Merge Right

Matching Salaries
One of the most difficult challenges in any business combination is rationalizing salary and benefits packages across the new company. "If [the target's] average pay is half of the buyer's average pay, guess what — their payroll is going up 50 percent," says Boschetti. "All those things need to be allowed for within the projection model in which you value the business, which is all a function of the CFO."

When pay inequity isn't dealt with, it can only cause problems. The integration process in the acquisition of US Airways by America West Airlines, for example, has been acrimonious and expensive, according to Bruner, because of difficulties in merging highly compensated US Airways pilots with their lower-paid counterparts from America West. "In the absence of any kind of harmonization or equalization of compensation among pilots on either side, how will the company ever achieve the operational flexibility it needs?" asks Bruner.

Even in cases where the firm being acquired will remain operationally independent of the buyer, pay and benefits should be put on a level playing field, warns Elizabeth Phillips, head of HR services at Bostonian Group, a benefits consulting firm. "On the operational independence model," she says, "one of the things the finance executive has to consider is the benefits packages of both firms. Because while they may be independent, if the firm you are looking at has inferior or superior benefits, it will cause problems."

Those costs then need to be calculated and used in the pricing model. Unfortunately, not all CFOs do this well, says Bob Bundy, worldwide partner at Mercer Human Resource Consulting and head of the firm's Americas M&A business. One of the most common problems he sees is a failure to project out pro forma labor costs several years past the closing date. Particularly in mergers in which there is no significant reduction in workforce, he says, labor costs will grow "at a progression that's greater than that at which both organizations alone would have grown." The reason: if one firm's salary structure is higher or its benefit structure is more generous, the tendency will be to pick "the best of both worlds." The quickest way to lose buy-in from employees is to cut their salary or benefits based on the deal, says Bundy. "Rarely have I seen anybody lower pay packages or lower benefits," he says.

When CFOs do have the foresight to make such projections, he says, "they are always surprised at the size of the numbers." During negotiations of a recent joint venture between two medical centers, Bundy says, the finance team took his advice and created several years' worth of pro forma projections of future salary growth. The numbers were so surprising, he recalls, that the entire deal had to be repriced.

Acquirers should keep in mind, too, that combinations — especially with underperforming targets — can put a drain on human-capital resources. That was the experience at Benchmark, says Haselman. In one of the firm's recent deals, she says, the company gave managers of successful properties the responsibility for bringing newly acquired units up to Benchmark's standards. But six months after the integration, it was clear that the practice of moving top managers had hurt both occupancy levels and expense controls at their original facilities. "In hindsight, I wish we had forecast the replacement cost of moving talented managers out of successful properties," says Haselman.

It's an important lesson. If a merger is to be counted as a success, says Hewitt's Zimmerman, CFOs must realize that, in terms of productivity, they effectively begin the process with a deficit, and they will need a clear strategy as to how to make up for that before they expect any gains.

Gone are the days when the CEO of an acquiring company could talk blithely of billion-dollar "synergies" in advance of a deal and trust that no one would mention the subject again once the heavy lifting began. These days, merged companies are held to their synergy forecasts, and the task of upholding those promises usually falls to the CFO.

Uncovering human-capital issues and planning for them down the line will go a long way toward meeting those goals.

Rob Garver is a freelance writer based in Springfield, Virginia.

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