The Value of Human Capital

Jack BergenThe term “Human Capital” is offensive to some. They see it as treating people as material objects. I hope to build a greater appreciation that the character, competence and commitment of a firm’s professional talent has a major impact on its valuation in an M&A situation.  That acknowledgement, together with other recommendations, are intended to guide buyers and sellers of PR agencies to maximize their human capital.

A Lesson Bitterly Learned

They say that failure is a better teacher than success. I’ll begin with a true story about the failure of the largest PR agency deal of its day. I won’t disclose names of the two firms or of the principals, except for one…me.  I learned a lot from my association with that failure that I applied later as a CEO of a global PR agency, the president of the PR Council and a leader of Corporate Communications and HR at two corporations.

The story begins when I was hired from GE to head the NY office of an agency – second largest in the market – that had just purchased the third largest, one of the hottest firms in town with a roster of blue-chip clients. It appeared to be a masterful strategic move, combining outstanding corporate, financial, consumer marketing and healthcare practices….and making us number one in the market.

The execution of the merger was a disaster.

Because the buyer – my new firm — was interested primarily in adding clients to its roster and achieving the number one ranking, due diligence to assess the seller’s talent base, particularly in identifying the key professionals who needed to be retained, was neglected. Nor did the seller’s executive team prepare their employees for the merger. In fact, those top executives moved to the buyer’s headquarters after the deal closed, leaving their account teams in the original office location. By the time I was hired, competitors had already started raiding the best professionals from the acquired firm. Not surprising, an exodus of clients followed. Lack of a post-merger integration plan resulted in knee-jerk attempts to stop the losses with individual deals. That reactive approach demotivated the buyer’s top professionals, causing several of them to defect to competitors.

A Blueprint for Success

The lack of attention to talent – the human capital within the seller and buyer firms – wiped out the strategic potential of that merger, as it has in too many other PR agency deals since.  Fortunately, there are also many success stories…and I’m relieved to say that what I learned from my bad experience enabled me to be part of some of those successes.

Buyers and sellers that have had successful M&A results all recognized that a firm’s value depends on three factors – financial performance, client commitment and quality of talent.  The price of entry for a selling agency is to show three years of profitable growth and a track record of client retention. While those backward-looking financial and client factors are vital, the highest valuations go to agencies that can show they have talented professionals who are ready, able and willing to continue to deliver financial performance and client growth as members of the buyer’s agency.

Seller Imperatives. If a sale is a likely future eventuality, agency owners should let their key professionals know about that possibility.  They should encourage those employees to voice their concerns and expectations, which could range from job security to career growth opportunities, compensation to work-life balance. Those discussions enable owners to discover what will motivate the professionals to contribute to the financial performance and client growth that will be essential to a future sale.  Employee feedback also will indicate whether the agency should create equity awards, such as shadow stock, to incentivize the performance of select top talent and encourage their retention.  Since buyers will be assessing the quality of the seller’s talent, owners contemplating a future sale also need to determine what kinds of coaching and development will be required for the first and second tier professionals that are the primary focus of savvy buyers.

Buyer Imperatives. Successful buyers spend as much attention during due diligence in assessing talent as they do in scrutinizing sellers’ balance sheets and client contracts.  This is an area where independent external resources can be extremely helpful. Besides providing an objective assessment of the sellers’ talent that’s not influenced by competitive or personal biases, talent advisory firms have diagnostic tools to help determine the commitment, capability and career interests of the sellers’ key professionals. Thorough talent due diligence helps buyers determine whether a firm is worthy of a premium or a discounted valuation. It’s also vital to the success of the post-merger integration process, particularly in determining how to meet the new employees’ expectations, on-board them quickly, motivate high performance and develop and retain them for a long and successful future with their new agency.

External Assistance in Optimizing Human Capital 

Bergen Partners is an Executive Coaching and Talent Development firm that supports Gould+Partners’ M&A advisory services with human capital assessment, coaching and counsel.   For agency sellers, Bergen Partners firm builds the engagement of their leaders and employees throughout the transaction, from coaching key talent to ensuring employee support for the sale. For buyers, Bergen Partners provides an assessment of the human capital valuation of target firms and assistance in assimilating and retaining key employees during the post-merger integration of the acquired firm.