EMPLOYEE‐FRIENDLY ACQUIRERS AND ACQUISITION PERFORMANCE

• Author: Mine Ertugrul
• DOI: http://doi.org/10.1111/j.1475-6803.2013.12014.x
• Published date: 01 September 2013
• Date: 01 September 2013

EMPLOYEE‐FRIENDLY ACQUIRERS AND ACQUISITION PERFORMANCE

Mine Ertugrul

University of Massachusetts Boston

Abstract

In this article I investigate the relation between the employee‐friendly practices of the

acquiring firm and the acquisition performance. I find a positive relation between

employee friendliness of the acquirer and acquisition performance. Employee

friendliness of the acquirer is also positively linked to acquisition completion

probabilities and completion speeds. The effect of employee‐friendly policies on

performance is stronger for human‐capital‐intensive firms. The positive relation between

employee friendliness and acquisition performance is robust to an alternative measure of

employee friendliness and endogeneity corrections. The results reflect the importance of

human capital and employee‐related policies for the long‐term success of an acquisition.

JEL Classification: G30, G34, M14

I. Introduction

Mergers and acquisitions are important events in corporate finance and have been studied

extensively. Recently, researchers have also focused on the importance of human capital,

specifically, employees in firm performance and corporate decision making. However, there

is little empirical work on the role of employees and employee‐related policies on the

acquisition decisions and the integration of the target. In this article I contribute to the literature

by examining the effect of employee friendliness of the acquirer on acquisition performance.

Although there is little systematic evidence on how employee friendliness affects

acquisition outcomes, anecdotal evidence suggests that some companies put great

emphasis on the human component of the target integration process. For example, Cisco

Systems has an “HR acquisition team,”which is responsible for “designing the integration

strategy around employee concerns to help facilitate and expedite acceptance of change

by the new employees.”Cisco Systems lists “retaining 100% of the employees who

transition from the acquired company”as the most important measure of the success of the

integration effort.

1,2

The importance of employee retention after an acquisition is

emphasized by Cisco founder, John T. Chambers, as follows: “Most people forget that in a

I would like to thank Randall Heron (the associate editor) and an anonymous referee for their valuable

comments and suggestions. I would also like to thank Katsiaryna Salavei Bardos, Olubunmi Faleye, Shantaram

Hegde, Karthik Krishnan, session participants at the 2011 Financial Management Association annual meetings, and

at the 2012 Eastern Finance Association meetings for many helpful comments.

1

Cisco on Cisco “Business Management Case Study: How Cisco Applies Companywide Expertise for

Integrating Acquired Companies,”www.cisco.com.

2

Cisco Systems’average employee friendliness index is higher than 95% of the companies covered in the KLD

database. Cisco Systems has been included in Fortune’s 100 Best Companies to work for list every year from 1998 to

2006.

The Journal of Financial Research Vol. XXXVI, No. 3 Pages 347–370 Fall 2013

347

© 2013 The Southern Finance Association and the Southwestern Finance Association

high‐tech acquisition, you really are acquiring only people. That’s why so many of them

fail. At what we pay, at $500,000 to $2 million an employee, we are not acquiring current

market share. We are acquiring futures.”

3

PopCap’s rejection of the bid to be acquired by

Zynga is an example of a target resisting a proposed acquisition. PopCap, a mobile web

company, refused the offer from Zynga, a gaming company, since “PopCap’s founders

worried about (Zynga’s) reputation after hearing rumors of the company’s rescinding

share awards and fierce internal competition.”Instead, they agreed to be acquired by

Zynga’s rival, Electronic Arts.

4

In this article I examine two major hypotheses about the effect of employee

friendliness of the acquirer on acquisition performance. The target employee resistance

hypothesis predicts that employee‐friendly firms can more easily overcome potential

resistance to the acquisition from target firm employees, better integrate the target firm,

and realize greater synergies, all of which will result in better acquisition performance.

Target employee reaction to the acquisition can have a significant impact on the

performance of the merger. Target employees are likely to be concerned about possible

layoffs, new management, and new work environment. These concerns may lead to

employee resistance to the acquisition in the form of work shirking, absenteeism, and

voluntary departures (Finkelstein and Larsson 1999). Employee resistance can negatively

affect employee productivity, hinder integration efforts, and result in failure to fully

exploit synergies expected from the acquisition.

Employee‐friendly practices of the acquirer and the extension of these benefits to

target employees can help reduce their resistance to the acquisition. Employees who are

satisfied with their work and employer are more likely increase their efforts and stay with

the firm. Akerlof (1982) argues that satisfied employees reciprocate to the firm with

increased effort. Rhoades and Eisenberger (2002) and Whitener (2001) show that human

resource practices such as recognition, pay, promotions, and job security increase

employees’perception of the firm’s support to them and result in greater job satisfaction,

increased willingness to exert effort on behalf of the firm, and increased willingness to

stay with the firm. Somers (1995) shows that more committed employees have lower

turnover and absenteeism. These studies suggest that employee‐friendly practices of a

potential acquirer, such as cash profit sharing, employee involvement in certain company

decisions, and extensive benefits, are likely to increase the employee’s commitment to the

firm and reduce turnover, shirking, and absenteeism after the acquisition. Furthermore,

employee‐friendly acquirers might be more likely to understand the importance of human

capital in merger integration and find it easier to overcome any potential resistance of

employees of the target firm. For example, they might define the leaders of the transition

team, communicate new policies and procedures to target employees, and clarify their

expectations early in the acquisition process. These measures might help reduce

uncertainty and resistance from target firm employees, and have a positive effect on

acquisition performance. Thus, employee‐friendly acquirers might better integrate the

target firm and realize greater synergies, resulting in better acquisition performance.

3

“The Corporation of the Future,”Business Week, August 24, 1998.

4

“Zynga’s Tough Culture Risks a Talent Drain,”New York Times, November 27, 2011.

348 The Journal of Financial Research