Before your M&A deal, do a human capital audit.

• Author: Carey, Dennis C.
• Position: Mergers and acquisition

Going beyond crunching the numbers, many CEOs are conducting an additional audit to assess the managerial talent in the company they are considering buying.

Any casual reader of the business press now knows that many highly touted corporate takeovers have backfired - some of them spectacularly. It is hardly surprising that top executives who have staked so much on an elaborate financial due diligence process prior to the integration of two companies are stunned to find that, when the two companies integrate, it yields disappointing and unanticipated results.

These results are forcing executives, boards, and senior managers to rethink their approach to mergers and acquisitions. Instead of merely looking at potential partners who would help achieve business goals, they must select their merger partner with great care, scrutinizing every potential merger or acquisition target for problems that may not be obvious from the company's financial profile. They must ask themselves, "Is this a company whose management, employees, and approach to business I can live with?" Having answered that question affirmatively, they must then prepare themselves to integrate two businesses that might have radically different cultures.

This task is more challenging than most business leaders recognize. As executives consider possible alliances prior to a merger, they discover the limitations of traditional pre-merger due diligence exercises. In most mergers, due diligence teams led by investment bankers conduct extensive research into the value of a company's capital assets. But they pay scant attention to its human assets. Yet, often the most undervalued, underappreciated, and underdeveloped assets are the huge stores of human capital that each company brings to a marriage. These pools of talents - and how they are used - can be the key to creating a new, dynamic corporate culture, which is essential to any successful enterprise. Making sure that that new culture can be achieved may be the most important yet overlooked element of today's corporate mergers.

Recently, some acquiring companies are trying to prepare themselves. Many CEOs are going beyond crunching numbers, and are conducting an additional "human capital audit," an innovative exercise to:

* assess the managerial talent in the firm they are considering buying,

* determine whether it is possible to create a common corporate culture, and

* get a head start on making the deal work.

By thoroughly examining the state of a target company's internal culture and the strengths, weaknesses, and potential of the people who manage it and work for it, a human capital audit can provide guidance as to whether a deal is worth undertaking, and at what price. And it can help shape a game plan for steering the new corporate entity in pursuit of a unified strategy as soon as possible. Shaping the culture of a new, combined company also requires a carefully planned and executed strategy. The more...