The Process of Change Management in M&A

What is Change Management

Change management is the concept of influencing the type, the amount, and the timing of change that occurs in a given scenario like a deal so that the desired outcomes are achieved. 

The part that's sometimes lost about that is it should be tied to what outcomes we want to get here so it's not completely esoteric and so the more it's tied the better. 

M&A is often the most consequential use case for change in the life cycle of an enterprise. When proper change management isn't recognized as an explicit component of the M&A activity, value creation is definitely in jeopardy.

So we need to always be mindful of that because most deals fail and they can fail for a number of reasons beyond change management. But change management is certainly one. 

Key people involved in planning and executing the change management

You need to identify sponsors and think about this as a RACI diagram. So those sponsors are accountable. 

They may not be responsible for all the leg work, they may not be responsible for creating all the content, and they may not be responsible for delivering all the content. Particularly if we're talking about M&A with large organizations, they simply probably don't have the bandwidth.

So depending on the deal, if this is a transformational deal, these folks should most likely have the word chief in their title. If not that, if you're talking about really large organizations maybe are one or two below, but they need to have an appreciation for the wider enterprise and anywhere that that deal might affect the go-forward enterprise.

So in other words, if I am a COO and I've got my hands into a number of areas, operations, etc, or across the operation spectrum. 

It's got to be at that level where you've really got skin in the game, and it matters. The success of the parts of the enterprise you own is a critical component of whether the deal itself succeeds. So it's gotta be at a fairly high level, that sponsor level.

There are plenty of folks who will be responsible in carrying that out, but if you think about one of the fundamental piece sets, stakeholder analysis, it's identifying the sponsors. 

The fundamental components of change management planning

• Stakeholder analysis
• Communications plan
• Training plan
• Coaching plans
• Management resistance plans

Stakeholder analysis

Analyzing as comprehensively way as possible all of the players. Whether its individuals or entities who will either execute or be affected directly or indirectly the change. And in this case, the change is dictated by that the nature of that deal.

If it's a buy-sell transaction:

• The buyers
• Sellers
• Shareholders
• Debt holders 
• other related parties

The stakeholder community should at least be considered in terms of whether or not they're relevant and then how much in a given deal.

• Employees on both sides 
• Customers 
• Service providers or vendors
• Government entities from federal to state to local, even broadly 
• Communities in another category that might be specific to a deal

Communication Plans

When we think about communication plans, often folks gravitate towards what we want to communicate. What do you want to say? And of course, those are relevant,  but we also want to consider 

• When things are said
• How we say them
• Who's delivering a message? 
• When they're delivering a message? 
• What they're saying? 

The actual components are dictated by the nature of the deal. The players involved, the circumstances around it, but also the nature of what the plans are moving forward to realize the deal thesis.

It's important though, that regardless of some of these components to speak with one voice, which means that with respect to a given topic, there aren't conflicting messages sent.

And sometimes that happens innocently enough. The more folks that are involved, the larger the deal is, the greater the chance that can happen if we're not really explicit about what the messaging is, and who's saying it. 

With respect to when, I give the general tenant that for most messaging, 

“The sooner things are delivered, the better. Communication's going to occur whether or not you have a plan, that doesn't really matter. 

What matters is whether it's going to be the those who are accountable for making the deal realize value have approved that content or whether it's the rumor mill or somewhere in between.” - Mike DeVita 

In terms of some of the how, when it comes to potentially career-changing events like M&A that can change careers, these messages are best delivered in person or personally.

It’s always better to be speaking to someone, being there as close as you can in person or personally rather than simply sending out a memo about what's happening or what's going to happen. 

Senior management has to be seen. Whether that's speaking to current employees, or acquired entities, to the extent they're not, folks will assume what they're thinking, what they might otherwise be saying behind closed doors. You don't want to run on assumptions. 

People managers really need to be involved. There's a saying and I think it's based upon statistically valid studies that regardless of the type of message, it takes about five times for someone to hear something before they really understand it. And there are also studies that by and large rank and file employees have a greater level of trust with their people managers than they do with senior management.

So if you have the correct messaging and again, in a rigorous plan, we're giving the same message and those folks can give that message in the context of the effects of a given function.

In terms of the who on the communication, in many cases, it should explicitly be different people and different roles with delivering the same message or maybe a play on the same message.

The Timeline of the Communication Plan

You have to look at it in terms of priorities. Anything that has regulatory restrictions has to be the very first criterion that you consider. So if there are certain things that can't be said within a certain period of time, that has to be priority number one. The last thing you want to do is run a scan of any sort of regulatory requirements. 

