OrgB300- Final
Dr. Siegel

The Effects of Mergers and Acquisitions on the Employee

Mergers and acquisitions involve more than company name changes, increased profits or new coworkers and superiors; they represent the union of separate corporate cultures into one common organizational culture. A corporate culture is a system consisting of "shared actions, values and beliefs that develops within an organization"1 and is reflected in the work ethic, loyalty, and commitment of employees and employers. If the organizational cultures of merging companies are vastly different, the conflicts arising from such incompatibilities can greatly outweigh initial positive forecasts for the merger. In this report we seek to illustrate the importance of establishing a sound corporate culture after a merger, on company productivity.

In order to fully understand the effects of a merger on the corporate culture formed from two or more separate cultures, it is necessary to analyze motivations for the merger: what the merger entails, and its consequent advantages and disadvantages. Doing this allows both managers and employees to assess their roles within the new corporation and work towards fulfilling them. Those individuals failing to comprehend exactly what sort of situations the merger places them in, can have such severe overreactions to the merger that they not only lose the respect of new and old coworkers, but also lose their jobs.

There are primarily six reasons companies choose to merge with one another, ranging from mere manipulations on the financial markets to strategic business goals, and these reasons will generally govern the methods utilized. The latter of the two has, in the past, provided for a smoother, more harmonious blending of cultures as there was no competition for positions since all positions were vital to the new company. Keeping this in mind, let us take a look at the six different rationales for mergers.

The first kind of merger is known as a leveraged buy-out (LBO). A leveraged buy-out consists of one company buying another company, usually at an attractive price to the sellers. The deal is sometimes accomplished with a mixture of equity in the form of stock offered by the purchasing company as well as large amounts of debt - debt being used to provide the leverage in such a deal. New management acts quickly to reduce debt by selling off branches and divisions and downsizing members of its staff. This type of merger has proven to be quite harsh on corporate cultures since the primary purpose is to make money for the parties involved meaning big-shot investment bankers get there hands on the millions of dollars involved in the union while general employee welfare is often overlooked.

Not all mergers are one sided; some are clearly done to benefit all parties involved. An example of such a merger would be one done in the distribution sector. Usually a seller or wholesaler of a particular product will acquire the direct retailer for that product in order to realize a direct mark-up on their product. This creates better deals for consumers and increases profits for sellers. Similar to this kind of merger, is the idea of "one-stop shopping". One-stop shopping is the term used to refer to a deal in which services deemed to be related, are consolidated so that the customer only needs to make "one-stop" in order to acquire several goods or services. This type of acquisition has been mostly recently reflected by financial firms offering various services such as investment planning, banking and lines of credit. Examples of such firms include MBNA America or Chase-Manhattan.

A merger in which the initiative is to take advantage of tax provisions or laws involving corporate structures is known as "financial engineering". Such deals are usually thoroughly thought out and planned with several pages of calculations offered as support for the venture. As part of a good business strategy and greater profitability, diversification is another incentive for company mergers. An illustration of such would be a manufacturer of family cars merging with a company which manufactures sports cars and sport utility vehicles. As a result of such a transaction the new company would be able to attract a more diverse group of customers facilitating cost cuts as costs overlap, thereby raising profitability.

The sixth and final motivation for a merger is scale: many mergers are justified on the basis of building scale in consolidating industries. The reason for this type of transaction is in the economics of savings by staff reductions of duplicate duties. These types of mergers are typical in the bank sector and telecommunications firms.

In conclusion, mergers are done for varying reasons, the rationale behind the merger often being the difference on the effect on the corporate culture of an organization. Therefore, considerations should be made as to why exactly the merger is being undertaken and what the real effects are going to be before the deal is given a chance to adversely impact the inner workings of a corporation through its culture. We now present the effects of mergers and acquisitions on organizational cultures.

Corporations have long held the place of servants to many constituencies, but more recently their focus has narrowed to taking care of shareholder concerns. This shift has taken away a long-standing belief in the mutuality of interest between employer and employee, in which a company would provide positive working conditions, ample pay, and a stable career if employees worked to the best of their abilities. Beliefs are fundamental to preserving a positive work culture since they provide a definition for the way individuals function and interact with each other, key aspects in the success of a company.

