Merging Forces
Aug 1, 2007 12:00 PM, By Elaine Misonzhnik
“The merger happened six months ago and I am still not doing any deals.”
It's a complaint John Ryan, president of RSMR, a Chicago-based executive search and human resources consulting firm, hears all too often in the aftermath of mergers and acquisitions in the REIT sector.
While these transactions might make sense on the portfolio level, they tend to fill rank-and-file employees with dread about losing their jobs or being underused in an industry where one's reputation for making things happen is critical for long-term career success. Up to 20 percent of REIT employees may decide to leave the company before a merger is even finalized, Ryan estimates. Headhunters know this, and within hours of a merger or an acquisition announcement are on the phone offering the firm's best professionals an employment contract somewhere else.
“If the employees are uncertain about their future, they'll take that phone call and be gone very quickly,” warns George McCormick, director of U.S. mergers and acquisitions with the Hay Group, a Philadelphia-based consulting firm.
With the current emphasis on property assets, rather than intellectual capital, in REIT mergers and acquisitions, the dealmakers might not care, notes Stanley Eichelbaum, president of Marketing Developments, Inc., a Cincinnati-based consulting firm. But in a booming industry, where it can take up to a year to fill executive posts, losing talented professionals is not a smart long-term move. And when a REIT is about to come into possession of an entirely unfamiliar property portfolio, it needs the expertise of people who have been working on those centers for years and have an ongoing relationship with the tenants, says Ryan.
With the current pace of buyout activity, that's a concern for more than one REIT. In the last three years, there were six mergers in the public retail REIT sector, approaching $22 billion in value, and approximately four transactions involving buyouts by private firms, according to statistics from the National Association of Real Estate Investment Trusts (NAREIT).
Mergers and acquisitions, however, don't have the best record when it comes to human resources management. In the past two M&A cycles, 10 and 20 years ago, companies that merged tended to perform worse in the long term than those that abstained from such transactions, regardless of the sector, notes Steve Allan, principal in the mergers and acquisitions group of Towers Perrin, a Stamford, Conn.-based global professional services firm. A “Global Workforce Study“ Towers Perrin recently completed on 86,000 employees across 16 countries found that the amount of discretionary effort people are willing to put into their jobs drops in the wake of M&A activity. A large part of the problem is inadequate attention given to human resources integration, Allan says.
The human dimension
One of the most common mistakes companies make in M&A transactions is forgoing human resources research. As they prepare for a possible deal, corporate executives tend to look at the financials, real estate assets and long-term growth prospects, but might forget to consider the internal culture of their merger or acquisition target — often one of the best predictors of whether the deal will be a success.
“There are instances where the cultures would never work out, they would always clash and you wouldn't know that without due diligence,” McCormack notes.
An example would be a company with a highly aggressive, performance-oriented mindset acquiring a family-owned competitor with a more paternal attitude toward its employees. When the employees from the latter firm find themselves in a high-pressure environment, they get anxious and have trouble assimilating. Meanwhile, visible frustration on the part of management accustomed to take-charge workers often makes things worse.
Since fixing a bad match is no easy task, it makes sense to research your target's reputation beforehand, asking people in the industry their opinion about its internal culture, discreetly contacting current employees and getting in touch with outside consultants to get a sense of how things are run at the other end. “A lot of times, the McKinseys of the world are aggressive about finding out that kind of information,” notes Craig Rowley, vice president of the national retail practice with the Hay Group.
