Keeping people in the picture (Corporate Dealmaker)

Keeping people in the picture

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It's easy to point to obstacles that Australian beverage company Foster's Group Ltd. faces as a result of buying Aussie wine producer Southcorp Ltd. for $2.5 billion in June 2005. Though the purchase brought some coveted premium brands, Foster's CEO Trevor O'Hoy paid a rich price in an unfriendly deal for a troubled company. Foster's wine list now boasts 60 brands, but some need major repair, and an Australian grape glut is squeezing profits. Though Foster's shares have risen since August, it's not clear whether investors are responding to improved performance or takeover rumors. (In October, O'Hoy told shareholders that Foster's had not been approached by any potential acquirers.)

At the same time, it's hard not to be impressed with what Foster's has already accomplished with Southcorp. This was a deal Foster's felt it had to make as it fought for the top spot in the consolidating global wine industry. O'Hoy and his team went into it promising major savings -- a reported $350 million through 2008 -- and are ahead of schedule to meet that goal. "There were a huge amount of synergistic opportunities, better than other people who were no doubt running their eyes across the Southcorp books," says Tony Weston, who currently leads Foster's global talent and leadership development effort. "The Southcorp brands were steeped in tradition but needed some love and attention. We felt we had the capability to grow those brands and get them back to where they were previously."

Love, attention -- and huge synergies? The combination sounds unlikely. But in truth, the still-unfolding saga of Foster's and Southcorp is an extreme but far from unique example of one of the most basic and persistent challenges corporate dealmakers face: getting the people issues right amid the larger swirl of strategic and financial concerns. With Southcorp, Foster's set itself the delicate task of retaining key talent while also reducing head count by about half of Southcorp's 2,500 employee work force. As part of the integration, Foster's would be blending sales and marketing teams, expanding Southcorp brands into new markets, and completely transforming and relaunching its prized but troubled Rosemount Estate brand, from bottle design to varietal blend -- all while managing a global restructuring of Foster's itself.

Foster's couldn't afford to lose those Southcorp employees with the knowledge and expertise to help achieve those objectives, and it took several innovative steps (see below) to keep and motivate them. "We all have a responsibility to grow these brands," says Weston, who is based in California and at the time of the acquisition was Foster's vice president of human resources, North America. "For me, it's continuing to retain and develop the talent we brought in. If we have turnover or bring in lesser-quality talent, that's going to affect our ability to grow our business."

Though it's not a big factor in every deal, talent retention is perhaps the highest-profile HR issue that dealmakers encounter. David Monderer, for one, says it often shaped integration decisions in the numerous transactions he executed to take Eastman Kodak Co. from its legacy business into the digital world. "A subsidiary has to maintain its own infrastructure, and as a result, they're very expensive to operate," says Monderer, who retired as Kodak's head of corporate development in April and is now a consultant. "Typically, if we kept it as a sub, we did it to keep a separate HR structure. If people were compensated in a completely different way, that may be a key reason for keeping it a sub."

You bought it, but they have to run it
Acquirers routinely take account of pension liabilities, union contracts, executive comp and other high-dollar human resources issues. Retention of top talent may loom large as well. But that still leaves a host of operational-type HR issues that dealmakers must manage if the business is to perform well post-close. "You clearly have to have a good business rationale, and you have to negotiate the right price," says Moira Donoghue, principal and Northeast leader at Mercer Human Resources Consulting. "But you only create or destroy value by how you operate the business you're acquiring. If you wait until post-close to start thinking about people, you've created a delay in realizing that value." Three key questions help keep these operational issues near the top of the agenda:
Who do you want to keep?	Your target may have more key employees than you realize. Competitors will woo them, so you'd better figure out who they are and do likewise. "You need to identify critical groups of people based on the business model and what you want to do," says Dave Kompare, who co-leads the corporate restructuring and change consulting practice at Hewitt Associates LLC. "If you look at the different lines of business in the target, you can see the gems and the dogs and then focus your attention on pivotal employees in the best-performing businesses."

