Biopharma merger and acquisition activity has reignited in the past year, driven by the economic realities of pharmaceutical companies needing to evolve business models and biotechs hungry for capital infusions. In the first half of 2010 alone, there were 40 biopharma M&A deals totaling $80.5 billion.
Another trend that is driving increased M&A activity is an evolution from pharmas licensing biotech products to acquiring the company on terms that mirror a licensing deal. In this case, pharmas’ demand for pipeline fillers is greater than biotech supply, so sellers are using that leverage to insist on an acquisition that serves their need for an exit. Examples include Celgene’s acquisition of Abraxis and Novartis AG’s acquisition of Corthera.
Given the increasingly critical role that M&As are playing in the industry, researching what can be done to optimize their success rate would be of great interest, particularly as these deals overall have low odds of success. Numerous studies show dismal statistics. For example, about 70 percent of mergers destroy shareholder value.
Biopharma deals also perform poorly—“Most observers agree that the pharmaceutical and biotech industry is no different from other industries in that most M&A transactions fail to create value for the acquiring company, although they generally do so for the target’s shareholders.”
HR—A Major Determinant of M&A Success
Are there controllable factors that affect the success of an M&A deal? Although controlled studies are impossible, a research evidence base examining significant variables correlated with success or failure has developed over the past several years. One of the factors consistently shown to be of critical importance to an M&A deal ultimately generating value is the involvement and capabilities of the human resources (“HR”) function. Almost every aspect of HR has been found crucial to the M&A process, and every stage of the process has been shown to benefit greatly from a “high powered” HR role.
Recent research from Towers Watson and the Canadian Financial Executives Research Foundation concluded, “Our research shows having a good track record in managing people issues in an M&A is a clear predictor of success in subsequent transactions. … In our study of finance executives, the very successful dealmakers involved their HR counterparts more often, and earlier in the transaction. … In tandem with HR’s increasing presence in all phases of a transaction, HR executives believe nontraditional abilities, such as cultural alignment and project management, are more important in an M&A context than traditional HR skills such as compensation and benefits design. Finance executives agree.”
The literature is replete with conclusions linking HR to M&A success. David Kidd of Egon Zehnder International remarks, “Many mergers do not create the shareholder value expected of them. The combination of cultural differences and an ill-conceived human resource integration strategy is one of the most common reasons for that failure.”
A number of recommendations are offered by consultants, investors, acquirers, and academics regarding optimizing the HR M&A function and more broadly applying best practices to analyzing, protecting, and managing human capital. Three of the areas most commonly addressed are HR’s role in conducting due diligence, managing cultural issues, and integrating the organizations. Selected highlights from a literature review of how to improve the odds of M&A success using HR as a critical resource to meet these challenges are discussed below.
HR’s Role in Due Diligence
The Boston Consulting Group, along with other consulting firms, has distilled all M&A success factors down to just four, and one of these is HR’s involvement in due diligence.
Prescriptives for HR’s assessment of organizational risks describe conducting both “hard,” data-driven and “soft,” interview-based analyses. Hard data should include, for example, organization charts, job descriptions, head counts, reporting lines, and decision process flowcharts. Employee interviews should supplement these analytics, and further delve into business unit functions, assets, capabilities, and deliverables track record. From this, HR should begin to settle on a design for the integrated company’s organizational structure, as well as the changes needed to get there.
Optimal HR due diligence also involves assessment of employment and personnel risks—for example, losing key talent, overall retention issues, and potential liabilities in employment programs. Employee retention risks are particularly important in biopharma deals in which knowledge transfer depends on keeping critical scientists, for example. Given that many employees depart immediately after an M&A deal closes, plans for retaining key people need to start pre-closing. One rule of thumb offered for a retention package is offering a bonus equal to one-half of a year’s salary for staying one year and tying the bonus to a deliverable during that year.
Finally, best practices for HR due diligence encompass identifying risks associated with cultural fit. Many experts emphasize the need to invest time and HR resources in this cultural due diligence, as cultural issues reside so frequently at the core of failed acquisitions.
HR’s Role in Cultural Transition
The majority of literature reviewed found the meshing of cultures to be a primary determinant of M&A performance, and HR’s involvement and capabilities to be a major factor in the outcome. For example, an extensive survey by consulting firm Towers and Perrin found that 56 percent of respondents cited incompatibility of cultures as a major reason for failure to achieve desired synergies and objectives in their M&A deal.
It is valuable to define culture in this context to delineate the issues that need to be assessed and addressed. Schein’s definition includes three levels: 1) “Artefacts,” which describes visible organizational structures and processes, including physical, behavioral, and stories or myths; 2) “Values,” the social principles, goals, and standards; and 3) “Underlying assumptions,” implicit beliefs and habits.
The first step is analyzing the cultural fit during due diligence. Recommendations for early analysis of the target company’s culture include:
- generating a fundamental organizational fact base—job descriptions, organizational maps, compensation programs, employee surveys, 360 degree feedback reviews, turnover rates;
- creating decision flowchart—how organizations make decisions;
- assessing leadership and management styles—decision making, communication, receptiveness to change, planning;
- conducting employee cultural surveys; and
- seeking external views of company culture from customers, suppliers, etc.
