HR's Role In Mergers And Acquisitions

The Council’s research on mergers and acquisitions provides resources to overcome three key challenges that chiefhuman resources officers must address to improve HR’s impact on M&A value creation: A lack of role clarity for the HR function A lack of alignment between corporate and HR functional objectives A lack of HR capabilities to execute against critical mandates throughout the transaction processM&A Tools and Mandates for theChief Human Resources OfficerThis study provides chief human resources officers with the business case,mandates, and staff tools to improve HR’s impact on M&A value creationCHRO Questions and Council ResponsesHow Can HR Most Improveon M&A Value Creation?What role shouldHR play in M&A?What are the key HRpitfalls and mandatesthroughout the process?How can HR improveexecution at overcominghuman capital risksthroughout M&A?Business Case for HRInvolvement Across theM&A ProcessEnd-to-End Guide for theChief Human ResourcesOfficerTools to Overcome HumanCapital Risks Throughoutthe M&A ProcessThe HR Map toBenefits of Successful HR M&A PerformanceThe Council’s 2006 M&A Survey finds that organizations that effectively manage human capital risks throughoutthe M&A process experience significantly better talent outcomes, as defined by engagement, retention anddeployment of talent. Furthermore, organizations that report successful M&A deals also report about 20% bettertalent outcomes (retention, engagement, deployment of talent) than organizations that report unsuccessful M&Adeals.Reaping Rewards from SuccessfulHR M&A PerformanceAn Overview of the CEO and Deal Team agenda itemsOpportunity Identificationand Deal PreparationMaximumImpact onKey TalentOutcomesCorporate Leadership Council M&A Survey (2006)230.00Ineffective HR Management ofHuman Capital Risks to Integrationand mandates for the Chief Human Resource Officer for the M&A ProcessIntegration Management6and Compliance RisksNo Involvement in Target PipelineManagementInadequate assessment and identificationof potential workforce-relatedcompliance and financial risks thatimpact valuation of target and integrationplanningInadequateRisk Mitigation85 Inadequate Assessment of Culture7and Talent RisksInadequate assessment and identificationof cultural misalignments and criticaltalent assets that impact valuation oftarget and integration planningPoor Engagementof Key ConstituentsLack of engagement and training of keyconstituents (e.g., line managers, HRbusiness partners) to manage humancapital risks throughout integrationIneffective Responsesto Value Creation RisksIneffective monitoring of and responding tochanging human capital risks that affect valuecreation during integration (e.g., workforcedisengagement and talent attrition)Inadequate planning of responses tohuman capital risks identified duringdue diligenceNo Understanding of StrategicObjectives of DealIncomplete understanding of deal’sstrategic objectives and misalignment ofHR M&A activities with CEO and dealteam goalsEffective HR Management ofHuman Capital Risks to IntegrationPost Deal AssessmentCEO andHRDealM&ATeamPitfallsAgenda Items4 Inadequate Assessment of FinancialLack of HR involvement in early evaluationof targets to identify, assess, and plan formanagement of potential human capitalrisks1.58Δ 58%1.000.90No M&A Infrastructureor SkillsInsufficient preparation within HR(identifying and developing needed dealmanagement skills and establishing dealprocesses, roles, and ownership) to enableeffective deal executionMaximum Impact of Effective HR Managementof Human Capital Risks on Key Talent Outcomes11.80the M&A ProcessIntegration PlanningHR M&A Pitfalls1Organizations that effectively manage key human capitalrisks experience significantly better talent outcomes Organizations involved early inthe M&A process experienceabout 60% better talentoutcomes, defined by better talentdeployment, higher engagementlevels, and higher retention levels.Due Diligence9Inability toRealize ValueTalent Outcomes of Successful and Unsuccessful M&A Deals2Corporate Leadership Council M&A Survey (2006)Performancein Key TalentOutcomes1.00Δ 18%1.180.900.00Unsuccessful M&A Deals1Based on data from its M&A survey, the Council used linear regression to determine how increasingeffectiveness in the human capital risks predicts an increase in the average of engagement, retention,and talent deployment responses, as rated by survey respondents.2Deal success was determined by analyzing responses to the question: “The last completed merger oracquisition in my organization was successful in achieving the deal’s strategic objectives,” using a fi vepoint scale from unsuccessful to successful.Successful M&A DealsSource: Corporate Leadership Council MemberSurvey on Mergers and Acquisitions;Corporate Leadership Council research.