Research suggests that companies prioritising talent assessments during transactions are 30% more likely to meet their strategic objectives than those that do not.
Global markets are finally exiting a period of prolonged inflation with the long term impact on interest rates still being felt. 2024 saw global deal volume fall by 17% while the overall value of deals increase by 5%. The total value of Private Equity ‘dry powder’ (capital not deployed on investments) increased to an eye watering $2 trillion at the end of 2024, with the money amassed in 2020 and 2021 now facing increased pressure to be invested in 2025. All this indicates continued caution from investors but the impetus to the ‘right deals’ continues to increase and the stakes higher than ever.
In this rapidly evolving landscape of mergers and acquisitions (M&A) and divestments, the significance of leadership assessments can therefore be a critical success factor. As organisations grapple with the complexities of integrating or disentangling businesses, a keen understanding of leadership potential becomes essential. These assessments will not only enhance operational continuity but also position organisations for sustainable growth and a competitive edge in the market. This article is the first in a series that will examine the critical role of assessing leadership potential and the optimal timing for such evaluations in the deal lifecycle.
Leadership assessments serve several critical functions during M&A and divestment transactions:
Identifying Key Talent Potential: A nuanced understanding of existing leaders' potential vs current capabilities enables organisations to pinpoint key talent that can drive the success of the merged or divested entity in the future. This is particularly vital in these agile environments where adaptability is paramount. These psychological based methodologies help you to go beyond the focus on current capabilities, offered by many organisations to enable you to predict how these people will perform in these future scenarios.
Facilitating Cultural Integration: Cultural alignment is a significant determinant of success in M&A transactions. BCG highlights that assessing leadership potential can yield insights into leaders' ability to navigate cultural differences and foster a cohesive environment post-transaction (BCG, 2019). Leaders who can bridge cultural divides are indispensable for ensuring smooth transitions.
Enhancing Decision-Making: Leadership assessments inform decision-making regarding leadership appointments and organisational structure. The Economist posits that a clear understanding of leadership potential allows organisations to make informed choices about who should lead the new entity or manage the divestment process (The Economist, 2020). This strategic alignment is crucial for achieving desired outcomes.
Retention and Engagement: Executives see talent retention as the second-biggest contributor to deal success. And with record numbers of employees actively job searching, the challenge is getting even more critical as many industries face a talent shortage. (Bain and Co, 2022) This research shows that the most successful Acquirers are taking this more robust and creative approach to people diligence, asking who is “mission critical” and identifying key players across three categories:
Who is mission critical today? Who drives the day-to-day success because of their expertise, and who is critical in the near-term to ensuring continued performance and supporting the integration?
Who is mission critical tomorrow? Who can deliver the capability spikes needed to realise projected outcomes?
Who are the true people influencers? Who do people listen to, and who will likely take others with them if they leave?
Optimal Timing for Leadership Assessments
The timing of leadership assessments is critical in the deal lifecycle. Key phases where assessments can add significant value include:
Pre-Transaction Phase: Conducting leadership assessments prior to the transaction can yield valuable insights into the strengths and weaknesses of the leadership teams involved. This information can guide negotiations and help set expectations for integration or separation. This is common for owners readying a portfolio company for sale and require a better understanding of the current management and ability to navigate a future deal.
Due Diligence Phase: During due diligence (particularly between sign and close) buyers should prioritize leadership assessments to evaluate the capabilities of the existing leadership team. In the cases of bolt-ons or mergers within the portfolio this may also mean an evaluation of both management teams. This phase is essential for identifying potential risks and opportunities related to leadership effectiveness.
Post-Transaction Integration or Separation: The dynamics of some transactions mean that assessment during due diligence can be sensitive. It may therefore make more sense to prioritise this once the transaction is finalized. Conducting leadership assessments at this point can assist organisations in aligning leadership roles with the strategic vision of the new entity. This is the crucial moment to identify leaders who can drive change and foster a unified culture.
Ongoing Evaluation: Leadership potential should not be assessed solely during transactions. Continuous evaluation of leadership capabilities is vital for long-term success. Have a clear view can inform decisions well in advance of the end of any hold period providing ample time to course correct for improvement to maximise price at exit.
Conclusion
In the context of M&A and divestments, the importance of assessing leadership potential cannot be overstated. By concentrating on the capabilities and adaptability of leaders—particularly through the lens of agile change leadership, organisations can significantly enhance their chances of success during these complex transactions. The optimal timing for leadership assessments is dependent on the specific context but can span the entire deal lifecycle. As companies continue to navigate the intricacies of M&A and divestments, prioritizing leadership potential will emerge as a key differentiator in achieving sustainable growth and competitive advantage.
About Opes: Opes provides a unique approach to assessments, grounded in science and focused on people. Its team of psychologists help organisations and owners assess leadership potential to understand gaps or alignment to the long terms strategy and success. For more information on our services visit the services section of the website or to get more information / schedule a consultation drop us an email at this address [terry.denny@opesltd.com]
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