After you've satisfied regulatory requirements, then it's about what the deal thesis call for in terms of realizing this plan. 

Some things happen sooner than others and some things in addition to when they happen, you consider what's the planning look like to achieve them in line with the timing of that plan, that deal thesis.

Make sure you satisfy anything that's required, not only legally regulatory, but there could be certain conditions that have to be satisfied before certainly a deal is closed and before other things are going to be said, and that has to be number one. 

And then, so any kind of legal contractual requirements have to be the first criteria to dictate what that looks like, then identify what you need to do when to make sure you’re going to realize the value.

Training plans

In terms of training, we really want to make sure that folks are prepared for what we think this combined entity looks like. They need to have a fundamental understanding of what their duties are so that that's a fundamental piece on the training side. 

There are mundane things, like benefits that can have a real impact on whether or not deals are successful because deals depend on engaged employees.

It’s also very important to get oriented into the culture. Many deals don't have much of a cultural change if you're acquiring an entity that's similar to the one you operate on, but many others have a ton. 

Coaching plans

On the coaching side, you could argue whether you make these part of one plan or what have you. I'm more considering about the substance rather than the form. 

If you're dealing with a larger organization that will be counted on to carry out things like the communications plan, they weren't involved in the deal-making. They might not be intimately familiar with the deal thesis. So when you have a good plan that asks them to explain it to frontline employees, that may be part of their team, they need to be equipped with what that looks like. 

You may need to coach them, not just on what's said, you could do that through an email, but how it's said. As the cliche goes, “it's not what you say, but how you say it.”

 That sort of coaching and just about all the other changes that someone might go through administratively that aren't directly related to the deal thesis. That will help make sure employees are onboarded the right way which would be fun along the coaching side.

Management resistance plans

There's always going to be some resistance to change so that plan's got to talk about how we're gonna navigate that resistance, how hopefully we're going to try to mitigate resistance by doing some of the other things we mentioned, having those plans where we've analyzed our stakeholders we communicate the way we want to etc. 

But standard stuff like having retention plans, retention agreements with employees, again, coming out of evaluating stakeholders. And then contingency plans, because as anyone who's been through any deal knows, the plans never work out perfectly. 

There's always gonna be something that falls through. A key employee that leaves, even though you had earmarked that individual and had given them a fair retention plan, et cetera, et cetera. So that is another key component to successful change management, 

Change management vs. integration 

I tend to think of many of those folks as shepherds, think of it as somewhat of a PM role in many cases because much like, HR pro can tell you the reason an individual probably stays or leaves a company doesn't have much to do with HR in most cases, it's the relationship with their manager. 

So that individual manager, in the context of M&A may have various responsibilities from participating in diligence through a heavy dose of work related to integration, those folks will be responsible for a lot of that execution.

But the change management folks can herd the cats and make sure not only that the plan is comprehensive, but that executional plan gets done, it gets done in the right way. 

So it's not as if there are separate folks who only do change management and only do or execute all the steps within change management. It simply needs enough of a presence across the organization to make sure that everything is planned for well and that it actually gets done.

Challenges when executing change management 

At the most fundamental level, having a plan, so having a documented, comprehensive change management plan, that's really the most important thing. Too often, there's a step here or step there. 

Let's say in an integration plan or some other aspect of M&A activity, but if we don't recognize and, acknowledge the need for something comprehensive, then we're at the mercy of circumstance. 

So we may have adjusted a couple of change management-related things, but we may have missed a whole group of stakeholders. So having that plan as fundamental as it sounds is the most important piece.

Executing the communications plan is huge. You can spend a lot of time on content, but so much is who's delivering the messages, when they're delivered and how. The larger the deal is, the more people you probably have as participants in that communication plan, and speaking with one voice and at the right time can be really, really difficult.

Clearly you communicate what you're going to do. Hopefully, anyway, it's a fundamental component of communication and thereby change management, but you've gotta make communication to that thesis, meaning that the biggest part of that is the rationale for the deal.

Why is it happening? That's one of the fundamental questions people, both acquirer and target will have. Invariably, in the early stages of a deal, certainly, before it's been signed, there is a smaller group that is aware of the deal at large, aware of the thesis, and the rationale behind that deal. It really needs to be communicated. 

Most employees on either side will not know what that is. They could speculate and maybe if it's a really high profile potential deal, there are press leaks. But to really know what that is, and particularly what the implications are for an employee, that's why it's really important that it's part of the content of that communications plan. 

