THE NEWEST amendments to the UK’s Takeover Code – which took effect in September – will have an immediate impact on the due diligence practices of organisations. Key practitioners from accountants to HR leaders involved in M&A deals will now be charged with focusing on the staff-related issues of prospective acquisitions.
The code changes impose a strict timetable of 28 days between a bidder’s identification and the requirement to make or withdraw a bid for the targeted organisations. Indeed, the new 28-day window makes necessary much deeper due diligence in a shorter time frame than was previously the case.
Until now, bidding companies have tended to focus on the financial and legal aspects of a deal, only considering the impact on employees much later in the process. But the new rules will concentrate companies’ minds on early plans for organisational integration and restructuring efforts. They must move quickly once any information surfaces regarding the bid – particularly in relation to any statements affirming the bidders’ operational plans that affect employees, such as likely job losses, site closures or retentions from previous plans announced by the target, as they will be held to account for these plans for 12 months.
This new reality should have the salutary effect of bringing HR directors to the deal table earlier rather than later, prompting a higher profile for HR in the early development of business expansion strategies. Importantly, it will also afford accounting and financial executives the benefit of HR’s strategic and data-driven perspectives on workforce size and deployment, key talent, retention challenges, benefit and compensation issues.
The fact is that many deals fail to deliver value to acquisitive companies due to lack of timely planning and communication about people and integration. This often leads to poor morale, reduced productivity and leakage of top talent. All of these are staff issues that quickly become bottom-line concerns, and HR is best prepared to address them, so financial leadership can make the right decisions regarding staffing levels, plant closures and the like.
With only 28 days in which to bid or withdraw, and with a one-year binding period for announced operational plans, there’s no excuse for failing to undertake prompt and thorough due diligence. For companies that may be expecting millions (or hundreds of millions) of pounds in savings as the result of a takeover, these amendments to the takeover rules may well force adjustments in financial modeling.
At the same time, any loose public statements about, for example, keeping a specific plant online may oblige the acquiring company to do just that for an expensive 12-month period. The last thing that any acquiring company can afford – from a public relations as well as a financial perspective – is to be held to commitments it made early in the deal that prove untenable or fiscally impossible as the deal closes.
Thus, the value of drawing up early plans for organisational integration becomes clear, as they require strategies for engaging and communicate with employees regarding any and all changes foreseen in the acquisition process. This means that employee representatives are likely to hear about acquisition plans at an earlier stage than has been typical in the past. It goes without saying that unionised organisations are going to be reacting to any plans earlier than they might have in the days before the takeover rule amendments, a recipe for potential union action that can prove both damaging and expensive.
The takeover code amendments may have the effect of extending the amount of time it takes for acquiring organisations to fully realise the value of the deal. When we consider that M&A activity tends to be spurred on by the potential synergies and cost efficiencies that can result from a combination of complementing workforces, it’s easy to see how any complication and expansion of the process – especially if that means a more aggressive inclusion of employee representatives – can stretch the takeover timeline and eat into profit projections.
The key to success in this new and more transparent takeover era is to ensure that any serious acquisition is rigorously pursued along the avenues of early and thorough due diligence. In doing so, organisations must engage the crucial perspectives and data of HR in close parallel with the highest standards of financial planning and business strategy. Otherwise, the value of so many deals that look good from afar may never materialise once the news of a bid gets out.
Peter Baynham is UK head of M&A consulting at Mercer
The finance chief of the Daily Mail has been recruited by Rolls-Royce after a management shake-up at the engineering group has resulted in the departure of its chief financial officer
Global mining company Anglo American has appointed Stephen Pearce as finance director, following René Médori's decision to retire
Three former Tesco executives, including the former finance director of Tesco UK, have denied charges of fraud and false accounting in relation to a £326m accounting scandal at the supermarket
The majority of finance bosses want to reach the position of chief executive, according to new research from Robert Half