M&A: Realizing Synergies in a Global Transaction

By Eddie Franco


During negotiations, the purchase price often assumes that certain synergies will be realized. However, the value of a deal and any sustainable added value is based on the accuracy of the work prior to post-merger integration, including planning for integration well in advance. Failure to plan will frequently impact negatively on the success of post-merger integration.

Every deal has its own unique set of challenges, often compounded by time pressure to get the "deal done." At the same time, business needs to continue as usual with minimal impact on productivity and employee engagement. Yet the business planners rarely if ever make any assumption that productivity will decrease for a while and that actions will need to be taken to minimize this.

Unless the deal team includes people with a broad understanding of the challenges of a global deal, the synergies are likely to be unrealistic. In addition, the terms of the Sale and Purchase Agreement will always be bound by local requirements, so whatever has been planned and carefully negotiated may not be realizable.

Share Deal versus Asset Acquisition

Many acquirers think of an acquisition as discretely stock or asset. However, in fact many deals are a combination of a share deal, where the acquirer buys the stock of the acquired company, and an asset acquisition, when the acquirer is buying assets (e.g. equipment, facilities, and products)

HR needs to understand the nature of the acquisition for each legal entity or business in each country. Under a stock deal, employment contracts continue unchanged, while under an asset deal, employment contracts will not transfer automatically in many countries (but see Acquired Rights Directive below) has bought a business but not the people. This may require an offer acceptance process.  Some countries require the buyer to maintain terms of employment, while others do not.

What happens to employees, inactive employees, retirees, employment contracts, the delivery infrastructure for HR programs and processes, and change-in-control issues, will largely depend on the deal structure at the local entity level.

The Acquired Rights Directive in the European Union (EU) and similar legislation in a few other countries gives certain employees primarily supporting a business that is transferred or sold, the right to be employed by the acquirer on the same terms of employment. In some countries the employees automatically transfer on the same terms. In others, employees can choose whether to transfer.

Because many companies assign or second employees from one company in a group to another, this can trigger differences of opinion between the buyer and seller as to whether an employee is covered by the directive and should transfer.

In some cases, the seller can use this to move "difficult" employees.  Buyers should use caution to ensure they understand who is transferring in an asset acquisition, and that they do not make plans assuming that certain employees of the buyer will not transfer without this knowledge.

For example, in an asset acquisition in Japan, employees do not transfer as part of the deal. An offer and acceptance process is required. However, if both buyer and seller are able to and want to to structure the deal as a split company transfer, employees of the transferring business become employees of the buyer on the same terms of employment.

Triggering Leaving Service Benefits

Severance liabilities may be significant and may be immediately triggered if the purchase agreement is not documented properly or in many cases, under an asset deal requiring a termination and offer acceptance process.

For example, in an asset acquisition in Brazil, employees do not transfer as part of the deal. This triggers costly termination indemnities unless carefully structured.

Note that in a number of countries, if the buyer offers employees a transfer on identical or equal value terms of employment, including prior service rights, employees may waive their entitlement to immediate severance.

Terminating Employees

Terminating employees is strictly regulated in many countries, and can lead to large severance obligations, and in some situations to reinstatement. This can also trigger the requirement to consult with or negotiate with employees, works councils, unions, other employee representative bodies, and/or Government. This can include plans to assist terminated employees for a time.

Buyers should ensure that, if their synergy plans involve layoffs or redundancies, they have included the costs of severance in the financial analysis as well as the time lead that may be needed for consultation or negotiation in particular countries.

In some countries, long notice periods may be required or typically provided. Notice periods should also be reviewed in an asset acquisition since the seller may be under an obligation to provide notice or pay in lieu.

For example, in Indonesia all employee terminations must be approved in advance by the Regional Labor Dispute Settlement Committee or the central Labor Dispute Settlement Committee (depending on the number of desired terminations).

