February 23, 2016

Psychological Impact of M&A on Shareholder Value

This paper documents the not insignificant psychological effects of M&A transactions on employees, which – left unaddressed – can correspondingly undermine productivity, realization of expected benefits from the transaction and shareholder value.

According to the paper, research shows that more than half of merger failures are due to failure to attend to the “people factors” – which are often neglected due to management’s focus on the myriad operational-related issues inherent in the merger process. While the percentage of mergers deemed to be “failures” varies depending on, e.g., the source and definition of what constitutes a failure, this paper asserts that most commentators agree that between 50% and 70% of mergers fail to achieve their objectives.

Psychological Impacts of “Merger Syndrome”

  • Anxiety – Employees face uncertainty about job prospects and impact on career
  • Social Identity – Employees lose their old organizational identity
  • Acculturation – Employees must adjust to a new culture and form new relationships
  • Role Conflict – Employees face uncertainty about where they stand in the post-merger organization
  • Job Characteristics – Employees must adjust to changes in their jobs as certain functions are changed to eliminate redundancies
  • Organizational Justice – Employees lose trust if the company is unfair or not transparent about who they promote or lay off

While each of these psychological issues and suggested antidotes are discussed in detail, the table on the last page does a nice job of summarizing each issue, its sources, predicted outcomes, and suggested management actions to avoid or mitigate the potential for undesirable consequences.

See this Norton Rose Fulbright article and my previous merger success blogs:
Post-Merger Cultural Integration Success Program
How to Achieve Post-Merger Integration Success
How to Effect Effective Merger Boards

An Attack on the Hedge Fund Activism/Positive Long-Term Value Link

This recent paper investigates the association of hedge fund activism and long-term firm value, concluding that:

  • Positive long-term association between hedge fund activism and long-term firm value documented in prior studies is likely affected by selection bias – as activist hedge funds tend to target poorly performing companies.
  • Once such selection bias is incorporated into the analysis, evidence shows that companies targeted by activist hedge funds improve less in value after their campaigns than ex-ante similarly poorly performing control companies that are not subject to hedge fund activism – suggesting that the hedge fund activism decreases – rather than increases – a company’s long-term value relative to comparably situated non-targeted control companies.
  • Findings are consistent with the authors’ hypothesis that the ability of activist hedge funds to substantially influence a firm’s investment policy exacerbates a company’s “limited commitment” problem toward long-term value creation and stable stakeholder relationships. The “limited commitment” problem (discussed further in the paper) purportedly arises out of the inability of public shareholders vested with strong exit rights and exposed to informational inefficiencies to credibly commit to long-term investment strategies or engage in long-term cooperation with other firm stakeholders.

See also this noteworthy Short-Term Thinking infographic from the New York Times.

More on “The Mentor Blog”

We continue to post new items daily on our blog – “The Mentor Blog” – for members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:

– Director Exit Interviews
– Data Breach Derivative Suit Protection: Action Items
– How to Calmly Effect Emergency Succession
– Non-GAAP Disclosure Compliance Tips
– Redefining the Board’s Role in Strategic Planning 


– by Randi Val Morrison