Private Equity

M&A: Securing the investment with the right skills

November 04, 2019
By Dominic Pfau Dennis Tanke

Private equity companies and family offices are facing similar problems as big and middle-sized ones: whether taking over or investing in a company, they both need the best and most suitable people in the driving seats. However, far too often the personal capabilities of specialists and executives are neglected during acquisitions and equity holdings. Or as a senior private equity professional put it in a joint study between Mercuri Urval and UCL [1]: We spend too little time on people issues compared to the amount of time we spend on numbers."[2]

More than fifty years ago, Håkan Eriksson founded Mercuri Urval. The Ph.D in Psychology not only strived for new insights into the behaviour of people as a theorist, but also applied his in-depth knowledge as a successful consultant and sales coach to sales organisations. Why did some sales people respond so well to sales training, boosting their results, whereas others did not benefit at all? His answer was to select people for certain training measures based on their personal abilities and potential, rather than indiscriminately provide them with trainings. The result was immediate. This science based approach to matching business outcomes with personal capabilities was also applied to selection and development assessments in all types of organisations and functions, and it is the guideline for the work of Mercuri Urval up until today. In essence, there are two requirements for this approach to work in practice:

  • The first is a clear focus on expected results in a job and a detailed job specification with the professional track record and personal capabilities that are needed in order to successfully reach the expected result in the job.
  • The second is a performance and personality profile of an individual or group that is evidence-based and reflect their track record and personal capabilities.
  • Combined, an assessment of the match between job specification and an individual's profile predicts - in an evidence-based manner - if the individual can reach or even surpass the result expectations set by the company. This can be applied to executive placements, promotions as well as evaluations of management teams.

The application into the private equity sector is direct!

As professional investors, most private equity companies aim at increasing a company's value within a clear investment horizon in order to exit the investment with a profit. Because they already think of the exit while acquiring a firm, private equity companies follow a different approach for search and selection of possible target companies than industrial enterprises. The post-deal strategy is also quite different: While industrial enterprises align the degree of integration with their business goals, private equity companies focus as new owners on the cooperation between their own management team, the managers sent into the acquired company and the existing executive team. Depending on the degree of participation, a replacement of the executive team is often necessary.

As Mercuri Urval consultants, we accompany human resources measures that follow Mergers & Acquisitions on a regular basis. Last year, the volume of such transactions exceeded globally more than 3,5 trillion US-dollars [3]. According to a study of UCL, carried out in cooperation with Mercuri Urval, up to 75 percent of all Mergers & Acquisitions do not achieve the expectations of their investors. Our experience with the supervision of transactions conforms with results of the common research work „Managing Private Equity Buyouts – Cracking the Human Element". The failure of M&As is not provoked by financial or legal quarrels but rather by the so-called soft factors. These intangible assets include the specialists and executive staff.

A more people-oriented approach helps secure the investment

When looking at our most successful clients and what we do together to secure their investment through a more people-centric approach, four areas materialise as most critical for success:

  • Start before the deal
    A thorough due diligence is mandatory at Mergers & Acquisitions, but they focus mainly on financial, legal and fiscal aspects of a deal. An in-depth analysis and evaluation of the personnel as an intangible asset is often neglected. A costly mistake, because already before the deal is done a "people due diligence" should be organised in order to evaluate existing potentials and compare them with the strategic demand of capabilities. Thus, the crucial specialists and executive staff members can be identified that need to be kept within the company. Furthermore, the investor can gain a detailed overview of necessary competences that need to be developed or recruited, in order to achieve the goals. A relationship that is based on appreciation with all counterparts is crucial for the success of a deal. Those that fully adopt this will gain a real competitive advantage.
  • Organise a management audit
    The participation or acquisition of a company is often accompanied by a new strategy. Companies are frequently acquired because investors see wasted potential that they want to make proper use of with a new leadership. Companies in a crisis are also popular takeover targets – at least if investors are convinced to accomplish a complete turnaround with a change of strategy and with a new team at the top management. Once the new strategy is set up, you will need appropriate competences and personalities to implement the change. A management audit is the best tool to examine the existing management staff and to complement it adequately with lacking skills.
  • Recruit the right way
    New strategies can rarely be implemented without external addition or change in the management team. With professional support and the application of personnel assessment, you can secure that the right people with the appropriate personalities are working for you. It is of paramount importance that both existing and new management members acts as one team, as well as possessing the individual capabilities and skills to lead their teams, motivate their staff and develop talent.
  • Scan and Develop your people
    It is not always possible to easily recruit the desired competences that are necessary for a certain strategy on the labour market. The reasons can be diverse: the location of the enterprise, a shortage of personnel within the industrial sector or on a certain position or other causes. Then there is no alternative to develop the existing staff accordingly. You can compare the situation to a football team that has been promoted to a higher league by playing offensively. For the next season, they normally need a more defensive alignment and players that can adjust to the new style of play. Neither as coach nor as manager can you replace the whole team. Therefore, benchmark your team with criteria and competencies that fit to the actual enterprise life cycle and strategy. Also have the next phase of your life cycle in mind and check which manager has the potential for this. Use a variety of tools to get a grasp of the potential of your staff and management.

Securing the investment with the right skills

In a time of rapid technological change that is increasingly affected by political and economic insecurity, it is a major challenge to invest successfully. Private equity companies struggle more than ever to secure their investments. The main source for entrepreneurial prosperity is and remains the human being with its capacity for innovation, creativity and leadership in order to inspire teams and staff members to their best efforts. Securing the investment is in the end of the day a matter of putting the right people capabilities in play. No strategy will ever work without people. That is exactly the reason why the slogan of the authors is: "Connecting people to strategy!"

If you want to know more about this matter or wish a personal contact, please reach out to Dominic and Dennis:  

Dominic Pfau | Partner & Director (Team Leader)
Mobile: +49 172 67 26 093 | Office: +40 85 17 16 15

Dennis Tanke | Senior Consultant
Mobile: +49 170 97 40 364 | Office: +40 85 17 160


References

[1] University College London
[2] Reseacrh Gate. Private Equity Buyouts. 2012
[3] Statista Volumen der weltweiten M&A Deals von 1985 bis 2018 (in Milliarden US-Dollar). 2019