Due diligence and integration should have equal weighting in any acquisition. As integration is gaining more and more steam, more acquirers are asking how to do integration these days compared to years ago. Joining Domenic Rinaldi on today’s podcast is Mark Walztoni, who shares his high-level formula for approaching this phase, along with how to avoid some of the common pitfalls. Mark has many years of HR mergers and acquisitions experience, and this episode will surely help you be prepared for your next acquisition.
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Mark Walztoni: Due Diligence And Integration: Preparing For Your Next Acquisition
My guest, Mark Walztoni, has many years of HR mergers and acquisitions experience. He has seen it all and helps companies of all sizes plan for and manage their HR due diligence and integrations. He’s also had to help lots of companies undo the mess caused by a botched integration. Integration is gaining more and more steam. Mark mentioned that more acquirers are asking how to do integration these days compared to years ago, where they were asking why. As we covered in an earlier episode with Jim Jeffries, over 70% of acquisitions fail to meet their ROI targets. Hopefully, that stack gets your attention. Diligence and integration should have equal weighting in any acquisition. Mark shares his high-level formula for approaching this phase, along with how to avoid some of the common pitfalls. Mark is an expert in his field. This episode will surely help you be prepared for your next acquisition.
Before we get into this episode, if you want to avoid the common deal pitfalls and the risk of losing substantial dollars, you need to know how ready you are to buy a business. I believe proper preparation is critical to your deal success. We have published several free resources to help you be better prepared. You can access these resources on our website at K2Adviser.com/resources. Being prepared is critical to ensuring that you maximize your returns and you minimize your risks. Thank you for being here and I hope you enjoy this episode.
Mark, welcome to the show. I am happy to have you here.
Thanks, Domenic. I appreciate you asking me to join. I’m a fan of the show and I’m looking forward to it.
Thank you for that. I’m excited and interested to get into this conversation, which is about integration diligence, specifically related to the human capital piece. It’s been picking up steam that integration and getting it right matters. More people are understanding that if you don’t get that right, you’ve squandered your investment in a big way. Maybe you could provide a quick background on yourself and what you’ve done and then we’ll get into it.
I completely agree with you, I’ve noticed that myself. What I based that on is over 25 years as both a Chief HR Officer for large organizations, and then another fifteen years in the consulting world, I’ve always seen interest in it, but often the question was why. I think the question now is how.
What a great distinction, why, and now how. That’s confirmation that the needle’s moving. It’s getting through to people that you can’t get this wrong. We have been involved in many transactions. I’ve seen it when it works well and I’ve seen it when it doesn’t work well. Not to get started off on a note where people are going to go, “I’m never going to do a transaction,” but do you have a horror story? Do you have an example that sticks out for you where you’re like, “They got it wrong from an HR integration culture perspective?” Maybe we can unpack that a bit
Everyone has a train wreck story. As you might imagine, mine are people related. Often, when I get involved, it’s for merger repair. We didn’t do HR due diligence. We’ve known them for a while, meaning the senior executives. We thought it was a fit. It’s a culture fit at a high level, but maybe where the work needs to get done and how people treat customers and each other, it’s a different situation, or the culture operates one way when everything’s steady-state. When you put pressure on it, people start reacting in different ways because they’re concerned and afraid. Who wouldn’t see an acquisition is one other brick in the backpack, one of the things to worry about?
One of the first ones that come to mind is a large acquisition where there was overconfidence, “We know these guys and we’ll figure it out.” After the deal closed, what they found were more people doing things in different places that they knew about. They also found that certain executives were causing more turnover. As a result, when the integration process started, people were sitting up in the grandstand and saying, “I’m going to wait and see how this sorts out. I don’t agree with this. No one’s talking to me about it. I’m going to sit on the sidelines,” which is the worst outcome.
Did the deal unravel as a result or was it salvaged at the end of the day?
It was salvaged in a sense. Essentially, it was a redo of diligence after the deal was closed. As a result, there were organizational structure changes, leaders left the organization and eventually, rather than being a standalone, the organization integrated into their company and took pieces out of it. It wasn’t what they wanted to do, but it was at the point where they realized they can’t run independently anymore.
