Jessica Brown Wilson of FisherBroyles, LLP participated in The Art of Deal Making: Using External Expertise Effectively
Foreword by Andrew Chilvers
For ambitious companies eager to expand into overseas markets, often the conventional route of organic business development is simply not fast enough. The other option to invest in or buy a business outright is far quicker but often fraught with unforeseen dangers. And even the biggest, most experienced players can get it badly wrong if they go into an M&A with their eyes wide shut.
If you search for good and bad M&As online the Daimler-Benz merger/acquisition with Chrysler back in 1998 is generally at the top of most search engines on how NOT to undertake a big international merger. Despite carrying out all the necessary financial and legal measures to ensure a relatively smooth deal, the merger quickly unravelled because of cultural and organisational differences. Something that neither side had foreseen when both parties had first sat down at the negotiating table.
These days the failed merger of the two car manufacturers is held up as a classic example of the failure of two distinctly different corporate cultures. Daimler-Benz was typically German; reliably conservative, efficient, and safe, while Chrysler was typically American; known to be daring, diverse and creative. Daimler-Benz was hierarchical and authoritarian with a distinct chain of command, while Chrysler was egalitarian and advocated a dynamic team approach. One company put its value in tradition and quality, while the other with innovative designs and competitive pricing.
Jessica Brown Wilson discussed The Art of Deal Making: Using External Expertise Effectively as part of the Employment chapter.
What advice can you offer international clients on harmonising employment practices and culture following a merger or acquisition in your jurisdiction?
Designing the new culture before the deal is closed is key to a successful (merged) business. This is something that is often overlooked, but is so important to create harmonious, productive workplace following the deal.
The good news is, creating the new business culture is work for the business leaders, not the lawyers. Designing a culture involves vision-casting and designing the personality and mission of this newly merged business. In the absence of designing a culture on the front-end of a deal, it is likely that after the merger there will be two competing cultures that are at war inside the business. Fiefdoms, unproductivity, turnover, and employment lawsuits usually are also predictable results.
If the buyer is a larger business, acquiring a smaller business, there is often an assumption the smaller business will adopt the buyer’s business culture, personality, and priorities. If that is the intention, then a plan is needed to communicate and execute the culture shift. Without this planning, Human Resources, Managers, and Executive Leadership will likely inherit new (often consuming) duties of fixing problems (stemming from the people) of the acquired business.
For example, imagine a couple entering their second marriage, each with children from a prior marriage. The wife has raised her kids with a growth mindset, private Montessori education, and the children always had a voice in the family. In contrast, the husband was a former military officer. He believes children did not have a voice in the family, but instead should do what they are told. The wife decides to let her new husband set and enforce the rules of their newly blended family, but she fails to communicate this plan and new way of parenting to her children before the two families merge. Ideations of mutiny, betrayal, being misunderstood, and unvalued would be expected outcomes.
These same reactions arise after a business merger. Businesses are more than P&L statements. Businesses are dependent on people for success. If you goal is to create a new, larger, more productive business post-deal, then making culture a priority is essential.
Do you have a best practice for incorporating collective bargaining agreements, employee benefits and pension scheme provision into the deal making process?
Obviously, every deal is different, depending on the size and type of business and the structure. For the buyer in a transaction, it is imperative to have a deep understanding of the collective bargaining agreements and benefit plans. These plans and their nitty-gritty details (that most of us don’t care to understand), could greatly affect the terms and the value of the deal.
A best practice for a buyer is to engage separate U.S. Employee Benefits counsel to advise the buyer and assist in deciphering the plans of the acquired business (and their impact in the future). This should be a lawyer with deep expertise that is not part of the law firm that is handling the deal. The large firms that handle big deals (e.g., Jones Day, Kirkland & Ellis) will have a benefits counsel on the deal team with a deal-centric focus. A buyer is well served with separate Benefits Counsel advising them through the deal, someone often in the trenches of drafting, creating, and litigating benefit plans (health care, pension, equity 401K, ERISA plans). This employee benefits expert will be familiar with the ins-and-outs of plans, the issues that lead to risk or litigation, and be able to spot issues that will affect the buyer in years 1, 2, and 3 after closing of the deal. This additional up-front expense will save you in spades in the coming years after an acquisition.
Incentivisation and retention of senior management is important to ensure stability and continuity post-deal. Any examples in which you have achieved this effectively?
When businesses want to keep key employees, they have to take actions to show they mean it. This ties into the importance of defining culture, so the employees have some sense of what to expect in the face of change.
I have had great success in drafting CEO agreements for the CEO that will continue to run the business post-acquisition. For executives, important terms to entice them to stay include generous equity and vesting schedules, aggressive bonuses that are tied to business success, and authority to lead. Additionally, agreeing to reimburse the executive $5,000-$10,000 in legal fees related to drafting and negotiating the new employment agreement have proven to be great incentives that ease the negotiation process.
Top Tips – To Keep Your People Happy During The M&A Process
• Communicate (with boundaries). Depending on the size of your business, the amount of employees, and the varying levels of employees, there are many shades of grey here. Not telling employees anything until after the deal closes is probably not advisable. Plan the communication and its stages to all employees and share according to the strategic plan.
• Do not make promises to your employees. Unless you are willing to kill the deal over a specific term (that may be very important to one employee) that in the grand scheme of the deal is not very important, it is prudent to not make promises.
• Create a deal inner circle. Make sure the inner circle understands with clarity they cannot chat causally about their deal frustrations. Likewise, communicate with employees who may become aware of the deal (who are not part of the inner circle), such as IT professionals.