The Impact of Mergers and Acquisitions on Companies & Employees

Difference between Merger and Acquisition

Although mergers and acquisitions as a term are generally used together to represent the coming together of two companies to become one entity, both the two words have slightly different connotation. 

When two companies combine to form a new entity it is called a Merger. A merger typically involves companies of the same size and then the stocks of both the individual companies are surrendered, and shares are new combined entity are issued to investors. 

On the other hand an Acquisition is when one company, usually the larger company buys over another company, and the acquiring company becomes the owner of the target company. In other words, the acquired company no longer exists following an acquisition since it has already been bought over by the acquirer. In such a scenario the equity shares of the acquiring company continue to trade but the stocks of the acquired company can no longer be traded on the stock market indexes, till its shareholders in exchange, receive shares of the acquiring company. And this is dependent upon the ratio of the acquirer’s shares to the target company’s shares based on the terms of the buyout. Typically, it is not done on a one-to-one basis, so you do not necessarily receive the same number of shares as the ones you had of the acquired company.

The Impact on Employees

It is but natural that the target company’s employees would feel quite anxious and insecure as those who had hired them are no longer making critical labor decisions. It is difficult to extract strong predictions about the employment consequences of acquisition activity. It may seem plausible to assume that mergers instituted by profit-maximizing managers or companies are more likely to be followed by cost cutting and employee downsizing while those undertaken by empire builders or managers anxious to dissipate free cash flow, may retain all the employees of the acquired company.

The merger and acquisition process can instantly impact the stress levels of the employees involved. Therefore, many mergers need to be approved by local governments, attorneys general, and regulators, which can become a long drawn process and drag it out for more than a year. The more time it takes to close a merger the more difficult and stressful it becomes for employees of both the companies involved.

Uncertainty

Such uncertainty can manifest itself in negative ways if the employees disapprove of the transition. Such employees who feel threatened or scared might prove less effective and productive than those who feel secure and content.

Culture Clash

Often a merger leads to a clash of cultures as the target company employees are also expected to understand the new corporate culture, management structure, and operating system. If the new management team struggles to communicate effectively to aid in the transition, discontent among the employees can occur.

Overlapping of Roles

When one company acquires another in the same industry, there will be a degree of overlap that exists between many of the roles performed by employees at both companies.

Commonly, this overlap is seen in:

• Admin staff such as secretaries and personal assistants
• Director level employees
• Support staff such as IT and catering employees

Inevitably this leads to duplication and many of these employees will be surplus to requirements in their current roles and letting them go creates better synergies for the new entity, in such cases job losses are unavoidable. Most of the time some employees will be aware of this existential threat to their positions and may begin looking for work elsewhere. But his duplication doesn’t destroy value as most often high-value employees are retrained for different positions that open as a result of the transaction. For those that don’t easily fit into newly created roles, job loss is inevitable. In this case, it goes without saying that their employee rights should be respected. Great change management processes often go the extra mile by ensuring these out-of-work individuals are well taken care of, reassuring those staying on.

Even after the surplus employees have left, there will be human resource issues that remain, some of these issues will be almost unending, that the newly created corporate entity will have to contend with:

Wage Disparities

It’s possible that there will be several wage disparities that exist between the two merged companies. Employees willtalk about these and even seemingly small disparities have the potential to turn into major resentment.‍

General disillusionment: 

Change itself is a source of disillusionment among employees and the nature of M&A is that some employees may not b able to digest and accept it for a variety of reasons.

Positive Impact or Benefits of M& A

There are many positive benefits that employees of mergers and acquisition deals  get and these are the ones that you need to emphasize, highlight and exploit as a change manager. The positive impact could be:

