Human capital in the process of preparing for a transaction

Human capital is one of the key elements determining the value of a transaction. Prioritising it within a company’s value-building strategy is essential for establishing and enhancing the unique value offered to employees. This requires a comprehensive and precise HR due diligence—both in the phase of identifying and assessing human resource risks and from the perspective of consciously shaping the culture and values of the company within the new organisation.

Transformational transactions
In the post-pandemic landscape, companies are facing numerous challenges due to the transition to hybrid work, evolving customer interaction models, rapid technological advancements, geopolitical instability, and continuous economic shifts. Consequently, management teams are focused on transforming their businesses to ensure sustainable, long-term growth. One strategic approach to development is through mergers and acquisitions (M&A), which involve changes in the company’s ownership structure. These transactions are typically aimed at business growth, such as expanding operational scale, enhancing competitive market positioning, or significantly increasing revenue. When these activities result in the acquisition of new markets, supply channels, or operations that fundamentally alter the fully integrated organisation, they are considered transformational transactions.

Transformational transactions accounted for up to 54% of all transactions in the decade leading up to the pandemic. However, the effective integration of these transformed organisations was often challenging, primarily due to neglecting the human aspect of integration and insufficient investment in process improvement. Consequently, by 2019, the share of transformational transactions had declined noticeably to 19% of all transactions. In 2022, there was a significant rebound, with the share rising to 48%. In 2024, the share of M&A transactions continued to grow, increasing by 7.3% compared to the previous year.

However, to achieve the objectives of a successful transaction, companies should prepare for potential reorganisation even before deciding on changes. Mismanagement of organisational culture shifts, staff turnover, retention of key personnel, or workforce reductions due to mergers can hinder integration and directly affect financial outcomes. Therefore, it is essential to prioritise the human factor throughout the entire process.

Value Creation Plan, Employee Value Proposition
One of the processes where the human factor should be considered before the transaction is the development of a Value Creation Plan, which captures the company’s full potential at the early stages of the transaction. This involves a comprehensive analysis of all aspects of the company and a strategy for future business growth. The Value Creation Plan is a strategic document that outlines how the investor plans to achieve profit from the business venture. It serves as a roadmap for companies to identify, create, and maximise value from available resources. Value Creation Plans offer a holistic view of prioritised initiatives or key actions—opportunities, gaps, internal and external resources, clear responsibilities, operational and financial metrics, and management frameworks—necessary to fully realise the transaction’s potential.

Long-term, sustainable value creation requires leading integration practices and a transformational mindset.

For a transaction to succeed, it is crucial to consider the value of human capital. This importance is highlighted by a global PwC survey, which found that 82% of transactions failing to deliver expected benefits experienced a workforce loss exceeding 10%. A study by MIT Sloan School indicates that, on average, 34% of employees from acquired companies leave within the first year, compared to 12% of directly hired employees. Additionally, a 2024 WTW survey revealed that only a quarter of European respondents track retention metrics until the end of the retention period to evaluate their employee retention strategies, and a mere 8% continue to monitor employee behaviour after the retention offer expires. The lack of such measurement means many respondents cannot accurately assess the effectiveness of their retention efforts or determine the return on investment.

Defined Employee Value Proposition
More than half of respondents anticipated that at least 80% of senior executives and other full-time employees would remain with the company by the end of the retention period. However, only a quarter of respondents actually monitor this.

This percentage decreased in both groups one year after the retention period ended. The most frequently cited reasons for employee attrition during transactions include discomfort with the changing organisational culture and misalignment with the new company’s direction. Some respondents also noted dissatisfaction with their new role or manager. These factors create uncertainty among employees, leading to a higher risk of employee loss.

When companies focus on developing a growth strategy, it is crucial to not overlook the value of their employees, who play a significant role in achieving business goals. Creating a structure and culture that strengthens, integrates, mobilises, and engages employees is a critical element of success.

This not only impacts the retention of key employees and talent or the development of an Employee Value Proposition (a package of specific features and values that unite the team and offer a unique proposition to employees) but also, most importantly, the financial results of the organisation. We forecast that companies with a defined Value Creation Plan and Employee Value Proposition significantly increase their chances of profitability.