What a shame you put people’s livelihoods at risk. You’ve put your investment at risk. There’s never a good outcome. Mark, I know you’ve got years of experience helping companies do this. Let’s talk about the best practices when somebody’s thinking about HR due diligence and integration, what should they be thinking about at the highest levels?
At the highest level, there are four transitions people need to think about. One is the basic org structure, are the right people in the right jobs, in the right locations? This is one of those things that get back to being the best company, looking at that type of thing and also leadership selection. Now, you’re going to have integration. There are two people for each job. Maybe there are some jobs that are different. You have to think about that specific change. If I was going to take that into due diligence, then you’re looking at org chart structures, but you’re also looking at something else. You’re looking at key influencers. Where are the people that aren’t on the org chart or say at a higher level, but they’re the ones that people go to ask questions? They’re the ones that at the end of the day will say, “What do you think about this thing? Is this for real? Is this going to happen? Am I going to lose my job?” It’s looking at the organization in a traditional way, top-down, command and control. It’s also looking at it as a network. That network has to include understanding the middle managers because they’re going to be key to the actual deal getting done.
Part of the reason I say that is the employee transition. You pointed out, Domenic, the first question is, “What’s in it for me?” The second one is, “What’s needed for me?” That then gets to the fear and anxiety piece of this, the actual employee transition. One of the things to look at there is what’s changing for whom and how. There’s going to be change, but where are the areas? For example, are the salespeople going from individual selling to more of a team sale model? Is their compensation going to change? That’s going to have a tremendous hit in terms of something to manage. How are you going to communicate during that change? People are going to go through endings, “What did I have in the other organization that I don’t have now? What’s the beginning for me?” Hopefully, there are some things there that people get motivated about.
There’s that whole messy middle, some people call it wandering in the wilderness. If you’re focusing on that individual change, people are going to get through that wilderness quicker and they’re not going to have as big of a drop in productivity. Those are two things: the organization and the individuals. On the cultural side, there are a lot of definitions of culture like values, attitudes. I try to look at it from a behavior standpoint. What do people do? It’s getting evidence and due diligence of how things are written, employee handbooks and communications. How often does the management communicate and how to do top-down email to everyone? Is it something where there are town halls and there is feedback? That’s going to give a sense of what can be improved and also what can show employees that there are some good things happening and there are some good changes. It’s critical.
The fourth piece, in a lot of ways, this is where people understand the acquisition process and integration almost more than any other step. That is who’s getting hired? Who’s getting promoted? Who’s getting listened to? Who’s getting terminated? Those are the things that get the message aside. This is the actual evidence of what type of personality and type of leadership style is the one that matters in the combined organization. That’s an awful lot, but if I’m boiling it down, I would say it’s changed cultural capabilities. People have the capabilities to do what’s necessary for the integration process as well.The best tools and templates can be found on the internet. As far as seeing it, that's a different animal. Click To Tweet
I especially love the key influencer comment because in every organization, there’s the management team and then there are other people that they go to that they rely on. Maybe they don’t even have a management role, but they’re in the know and they influence thinking where they have somebody in management.
A couple of practical ideas on that is often after we work with the clients to identify some of these people, we bring them under the tent to pre-screen employee communications. We review FAQs with them. We use them as listening posts and we develop messages for them. It’s two-way communication, but it may be some of the bullets that at the senior management level are at the 10,000-foot level. Then the key influencers are right on the top floor. We actively involve them. We also bring them in if it’s a large enough acquisition where you have a project management office and work teams. We make sure to get the key influencers on some of those teams because when someone says, “I don’t know, I haven’t heard anything. I don’t know what’s happening,” you have someone who has either know it from experience and being on a team, or they’re hearing the key messages and what’s next in-person from a group. It is a key area. It’s completely understandable if we think about change, endings and beginnings, by the time the deal closes, all the senior executives have been through that entire cycle themselves. They know what’s going to happen to them. They know what’s in it for them, all those things. To some extent, they’re done on day one, whereas the average employee is still in the “what happened to me?” stage.
