A Guide to M&A Due Diligence from HR's Perspective

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“If you're pulling HR in after you announced the deal, then you're missing a lot of opportunities to help realize deal value earlier on in the process.”

On this episode of M&A Science, Kison Patel speaks with Dr. Klint Kendrick, Chair of HR, M&A roundtable. Klint was a former director of M&A, HR at Oracle, and HR M&A leader at Boeing.

Together they discuss the HR practitioner's guide to M&A and due diligence, covering topics such as when to bring HR in, major HR risks, and how to weigh risks.

They also cover how to work with other functions, information ecosystems, and retaining key employees.

Learn valuable lessons on how to deal with reputation risks, the difference between buying a house and buying a company, and the craziest thing Klint has seen in M&A.

M&A due diligence improvements

Text version of interview

Can you kick off by briefly describing your roles at Oracle and Boeing?

During my time at both Oracle and Boeing, I led the HR workstream for a number of acquisitions, joint ventures, and a handful of divestitures. In that role, I am responsible for pulling together HR teams and other individuals who touch the people, leadership, and culture aspects of a deal. 

Tell me about roundtables. Why do you think they are an effective way to learn M&A skills?

In my mind, roundtable learning is peer learning. When we work on a deal, we learn the lessons from that deal and we hopefully can apply them to future deals. A lot of people are pulled into a deal either as somebody who is trying to set up a business for sale or somebody who is the HR leader for an incoming business unit. It’s tough for them to learn those lessons because they are doing one deal maybe in their entire career. By setting up a roundtable we can learn not only from our own experiences but from the experiences of others. I think we elevate the entire practice of M&A.

Tell me about the book.

There is not enough information about how HR practitioners can do due diligence out there. I took ideas and the best practices, both from the work that I’ve done and the things that I learned from others and, I put it in 178 pages that I believe any HR M&A practitioner can use as their due diligence playbook. This isn't necessarily something a serial acquirer needs, because they know how to do due diligence. This is something that an individual practitioner, a person who is part of the company that is looking to buy, can use to make their deals more successful.

Useful topics:

HR Integration: What to Do with Employees during M&A Deal

Integrating Unique Cultures in M&A

I was really interested in the views you brought in the book because it gives a lot of light to what the responsibilities are for an HR practitioner in M&A and I found it very valuable for those who may not directly be in an HR role but can get a much better understanding of it because it is really important. 

A lot of HR practitioners don’t get involved in a deal until after an announcement has happened. Then, they are trying to play catch-up and there are really limited opportunities out there after the announcement to do any kind of mitigation or planning work. Sometimes you're stuck with things that were put together even as far back as LOI, but there is nothing you can do to fix them if HR is brought in late. 

The people aspect needs to be looked at sooner. In the book, I point to six different areas where I believe that people, leadership, and culture diligence can make a difference. Then I walk the practitioner through how to mitigate some of those risks. Some of the risks will be mitigated during integration, but there are specific things that you can do in crafting the LOI. All of that can be done before the announcement. If you are pulling HR in after you announce you are missing a lot of opportunities to help realize deal value earlier on in the process.

What’s one of the biggest lessons you learned during your time in HR M&A?

We, M&A practitioners, don’t talk to each other enough, even on our own deal teams. In the book, I cover using a post-diligence huddle to sit down with everybody who’s part of the deal team and ask questions about two things. One is about the people - Who are the people that we absolutely need to retain?

A lot of times the folks that are working through the deals are really concerned with top leaders, but we don’t often pay attention to the next level down. The second thing I ask folks to cover in the post-diligence huddle is how are we going to break the business during integration. In HR we call that culture. 

One thing I really liked about your book is when you draw the parallels between buying a house and buying a company. Can you explain the similarities and differences between those two purchases?

I relate the house-hunting process to the target screening process, where you are going out and you are looking for something that’s going to help you meet your strategy. When you are house-hunting, you’ve got different needs, depending on what your personal goals are, and it’s very much the same for a company.