HR due diligence
The challenges companies have encountered in recent years necessitate a shift in their approach to managing human capital. From completed transactions, we know that a crucial step is to review the acquired company’s practices as part of the HR due diligence process. Assessing the company’s human resources management practices allows us to evaluate how well the organisation supports its employees, who are the driving force of the business. This process involves examining the human capital to determine the company’s stability and reputation in the labour market, which is strategically important in a changing labour landscape.

During client interviews and in the context of acquisitions or mergers, we often hear about a ‘strong culture’ and ‘our values’. However, these concepts are not always clearly defined or easily articulated within the company, even though they are simultaneously felt and noticeable.

PwC research indicates that 57% of investors reported that cultural issues impeded the creation of value from the transaction.

Therefore, a broader and more comprehensive approach to the human aspect, including cultural integration during the due diligence stage, is crucial for effective integration.

In practice, HR due diligence projects have revealed irregularities stemming from process discrepancies at the as-is stage, posing significant risks to the transaction’s success. These include errors in tax or social security declarations, risks associated with contract work or B2B collaborations, and cultural misalignments or lack of identification with the company. During a transaction, the risk of not retaining key employees is very real. This is especially challenging in the IT sector, where the loss of specialists leads to a loss of revenue, and efforts to improve employee motivation and engagement are still largely reactive.

Human capital as the engine of transactions
Building value around human capital is essential in preparing an organisation for a transaction. Emphasis should be placed on quantifying human costs and organisational efficiency and determining their impact on the transaction’s value. This includes identifying key employee groups with skills critical to the company’s development or essential professional functions planned for specific stages of integration. Effective employee retention tools go beyond bonuses. Employees value opportunities arising from the acquisition, such as career development through internal rotation, knowledge exchange, an expanded client portfolio, and knowledge transfer. Additionally, continuous monitoring of factors like leadership behaviours, cultural change, and communication methods from both management and HR teams is crucial. Companies must also identify risks related to organisational and contractual inefficiencies before they impact the transaction’s success. Assessing people’s potential and carefully planning actions in this area will help achieve post-transaction goals.

Sources:
https://www.pwc.com/us/en/industries/financial-services/library/building-a-valuation-creation-plan.html
PwC Creating value beyond the deal, global survey among 600 corporate managers
https://www.financierworldwide.com/ma-challenges-employee-engagement-and-retention
WTW, 2024 M&A Retention Study

Katarzyna Komorowska, partner, PwC, People  Organisation
Katarzyna is a PwC partner and leader of the People & Organisation practice, with 20 years of professional experience in tax and HR consulting. She possesses extensive expertise in HR, particularly in people development and talent retention. As a certified Change Management APMG expert, she also supports PwC clients in navigating complex change management initiatives.

Katarzyna has spearheaded comprehensive projects focused on transforming HR processes. She has played a key role in the development and implementation of effective remuneration systems for managers, expatriates, and local employees, including long-term incentive plans. Her experience covers leading projects in HR process integration and restructuring, with a particular emphasis on optimizing employment costs and developing and modifying compensation systems. Katarzyna has extensive knowledge of market trends and practices and has worked with a large number of clients in Poland.
At PwC, Katarzyna is recognized as an exceptional leader and role model.

Izabela Niewirowska, manager, PwC, People & Organisation
Izabela is a distinguished expert in HR strategy, organizational culture, and global HR practices and processes. She has co-developed model alignments to optimize structural efficiency and, from an employee perspective, she has co-created a tailored Employee Value Proposition (EVP) model to enhance the Employee Experience. Izabela has also played a pivotal role in M&A projects, managing the HR component from due diligence through to integration with acquired entities. Her expertise extends to effective conflict management, the implementation of best practices, and the precise identification and monitoring of areas for improvement.

Izabela holds the CoachWise certification, qualifying her as a professional coach, and is also certified in Crisis Intervention by the ARCAN group, pioneers of this approach in Poland. Her extensive experience includes over 20 years in the international business environment and serving as a long-standing board member of the Canadian Chamber of Commerce. Izabela is a graduate of SWPS University, where she an earned honours degree in social psychology.