THE LIFE CYCLE OF MERGERS/ACQUISITIONS:
coping strategies for those who lead and those who follow.
Dr. Laurence J. Stybel Maryanne Peabody
Stybel Peabody Lincolnshire
Sixty State Street, Suite 700
Boston, MA 02109
Waltham, MA 02154
e mail: firstname.lastname@example.org
Individuals have life cycles. Products have life cycles. Do
corporate mergers/acquisitions (M/A) have life cycles?
Understanding M/A management from a life cycle perspective can
better help employees to predict "what happens next" amidst the
chaos of the present. It can also help increase the odds of
individual employee survival.
We are going to address three key issues:
1. What do we know about M/A management?
2. What is the M/A Life cycle?
3. What are the implications of the M/A cycle
for those who manage it and those who
are managed by it?
WHAT DO WE KNOW ABOUT M/A MANAGEMENT?
We certainly know there is plenty of it going around! The
MÀ Data Base shows that in 1980, there were approximately 1500
M/As; by 1986 there were 4500 in a year. Dollar value of the M/As
during this period went from less than $40B in 1980 to over $200B
Britain shows a similar trend, with 400 M/As taking place in
1980 and 1,200 in 1988.
The dollar value of M/As is significant. And so is the
impact on people. It is estimated by Fortune that 25-50% of the
work force is directly affected when two companies merge. In 1983
alone, nearly a quarter of a million employees lives were changed
as a result of just 10 large mergers.
Review of the M/A Literature
There tend to be two general types of M/As. The first type
might best be called "create wealth through leveraged buying
followed by asset sales." This type of activity will not be the
subject of today's talk.
A second type of M/A is based on generating value by
creating synergy and efficiency. By blending two companies with
complimentary or different products, there will be added value
for the new,larger company. An example of this would be Sears'
acquisition strategy. The efficiency argument states that there
are cost savings to be made by eliminating redundant services and
paring down middle management bulge. The growth of banking M/As
are largely based on this premise. Presumably, this synergy and
efficiency will result in bringing more wealth to the owners.
That is the theory. Does it work in practice?
A 1983 article by Michael Jensen and Richard Ruback in the
Journal of Financial Economics summarized 13 separate studies of
the prices of shares involve in U.S. takeovers. They concluded
that, if you look at share prices one month before and after a
M/A event, then one could safely conclude that M/As do indeed
increase shareholder value. Beyond a year after the event, share
prices actually underperformed the market!
Julian Franks and Robert Harris looked at share price data
for 1500 British acquisitions from 1955 to 1985. They found
results similar to the Jensen Ruback U.S. study.
David Ravenscroft and Frederick Sherer conducted a fairly
elegant study of 471 companies broken down by comparing the
performance of purchased operating units with control groups of
similar units that stayed independent. For example, a division of
a larger company would be compared with a free standing company
of similar size and market focus. As a group, the acquired units
were yielding 9.8% per year between 1975-1977 compared to 13.7%
for independent groups.
And what do we know about the management of mergers once the
financial and legal dust settles?
The Management Contents data base contains summaries of
articles appearing in 120 business journals from 1974 to the
present. Of 253,000 articles in the database, only ten citations
could be found covering the management of people during M/As.
THE M/A LIFE CYCLE
This discussion must be a broad overview. Mergers and a-
cquisitions will clearly differ depending upon a number of
factors: degree of hostility in the take-over, related versus
unrelated industries, whether the new owner seeks to grow the
business or simply harvest its profits, etc.
Having said this, we find M/As go through some clear cycles.
STAGE 1: AMBIGUITY
There is a paradox here. This stage--called the Stage of
Ambiguity--is actually the clearest phase of all. It begins at
the first rumor of a M/A activity; it ends when the acquiring
company makes its first clear policy move.
As with all ambiguous social situations, rumors abound and
institutional paranoia is the norm. And in a paranoid state,
there is a tendency to overinterpret motives and undervalue the
likelihood that events are caused by chaos or randomness.
What appears to the acquiring company as the acquiring
company's own lack of clarity / chaos or unwillingness to discuss
its plans with subordinates will appear to the acquired company
officials as a clear indication of deceit and bad faith. For
The General Manager of an Acquired Division met the
acquiring company president at a company social gathering.
The General Manager's question to the CEO was, "When do
you plan to take over our operations?" Fumbling with his
drink, the CEO mumbled, "Not anytime soon."
