How To Manage A Merger | with Diane Dooley

This video provides an in-depth exploration of the critical role of Human Resources (HR) in Mergers and Acquisitions (M&A), from the initial due diligence phase through post-acquisition integration. Diane Dooley, a seasoned CHRO and consultant with extensive experience in the private equity portfolio space, discusses the multifaceted challenges and strategic opportunities for HR leaders during these complex corporate transformations. The discussion emphasizes that each acquisition is unique, with distinct players, financials, and due diligence requirements, moving beyond the simplistic view of M&A.

The conversation delves into the pre-acquisition phase, highlighting the importance of HR due diligence alongside financial assessments. While financial experts scrutinize EBITDA and valuation, HR focuses on evaluating the "people" component, including owners, senior leaders, and their potential legal or employee relations issues. A significant portion of the pre-deal analysis also addresses benefit plans, scrutinizing health and welfare costs, voluntary benefits, and the complexities of integrating disparate plans across different geographic regions. The speaker underscores the confidential nature of pre-deal activities, which often limits the depth of organizational assessment.

Transitioning to the post-acquisition environment, the video stresses the paramount importance of change management and robust communication strategies. Dooley explains the need to educate both the acquiring and acquired companies about the upcoming changes, proactively addressing employee concerns about personal impact ("What's in it for me?"). She categorizes employee reactions into "resistors," "early adopters," and "waiters," suggesting tailored engagement strategies, particularly for talented resistors. The discussion also covers the emotional aspect of M&A, including "founder syndrome" where entrepreneurs struggle to relinquish control, and the strategic use of financial incentives like stock options to drive retention and align interests during a sale. The video concludes by looking at the future of the M&A market, particularly in the middle market, and offering advice for HR professionals to be proactive business partners and for individuals to own their career growth.

Key Takeaways:

• M&A is Highly Nuanced: Each acquisition possesses unique "fingerprints," meaning financials, players, and due diligence processes differ significantly, requiring a tailored approach rather than a one-size-fits-all strategy.
• HR's Strategic Value in M&A: HR is not merely administrative but a critical value-add function in M&A, contributing to people integration, economic assessment, cultural alignment, and overall deal success. Proactive HR leadership is essential.
• Pre-Deal HR Due Diligence: Beyond financial vetting, HR must conduct thorough due diligence on owners and senior leaders, including background investigations, identifying potential legal issues, nefarious activities, or employee relations problems that could derail a deal.
• Benefit Plan Analysis is Critical: A key part of pre-acquisition due diligence involves understanding the acquired company's benefit plans (medical, dental, voluntary), their funding status, claim spends, and how they compare to the acquiring company's offerings to manage costs and employee expectations.
• Cultural Fit is Challenging to Evaluate: Assessing cultural elements like accountability, education, kindness, and drive is difficult but crucial. It's important to recognize that corporate culture can differ from office or branch cultures and that B and C players often have a greater impact on daily culture than A players.
• Change Management is Transformational: Post-acquisition, educating both the acquiring and acquired companies on change management is vital to set expectations, mitigate discontent, and provide insights into what employees can expect.
• Pronounced Communication is Key: Effective communication is paramount on day one and throughout the integration period, not just for the acquired company but also for the existing organization, to address natural concerns and manage potential shock.
• Understand Employee Personas: Employees react differently to acquisitions: "resistors" (often talented, requiring engagement), "early adopters" (fully committed), and "waiters" (observing before deciding). Tailored communication and engagement strategies are necessary for each group.
• Founder Syndrome Impact: Founders' emotional attachment to their "baby" can complicate integration post-sale. Understanding their motivations (financial, retirement, family) and potentially structuring deals with equity or earnouts for key personnel can help manage this.
• Talent Retention is a Deal-Breaker: High turnover rates (e.g., 50-60%) significantly devalue a company. Strategic incentives, such as offering stock options at the manager level, can be transformative for retention and align employee interests with company growth.
• Healthy Turnover vs. Problematic Attrition: A 7-8% annual turnover rate is considered healthy, fostering new ideas and exchanges. However, double-digit turnover indicates deeper issues that leaders must address to prevent loss of value and critical talent.
• Scalable M&A Playbooks: Building repeatable processes through "workstreams" (e.g., M&A playbook, benefits, operations, sales, learning & development) ensures consistent and successful integration across multiple acquisitions.
• Integration Timelines Vary: Smaller deals typically integrate quickly, while larger acquisitions involving hundreds or thousands of people can take a year or more to fully iron out complexities like territories, systems, and culture.
• Middle Market M&A Dominance: The middle market (companies with a few hundred to a few thousand employees) sees the highest volume of M&A activity, often driven by the desire for change, greater resources, and expanded career opportunities for employees.
• Own Your Career Growth: Individuals should proactively manage their own career advancement, embracing periods of discomfort and new responsibilities as opportunities for significant personal and professional growth.

Key Concepts:

• IBIDA (EBITDA): Earnings Before Interest, Taxes, Depreciation, and Amortization. A common financial metric used by buyers to assess a company's operating performance and valuation.
• Founder Syndrome: A phenomenon where the founder of a company struggles to let go of control or adapt to new leadership after selling their business, often leading to friction during integration.
• Change Management: A structured approach to transitioning individuals, teams, and organizations from a current state to a desired future state, particularly crucial during M&A to minimize resistance and maximize adoption.
• Workstreams: Organized, parallel efforts or teams focused on specific functional areas (e.g., HR, IT, sales, operations) during an M&A integration to manage different aspects of the transition systematically.

Examples/Case Studies:

• Deal Derailment: Diane Dooley recounted instances where issues identified during due diligence on owners or senior leaders (e.g., legal problems, incendiary public behavior) caused an acquisition deal to be abandoned or significantly re-evaluated.
• Founder Remorse: An example was given of founders who, after selling their company, struggled so much with relinquishing control that the acquiring company eventually sold the business back to them after a year or two.
• Succession Plan Miss: A case where an acquiring company bought a highly successful business primarily for its EBITDA, but failed to adequately assess the lack of a succession plan for the key leader. This created a significant challenge as the leader approached their earnout period, leaving a gap in revenue generation.
• Turnaround via Stock Options: Dooley described a company with 50-60% turnover rates that was successfully prepared for sale by implementing a program to offer stock options at the manager level, which was highly unusual. This initiative dramatically improved retention and employee motivation, allowing the company to be sold at a fair market value within nine months.