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Hold your horses: M&A is about talent, not just pipelines

Published on 25/11/13 at 08:19am

The morning mist is rising on the battlefield. At stake: the crown riches and glory of tomorrow’s pharma leadership. The corporate battle plans call for aggressive M&A.

Piles of market data and groups of fortune-tellers, forecasts and patents have been combined to identify the best target firms; investment banks and private equity firms are wining and dining pharma magnates with talk of multi-company ‘roll-ups’; weak companies are developing defensive strategies to avoid being ‘eaten alive’.

Pumping further adrenaline into the bloodstream, US offshore money is driving foreign investment, and the re-opening of the US equity markets to biotech is fuelling a fire the like of which we have not seen since before 9/11.

It’s a heady mix. But hang on a minute. Before we mount our corporate steeds, scream ‘charge’, slam down our visors and engage in some good old-fashioned corporate cut and thrust, take a breath and remember that it is not just pipelines and customer wallet-share that you are combining.

You are combining people and cultures, you are acquiring talent and risk losing it too, either on the field or soon afterwards. Everyone knows that in the cool of the morning, but the red mist can descend and your plan for a post-victory party can turn into a wake.

If you are to lead a new company off the battlefield and into the Elysian Fields, make sure that you have talent acquisition (TA) as part of your planning and a people and culture plan as sharp as your boardroom weaponry.

Does M&A work?

M&A is common - there were 111 instances of it in the UK in the second quarter of 2013 alone - yet there is no one-size-fits-all formula to ensure smooth transitions; traditionally, TA has played a secondary role to the tangible asset grab. M&A is time-consuming and stressful and it is only by placing TA at the heart of M&A that the maximum value can be realised.

According to GlaxoSmithKline’s chief strategy officer, David Redfern: “As major Western markets slow down, M&A has been seen as a way of getting more top-line growth.” Studies over the last 20 years show that in up to 83% of cases, M&A fails to produce real benefit for shareholders (let alone employees) and actually destroys value half of the time.

The major causes of failure were cited as people and cultural differences. Unfortunately, there is no reason to believe that the situation has improved much since. Many have also cited lack of ‘strategic fit’ and ‘inappropriate management during integration’ as the primary reason for poor M&A performance.

The pharmaceutical industry has seen a narrow band of huge companies grow ever larger in the past 30 years as they swallow other firms. In 1985, the ten largest pharmaceutical businesses accounted for around 20% of worldwide sales, whereas in 2002 the largest 10 accounted for 48% of sales - a striking transformation.

In spite of these figures, the success of M&A is often compromised because a company is more than just its tangible assets.

A company is its people, in ‘company’ with one another, defining a culture and a framework for doing successful things. Of course, M&A often makes perfect sense and if it is done with people and culture at its centre, it can be both agile and productive; and these are values that the industry desperately needs to relearn as we move towards a future based around increasingly personalised medicines.

FDA approvals are at their highest level since 2000 and, however fractious the debate around healthcare costs, there is patient demand for more effective, targeted therapies.

M&A can bring together a portfolio of technologies such as diagnostics, devices and treatments which would never have been combined otherwise. This can be transformational but only if you also harness the talent you acquire with the pipeline.

Impacts are short-term in commercial and long-term in R&D

The people impact is often felt most immediately in sales and marketing, as customer confusion and employee confidence lead to ‘fight or flight’ within days of any announcement. You only have to examine some well-known industry blogs to understand just how febrile that community can be.

However - much more perniciously - there is an initially unseen but massively damaging impact on R&D.

Given the normal high risk/high failure nature of R&D, reductions in productivity through the ‘fog of war’ nature of M&A are often hard to spot in the early months, but they are there from day one.

R&D is particularly vulnerable to M&A pain: during a merger, R&D departments are the last to combine as a company’s pipeline and patents are its most prized assets and are not revealed to competitors in case the deal falls through.

