This is one of the most exciting moments in the life of a company: you acquire another company.
The entire process—from non-binding offer to binding offer, deal signing and finally deal closing—is full of adrenaline and deadlines. It requires in-depth knowledge, fast turnaround of deliverables across all functions and sound judgement.
The pre-deal phases are all about realistically assessing the opportunities and risks of the transaction. HR is involved in the latter part.
Firstly, it is important to understand why we intend to undertake this transaction. Are we acquiring another company to:
Achieve better regional coverage?
Buy market share?
Acquire a patent or knowledge that would be difficult to build internally?
Buy a client portfolio that we could not win in the market?
Add a new service missing from our strategy?
The objective of the transaction, including its post-closing plans—full integration, partial integration or arm’s-length management—gives HR the guiding principles for the due diligence phase.
If the objective is unclear, HR due diligence is half-blind: HR does not know what to prioritise or how to assess the risks.
Usually, the following 10 risk categories, in no particular order, need to be analysed:
Remuneration
Special attention should be paid to salary bands and levels, bonus schemes and amounts, commission schemes, one-off payments and collective bargaining agreements.Benefits
The most important areas include pension liabilities, insurance schemes, company car schemes, employee stock purchase plans and holiday practices.Top executive terms and conditions
It is often crucial to retain senior management after an acquisition. It is therefore essential to understand their contractual situation and expectations regarding retention bonuses, guaranteed bonuses, change-in-control clauses, share or stock option plans and notice periods. The review should also cover performance records, departure risks, expatriate assignments, key people and expected new senior hires.HR operations
To understand the HR environment you will inherit, examine the HR target operating model, systems and processes, payroll handling, HR services and HR audit findings.Employee turnover
Multi-year data by function and location help identify potentially damaging losses of knowledge and experience.Employee absence
This analysis focuses mainly on sickness rates by function and location.Corporate culture
Although partly intangible, it is important to understand the target’s corporate values, principles and behaviours, particularly those perceived as defining the organisation’s unique identity.HR policies
This broad subject includes diversity, disciplinary procedures, remote working, pre-retirement, time management, performance management and sabbaticals, among other areas.HR demographics
A deeper look at age, gender, education, tenure and country of residence provides a clearer overview of the target’s employee population.Litigation
A clear picture of pending and potential labour law cases, works council disputes, labour inspections, regulatory fines and HR compliance issues contributes to the overall acquisition cost analysis.
In an ideal world, these 10 risk categories should be compared with internal and external benchmarks to reach a final conclusion.
In reality, however, HR is often involved late in the transaction, and the target may be unable or unwilling to provide the necessary data. Several obstacles can arise:
Some data are held by external service providers.
Some data need to be anonymised.
The target may be a direct competitor and reluctant to share information until the acquisition is almost finalised.
The target’s management team may be hesitant to release documents classified as confidential.
Unfortunately, this means that HR due diligence is often incomplete. The only way to gain greater confidence in a specific target may be to verify the most important issues during management meetings just before deal signing.
HR should therefore maintain close contact with the M&A team and insist on establishing a high-priority HR workstream for every acquisition, ensuring involvement at the earliest possible stage.
This effort is worthwhile given the significance of people-related risks in acquisition projects.