The Human Side of Mergers: Those Laid Off and Those Left AboardPublished: March 30, 2005 in Knowledge@Wharton
The initial headlines announcing mega-corporate mergers and acquisitions typically focus on Wall Street's appreciation for improved finances, less duplication of services and staff, the ability to grow a company faster, and the anticipation of higher returns for shareholders when the two companies merge into one.
But what about low morale and decreased productivity among the rank-and-file, a by-product of many corporate mergers that attempt to slam together two diverse corporate cultures? Or the impact on employees who lose their jobs, and the employees left behind after layoffs are announced? How will these so-called survivors deal with the loss of institutional knowledge, increased workloads and a sense of uncertainty about their own futures?
The story of what happens to the rank and file employees after these corporate weddings is rarely headline-grabbing news. When Procter & Gamble announced in January that it would buy Gillette for $57 billion, the fact that 6,000 people would lose their jobs was all but buried in the details of a deal that would link some of the world's most well-known household brands.
The reasons why, many say, are simple. "The investment community focuses on costs. They generally always like the idea that you can cut workers" and save money when mergers and acquisitions are announced, says Peter Cappelli, director of Wharton's Center for Human Resources. "But it's difficult for them to factor in the associated costs of layoffs, declining morale, and the chaos" that comes from restructuring. Because the investment community can't easily measure these costs, "they don't factor them in, and that's one reason why mergers rarely work out."
Also, mergers of large corporations rarely consider the effects of layoffs on local communities because "they are such a small part of the overall global economy and their effect on it is tiny," says Cappelli. Corporate boards used "to care about the local economy, but the change in governance of corporations means that they focus primarily on the concerns of the shareholders." When it comes to the well-being of the employees, he says, "they don't care."
Perhaps they should. Mergers that result in layoffs can be a "devastating experience, both psychologically and physically" for those who lose their jobs, says Sigal Barsade, a professor of management. People who are fired or laid off often get sick and develop stress-based illnesses. Recent studies have even shown that "being laid off and then rehired is associated with more work-related injuries and days off than just receiving a warning notice, or of course, not being laid off at all. So even if you rehire employees, there can be damage."
Furthermore, says Cappelli, companies typically "don't pay attention" to the potential loss of institutional knowledge when there are layoffs. Why? Because on paper, the merger of two corporations means "an opportunity for some companies to increase their quality of talent -- two people for every position -- so they pick the best one. But the process through which this happens is messy. Some companies that do this are good at it -- particularly when they are making small acquisitions, for example, or acquiring smaller companies. But when big mergers are involved, I think they are just bad at it" as the others.
Management professor Nancy P. Rothbard points out that institutional knowledge can "have two meanings. One is the idea of skills and knowledge of information that is relevant. But another is the knowledge of the way things are done in the company. Often, that changes with the merger. It's not clear, but sometimes retaining the people who are wedded to the old ways might be problematic if they are not able to adapt. It might become a hindrance if it creates a barrier to change."
Another way to look at institutional knowledge is to view its retention as a competitive advantage, says John Paul MacDuffie, co-director of Wharton's Reginald H. Jones Center for Management Policy, Strategy, and Organization. "Companies that pay attention to these human factors, who retain and keep the right people and do it better than other companies have a competitive advantage, not just on the deal-making side, but the human resources, merging-of-cultures side. And it's not as common as you would think."
Violating a Psychological Contract
Companies should pay attention to how they treat the people who are leaving for several reasons: namely, the survivors, the people who are left behind to keep the show going. Both Barsade and Rothbard agree that one of the key factors in predicting how corporate survivors and those who get laid off respond is each individual's perception of "procedural justice."
"Were fair standards and clear guidelines applied? Or were the layoffs done in an unfair or ambiguous manner?" asks Rothbard. "It's usually important for the company to use consistency and clarity (in making the announcements), and explain what the criteria are for the people who are losing their jobs." What the literature has found, adds Barsade, "is that the best way to help survivors get through this period -- as well as help the people who are laid off -- is if there is the perception of procedural justice. Is the layoff process fair and transparent, and recognized as such?"