What do you want them to do?	If employees in the acquired business will need training on new systems, the time and resources needed to accomplish that must be factored into performance targets. Elizabeth Fealy, Kompare's partner at Hewitt, recalls working on a bank merger in which the buyer was projecting $200 million in synergies within four months of close. Some of that would be generated by the companies' sales teams cross-selling products, meaning the teams needed to be trained and ready to hit the ground selling soon after close. That wasn't going to happen unless the cost of that training was covered, and there was a plan for it in place on day one.

How do you get them to do it?	You can get acquired employees focused on the objectives of the combined organization by quickly identifying "opinion leaders" inside the target and selling them on the deal. These are the employees others seek out when big changes are under way and, as a result, hold a certain amount of sway. "Engaging them and their ability to influence other people can be essential for continuity," says Tony Weston, who heads global talent development for Foster's Group Ltd. and employed the strategy in its acquisition of Southcorp Ltd. "Then you can decide whether they are people you want from a longer-term talent perspective."

Source: Suzanne Stevens, Corporate Dealmaker illustrations by Art Valero

But the list of deal-related HR issues is a long one -- longer, in fact, than some dealmakers realize. Matters such as pension liabilities, union contracts, executive compensation and benefit costs can all have material impact on the price paid for an acquisition, and sophisticated deal teams routinely consider them early in the deal cycle. What they may not be paying enough attention to, HR professionals say, are a host of operational issues that can also eat into financial performance if not planned for. These include costs related to organizational restructuring, labor and benefit regulatory compliance, severance packages and retention and employee training.

What many deal teams fail to consider, says Elizabeth Fealy, who co-leads the corporate restructuring and change consulting practice at Hewitt Associates LLC, is the year-one strategy of the business and the resources that will be needed to execute it. For instance, what is it going to cost to transfer acquired employees to the new benefit structure, and how quickly do acquired employees need to be trained on new systems?

"These are the exact issues that don't get significant attention when setting the price, but that are now going to govern whether the deal is a success or not," says Fealy. "Some of our most converted clients are those that realize they didn't miss a liability but underestimated what it was going to cost to integrate the business, and the margins they thought they were going to get were way smaller than anticipated."

Yet it's not necessarily easy to give HR issues all the attention they deserve when there's a great deal of strategic change going on. That's another reason why the way Foster's handled its high-stakes Southcorp acquisition is worthy of study.

In the two years prior to the acquisition, there were radical shifts in strategy and structure under way at Foster's, driven largely by its underperforming wine business. With beer sales turning flat, the Aussie brewer got its first taste of wine in 1996, acquiring Australian producer Mildara Blass Ltd. for $500 million. But it was the $1.5 billion acquisition of California-based Beringer Wine Estates Holdings Inc. in late 2000 that vaulted it into the top tier of global wine producers. After two years of solid results, though, an oversupply of California grapes and the steep discounting that followed seriously cut into performance of Foster's premium brands. Earnings for its North American division alone were off 41% in the second half of 2003. Two years of aggressive consolidation and divesting of wine and beer assets followed. The company has rebounded somewhat -- a good thing, as wine now accounts for about half of Foster's business -- but growth in wine remains stagnant, and fundamental industry challenges remain.

Perhaps this environment was not the best one in which to pursue a big acquisition, particularly when the target had major operational issues of its own. A botched integration in 2001 and a failed discounting strategy had set Southcorp on a downward spiral from which it was still struggling to recover. The company lost nearly $1 billion in 2002, the Rosemount brand was sinking fast and after heavy pruning of the Southcorp portfolio failed to turn things around, the company's CEO was fired.

Still, with premium wines today making a comeback, Southcorp's high-end brands -- including Rosemount, Lindemans and Penfolds -- proved too tempting a target to ignore. Foster's charged ahead with what turned out to be a lengthy and contentious pursuit. The Southcorp board soundly rejected Foster's initial offer in January 2005, saying it didn't "adequately reflect the strategic value of the company." It was six months before Foster's acquired the shares necessary to take control.

The previous years of upheaval may have led some Southcorp employees to want a change. But that still didn't mean that retaining Southcorp's top talent was going to be easy. Competition for talent, particularly for individuals with strong customer relationships and marketing expertise, is fierce in most packaged goods industries, but maybe even more so in wines, says Vic Motto, founder of wine consultancy MKF Group LLP and CEO of wine-focused investment bank Global Wine Partners LLC.