Acquired Rights

Many countries require written employment agreements that create legal entitlements to compensation and benefits. Acquired rights may extend to undocumented programs that have been provided consistently, often interpreted as two to three years in a row. Buyers should review all plan documents to understand whether it has the right to change a benefit and in what circumstances, as well ensuring what can be done under local legislation. Separate from any rights under a transfer of undertakings, acquired rights may restrict a buyer's ability to change programs at acquisition or during integration.

For example, in Mexico, benefits may only be reduced or taken away if equivalent cash value is provided. Typically, this is done on an individual employee basis.

Equity Programs

Equity programs of the acquired company will usually need to be terminated or modified, particularly if the stock of the acquired company will no longer exist. This includes incentive plans as well as stock purchase plans. Depending on circumstances, a global or local stock plan may have to be replaced as an acquired right, or may be taken away.

The issues will be different if the stock plan is local or if it is a global plan delivering corporate stock.

Retaining Key Employees

In many cases, employees may be sitting on substantial equity that may have accelerated vesting in the event of an acquisition. There may also be change-in-control agreements and other vehicles that will make key people fairly wealthy and independent. While most sellers are reluctant to disclose every employee agreement, buyers should push to receive any executive (or key employee) agreement and to fully understand the nature of any plans they may have an entitlement to.

Retirement Savings and Wealth Accumulation Plans

Buyers are usually very familiar with the need to assess the assets and liabilities of retirement, savings, and wealth benefits, including the need to assess these under their accounting standards versus the seller’s accounting standards. However, while most countries are attempting to force or encourage employers to properly fund their plans, it is still not unusual to find unfunded or underfunded plans by international standards.

It is also fairly common to find retirement and savings plans subject to vesting provisions, either for cultural reasons or to meet local tax requirements. The seller may wish to only transfer assets corresponding to vested benefits, which become prior service liabilities of the buyer as the employee accrues service with the buyer. Due to future vesting rights, the buyer then will have to fund for the liabilities that accrue for service with the seller before the acquisition.

Many companies have established vehicles that cover these plans for all companies that it owns in a country. In the EU, some companies are also creating vehicles that cover their companies across borders.

This can result in the buyer inheriting the liabilities and obligations to pay the benefits, but with no plan vehicle. It may also complicate a transfer of assets until an appropriate plan vehicle is established. The same situation exists with an asset acquisition.

For example, in China, many savings plans exist with vesting requirements and no assets. In some cases, even employees contribute to an unfunded plan. In the Philippines, 20 or more years' vesting is not unusual.

Insured Benefits

It is increasingly common for the seller to leverage buying power by insuring benefits across different companies in the group. The result in a stock deal is that, while the buyer inherits the liabilities and the obligation to pay the benefits, it may not inherit the insurance contact.

With more and more companies maintaining that data privacy restricts the seller's ability to provide full employee demographics until or very near to close, and with headcount for transferring employees often changing right up to close, this may require some fancy footwork to ensure that employees are covered.

Ability to Obtain Group Insurance

The deal may include very small numbers of employees in a few countries. The result may be that the buyer is not able to obtain group insurance and also that insurers may not accept the liability for pre-existing conditions.

Since data privacy typically prevents the buyer from obtaining information about existing health conditions, any employee with serious long term complications may be uninsurable but nevertheless entitled to health care benefits.

In this situation, some buyers may be tempted to provide insurance cover from another country where they have a larger number of employees. Care should be taken to understand local insurance legislation, since many countries require insurance to be placed with a locally admitted insurer, resulting in questions about the tax deductibility of insurance premiums, and/or the taxability of any benefits paid out.

The deal may include very small numbers of employees in a few countries. The result may be that the buyer is not able to obtain group insurance and also that insurers may not accept the liability for pre-existing conditions.

Since data privacy typically prevents the buyer from obtaining information about existing health conditions, any employee with serious long term complications may be uninsurable but nevertheless be entitled to health care benefits.

For example, in the Republic of Korea, many insurers require at least 20 employees in order to provide group insurance. In Hong Kong, the minimum is typically 5.

