What are the best HR due diligence review practices for successful mergers and acquisitions?

In my experience the effective HR due diligence in mergers and acquisitions involves reviewing employee records, assessing cultural fit and identifying potential risks of exit. This needs to be managed thorough interviews, analyze compensation structures, and ensure compliance with labor laws. Importantly evaluate employee morale and communication channels to anticipate challenges and plan for a smooth integration process.

I concur with the specified scope and objectives. Nevertheless, I emphasize the utmost importance of aligning the acquired CEO and leadership character with the values of the acquiring company. Additionally, incentive compensation should reflect their accountability for the comprehensive integration business case, encompassing financial, business, and cultural aspects, along with the retention of key talent. These critical factors are often overlooked or underestimated in unsuccessful integration efforts.

Resist the urge to treat employees as part of an asset and liabilities register. All too often the 75% of M&A transactions that fail to yield the desired outcomes can be linked to human capital limitations. The HR DD process should be deliberate about collecting quantitative information on employee perceptions of the transaction. the stakeholder and change management programmes should forecast the likely employee responses to and plan accordingly. The valuation should include an assessment of the quality of human capital and not just headcount /wages. The last thing you want at deal close is to discover the transaction closed successfully but the human capital will not be adequate for the anticipated returns.

Talent acquisition is a key component of a merger and/or acquisition transaction which is why HR due diligence is incredibly important.

In my experience it is critical to have a well thought out plan for short term, medium term and long term organizational changes. Many times M&A transactions fail because companies merge teams without thinking about the implications on key resources responsible for building products and also maintaining key customer relationships. The key is to ensure you have a retention plan for critical resources so that you have minimal disruption in the organization. Additionally, think about how you can balance new leaders from both organizations vs. only keeping leaders from one organization.

In my experience, there is almost no such thing as too much analysis when doing M&A due diligence. "Almost" because there needs to be focus and prioritization, to avoid analysis paralysis. That said, it is equally important for the acquiring entity to have a clear understanding of its own risk tolerance. Setting those guardrails at the outset makes the decisions more objective and less fraught. Create a framework, use heat maps. Leverage data scientists, if you have them. Investment in thoughtful analysis, with concise findings, will make the overall process much smoother.

In my experience, look at how the two companies are structured. To ensure a smooth transition, review all HR data and systems, such as payroll and employee records, and figure out how the two systems will merge. If redundancies or restructuring are required, then proceed accordingly. Subsequently, make preparations to communicate the changes to staff in an effective manner. Employees are less likely to be resistant and uncertain when communication is well-managed. Finally, Ensure the company complies with all employment laws and regulations, including contracts, benefits, and potential legal liabilities related to employees.

The better the quality data gathered, the better the quality of analysis that will help to understand the strengths, weaknesses, opportunities and risks. It also helps crystalize the success criterias/ dependencies to the business case of merging/ acquiring the asset.

Before doing analyze, do an audit of the HRIS system: review the company’s HR information system to ensure that it is up-to-date and accurate Then start the review : 1/ Review HR policies to ensure that they are compliant with laws and regulations. 2/ Review legal and compliance issues to ensure that there are no outstanding legal or compliance issues. 3/ Review employee compensation to ensure that it is competitive and fair. 4/ Review employee benefits to ensure that they are competitive and meet the needs of the employees. 5/ Review employee classifications to ensure that they are accurate and compliant with relevant laws and regulations. 6/ Review immigration compliance to ensure that it is compliant with relevant laws and regulations.

Instead of the legacy focus on culture, a 21st century M&A due diligence should include an assessment of the collaboration system for the merging organizations. The collaboration system includes the daily processes that people use to connect with each other and to deliver daily outcomes, and it is the cornerstone for human performance. Such assessment delivers actionable data on the differences in operational profiles of both organizations and on the gaps and red flags for integration.

It is important for the acquiring entity to have a clear understanding of its own risk tolerance. Setting those guardrails at the outset makes the decisions more objective and less fraught. Use the data analyses to build a business case. Create a framework, use heat maps and other visuals to help call out the findings, and how they interrelate.

If you clearly defined the desired objectives, "why", culture and value proposition, the evaluation of the data should guide you to create a true north strategy, understanding what is the priority and what is mission critical.

