After the Honeymoon - A Three-Country Study of Employee Reactions to Takeovers

Failure rates for Mergers and Acquisitions are reported to be in the range of 50-70% and are even higher for cross-border M&As. With significant controversy as to the root cause of these failures, more researchers are looking at the “softer” side of M&As, the less tangible social, psychological, and cultural issues. In this working paper, Professors Stahl and Pablo, and Research Associate Chei Hwee Chua, examine how characteristics of the takeover situation (hostile vs. friendly, cultural distance, interaction history, etc.) affect the target firm employees’ trust in the acquiring firm’s management. They test their theory on employees in three countries: Germany, Singapore and Canada.

by Günter Stahl, Chei Hwee Chua
Last Updated: 23 Jul 2013

In many ways mergers and acquisitions are marriages, and like any relationship, there are psychological and emotional issues to contend with. Yet despite high failure rates (M&A literature generally puts it at 50-70% and even higher when cross-cultural), little research has been done on the “softer” side of M&As, the less tangible social, cultural, and psychological issues. In this working paper, Günter Stahl, Assistant Professor of Asian Business at INSEAD, Chei Hwee Chua, Research Associate at INSEAD, and Amy Pablo, Haskayne School of Business, University of Calgary, hypothesize that these “softer” issues matter. They test their hypothesis in a three-country comparative study.

Using a policy-capturing approach, the authors presented a cross-national sample of employees in Germany, Canada, and Singapore, with a series of decision scenarios in the form of a questionnaire (a “what if” approach). The scenarios were designed to determine first the role of trust in the post-acquisition integration process, and second whether employees’ trust decisions following takeovers differ across cultures. They hypothesized that there are five key variables influencing trust:<UL><LI>Mode of takeover (hostile vs. friendly)

<LI>Cultural distance

<LI>Extent of imposed control (how much the acquired company employees must conform to the acquiring firm’s processes and philosophies)

<LI>Perceived attractiveness of acquiring firm’s HR and reward system

<LI>Interaction history </UL>As hypothesized, the results showed that the five factors were significant influences on respondents’ trust decisions. However respondents did not assign equal weight to each. Perceived attractiveness of acquiring firm’s HR and reward system was the most important determinant of trust, consistent with existing research showing that employee reactions to a merger or takeover depend primarily on personal benefits and losses. Results also showed, unexpectedly, that cultural differences do not have a significant impact on trust. The results did, however, suggest a significant interaction effect between mode of takeover and cultural differences, suggesting that the detrimental effects of a hostile takeover are more pronounced in cross-border situations. This may be due to the fact that cultural barriers and the associated stereotypes and biases become more pronounced when people feel threatened or powerless.

Cultural orientation also seems to have a strong mediating effect on decision-making. For example, interaction history was deemed as mildly important to Germans, while the Canadians and Singaporeans rated it second highest.

Looking ahead, the authors see several implications for practice. They note that in M&A activity, emphasis is usually placed on strategy and financial goals, while the human factors often go unnoticed. This study suggests that the less tangible psychological, social, and cultural aspects play a key role in the post-integration process. They conclude by observing that the characteristics of the initial takeover situation, such as a hostile takeover tactic or lack of prior personal contact, can be major obstacles to achieving integration benefits because they can undermine target firm members’ trust in the acquiring firm management. Therefore, the socio-cultural implications should be considered at an early stage in the acquisition process, in the evaluation and selection of a suitable target, and the planning of the integration process.

INSEAD 2003

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