It can take up to nine months for the completion of departmental merging, which is inevitably highly stressful and time-consuming for management and employees. No new projects will be undertaken in this period; nor will any major hiring decisions be taken beyond existing employees of the merging firms.

Whilst a loss of sales may be made up in the next business cycle, once customers understand the new world order and restock their inventory, the loss of R&D productivity from both acquiring and acquired companies follows the new firm for years like a spectre, and often has its true impact long after the ‘buzz’ of the integration is over.

The irony is that this R&D gap is often only plugged by further in-licensing or - wait for it - more M&A. A key critic of the entire process is Dr Raymond Firestone, a scientific fellow at Boehringer Ingelheim.

Firestone recently published an account of the merger between two large pharma firms: “Mergers have a strong negative personal impact on researchers and, consequently, the innovative research environment. One merger I witnessed in the late 80s was a scene of power grabs and disintegrating morale. Positions were often decided by favouritism rather than individual talent.

“Productivity fell so low that an outside firm was hired to find out why. Of course, everyone knew what was wrong but few - if any - had the nerve to say it.”

This is a true indication of how badly mergers can go when HR is not on board from the beginning up to completion. It also reflects a time before talent acquisition existed in its current form. Yet is an important reminder that a company’s human capital is perhaps even more crucial than its financial assets. Without a stable, co-operative company culture and a settled employee base, the new business is built on sand. 

For pharma employees in particular, there are several key concerns one might have, including job security, the survival of a research project as well as vying for a position in the new firm.

Dominance is not dictatorship

One thing that is easily forgotten in the campaign is that - in general - both parties in any transaction are there because they have done great things that the other wants.

This success is people-driven and people are the ones most affected by M&A. So, intangible or not, without getting the people and talent part right you cannot claim victory during or after the battle. Recent global geopolitics reminds us just how true this is. Corporate campaigns run by the same rules and fail for the same reasons.

In almost all M&A, one ‘side’ has the upper hand and is able to set the agenda. True mergers of equals are the exception rather than the rule, resulting in the impact of culture from the more dominant firm prevailing and employees of the less dominant firm being confronted with an entire new set of rules and values. 

The smartest acquirers in history - from Alexander the Great to J&J - make sure that although they imprint their culture at the top of an acquired company, they allow the culture of the acquired to have an impact on the entire new firm.

Enforcing a dominant uni-culture almost always fails, not because it is a poor one, but simply because it does not reflect how humans work when they join together. The irony of companies who promote a deep understanding of human biology but show a complete misunderstanding of human psychology should not be lost on anyone.

The same applies to operations and processes. Both parties have created success and have something of value to show each other. The acquiring firm’s processes and procedures are not by definition the better ones.

An objective and transparent analysis of both sets of systems and procedures should lead to the selection of the most appropriate ones. This will have a tremendous impact on people’s confidence in the sincerity and honesty of the new management. It will, therefore, be an important contributing factor to the success of the integration.

The impact of fear on talent

M&A causes organisational stress but this is dwarfed by the combined personal stress across employees at all levels. From the boardroom to the bench, nobody is spared.

It is emotional for all and therefore handling emotion is critical. It is very common to hear people describe having ‘survived’ rather than ‘been involved in’ a merger. So much of this is perception and smart human management.

Most human behaviour (which we see in public anyway) is driven directly or indirectly by fear. Although those at the battlefront have their fear dulled by adrenaline, most of those involved do not. We must therefore look to reduce fear - and the uncertainty which causes it at every stage.

Mergers call for collaboration, but non-collaborative (fear-based) behaviour is natural when people realise they might be in direct competition with their counterparts. In fact, although from the outside the business appears to be growing, mergers often compel the most valuable - and therefore marketable - employees to look elsewhere resulting in the company losing key personnel.

Many senior staff - particularly in R&D - are risk-averse and will prefer stability and certainty elsewhere to the maelstrom of M&A.

