Thesis M & As 2016

Beyond Due Diligence: The Human Element in Mergers and Acquisitions

A Master’s thesisPresented to the Faculty

School of Behavioral SciencesCalifornia Southern University

In partial fulfillment of the requirementfor the degree of

MASTER’S OF SCIENCEin

PSYCHOLOGY

Mary CraigAugust, 2016

Acknowledgements

This thesis would not have been possible without the support and guidance of many

individuals over the past several years. A sincere thanks to my undergraduate professors who

believed in me, and encouraged me during the times I doubted myself. Without them, I am not

sure if I would have even received my undergraduate degree. In addition, I owe a special thanks

to all of the mentors at California Southern University who were so helpful over the last couple

years in offering their guidance throughout all of my classes. Much thanks to my family and

friends for being patient and understanding of the time I needed to invest in my studies. In

particular, my husband who was extremely supportive, was always ready and willing to engage

in discussions, and got this degree right along with me. I cannot thank him enough for allowing

me to focus on my education while he took on the financial responsibilities. To my brother, who

persistently talked about the importance of furthering my education. It may have taken me a

while to complete my degree, but I did it!!! My parents are not here to see my accomplishment,

but I know they are very proud. Without all of these special people in my life, I am not sure I

would have been as successful as I was on my pursuit to obtain a B.S. and an M.S. degree. My

sincere thanks to all of you!

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HUMAN ELEMENT IN MERGERS

Table of Contents

Acknowledgements

Table of Contents

Chapter One: Introduction

Background Information

Statement of the Problem

Purpose of the Study

Theoretical Framework

Research Questions

Hypothesis

Importance of Study

Scope of Study

Definition of terms

Summary and Organization of the Remaining Chapters

Chapter Two: Literature Review

Mergers and Acquisitions

Phases of Mergers and Acquisitions

Communication

Human Element/Relations

Culture

Leadership

Merger Syndrome

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Summary

Chapter Three: Research Findings and Conclusions

Research Methods and Procedures

Methodology

Data Analysis

Methodological Assumptions and Limitations

Research Findings

Summary

Conclusions

Direction for Future Research

References

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Chapter OneIntroduction

Mergers and acquisitions (M & A) are a common occurrence for organizations all over

the world. Organizations search for opportunities to purchase other companies in hopes to

increase their market share, lessen their competition, increase their talent, and diversify their

products and services. According to Adomako, Gasor, and Danso, (2013), M & As, in general,

have been a focus in research for several decades. The multifaceted processes of M & As have

focused on financial, strategic, and more recently the human aspects. The M & A process is

difficult, and the success rates are quite low. Cartwright, Tytherleigh & Robertson (2007) state

literature shows that mergers and acquisitions have a failure rate that ranges from a bleak outlook

of 80% to a more positive outlook, but still poor, of 50% as cited in (Kyei-Poku & Miller, 2013).

As research indicates, not all mergers are successful. Organizations tend to be extremely

concerned with the financial and strategic attributes that accompany the M & A. There are

endless reasons for failure and struggle after an M & A takes place.

Even though the financial and strategic issues remain dominant in the M & A process, the

human element should not be dismissed (Adomako, Gasor, & Danso, 2013). Financial processes

are affected within the organization; however, the working lives of the employees are affected, as

well. Unfortunately, Schuler & Jackson (2001) found many mergers fail due to neglecting

human resource issues. An overall quality of life for both organizations will be enhanced if their

focus goes beyond gaining more power in the marketplace and diversifying products. This study

will stress how the human element of mergers and acquisitions should be given the same

emphasis as the financial and strategic concerns.

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Background Information

It is in the best interest of the organization participating in an M & A to consider the

human element in addition to the financial and structural aspects of the process. Organizations

are not making large investments in acquiring other companies in hopes that the “marriage” fails.

The organization’s intent is for the M & A to provide growth for their organization and to blend

the best that both companies represent by gaining market share, expansion of the organization,

diversifying products and services, gaining competitive advantage, and possible cost savings

(Datta, 1991; Jayesh, 2013; Moffat & McLean, 2009, Sanda & Benin, 2011). In addition to these

valuable assets, research exists indicating that employee issues exist and should be considered

throughout the various stages of the M & A process (Kiefer, 2002; Sanda & Benin, 2011;

Schuler & Jackson, 2001).

Marks (2002) describes various phases in the M & A process: pre-combination,

combination, and post-combination as cited by (Muchinsky & Culbertson, 2015). Employees’

core values within an organization should be reviewed through the pre-deal, during the act of

merging, and post-integration (Marks & Mirvis, 2011a). Research indicates most organizations

place more emphasis on the financial concerns in the pre-combination phase, and little concern is

spent on psychological or cultural issues (Marks & Mirvis, 2011a; Muchinsky & Culbertson,

2015; Schuler & Jackson, 2001). Ignoring or starting to address the human element too late in the

M & A process could be a major mistake for an organization, and could cause turmoil and

disruption to the organizational operations.

Leaders in the organization need to account for the human element, and each

organization’s present cultural attributes when trying to create wholeness amongst the two

organizations. The integration of organizational cultures does not happen immediately. Instead,

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it is a process which can take years (Bouchikhi & Kimberly, 2012). Hence, it is important for

the leaders of the organization to understand the organizational cultures that currently exist in

both companies in order to devise a plan of direction or training that may be required, (Warren,

Gaspar & Laufer, 2014).

