Global mergers and acquisitions achieved a modest rise in completed deals in the first quarter of 2024 compared to the same period last year. Involving HR professionals early in M&A due diligence can help deals close more quickly and increase the chances of a successful transaction. Finance, legal, tax and other experts are typically involved in the due diligence phase of M&A transactions.
Teams often have limited knowledge of human resources, which leads to a shallow exploration of personnel issues, according to WTW research. However, even small concerns related to people can significantly delay or completely derail transactions.
Run in partnership with the M&A Research Centre at Bayes Business School, City, University of London, the data reveals 166 deals valued over $100 mn were completed globally during the first quarter of 2024.
This compares to 150 deals completed during the same period in 2023, representing an 11% increase in volume, according to Global M&A Achieved a Modest Rise.
Involving human resources experts early in the due diligence process can mitigate these risks and enhance the likelihood of a successful deal.
Global M&A achieved a modest rise
Following four consecutive quarters of decline, the volume of large deals (valued over $1 billion) may also be stabilising.
With 34 large deals completed in the first quarter of 2024, this represents the second quarterly rise in a row, following 33 deals completed in Q4 2023 and 32 during the previous quarter.
According to WTW report, five mega deals (valued over $10 billion) closed in the first quarter of 2024 compared to just one in the first three months of 2023.
In the first quarter of 2024, companies engaged in mergers and acquisitions (M&A) for deals valued above $100 million exhibited a share price underperformance of 13.1 percentage points relative to the robust global equity market (see about M&A in UK insurance industry).
This trend of underperformance aligns with the previous quarter’s figure of 13.6 percentage points, highlighting a continued challenge in the M&A sector.
Despite these latest performance figures, the long-term 15+ year trend still shows M&A deals to have outperformed the market since the global financial crisis (+1.5pp).
European dealmakers also struggled to generate value from transactions. Having not outperformed their regional index since 2021, they underperformed during the period January to March 2024 by -9.2pp, with 37 deals completed.
Commonly ignored topics in HR due diligence
While HR issues with more easily quantifiable costs (e.g., executive compensation, cost of benefit plans, anticipated severance) are usually covered in HR due diligence reports, many of the more challenging costs to measure are left unexamined. Examples of HR topics frequently neglected during due diligence include:
Employee headcount by location
High-level due diligence reports often list total employee headcount, yet many omit employee headcount by location.
Understanding headcount in each location enables buyers to consider critical factors such as relevant country- or region-specific laws and regulations, the potential for organized labor presence, and whether location-specific headcount thresholds might necessitate certain employment-related actions or payouts from the buyer.
Some of those actions, such as works council notification and consultation, might require several weeks before deals are allowed to close, resulting in deal delays.
HR operating model
Integrating an acquired business’ HR department and its processes can be challenging and costly. Understanding the extent to which the target company’s HR model is centralized or decentralized and how that might contrast with the buyer company’s HR model is complex and can require significant resources and change management.
HR systems
HR technology integration is one of the most complicated aspects of a transaction, and it can be one of the most expensive to execute. Inventorying the full suite of HR systems used in each in-scope country is imperative for understanding the resources required to execute those changes and how that should be factored into deal costs and integration plans.
Talent management
If one or more of the target company’s talent management processes are misaligned or non-existent, rationalizing or developing those processes will require substantial time and resources and extensive change management.
For example, suppose the buyer’s performance management processes are well-refined and the seller has few formal ones.
The target’s people managers will need intensive training to effectively coach and manage the performance of their direct reports using the buyer’s desired method.
How detailed HR due diligence accelerates M&A integration?
While HR due diligence is sometimes considered a mere checklist for assessing compliance and risk, it should also be viewed as a catalyst for rapid integration planning and execution.
Companies that rely on minimal HR due diligence are ill-equipped to anticipate integration needs before Day 1, and any plans they’ve developed will likely be too high-level or arbitrary to be effective.
If companies neglect to request all relevant data during due diligence, they’ll still need to receive information during integration planning and execution, as all plans and timelines must be specifically tailored based on review of the target’s data.
Requesting, acquiring, and meticulously reviewing information from target companies can consume valuable weeks, precluding a buyer from initiating proper integration planning and execution until that process is complete.
If HR due diligence is done well, integration plans and timelines will be well-informed before close, enabling buyers to begin executing near-term plans immediately and further refine the integration approach for more long-term initiatives.
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Edited & Reviewed by Oleg Parashchak – CEO Finance Media and Beinsure Media by WTW Reports.
