Cause and effect relationship between post-merger operating performance changes and workforce adjustments

Prior empirical research provides substantial evidence showing that mergers and acquisitions lead to operating performance decline (Ghosh, 2001). At the same time such transactions involve workforce reductions, as reported in the public media. However, systematic empirical evidence on the association between operating performance and workforce adjustments is inconclusive. On the one hand workforce reductions may be undertaken to improve efficiency and firm profitability (Cascio et al., 1997) or to arrest further performance deterioration. On the other, post-takeover layoffs may be undertaken to create shareholder value and to regain premiums paid to targets. Consequently, it is suggested that such layoffs destroy the human capital of acquired firms and thereby negatively affect firm performance post-merger (Krishnan et al., 2007). Thus, the answers to (1) whether post-takeover performance decline leads to workforce reductions and (2) whether such layoffs positively or negatively affect firm performance are unknown. This chapter aims to provide new empirical evidence on these two questions. Empirical evidence on these questions would clarify whether post-merger labour management decisions are made to further enhance efficiency and firm profitability

Causes of post-merger workforce adjustments

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Labour demand and wage effects of takeovers that involve employee layoffs

The issue of whether mergers and acquisitions lead to economic efficiency is divisive, as is confirmed by mixed empirical evidence. There is no general agreement on the dominating motive for such transactions. Consequently, the sources of takeover gains are unknown. Synergy realisation and management disciplining have been suggested as the main driving forces of efficiency improvements. However, it is not well understood how such factors may create value. One suggestion is that better labour management and more efficient labour usage reduces demand for labour during post-takeover years (Conyon et al., 2002). Profit maximising managers may undertake workforce reductions to realise the synergetic and better labour management gains created by mergers. However, any workforce reduction should be undertaken on the basis of the level of decline in labour demand. This implies that decline in labour demand should be steeper in mergers that involve employee layoffs than in mergers that do not

Shareholders and employees : rent transfer and rent sharing in corporate takeovers

The introduction of the ideology of maximising shareholder value and the rise of institutional investors in LMEs contributed to the development of an active MCC, which threatens managers with replacement if they do not act in the best interests of shareholders. However, some authors argue that restructuring for shareholder value through the MCC may negatively affect labour (Froud et al., 2000; Lazonick and O'Sullivan, 2000). It is suggested that such corporate governance practices may discourage employees from investing in firm-specific human capital and may pressurise managers into taking short-term profit-maximising actions instead of investing in long-term sustainable projects (Blair, 1995)

Shareholders and employees : rent transfer and rent sharing in corporate takeovers

The introduction of the ideology of maximising shareholder value and the rise of institutional investors in LMEs contributed to the development of an active MCC, which threatens managers with replacement if they do not act in the best interests of shareholders. However, some authors argue that restructuring for shareholder value through the MCC may negatively affect labour (Froud et al., 2000; Lazonick and O'Sullivan, 2000). It is suggested that such corporate governance practices may discourage employees from investing in firm-specific human capital and may pressurise managers into taking short-term profit-maximising actions instead of investing in long-term sustainable projects (Blair, 1995)