Mergers and Acquisitions: 10 Things HR Won't Tell You
A Done Deal
How Do Mergers and Acquisitions (M&As) Affect Employees?
Word on the street is this: your employer is looking to merge with another company. Or perhaps there are rumors that your company will undergo an acquisition.
When M&As occur, there's a lot of hype. It's often difficult for employees to get no-nonsense answers amidst all the sunshine-and-magic-ponies promises of how the new organization will deliver
- increased profits with
- greater productivity and
- fewer expenses.
While mergers and acquisitions may be good for investors, what do they mean for YOU? Here is what your Human Resources department isn't sharing — either because they don't know yet or won't say. Although every M&A situation is different, employees can anticipate at least some of the following 10 things.
MERGER - the consolidation of two companies into one
ACQUISITION - the purchase of one business by another
Have you ever worked for a company that went through a merger or acquisition?
M&As: What Was Two Is Now One
What Are Common Reasons for Mergers and Acquisitions?
Let's first consider why companies engage in mergers and acquisitions. Here are several common reasons:
- Growth - Companies grow in basically two ways: 1) organically (i.e., by increasing sales) or 2) through mergers and acquisitions. By purchasing a competitor, for example, an acquiring company can gain revenue or market share without having to work as hard for it.
- Synergy- Ever hear the phrase, "Two heads are better than one?" How about, "Two can live as cheaply as one?" By combining business activities, the new company aims to achieve both operating and financing costs savings. It hopes to reduce overhead by taking advantage of economies of scale (e.g., redundant assets, personnel, processes and taking advantage of bulk buying discounts). The intent is that the combined organization will be more efficient than its predecessors.
- Strategic Focus - A company can reduce risk by diversifying its revenue sources or integrating with its suppliers or distributors. M&As provide quick access to a foreign country or new market, for example. Companies can also cross-sell related products and services.
- Eliminate Future Competition - M&As can increase an acquiring company's profitability by reducing its number of competitors, particularly in an overcrowded market. A well-planned merger or acquisition can open up access to a competitor's knowledge and customer base.
Upper Management Celebrates M&As, but Should You?
So What's Not to Love About M&As If You're an Employee?
Given the benefits that M&As seem to promise, what's not to love about them if you're an employee? Shouldn't you be jumping up and down, too? Well, maybe.
By nature, M&As bring with them a lot of organizational change, so if you are not change adept, get ready to be very uncomfortable. Also, some employees' jobs are impacted substantially more than others.
Regardless, anticipate the following if your company is experiencing a merger or acquisition.
M&A Deal Makers Can Ignore the People Issues
1) People Factors Are Often an M&A Afterthought
The lawyers, top executives and business consultants who put together M&A deals are analytical, logical thinkers. They focus primarily on whether the new organization is capable of achieving the financial and strategic benefits that would create additional shareholder value.
Unfortunately, like horses with blinders on, they're not always as concerned with people factors, such as who will be leading the transition, who will be losing a job, and other day-to-day impacts on people's lives. That's the "soft," tactical stuff that can be figured out later. Those issues are afterthoughts.
Making It Up As They Go Along
When communication and other people factors are sidelined, results can prove counterproductive. Layers of M&A integration teams are deployed, and they feverishy begin their work without understanding the basics:
- why their company's M&A deal was undertaken
- what the end goal looks like
- practical impacts of the M&A on employees and their families
- the "me" issues of other key stakeholders, including customers, suppliers, and the community.
Without this strong foundation of understanding, implementation teams give the impression that they don't have everything figured out yet and are making it up as they go along. And that's because they are. Worse yet, they can convey a lack of patience and empathy for those impacted most by organizational changes.
Redundant People, Processes, and Assets Will Need to Go Away
2) Layoffs Are Inevitable
When you hear the word "synergy" or the phrase "economy of scale," job cuts should immediately come to mind. The business sees it as time to "trim the fat." The only real question is whether your job is at risk. The new organization will be looking to enhance efficiency by getting rid of duplicate personnel, streamlining its business processes, and eliminating redundant assets where possible.
The New Organization Will "Trim the Fat"
Wage and compensation costs typically account for about 70% of a business' operating expenses, so layoffs are inevitable in this time of turmoil and transition. 1 Expect the company to
- examine current job roles
- look closely at past job performance, and
- forecast what skills are needed in the new organization.
You may be asked in various ways to justify your job or your value to the company. Companies commonly "cherry pick" who they will retain and who they will lay off. Be ready for anything.
Some companies choose to fire employees from their old organization and rehire them as employees of the new organization. Other employers require workers to apply competitively for their own jobs or for other jobs in the new organization.
Confused? That's Normal
3) Expect Role Shifting and Confusion
Uncertainty reigns before the new normal settles in. People and predictability that you once knew might go away entirely.
