical to a deal. HR professionals can add signicant value to the success of a transaction, beginning with due-diligence, assessing culture, forecasting human capital expenditures, and evaluating top talent. Perceptions on how well HR achieves this today vary, according to the survey. The results also suggest that HR executives are expected to better understand their industries and strategic direction and translate that understanding into actions that are tailored to the deal. Supporting this view, a plurality of respondents say that while full integration is the desired end-state, they often start with a more limited integration. In addition, participants that focus on limited integrations believe that greater HR involvement during integration-related activities, such as integration planning and change management, would have led to better results. Moving from point A to point B

requires a slightly dierent or more dynamic HR strategy and programs to accommodate dierent states of integration. We also see that variances in responses across industries add another dimension to the strategy involved in shaping the deal. For example, the professional services industry shows the greatest room for improvement when it comes to establishing culture, employee retention, and compensation and benet plans for newly merged organizations. Similarly, healthcare/biotech and manufacturing have the greatest room for improvement when it comes to pricing human capital elements of a deal. In summary, both nance and HR executives acknowledge the importance of human capital to the success of M&A. HRs challenge is to seize the opportunity to own the organizational and human capital elements of a transaction while providing guidance and counsel to the line managers and deal professionals. This requires three critical imperatives for HR: 1. HR must understand the strategic rationale of the deal and translate that strategy into operational, organizational, and human capital implications that make the deal work. 2. HR must partner closely with line-of-business management and other functional leaders to provide a well-integrated environment for employees in order to retain the talent that is critical to the deals success. 3. Finally, HR must leadproviding a business focused point of view for how all human capital elements, ranging from organizational culture to HR programs, can be leveraged to optimize the value of the business combination. We believe this is HRs time to shine through value creation and nancial results in a long-anticipated, fast-paced deal environment. For more information about this research or how Aon Hewitt can assist with your transaction needs, please contact: Mark Arian, EVP & Practice Leader, Corporate Transactions Aon Hewitt; 212.441.2034; mark.arian@aonhewitt.com Mark Oshima, SVP, Corporate Transactions Aon Hewitt; 949.608.6409; mark.oshima@aonhewitt.com Kurt Ewen, VP, Corporate Transactions Aon Hewitt; 312.381.4126, kurt.ewen@aonhewitt.com

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Human Capital Management and the Success or Failure of M&A is published by CFO Publishing LLC, 51 Sleeper Street, Boston, MA 02210. Please direct inquiries to Jane Coulter at 617-790-3211 or janecoulter@cfo.com. Aon Hewitt funded the research and publication of our ndings, and we would like to acknowledge Mark Oshima and Ken Oehler for their contributions and support. At CFO Research Services, Sam Knox and Celina Rogers directed the research and wrote the report. CFO Research Services is the sponsored research group within CFO Publishing LLC, which produces CFO magazine. November 2010 Copyright 2010 CFO Publishing LLC, which is solely responsible for its content. All rights reserved. No part of this report may be reproduced, stored in a retrieval system, or transmitted in any form, by any means, without written permission.