"People come from outside the industry, and the learning curve can be steep. Wine is a sensory product. It's a cultural product. It has to be marketed in a way that's compatible with that, not with created attributes and coupons and things you might see with laundry detergent," says Motto. And certainly on the winemaking side, consistency is important. "If you have someone who's made 20 or 30 vintages and you replace him with someone who's seeing the grapes for the first time, you lose something."

In selling the Southcorp acquisition to shareholders and analysts, O'Hoy laid out a strong case for folding Southcorp brands into Foster's own 50-plus brand portfolio. Along with the millions in synergies, he said the deal would provide a more diversified earnings stream and would be earnings-per-share accretive within two years. Less than 30 days after the company made its initial bid in January 2005, O'Hoy launched a radical restructuring that anticipated the Southcorp integration and realigned Foster's geographically. The plan called for individual sales reps to cross-sell beer, wine and spirits; that would necessitate a retraining of the global sales force, which is ongoing.

But first, Southcorp -- and its talent -- had to be brought into the Foster's fold. Shortly after the January bid, senior HR executives from Foster's began working on people-related issues. A corporate-level HR executive reported their progress to the deal team, which was then able to use the information to determine realistic operational goals for the combined organization and shape the bidding.

Talent retention was the priority. HR teams in Australia, North America and Europe began working to create a prioritized list of Southcorp employees the company hoped to keep once the deal was finalized. With no access to Southcorp employees, the research wasn't going to be easy. But Foster's didn't think it could afford to wait until the battle was won and the deal was closed before getting to work on this crucial project.

"Being slow to make decisions can be dangerous, particularly around talent," says Weston. "Whenever an organization is going through change, the vultures are there. There are executive search consultancies who want to get people on their books, and employees are more open to talking with them to get a sense of their worth."

If they couldn't speak directly with Southcorp people, Weston and his HR colleagues decided to do the next best thing: speak to former employees, who could give them a sense of Southcorp culture and the company's brightest stars. "But herein lies the greatest risk," says Weston. "A lot of what you get can be very subjective and based on perceptions. It's not until you can actually get into the organization after the acquisition that you can validate those perceptions."

Foster's and Southcorp finally reached agreement in late April of 2005, going on to close the deal in June. Weston and the HR teams spent the first 90 days post-closing validating their earlier work, and they found that most of the employee data they had collected was accurate. They also launched an aggressive communication campaign to let employees in both companies know that the objective going forward was to build an entirely new wine business using the best people available.

"An important part of the messaging with Southcorp employees when we spoke to them in the first instance was to say this is not going to be a culling experience," says Weston. "This is going to be about bringing the best of what Southcorp can bring to the organization and combining it with the best we currently have. Prior to that, I think that there had been a feeling within both Southcorp and Foster's that most of the people to lose their jobs would be Southcorp people."

That notion was put to rest almost immediately, when Southcorp's Scott Weiss, who had headed the company's Americas division, was appointed to a similar post at Foster's, displacing the existing manager. The decision was made after a thorough assessment of the candidates, says Weston, and the selection of Weiss reinforced the message that every employee had a shot when there were overlapping jobs.

Southcorp employees, including the senior IT, HR and brand managers, were also recruited onto the integration team once the deal closed. So was the Southcorp CFO, who participated even though it was pretty clear he likely wouldn't have a place in the combined organization. "We committed to him to keep him on for a period of time and try to find him an opportunity," says Weston. "We agreed later on that that wasn't going to be the case."

In the end, Foster's was able to make most personnel decisions within six months of close. About half of Southcorp employees stayed on in the combined organization, and Foster's was able to retain most of the employees it identified in its preclose research.

Facing some unusual challenges, Foster's came up with its own set of solutions to the problem of weaving HR issues in with financial and strategic considerations. What do other acquisitive companies do? One of the most common solutions is a dedicated HR expert on the corp dev team.

That was the approach chosen by Monderer, who had a full time HR specialist on his M&A team for about the last 10 years of his time at Eastman Kodak. That person would typically have HR experience at the business unit level, including significant benefits experience. After joining the corp dev team, he or she would work closely with the HR specialist in the business unit making the deal, as well as with HR people inside the target.