A week later, the acquiring company made its first
move to dismantle financial operations at the Division
and to move it to corporate headquarters. For the General
Manager, this sign was proof positive that the President
deceived him at the party. For the President, the same
event meant that the General Manager had put him on the spot
and the President was unwilling to go into a detailed
business conversation at a social gathering.
Of course, not all acquired company officer claims of deceit
are due to institutional paranoia. We suspect a significant
percentage of M/As fail to meet high expectations because of
deceit on the part of the acquiring company officials. It poisons
the atmosphere so much that only the death/retirement/termination
of those who lie may solve the problem. For example:
When an acquiring bank negotiated for the purchase
a competitor, it publicly went on record to state
that there were no intentions of replacing the senior
management. And that is exactly what it did within four
Between these two extremes lies the more common day-to-day
operational ambiguities that routinely poison the atmosphere:
The Director of Personnel of an acquired company visited
the Vice President of Administration of the acquiring
company. After assuring her that her operations would
not be impacted by the merger, he politely vetoed her
choice of a compensation consulting firm on the grounds
that headquarters always used Firm X.
Suggestions for Dealing with the State of Ambiguity
1. Try to keep the period of ambiguity as short as
possible. If changes are going to be made, make
them rapidly. Making a series of "small adjustments"
over a period of years is likely to be perceived as
a Chinese "water torture." People will be able to
adjust when they understand what is going to happen.
. Don't call it a merger unless it really
is one. A merger implies two companies of
equal value. An acquisition implies a power
imbalance. People need to know where they
stand at the front end of a M/A operation.
Slick face saving gestures calling an
acquisition a merger probably does not fool
customers or the financial community; but
it can easily confuse employees at the
acquired company who desperately don't
want to believe they have been acquired.
. The value statement "honesty is the best
policy" is not only an ethical issue, it is
also a philosophy of M/A management that is
profoundly practical. Employees may not
like bad news, but they can deal with it.
Employees may resent chaos in upper
management, but they can understand it.
Deliberate duplicity is unlikely to be
forgiven or forgotten.
2. Announce the company severance benefits as quickly as
possible. One of the benefits of a clear and
generous severance program is to make it worth
something to employees to take a "wait-and-see"
attitude during this period of ambiguity. If
the severance benefits are also ambiguous, then
many good people are likely to prematurely jump
ship as a way of achieving some measure of
certainty and control over their professional lives.
3. Establish a Rumor Control Center in each division.
This Center could actually be a senior level person
who has the authority and credibility to confirm or
deny rumors before they begin to spread.
1. Don't jump ship until you are pushed, if the
severance plan is decent.
STAGE 2: CONSOLIDATION
With the acquiring company's first policy moves, its inten
tions now become clear. An "us" versus "them" mentality becomes
common. Also common is the resentment among acquired officials
over demands for more and more operational data. It is often
perceived that owners are going to use this information against
the people providing it.
At the same time, the officials at the acquired company will
likely feel that people in the acquiring company are withholding
Institutional Paranoia is likely to give way to
Institutional Mourning for the old company and its way of life.
It is a profoundly sad time. But there is also the danger of the
"Rebecca" is a short story by Daphne DuMaurier. A man brings
his second wife to his home. The servants keep comparing the new
wife to the dead first wife--"Rebecca Wouldn't Have Done It This
Way." The second wife is convinced that the servants hate her and
that she can never compare with the often mentioned Rebecca. But
the end of the story has a twist: Rebecca was actually a hateful
woman! In other words, the Rebecca Myth refers to a sincere sense
of mourning and loss for a state of affairs that objectively
wasn't as wonderful at the time as it now appears!
During this time period, the acquiring company is apt to be
evaluating the depth of management talent in the mid management
ranks of the acquired company. Evaluations based upon old perfor
mance appraisal documents are likely to be suspect, as these
evaluations are often confounded by compensation factors ("I want
to give this employee a 6% raise when "average" performers are
only able to get 4%. I'll fill in the appraisal sheet to justify
the 6% raise, even though I privately believe this employee to be
only an average performer"). Evaluations of subordinates by
asking the boss directly about his/her opinion are now also
likely to be suspect, as bosses have political motives to make
themselves look good in the eyes of the new owners--even it means
downgrading the performance of subordinates. In other words, one
can count upon bosses to claim more personal credit for success
than they may really deserve.
