In an age when business models are marked by expansion and digital disruption, mergers and acquisitions (M&A) and spinoffs have become central to the strategies of most global companies. With their accelerated timelines and pervasive impacts on employees, including business travelers, these deals raise a host of challenges for human resources and global mobility functions. They also offer plenty of opportunities for HR and global mobility teams to identify people risks, advise on solutions and facilitate the deal – before, during and after — to help ensure the deal’s success.
Many of today’s international companies have made expansion through acquisitions a pillar of their strategy and even though deal-making levelled off in 20191, we are now seeing some resurgence despite the continuation of COVID-19 as well as other geopolitical uncertainties such as Brexit.
With all industries embracing digital business models, many companies are also looking to become leaner. Many are divesting business lines so they can focus on their core business. They are also scooping up technology companies that can help them transform their operations and engage in more data-driven, science-backed product development.
Acquisitions, spinoffs, restructuring and initial public offerings (IPO) involve different sets of HR issues, as we’ll see later in this article. But whatever the deal, it usually involves operating model changes that create issues across the entire HR remit, including compensation, benefits and retirement plans, severance and retention issues, and compliance and legal matters. Where mobile employees are concerned, issues may involve assessing assignee populations and localization and repatriation, revising assignee polices, and supplying data for immigration, tax accruals and audits.
Since M&A deals can occur at breakneck speed, HR professionals often need to deal the entire universe of employee-related transactions within very short timeframes on top of their usual day jobs. This makes it crucially important for HR professionals to be close to — and ideally part of — the deal-making process. They need to understand the business reasons driving the deal so they can prioritize issues and work through the impact on both the employee population to and their own HR teams.
For example, the objective of an acquisition could be to acquire new skill sets, so people issues are front and center. The war for talent is as hot as ever, so when talent is the target, the company needs to have a clear retention strategy and a strong plan for communicating it. Otherwise, there is a high risk that the talent the business has paid a lot of money for could walk out the door.
But the deal could just as easily be aimed at acquiring a new product for the company’s portfolio or easing the business’s entry into a new market, making people less important to the deal’s success. Gaining this understanding early in the deal-making process helps HR teams determine how to service and prioritize all the M&A-related issues they will need to deal with.
To be effective as key advisers who are integrated with M&A teams, HR professionals need to learn how the deal process unfolds. They need to speak the language of the deal team. They need to understand what types of agreements are possible, and where employment and HR-related matters arise. They also need to anticipate when they may be needed to provide comments or be involved in negotiations. This means HR teams need to move at deal speed and ensure they have the right people, with the right knowledge, available at the right time.
HR teams can better understand their role in specific transactions by asking themselves these questions:
The answers to these questions can help the HR team plan how they will fill their roles throughout the deal continuum — from negotiation and due diligence to post-deal restructuring and integration.
In the past, HR due diligence was largely limited to pension obligation and certain other compliance matters. More and more, however, KPMG professionals can see HR due diligence expanding to include strategic talent analysis, cultural assessments and mobility reviews. This involves not only uncovering people and mobility-related liabilities and risks but also developing mitigation plans and identifying what items are negotiable. It also extends to understanding key employees and their future roles to determine retention strategies.
From a mobility perspective, acquiring companies need to understand not only the target’s assignment policies but also whether the target actually knows where its people are, why they are there, and which entity will employ them after the transaction is complete.
Taking human capital issues like these into account early can help HR teams spot sensitive topics so they can be addressed and identify red flags to watch for as the deal progresses.
As the deal moves to implementation, HR and mobility teams have key roles to play in:
All deals call on HR and mobility teams to address issues related to workforce planning, compensation, technology, HR disclosures, governance and implementation, and workforce engagement and communications.
But within these broad categories, the specific issues and priorities differ widely depending on the deal.
Initial public offerings
Companies that are preparing for an IPO tend to be smaller, perhaps start-up companies, so the higher scrutiny and heightened sensitivity to compliance that going public bring are big concerns. For HR and mobility teams, a significant part of the IPO readiness process often involves answering detailed questions about anything that affects the financial statements and other required disclosures, including:
The public company environment will create demands for activities that a private company does not need to deal with, so the company may have to bolster its resources to execute the IPO and deliver the necessary ongoing support functions.
