FREE online courses on Mergers & Acquisitions - Chapter 3 - Going Beyond the Financials

 

As we previously noted, due diligence must be broad and deep. This includes things like cultural and human resource issues. It is these types of "people" issues that will be extremely important when it comes time to actually integrate the two companies. Therefore, due diligence helps set the foundation for post-merger integration.

 

Cultural due diligence looks at corporate cultures and attempts to ascertain an organizational fit between the two merging companies. Each company will have its own culture, derived from several components - corporate policies, rules, compensation plans, leadership styles, internal communication, physical work environment, etc. Cultural due diligence attempts to answer the question - To what extent can the two companies change and adopt to differences between the two corporate cultures? The wider the cultural gap, the more difficult it will be to integrate the two companies. Consequently, cultural due diligence identifies issues that are critical to integration and helps management plan necessary actions for resolving these differences before the merger is announced.

 

Human resource due diligence attempts to evaluate how people are managed between the two companies. Several issues need to be analyzed:

 

• How do we continue to maximize the value of human resource capital?
• What is the appropriate mix of pay and benefits for the new organization?
• What incentive programs are needed to retain essential personnel after the merger is announced?
• How are employees rewarded and compensated by the Target Company?
• How does base pay compare to the marketplace?
• How do we merge pension plans, severance pay, etc.?

 

It is very important to get your Human Resource Department involved in the merger and acquisition process early on since they have strong insights into cultural and human resource issues. Failure to address cultural, social, and human resource issues in Phase II Due Diligence is a major reason behind failed mergers. As one executive said: "We never anticipated the people problems and how much they would prevent integration." Therefore, make sure you include the "people" issues in Phase II Due Diligence (which kicks-in once the Letter of Intent is signed).