Navigating Successful M&As: It’s All About The People

There has been a lot of recent consolidation in the market, and with the current market conditions we can expect even more consolidations. The merger and acquisition activity in the food service technology industry is growing. In today’s business environment, consolidation of IoT solution providers can add great business possibilities, but can also cause concern for customers who rely on consistent service and predictable outcomes from their solution providers. When a new acquisition takes place, the acquirer must link the new combined organization’s road map to its larger organizational strategy. While upcoming transitions take place, the ability of the parties involved to retain customers and employees will determine the level of service that Foodservice companies receive from their solution providers. Strong execution will be crucial to meet the needs of Foodservice companies. Remember – it is all about the people. If done right, M&As are a great thing for employees, customers, and acquirers. Unfortunately, in my career, I’ve witnessed many M&As be poorly executed.

Root Drivers

Acquirers take on more risk when targeting larger companies without enough consideration given to the management expertise required to handle big egos, employee mistrust, and overlapping product portfolios. In most mergers and acquisitions, the typical objective is to add shareholder value. Whether the acquisition is initiated by a private board or public company, adding shareholder value is almost 100% of the reason for the acquisition. Typically, the root driver of the acquisition falls under three categories—obtaining customers, acquiring technology, or bringing in amazing talent. An acquirer may have better technology than the company they are acquiring, but if they can acquire a target with a good customer base, they will gain revenue in the short term and the potential to upgrade those customers for the better technology in the long term. In another scenario, a potential target may not have a great customer base, but their technology is so innovative, fast, and scalable that acquiring the company for its technology makes sense. Finally, a target may be lacking loyal customers and differentiated technology, but their talent assets are so impressive—their scientists, developers, customer success teams, sales, and marketing personnel—that buying the company for the people is a strong investment leading to increased shareholder value.

When a board decides to make an acquisition, the key root driver is usually all they focus on, to the detriment of the other factors. A board may acquire a company for their customers, but if they don’t maintain their people or invest in the technology, the customers will leave. If they acquire for the technology, but don’t consider the needs of the employees, the technology is a moot point because the people know the technology best. If they acquire for the people and don't invest in the technology, the people will leave. So, for all three types of drivers, if you don't invest in the others, the acquisition will go wrong, and the desired outcome of the board will not be fulfilled.

Customer Viewpoint

Customers, too, are affected by M&A activity. The customer, the buyer persona, had a desired outcome when they purchased the solution from Company A, and they made the purchase for a specific reason. Maybe they became a customer because the culture of Company A is so fantastic. Or because the innovation of Company A is amazing. Perhaps the product is unbelievable, incredibly easy to use and scalable. Well, when Company A becomes Company B, the culture may change, the product may change, and the investment in innovation might not be as consistent. So, the customer needs to get information about the root decisions for the acquisition. Why did company B acquire Company A?

If the customer initially made their purchase decision based on the culture of Company A, they may not want to continue the relationship because Company B has a different culture. If the customer bought Company A’s solution for the technology, the fact that Company B may change the technology threatens the relationship. If the customer went with Company A instead of other options because of the quality of Company A’s employees, the ability of Company B to retain the talent will be a big indicator of the customer’s willingness to renew. The acquiring company needs to analyze the motivations and desired outcomes of their new customers and realign to make sure they can continue to deliver that. Otherwise, the churn rate will increase too much, and the acquisition will be unsuccessful.

Additionally, decisions concerning brand equity can complicate customer relationships after an acquisition. Do you retain the acquired company’s name and brand in some way, or rename its product to align with the acquiring company’s brand? There’s no right answer, but careful attention needs to be paid to brand recognition during the transition. If the acquired company’s customers and target market don’t associate your brand with the acquired company’s product or capabilities, brand recognition and equity may be lost. So, throughout the M&A process, and especially in the decision-making process post-acquisition, there’s a lot of risk that needs to be skillfully navigated to retain customers.

