New Capabilities a Major M&A Driver in Southeast Asia

Far more so than elsewhere in the world, more than half (52%) of companies in Southeast Asia cite the need to acquire talent and new capabilities as their key reason for undertaking M&A activity, according to a new survey by Towers Watson.

However, creating the ideal employee retention strategy remains elusive for Southeast Asia companies that have recently completed either a merger or acquisition and exercised employee retention agreements, with the result that such deals tend to fall short of expectations.

More than half (59%) of Southeast Asia respondents indicated they retained a high percentage (over 80%) of employees who signed a retention agreement, over the course of the full retention period. However, less than one-third (29%) said they retained that same percentage one year after the period expired.

The primary factor for employees who left before the end of the retention period centred on their concern with the changing organizational culture (75%). Their discomfort with the new culture was far greater than that of their peers globally (48%).

“Far more so than elsewhere in the world, more than half (52%) of companies in Southeast Asia cite the need to acquire talent and new capabilities as their key reason for undertaking M&A activity," said Massimo Borghello, Towers Watson’s head of M&A services in Asia Pacific.

"Yet, given their poor retention rates post-deal, it’s reasonable to deduce that acquirers fail to get the most out of such transactions."

Borghello notes that companies involved in M&As need to understand the organizational and/or cross-border cultural implications of the deal, build employee engagement and work individually with key employees as early in the deal process as possible.

"Retention agreements are useful in that they offer a way to buy time, but the time must be used productively and wisely,” adds Borghello.

Survey participants in Southeast Asia stressed the importance of identifying candidates who are most vital to the deal and eligible for retention agreements. Ability to affect the success of the transaction and high-potential status were the main factors.

Interestingly, however, unlike elsewhere in the world, companies in this region tend to focus more on job title (41%), reporting level (41%) and business unit (37%). It suggests these organizations are focusing on potentially ineffective selection criteria.

Can make or break a deal

“Retaining the right people can make or break a deal. After all, human capital is very often a company’s most important asset. Retention starts with properly identifying the talent, roles and functions most critical to the success of the transaction,” said Borghello. “It’s clearly more efficient to take the steps necessary to keep key talent in place than it is to find, hire and integrate new employees during or just after an acquisition.”

Seventy-four percent of the respondents said that engaging with the target company’s senior leadership was the most useful source in drawing information about which individuals should sign retention agreements.

Getting senior leadership on board to sign retention agreements as early as possible can help keep executives engaged throughout the entire process.

More than two-in-five (42%) disclosed that they asked senior leadership to sign retention agreements before the transaction’s initial signing, while 21% did so at the initial signing.

“Retention should start with executives,” said Borghello. “It’s critical for them to be completely on board and aligned with the goals and strategies of the acquisition. Their behavior is essential to the retention and engagement of employees. They can’t be distracted by concerns about their future employment, so it’s helpful to provide them with a clear personal stake in the success of the new company.”

Higher budget

The survey findings show that companies in Southeast Asia set aside considerably more budget for retention planning than their global counterparts. More than one-third (38%) have retention budgets that account for more than 5% of the total transaction cost, in contrast to just 20% for companies globally.

When considering retention budgets, most participants said their companies aimed for a sweet spot that encouraged retention by an optimal number of key employees, not the maximum number of employees, so individual rewards would be most meaningful to those retained without overspending in the aggregate.

Not surprisingly, cash bonuses were the most common type of financial award used in retention agreements, at 76% for senior management and 80% for other employees. But somewhat strikingly, high-retention companies used cash bonuses in retention agreements far more often than low retention companies.

Towers Watson conducted a similar retention survey two years ago and found that only 1% said their companies offered retention agreements based purely on performance, whereas today that number stands at 14% for senior leadership and 16% for other employees.

The new survey found that companies typically use retention agreements that feature a combination of pay-to-stay and pay-to- perform metrics for senior leaders, while utilizing purely time-based agreements for close to half (48%) of their other employees.

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