(pages 1–8)Ensure Involvement inEarly Deal EvaluationEnsure HR is involved early in the M&Aprocess so that HR fully understands thestrategic objectives of each deal and aligns HRM&A activitiesIdentify Human Capital Risksthat Impact Target PrioritizationScreen targets to identify significant humancapital risks that impact prioritization oftargets: Potential liabilities Cultural misalignment Talent and leadership capabilitiesIdentify Financial and ComplianceRisksIdentify major human capital-related financialand compliance risks that impact valuation oftarget and integration success: Pensions and insurance Compensation plans Union and employment contractsIdentify Cultural and Talent RisksIdentify major cultural and talent-relatedhuman capital risks that impact valuation oftarget and integration success: Cultural alignment Leadership transition Talent identification and retentionPlan Responses to Human CapitalRisksPlan responses to human capital risks identifiedin due diligence that affect value creation duringintegration Talent retention Employee engagement Organizational integration Executive deployment HR policies and programsHuman Capital OutcomesNo measurement of human capital outcomes toassess achievement of human capital objectivesthat align with deal’s strategic intentTrack Human CapitalM&A MetricsAssess and document the extent to which keyhuman capital objectives were realized and theimpact on overall deal objectivesExecute on Value CreationOpportunitiesMonitor execution of the integration plan to ensurethat synergies and opportunities for value creationare capturedAssess HR Performance and DocumentLessons LearnedSolicit feedback from key stakeholders to assessHR’s performance throughout the deal process andcapture best practices and lessons learnedto improve HR’s future performance(pages 9–18)Base SalaryProgramVariable Pay PlansSales Pay PlansExecutive Pay Plans/DeferredCompensationMonitor and Respond to Human CapitalIntegration RisksMonitor and proactively respond to changing humancapital risks that continually arise and affect valuecreationBuild Workforce CommunicationPlanBuild a workforce communication plan thatproactively responds to talent and workforcewide retention and engagement risksReceived?Low Risk/High RiskIssues/Exposures/Areas of Risk(Illustrative)YellowRedBase pay is market competitive. ABCmerit increase proposed by target atcost of XXXm/quarter.Seagate recommends not to implement.No assessment of HR performance during theM&A process to capture best practices andlessons learned and improve HR’s future M&Aperformance11 No Measurement ofStalled or lost opportunities to capturesynergies and realize value opportunities(e.g., headcount doesn’t decrease, dualcompensation and benefits plans remain inplace, new executive team is established toolate)Specific InformationRequested by SeagateBase Pay PlansImprovement of HR’s M&A PerformanceCHRO Mandates to Support CEO AgendasCHRO Mandates to Support CEO AgendasEstablish an HR M&A InfrastructureEstablish an M&A infrastructure (framework,tools and roles) within HR and identify neededskill sets to enable effective deal assessmentand integration management.Areas of Review10 No Assessment and Plan for and those organizations with better talent outcomes have more successful M&A deals1.80Seagate’s Evaluation for Target’s HR Information Pre-Announcement: Highly ConfidentialGreen: All Info Received/Low RiskYellow: Partial Info ReceivedRed: No Info Received/High RiskData HypotheticalEquity Plansand ObligationsStock plans, omnibus plan documentdetails, ESPPRedRedGreenGreenRedRedNo visibility into target’s incentive planproposalNo issuesHave not received deferredcompensation plans, so do not knowif target is in compliance with newlegislationGreenGreenTurnover by major siteGreenRedTarget’s overall turnover is much higherthan Seagate’s.Benefits Plansand CostsListing of any key executivedepartures, groups/levels ofemployees with major turnoverYellowRedNo issues, continue implementationof ongoing planxx new executives (VP and above) hiredwithin past xx months.No information provided on groups/levels of employees with major turnoverEmployeeHeadcount,ManagementLayers, andSpansHeadcount by major site, level ofemployee, and function, organizationchartsYellowGreenNo issues with headcount belowexecutive level(pages 19–100)Source: Corporate Leadership Council research. 2006 Corporate Executive Board. All Rights Reserved.

