Merge Right

Sometime after Benchmark Assisted Living, one of the largest senior-care providers in the Northeast, entered talks to acquire Village Retirement in December 2004, negotiations hit a snag. Village Retirement's management was extremely reluctant to allow Benchmark executives to contact key employees. "We knew that was a problem," says Jill Haselman, Benchmark's senior vice president for organizational development. "But I don't think we pushed hard enough."

The Wellesley, Massachusetts-based company pursued the merger anyway and decided to keep seven out of nine of the executive directors of the Village Retirement facilities it purchased without interviewing them first. That turned out to be a mistake. Less than a year after the deal closed, four of those directors had left the company, forcing Benchmark into the costly and time-consuming task of recruiting replacements. As employees who didn't fit the new corporate culture began to exit, Benchmark faced the costs of unemployment, severance packages, recruiting, and temporary labor. "We're still cleaning up, because we didn't get in and clean house the first time," Haselman says.

It's a common merger mistake. Companies routinely overlook human-capital issues during deal negotiations or during the early stages of integration. "It always surprises me how rarely CFOs participate in human-capital decisions," says Ross Zimmerman, a senior consultant with human-resources consulting firm Hewitt Associates LLC. Mistakes such as failing to retain key managers, putting the wrong workers in important jobs, neglecting to equalize pay and benefits, or missing human-capital liabilities can torpedo a merger and turn synergy projections into an expensive joke.

Part of the problem is that many HR departments aren't even prepared to assist in the due diligence that a merger requires. A 2005 study by professional-services firm Towers Perrin, headquartered in Stamford, Connecticut, found that just 26 percent of the companies surveyed considered their HR departments to be "fully ready" to aid a merger or an acquisition effort.

Not only do companies overlook human-capital concerns, but they also fail to account for them in the deal price, says Robert F. Bruner, dean of the University of Virginia's Darden School of Business, who studies the reasons why mergers fail. "The cost of an acquisition isn't just the amount paid to the target's shareholders," he says. The true total must account for all the human-capital issues that get larded in, says Bruner. That includes, for example, severance payments, consulting fees, and perks — such as the continued use of the corporate jet or the company condo in Paris — paid to the CEO of the target company.

Before signing a deal, the acquirer should create an integration plan, says Marco Boschetti, a Towers Perrin consultant. Then, the acquirer should quantify the costs of the plan, budget for those costs, and tie them back into the deal price. Severance payments, raises, new hiring, relocations — all need to be reflected in the pricing model. "HR should have a seat at the table only if they are able to talk dollars and cents," says Boschetti.

Retaining Talent
When a deal goes badly, says the University of Virginia's Bruner, the best talent leaves first. "They either get poached or they get frustrated and quit," he says. The costs of addressing human-capital issues will be inconsequential if the deal hits the skids and the new company discovers that it really needed to have those people around.

And nothing can precipitate an exodus of talent like the collision of disparate corporate cultures. So when Sprint Corp. and Nextel Communications Inc. signed a deal to merge last year, a team of top executives sat down together before any attempt was made to bring the two companies together and set about crafting a new corporate culture for the combined firm.

"I think it was clear to us, having seen what other companies have done, that we had to get a good sense of the heritage and strengths of both companies and then leverage the best of each," says Sprint CFO Paul Saleh. "But at the same time, we wanted to establish the traits we wanted to emphasize in the combined entity and what behaviors we wanted our leaders to exhibit, such as a strong focus on customer services, teamwork, integrity, delivery of results, and respect for one another."

The dual goals required a fairly deliberate process. With the input of colleagues from both firms, as well as James Kissinger, the designated head of HR for the merged company, top executives selected their own direct reports but did so with an eye toward creating the culture they had envisioned in their early meetings. "With those things in mind, we then tried to select executives from both companies who would best exemplify these characteristics and best represent that new culture."

A common merger mistake is that companies are too slow to put the key people in place, which can create a lot of uncertainty. High anxiety, says Saleh, hurts productivity and can cause important personnel to leave. So after it identified top managers, Sprint moved quickly to announce its decisions. "That approach is probably not intuitive," says Saleh. "People often argue that if you move too early on this, you run the risk of losing talent. But in fact, the quicker you move, the better you are in creating clarity around certain functional leads and responsibilities."

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