They need to have an understanding of how that deal thesis translates to integration. Because it won't be obvious, you just can't throw a discount of cash flow at someone and expect them to really glean. Part of that is saying why the company was bought and the steps you need to take to realize value. 

In many cases, there's a large integration component to that, and then need to be able to create a process to transfer knowledge to that lowest level. 

It's not only including it at large, but it's also making sure it's linked to the future steps in terms of integration, and then it's making sure it can be described at the appropriate level to make its way to the rank and file. 

The reality is you can execute this really, really well, and you should, but it doesn't mean people are gonna be happy. 

We could have a great plan to disseminate the deal rationale for a deal that we just signed. But particularly if it involves a workforce rationalization, people aren't gonna be happy with it. 

“Success or failure isn't necessarily based on happiness, it's based on an understanding. As long as I know that the employees are involved and have an understanding of what we're doing, they may not like it, and they may not agree with it either, but at least they know why.  - Mike DeVita.”

We shouldn't hold ourselves to an unreal, unrealistic standard that everyone's going to be popping champagne when a deal is announced, a deal closes and we get onto realizing value, but we do owe all those folks to at least understand. 

Resistance Management

I've always thought that timing is important here. So you've gone through these conversations, even down at an individual manager to employee level, and if they're not bought in, you really need to be able to move on.

Firm, quick decisions, including decisions that would include separating employees that are not only not aligned with the plan, but may be actively against it. Those can't happen quick enough. 

I've seen situations where folks who may not be on board are placated. They may have a particular bit of knowledge that is deemed to be important. The reality is, that sort of resistance can spread like a disease. 

I've always seen the most successful, even if it's somewhat painful to make those decisions as soon as possible. As part of that resistance management, it's a one-on-one conversation talking about what's in it for them. 

What I've found in conversations I've had in the past is that when you talk to an individual beyond the deal, so let's say they're in a role that's going away in a matter of time as part of the integration, I've always taken the approach to talk to them about what's important to them for their career. 

In many cases where shortly after a deal closes, if in this scenario, you're talking about an employee of an acquired company, the top folks for that company probably leave soon after a deal.

There's often an opportunity for folks who may be at a more junior level to operate at a level and take responsibility and have a span of control beyond what they'd normally get to. 

You need people who are actually motivated and having those folks around could destroy it. So bringing in another resource, potentially, if you deem it appropriate ascending a lieutenant, who's more than eager to take on the responsibility of someone who might need to be separated. 

That's really one of the ways in which you can come back and an otherwise precarious situation like that. 

Slow and Underperforming Leaders 

It's essentially making sure that the individual who may be underperforming and I are completely aligned on what the expectations are, the steps you're going to try to take to get to where we need to be, and how we're going to measure success.

And in the context of M&A, these things might already be captured in the form of a project plan anyway. And then the timing, which again is probably already part of any good plan. And then I'm taking the appropriate action and it may involve if the person's still enthusiastic about it, maybe it's just the type of role.

So maybe there's a reassignment of responsibility. I'm calling, the bench to see what other resources I might have in order to make sure things get done. Maybe there's something revealing, even though this person is accountable for it, maybe they haven't been armed with the authority to take the action or didn't think they have the authority to take action to be able to meet those accountabilities.

In order to keep the respect of those who are on your team, you shouldn't be going around them before you give them the opportunity to explain themselves.

So it would certainly start with that conversation if they're direct. If it's a broader issue and it spans a number of different accountable individuals, then maybe it's something done at more of a committee level from the get-go. 

But when it comes to that stuff, you should already have all your milestones in your plan, your project plan, not even change management, and what needs to be accomplished when, and who's accountable for it? So to me, it's just sticking to that. 

Culture

We often talk about culture. So, there's always a question about what role does culture play in change?

I just want to point out that it really depends on how divergent entities are, let's say it's a classic acquisition so you've got two entities involved. It might not have that different culture in which case, you should never overlook it. 

You should analyze what cultural impact there is, but you may determine that the risk to deal value realization is fairly low in the cultural realm. It's not always a super hot button issue. 

If you have a classic case, a fairly traditional cost-conscious retailer, and then acquiring a technology company that had half barrels are kegs of beer in the office and had like vastly more generous benefit plans, all these other things, then  potentially you've got some real potential issues there. 

Think about the volume of it with so many other considerations, it's important to have it as a consideration, but then let the deal circumstances determine how crucial or what the impact is. You wanna take it quantitatively. 

I think about a lot of things that may be to my detriment, but what's the real quantitative risk to deal value realization and then you can prioritize it accordingly. 

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