So the competition watches M&A battles with interest and uses the confusion to attract those key staff that the talent acquirer is looking for. For example, scientist and Pharmafocus regular John LaMattina says that when he was heading-up the R&D department at Pfizer, he was pleased to be headhunted during a merger.

“I was really relieved; the stress at work was incredible.” This is surely an indication of the importance of a professional HR strategy when it comes to M&A.

Talent acquisition is as important as pipeline acquisition

While much has been written about the objectives and success rates of M&A, historically there has been a general complacency over TA and HR’s role in the process. Instead of being a deliverer of M&A, drawing up plans for how to manage the problem, TA can, and should, be part of the team that targets acquisitions.

Having TA input in prioritising acquisitions based on compatible cultures is rare but with everything that we know about the people-based failures in M&A, surely ‘talent expiry’ should be just as important as patent expiry in valuing a portfolio?

M&A scholar Peter Howson sums it up bluntly: “The benefits of due diligence HR is often underestimated and its findings are often not integrated with the rest of the due diligence. Do not fall into this trap.”

The fact that companies now have TA groups does reflect the notion that firms understand there is a limit to available talent and that it must be sought out and attracted in just the same way as acquired companies are. Yet, do we have TA at the heart of corporate acquisition?

Talent acquisition has a place at the very heart of management

Although senior management will go out of its way to emphasise the importance and value of the employees from the company that is being taken over, its primary preoccupation is often on the immediate concerns of financial return, particularly of shareholder value.

It is understandable - but not forgivable - to focus solely on the predicted financial bottom line rather than the softer, less predictable realm of employee satisfaction and culture integration. However, any chief executive building for the long-term must focus on their ‘company’ and this is often most effective when there is a tight bond between business, HR and TA leaders. 

They themselves are not immune to the consequences and the fear involved with M&A. This strong bond is all the more important because they may have to act as each other’s councillors at different times in the process.

In more and more companies, the CHRO is an integral part of the organisation’s senior management. TA should therefore always be on the agenda but let us all make sure that it is given the same limelight, or discussed as often as pipeline acquisition.

Talent acquisition and HR both support the success of integration

The HR departments of both the acquiring and the acquired company have to play a pivotal role in guiding all employees through the difficult process, that starts for most with the announcement and ends well beyond integration date.

Senior management must bond with HR and TA, from inception to three year post-transaction planning, to devise strategies to tackle the fear and potential cultural ablation that can be expected along the route. This involves mapping the likely structure and individuals, looking for possible conflict and talent leakage, then intervening hard and early to secure those areas.

This is not a job just for HR or TA or for management; they must be one in the same. Then for the division of labour. It is vital that the HR department is completely focussed on the wellbeing and concerns of employees during these upheavals - but equally so, it is important that TA groups focus on looking out  for talent leakage at every turn.

These things are not mutually exclusive, but by the TA and HR groups each focussing on their key objective, the ground is well covered lest they lose employee trust and enthusiasm or their brightest individuals to rivals. Communication is critical: clearly, honestly and openly. Incomplete, delayed or - worst of all - well-meaning but untrue communication will kill employees’ motivation and support.

It is vital that people understand what is being communicated and are aware that the style of communication may differ between the two companies is critical. Whilst it is normally the role of marketing to engage the customer, every person in the company is able to do this and the greatest confusion is seen when marketing messages are confounded by staff who say something different.

Get it right internally first and you have potentially thousands of marketers, showing consistency to your customers, suppliers and competitors. Pipeline is critical for any pharma company and all possible steps should be taken to ensure any pipeline-generating M&A runs smoothly.

However, going into battle to win the pipeline without a lust to acquire the talent is a high risk approach. Talent acquisition is your guarantee of future pipeline. Something to think about whilst you strap on your armour this season. 

Chris Molloy is chief executive at RSA and Theo de Roij is a senior consultant at RSA Consulting GmbH

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