Table of ContentsLetter to the MembershipixWith Sincere AppreciationxAdvisors to Our WorkxiSection I: Business Case for HR Involvement Across the M&A Process1Defining the HR ChallengeCLC research demonstrates that a majority of deals fail due to poor integrationof human capital elements and lack of HR involvement early enough in thedeal process to effectively identify, prepare for, and respond to human capitalrisks.Section II: End-to-End M&A Guide for the Chief Human Resources OfficerThe 30,000-Foot View of the M&A ProcessThe Council has created the following guide to the M&A process to focus HRinvolvement on the highest-impacting areas throughout M&As.912The HR Map to the M&A Process14The HR map to the M&A process provides an overview of the key chief humanresources officer mandates throughout M&A in support of the CEO’s priorities.Twenty-Three Key Questions for the CHRO Throughout M&A16The Council has created this list of 23 key questions that chief human resourcesofficers must answer to ensure successful execution on key M&A mandates.The CLC M&A Resource Center18Section III: Tools to Overcome Human Capital Risks Throughout the M&A Process19Executing on MandatesThe Council has documented a series of best practice tools to support HR’sexecution on critical mandates throughout the M&A process.20Stage I: Opportunity Identification and Deal Preparation23HR M&A Rapid Response TeamIntel creates a flexible HR M&A staffing plan consisting of a core team ofseven HR staff as well as 15 to 20 HR functional employees trained in M&Askills to ensure that HR always has the necessary resources to provide supportfor any deal volume, size, or complexity.25Early Human Capital Risk AnalysisCadbury Schweppes uses an assessment tool to identify and assess theorganizational and cultural dimensions that matter most for targetintegration, valuation, and risk assessment.29

Risk-Driven HR M&A TeamPhilips builds an HR M&A team with the key skills to manage critical humancapital risks specific to each transaction and fast tracks the team’s developmenton how to support the critical elements of a transaction.Stage II: Due DiligenceHR Due Diligence Risk AssessmentSeagate requests financial, compliance, and talent information from the targetduring due diligence, and creates a due diligence dashboard to provide anoverview of major human capital risk areas, which informs deal valuation aswell as integration planning.333739Cultural Assessment47Sterling Financial evaluates culture indicators during due diligence byreviewing standard due diligence documents and searching for cultural insightsto assess the level of fit between the target and acquirer for each attribute,determining whether to walk away from the deal or begin planning cultureconflict mitigation efforts.Talent Identification and Retention AuditNortel identifies critical talent early in the deal process so that targetedretention and transition support can be put in place.Stage III: Integration PlanningM&A Integration PlaybookBrambles uses a comprehensive integration playbook on all aspects ofintegration, including HR key responsibilities such as cultural alignment,organization design, staffing, talent retention, rewards and redundancy, andcommunication planning.515961Workforce Communication Plan65Kraft recognizes that employee uncertainty and anxiety is a significant driver ofattrition and employee underperformance through an M&A transaction andbuilds a communication plan around the key communication risk moments.Stage IV: Integration Management69Employee Pulse DashboardFPL Group tracks human capital metrics throughout integration to developan ongoing understanding of employee morale and turnover that enables thecreation of targeted responses which overcome root causes.71Integration Risk SurveyDanske Bank uses an integration risk survey to increase visibility into changesin employee commitment during integration, respond to escalations inemployee commitment risks, and continually monitor progress.77HR Integration Execution DashboardABN AMRO uses a dashboard to monitor execution of integration activitiesand tracks progress against task milestones, highlighting tasks that are likely tobe completed late.83

