Mergers & Acquisitions: Human Capital as a Change Agent

Dr. Tommy Comer | Vice President of Human Resources, Commonwealth Assisted Living

Who is this guy?

• Dr. Tommy Comer

• Currently VP of Human Resources for Commonwealth Assisted Living (Owner/Operator in State of Virginia – 22 communities)

• Previously Regional HR for Integral Senior Living (based in Carlsbad, CA)

• First day at ISL (and first day in Senior Living) was an acquisition of 7 communities in Arizona

• I have been through 15 acquisitions in my 5+years in Senior Living

• Prior to Senior Living, I worked in HR in proprietary higher education. I was on the other side of a major acquisition when the “mom & pop” I worked for – Chaparral College – became a part of Education Management Corporation

• Experience in retail

• Married with 4.5 year old triplets

Program Overview

• Simple definitions of Mergers and Acquisitions

• M&A figures/statistics

• Why role of Human Capital is so crucial

• Ways to improve the process

• Historical failures

• Next steps

What does a Merger/Acquisition Feel like?

M&A defined

When we use the term "merger", we are referring to the merging of two companies where one new company will continue to exist.

The term "acquisition" refers to the acquisition of assets by one company from another company.

Mergers and Acquisitions

Mergers and acquisitions represent the ultimate in change for a business.

No other event is more difficult, challenging, or chaotic as a merger and acquisition.

Hence it is imperative that everyone involved in the process has a clear understanding of how the process works.

Some interesting M&A figures

Virtually every major company in the United States today has experienced a major acquisition at some point in history.

And at any given time, thousands of these companies are adjusting to post-merger reality.

Source: http://www.imaa-institute.org/statistics-mergers-acquisitions.html

Some interesting M&A figures – Senior Housing

2015 saw Merger/Acquisition records shattered in our industry.

More transactions that ever before for 6 straight years.

Provider Magazine called 2015 the “Year of the Mergers” (http://frontiermgmt.com/Top40_2015.pdf)

Source: http://www.imaa-institute.org/statistics-mergers-acquisitions.html

Some interesting M&A figures – Senior Housing

So what does all that mean??

• For one, we need to get better at managing the transitions because M&A is a way of life –a near certainty for all of us in Senior Housing.

• The supply/demand of Senior Housing means it will continue to be quite attractive to investors.

• The sector is also better understood today due to its increased transparency. Investors can now more easily compare the sector’s opportunities and risks with other commercial real estate sectors (office, retail, industrial, hotel and multifamily).

Why the role of HR and Culture are both important in M&A

HR ROLE

HR ROLE

What do Associates want to know?

• -Who is acquiring us?

• -What do they do and how do they do it?

• -Why are they acquiring us?

• -What will happen to my job?

• -What will happen to my department or project?

• -What will happen to my incentives/bonus?

• -What will happen to my other compensation?

• -What is the compensation structure at the acquiring company?

• -What will happen to our benefits (health, 401k, etc.)?

• -What will happen to my PTO/Vacation time?

• -How does the acquiring company handle PTO/Vacation/Sick pay?

• -Who will my boss be?

• -How are employees measured and rewarded at the acquiring company?

• -What will happen to our current leadership?

It is more than just Information Dump

• Avoid just downloading information – be available/accessible

• Mergers and acquisitions are planned and executed based on perceived cost savings or market synergies; rarely are the “people” and cultural issues considered. Yet, it is the people who decide whether an acquisition or merger works.

• Things to consider:

• What is the communication strategy for the new associates?

• How early can you get into the community?

• Confront “power” issues honestly and openly right away

• Determine how to “train” and “educate” on Culture• “Not doing that is a really common reason for deal failure,” - Sally Dixon (Director of HR

Transaction Services, PricewaterhouseCoopers).

Role of Human Capital Leaders

• Helping the leaders to agree on a clear and specific set of goals for the merger, with a focus on tangible, measurable results, which brings misunderstandings and conflict into the open.

• Scenario planning - will the merger work if there is a market decline? What will be the responses of customers and regulators?

• Investigating assumptions - the OD consultant, as an outsider, is in a unique position to bring out hidden assumptions. This should be done continuously throughout the process, though scenario planning and exploring options are expressly designed to explore and test assumptions.

• Rewards - even where bonuses or profit-sharing help to increase motivation, the money itself is often symbolic, a measuring stick for achievement. The HR staff should help the organization to set up milestones and celebrate small and large successes along the route to integration, so that people not only feel progress, but also feel that their achievements are being rewarded.

