The Perks and Pitfalls of acquiring a service or an IT business
Have you ever considered acquiring a business where the key asset walks out of the door every night? How does one mitigate this risk when buying a service or an IT business?
History is full of examples where an acquirer has paid a rich multiple to acquire talent, a sales force or both but found themselves left with only a fraction of that expensive talent after a short time.
So, how does one mitigate this issue? Below are some ideas to consider - some may work better if a small team is expected to join your business and others can encourage a larger team (compared to your current number of employees) to blend in quickly and remain in situ. To begin with, there are several basic key attributes to attract and retain talent:
Salary and bonus schemes: Be cautious about buying loyalty: We all know that loyalty is the most important attribute to retain employees. It is an asset you must nurture by creating an environment where people can shine and where they feel truly valued. However, paying for loyalty as a stand-alone strategy seldom pays off. The initial positive effects quickly wear off and in the best case, personnel will stay physically but leave mentally. In the worst-case scenario, they find a competitor willing to pay even more for that loyalty.
Employee benefits and perks: Some benefits and perks typically come at a low cost to the employer yet are still valued highly by employees. Employee take up can easily identify which benefits fit the bill. In the instance of a merger, it is both straightforward and imperative to give the same benefits and perks to all employees.
Participation schemes: Direct shareholdings, phantom shares (an employee benefit plan that gives selected employees many of the benefits of stock ownership without actually giving them any company stock in order to provide a financial incentive but avoid dilution or additional voting rights) or any other form of vesting plans rewarding long-term employees for their loyalty and hard work are an effective way to align interests and retain key employees. However, direct shareholdings or phantom stock should be limited to a smaller number of staff and are typically only an instrument for senior management. Employee plans are designed for a wider group of people and although they are a useful tool to align the interests of shareholders and management or employees, can be fairly complex to administrate and manage, thus requiring a certain critical FTE size often not reached in SME’s.
Retention packages: Such packages are typically one-off financial payments given to very few critical employees. In most mergers, the vast majority of employees do not receive retention packages. It will ensure that a few employees vital for operation and integration will stay on board during the integration phase to operate vital systems or transfer know-how, but they are not designed to ensure loyalty and long-term commitment.
Career pathing and employee development: This should be as standard in every HR department and as important as it is to provide career pathing to new employees, it is equally important for existing employees. Make sure this is part of your own HR culture before considering a merger or acquisition.
In the context of a merger or acquisition, another dimension is added. The employee packages’ significance increases because every employee will consider and compare the new conditions to the old regime and this can be pivotal in their attitude going forward. The merger employees will compare with the conditions of the incumbent employees and vice versa. This leaves a tricky yet vital optimisation exercise.
Dealing with all these aspects in the context of an acquisition
Come prepared: Acquisitions are often opportunistic and give the acquirer little time to perform due diligence on HR culture, salary and benefits of the target. More importantly, many acquirers start collecting information on their own talent retention scheme when it’s almost too late. If you are in acquisition mode and likely to acquire a large pool of talent in the near future, make sure you have an idea of the possible changes required to your own system to make an acquisition successful. Alignment of compensation systems is a big project. It’s a good idea to hire an HR advisor to help.
Ensure you have HR and talent retention staff capable of dealing with the new and enlarged organisation: HR and talent management functions are often quickly centralised in order to leverage synergies. However, talent retention is becoming an increasingly important role after an acquisition and it is important to think about the right size and shape of your HR organisation prior to an acquisition.
Equal treatment of existing employees: Acquiring a business and offering new employees career steps and benefits not available to existing employees will disgruntle long-term employees. As well as ensuing cultural problems, accrued talent will then leave if they perceive a misfit of expectations and reality. When considering a sizeable acquisition, it might be a good opportunity to revisit talent retention schemes across the board.
Be careful with offering steep career steps: A fairly common way to motivate talent in the context of an acquisition is to offer them a career step outside the normal promotion cycle. This will buy you the commitment of new employees in the short term but might easily backfire in the medium term. Promotions should be based on merit and sometimes seniority, but allowing a group of individuals to shortcut the normal promotion cycles will create envy and anger for the ones that have been quietly waiting for their turn. Instead, provide a clear career path to everyone that has joined the business resulting from a merger or acquisition.
Strive for a quick integration: Integrating cultures and talent retention schemes can be painful and a certain churn might be unavoidable. However, retaining two systems and waiting to make changes is definitively a bad idea, as it becomes more difficult by the day.
Making an in-depth assessment of the target but also your own salary and talent retention schemes and considering adjustments across the organisation to create one unified scheme for everyone is the route to success. You should ask yourself not only what changes are required to bring the talent retention functions of the target in line with your own, but also what changes are possibly required within your own organisation. It is vital to ensure that these changes are well communicated internally either through an HR or communications function.
If there is a substantial gap between the remuneration policies of your own enterprise and the target business that can only be bridged by throwing money at the talent of the acquired business, think twice or adjust the purchase price to such additional costs. If this is not done effectively, the worst case scenario is paying double for the acquisition of talent that one day decides to walk out the door but does not come back.