When a basic belief becomes compromised, such as occurring during layoffs or salary cuts, employees can react in a number of ways, but a common initial response can be disbelief followed by anger. This anger can fuel a need to reduce tensions and frustrations via union militancy, strikes, or sabotage. Anomie is a concept used to describe this state of normlessness or breakdown in society that adversely affects the behavior of the individuals comprising the organization. Provided that feelings of anger have been allowed to subside, people tend towards states of depression, which, during major company downsizing can result in high levels of family disruption due to domestic violence, or in extreme cases, increasing suicide attempts.

The corporate downsizing accompanying most mergers can lead to widespread fear that all jobs are unstable. For many employees, there is nothing as unbearable as the fear of losing a source of revenue since a job is basically a lifeline allowing them to support their family, and other activities which they view important. Once the guarantee of a pay check is taken away, people begin to worry and societal norms and rules become inoperative resulting in chaos. Although such problems cannot all be attributed to an erosion of trust in the employer-employee relationship, it can have a significant impact. The next stage after depression is usually a grudging acceptance of the new conditions within the company, and for the most part, some companies experience a relatively smooth transition to a new set of beliefs and business proceeds as usual.

For other companies, the new company order is a long way off in being widely accepted and only when the new belief system becomes adopted by everyone, can those businesses reclaim the cultural unity they once had. Will a newly improved workplace emerge or will there be a resentful acceptance of the new policy because no hope exists for anything better after companies have merged? The future of work place cohesion and performance may depend on this pivotal question.

The consequences of job loss are not only felt by those whose services have been terminated but also those employees who have been able to survive the initial round of lay offs - these employees literally live with the fear that they will be next on the breadline. Fear now rules the workplace, replacing old promises of job security. It might not make any difference how hard you work, how loyal you have been to the company or even, how long you have been with the company: you could be treated as an expendable commodity. If the company needs to increase profits, the future of a given employee with that company cannot be assured. Shareholders, not employees, say what goes in the workplace.

Not only do mergers bring with them uncertainty of jobs and expectations that may not be met, they also bring in a new cultural identity that may differ and even clash with the pre-existing one. The loss of cultural identity which is associated with anomie can often be one of the by-products of mergers and acquisitions. Mergers and acquisitions can function to undermine the trust system established between employees and employers triggering an affective component of an attitude, making it difficult if not impossible, to sustain the loyalty, commitment, and best efforts of employees. Individuals are not sure of how they are expected to behave anymore. The line between right and wrong, acceptable and unacceptable, appropriate and inappropriate becomes gray. Often as a result of mergers and acquisitions, new standards which are an amalgamation of two or more cultural ideologies, need to be implemented. Though the joining of the cultures may be a popular method to put into practice, it is can be unsuccessful and lead to further tension between the individuals.

Corporate culture - or the lack thereof - is not a trivial concern, since the existence of a strong culture ensures that employees can share a commonality. Through these common practices, beliefs and behaviors, employees are able to feel secure and accepted in their organization, just in a way that family members share a common bond and mutual respect, all while getting their job done. These bonds and securities are often severed as a result of mergers and acquisitions. Employees are forced to re-establish and re-acclimate themselves in a non-threatening environment. This process not only takes time but can also be very costly, and companies are forced to incur these costs at the risk of losing their employees. It is therefore inevitable that cultural anomie will be a direct result of corporate mergers and acquisitions affecting organizational behavior.

The incompatibility of corporate cultures during and/ or after a merger can be even more pronounced if the merging companies have different country origins. One issue of primary concern for the new entity, will be how to integrate operations when the people required to work together literally do not understand each other. Language - as expressed by words and gestures - is an essential communication element; in the absence of a common language, people are unable to progress towards desired goals rapidly. Language barriers can also exist when merging companies speak the same language: problems arise because different social cultures cultivate their own jargon/ colloquialisms which best serve their immediate markets. For example, what qualifies as "quite good" in the United States, translates into "mediocre" in the United Kingdom.

Although distinctions in language appear minor, they may present many problems. If individuals cannot easily follow what others are discussing, distrust can set in. New people brought to a group formed prior to the merger can become outcasts not only because they are an "outsider" but also because they may have replaced a group member. The inner circle of old group members may cast feelings of resentment - intentional or unintentional - on their new coworkers, making it hard for the group to work together effectively: group productivity suffers. When these feelings of resentment are transferred to managers and others running the organization because they will be earning considerably more than you, in addition to their stock option-based compensation, the chances of management and the workforce having a "shared agenda" will be very small and company cohesiveness can decrease.