Senior managers can’t forget about that. They can’t forget that they’re in the know whether they’re recapitalizing, they’ve got rollover equity, they’re going to continue with the new entity or they’re exiting stage left and they’re leaving it to a new management team. They understand that and they know what hand they’re playing, but the employees don’t. It’s critical. It’s interesting because I’ve seen many deals and there are a couple that come to mind. I had a client who went out and acquired a company to diversify. They took the time to go through the integration and think about the people and how they were going to end. They were moving the operation into their facility. It wasn’t like they were taking over an operation and it was analog, they were moving people.
To their credit, they nailed it. They kept every single one of the employees, except for the people who didn’t want to come, who opted out of moving to the new entity because they were ready to retire. Fast forward, that business is doing incredibly well. It’s been incredibly creative. They’ve kept everybody and they have a seamless operation. I compare that to another situation that we had where a corporate entity came in. They took over an operation and left it in its facility, but they came in and mandated all of these changes based on the way they did business. They’re completely ignoring how that business operated, dealt with its clients and what that business’ clients were used to. It will not shock you, but that business was a fraction of itself a year later. It had declined by almost 80%. Here’s how you know it wasn’t the business, it was the people who bought it. The old management team brought it back and brought it right back to where it was before.
That is crazy but true. The lesson learned that pops out of there for me, and I’ve seen it as well, starting with that deal thesis and looking at the secret sauce, especially for more of an early stage deal. One of the primary risks is killing that golden goose and then thinking about what’s the integration strategy, because if it’s going to be a standalone, maybe the whole cultural shift and all those things are going to be more at the level of the senior executives. Not much is going to be changing for other people, but then full integration like your first example, change in facility and supervision, certainly that visibility, integration, that’s the piece on the deal that says, “It’s going to be important to look at all those factors and come up with a plan, communications, culture, change and capabilities.”
The stakes are high. I had Jim Jeffries on and he talked about how 70% of acquisitions missed their ROI targets. It doesn’t mean they don’t return ROI. It means they missed their targets. The stakes are high. That’s an incredible percentage to be missing their ROI targets. It tells you there’s more to be done in this area of integration, especially when it comes to the people.
When I think about people, one of the questions to ask is how important is people’s adoption to the deal? If something is an add on, maybe adoption doesn’t mean as much to 80% of the employees, but if the deal’s not going to work, unless everyone is ideally not only onboard but committed and engaged, that’s where the level of effort goes up. That’s what I think the deep dive is important to upfront. Even in organizing a project management office, I’m supporting a project management office on change communication and HR workstream, sometimes on a smaller deal. I’m advising senior executives because they want to be perceived accurately. As the person who’s upfront and they’re not looking for a consultant per se, but they recognize that they need a sounding board and someone who can see the patterns versus relying on the toolkit. The best tools and templates, we can all find on the internet. As far as actually seeing it, that’s a different animal.
I want to shift gears a little bit. Our audience runs the gamut from companies who have an HR department that can manage some of this integration stuff, to people who don’t have an HR department. They don’t even have a head of HR. I want to attack the companies first who have HR talent, the management team and infrastructure. What is your sense, are HR groups gaining the knowledge and the expertise to do this themselves? Are they having to pull in experts like yourself for certain pieces? Where’s the evolution from an HR perspective and their skillset when it comes to M&A?
In M&A, whether it’s HR or any other group, it’s the number of times you’ve done it before. It’s a battle-tested person. What I typically see is in one situation, they’ve never done it before. That’s less there, but then they want to bring in an advisor to help and make sense of the patterns, toolkits, roadmaps, all those things. The second piece is they’ve done it before and it was a disaster, it was a train wreck. Maybe they didn’t even integrate the past company, they gave up and left it there. They’re almost looking to do two things. The third is they’re a well-oiled machine. Everybody knows what to do. It’s a bandwidth problem. They’ve got too many deals going on. I see HR people who haven’t done it before. They’re looking to improve their capabilities or get that perspective for multiple deals. The second one, the train wreck is there are some lessons learned and maybe in the organization, in the back of their mind, they are thinking, “This is a company or a career killer.” The difference between an effective and ineffective HR person, all of the things being equal, is the number of deals.