• Integrating initiatives - ensuring that managers are not overwhelmed by initiatives and changes that all seem to come at once.

• Watching key processes - often forgotten are key processes such as new hire orientation, training, and even compensation systems. These processes all support or sabotage both the present and desired culture. Human Capital leaders must know the impact of these processes, and can work to make them support change efforts.

Famous Mergers that Failed due to Culture

Daimler-Chrysler: German Daimler (makers of Mercedez-Benz) merged with American Chrysler in late 1990s. “A merger of equals”. Ended up being a “fiasco” because of differences in formality, philosophy towards pay/expenses, and operating styles.

Famous Mergers that Failed due to Culture

Sprint-Nextel: In 2005, in a bid to keep pace with industry giants like Verizon & AT&T, Sprint acquired rival Nextel for $35 billion. By 2008, the company had written down 80% of the value of the Nextel, confirming the widely held belief that the merger had been a failure. That failure is widely attributed to a culture clash between the entrepreneurial, khaki culture of Nextel and the buttoned-down formality of bureaucratic Sprint.

Famous Mergers that Failed due to Culture

AOL-Time Warner: In January of 2000, Time Warner stock sold for $71.88. By 2008 you could buy a share of Time Warner for less than $15. What happened to the media giant? A failed $350 billion merger with AOL. Culture clash was widely blamed for the failure of the joint venture. Said Richard Parsons, president of Time Warner: “I remember saying at a vital board meeting where we approved this, that life was going to be different going forward because they’re very different cultures, but I have to tell you, I underestimated how different… It was beyond certainly my abilities to figure out how to blend the old media and the new media culture.”

Integration

If all goes well, the two companies will announce a agreement to merge the two companies. The deal is finalized in a formal merger and acquisition agreement.

Every company is different - differences in culture, differences in information systems, differences in strategies, etc. As a result, the Integration Phase after “closing” is the most difficult phase within the M & A Process.

The Integration Phase is where you must resolve Power and People issues quickly.

HR and the Integration Phase

• Start the integration when you announce the deal – get in the community as soon as you can/are able.

• M&A make people on both sides nervous, but the stress and uncertainty is hardest for those being “acquired”.

• “Is my job in jeopardy?”

• “Is my pay being reduced?”

• “What is happening to my benefits/hours/schedule/etc.?”

• Leaders need to go into the Integration phase with answers

Typical M&A Process

Timeline of M&A Events

CandidateScouting

FormalDue Diligence

Initial HR Strategy Identify Implementation Leaders and Team

Program DesignDecisions

Detailed HR Strategy

StrategicPlanning

ConfidentialCourting

Price and TermsNegotiations

PreliminaryProgram Design

Implementation of Integration Plansand ProgramsAnnouncement

Closing“DAY 1”

CandidateScouting

FormalDue Diligence

Initial HR Strategy

Identify Implementation Leaders and Team

Program DesignDecisions

Detailed HR Strategy

HR Process

Strategic HR—Due DiligenceIntegration

PreparationIntegration

StrategyAssessment

HR-Liability& SynergyGap Assess.

DealInput

ProgramOfficeSetup

Create “100 Day”

Plans

Create Optimization

Plans...

Execute100 Day

Plan

ExecuteOptimization

Plans

Monitor Synergy Realization

A Reality Check Why M&A fail

Poor strategic fit - The two companies have strategies and objectives that are too different and they conflict with one another.

Cultural and Social Differences - It has been said that most problems can be traced to "people problems." If the two companies have wide differences in cultures, then synergy values can be very elusive.

Incomplete and Inadequate Due Diligence - Due diligence is the "watchdog" within the M & A Process. If you fail to let the watchdog do his job, you are in for some serious problems within the M & A Process.

A Reality Check Why M&A fail

Poorly Managed Integration - The integration of two companies requires a very high level of quality management. Integration is often poorly managed with little planning and design. As a result, implementation fails.

Paying too Much - In today's merger frenzy world, it is not unusual for the acquiring company to pay a premium for the Target Company. Premiums are paid based on expectations of synergies. However, if synergies are not realized, then the premium paid to acquire the target is never recouped.

Overly Optimistic - If the acquiring company is too optimistic in its projections about the target Company, then bad decisions will be made within the M & A Process. An overly optimistic forecast or conclusion about a critical issue can lead to a failed merger.

Questions?

Thank you!

Email: tcomer@commonwealthal.com

Twitter: @tcomer4418

Phone: 434.981.2512