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MERGERS
AND ACQUISITION:
The need for People Due Diligence.
Written by Aruosa Osemwegie, GPHR, SPHR
aruosa@gettingajobisjob.com

Financial due diligence alone isn't enough. People due

diligence is the make or break lever.

Almost all mergers fail to produce intended business

results, experts say. Studies indicate that several
companies fail to show positive results when it comes to
mergers. Researchers estimate the range of failure to be
5080%. After so many corporate marriages, the world
having gone full circle, are now asking the one wise
question “Why do mergers and acquisitions fail”? What
does it take for a company to be successful, post
merger?

Success or failure of mergers and acquisition certainly

depends on executives having a realistic outlook. Some
have been known to lose their sense of objectivity
because they fell in love with the merger idea wanting it
to work no matter the cost. Most people who study M&A's
divide these transactions into four distinct phases: pre-
deal (selecting the target); due diligence; integration
planning; and implementation. From the time when the
search for a bride starts, all through post - merger
activities, executives need to remain objective, desiring
the company's greater good and not personal ego
fanning. Secondly, do your key people buy-into the
proposed merger/acquisition deal? . . . this is key, for
leadership is a collective responsibility and more
importantly, so as to buy the hearts and minds of your key
people.
 Z or corporate development officer who presents the
acquisition opportunity to management. If doing the deal
makes sense to management, the wheels are set in
motion, a letter of intent is drafted, and the investigative
process known as due diligence commences. Financial,
legal, regulatory, accounting and tax specialists are all
assembled to value the target company, unearth
liabilities, and confirm management's assumptions. When
everything in the examination checks out, the merger
partners typically plunge forward assuming that the
strategic and people-related benefits of the merger will
necessarily fall into line. However, the fact that most M&A
transactions fail to achieve their strategic, operational, or
financial objectives suggests that this assumption of
presumed success is erroneous. Acquiring a company is
really about acquiring people.

As Nigerian banks are in a flurry of M & A activities it would

be crucial that they take a look at these issues. In today's
knowledge-driven economy, models for financial due
diligence are even changing. A study of financial analysts
and portfolio managers reveals that, for the average
analyst, 35% of his or her investment decision is determined
by nonfinancial information. 21st century valuation
models are now more robust; being made to include a
number of intangible assets. How then does the traditional
due diligence process account for those items that never
show up on a balance sheet or income statement. Items
such as; brand value, management quality and
credibility, quality of business processes, ability to attract
and retain talented people, quality of corporate strategy,
innovation etc.
For due diligence to be thorough and for it to be the
basis on which M & A decisions are to be taken, then it
must include people and culture due diligence; IT &
major business process due diligence and brand due
diligence.

Let's not forget the basics. What is the purpose of a

merger or acquisition? Organizations merge so as to
gain competitive advantage and value. They merge so
as to achieve certain levels of synergies. Examples of
such synergies are: growth in market share, leadership in
industry consolidation, enhanced brand strength &
reputation, reducing overhead/operating costs and
compliance with government policy as in the case in
the Nigerian banking sector. To be able to do this the
financial health of both merging parties (acquire and
acquiree) must be properly determined this is what
brought about the need for due diligence. It aims to
objectively value the organizations assets and liabilities.
The financial and legal aspects of M&A planning are
critically important to the success of any transaction.
But this traditional “ledgers and liability” orientation
toward due diligence highlights its principal
shortcoming. A comprehensive valuation of an
organization in today's world would require us to take
inventory of its people and culture. Compelling
evidence now exists that firms with strong cultures
achieve higher results because employees sustain
focus both on what to do and how to do it. It has been
found that most alltimetopperforming companies are
clear in their culture and are passionate about it.
In General Electric leaders are held accountable for
“making the numbers” and for “living the value”. One of
the characteristics of 'built to last' organizations is their
cult like culture. It is said that IBM attained its greatest
success, before Lou Gerstner, during the same era that it
displayed its strongest cult like culture. Interestingly
after the company posted an $8 billion loss and Lou
Gerstner was now brought in '93 to turn things around,
the toughest challenge he said he faced was that of
changing culture. “Culture isn't just one aspect of the
game”, he writes. “It is the game”.

In conducting a people and culture due diligence

some issues are critical. They range from conducting a
top talent analysis for executives and non-execs,
people skill inventory, analysis of management
credibility and depth, leadership assessments,
employee attitude and performance history, quality of
HR policies, internal structure, comparism of
compensation and benefits systems, HR policies &
procedures comparism eg promotion policies,
performance management system particularly for
managers, culture assessment and definition, value of
integration costs (salaries, allowances, and culture
fusion).
There are some better-totakealong benefits that make
the need for conducting this kind of due diligence a
need-to-do and not a-nice-to-do.

It leaves out most surprises. Being a more broad process it

leaves less to the unknown. It aids us retain key talent.
Retaining top talent is a major challenge for most
businesses under any circumstances. Retaining key
talent while coping with the organizational upheaval
wrought by a merger or acquisition increases that
challenge exponentially. Identifying the key human
assets in a target company and quickly taking steps to
keep them from walking out the door on announcement
of the deal is a great result of this kind of assessment. An
additional gain to people due diligence is that the actual
value of the organization is known, the cost and length of
integration is also clearer.

An acquisition or a merger initiates 'turbulence' of some

sought and thus lets up some 'dust', conducting this kind
of due diligence better prepares us to mitigate/contain
fallouts of the M & A process.

References: Why Do So Many Mergers Fail” from Knowledge@Wharton ,

“Human Capital Due Diligence in the Merger Process” by Mark N. Clemente
and David S. Greenspan; “The Correct Spelling of M&A Begins with HR” by
Jeff Schmidt.

Compiled: July 2005

aruosa@gettingajobisajob.com

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