Let’s talk to the people out in the community who don’t have an HR function or that specific expertise, in-house. They may or may not have a lead on integration. What should they be thinking about and doing as it relates to this function?
The primary thing they should do, and I know this is a challenge with day jobs, is to pick someone who is accountable. A good business person will be able to hit all those HR checkboxes maybe not on a mega-deal, but on most deals simply because a lot of it is good business sense. If it’s something like, “There’s a defined benefit program here or a pension plan,” you could find a specialist for that. Accountability is key. I know that’s a challenge with a day job, but that’s the one single thing. Maybe the person you put in that job isn’t the person someone won’t miss, maybe they’re not contributing as well. It’s someone that you’re looking for to test maybe for that next position. If they had high potential, put them in there. They may need some external support or not, but because of the way they are, this is a career-maker for them. I think that provides the focus of the company.
You have to have somebody at the end of the day who owns the integration and the buck stops with them. They have to have the authority to make stuff happen. What I see too often is pieces get parceled out. You’re responsible for IT. The head of IT is going to take over it. You’re giving your production people responsibility for production. It’s scattered everywhere and nobody owns what’s happening. Nobody’s working on the same timelines. They tried their best to come together and talk about it, but nobody really owns it.
That’s the disconnect where there is a steering committee of senior executives as a larger deal. Maybe there’s a meeting once a week, but if that person who’s running the integration management office doesn’t have the authority or can’t get air time other than once a week, red flags come up. They don’t wait for Friday morning at 10:00. All of a sudden, things start getting reversed because the head of whoever is responsible also needs to understand the organization and the people so well that they know how things get done. They’re involved with the deal ideally as early as possible because then they understand the reason for the deal and all those other things. Governance, if it’s too complex, gets in the way, especially if it’s the least objectionable person gets control of the project management office, they’re not going to be able to. If they can’t work across boundaries and they aren’t respected in order to push what needs to be pushed, it’s going to be a bureaucratic office.
No discussion about this would be complete unless we brush on its early stages. I understand that our thinking might be evolving, but with COVID pandemic, companies running virtually and with distributed workforces, this is adding a whole new element to how you evaluate the effectiveness of your talent. That network that we talked about with the influencers, that could shift. It is hard to find those people. Do you have any advice for people that are doing due diligence, what they need to be thinking about with virtual employees and distributed workforces?
There are a couple of different cuts at it. One is the technology side of it. If you own technology, how long did it take the organization to move people to that remote environment? How well is the technology enabling that change? I think the other piece is thinking about retention. If someone’s doing let’s say an accounting task, if they’re doing it for one company, but it’s similar to the functions they perform somewhere else, it loses the human connection and that notion of the culture, “If I’m doing it for A, why can’t I do it for B if B offers me more money? I used to care about my team. I used to spend time with my boss, but I’m at a Zoom meeting 30 minutes a week and it breaks that bond.” There’s the retention piece there.
There’s also, “I’ve built this into due diligence,” is looking at COVID policies and procedures for returning to work simply because that can involve liabilities as well. Also the capabilities. This goes to some cultures, especially a fun culture. We go out once a week and that creates a certain bond. Not all leaders can lead remote employees though. That’s another area where as things go on and what’s been demonstrated so far, the old normal is unlikely, better off we prepare for the new normal. Leaders have to take different approaches. They have to find out what’s the right time of the day to communicate with certain people. It may not be 12:00 to 1:00. It may not be scheduling hour meetings. It may be 50-minute meetings so people can get to their next area, but then feedback. This is critical because the more people feel marooned, the less likely they’re going to be at the same level of performance and retention.The difference between an effective and ineffective HR person, all of the things being equal, is the number of deals. Click To Tweet
Management teams are going to have to learn new skillsets, learning to manage remotely. Personally speaking, I prefer it because if done right, you focus on the right things. You focus on the outputs and the performance and not so much about what you see or hear, which sometimes clouds your judgment about what’s happening at the end of the day. Who’s being effective and who isn’t, who’s controlling the water cooler? It appears to be productive, but not. We started with a story about integration didn’t work so great. Do you have a story we can end on here as we start to close up, one that worked well and why it worked well?