In this situation, some buyers may be tempted to provide insurance cover from another country where they have a larger number of employees, or where an insurer indicates its willingness to provide cover. Care should be taken to understand local insurance legislation, since many countries require insurance to be placed with a locally admitted insurer, resulting in questions about the tax deductibility of insurance premiums, and/or the taxability of any benefits paid out.

Labor Relations Environment

Unions, works council, or other employee representative agreements should be reviewed. They may result in inherited liabilities and restrict the acquirer's flexibility after the deal goes through.

Different countries require communication, discussion, or co-determination with these bodies before the deal can close. In a few countries, this can take considerable time and effort, and in some there are legal requirements regarding the content and timing for communications with employees.

Restrictive labor laws can make it difficult to change or harmonize employment terms and conditions.

For example, a works council in Germany may have a role in negotiating any restructuring of the organization or even a proposed change in the way work is done.

Time Off

Buyers should review the liability for accrued, unused paid time off. The seller may not always accrue for this on the balance sheet, and may also permit (due to local legislation or custom) unused time off to be continuously accrued from year to year.

The country may also require an employer to provide “long leave”, an extended period of paid time off after a period of service. The buyer will inherit this liability.

For example, in India, accrued, unused paid time off is considered a defined benefit, and must appear in the accounts.

Data Privacy

Data privacy has become an increasing problem in recent years, with the seller’s legal and HR groups reluctant to provide employee data that the buyer requires to properly evaluate a deal.

Not only have many countries now enacted data privacy regulations, but many multinationals have enacted global privacy regulations in order be able to transfer restricted data across borders.

One effect is the growing reluctance to transfer employee data to a potential buyer until just before close. Confusion about what the action requirements are and differences in local regulations typically result in varying amounts of information being provided ahead of close.

HR Operations

HR operations can be among the most challenging of HR activities in a transaction, often involving multiple cross-functional cross-organizational relationships (e.g., HR Information Systems, payroll, general ledger, and benefit providers). Since many organizations now manage services through a corporate shared services function, they must be separated out.

The buyer may have adequate HRIS, payroll, and other systems to enable it to “stand up” the acquired organization at close. However, if it does not have operations in the countries being acquired, or if its own systems are not compatible with the programs of the acquired organization, care will be needed to ensure that HRIS, delivery vehicles, and technology interfaces will be functioning at close.

These transitions can be very complex, especially where the seller has customized systems to specifically meet its needs. Successful transitions often require long lead times (12-18 months) and may therefore require transition services agreements (see below).

Increasingly organizations are pursuing new HR operations solutions (e.g. regional ang global outsourcing platforms, cloud based vendors, etc.)

Managing the Linkages

The deal team needs to identify the linkages between the various work streams involved in the deal, and ensure that there is a consistent and accurate dataflow between them. Examples of HR linkages are:

  • Legal: legal structure for the spin off of each entity in each country
  • Legal: employee representation and consultative bodies and requirements
  • Legal: legal filings required
  • IT and Payroll: interfaces with payroll deductions and third party administration systems
  • HR: organization design issues to standup the entities
  • Finance: implications of liability/asset transfers
  • Legal and Communications: employee communications and documentation, including offer process as needed

Globally Mobile Employees

Expatriates and other mobile employees require special care. In many deals, “stealth” expatriates exist where the parent company is not aware of individuals on assignments that do not transition through the normal mobility programs. These people may appear to be on local terms, but with additional commitments or promises that need to be understood.

Not all companies strictly follow requirements for work permits, residence permits, and other legal requirements to work in a country other than their own. At the same time, many Governments are now spending more effort in identifying such people; if these employees transfer, the buyer is inheriting the risks and liabilities.

The seller may have an umbrella retirement plan, whether formal or not, that results in the unwary buyer inheriting liabilities without assets or compensation.

The U.S. taxes its citizens and resident aliens on worldwide income whether or not resident in the United States. As a result of expatriate tax equalization policies, the employer typically pays the additional employees’ taxes in the year after the income is earned. This creates income for an employee in the year of payment. The entire expatriate process will then result in “trailing liabilities” for all expatriates – which the buyer may not be aware of. For high paid individuals, the amounts can be substantial.

