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How finance execs can earn high marks in M&A.
David M. Katz, CFO.com | US
July 5, 2001
Here's a tip for CFOs on how to boost your job prospects: Serve an apprenticeship in the human resources department. It could help make your company's next merger a career-building success.
With the fate of M&A deals often hanging on intangibles like the quality of a workforce or a customer base, many CFOs would do well to bolster their knowledge of people-related issues. For finance executives on the way up, a stint in HR of six months to a year might do the trick, advises Jeffrey A. Schmidt, a Towers Perrin managing director in Chicago.
CFOs with less time on their hands could work on a specific personnel-related project—determining the relationship between employee retention rates and earnings at the company over time, for instance.
At the same time, Schmidt thinks, HR people would benefit, say, by working in the controller's office. Nowhere is there more need for "a convergence in skill sets," he says, than in the M&A area.
But don't CFOs commonly play a big role in HR?
Schmidt replies that while many CFOs are heavily involved in HR decisions and even in program implementation, "it's more by default than by design."
Functions like benefit administration and payroll management require information-technology know-how, he notes, and HR departments are frequently not as proficient in IT as finance people are. For that reason, CFOs are often compelled to take over such jobs.
But a background in benefits IT doesn't supply many CFOs with a grasp of the nitty-gritty people issues that can make or break a merger and hurt a company's prospects after an M&A deal is done, Schmidt suggests.
For instance, inept, spur-of-the-moment handling of people issues can make a company less competitive in a merger's aftermath. If frontline employees are confused about their standing in the wake of a merger, "that is going to be carried over into customer relations," the consultant tells CFO.com.
"Customers can defect if employees defect," he says. Competitors, sensing an advantage, "will attack at the weakest point" and try to recruit talented employees and lure away the merged company's best customers. All that can "undermine the positive effect" of the merger, Schmidt adds.
From a career standpoint, CFOs ignore such factors at their peril. "Managing a merger is almost never career-neutral," says Patrick Donohue, national practice leader for Deloitte & Touche's human capital M&A services in New York City.
"Companies [that have made] successful mergers have successful executives" who can parlay those wins into even better positions, he adds.
Early HR Involvement Is Crucial
Recently released studies by Towers Perrin and Deloitte & Touche suggest, in fact, that HR involvement in a merger's early, strategy- setting phase can be crucial.
The survey Towers Perrin did with the Society of Human Resource Management, for instance, found that HR professionals were heavily involved in the M&A due-diligence phase in 72 percent of the successful deals studied.
At the same time, HR pros played a substantial role in due diligence in just 39 percent of failed deals.
Conducted from June to September 2000, the survey found that 43 percent of 447 HR professionals said their companies had met their M&A goals; 33 percent said their companies were partly successful; and 24 percent said they had failed. The participants picked the following as the top-five roadblocksto M&A success:
Three of the last five are HR issues, Towers Perrin's Schmidt notes.
Deloitte & Touche's study, however, finds that HR executives are asked for their opinions late in the M&A process.
Just 42 percent of the 117 HR executives from the Fortune 1000 say HR gets involved in managerial issues during the due-diligence phase of M&A activities, according to the D&T study, which looked at a broad range of HR issues.
Only 47 percent say the department provides input on reward systems— one of the most natural areas for HR involvement—during the early stages of a deal.
To be sure, the respondents in both studies were HR people, who could be expected to push for a greater strategic role for themselves in M&A.
But CFOs shouldn't let the surveys' natural bias obscure their broader messages: HR issues are becoming more and more crucial to mergers, and early discussions of a deal should include the HR perspective.
One factor that could drive HR more firmly into the M&A picture is a growing awareness among executives that to create a successful merger, they shouldn't "focus on just creating a successful new deal, but [on running] a successful business," says Deloitte & Touche's Patrick Donohue.
For instance, he says, HR can show how to integrate the sales forces of merging companies or put together decentralized and centralized companies—matters that become significant only after the deal is done and the parties need to mesh.
Towers Perrin's Schmidt thinks HR people should be brought into M&A discussions very early indeed. "Once you start to develop specs for an ideal partner," he says, "that's where you want to get HR involved."
Even before a company has located a specific acquisition target, it should bring in HR to provide "a hard-edged analysis" of the value of workforces potential target companies have, he says. HR can help develop such criteria as the desired stability of a target's workforce and its talent mix, he adds.
To be sure, one reason HR people have been shut out of M&A strategy sessions is their perceived ineptitude with numbers. But they can learn to talk to finance by linking metrics they're most familiar with, like rates of employee turnover and retention, with factors like earnings and share price, says Schmidt.
"There's room for quantitative analysis in the people area," the consultant says.
What with the many M&A deals that fail for people-related reasons, there's also room for qualitative analysis in the finance area. CFOs on the lookout for career improvement might indeed have much to learn from the HR folks down the hall.