Particularly during the interim stage — that is, between the time of the M&A announcement and the date the deal is closed — it may unclear who reports to whom, who should do what, and who has what authority. Even more challenging, the two companies may have very different systems, operations and platforms that will make joining forces a technological challenge.
As employees are shuffled around, a new organizational structure emerges, along with new roles, relationships and responsibilities. In this restructuring and chaos, titles, positions and the name of the company may be different.
Be ready to show how adaptable you are, and keep your grumbling to yourself. It's too early to tell where you and your co-workers will be in a year. (That co-worker could turn out to be your boss before all of this shakes out.)
Beware: Power Struggles in the New Organization Can Be Brutal
4) There Will Be Internal Power Struggles
Perhaps you'll notice the internal power struggles taking place on all levels. Much of that depends on
- how nasty and open the battles get and
- how politically astute and connected you are.
Executives with big egos may seek to build or maintain their empires in the new organization. Meanwhile, managers below them jockey for position in a changing organizational landscape. For all of their public kumbaya, there's likely a clash of the titans behind the scenes, with battles over personnel, reporting relationships, titles, assets, budget, and more.
While the gossip can be juicy, just know that practical aspects of employees' lives are impacted by these personality and political conflicts.
Workload Getting To You?
5) Workload and Stress Levels Will Increase for Survivors
An M&A is much like getting married. There's the proposal, the excited announcement, and the flurry of activity and hoopla with event planning. But once the marriage is finalized, that's when the real work begins. Sure, the honeymoon is nice, but don't kid yourself. Any kind of merger involves hard work.
When an M&A is announced, the workload kicks into high gear for those who must now integrate and adapt operations, systems, and business processes. If you're an employee, that's you!
In your particular department, you may be surprised that the other company varies substantially in how it accomplishes its work. For example, it may be significantly more structured, streamlined, technologically advanced, and compliant with government regulations. Your disjointed process of Excel spreadsheets must undergo major transition, and it will take a lot of work to make the adjustments. Expect numerous meetings, tight deadlines, and conflicts with new co-workers as you find new ways to work together.
And then, of course, you must integrate the work of your downsized co-workers. Get used to the new mantra: "do more with less."
Different Business Models, Different Organizational Cultures
6) Organizational Cultures May Clash
You can change products and services, company ownership, and top leadership, but there's no instruction booklet for changing corporate culture. Thus, organizational culture clashes are a key reason that M&As fail.
An organization's culture involves all the elements that make up the company's emotional and social environment:
- how the work gets done
- managerial and decision making styles
- habitual methods of interacting with each other, with clients, and stakeholders
- shared understandings about what capabilities and groups are most important
- accepted behaviors, attitudes and priorities
- basic beliefs and underlying assumptions and
- shared language, history, and meanings.
Like a marriage between two partners from different countries who speak different languages, the successful M&A must somehow blend or assimilate a new business' culture. That challenge, however, can seem insurmountable when two organizations have substantially different business models, a hostile takeover is involved, or the partners have a long history of fierce competition against one another.
High Profile M&As: Successes and Failures
Disney and Pixar
EPIC SUCCESS: Disney bought Pixar in 2006 for $7.6 billion. Pixar has since produced a steady stream of films that have been both commercially and critically successful.
Sirius and XM Satellite Radio
SUCCESS: In 2007, the $13 billion merger between these two American satellite radio providers combined their 14 million subscribers. At the time of the deal, neither company had turned a profit. Within months, the new company teetered on bankruptcy but eventually turned a profit. Sirius XM anticipates about 100 million subscribers by 2018.
Exxon Corporation and Mobil Corporation
SUCCESS: Exxon's 1998 controversial acquisition of Mobil was valued at $85 billion. The deal reunited the two largest companies in John D. Rockefeller's Standard Oil which was forcibly separated by the federal government nearly 100 years before. The deal has been referred to as the archetype for oil industry mergers.
New York Central Railroad and Pennsylvania Railroad
FAILURE: In a strategy to avoid bankruptcy, New York Central Railroad merged with its rival in 1968. The deal was itself a train wreck in the making. Penn Central, the sixth largest corporation in the US at the time, filed for bankruptcy just two years after the merger.
Daimler-Benz and Chrysler
FAILURE: In 1998, when Daimler-Benz merged with Chrysler, America's third largest automaker, it was billed as a partnership of equals. However, the German company had deep control needs that got in the way of a collaborative partnership. The clash in organizational cultures -- "conservative, efficient and safe” vs. “daring, diverse and creating” -- led to Daimler selling off Chrysler to a venture capital firm in 2007. In 2009, Chrysler filed for bankruptcy.