Group productivity can also be adversely affected when individual group members become more focused on their future with the newly-formed company, than on doing their work. Persons holding similar positions in similar departments in the separate companies participating in a merger, must make a case for their survival at the new corporation. This self-interest can lead them to withdraw from the group as they cease to be team players. The idea of self-interest being a negative consequence of a company merger actually depends on the social culture against which the separate companies were formed. In some countries, individual performance is greatly valued in the form of rewards for a job well done; in other countries, teamwork and group activities are more highly favored approaches to task completion. As such the impact of individual actions or non-actions on projects for example, will be different in different regions.

The educational and experience levels of the employees of the separate companies can vary. What the manager from one company may expect of his foreign employee, may be above the capabilities of that subordinate although the job description at the two companies was similar. As a result of different emphases for a particular task in the separate corporate cultures, conflicts arise. This does not only occur with employees, but also managers. In different countries, different managerial strengths are nurtured: while the French stress managerial competence, Americans consider individual accountability a greater virtue for their managers. Disparities in organizational strategies will also determine managerial practices. If one company is focused on the bottom line, then the manager may construct short term goals for his employees by directive leadership; in contrast, a company which accentuates method as well as the bottom line, may require participative as well as achievement-oriented leadership.

General business practices also vary widely by region, and the area of arranging business deal provides many examples of this. While in some European nations, an oral agreement is considered a formal business bond, in the United States, agreements are to be ratified by signed documentation between the parties involved. Americans are willing to take great risks to ensure that a deal is completed. They usually try an aggressive approach, in which they emphasize their company's financial status and market position, in order to sell their ideas in as little time as possible. The French on the other hand, are more interested in the technical aspects of a business deal, and utilize meetings as times for exploring the viability of an agreement. Therefore, they are not easily swayed by the 'hard sell' and take their time in making decisions. Such differences in culture must be managed very delicately in order to ensure that the full potentials of the merger can be achieved.

The ability to successfully cope with the pressures associated with a merger is dependent primarily upon the attitudes of individuals in the merging companies. Most people tend to focus on the negative aspects of the merger, that is, layoffs and sometimes salary cuts as well as having to work with a different set of people. One of the most important things to do is to actually find out detailed information in terms of what the merger will mean for the two companies, and what exactly will be the result. Failing to do so can result in a great deal of confusion and anxiety about the position an individual will hold after the union has been completed. If the individual is still unsure of the situation, management should be approached to clarify gray areas since management should be helping to guide the transition process between the former separate firms.

Learning about the other company with which your company is merging is also a good idea, since it will give one an idea of what to expect in interactions with employees and supervisors from the other company. This means that once changes start being made in the new entity, that person should be more receptive of these changes, and be willing and able to modify their business approach as such. Change is never easy once a given method has proven successful but it is a key step to the well being of an individual, whether that individual decides to stay with the newly formed corporation or find another post. In either case, the person will have to adapt to new co-workers, supervisors and above all, a new corporate policy therefore the ability to change to match the situation is crucial.

Remaining tolerant when management makes errors during company mergers is also very important, because even though the situations appear different for supervisors and regular employees, management is in the same boat as employees. Managers are feeling their way along, testing what will and will not work in the new firm, while at the same time trying to make sure that everyone - subordinates and employers alike - is happy. Although the merger presents a lot of difficulties for an individual, that person should be both optimistic and realistic, and keeping on doing what is required of him/ her. Showing such a resilient attitude could indicate to management that that person is a definite company asset and should be allowed to keep their job once the merger is completed.

Leadership is an essential element in cultural stability and evolution in any organization. If management of the merged organizations is dedicated to the cause, and willing to work with each other and their employees in establishing good work relations, a well fused organizational culture can result, with benefits for all involved.

References

1. John R. Schermerhorn, Jr, James G. Hunt, Richard N. Osborn
Organizational Behavior, Seventh Edition. John Wiley & Sons, Inc.: New York/ Chichester/ Weinheim/ Brisbane/ Singapore/ Toronto

2. http://www.executiveplanet.com/community/