A fundamental decision that needs to be made early on with HR’s direction is whether the merged entity will aim to preserve the two distinct cultures, create a new culture, or have one company adopt the other’s culture. Depending on the objective, HR must assess the degree to which cultural differences might lead to failed integration, regardless of change initiatives. Assuming the deal proceeds, HR needs to work with leadership to define the new values of the merged entity, and the behaviors that derive from those values, and to develop a plan for transitioning the organizations and leadership to that culture.
Companies that successfully addressed culture during M&A also consistently made time to bring senior leaders together to delve into the similarities and differences in their ways of working and what actions might need to be taken as a result. Further, these leaders identified specific, value-generating behaviors that would be key to successfully merging the companies and prioritized explicit levers that reinforced those behaviors. Finally, systems were established for tracking the progress of the cultural alignment, often using leading indicators to monitor success or failure on an ongoing basis.
HR’s Role in Organizational Integration
The final key HR performance determinant concerns organizational integration, of which a major component is cultural assimilation. A wide variety of functions and best practices are encompassed by HR’s role in the integration stage. A few of the evidence-based recommendations supported by multiple reports include:
- Rapid integration—studies show that there is direct correlation between speed of integration and M&A success.
21 “The role of human capital in M&A,” Towers Perrin, 2003.
- Rapid (within the first 12 months) integration of biopharma sales forces also is critical. Form a dedicated “revenue momentum” team to facilitate transition and minimize disruption.
22 Gerald Adolph, Bob Hutchens, and Justin Pettit, “Capability-Driven PMI: Realising the Promise of BioPharma,” Booz & Co., June 9, 2010, available at http://executiveview.com/knowledge_centre.php?id=11688.
- Implementation of job cuts quickly and in very few passes, to mitigate demoralization and anxiety.
23 “The role of human capital in M&A,” Towers Perrin, 2003.
- Creation of a transformation roadmap with multiyear targets and measurable progress systems.
- Development of extensive communication programs for leadership and HR to employ regularly throughout the companies during integration. Explain why the deal is good for employees and discuss future job security.
- Involve employees—“Staff involvement serves as a guarantee of cooperation and support for the immediate post-merger phase. Staff involvement includes exchanging ideas, concerns, proposals, and feedbacks.”
24 Steven H. Appelbaum, Frederic Lefrancois, Roberto Tonna, and Barbara T. Shapiro, “Mergers 101 (part one): training managers for communications and leadership challenges,” Industrial and Commercial Training, (2007) Vol. 39, Issue 3, pp. 128–136.
A number of studies have developed HR integration best practices specifically for biopharma M&A, based on the business objectives, assets, and cultural issues that characterize this industry.
For example, Booz’s “capability-driven” integration is based on the view that “BioPharma integrations are more about capability-building. This creates two types of strategic intent challenges—adding a capability to a large organisation (“how do we keep from just swallowing them”) and, infusing a new capability throughout a large organisation (“how can they be a catalyst to change us”).” HR’s charge then becomes to develop an operating model that centers around a core set of critical capabilities and to direct plans to build scale in these targeted capabilities.
Finally, Schweizer researched organizational integration issues following pharma acquisitions of biotech companies.
The proposed scheme recommends a dual-path, parallel integration program wherein left-side functions (typically, R&D) are given autonomy and integrated very slowly with attempts to preserve aspects of the biotech culture, while right-side functions are absorbed into the pharmaceutical organization rapidly. Schweizer explains the objective: “Preserving the innovative capability of the biotechnology company has been one of the dominant motives for the acquisition. By this, they are to contribute to the long-term growth of the pharmaceutical company. Thus, the overall organizational integration strategy must be to grant the acquired biotechnology company as much autonomy and independence as possible. Because of this, a slow integration process is the right alternative to choose.”
Final Thoughts
With M&A’s track record of more failures than successes and HR’s evidence base of performance improvements, one would surmise that corporations would be widely adopting an extensive, structured role for HR in the M&A process. Surprisingly, though, studies do not indicate that a majority of acquirers are utilizing HR in the ways suggested by the research reviewed here. “The most common responsibility given to HR (and the only one to be identified by a majority of respondents) is to provide ad hoc advice to senior managers. In other words, the majority of HR departments do not have a structured and formal role to play in their companies’ M&A activity.”
Perhaps there’s a disconnect between what’s conceived of as “soft” people issues and “hard,” quantitative, fact-based transactions. “No one would dispute the importance of people and culture issues in a merger, or the value of an effective, engaged, and well-integrated workforce in a new organization’s success. But the simple fact is, even today, people- and culture-related issues—things such as effectively and openly communicating with employees throughout the transition, creating and implementing strategies to retain key employees, and focusing on cultural alignment between unfamiliar organizations—still don’t command the same level of rigor and focus that financial or operational issues do.”
Here, then, is a great opportunity for competitive differentiation. The research strongly suggests that by giving HR the resources, responsibility, and time to take a central and early role on the M&A team, your organization can significantly improve the performance of your next acquisition, and thus advance your competitive position in the marketplace.
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