The one I’m thinking about is a smaller acquisition, but it depends on the definition of small. Let’s say it’s about 100 people. On this one, specifically there was a recognition that one company needed the salesforce from the other company. That was their success factor in the deal. I remember talking to a client who said, “I am not looking to cut heads. We sell the same things. There’s no reason to do this deal if we can’t integrate our salesforces.” The process of that was looking at how they were compensated. One was $100,000 based on ten levels of incentives. The other was what you kill straight commission. Interestingly enough, the acquirer was eaten what you kill straight commission. The fear was right away, “When we come in, the best salespeople are going to just jump.”
There were a lot of hard upfronts starting in the early on due diligence on looking at the sales rep results, identifying the ones that are in that top 20%, and then developing individual retention plans. Essentially, the primary campaign around retention was about that group because it was so key. In compensation to say, “What we have to do is show them an opportunity to make more than they’re making now, but also give them a bridge because they plan their kid’s tuition and their mortgage on base salaries.” There was a one-year transition where it was the best of plan, interestingly enough.
What they found is that the rest of the companies came together well. They’re very similar in terms of their customers in that, but they were able to retain the salespeople. They also thought that if they had waited until close, the headhunters would have been managing their retention process. It wouldn’t have been to their favor. They identified the secret sauce. They got in there early with the risk management plan. By the time the deal was announced, all the individuals that were key, they had someone assigned to talk to them, their onboarding coach. It wound it altogether. That credit goes to the head of sales for the acquiring organization. He saw what happens when it didn’t work
They had the right advisor too. Take some credit where credit’s due.
I appreciate that, but the client always gets the credit.
I’m going to ask one final question. Is there a question that I didn’t ask you that would be helpful for people in the audience to have learned?
I want to go back to one we talked about. It’s this notion of culture. You mentioned Jim Jeffries and this 50% to 70% of why deals fail. The answer to that is if you’re reading a lot of those articles, starting with the original Harvard Business Review one, it was culture. Culture wasn’t a fit. Where can that be a false assumption, the definition of culture? It may be that leaders couldn’t get along with the other leaders. It could be that the compensation pot wasn’t right. It could be that they didn’t communicate, but the culture piece can be a get out of jail free card. In any situation where culture comes up, as others has culture problem in this, it’s got to be practical and pragmatic in terms of what that means. I use how people treat each other and customers. How they do that normally in under stress? Who they promote? Who did they hire? Who do they fire? That’s where culture matters. A lot of it can be white noise. Tying those two things together of why deals fail and culture, you’ve got to appeal that on.
It’s easy to blame the youngest sibling because they can’t stick up for themselves. You point to culture because it’s an easy thing to do.
The paradox is that when you go down that level to what you observe and behaviors and the physical evidence, that starts to come out as due diligence. You’re able to get a bead pretty quickly on that whole human dimension.
That’s great advice. You’ve got to peel back the onion. Don’t let people get off the hook easily. Mark, this has been tremendous. It was such a pleasure to have you here. If people wanted to get in touch with you, how could they reach you?
The best way they can reach me is at my email address, which is [email protected] or they can give me a call at (616) 550-5945. I’m happy to chat about things, share experiences. We’ll learn from each other. If there’s a path forward, we’ll know that too.
Mark, thanks again for being here. I appreciate it.
Thanks for having me.
I hope you enjoyed this episode. If you enjoy our content, please remember to subscribe and review our show. I look forward to seeing you again in the next episode. Until then, please remember that scaling, acquiring or selling a business takes time, preparation and the proper knowledge.
- Mark Walztoni
- Jim Jeffries – M&A Unplugged Episode 64
- [email protected]
About Mark Walztoni
Mark is a Managing Director with Crowe LLP and leads their M&A HR practice. He assists early and middle-market acquirers and private equity firms to reduce employee and culture risks and accelerate value capture during M&A transactions, turnarounds, and transformations. His clients apply a proven change, communication, culture, and capabilities road-map and toolkit tailored to their goals and situation, with his support in a project team or advisory role.
Mark has 30+ years of industry and consulting experience with deep expertise in M&A due diligence and integration, culture and change leadership, human capital strategy, employee communications, and leadership development.
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