When acquisitions do go right, there can be a lot of benefits, especially if the technologies are compatible. When there’s synergy in the technologies, customers receive added value and benefit from optimized efficiencies. If the product portfolio of the two companies overlaps at 5% -10%, the acquisition can still be successful. If there’s too much overlap, the benefit to customers decreases and the value to the acquiring company is diminished.

Retention: It’s All About The People

You can tell if an acquisition went well based on how many people from the acquired company stay and stabilize the merger. My belief, my mantra is that “It’s All About The People.” When I say it's all about the people, I'm not only referring to employees—it's also about the customers, the user, the buyer persona. The potential lack of stability during an acquisition creates a vacuum where turnover can accelerate. Employees are in flux as they transition to working for the new company. Recruiters take advantage of employee uncertainty and headhunt the talent. Management must create a bridge to fill in the gap during the transition and take care of the employees. Of all the things to pay attention to during an acquisition, taking care of the talent is the most essential because they are the ones who take care of customers.

There are several pillars of employee retention. Number one, employees like to be valued and heard. Merger and acquisition decisions are made by the boards of companies, obviously, without employee input. So, once the announcement of the change of control reaches employees, there is already a dent in employees’ trust that their voice is being valued and heard. Management must make meaningful decisions that make a material difference in the lives of employees to start building back trust. For instance, taking consideration on when to transition healthcare insurance providers is critical. If employees transition to a new company, and thereby to a new insurance plan, in the middle of the year and have already payed their deductibles, the switch can cost them a meaningful amount of money. If management chooses to not switch until the next calendar year, they will save their employees money and show that they’re still looking out for employee interests.

Another pillar is maintaining the seemingly small norms and practices that employees enjoyed at the acquired company. Celebrating birthdays, keeping company events scheduled at the same intervals, and reimbursing the same expenses as before the acquisition (home internet for example) are all examples of cultural maintenance that may seem inconsequential but have an outsized impact on preserving employee goodwill. These little cultural cornerstones need to be migrated from one company to another, even if they don’t perfectly comply with the policies and procedures of the acquiring company.

To retain the employees, it's crucial to manage the incentives and payouts that employees themselves may receive because of the exit. Far too often the budget for retention is concentrated at the top of the management hierarchy. Whether it’s a flat organizational structure or a typical management pyramid, the board tends to disseminate 95% of the retention budget to the top 2-3 executives. The functioning logic is that the rest of the employees will follow the leaders. This is a mistake that does not account for the reality that employees are in flux during a change of control. A better practice is to identify the 15-25 key leaders in the organization and distribute the retention budget more evenly to them. These are the team leaders that have proven that they contribute the most to the success of the company. The retention for the first year should typically be cash and to retain people longer, should be stock in the company with vesting over 2,3 and 4 years. That way the key employees have a stake in the success of the integration. Short term cash, long term stock. If the acquiring company is publicly held, the value is more obviously understood. If it's private, it's a bit tougher because the value of those stocks and timing of a change of control is unknown. Still, management needs to consider how they will set up incentives to motivate short-, mid-, and long-term retention.

Exits Usher In The Next Business Phase

When my company, Demantra, was acquired by Oracle in 2006, Oracle was in a period of aggressive growth through acquisition. They had a strong strategy for integration and successfully brought several innovative companies into more mature phases of business during that period. Most important, the people were successfully on-boarded. To this day, more than 80% of the original Demantra employees are still either working at Oracle or working in the network—developing, implementing, or selling Oracle Demantra with partners. I recently spoke to a Demantra customer who told me a story of gaining enormous insights and value from the solution that helped her company navigate the difficult supply chain landscape and demand fluctuation over the last few years, especially through the pandemic period. I’m privileged to have been a part of a company that produces so much value for customers, and to have been acquired by a company that managed a change of control so successfully.

M&A is a fascinating area of business because it produces interdisciplinary opportunities. Successful M&A activity incorporates psychology, finance, technology and integration, and many other multifaceted business competencies. Too often, people think that it’s Nirvana once the exit arrives. It’s not. The exit ushers in the next phase of the company with its own unique challenges and opportunities.