Once you’ve selected a place and you put in your preliminary offer or your letter of intent, you move into the home inspection process, which is due diligence. Integration planning is just like planning to move into your home. You are planning to move in even before you get the keys to the house at the close. Then you move in and hopefully become a good neighbor, and in the case of an M&A deal hopefully, we’ve captured some value and recognized the deal thesis. 

How do you define due diligence and why is it so vital to M&A?

In the book, I really look at due diligence as the art and science of identifying, assessing, and mitigating risks, associated with an M&A transaction. My job as an HR practitioner is to support the assumptions that the corp dev team has made. The things that are going to derail that deal thesis from being met, the things that will keep us from achieving the growth strategy a lot of times are going to be people, culture, and leadership risks.

It’s not enough just to identify risks - we have to assess them.

  • Is there a materiality threshold?
  • Are they significant or can we deal with them later?
  • How do we mitigate those risks? 

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It sounds like you're starting a poke at the deal model itself that the corp dev team comes up with. How do you work around that and bring up those issues, especially when people are really reserved around keeping that to get the deal done?

It all comes down to what are the incentives. If we can sit down and have that conversation about what that final integration plan and model is going to look like, I can then ask some questions about the HR elements of that, that will help them meet their ultimate goal of getting a strong ROI. In situations where I’ve been able to get in prior to LOI and look at some of the assumptions that are being made I can at least point out some of the financial impacts of the deal model. If deal teams are really looking for a solid return or making sure the deal achieves goals, it’s really in their best interest to partner with HR so that we can help provide that input.

How do you work with other functions when you're pursuing this approach in diligence? 

Being highly collaborative is the best way to go about this. If we all have a shared understanding of what the final integration model is going to look like, then we can go in and look at how each of our workstreams is going to affect whether or not this deal works. I need to get in with those organizations that are going to have an impact on the people side of things. Usually, who I end up working with are folks in tax and finance, IT folks, and folks that are in procurement, depending on what that deal looks like. 

Collaboration is key. What’s the information ecosystem like and how does that impact a deal?

When I look at the information ecosystem in a due diligence context I am looking at all of the different places where we can learn about a target company. I think of this as a beginning in the target screening phase. I am going to look at the target company’s website, understand what they say about themselves, what their core competencies are, their press releases, and I want to understand what their hiring and recruiting needs are because that will give me a pretty good sense of how they’re positioned in the market.

I am going to look at social media, Glassdoor, and Yelp for reviews, LexisNexis, or some analyst report. That’s the public piece. One of the sources of information that are frequently overlooked is folks that are in-house, and there are also outside experts and gathering competitive intelligence. We also have the more traditional pieces, looking at the SEM, looking at the information that we get through the checklist, through our due diligence interviews, and our site visits. I consider all of those pieces to be pieces of the information ecosystem.

In your book, you talk about the six major HR risks. Can we dive into each of those?

The first thing I am going to look at is the financial risk, such as pension liabilities, retiree medical plans that may be underfunded. The next area that I look at is operational risks, where I had a case of such risk appearing due to changes in HR policies. I also look at compliance risk,  and here I am looking at things that are going to end up with some sort of government-imposed fine or penalty. This will have a lot to do with the integration plan. I also recommend looking at things like employment terms and conditions, so if there are non-competes or non-solicits that are part of employee terms and conditions.

The fourth area is leadership risk. With the strategics, we don’t tend to have the same kind of formal assessments of potential leaders that some of the more advanced private equity firms do. There are also culture risks, and here I look at how changes in the way the work is done are going to affect the combined company’s ability to deliver products and services to customers. Finally, we have to look at the HR function as well, as we also have to look at HR functional risks and that can be anything from tackling how we pay people to more sophisticated things like how are we going to integrate the HR systems.

What are the actual deal killers?

I’ve run into only a few HR deal killers in my career and those have usually been significant financial risks. A lot of the HR issues get ignored early on in the deal. It’s not necessarily about the deal killers, but it's about all of the mitigations that can happen in early integration planning and looking at your definitive agreement and whether or not there are changes.

From what I’ve seen, the worst thing that could happen is to lose key people during integration.

