Optimize deal value: Connect business and human capital strategy
In today’s dynamic business landscape, driven by AI and shifting consumer demands, CEOs are increasingly turning to M&A for transformative growth.
The case for M&A as the transformation engine is clear, with 79% of CEOs and private equity leaders foreseeing a megadeal surge, along with the compelling 130% advantage in shareholder returns experienced by those that leverage M&A versus those that do not. As competition heats up, swift action will be vital for winning and executing successful deals.
However, amid the allure of expansion through acquisitions, we must also recognize that for at least two decades, more than 70% of deals have failed to deliver the expected results. Human capital is at the heart of both deal value and underperformance — nearly 50% of leaders cite a lack of planning for and mitigating people risks as the leading cause for underperformance.
Those who live and breathe M&A know that success in the inorganic world takes “reps.” It takes experience. It takes failing, learning, adapting and constantly improving. And this experience can provide a greater than 50% improvement in shareholder return. Those who seek growth through M&A but lack the experience and “reps” need to lean on the learnings of others and design or adapt their M&A strategies and approaches at the speed of leap-forward disruption.
With Mercer’s M&A Advisory Services practice assisting more than 300 clients and facilitating nearly 1,000 deals worldwide each year, our extensive experience positions us as leaders in the field. Backed by ongoing research into transaction effectiveness, we offer insights to clients seeking a competitive edge in one of the most challenging business transformations. In addressing people issues as the primary failure point, we have identified four core practices to enhance our clients’ ability to consistently achieve and maintain the expected value promised at the start of the transaction:
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View the transaction life cycle as a continuous journey of valueThis involves seeing the transaction life cycle as a seamless path of value creation, not as isolated events over time. It begins with identifying value, stabilizing it, and then enabling and sustaining it. Successful acquirers don’t view the process as static steps, such as due diligence, signing, and closing, but as interconnected phases. Value identification involves target selection, readiness assessment and thorough diligence, setting the stage for stabilization. This phase includes integration planning and execution to preserve value and ensure business continuity. Each phase must blend into the next, with priorities constantly evolving. For instance, in the value identification phase preliminary diligence, it is not good enough to identify primary compliance issues or to identify material findings / risks calling for a purchase price adjustment, but integration priorities – both operational in the context of the transaction structure and strategic in the context of the deal thesis – must begin to take shape for further vetting during integration planning of the value stabilization phase.
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Recognize the time needed to realize full deal valueUnderstanding that achieving the full value of a deal takes time after closure is crucial. Develop strategies for realizing expected value over the medium to long term. Black and Gregersen’s business transformation theory highlights three common barriers to success: failure to see, act and finish.1 M&A often falls victim to “failure to finish,” where momentum isn’t sustained through completion. While achieving day-one objectives is commendable, it’s just the start. Typically, immediate business continuity and some synergies are achieved by this point, but a long-term strategy and resource plan are often lacking. An emerging best practice involves fully developing post-closure change strategies during the value-stabilization phase, ensuring ongoing leadership buy-in before transition and marking transaction leadership handover completion.
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Address people-related issues for deal successRecognize that people-related issues often hinder deal-value achievement. Develop strategy sequence maps aligning the business’s operating model with culture, talent and organizational needs. When all aspects of an organization work harmoniously toward a common goal, organizational effectiveness improves. However, creating direct cause-and-effect linkages between elements is challenging and takes discipline. Without it, disconnected human capital strategies emerge that have no direct benefit or alignment with the enterprise strategy. In the context of a transaction, deal-specific value drivers guide the creation of a congruent operating system. HR is crucial in identifying and executing strategic requirements across culture, organization and talent platforms to support deal-value drivers. HR must understand the enterprise strategy, define critical elements for achieving value drivers, assess drivers’ fitness for purpose, develop a blueprint for change, and execute the strategy with expertise and governance.
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Focus on culture to maximize deal value
Culture plays a pivotal role in the success or failure of mergers and acquisitions. Mercer’s research indicates that cultural issues hinder synergy achievement in two out of three deals. Specifically, a lack of organizational cultural alignment impacts post-close value creation an average of 19% of the time.
To drive meaningful change, discussions on culture must be grounded in reality, supported by facts and tied to deal-value drivers. Identifying significant cultural differences before finalizing a deal is crucial as these differences can impede value realization and disrupt operations. Proactively addressing issues such as decision-making disparities and leadership style variances is essential for mitigating risks and achieving synergies.
Around one-third of transactions face significant cultural risks related to structure, roles, accountability, communication and talent management. Addressing these challenges is vital for ensuring business continuity and achieving anticipated synergies. The most effective approach to mitigating culture integration risk involves several key steps:
- Pre-close, pinpoint the critical elements of culture with significant differences that will most impact deal value.
- During integration planning, assign clear accountability for actions to address priority risks.
- Immediately establish decision-making authority for the first 90 days and beyond.
- Transparently track and communicate actions taken, along with responsible parties.
- Share a straightforward “culture story” outlining planned changes and the reasons behind them.
- Develop a long-term culture transformation plan once value stabilization is achieved within the first 90 days.