Stage V: Post-Deal AssessmentHR M&A Performance AssessmentDeutsche Bank’s HR integration leader conducts in-the-moment performanceanalysis based on feedback from team members and third-party M&Astakeholders to measure HR M&A team performance and target skill buildingon 10 imperatives previously identified as critical to the M&A process.89HR M&A 360-Degree Performance AssessmentIntel’s HR M&A team collects performance feedback from all key stakeholdersimpacted by HR’s activities throughout key deal phases to assess performanceand improve effectiveness of the HR M&A team.93AppendixOrder Form87101Supplementary ToolsIn this appendix, the Council offers the complete Seagate Due DiligenceDashboard, pages from the HR section of Brambles’ M&A IntegrationPlaybook, and the Danske Bank Full Integration Risk Survey profiled inthe study.101Seagate: Due Diligence Dashboard102Brambles: M&A Integration Playbook—People-Related Pages104Danske Bank: Full Integration Risk Survey113119

ixLetter to the MembershipAs indicated by sharp increases in both deal volume and value, companies are once againpursuing mergers and acquisitions as a means to strengthen their competitive position.Yet recent surveys show that a majority of companies fail to capture the full value frommergers and acquisitions, mainly due to poor integration management. Human capitalrelated factors (e.g., cultural integration, workforce engagement, talent retention) arefrequently at the root of failed mergers and acquisitions (M&A).All too often, HR is not involved throughout the key deal phases to ensure effectiveidentification and management of human capital risks. HR often lacks specific dealskills, knowledge, and tools to be an effective partner to the CEO and deal team. Giventhe importance of effective integration of human capital–related aspects to overall dealsuccess, chief human resources officers must be hardwired with the knowledge and toolsto overcome the key challenges they face throughout the M&A process.In response to these imperatives, the Corporate Leadership Council is pleased to offerHR’s Role in Mergers and Acquisitions—Tools and Mandates for the Chief Human ResourcesOfficer, which provides chief human resources officers with three critical tools to improvetheir overall impact on deal outcomes: Business Case for HR Involvement Across the M&A Process End-to-End M&A Guide for the Chief Human Resources Officer Tools to Overcome Human Capital Risks Throughout the M&A ProcessIt is our hope that this initiative will support member organizations in improving theirimpact throughout the M&A process and help them to realize the strategic objectives ofthe organization. Since the findings presented here do not address every challenge faced byorganizations during the M&A process, members are encouraged to contact the Council’sresearch team for further assistance. As always, we encourage and look forward to yourfeedback.With our continued appreciation,Corporate Leadership CouncilWashington, D.C., London, and New DelhiDecember 2006 2006 Corporate Executive Board. All Rights Reserved.

xWith Sincere AppreciationThe Corporate Leadership Council would like to express its gratitude to the followingindividuals who contributed time and insight to the development of this study.Marco BoschettiPrincipalTowers PerrinGlobal Merger, Acquisition, andDivestiture Practice71 High HolbornLondon WC1V 6TPUnited Kingdom Robert F. BrunerDean and Charles C. Abbott Professorof Business AdministrationDarden Graduate School of BusinessAdministrationUniversity of Virginia100 Darden BoulevardCharlottesville, VA 22903 1-434-924-7481brunerr@virginia.eduRavi ChanmugamPartner, Corporate Strategy/M&AAccenture1345 Avenue of the AmericasNew York, NY 10105 1-917-940-3228ravi.chanmugam@accenture.com 2006 Corporate Executive Board. All Rights Reserved.Mark HerndonPresidentParkwood Advisors, LLC15455 Dallas Parkway, Suite 600Addison, TX 75001 othy J. Galpin, Ph.D.Professor of ManagementThe University of Dallas3410 Lakeside DriveRockwall, TX 75087 1-214-679-0424tgalpin@gsm.udallas.edu

