Human Due Diligence in Hostile Takeovers

In Hostile Territory

The rhetoric of hostile negotiations as it plays out in public seems designed to amplify cultural differences between two companies. From the target pours the language of resistance, decrying the poor fit and often questioning the motives and track record of the acquirer, sometimes in highly personal terms. For its part, the acquirer blasts away at the performance of the target’s management team, usually casting it in the worst possible light. Hostile acquirers that win the day often end up alienating at least part of the organization they are taking over, creating cultural terrorists in the process who do everything in their power to resist integration.

In this environment, it’s clearly impossible to employ most of the analytic tools we describe in this article ahead of time. Executive teams can’t spend time together, except in highly charged circumstances with lawyers on hand. Acquirers can’t expect to see inside data on questions of employee satisfaction, compensation and promotion processes, or decision-making norms. But companies cannot afford to ignore human due diligence just because the target won’t cooperate. Although hostile bids are rare, they also tend to be large. Hostile deals accounted for about 1% of all deals announced in 2006, for instance, but they accounted for 17% of deal value during the same period. Last year, the 374 uninvited bids made by corporate and private-equity buyers added up to offers worth $700 billion. What’s more, such deals often turn out to be game-changing for the companies involved and their industries.

Fortunately, there is a certain amount you can do in a hostile situation in advance. You can analyze published reports and news stories about your target. Senior executives who have moved on from the target company can sometimes provide useful views of their former employer’s culture. Customers and suppliers often have valuable insight into the decision-making processes and capabilities of the organization and may know how these compare with those of the acquirer. Any progress you make with this kind of human due diligence will help to test your investment thesis, determine boundaries for pricing, and identify some of the hot-button issues for the target’s employees. It will also help keep you focused on life after the deal and the critical next steps you will need to take to improve it.

Don’t rest on your laurels once the deal is completed. On your first day as boss, launch an aggressive “get to know you” program. As you become acquainted with the people, focus especially on the next generation of leaders, usually two levels below the CEO. These managers have not fought the pitched defensive battles a hostile takeover generates and thus often see the opportunities that a business combination can provide. They will be your key allies as you move to overcome resistance and build support, because they are highly influential down the ranks of the organization. Decisions they make to stay or leave will have a significant ripple effect. You should follow up this program with employee surveys, interviews, and visits, all of which should be framed to protect your investment—the people you acquired.

Properly presented, human due diligence can be more than a learning exercise. It can be an important part of the healing process that needs to happen before your hostile acquisition can deliver the value you were so desperate to obtain.

For more read HBR article in April 2007