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M&A Valuation: What’s HR’s Role During This Stage?

11 February
by Josh Hrala
5 minute read

The mergers and acquisitions process is a daunting one for everyone involved. For HR leaders, the concern typically lies with how the event impacts the people side of things.

This means that during the M&A valuation process, HR is often excluded from the table, which makes a lot of sense because this section is typically handled by investment bankers, accountants, leadership teams, and roles of that nature.

However, while the M&A valuation talks are underway, HR can use that time to explore key issues that will impact the success rate of the merger or acquisition.

Download our HR Guide for Mergers and Acquistions!

Let’s take a look at what HR can do at this stage of the process, and - as a summary - what this stage of the process looks like outside of HR.

First, Who Is Involved in the M&A Valuation Process?

Like we mentioned briefly above, there are a lot of stakeholders working to come up with accurate valuations. Most of these people are directly involved in finance by being investment bankers, lawyers, upper management teams, and people who concern themselves with the business on a broader level.

“Different industry sectors use different valuation metrics (e.g., multiples of revenue, discounted cash flow or EBITDA, which is "earnings before interest, taxes, depreciation and amortization"). The parties' financial advisers, both internal and external, generally control this aspect of the transaction,” reports the Society of Human Resource Management (SHRM).

The last line there is important. In most situations, financial advisers work on this stage of the M&A process, allowing HR to take a step back and focus on the issues that they directly impact.

M&A Valuation

If you’re curious as to what happens during this time that HR isn’t in the room, SHRM goes on to say:

“Assuming the due diligence process has not uncovered any material issues that cause a reconsideration of the transaction, and assuming the price seems right, both parties draft, negotiate and approve the legal agreement. Regulatory and filing issues must be considered at this time. Despite the prior approval of the parties and their respective boards of directors, organizations must often take additional steps (e.g. filings with the relevant secretary of state, taxing authorities and other government agencies with regulatory authority over either company, such as the federal Securities and Exchange Commission).”

Now, this is a very simplified and watered-down version of how a valuation takes place. There are literally tons of things to consider when coming up with how much a company is worth. We will not delve into those here because we are not financial advisers in any way.

So, with that out of the way, what can HR do while these proceedings are taking place?

Good question.

What Can HR Do While Negotiation and M&A Valuation Is Underway?

In short: people management. This is always HR’s concern, right? So, ask yourself how human capital will change if the deal does go through. Ask what you can do in the moment to help make the integration of two businesses a success.

Consider this: most M&A events fail because of people issues.

According to SHRM, 70 to 90 percent of all mergers and acquisitions fail in a financial sense with most companies missing their objectives. They say that this is largely due to HR related activities, such as:

  • Incompatible Cultures
  • Management Styles
  • Poor Motivation
  • Loss of Key Talent
  • Poor Communication
  • Loss of Trust
  • Uncertainty

In other words, “people issues” are largely to blame when it comes to the failure rate of mergers and acquisitions.

M&A Valuation

While the news media typically only covers when a merger or acquisition is happening, we never really get a chance to see what they fully entail. We think of these events like a movie with high-powered executives in flashy offices signing papers and cashing checks. In reality, it’s the people in the departments who work there that make the merger or acquisition work. And the main department responsible for this is HR.

SHRM goes on to say that HR has a few key things to focus on during a merger or acquisition, such as:

With all that said, it’s easy to see why mergers and acquisitions are a stressful time. Employees are worried about fitting in, what their benefits will be now, how their retirement has changed, if they’ll like their new managers, and a slew of other things.

Again, HR needs to step in and make sure these issues are ironed out. The good news is that one organization’s HR team should be able to work closely with the other company’s to make sure of this. With two expert teams - both knowing a ton about their respective organizations - these issues can be addressed quickly and professionally to ensure a good fit.

So, while the deal team is working on the financials, HR should be concerning themselves with these people issues that will soon come into play if the deal is passed.

Also, HR needs to thoroughly understand how people make the financials work.

M&A Valuation: Retaining Key Talent

While the finance team is hard at work looking at business related issues that drive profits, revenue, etc, HR needs to understand that in order to meet the goals set forth by the merger or acquisition, key talent will need retained.

As we mentioned above, there is a lot of turnover during a merger or acquisition. This is generally because a lot of redundancies happen when two organizations merge into one. However, key talent may also jump ship, throwing a wrench into the financial projections because now the business has to find new talent to fill that very big hole.

M&A Valuation

This means that the first step HR has to take is to come up with a way to track how key employees are feeling about the move and then take further steps to ensure that they stick around.

Download our sample retention bonus letter here.

At the same time, HR needs to consider the impact of integrating all of these teams together in a way that allows the newly formed business to thrive.

This is obviously a lot of work. However, in order for the event the succeed, it's vital that these issues are not ignored.

HR's Role During M&A Valuation Proceedings: The Final Say

When it comes down to it, HR plays a vital role in any M&A event. They are responsible mainly for integrating teams, offboarding redundant workers, and retaining key talent.

However, a huge concern should also be understanding two separate cultures can come together and mesh well enough for everyone to still enjoy their jobs and perform their needed duties.

Want to learn more about M&A and HR's role? Check out our guide here or download our resource below:

Download our sample Post-Acquisition Integration Checklist.

Download our sample Post-Merger Integration Checklist.

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