The legal employment status of an expatriate can take various forms. For example, expatriates may remain employees of the legal entity in their home country and be assigned to the host country legal entity for the duration of their assignment; be transferred to a global service entity in the same or a different country than their home country and then be assigned to the host country entity; be transferred directly to the host country legal entity. The different agreements pose different issues for the transition process.

Transition Services Agreements

Because of the problems with having infrastructure, plan vehicles, HRIS, payroll, and technology interfaces functioning at close, some sellers will agree to a Transition Services Agreement (TSA) under which the seller continues to provide pay and benefits to all or some sets of transferring employees for an agreed period of time (typically one to three years) subject to any legal restrictions.

Because of legal concerns, some sellers will not consider a TSA, putting pressure on the buyer to ensure it can set up the necessary infrastructure on time.

With a TSA, it is common for the seller to mandate that if one program goes, everything will go. This is because the seller will not want to program its interfaces to transfer say employee contributions to the buyer’s new plan; or to have the buyer’s payroll interfacing with its programs.

Ironically, where small numbers of employees are transferred, it can be significantly cheaper to maintain a TSA, and this resolves the challenge of covering very small numbers of employees.

Points to Consider

  • There may be current or pending employment-related lawsuits. Class action suits can be particularly costly. In many countries, the legal system favors employees.
  • Documents may be posted in local languages; creating issues for an unwary buyer without time and resources to understand what obligations it is taking on.
  • Most sellers focus on their headquarters or largest country, with inadequate information provided about its operations in other countries. The deal maker’s focus may also be on that country, and with limited time to get a deal finished, it may put pressure on HR to ignore or limit the review of smaller countries.

Planning for Integration

There are six key questions that any organization needs to answer to guide its approach to post-merger integration:

The buyer should also consider the main purpose of the acquisition. Unless the acquisition is opportunistic - buying a business at below fair market value-  the buyer will have a strategic purpose or purposes in mind. Some examples are:

  • Increase sales by providing access to new markets, geographic or demographic.
  • Increase sales by transferring skills between the buyer and the acquired company.
  • Reduce costs through economies of scale, typically through shared activities that impact purchasing, facilities, equipment, distribution, and people.
  • Buy at fair market value, but bring its own organization’s general management discipline and capabilities to increase value. The key synergy is obtained through process improvement.

Each of these will have different implications for the approach to integration and the integration process.

Other Questions to Consider for Integration

To what extent would letting the acquired organization stand-alone help reduce costs though economies of scale? Would it be better to let the business unit manage the Governance, or would making decisions at the enterprise level deliver better results?

Would leaving the culture of the acquired organization remain as-is facilitate using the buyer’s general management discipline and capabilities to increase value? What level of stakeholder involvement would be necessary to change the acquired organizations business processes?


Planned synergies can be easy or can be difficult to identify, but are typically hard to achieve. Consider the following examples set against the typical issues and questions above:Unless very well executed, synergies may not be achieved, resulting in headcount cuts as the “easiest” way to satisfy the demands of Wall Street and other analysts to meet expected synergies. As noted above, this too has a financial cost as well as a cost on the morale of employees.

The early euphoria of a deal, which we often see when there is a divestiture from a multi-business organization to a buyer in the same business, can quickly disappear if employees are not sure what the transaction means to them. William Bridges identifies three phases of a transition – the change event or ending, the neutral zone (represented between the two sets of dotted lines the below chart ) and the new beginning.

Some employees will zoom from the ending to the beginning very quickly, particularly management who understand the rationale of the deal and see a benefit from it. Some may transition very slowly, and others will wonder endlessly in the neutral zone, eventually withdrawing while perhaps remaining employees. Everyone has his/her own pace.

Since the goal of the deal is to realize synergies while as much as possible keeping the momentum of business as usual as much as possible, it is important to keep an eye on employee’s transitions, otherwise there is a danger that productivity will dip, ruining the hard work and planning that went into the transaction in the first place.