Merge Right

Numbers don't drive deals. People do.

Sometime after Benchmark Assisted Living, one of the largest senior-care providers in the Northeast, entered talks to acquire Village Retirement in December 2004, negotiations hit a snag. Village Retirement’s management was extremely reluctant to allow Benchmark executives to contact key employees. “We knew that was a problem,” says Jill Haselman, Benchmark’s senior vice president for organizational development. “But I don’t think we pushed hard enough.”

The Wellesley, Massachusetts-based company pursued the merger anyway and decided to keep seven out of nine of the executive directors of the Village Retirement facilities it purchased without interviewing them first. That turned out to be a mistake. Less than a year after the deal closed, four of those directors had left the company, forcing Benchmark into the costly and time-consuming task of recruiting replacements. As employees who didn’t fit the new corporate culture began to exit, Benchmark faced the costs of unemployment, severance packages, recruiting, and temporary labor. “We’re still cleaning up, because we didn’t get in and clean house the first time,” Haselman says.

It’s a common merger mistake. Companies routinely overlook human-capital issues during deal negotiations or during the early stages of integration. “It always surprises me how rarely CFOs participate in human-capital decisions,” says Ross Zimmerman, a senior consultant with human-resources consulting firm Hewitt Associates LLC. Mistakes such as failing to retain key managers, putting the wrong workers in important jobs, neglecting to equalize pay and benefits, or missing human-capital liabilities can torpedo a merger and turn synergy projections into an expensive joke.

Part of the problem is that many HR departments aren’t even prepared to assist in the due diligence that a merger requires. A 2005 study by professional-services firm Towers Perrin, headquartered in Stamford, Connecticut, found that just 26 percent of the companies surveyed considered their HR departments to be “fully ready” to aid a merger or an acquisition effort.

Not only do companies overlook human-capital concerns, but they also fail to account for them in the deal price, says Robert F. Bruner, dean of the University of Virginia’s Darden School of Business, who studies the reasons why mergers fail. “The cost of an acquisition isn’t just the amount paid to the target’s shareholders,” he says. The true total must account for all the human-capital issues that get larded in, says Bruner. That includes, for example, severance payments, consulting fees, and perks — such as the continued use of the corporate jet or the company condo in Paris — paid to the CEO of the target company.

Before signing a deal, the acquirer should create an integration plan, says Marco Boschetti, a Towers Perrin consultant. Then, the acquirer should quantify the costs of the plan, budget for those costs, and tie them back into the deal price. Severance payments, raises, new hiring, relocations — all need to be reflected in the pricing model. “HR should have a seat at the table only if they are able to talk dollars and cents,” says Boschetti.


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