Alan Luba, Owner, Human Resources Consultants, LLC

Failed mergers cost significant loss of shareholder value and jobs, and may result in additional costs for continuing litigation.

Several business and academic studies into the factors impacting merger failures suggest that the greatest risk of merger failure exists in the area of people issues. These studies confirm the value of a “soft” due diligence audit focusing on human resources to identify cultural differences and issues to be faced and the impacts on those people who are critical to the success of the merger.

A complete pre-transaction due diligence effort on the part of a buyer will include close scrutiny of several human resources issues involving buyers and sellers. Together or separately, any or all of these issues may doom a transaction to failure, or, if handled strategically and wisely, can lead the way to a successful, profitable new entity.

Does the potential buyer have an HR strategy as part of its strategic plan for the new entity? Will the separate work forces be merged into one? What legal requirements govern the combination of work forces?

Many HR issues which should be included in any due diligence effort are familiar:

  • Legal Compliance: As employers, how do the parties of a potential transaction address legal requirements in terms of policies and procedures? In addition to considerations such as COBRA, FMLA, FLSA (overtime pay), ADA, ERISA, and other major laws, how does each party recruit, hire and terminate employees? What documents are involved? Is the content of these documents legally compliant?
  • Employee Benefits: Which benefits plans provide greater value to employees, and will these have to be implemented throughout the new entity? What are the costs involved? Will one group of employees experience increases to their accustomed cost for their benefits plans? How are new plans to be communicated throughout eh new organization?
  • Compensation: How will compensation plans be merged into one? How will pay disparities for similar labor categories be resolved at minimal cost and maximum legal compliance?
  • Vendors: What vendor contracts exist for benefits plans, HR systems, and for other services, and what must be done to comply with all while minimizing costs and liabilities?
  • Liabilities: What potential liabilities exist and may be lurking as time bombs ready to disrupt the path toward transaction success if they are not disclosed or identified before the deal is done? These may include undisclosed contracts for HR related services; contracts with embedded cost escalations; verbal employment agreements, including undisclosed compensation and/or equity sharing agreements; non-disclosed legal issues such as unresolved employee complaints and legal actions. Which of these should be included in transaction price negotiations as responsibilities of the seller? Which may be accepted by the buyer as legitimate on-going business costs?

In subsequent posts, we will address these questions, and talk about corporate culture and management style and effectiveness, and their impact on value. Please stay tuned and drop us a comment with your insights on HR issues. 

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