xiAdvisors to Our WorkThe Corporate Leadership Council expresses its appreciation to the individuals andorganizations who have so generously contributed their time and expertise to our work.Their contributions have been invaluable, and we extend our sincere thanks.ABN AMRO Holding N.V.Express Scripts, Inc.Micron Technology, Inc.Adobe Systems, Inc.First Data CorporationMillipore CorporationAgere Systems, Inc.FPL Group, Inc.MTN Group Ltd.Agilent Technologies, Inc.Fortum CorporationMusgrave Group PlcAlcoa, Inc.Foster’s Group LimitedNational Grid PlcAnadarko Petroleum CorporationFreescale Semiconductor, Inc.Applied Materials, Inc.GE HealthcareNavistar InternationalCorporationAT&T Inc.Genworth Financial, Inc.Australia and New ZealandBanking Group LimitedGenzyme CorporationBellSouth CorporationBio-Rad Laboratories, Inc.Blue Cross of NortheasternPennsylvaniaBlueCross BlueShield ofTennessee, Inc.BMC Software, Inc.Brambles Industries Ltd.British Sky BroadcastingGroup PlcGilead Sciences, Inc.Nortel Networks CorporationOrkla ASAGlaxoSmithKline PlcPAREXEL InternationalCorporationThe Goodyear Tire & RubberCompanyPeople’s BankH. Lundbeck A/SHalliburton CompanyHanson AmericaHealth Care Service CorporationHospira, Inc.HP Hood LLCCadbury Schweppes plcInco LimitedCaterpillar, Inc.Intel CorporationCelanese AGIntelSat Ltd.Celestica, Inc.JPMorgan Chase & Co.CEMEX, S.A. de C.V.Kansas City Power &Light CompanyCiba Specialty ChemicalsHolding, Inc.NIBC Bank N.V.Kraft Foods, Inc.Prudential Financial, Inc.Reckitt Benckiser PlcRoyal Dutch Shell PlcRoyal Philips Electronics N.V.Russell CorporationScottish EnterpriseSeagate TechnologySony Ericsson MobileCommunications ABSovereign Bancorp, Inc.Statkraft AsSterling Financial CorporationSun Microsystems, Inc.Svenska Cellulosa AktiebolagetSCACisco Systems, Inc.Lafarge North America, Inc.The Commerce Group, Inc.(Commerce Insurance Group)LeasePlan Corporation N.V.Liberty Mutual GroupTata Consultancy ServicesLimitedConstellation Energy Group, Inc.Linde Aktiengesellschaft(formerly The BOC Group Plc)Telefónica Móviles, S.A.Danske Bank A/SDeutsche Bank AGLockheed Martin CorporationEMC CorporationL’Oréal SAEnodis PlcMercury Interactive CorporationExelon CorporationMervyns, LLCTesoro CorporationThe Thomson CorporationUnicredito ItalianoVeritas DGC, Inc.Vodafone Group Plc 2006 Corporate Executive Board. All Rights Reserved.

xii 2006 Corporate Executive Board. All Rights Reserved.

1Section IBusiness Case for HR InvolvementAcross the M&A Process 2006 Corporate Executive Board. All Rights Reserved.

2HR’s Role in Mergers and AcquisitionsOccasion for the ResearchM&A transaction volumes remain at high levels with an increasing number of large deals in recent years, whichcombined with growth in M&A prices is increasing M&A value at risk.Increasing M&A Value at RiskContinued high-deal volumes combined with more large deals Number of M&A Transactions2001–2006(E)Percentage of Deals More Than US 100 M ( 78 M)40,000Deal Values Adjusted for Inflation, 17%17%17%15%15%15%12%14% 13%13%13%Percentage 10%of DealsNumber 20,000of Deals0%01995 1997 1999 2001 2003 20051996 1998 2000 2002 20042001 2002 2003 2004 2005 2006(E) and growth in M&A prices contribute to increasing value at riskGrowth in M&A PricesEBITDA Multiples, All Industries,Q2 2001–Q2 200612R CAGMedianEBITDA 6Multiple16.6%020022003200420052006n 5,561 transactions.Source: Thomson ONE Banker; Corporate Strategy Board research;Corporate Leadership Council research. 2006 Corporate Executive Board. All Rights Reserved.

