Human impacts on the performance of mergers and acquisitions

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Human impacts on the performance of mergers and acquisitions
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in Advances in Mergers and Acquisitions · January 2013
DOI: 10.1108/S1479-361X(2013)0000012004
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HUMAN IMPACTS ON THE
PERFORMANCE OF MERGERS
AND ACQUISITIONS
Nicola Mirc
ABSTRACT
The contribution revisits existing research on human impacts on the
performance of mergers and acquisitions. Findings are grouped into three
categories: individual-, organizational- and managerial-related factors.
Results show that while research seems various and abounding, influential
factors are often studied as static setting approached in isolation, without
measuring their direct relation to post-acquisition outcomes.
Keywords: mergers and acquisitions; human impacts; post-acquisition
performance; organizational integration
INTRODUCTION
From the outset, the literature on mergers and acquisitions (M&As) has
concentrated on post-operation performance. An ongoing issue has been
the disappointment in observing that most M&As were reducing rather than
enhancing firm value (e.g., Dickerson, Gibson, & Tsakalotost, 1997).
Advances in Mergers and Acquisitions, Volume 12, 1–31
Copyright r 2013 by Emerald Group Publishing Limited
All rights of reproduction in any form reserved
ISSN: 1479-361X/doi:10.1108/S1479-361X(2013)0000012004
1

In order to get a better understanding of M&A performance variations,
scholars have developed a special focus on the way humans may impact
on M&A outcomes. Since strategic, economic, or financial factors do not
seem sufficient to understand the phenomena, reasons for M&A failure are
more and more associated with the way people inside the merging
organizations deal with and react to the deal. Studies mainly in the field of
organizational behavior, and to a lower extend in HRM, sociology, and
psychology identified a multitude of ways, humans might impact M&A
performance. In this paper, we will present the main findings related by
this research.
For the literature review, we selected all papers published in leading
management journals since 1990 that address human-related issues in M&A,
in a direct or indirect relationship to post-acquisition performance. The final
sample comprises 92 papers published in 17 journals (see Table 1 for the
detailed number of selected papers/journal).
Two-thirds of the papers were published after 2000, and we can note
a significant increase after 2005 that seems to hold on until today the
increased number of papers in 2005 and 2006 is partly due to special issues
on human-related issues in M&A in ‘‘Organization Studies’’ and the
‘‘British Journal of Management’’ (see Fig. 1).
The literature review has led to the identification of three main ways in
which humans may impact on M&A performance.
A first group of scholars focused on individual-related aspects of the
merger process, and in particular on the psychological effects, M&A can
induce on employees. They further focused on factors influencing turnover
and on post-acquisition organizational identification issues.
Table 1. Number of Papers/Journal.
Academy of Management Executive 2 Journal of Management 3
Academy of Management Journal 9 Journal of Management Studies 9
British Journal of Management 10 Management Science 1
Human Relations 7 Organization Science 10
Human Resource Management 3 Organization Studies 8
Human Resource Management Journal 2 Personnel Psychology 1
International Journal of Human
Resource Management
10 Personnel Review 1
Journal of Applied Behavioral Science 3 Strategic Journal of Management 6
Journal of International Business Studies 7 TOTAL 92
NICOLA MIRC2

A second set of research concerns organization-related issues. Here, the
emphasis is on cultural differences between the merging companies,
corporate as well as national, and the organizational capacity of transferring
resources between the acquirer and the acquired company, notably in terms
of knowledge and technology resources.
A third category of research discusses the impact of managerial action
and decision-making processes during the acquisition process. These actions
and decisions made by the managers of both firms are found to have a
highly structuring impact on the success of the operations they engaged and
planned. By deciding whether and whom to acquire or to be acquired, by
planning and controlling the integration process and determining integra-
tion policies (as, for instance, the need for downsizing or the functional
equality between firms), and by setting up the degree of integration to be
achieved (level of coordination/autonomy granted to the acquired firm),
managers as humans influence actively and extensively the whole acquisition
process and its outcomes. A special focus here has been set on HR repre-
sentatives and the way the HR function accompanies and influences the
post-acquisition integration process.
In the following, we will develop main findings of all three categories in a
detailed way.
INDIVIDUAL FACTORS
The first identified category of research has focused on the way individuals
are affected by the merger. Three main issues are addressed in this regard:
the negative psychological consequences of M&A on employees, their lack
of identification with the new merged firm, and the high turnover of top
managers, in particular, of the acquired firm.024681012
Fig. 1. Number of Papers/Year.
Human Impacts on the Performance of Mergers and Acquisitions 3