Eastman Kodak's corporate HR department used the appointment as a career development tool, rotating specialists from the businesses through corp dev every two or three years. Prior to having a dedicated HR person, Monderer and his deal team would address HR issues using the functional specialist in the relevant business unit. That approach, says Monderer, failed on two counts: The HR person typically had no M&A experience, and he or she still had daily responsibilities to the business.

Sometimes even a dedicated HR person isn't enough. Cross-border deals, for example, can present complex issues related to labor and benefits. Rules and regulations as well as employment cultures vary greatly around the world. In Asia-Pacific countries, for instance, there is a strong climate of lifetime employment, while in Europe strictly regulated benefit programs could end up costing a company more to operate than those in its U.S. businesses. And, certainly, there are labor laws that, if violated, can cripple a deal. Divestitures pose their own set of problems.

"We did a lot of deals in Europe where work councils or trade unions are a factor," says Monderer, who relied on local counsel in cross-border deals. "Every country is different so you need to know the rules. In some deals, you had to announce ahead of time that you were looking for buyers. When you do that, you can have a lot of disruption of labor including work stoppages. You can imagine what that would do to your deal. You have to plan for things like that."

No matter the nationality of the employees affected by a deal, there is one reaction that's universal: Achieving the benefits laid out in the business case is not going to be top of mind for employees inside the target organization, at least not in the early stages. "The first thing you're going to get is 'what does this mean for me?'" says Monderer. "'Is my salary going to change? What about my benefits?'"

But then, why would it be otherwise? Balancing competing interests is a big part of being a corporate dealmaker -- and the experienced ones know you can't serve shareholders by neglecting employees. At a minimum, employees need to feel they're being treated fairly in a deal. And often, they're the key to making the transaction a success.

Foster's Group ended fiscal 2006 on a positive note. Profits were up 27% to $885 million, buoyed by the sale of about $1 billion worth of its international beer assets and the addition of the Southcorp brands. Still, it's too soon to tell if the acquisition will be a success. O'Hoy says it could be months before his ambitious "multibeverage" sales strategy begins to pay off.

But say this for Foster's: Whatever the challenges ahead, the company has done its best to field a strong team to meet them.

You bought it, but they have to run it

Acquirers routinely take account of pension liabilities, union contracts, executive comp and other high-dollar human resources issues. Retention of top talent may loom large as well. But that still leaves a host of operational-type HR issues that dealmakers must manage if the business is to perform well post-close.

"You clearly have to have a good business rationale, and you have to negotiate the right price," says Moira Donoghue, principal and Northeast leader at Mercer Human Resources Consulting. "But you only create or destroy value by how you operate the business you're acquiring. If you wait until post-close to start thinking about people, you've created a delay in realizing that value."

Three key questions help keep these operational issues near the top of the agenda:

Who do you want to keep?
Your target may have more key employees than you realize. Competitors will woo them, so you'd better figure out who they are and do likewise. "You need to identify critical groups of people based on the business model and what you want to do," says Dave Kompare, who co-leads the corporate restructuring and change consulting practice at Hewitt Associates LLC. "If you look at the different lines of business in the target, you can see the gems and the dogs and then focus your attention on pivotal employees in the best-performing businesses."

What do you want them to do?
If employees in the acquired business will need training on new systems, the time and resources needed to accomplish that must be factored into performance targets. Elizabeth Fealy, Kompare's partner at Hewitt, recalls working on a bank merger in which the buyer was projecting $200 million in synergies within four months of close. Some of that would be generated by the companies' sales teams cross-selling products, meaning the teams needed to be trained and ready to hit the ground selling soon after close. That wasn't going to happen unless the cost of that training was covered, and there was a plan for it in place on day one.

How do you get them to do it?
You can get acquired employees focused on the objectives of the combined organization by quickly identifying "opinion leaders" inside the target and selling them on the deal. These are the employees others seek out when big changes are under way and, as a result, hold a certain amount of sway. "Engaging them and their ability to influence other people can be essential for continuity," says Tony Weston, who heads global talent development for Foster's Group Ltd. and employed the strategy in its acquisition of Southcorp Ltd. "Then you can decide whether they are people you want from a longer-term talent perspective." - Suzanne Stevens

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