It’s not just about losing key people, it’s about losing a significant number of those folks. One of our roundtable members refers to it as the triple bump. The first bump happens when the announcement occurs, and you end up losing all of your A-players. Your B-players then end up trying to fill in A-player shoes. Your second bump really happens when your B-players are so demoralized and demotivated that they actually end up underperforming themselves. The final bump happens because the organization now has such a bad reputation that you can’t recruit new talent. That messes with your entire talent ecosystem. I do believe, however, that things can get a lot worse than a couple of people leaving. 

How about those key people though, in terms of retention? What's your approach when it comes to that?

I tend to look at retention as a risk factor using a traditional heat map and using an impact probability matrix. I look at the probability of a person leaving and then I look at the impact of the role being vacant, both on integration and on ongoing operations. Depending on where a person sits in the impact of their departure and their risk of flight, where those two things intersect tells me how much time I want to spend thinking about the retention plan for that individual. To keep the key people, you can use options that could range from financial incentives to throwing more money at them, as well as non-financial incentives.

Is key person insurance a real thing?

Yes. A lot of small organizations have that because if a person who is in a key role dies it could absolutely destroy the business. They buy that key person insurance to make sure that they can pay off their debtors and take care of the rest of the business if they go away. 

Can you walk me through how side-by-side comparisons work?

The side-by-side comparison is something that could impact the financial model of a deal and employee morale during integration. When we look at it in an HR context, we are looking at different elements of the comp and ben package that’s made available to the employees. We are looking at everything from base bay to bonuses, to the way equity is managed, medical and wellness programs, pension and retirement benefits, insurances, etc. 

If the integration model is to leave them standalone, you don’t need a side-by-side comparison. But, if there are changes going to be made to bonus plans or medical insurance, those can be really costly and need to be factored into the deal model and change management plan. The only way to do proper side-by-side is to understand what the proposed integration model looks like. When doing a side-by-side, we are usually looking at larger groups of people and looking at them in the aggregate. 

What have you seen with the staffing level? In your book, you mention how sometimes companies start shifting things in preparation for sale. What are the do’s and don’ts there?

I’ve seen in more than one situation where a company will start to do some housekeeping before they get ready for sale. It gets companies looking a lot cleaner on the financials, and they get rid of folks that would thrive better in other environments, but sometimes they undercut the business too much to make the payroll costs look like they’re cheaper than they are, and you end up with a bunch of frazzled employees. So understanding this can help me look at whether or not I am going to need to do some additional recruiting as we start integrating this business.

You talked earlier about the risk with people. On a broader level, how do you weigh risk so you don’t get caught up in things that may not be so important?

Looking at how something is going to affect the complexity of the integration or the financials really needs to be taken into account when looking at how much time and attention we are going to pay to this as we go through integration. Some things may be important from an HR perspective, but are not that crucial in the context of a multimillion-dollar business and we really need to be sensitive to that. 

In the book, you provide some interesting examples of templates to think through that, which is pretty helpful to see visually.

On that same template, I also talk a little bit about reputational risk as well. I think sometimes that is actually downplayed when we look at financial risks. If you look at the impact of something like a compliance risk, if you have somebody in an organization high up who has accusations of sexual harassment and they are not dealt with, that can really hurt a business and where that business is going. There may not be a fine associated with that, but if a company's got that kind of reputation that is going to affect its ability to go and sell in a market. 

What’s the most essential advice you offer in your book?

You really have to trust yourself. When an HR person is put in the middle of a transaction they were put there because their leadership trusts them to do the right thing. Their leadership team wants them to help the deal be successful and so they have to trust their knowledge of acquiring the acquiring company, trust the information that they were able to get on the target, trust what they know about their leadership team and then just apply some common sense HR. Trust yourself and look for help outside.

What is the craziest thing you’ve seen in M&A?

We bought this small family-owned business, we were putting together the packages for the key employees and the founder stopped and asked us where the offer for his son was. His son wasn’t an employee in the business, he was a Ph.D. student who had been a contractor to this business during the summer and he made it very clear that he was not going to sell his company unless Junior had a job. We had some interesting discussions happen. 

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