Impact of Mergers and Acquisitions
Mergers and acquisitions can have both adverse and positive impacts on the corporation involved and their stakeholders which include the investors, management, employees, customers, the community, suppliers and so many. Bastien says that the target success of mergers and acquisitions were not at all claimed or achieved. There are many factors and issues that determine the success of failure of mergers and acquisitions. The success or failure of every merger or acquisitions depends on the interplay or dynamics of the merging system or the appropriateness of the strategies applied.
One of the elements which play a crucial role in the success of a merger or acquisition is the reaction of the employees. In all of these, the stakeholder who absorbs the most significant impact is the employee. Furthermore, research indicates that employee-related concerns and issues impede the success of mergers and acquisitions. K & L Gates, a company which specializes in providing services related to business mergers and consolidation, says that a considerable bulk of issues involved pertain to employment (K & L Gates 2010).
This statement coincides with that of Bastien’s research which suggests that issues of employee motivation, retention and communication are central activities of post M/A organizational accommodation process
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Mergers and acquisitions can be domestic or cross-cultural, and either can be as shocking and as traumatic as the other one. Cross-border mergers and acquisitions have become another growing trend, and they are much complicated because of the multi-nationality and multicultural issues. The cross-cultural nature, environment and aspect of the merged companies and the parties in an acquisition are the factors that have affected the success of M/As. This research suggests that the role of international HRD experts in global mergers should be significant.
The work of a global HRD expert on a merger and acquisition projects starts with cultural due diligence (an assessment of culture of both sides of the merger and a determination of the degree of the match or divergence between the two cultures. Later the projects should involve cultural awareness, culture-specific and behaviour modification training. Ideally, however, the role of HR should not stop here. HRD should be involved in the design of new, integrated divisions and work teams, as well as in conducting teamwork training informed by both theories of team performance and cross-cultural understanding” (Swanson & Holton III 2009:428-429).
One example of a cross –cultural merger and/or acquisition is what happened to Daimler-Chrysler in 1998. The complete integration of Daimler and Chrysler was marred by so many issues two of which were on the human resources. These issues are as follows: 1) Leveraging the ‘soft’ assets, such as Intellectual Capital in the form of Knowledge Management; 2) Resolving cultural differences between Daimler and Chrysler; 3) Convincing executives, managers, and staff to be open and remain loyal; and 4) Applying the knowledge management in polishing the merger process.
As can be seen above, the two human resource-related issues which directly affected the merger are item numbers 2 and 3. After the merger between Daimler and Chrysler, its combined market share fell from 16 % to 13. 5 % from 1998 to 2001. The Chief Executive Officer of Chrysler, Mr. Holden, was fired within one year. Because the German and the American executives did not get along very well, two-thirds of Chrysler’s senior executives were either terminated or resigned. As a result, Chrysler’s operating profits also decreased 90% in 2000. The merged company ranked only fifth among the seven largest automakers-invented-here.
There was also no sharing of ideas and even parts because of the syndrome “That is not invented here. ” (Hill 1999: 352 & Daimler Chrysler). Another M/A case plagued by cultural clash is that of Bridgestone & Firestone- The merger between Firestone and Bridgestone Acquisition Corporation was finalized in early May 1988. In early 1990, Bridgestone announced a hiring freeze; roughly 150 employees accepted early retirement options, and another 250 workers were laid off. Profits at Bridgestone fell to 33. 2 million dollars that year, due mainly to the 400 million dollars losses by Firestone Inc.
Despite improvements in earnings in 1991, culture clashes and labour disputes at Bridgestone/Firestone continued to plague the parent company. In 1997, Bridgestone wrote off the costs related to the purchase of Firestone. This caused the profits to dive at 44% despite record sales (Hill 1999: 193-196). (Selden and Colvin 2003) in (Cameron & Green 2009) “say that 70 to 80% of acquisitions fail, that is, they do not create the wealth for the shareholders of the acquiring company. Most often, they destroy wealth. The historic M & A wave from 1995 to 2000 resulted to deals of more than 12 trillion US Dollars.
Conservative estimates put the losses at one trillion US Dollars of share-owner wealth. According to Selden and Colvin, these failures can be attributed to failure to look beyond the lure of profits. (Cameron & Green 2009: 228-229). “Efforts to encourage cooperation can be overshadowed by the continual need to deal with issues that are concerned with coordination, such as pay and benefits, redundancies, appointments and job transfers. These issues absorb a considerable bulk of time. They typically require the attention of senior managers and integration teams.
They have the potential to disrupt the business, trigger employee disputes and cause unwanted departures” (Devine 2002:170). This can be exemplified by what happened to Gate Gourmet and its unforeseen labour problems which directly impacted on the customers. (Moeller & Brady 2007:96). Gate Gourmet, the principal supplier of in-flight food for UK airlines, was acquired by Texas Pacific in 2006. Texas Pacific was a US-based equity firm. Shortly thereafter, Gate Gourmet encountered some serious labour issues. These issues were not appropriately resolved and were exacerbated by the organisational changes and new policies.
The anger and frustration of the employees was vented on the customers with whom they had direct contact. As a result, a very public row within Gate Gourmet and with its customers erupted in the Heathrow Airport. Customers from other major airlines were also affected. Among the reasons identified for the employee-related issues in Gate Gourmet included the lack of cultural integration for the newly-acquired company, with that of the acquirer. There was also lack of communication processes during the completion of the merger, leaving employees to develop resentments and anger.
