Harvard Business Review
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The Idea in Brief
The strategic logic of Bank One’s 1998 acquisition of First Chicago NBD was clear. According to the Cincinnati Post, the deal would make the Columbus, Ohio-based acquirer, then the United States’ eighth-largest bank, “the dominant bank in the Midwest,” ensuring its survival in a rapidly consolidating industry. But three years after the deal, none of the 16 top executives picked to run the merged company remained on the job. One M&A firm included the deal in its list of the top ten M&A bloopers for 1999.
Bank One eventually recovered its momentum, but the acquisition reflects a common business problem. Too often, deal makers simply ignore, defer, or underestimate the significance of people issues in mergers and acquisitions. They gather reams of financial, commercial, and operational data, but their attention to what we call human due diligence—understanding the culture of an organization and the roles, capabilities, and attitudes of its people—is at best cursory and at worst nonexistent.
The most obvious consequence of making a deal without conducting human due diligence is a significant loss of talent right after the deal’s announcement. Less obvious is the problem of long-term attrition: Research shows that companies continue to lose disproportionate numbers of executives years after their merger deals have closed (see Jeffrey Krug’s Forethought article “Why Do They Keep Leaving?” HBR February 2003). For those who remain, confusion over differences in decision-making styles leads to infighting. Managers postpone decisions or are blocked from making them. Integration stalls and productivity declines. Nearly two-thirds of companies lose market share in the first quarter after a merger. By the third quarter, the figure is 90%.
That’s the bad news. The good news is that human due diligence can help acquirers avoid these problems. When they have done their homework, acquirers can uncover capability gaps, points of friction, and differences in decision making. Most important, they can make the critical people decisions—who stays, who goes, who runs the combined business, what to do with the rank and file—when a deal is announced, or shortly thereafter.
The value of addressing these issues early is highlighted in detailed interviews Bain & Company conducted with managers involved in 40 recent mergers and acquisitions. The research compared people-related practices in successful and unsuccessful deals. In the 15 deals classified as successful, nearly 90% of the acquirers had identified key employees and targeted them for retention during due diligence or within the first 30 days after the announcement. By comparison, this task was carried out in only one-third of the unsuccessful deals.
Human due diligence lays the groundwork for smooth integration. Done early enough, it also helps acquirers decide whether to embrace or kill a deal and determine the price they are willing to pay. In hostile situations, it’s obviously more difficult to conduct due diligence. But there is still a certain amount of human due diligence that companies can and must do to reduce the inevitable fallout from the acquisition process and smooth the integration (see the sidebar “In Hostile Territory”).
So what does good human due diligence actually involve? In our experience, an acquiring company must start with the fundamental question that all deals should be built on: What is the purpose of the deal? The answer to that question leads to two more: Whose culture will the new organization adopt, and what organizational structure should be adopted? Once those questions are answered, human due diligence can focus on determining how well the target’s current structure and culture will mesh with those of the proposed new company, which top executives should be retained and by what means, and how to manage the reaction of the rank and file.