Psychological Effects on Employees
Psychological effects of mergers and acquisitions (M&A) on employees have
first been addressed by scholars like Buono and Bowditch (1989), Marks
and Mirvis (1985), or Cartwright and Cooper (1990, 1993). They pointed
out the increased stress and anxiety that M&A induced on the personnel of
the merging firms, due to changes in work practices and tasks, managerial
routines, colleagues, environment, the hierarchy, and so on. Furthermore,
M&A often introduce an uncertainty climate among employees about
potential job losses and future career development.
The high stress level caused by M&A was demonstrated by Cartwright and
Cooper (1993) in their study of changing mental health states of middle
managers after they experienced the merger of two building societies in the
United Kingdom. The post-acquisition measurement of mental health
indicated indeed major health impacts and a significantly deteriorated well-
being of the interviewed employees, even though the cultural differences
were said to be minor in the given operation. In an earlier contribution,
the authors put forward that the negative impact of psychological effects
on M&A performance are primarily caused by the fact that employees
experience acquisitions as a major loss due to a modification of the psycholo-
gical contract that links them to their company, resulting in amplified
preoccupation, lower work commitment, and higher employee turnover
(Cartwright & Cooper, 1990).
As argued by Wickramasinghe and Karunaratne (2009), psychological
effects are not homogeneous throughout the organization but depend on the
employee’s perception and interpretation of the merger situation. This
assumption might seem trivial but merits, however, to be studied in detail. As
the authors show, individual characteristics like an employee’s age, gender,
and marital status influence his perception of the merger. Furthermore, the
study revealed that collaboration mergers (in the sense of Napier, 1989) were
more likely to create dissatisfaction among the personnel than extension
mergers.
None of the identified studies tried to measure the direct relationship
between psychological effects on employees and M&A performance. How-
ever, the assumption of a certain interdependence between both variables
underlies each study and was actually treated by all scholars in a compre-
hensive, indirect manner.
Stress and uncertainty may lead to employee resistance to change, a high
staff turnover, absenteeism, and a lack of commitment to work and to the
organization, which in turn are associated with a negative impact on
NICOLA MIRC4

M&A performance (Cartwright & Cooper, 1990; Gutknecht & Keys, 1993).
Employee resistance to the merger prevents the building up of a well-
functioning organization and of a constructive cooperative environment.
A high staff turnover brings about important losses of knowledge for the firm
and effects M&A performance especially in those cases where the operation
intended to acquire people assets, their knowledge, and skills, as for instance
in technology or R&D-based acquisitions. A lower work commitment might
have a negative impact on individual and organizational performance in
terms of productivity, quality, and service (Cartwright & Cooper, 1996;
Gutknecht & Keys, 1993).
On the opposite side of the argument, satisfied employees are presumed
to work harder, better, and longer with higher productivity records.
Even though a direct relationship between job satisfaction and corporate
performance remains to be established with certainty (Rusu, Miettinen, &
Varjonen, 2006), it appears that lower job satisfaction is a cause of higher
absenteeism - which in turn is shown to have a negative influence on
organizational performance (Sousa-Poza & Sousa-Poza, 2000).
Even though M&A effects on employees are mostly dealt with as negative,
several scholars point out cases in which the merger had a positive influence
on employees mentality and satisfaction. M&A can indeed offer opportu-
nities for new responsibilities and career development (Buono & Bowditch,
1989; Empson, 2001), increased job security (especially in the cases where the
acquisition prevented a target from bankruptcy), greater job satisfaction,
and more varied work tasks (Napier, 1989).
Top Management Turnover
As pointed out in the section above, M&As increase employee turnover.
Departing might be volunteer if employees decide to leave, for instance,
because they feel uncertain about their future in the company, or non-
volunteer in the case of post-merger lay-off plans. In the existing literature,
the turnover of one group of actors in particular has received a quite
important level of attention: the turnover of top management.
Several factors have been identified as amplifying the degree of top
management turnover.
Buchholtz, Ribbens, and Houle (2003), by applying a human capital
framework, found that the departure of the CEO of the target firm was
significantly influenced by his age (CEO turnover is less likely until the age
of 54, but more likely after that) and by the degree of relatedness between
Human Impacts on the Performance of Mergers and Acquisitions 5