Section I: Business Case for HR Involvement Across the M&A Process3Low M&A ReturnsMultiple studies highlight that, for a majority of organizations, M&A transactions do not deliver anticipatedbenefits. Meanwhile, across the Council membership, just 12% of organizations report significant success in M&A,while 34% report no success in M&A transactions.The Sobering RealityThough intended to accelerate growth, deals often fail to achieve objectives Summary of Merger and Acquisition Failure RatesEstimatesSourceObserved Merger or Acquisition Failure RateRight Management Consultants 77% of mergers and acquisitions do not achieve their original purpose.Mercer Human Resource Consulting 50–80% of mergers and acquisitions never produce anticipatedbenefits.McKinsey & Company Almost 70% of mergers fail to achieve revenue synergies. Nearly one-quarter of anticipated cost synergies are overestimated byat least 25%.Accenture Only 13% of executives strongly agreed that their companies’ mostrecent acquisitions were completed “as quickly as possible withminimal distress.” Fewer than half of responding executives reported that theircompanies captured either anticipated cost or revenue synergies.The Boston Consulting Group As many as two-thirds of mergers fail to create shareholder value. and only 12% of organizations report highly successful recent M&A transactionsM&A Deal SuccessCorporate Leadership CouncilM&A Survey, 2006Not Successful34%ModeratelySuccessful54%12%n 53.Very SuccessfulSource: “2002 McKinsey Postmerger-Management Survey,” McKinsey & Company, 2002; “Accenture/EconomistIntelligence Unit 2006 Global M&A Survey,” Accenture, 2006; “Creating Value Through Mergers andAcquisitions,” Right Management Consultants, 2003; “Growing Through Acquisitions,” The BostonConsulting Group, 2004; “Making Acquisitions Work: Human Capital Aspects of Due Diligence andIntegration,” Mercer Human Resource Consulting, 2005; Corporate Leadership Council research. 2006 Corporate Executive Board. All Rights Reserved.

4HR’s Role in Mergers and AcquisitionsRoot Cause of M&A Underperformance: Poor Integration Management of Human Capital ElementsA recent study by the Corporate Leadership Council’s sister program, the Corporate Strategy Board, indicates thatpoor integration represents the most common challenge to capturing the full value from an M&A transaction.Furthermore, overcoming human capital–related challenges during integration proves critical to successfulintegration.Integration: Key Driver of M&A FailureSenior executives report that integration is the greatest source of failure in M&A Sources of Deal FailureCorporate Strategy Board Integration–Performance Survey, 2006Percentage of 50%RespondentsCiting Reason25%as NumberOne Source0%of Failure44%28%28%IntegrationStrategyValuationValue wasavailable, buterrors were madein executing dealobjectives.In hindsight, thestrategy waswrong.You assumedgreater valuethan was actuallyavailable andpaid too much. and rate human capital aspects most critical to successful integrationPercentage of Senior Executives Rating Element Most Critical to Successful IntegrationSenior executives report that overcoming humancapital–related challenges is more important to M&Aintegration success than any other aspect of integration.Corporate Strategy and BusinessDevelopment Elements,Mean 11%Human Capital Elements,Mean 30%40%32%32%30%24%Percentage of 20%Respondents20%18%12%8%6%4%2%n 420. 2006 Corporate Executive Board. All Rights Re

HR is underperforming in integration —Only 15% of chief human resources offi cers rate their organizations as effective in managing human capital risks throughout integration. Early identifi cation of and response to human capital integration risks is critical to deal success—Only 34% of HR organizations are involved early in the deal .