MacDuffie suggests that employees respond better to layoffs if the process "does not violate the sense of a psychological contract" between the employee and the company. It's important that the employer turned to layoffs as a "last resort, not a first resort. If mismanagement from the top causes the layoffs, then obviously it is going to produce a very different feeling. If there is a scenario where managers imperiled the employment of a lot of people who placed their trust and faith and retirement savings with them, that has a different feeling too."
The P&G and Gillette merger, MacDuffie says, "is two successful companies coming together, a merger that is trying to take advantage of economies of scale and better use of distribution networks, that is going to end up with redundancies and layoffs. But if the growth prospects overall are high, people may take a relatively positive feeling into the merger. If they are not in a place where the redundancies are, their jobs will be safe, and prospects for the company's future are enhanced."
For those who "survive" and keep their jobs after a restructuring, the results can vary. For instance, people who are resilient by nature tend to do better, and if survivors are surrounded by positive, resilient people, everyone tends to perform better. Both survivors and those who lost their jobs tend to go through a natural phase of grieving -- similar to the steps of grieving that occur after a death, as outlined by author and physician Elizabeth Kubler-Ross, says Barsade. "They are mourning the loss of friends, the loss of the organization. Once you have undergone a layoff, it jolts you. It is a feeling of betrayal. And you have to manage that."
How? "If you are a line manager, your ability to bring in a therapist for everyone is extremely low. So you have to let people vent, you have to let them be angry ... Many managers feel uncomfortable dealing with sadness, fear and anxiety -- and they are feeling it themselves, too." More often than not, the situation is particularly "sticky for middle managers -- who didn't decide that this (layoffs) should happen but are in the position where they have to carry it out for the organization."
The Push for "Employability"
Mergers and acquisitions offer another challenge -- keeping the survivors who are "acquired" and clearly bring value to the new company. MacDuffie notes that companies that do this successfully "work hard to communicate to the employees that they match the new company values and culture. They put a lot of careful attention into the human factors that would make them inclined to stay" -- factors ranging from e-mail availability on the first day of work to future stock options. Otherwise, talented employees "are primed to be picked off by other firms" after a merger.
The ubiquitous nature of layoffs and the changing perspective on employment may also play a role in how people respond to mergers and acquisitions that result in layoffs. "I don't think there is ever a way to be comfortable with (layoffs), because it introduces an element of risk to anyone's employment," says MacDuffie. "But the fact that it's more common today means that there's no stigma to being laid off. You are not as likely to see it as your fault. It's the result of organizational change. The new word is 'restructuring.' It's a fact of life in our economy." Cappelli agrees. When it comes to layoffs, "there is a clear message that it's not about individual performance, particularly with mergers and acquisitions, when it's due to duplication of jobs."
MacDuffie admits that young workers today are much more reluctant to embrace a job for life and have adapted to today's push for what many call "employability." "Companies today offer employees 'employability' -- which means that 'we promise you wonderful training and experiences, so even if we have to lay you off, you could sail out and get a new job.'" Though he knows it exists, MacDuffie questions many aspects of this changing employment contract. "Will people adjust to a new reality and be willing to take the view that, 'Oh, I'm here to get skills; I'll have many more jobs in my lifetime'? Will that actually prevail, or will the reaction be cynicism, mistrust, withdrawal of effort and commitment, a lot of things that are negative for the company and the individuals involved?"
MacDuffie points to a recent survey of American workers aged 18 and over which shows that only 45% of workers say they are satisfied with their jobs; only 20% feel very passionate about their jobs; less than 15% feel strongly energized by their work; and only 31% believe that their employer inspires the best in them. The "New Employer/Employee Equation Survey" -- conducted by Harris Interactive, Inc. for Age Wave, an independent think tank, and The Concours Group, a global consultancy advising senior executives -- points to a somewhat ironic consequence of the so-called "employability" model for workers.
"If you begin to embrace the notion of employability, you are getting less commitment," MacDuffie says. "I'm not sure why. One view is that people are very committed to the job they are doing, to the projects that they are on, but they are not caught up in loyalty to the company. Maybe this is an acceptable loss. But the other view is that people are not just less committed but they are cynical, they are suspicious, they are always kind of calculating 'What is in it for me?'"