Problems and issues posed by manpower can defeat the most promising investments, and as Lord Hanson said in the Foreword of the book: “Corporate Acquisitions and Merger…”, ‘a clear understanding of the human factors is essential to the successful pursuit of M/As’ (Begg 1986:11. 20-11. 21). Similarly, in the late 1960s, Professor Newbound concluded in his research work and survey of 38 companies that majority of the mergers failed to satisfy the objectives of such. Personnel issues dominated the causes of the failures.
These issues included the following: 1) Attitude of senior management in “victim”; 2) Staff in “victim” afraid of being swamped; 3) Fears of redundancy; 4) Management in “victim” less able; 5) Aligning the terms of services (Begg 1986:11. 21). The M /A process can be very stressful and may lead to anxiety, cynicism, anger and depression among those involved in it. Even the best plans can easily be diverted by the influx of emotions and impulses that cause employees to act in unpredictable and irrational ways. Many employees may become preoccupied about seemingly trivial details” (Devine 2002:156).
An organisation and its employees can be shocked by the impact of a merger or acquisition and even integration teams may be unprepared for various types of reaction. The support of the management teams of the combining organizations in the transition does not necessarily mean the alignment of the rest of the workforce. Adverse situations which may not have been predicted may emerge. “Mitchell Lee and Philip Mirvis, two M & A experts, argue that a merger or acquisition, no matter how amicable, is a seismic event, resulting in a climate of ambiguity in which trust levels decline and people put more emphasis on self-preservation.
” Six common problems normally occur after a merger: deteriorating communication; poor productivity; increased parochialism and team play’ power struggles; reduced commitment to goals; and a tendency to bail out by leaving the organisation. The combined business can be caught up in vicious cycles (Devine 2002:156-157). There are also different studies that suggest that mergers lead to adverse impacts which are opposite to the actual objectives of the mergers. For example, most mergers and acquisitions are made to increase market share and hence, the revenues.
In a study by Cox School of Business at Southern Methodist University in America, of the 193 mergers completed between 1990 and 1997, only 37% of the acquired companies maintained the same rate of revenue growth in the first quarter after the merger announcement. After nine months, only 11 percent had the same or better rate of revenue growth than before the merger. In its conclusion, the study cited unsettled customers and distracted staff as the major reasons for the drop in the revenues.
According to the same research, the performance of the new business is affected by four reactions following the merger: widespread anxiety; organisational paralysis; loss of leadership; and rising levels of customer dissatisfaction” (Devine 2002: 157-158). “Cultural differences have been associated with lower commitment and cooperation of the acquired employees (Sales and Mirvis 1984, Buono, Bowditch and Lewis 1985). There are also such issues as the diminished relative standing and increased turnover among acquired executives (Hambrick and Canella 1993) in (Pablo and Javidan 2004:24).
” As mergers and acquisitions bring about change, uncertainty and instability also emerge which can trigger cultural clashes among employees and even, executives (Cartwright and Cooper 1996). M/As impact both the macro (organizational) and the micro (individual) levels of the organization. Incongruity of the person-organization fit (P-O fit) has been shown to negatively impact job satisfaction and stress, which in turn, affects physical and mental well being, in turn affecting organizational performance and quality of work life (Cartwright and Cooper 1996) in (Pablo & Javidan 2004:24).
Often, during a merger or acquisition, key personnel who are retained on board still lose their commitment because of the apparent instability, uncertainty and dramatic changes. It may not be so surprising for employees to lose commitment in times of mergers and acquisitions because these situations encourage people to think about themselves, to be self-centred (Golpin & Herndon 2007: 127). Another case of bitter and costly M/A aftermath is the takeover of the much-larger Continental Airlines by Texas International Airlines in 1981.
In this fight, employees and personnel from all levels of the organization struggled to prevent Texas International from taking over the Continental. Texas International Airlines, a subsidiary of Texas Air Corporation, and headed by Francisco Lorenzo desperately attempted to gain control of Continental Airlines. The latter airline was a medium-sized carrier based in Los Angeles. Continental was headed by its CEO, Alvin Feldman, a veteran in the airline industry.
Lorenzo, on the other hand, was a young Harvard-trained businessman who was known for being shrewd and aggressive (Michel & Shaked 1986: 264-275). With revenues of 769. 6 million dollars and losses at 20. 7 Million dollars, Continental Airlines was in the process of merging with Western Airlines. Early on, Feldman’s team suspected that Texas International, led by Lorenzo, was just interested in gaining control of Continental and capitalizing on the latter’s assets and laying off the workers.
These prospects didn’t sound too well for the Continental and its employees. Alvin Feldman, along with the Continental Employees Association thwarted all attempts of Texas International. With the tragic suicide of Alvin Feldman in the midst of the battle for control of Continental Air, the vantage point was sealed in with Texas International. In October 31, 2981, the operational and management integration of Texas International and Continental Airlines was formalized.
The merged company was plagued by a combination of employee dissatisfaction, union problems, recession and the declining profitability. Lorenzo’s business strategies to apply lean operations in order to cut costs and gain momentum further exacerbated the problems which resulted in numerous strikes and operational issues. At one point, a pilot even refused to fly a cross-country route due to the fact that only one air conditioning unit was function. Repairs on airlines were also delayed, thereby adversely affecting the pilots’ morale and motivation on the job.