How to deal with the management of the acquired company
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In some deals I have managed, one of the intensive discussions I needed to have as a buyer was how to deal with the management of the target after the deal. As we learned in this course, it is important to keep important people after the deal, but they might leave if the management of the acquired company are asked to leave after the deal. However, in some cases, we wanted the management to leave the company because we thought they did not fit what we wanted to achieve. What could be the best strategy?
IN my experience the latter situation you describe (want them to leave) is a risky proposal. It is very difficult to hinge the success of integration on the attrition of embedded leaders. I have found the strategy of being direct – painfully at times – to ensure an understanding as potential negative forces in management to see that the status quo will not survive.
In my experience, keeping most of the management team is crucial to retaining the other employees. While it can be painful at times, I’ve seen the opposite approach of removing management early on and we lost 50% of the salesforce within the 3-4 months that followed. We found out it wasn’t necessarily that they were loyal to the management, but more so because they did not feel as though they had any management dedicated to them any more.
The firm I work for acquires companies on a regular basis to increase market share in areas of interest. My observation is that the most essential acquired company hires are extended ‘generous’ employment packages while those which are not as essential receive the ‘vanilla’ version. Those with the better retention plans are typically onboarded as Sr Dir or VP and extended an offer to handpick the best folks they feel would help them be successful. Given the cultural differences between the acquired and acquirer, those who are not selected tend to resign within 12-18 months of the announcement.
I agree with a lot that has been said previously. One thing that I’ve seen is always keeping at least one main head of the acquired company as the face. Regardless of fit or strategy, keeping this individual there helps the employees below stay motivated to stick around and not look elsewhere. Once you lose that key leader, it all slowly starts to fall apart.
In my experience, keeping the leadership of the acquired company makes sense if they align with your (acquirer) strategy. I agree that the leaders are crucial in many cases when it comes to retaining the other key personnel and clients. But if they are not seeing themselves in the combined company after all, they are actually able to do a lot of harm while being around (misleading the others, introducing misunderstanding in certain areas). I believe that depending on personalities, this could be foreseen before acquisition and should be managed properly / risks mitigated.
From experience, there’s a few things to perhaps share:
1. It helps if during the DD pre-deal or the start of the integrated NewCo, that you’ve identified the key roles via talent-to-value methodology. Once you know which key roles drive the most value for the overall NewCo (e.g., CFO, Head of Sales, COO, Head of SCM, etc.) you can start a management assessment of those particular high-priority individuals of the acquired company in those roles. If you’ve identified a bad fit, best to transition him/her out ideally replacing them with someone in-house who can step-up or parallel in rather than an external hire.
2. For any acquisitions, no matter how good the asset or the business case, the most senior leaders need to be a good fit. For our PE firm, if the C-suite are not viewed as long-term stays, then more often than not the whole deal blows apart and will never get closed. Additionally, when you’ve found a good fit of senior leaders, best manage those key-man risks by ensuring they each sign a new employment agreement locking them up for at least the next 3 yrs, while giving them a portion of the NewCo’s shares.
3. If in tough spot where you are needed to intentionally root out bad apples in senior roles of the acquired asset, always do it quickly (rip off the bandaid) and over-communicate to all the employees. Invest in educating and over-communicating to the direct reports and next management line. Ensure that they know exactly why this was a bad fit and the rationale behind it – and to ensure confidence and remove any fears or doubts in the remaining team. Instead flip it around and offer it as an opportunity that the NewCo is going to be intentional with promoting via meritocracy and those who deserve the spot.The acquisition rationale must drive your integration strategy. During the negotiation period, I believe it is important to understand if the skills of the new company’s management team are needed and if the employees align with the parent company’s culture. If the skills are not needed, or the culture does not align, this may be added to the contract to make it clear that the management will not be retained.
I haven’t been directly involved so far in this, but with recent acquisitions, I have seen from the peripheral, key management from the target company can negotiate to retain the position or exit with agreed compensation. Most of the time, management is retained for 12 months or so with a contract to meet certain goals. They will also be bound not to poach other employees within a certain period of time if they decide to leave. Decisions are made in the best interest of the aquirer.
Much of the talk in this class is around the senior leadership and having them be around for a certain period of time. While this is certainly true, there are also other leaders in the middle, whose departure could be more impactful than even someone in the Csuite. The leaders of the target company should have some idea who those folks are. While formal announcements might not include the role of these individuals, personal outreach after the announcement could go a long way in solidifying an ally within the target company. If a transition team is in place, including some of these other future leaders and top talent so that they have a voice and can provide feedback on the transition, may help stabilize the organization during the transition.
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