the merging firms, the CEO’s skill set being in that case ‘‘more likely to be
redundant with skills already available within the acquiring firm. This
redundancy lessens the value the CEO’s human capital holds for the firm
and increases the likelihood the firm will initiate CEO departure.’’
(Buchholtz et al., 2003, p. 508). The positive relationship between relatedness
and CEO turnover has also been discovered by Lee and Alexander (1998)
who state that CEO succession can in this case be used as a promoter of
acquisition integration. The acquirer may ‘‘encourage CEO succession as an
integrative mechanism to introduce its values, strategic priorities and
operational procedures into the new subsidiary’’ (Lee & Alexander, 1998,
p. 181). Although Buchholtz et al. (2003) found no significant relationship
between a CEO’s tenure duration and post-acquisition departure, Lee and
Alexander (1998) observed in the case of related acquisitions that CEOs with
longer tenure than their counterparts in the acquiring firm were more likely
to leave the firm due, as argued by the authors, to their attachment to
stability and inflexibility to accept change.
Other scholars studied more closely the consequences of the way top
managers perceived the acquisition process in order to explain whether they
stayed or left the merged firm. The perceptions of strong cultural differences
and of a limited autonomy granted to the top management of the acquired
company (Lubatkin, Schweiger, & Weber, 1999) as well as regarding the
quality of interactions with the acquiring company’s top management team,
the way the deal was announced, and the likeliness of long-term effects of
the merger (Krug & Hegarty, 2001), were found to promote CEO turnover
during the post-acquisition period.
The linkage between top management turnover and M&A performance
is only indirectly addressed. The relevance of the treated subject for
performance issues is, however, the underlying motivation for these studies.
In all related studies, the identification of factors that induce top management
turnover during M&A is actually based on the premise that high top
management turnover has a direct impact on M&A outcomes. Yet, as for the
question whether this impact is positive or negative, scholars appear divided,
depending on the adopted perspective. Whereas several scholars assume a
negative relationship, arguing that high turnover induces important losses
in terms of human capital, skills, and knowledge and therefore reduces
organizational capacities and efficiencies, leading to a negative effect on
M&A performance, others advance that CEO succession might be necessary
to reduce resource redundancy and to successfully integrate different
cultures and organizational processes.
NICOLA MIRC6

Identity and Identification
A growing body of scholars approaches human impacts on post-acquisition
integration by looking into identification issues that employees may face
with regard to the new organization. The emphasis is on the contributions of
social identity theory, considering the level of employees’ social identifica-
tion with the organization’s identity as crucial for successful post-acquisition
integration.
Several factors have been identified as favoring the identification with
the new organization following M&A. One frequently studied relationship
has been the one between pre- and post-merger identification. Results
appear inconclusive, since scholars found evidence for both possible
effects. Bartles and colleagues (2006) found that a strong identification
with the former organization positively influenced the identification with
the post-merger organization. Maguire and Phillips (2008), on the
contrary, relate evidence where a high identification level led to a weak
identification in the post-merger situation. Van Leeuwen, van Knippen-
berg, and Ellemers (2003) moderate these contradictory findings by stating
that there is indeed evidence of a direct relationship between pre- and
post-merger identification, but that the effect, positive or negative, of the
first on the second depends on the perceived identity fit between
the former and the new organization. Employees that perceived only
minor discrepancies identified more easily with the new organization,
whereas those who experienced more substantial changes were less likely
to do so.
Other influential factors on post-merger identification include a perceived
high level of job insecurity (Van Dick, Ullrich, & Tissington, 2006), the
expected utility of the merger (Bartles, Douwes, De Jong, & Pruyn, 2006),
the sense of continuity of the change process during the acquisition
implementation (Bartles et al., 2006; Ullrich, Wieseke, & Van Dick, 2005),
and satisfaction of employees with the amount and quality of communica-
tion about the merger (Bartles et al., 2006).
As for psychological effects and top management turnover, performance
implications of employees’ identification with the post-acquisition organiza-
tion are only indirectly assessed. The main assumption is that the more
employees identify with the new merged firm, the more they are supposed to
show increased work effort and productivity as well as a more substantial
involvement in positive organizational citizenship (Bartles et al., 2006),
resulting in positive effects on M&A performance.
Human Impacts on the Performance of Mergers and Acquisitions 7