• New job opportunities: Since in an M&A deal usually a smaller company is acquired by a larger corporation new job opportunities or switch of position or job responsibility may arise in the larger merged entity that just did not exist in the smaller acquired company. These might include employees working in a subsidiary or move into a parallel or more senior function in the merged entity.
• New training opportunities: A good filter to decide about your best employable or retainable employees is provided by observing their enthusiasm about being up-skilling in the job. M&A often involves training of some form – typically in systems training – and/or reorientation given to enthusiastic employees willing to access a new skill set or work profile.
• Better perspectives: Employees gain better perspectives merely by virtue of being employed at a bigger, growing company. The recognition of the larger company normally open career doors for people in ways that don’t always happen when they work at smaller or lesser well-known companies.
• Retirement Benefits: By and large, the target company’s employees do not have to fear for their current accumulated retirement benefits as normally they get protection by law from post-retirement pensions and other benefits. The acquiring firm fully understands that it needs to protect the loyalty and reassure the target company’s employees both during and after the deal about the safety of their accumulated retirement benefits. However, the fact remains that the treatment of retirement plans is a complex subject matter and one that the acquiring company needs to weigh very seriously before closing any deal. It often proves very difficult to transfer existing target employee assets into a new retirement system.
• Stock Options: In some M&A deals, the employees of the newly created entity receive new stock options such as an ESOP or other financial benefits as a reward and incentive. ESOP are contracts that allow an employees the right to buy their company’s stock, at a specific price–called as the strike-price, at some point in the future. In an employee stock ownership plan, the employees are awarded the options, meaning they don’t have to pay for them as would typically be required in the markets. However, most such plans require the stock options to be held for a specific amount of time before they can be cashed out, may be one year or a pre-specified period. Once the holding period has elapsed, the employees can redeem the option where they would be awarded the shares of stock, and if they choose, can sell the stock for cash in the market. Stock options could also serve as a form of compensation for discontinuing prior benefits.

Surviving a Difficult Time

The hardest-hit employees are almost certainly those who have lost their jobs as a result of an M&A deal. Impacted employees have to be informed in advance of the possibility of staff reductions and given some time to look for new jobs.

The employees that remain are likely to find themselves in unfamiliar territory with new co-workers and management. Some employees might find they need to work harder to catch up with their new contemporaries. The extent of the challenges faced by the target company’s employees largely depends on the communication between the surviving employees and their new management team. Of all the reasons why M&As fail, poor communication leading to culture clashes are often the most damaging.

Questions Employee Ask During an M&A

Poor communication during any M&A deal, including overly vague and one-way communication, can wreak havoc on the morale and productivity of the employees of both the acquired and acquiring company.

More detrimental or disastrous for the deal could be that the key employees who drive value may feel the need to quit if they do not feel protected, secure and respected during this change. It is only natural for employees to ask the following questions during a M&A:

• What will be the changes to their salary, benefits, paid time-off and severance plans/packages?
• Will there be any functional job relocations?
• Will there be job opportunities in other/new locations?
• Will their job profile and responsibilities change?
• What will the new reporting structure look like?
• Will their work processes, systems and procedures change? If so, what kind of training will they be provided?
• How should they handle inquiries from customers and/or the media?
• What is the timeline for formal announcements?

The clarity and manner in which these questions are answered by the acquiring company can directly correlate to how productive these employees will be and how likely they will be to want to stay in the newly formed company.

Employee Rights During an M&A Deal

Job losses are often a natural part of any M&A deal and nothing much can be done to protect yourself against being laid off; however, being familiar with your current contract is critical. It most likely addresses severance pay and additional key information including non-compete agreements.

In some cases you are entitled to a certain number of days notice – this can depend upon both your location and contract. On the other hand, if you are retained by the acquirer you will want to carefully review all documents before signing.

HR questions to Ask During an M&A

A competent acquiring company will deal with many of the HR issues that need to be addressed as a part of the acquisition process. An acquisition complicates matters for HRM practitioners in that they’re now potentially dealing with two employee handbooks; but because everyone is now operating under the same roof, they’ll expect equal treatment.

A good thumb rule for HR managers is to opt for the condition which grants the optimum condition for employees.

But it’s not just benefits: The acquisition is also likely to create a range of training requirements across the organization.

Questions could include:

• How will benefits and remuneration packages change as a result of the acquisition?
• Where is training required most urgently?
• What role does HR play in shaping the organization’s culture?

Conclusion:

In their quest to gain market share, footprint in a new geography, or a new product line, companies overlook the impact that an acquisition will have on their people. As one of, if not the biggest, value generator for most companies, managing people through an acquisition is of utmost importance. That’s as much the case for the people leaving the company as those remaining. By appointing a change manager at the outset, you send a message to your employees that they’re a valued part of the acquisition process.