Developing a retention plan for key employees involves several steps 1/ Identify the employees who are critical to the success of your organization 2/ Understand what motivates your key employees and what they value most in their work 3/ Develop a retention strategy that includes incentives such as bonuses, stock options, and other benefits 4/ Communicate with key employees early and often to ensure that they feel valued and informed during the M&A process 5/ Provide opportunities for growth and development to help key employees advance in their careers 6/ Create a positive work environment that fosters collaboration, innovation, and creativity 7/ Offer competitive compensation packages that are commensurate with the skills and experience

In prioritising findings, it is crucial to note that one of the key purposes of the HR due diligence process besides identifying potential risks is to help arrive at a fair value. Consequently, articulating the implications and materiality of HR findings for the valuation of the target is vital as it ensures that potential people-related financial obligations, costs or risks are included early on in the negotiations or planned for.

For effective HR due diligence in mergers and acquisitions (M&A), prioritize the following practices: Legal Compliance: Assess HR policies and practices for compliance with labor laws and regulations, identifying any potential legal risks. Employee Contracts and Agreements: Review employee contracts, non-compete agreements, and other legal documents to understand obligations and potential liabilities. Workforce Composition: Analyze the composition of the workforce, including skills, roles, and demographics, to identify strengths and potential gaps. Cultural Fit: Evaluate organizational culture through surveys and interviews to assess compatibility and potential challenges in cultural integration.

The merger of companies requires exceptional execution of a well thought out Change Management Program across the organization. The communications must include the new vision, the desired measurable goals, the linkage between the above and the organizational structure and roles moving forward, how all divisions will work together as a unified powerhouse for their customers and the mechanisms that will be in place to ensure all employees are heard and valued throughout the typical lifecycle of this massive change. All employees should walk away from such communications feeling they matter.

Decide as early as possible on an Honesty Policy regarding who will be kept, who will be let go, and the process you will follow in developing and implementing the policy.

Communication must be well planned. There might most likely be somewhere some hidden resistance. Reduce the resistance level first in order to have communication that leads to the desired results.

The importance of an effective change management communication strategy is critical. The difference between standard communication is change management communication creates the climate for change with proactive communication to support the employees, promote team engagement, builds trust, moves M&A forward, and sustains the M&A.

Properly applied change management is a vital part of any M&A transaction as it already paves the road for the PMI. In the first instance, consistent collaboration and communication of the deal team is key, but in parallel it already needs to involve the future management team, same as the entire staff in terms of the various levels of information.

Do not under estimate the culture element. It is a marriage of organizations - and where there is a conflict of values, beliefs and expectations - trust will be hard to foster. Synergies fall apart, frustration and disappointments sets in.

It is important to assess the integration efforts associated with any acquisition or merger. You need to understand where you can gain "value" from the acquisition and ensure that this is constantly evaluated as you move forward with any integration.

Another critical consideration is company culture. M&A brings 2 separate cultures together into one. Leaving them independent never lasts long. In my experience, the post transaction culture needs to be openly discussed and a plan needs to be developed during due diligence. When people leave a company they take a part of the company’s culture with them (good and bad), and when people join a company they bring a new part of the culture with them (good and bad). During the normal course of business, it is a gradual change. However, it is highlighted in M&A transactions which can significantly impact the success of a deal.

HR due diligence is unlike any other part of the M&A activities as it deals with the most important asset of any company: people. It is key to deal both with the hard and soft aspects, eg creating a relationship with the key people and ensuring they feel valued and see the acquisition as an opportunity rather than as a potential reason to leave. Hence, I found it valuable to have clear rules of engagement, such as a “best of the best” for any overlapping role, ie for any similar position the best person will be chosen between the acquirer and acquired, based on professional and independent review by a third party (eg a major retained search consultants). Thus, M&A can become an opportunity to upgrade positions and integrate capabilities.

I would say a thorough HR Audit and a HR Risk Analysis is a good start. Due diligence components are embedded in a HR Audit exercise. A HR Audit, done prior to the M&A, will give a snapshot of how "healthy" the state of HR is for that particular business entity, and an accompanying HR risk matrix will let all parties see a detailed picture of the key risks and their impact. This will be useful to chart action plans to mitigate those risks and take the business entity's HR from A to B, B being the ideal state that it should be in after the M&A.