Given these dynamics, old mentor relationships and political
alliances are apt to be severely strained. And the more naive
employees may not realize it until it is too late.
Suggestions for Dealing with the State of Consolidation
1. This is a good time to initiate employee climate/
attitude surveys. Results are likely to be "rock bottom," thus giving a good base line against
which to measure later improvements or lack of
2. Given the new politics of promotion decisions, it
may be useful to involve outside consultants in
helping to evaluate employees. At its best, such
consultants help to convince employees that the
company is going the extra "mile" to insure
impartiality against its own favoritism or
subordinate backbiting on the part of subordinate's
bosses. At the worst, it allows the consultants to
function as a scapegoat to explain why promotions
1. Provide management at the acquiring firm with
more information than they may actually be
seeking. This action positions you as having a
reputation of being cooperative and a player
on the "new team."
2. Make every effort you can to establish good personal
relations with the new power sources.
3. Be wary of your boss. An M/A action can turn
a mentor into an ex-mentor!
4. Request that the acquiring company provide an
impartial "second opinion" prior to making a decision
about your suitability for promotion or new jobs.
Many companies now routinely provide such assessments
as part of the screening process of senior level people
who are being recruited externally.
5. Organize employee-sponsored (not company sponsored)
mourning rituals for dead products, services, or
organizations. Such rituals can be as simple as
a toast with wine to an actual memorial service.
Like funerals, such mourning rituals help acknowledge
communal loss and help start the healing process.
STAGE 3: POST CONSOLIDATION
It is said that in the aftermath of a nuclear war, the
survivors will envy the dead. In a similar way, in the aftermath
of a consolidation, remaining employees have been known to state
that they envy those employees who were able to obtain early
retirement or new jobs.
It may take up to 18 months of no new policies or
disruptions to finally convince employees that the period of post
consolidation is at hand. During this period, employees may find
themselves in chronically undermanned situations.
Chronic and constant undermanning can be a major source of
stress for employees. But an organization that is staffed at a
somewhat less than optimal level actually performs more
effectively than other staffing patterns. Slight undermanning
prevents the freezing in of stereotype work roles and forces
employees to be flexible in responding to customer needs. An
example of this would be the typical emergency room of a large
city hospital. Staffing patterns can often can go from
overmanned to undermanned and back to overmanned in a matter of
minutes. The TV series "M*A*S*H" also captured the essence of
the desirability of a slightly undermanned situation.
If this type of optimal undermanned situation is achieved
and maintained on a consistent basis, the work unit is likely to
develop a sense of mission and enthusiasm...even an "esprit de
corps." Of course, if that optimal level is not achieved, then
employees will simply feel overworked and unappreciated.
But if an optimal undermanning situation can continue, this
sense of mission and enthusiasm will continue until.....the
parent company announces the impending sale of the division to a
Like all life stages, the M/A life cycle sets up a series of
challenges for individuals to meet. Meeting those challenges does
not end the problem...it simply helps position one to go onto the
next level of problem. In short, if you are looking for a way to
achieve homeostasis following a merger, you will be doomed to
disappointment! The good news, however, is that the challenges
and hurdles are beginning to become predictable. And, as they
become predictable, they become more controllable.
Harvard University Medical School psychiatrist Leston Havens
perhaps put the issue best when he wrote:
"The expected can be discounted, as they say in the
commercial markets. Against the unexpected, there is
confusion, denial, turmoil...the sense of being
thrown. It is the slow translation of the unexpected
into the expected that constitutes much of wisdom."
Dr. Laurence J. Stybel and Maryanne Peabody are co-founders of
StybelPeabody Lincolnshire. There are twenty five Lincolnshire
International offices in the United Kingdom, Canada, and the
United States. The firm provides career effectiveness services
for senior executives. Contact Larry at email@example.com.
Stybel Peabody Lincolnshire clients include 36% of New England's
largest 14 thrift institutions, 40% of Boston's largest 25
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Their programs are the only ones approved by the Massachusetts
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WEEKLY voted Stybel Peabody Lincolnshire "Best retained search Firm"
Alan Auerbach. Corporate Takeovers: causes and consequences.
Chicago: University of Chicago Press, 1988
Leston Havens. Making Contact: uses of language in
psychotherapy. Cambridge, Massachusetts: Harvard
University Press, 1986.
David Ravenscroft quoted in The Economist, December 17,
1989, p. 78.