Where compensation is concerned, common elements of private company cross-border arrangements, like gross-ups and tax equalization payments, could raise issues in the public context. HR and mobility teams will need to move the business to a public company pay model that aligns employee compensation with shareholders’ interests. They also need to prepare the company for public disclosure of executive compensation and the ensuing scrutiny from shareholders, regulators and media.
In short, HR and mobility teams need to ensure companies going public are prepared for an in-depth health check so there are no surprises that could impede the IPO’s success.
Compared to companies preparing for IPOs, HR and mobility teams of companies that are about to execute a spinoff, focus more on the employee experience — making sure the transition runs smoothly and everyone knows where they stand. A key part of this is determining which employees will remain and which employees will move to the new company and then tailoring retention, engagement and communication strategies for each group.
Part of this effort involves creating the infrastructure to sustain global mobility in the new entity to ensure assignees continue to be paid, tracked and otherwise supported. The parent company will often continue in this role for a period of time under a transition services agreement (TSA) to give the new company the time it needs to develop these capabilities. People on assignment are just one category of employee that need HR’s attention in a spinoff situation, so a TSA can help bridge the gap while HR deals with more pressing needs to create new employment agreements, benefit plans and retirement schemes.
However, a TSA can lock the new company into the parent’s mobility model, potentially slowing efforts to shift mobility practices and reduce costs, for example, by relying more on local transfers or by reducing assignment incentives. Once the new company’s HR team is confident that it can meet the company’s payroll and other mobility needs for all its global assignees, it may be possible to renegotiate and shorten the TSA’s terms accordingly.
Another key mobility-related aspect of spinoffs arises in the division of assets and liabilities. A leading practice is for companies to maintain an account for hypothetical tax liabilities that could arise in the future, for example, when assignees undergo tax audits. These audits can happen many years after the transaction occurs, so in a spinoff, it’s important to specify how to handle ongoing or future audits as part of the transaction’s terms. It’s also important to ensure the so-called “hypo tax” reserve lands on the appropriate side of the deal.
In acquisitions, the focus tends to be on identifying retention needs and synergies for the integrated company, as well as harmonizing compensation and benefits. An integration communication strategy is needed to support engagement, retention and performance with tailored messages for the acquired and existing workforces.
In this context, the HR team’s understanding of the acquisition’s strategic purpose can help them align their time and resources on retention versus change management issues. Cultural assessment is critical for a successful integration, so HR teams need to clearly establish what aspects of the target company’s culture they want to import and what to leave behind.
This is especially important when buying talent is the acquisition’s key business reason. The target’s talent was probably drawn to and stayed with the target because of its culture to some extent, and cultural shifts at integration could put their retention at risk. Getting cultural integration right requires a great deal of empathy and forethought to gather and respond to employee feedback.
During the HR due diligence process, buying companies often focus on the target’s high-risk business travelers, including their global mobility management systems and processes. We’ve experienced a recent situation, where the target’s systems, processes and programs for business traveler compliance were stronger than the acquirer’s, so the buying company looked to adopt those practices it could absorb. At the same time, however, the buyer realized that the target company’s mobility-related compliance rate could temporarily decline, until the target systems could be fully adopted, so a financial statement reserve was set up to cover any resulting costs.
HR and mobility teams also need to anticipate any mobility developments that the acquisition may bring. If the company is acquiring a target in a new market, significant risk can arise if the company wants to rush executives into a new jurisdiction to manage integration without considering immigration requirements or tax impacts. When HR and mobility teams are involved early, they can educate management about these risks and help get the company’s business travelers on their way as soon as possible.
Overall, the role of HR and mobility professionals in M&As is to minimize the disruption to the business. At the same time, working through these deals as valued members of the M&As team can contribute to other policy and operational changes — such as mobility technology solutions, localizations, outsourcing and business traveler tracking — that strengthen your global mobility program overall.
Jill M Hemphill Lori Worcester
KPMG in the US Global Mobility & Immigration Supervisor
Tax Partner PTC