Mattel and The Learning Company
EPIC FAILURE: In what has been called one of the worst acquisitions in history, Mattel ditched The Learning Company, an interactive software company, only a year after acquiring it in 1998 for $3.8 billion. In the year that Mattel owned it, The Learning Company lost about $1 million a day, with Mattel seeing its stock take a 65% dip.
Sears and Kmart
FAILURE: In 2005, Kmart acquired Sears in an $11 billion deal. In 2007, the Sears executive in charge of the deal was named the worst CEO of the year. Sears has experienced steady decreases in revenue and income since the partnership.
Sprint and Nextel
FAILURE: In 2005, the two telecommunications giants joined forces in a $36 billion deal. Unable to overcome technological differences, Sprint shut down the Nextel network in 2013.
AOL and Time Warner
EPIC FAILURE: In 2000, AOL bought Time Warner for $164 billion, to create "the world's largest media company." Shortly after the megadeal, the dot-com bubble burst, leading to a loss of $99 billion, attributable to AOL. At the time, this was the largest one-year loss ever by a company. Time Warner spun off AOL in 2009.
High Performers May Pack up and Leave
Turnover in acquired companies is double that of non-merged companies for a full decade following an M&A.
7) Key Employees May Leave for Competitors
After a major organizational change such as a merger or acquisition, it's not uncommon for as many as one in four top performing employees to leave. This is regardless of whether they still have a job with the new organization.
In addition, research has found that turnover in acquired firms is double that of non-merged companies for a decade following an M&A.2
High performers become frustrated by poor communication, job losses around them, and an uncertain status and reward structure in the new organization. They've kept their knowledge, skills, and abilities marketable and don't have to tolerate being treated poorly. Thus, they pack up and leave, often for competitors. HR actually has a term for picking off another organization's employees: talent poaching.
Watch to see if company superstars voluntarily head for the doors. The exodus may confer risks to:
- institutional knowledge
- client relationships
- the leadership and technical bench and
- the likelihood of achieving long-term business goals associated with the M&A.
Employees Struggle to Stay Engaged in Their Work
8) Less Engaged Employees
Survivors of layoffs often experience trust issues surrounding 1) outcomes, 2) decision-making processes and procedures, and interpersonal treatment that they and co-workers received during the M&A. They commonly have lingering questions about the future of the company and their future in it. Accordingly, survivors are often less engaged in their work.
Research indicates that layoff survivors may experience the following:
- decreased morale and increased cynicism
- reduced productivity and withdrawal of effort
- poorer job satisfaction
- lower organizational commitment
- greater resistance to change
- higher absenteeism and lateness
- and more counterproductive behavior such as sabotage.
So what does this mean for you? Even if you're firing on all cylinders, employees around you may not be fully engaged, thus making it harder for you to do your job following an M&A.
High Stakes Gamble
9) Over-Invested in Company Stock? You're Gambling Big
If you participate in a stock ownership plan (ESOP), 401(k) plan, stock purchase plan, or enjoy stock options, then you're among the 20% of employees working in the private sector who are employee shareholders in their companies.3
However, the lure of matching contributions and purchasing company stock at a discount can prompt some employees to over-invest in company stock. Also, buying stock on a regular basis can lead some employees to accumulate more company stock than they anticipated. As a result, they can end up violating the first principle of sound investing: diversification.
If you have more than 5-10% of your holdings in company stock, maybe it's time to review your portfolio. Remember Enron, Lehman Brothers, WorldCom, and Kodak? Employees invested their entire nest eggs in company stock. When each of these companies failed — as is a risk with M&As — employees who had invested their life savings in them saw both their jobs and retirement funds disappear.
How much are you willing to gamble with your future?
10) More Than 70% of All Mergers & Acquisitions Fail
Recall that the key stated rationales for M&As involve enhancing stakeholder value—to increase profits, productivity and reduce expenses. Unfortunately, however, a substantial majority of mergers and acquisitions fail to do so.
A 2004 study by Bain & Company found that 70% of M&As fail to create meaningful shareholder value. Reasons included ignoring difficulties of integrating the companies, overestimating synergies, and loss of key talent. A 2009 study by Hay Group and the Sorbonne found a similar result; more than 90 percent of mergers in Europe fail to reach financial goals.
But hope springs eternal. Just as soaring divorce rates don't stop couples from getting married, M&A failure rates don't seem to deter the likes of corporations such as
- Office Max and Office Depot
- Novartis and GlaxoSmithKline
- Kraft and Heinz
- AT&T and DirecTV and
- Actavis and Allergan.
A 2004 study by Bain & Company found that 70% of M&As fail to create meaningful shareholder value. A 2009 study by Hay Group and the Sorbonne found a similar result; more than 90 percent of mergers in Europe fail to reach financial goals.
