Merge Right

In any deal, the ability to retain the right people is "the most important factor of all," says Robert K. Shearer, CFO of Greensboro, North Carolina–based apparel firm VF Corp. Shearer has been involved in more than a dozen acquisitions in his 20 years with the company. One of the very first things VF does is to meet with a target's managers, including those who are outside the senior-executive suite. "It can be difficult," says Shearer. "The seller may be trying to get a feel for our level of interest and will not want to open up the company, and particularly its people, until it is sure we're serious."

When VF acquired Vans in 2004 and Reef in 2005, it ensured that it could retain nearly all of the top-level executives before it signed each deal. The company was interested primarily in the growth potential of each target, so Shearer believed that keeping high performers was essential to assuring that growth. "This is the same team that has built the brand," he says. "If we don't believe that we can retain the individuals who really live and breathe it, who know it inside and out, that may kill the deal."

VF has walked away from deals when it felt it couldn't retain top talent. In some cases VF didn't feel confident that, for instance, a company founder whose personal style or skills were important to the development of the brand would be content to operate in a subordinate role for any length of time. Rather than risk gaining a new unit but losing its driving force, says Shearer, VF has elected to not do the deal at all.

The CFO has also learned that one key to retaining the best executive talent is to allow for a certain amount of flexibility in their management styles, rather than trying to cram every acquisition into a VF template. "In my career, I have changed the way I think about these things," he says. "We don't have all the answers, and there are other ways of doing things. A little give-and-take can go a long way."

That approach varies somewhat from other cases, such as Sprint, where a cohesive corporate culture was ironed out in the early stages of the merger. In general, it appears that firms that are merging in order to jointly offer a single product — such as mobile phone service or assisted living — find it desirable to fuse cultures as quickly as possible. In the case of VF, however, the success of individual subsidiaries is often dependent on the image they project, so creating a seamless corporate culture across brands as diverse as adventure-gear supplier The North Face and lingerie manufacturer Lily of France may not be advantageous at all.

There is, of course, a flip side to keeping the right people: How do you identify those who aren't a good fit for the combined firm? Some experts say that doing this is a priority. "The most critical financially related strategy is to figure out who not to hire from the company you are purchasing," says Benchmark's Haselman. "This is something we have learned to do better, after having failed miserably at it and seen it cost us 5 to 20 times as much as it should."

Benchmark has found that in deals where no attention is paid to the suitability of inherited employees, unexpected costs start cropping up. "We have learned the hard way — and I mean the million-dollar hard way — to look at the cultural fit and performance level of frontline staff, because there is never another time in the history of the company when you can choose your own workforce," says Haselman.

Uncovering Liabilities
As Benchmark learned when it acquired Village Retirement, it's critical for the CFO and the merger team to interview key talent during the due-diligence phase of a merger and secure input from the HR department. Haselman says the cost of turnover following an acquisition is exponential. "When human resources or organizational development doesn't work with finance in the due-diligence phase, it costs you more money," she says.

And it's not only because of the cost to replace individuals that don't fit the new organization. Haselman says a certain percentage of employees of the target company will almost certainly be sufficiently upset by the change to file lawsuits. Personnel interviews are the best way to uncover legal risks, although in some cases, wrongful-termination lawsuits will be inevitable. "I would advise any CFO doing an acquisition to factor in a very hefty human-resources legal budget, because the lawsuits start going wild," Haselman says.

Other risks related to human capital include underrecognized or unrecognized liabilities. Towers Perrin's Boschetti says hidden pension liabilities can be detrimental to a merger. They are especially common in transactions involving overseas entities. "In some countries, it's easier to play games, or their liabilities are less transparent," he says. For this reason, acquirers should get an outside appraisal of a target's pension-plan status.

Accrued vacation can be another surprising liability. When companies merge, they will usually have to adopt a uniform vacation and sick-day policy. That can be expensive if the merger target has a very generous policy or if it has been allowing workers to accrue lots of vacation time over the years. Meanwhile, risks such as discrimination or sexual-harassment liabilities are harder to see. "You can ask some questions that might uncover it, but if you can't get to it, you can't get to it," says Boschetti.

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