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Talent Getting its Due Diligence Before Deals

June 30, 2006
Related Topics: Mergers and Acquisitions, Featured Article
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After 39 years of running such businesses as International Paper and DuPont, Mark Suwyn says that the most important lesson he has learned is that it’s the people that make a company successful.

    That’s why in January 2005, when Suwyn started working as a contract associate with Cerberus, a New York-based private equity firm, he was surprised to see how little investment banks and private equity firms focused on assessing the workforce of an organization before investing in it.

    "In the past you would expect venture capital and private equity firms to do due diligence on the financial end, but there wasn’t at lot of focus on talent," he says.

    But that’s changing, he says.

    Today, a growing number of private equity firms and investment banks are realizing that given the risk and large investments being made, they need to assess an organization’s talent just as they do the firm’s financials.

    "Companies are realizing that it’s too expensive not to do this," says William J. Morin, chairman and CEO of WJM Associates, a New York City organizational consulting firm. WJM has seen a 30 percent increase in clients selecting it to do talent assessments before a merger or investment.

    Market pressures force acquirers to prove the success of a transaction within months of a deal being signed. This means they need to start assessing the talent of the target organization as early as possible, experts say.

    Many organizations have failed to do this, and as a result have seen negative returns, says Jill George, a partner at Mercer Delta, a global professional services organization. Forty- eight percent of merged companies have a total shareholder return that was lower than the industry average three years after the deal had closed, according to Mercer Delta.

    "Ten years ago, maybe one-quarter of organizations were doing talent assessments before making an acquisition or an investment," says Philip Miscimarra, a partner and the co-chair of the workforce change practice of Morgan Lewis & Bockius. "Today that number is up to 75 percent."

    The scandals at companies like Enron and Tyco also highlighted the need for a greater focus on talent, experts say. "Thirty percent of material weaknesses found [in companies] by Sarbanes-Oxley were people-related issues," says Chris Hagler, national managing director of strategic services at Resources Global Professionals, an international professional ser­vices company.

    For the workforce managers who lament that their bosses don’t include them in business strategy discussions, this represents an opportunity, experts say.

    "Human resources managers have to be able to speak in financial terms and provide metrics so that their voice is heard," George says.

Common mistakes
    The companies that do take into consideration workforce issues when deciding whether to buy or invest in a firm often only focus on the bare minimums, consultants say.

    Sometimes that means they only look at the top executives, but depending on the transaction, that might be a poor strategy, Hagler says. She suggests that companies make sure they cover all of the people who interact with clients.


"It's hard to imagine that if an assessment uncovered something that it would stop a deal. Rather it might redefine how we go about the deal."
--Mark Suwyn, Cerberus

    George suggests that companies go at least four levels down from the top management.

    "Those are the people who are making the calls with the customers," she says.

    These employees can also be critical to helping organizations assess the culture of the target company, says Karen Ferguson, executive vice president and co-founder of Resources Global Professionals. "Often the administrative assistants know the most about the company," she says.

    One mistake potential acquirers make is that they only take into consideration the barest essentials of the target company’s workforce. While it is important to get a picture of the demographics of the workforce and where employees are located, companies need to dig into more qualitative data, such as productivity rates, Miscimarra says.

    For example, formal workplace complaints with state and federal agencies can be a good indicator of company culture. Not only can these claims tell potential acquirers about possible red flags, but if there is a lack of claims, it may also signal that the company has not established the proper channels for employees to make claims, says Jim McKay, a merger and acquisition engagement leader at Watson Wyatt Worldwide.

    But getting a true sense of a company’s culture requires more than reviewing claims and meeting with top management, experts say. Potential acquirers need to do their own performance reviews of individual employees, and not just go with whatever the target company provides.

    "Many companies make the mistake of assuming they can rely on the acquired organization’s performance data, but when they start asking questions, they realize that the data isn’t anything they want to measure," George says.

    Potential acquirers face push-back when trying to do their own performance reviews, she says. At Cerberus, Suwyn addresses this by being candid with the potential target companies and explaining the importance of these assessments.

    "We position it by explaining that this process is about getting the right skills in the right positions," rather than being a selection process of who stays and who goes, he says. Cerberus, which works with WJM, will often retain an executive coach to work with executives of a company it has acquired.

    "We don’t view the assessments as an on and off switch," he says. "If something isn’t working, we try to fix it through this process."

    One way that acquirers and sellers can agree to share information and get around any regulations surrounding it is by setting up "clean teams." These neutral third parties do the talent assessments and keep the information confidential until the deal is signed.


Given the large investments being made, a growing number of equity firms are assessing talent as well as financials. "Companies are realizing that it's too expensive not to do this."
--William J. Morin, WJM Associates

    The teams, which often consist of accountants, lawyers or consultants, usually write up a one-page report of their findings for the buyer, but keep the details private, says John Koob, a member of Mercer Human Resource Consulting’s M&A services leadership team.

The process
    Cerberus takes a three-step approach to its talent assessments. The private equity firm uses in-depth interviews, 360-degree reviews and personality tests to assess only the top management.

    While Suwyn understands why organizations would want to do broader assessments of a workforce, he has never done so, largely because of time constraints. A thorough assessment using all three methodologies can take about five weeks, according to WJM.

    But Suwyn does believe that, regardless of how much time it takes, a three-step approach to assessing talent is critical.

    "Each of these methods brings in a certain degree of validity in terms of predicting people’s performance," he says. "By doing all three, we are essentially spreading out the risk."

    Through the interview process, WJM asks managers to provide examples of what they believe good leadership to be. Another question might be about what the managers view as their strengths and weaknesses.

    "Basically this allows us to determine if what we are hearing represents the skills that we need for our new organization," Suwyn says.

    Doing 360-degree reviews is also important because top executives are likely to put on their best face during acquisition talks, experts say. Another way to gauge how managers and other employees work with others is by holding group interviews or dinners, Hagler says. Group dinners with five or six employees can be effective in seeing how people interact in a more casual situation, she says.

    Cerberus will also have WJM conduct written personality tests, depending on the position. These paper-based multiple-choice tests can help confirm what the company found through the interviews and 360-degree reviews, Suwyn says.

    On the other side of that argument is David Silvera, a managing director at Rose­mont Investment Partners, a private equity firm in West Conshohocken, Pennsylvania, that specializes in asset management companies. He steers clear of such tests.

    Instead, the company chooses to do more face-to-face meetings and dinners.

    "We are seeing more investment banks doing psychological testing," he says. "But we feel like sitting across the table from someone is more effective than having them fill in bubbles on a piece of paper."

    The company also will check references before going through with an acquisition, Silvera says. "Since the asset management business is a small universe, we usually have some people we know in common that we can check in with," he says.

    Silvera and Suwyn agree that assessing talent before acquiring a company is becoming more mainstream among investment banks and private equity firms. But it remains to be seen whether this due diligence will ever have the same weight as reviewing a company’s financials.

    Silvera says he has walked away from deals because of talent issues at an organization. Suwyn, on the other hand, says that’s rare for Cerberus.

    "It’s hard to imagine that if an assessment uncovered something that it would stop a deal," Suwyn says. "Rather, it might redefine how we go about the deal."

Workforce Management, June 26, 2006, p. 1, 55-58 -- Subscribe Now!

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