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APPRECIATING HUMAN CAPITAL IN
MERGERS AND ACQUISITIONS
by Jeffrey L. Berger, Esq.
Jeffrey Berger
represents high tech and professional services
companies, federal contractors, and executives in employment and labor
law, business disputes, and litigation.
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In the upcoming sequel
to the film Wall Street, Gordon Gekko is released from prison to a
far different world from the one he knew. Indeed, the current focus in
mergers and acquisitions on integration of corporate cultures and human
capital would cause Mr. Gekko to squirm in his well-worn Guccis. For high
tech industries, competitive advantage and value frequently flows directly
from unique human abilities that are hard to duplicate. Employee
innovation, experience, and knowledge, fostered in a supportive work
environment, are key resources relied upon by today’s companies to provide
competitive products and services. The extent to which these human assets
are enhanced or depreciated through mergers and acquisitions may determine
their actual value to the buyer. Under our employment laws, ownership
change can open a window of opportunity for restructuring the employment
relationship; that window often closes rapidly as new management begins
operating. Thus, it is essential during the pre‑acquisition stage for both
sides to assess the value of human capital to the transaction.
Where employees play a
crucial role in the seller's value, the company must take steps to retain
them beyond the M&A process by such devices as change-in-control agreements,
stock options, and non‑competition/trade secret restrictions. Retention of
critical staff can become complicated, however, when sellers undertake staff
reduction to "spruce up" their bottom line for prospective suitors. Even
without layoffs, the specter of the unknown brought by a potential sale
frequently spawns employment law claims by employees who do not see their
future with the acquiring employer. Prudent purchasers will scrutinize the
seller during due diligence for labor and employment law compliance and
well‑structured human resource management. Thus, companies, hoping to be
acquired, undertake fix‑ups in the form of employee handbooks, overtime
compliance, and settlement of discrimination complaints, in order to present
a seemingly risk-reduced environment.
In assessing the value
of retaining the seller's employees, the buyer should determine whether it
is seeking a strategic, long‑term investment or short term profit. This is
further qualified by whether the buyer intends to integrate the new
operation into its own or leave it intact with minimal disruption to
organization and culture. If the target company is unionized, strategic
corporate planning of ownership, control, workforce continuity, and
operations integration are critical to the buyer's legal obligations. These
issues also affect whether the purchaser will be a "successor employer" that
is liable for the old company's labor and employment law violations.
Essentially, a prospective purchaser must review all aspects of the target's
employment relationship, such as recent lawsuits, employment and independent
contractor agreements, personnel handbooks, and benefit plans. Review of
trade secret and non‑competition restrictions is particularly important as a
company's competitive edge is often closely connected to the skills and
knowledge of its professionals, its technology and capture plans for new
business. Finally, the purchaser must "cost out" all potential human
resource liabilities and factor them into the deal.
Companies are now paying
significant attention to their respective corporate cultures to determine,
as an adjunct to the financials, whether the acquisition will work in terms
of retention and growth of human capital. Indeed, the path to a successful
acquisition or merger begins with gathering, analyzing, and applying this
intelligence. It may be the best way to protect and ultimately enhance
value in a merger or acquisition for the companies, employees, and their
shareholders.
© 2010 Jeffrey
Berger
The Berger Law Firm, P.C. 1825 Eye St. N.W., Suite 400, Washington, D.C.
20006.
Phone: (202) 861-1361 Fax: (202) 861-1362
Legal advice is case specific and is not intended to be provided by this article.
The Berger Law Firm, P.C. may not be held responsible for any consequences
that may arise in connection with the use of or reliance on the information provided.
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