M&As Fail More Often Than Marriages
1Shermon, Ganesh. "Post Merger People Integration." Cutting Through Complexity. Last modified 2011. http://www.kpmg.com/IN/en/IssuesAndInsights/ArticlesPublications/Documents/Post%20Merger%20People%20Integration.pdf.
2Price, Jim. "Why Acquisitions Fail." Business Insider. Accessed July 21, 2015. http://www.businessinsider.com/why-acquisitions-fail-2012-10.
3National Center for Employee Ownership. "Estimated Number of ESOP Plans, Number of Participants, and Plan Asset Value (2012 data)*." National Center for Employee Ownership (NCEO): ESOP Plans, Stock Options, Restricted Stock, Phantom Stock, and More. Last modified March 2015. http://www.nceo.org/articles/statistical-profile-employee-ownership.
4Voigt, Kevin. "Mergers Fail More Often Than Marriages." CNN.com. Last modified May 22, 2009. http://edition.cnn.com/2009/BUSINESS/05/21/merger.marriage/index.html.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
Questions & Answers
I work at a prominent bank that is merging with another bank. Should I look for another job?
Expect reductions in force (RIFs) when there are mergers and acquisitions (M&As). When organizations merge, there are often job redundancies – that is, too many people performing the same role, thereby necessitating layoffs. If your job is one of these, you may be at risk, particularly if you occupy a position in the lower or middle layers of the organization. Average and poor performers are especially vulnerable as companies seek to become leaner and more adept with a workforce of only the best performing employees.
Sometimes RIFs come in waves or phases. Pay attention to what your company’s CEO tells investors and what market analysts say about your company’s need to reduce its workforce.
Although you may survive a RIF, even survivors experience job stress from all of the rapid change, poor communication, longer hours, and the resulting expectation of "doing more with less." It’s also not unusual for voluntary turnover to increase. This makes it further challenging on survivors.
You need to consider now whether you love your job and company (at least what there is of them now) enough to stick it out through all the turmoil. This is assuming you survive the RIFs. My view is that we all need options to feel in control. Therefore, start preparing now, but be quiet about your plans at work. It NEVER hurts to have your resume updated and be actively looking on job boards like simplyhired.com or indeed.com. Update your LinkedIn profile. Go on some interviews as “practice” just to keep your interviewing skills fresh. Even if you don’t get a job offer, you’ll see what’s out there and what knowledge, skills, certifications, etc. you might need to acquire or update. If you do get a job offer, you don’t have to take it, of course, but you’re creating options for yourself. In a time of turmoil, it’s better to put yourself in the driver’s seat and take charge of your future rather than waiting to see what the company decides for you.Helpful 4
Our financial institution is in the middle of an M&A. I will be 64 when the merger is completed. If I don't lose my job in the restructuring, should I tell them I plan on retiring at age 65?
I see no upside to telling them about your plans. The company will need fewer people, but if you're in a key role (for example, rare expertise), you might not be offered severance or early retirement. Restructuring efforts following M&As sometimes benefit people like you who are a bit too young for regular retirement. These folks may enjoy "sweeteners" to get them to retire early -- enhanced retirement options, for example, that "bridge" them to retirement age. That's the best case scenario for you.
Even if your employer does not offer an early retirement package, the severance terms may be negotiable, particularly if you are close to retirement, a long-term employee, and retain good counsel. If it were me, I'd make the company believe I plan to work there forever and haven't thought about retirement at all. Make them pay you to go away. I also would not confide my true plans in coworkers, my boss, or anyone else.Helpful 3
Can I cash out my retirement during an acquisition?
You're generally not supposed to be able to withdraw money from your 401(k) until you've reached age 59 1/2 (or 55 if you have lost or left your job). You don't indicate either your age or employment status. Both factors are critical here, and what you're using the money for can be important, too.
There are almost always staff reductions during mergers and acquisitions, so you'll need to know whether you will continue to have a job. If you are one of the downsized employees, you will be able to
1) roll your 401(k) over into an IRA that you open at a bank or online brokerage service (I prefer Ameritrade)
2) roll it over into your 401(k) plan at your new employer
3) keep it with your old employer and let them continue to pay the administration fees or
4) if you absolutely must, you can cash it out and incur the significant penalties and taxes for doing so. (Penalties are less at age 55 if you've been downsized.) I cannot emphasize how bad this option is if you are a young or middle-aged person, however.
If you maintain your job following the acquisition, you generally cannot cash out your retirement. There are rare exceptions, such as the hardship exemption that includes the purchase of a first-time home, but that's not a real good move either.
Cashing out is generally regarded as a bad idea so please consult with a financial advisor about your own individual situation. A place to start is to call the company that administers your company's 401(k), like Fidelity. They can walk you through it, but the decision needs to be yours.Helpful 2
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