Statement of the Problem

Organizations that are involved in an M & A have a great chance of failure, and

addressing the human element and cultural traits during the integration process will be an

important element for those organizations to succeed (Adomako, Gasor, & Dansor 2013;

Kavanagh & Ashkanasy, 2006; Weber, Rachman-Moore & Tara, 2012; Weber & Tara, 2012).

During the integrating of the two organizations, conflict often arises due to the clashing of the

two organizations.

The personnel best equipped to handle the employee difficulties that can occur during an

M & A would be working in the human resources department. However, often the individuals in

the human resources leadership role and executive management roles do not feel they are

knowledgeable enough of the M & A process to provide the best guidance for the employees

(Anderson, 1999; Antila & Kakkonen, 2008; Kyei-Poku & Miller, 2013). Therefore, an

organization that does not have the appropriate personnel in place to handle the human element

will often just ignore the employee issues. Neglecting this element of the M & A process will

negatively influence the relative success of the merger.

An interesting perspective on the issues involved in and M & A is brought about by the

organizational and human resources literature. The research emphasizes the importance of people

in this process of synergy realization, indicating that a substantial number of merger failures can

be traced to neglected human resource issues (Datta, 1991; Kavanagh & Ashkanasy, 2006; Kyei-

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Poku & Miller, 2013; Sanda & Benin, 2011; Schuler & Jackson, 2001; Sethi, Mishra, & Dash,

2010). The larger purchasing organization, referred to at times as the parent, has their sights set

on the potential sales growth, taking over a piece of the market share, and expansion. The parent

organization often neglects the human element’s importance during the uniting of the two

organizations.

Purpose of the Study

The purpose of this thesis is to explore the strategies that organizations and business

executives have used, or neglected to use, in unifying the organizations involved in the M & A.

Seldom do organizations allow the company they are acquiring to continue with their own

organizational culture, which can contribute to the negative impact on the employees’

psychological well-being. The human-element is disturbed amongst the employees. Not all

employees are open to the change that presents itself during an M & A process. The employees

often struggle with stress, uncertainties about their role, and other potential conditions of

dysfunction within the organization during the M & A process.

The human element’s importance during the uniting of the two organizations is often

neglected. Change is difficult for individuals in general, and the change that occurs in an M & A

is just as difficult for the employees of the organization. Therefore, when uniting two

organizations, leaders of the organization need to consider the effects of change on the employee,

along with other human elements involved while they try to create one culture. If you can get

the employees to adapt to the change smoothly, the organization, as a whole, stands a better

chance of achieving a successful outcome from a merger (Clayton, 2010).

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Theoretical Framework

This thesis contributes to the ongoing efforts of understanding the human factor in

mergers and acquisitions. The M & A process consists of various stages throughout the

assimilation process of the two organizations. The current literature has identified that the human

factor and the culture of the two organizations does matter in the M & A success. However,

even though the human element and culture have been identified as being important, these two

factors continue to get low priority by executives who are consumed by the operational elements

of the integration process or “hard issues” associated with the merger (Marks & Mirvis, 2011a;

Lawlor, 2013).

Recent research on this subject matter does argue that the success of the post-merger

stage is correspondingly dependent on the combination of human resources and the degree of

cultural fit (Lawlor, 2013). Lawlor (2013) states, based on the current literature, human “soft”

issues, defined as employee morale, job satisfaction, employee stress levels, human behavioral

and attitudinal issues, clearly need to be further studied. These human issues are examined

throughout this thesis. The current review of the literature suggests that there remains a lack of

emphasis placed on the role of human resources and the merging of, heretofore, different cultures

(Marks, 1997; Cartwright & Cooper, 1993).

Research Questions

RQ1: During a merger and acquisition what psychological strategies should business

executives use to unite the two organizations with keeping the human element and organizational

culture at the forefront?

RQ2: What communication strategies are utilized with the employees at the initial phase

and throughout the process of the M & A?

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RQ3: What are some of the skills and strategies managers should implement to facilitate

cultural integration during the process?

RQ4: What can leaders of the company do to improve the M & A process in regards to

the human element?

Hypothesis

H(1): Human element and organizational culture can be kept at the forefront by the

organization utilizing specific psychological strategies that will unite the two organizations with

less disruption.

H(2): Implementing communication strategies throughout the M & A integration will

create synergy amongst the two organizations.

H(3): Managers that have skills in implementing cultural integration will be able to

facilitate a more successful “marriage” between the two organizations.

H(4): Managers that put an emphasis on the human element of an M & A will experience

a more stable workforce within the organization.

Importance of the Study

Reviewing the various studies on this topic, and incorporating the information into this

thesis will potentially offer a better understanding of the human element’s importance as part of

mergers and acquisitions. Senior executives within an organization can benefit from this thesis

by acquiring a better understanding of the cultural clashes that exist for the employees, the

effects of change on the employees, and the overall importance of communication provided to

the employees. The communication provided to the employees needs to begin when the merger

announcement is first broadcasted. The employee process begins with the initial announcement.

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Researching the importance of the human element and cultural understanding in M & As

will help organizations retain valuable employees, experience a smoother transition for

employees, and reduce disruption in the company’s flow of processes. This study will provide

the incentive for organizations to put a greater importance in developing their human resources

staff to be trained in dealing with the human element, and become educated about the potential

cultural conflicts that can occur during the M & A process. Going into an M & A with staff that

is thoroughly trained in these areas will help in retaining valuable employees, keep the

organization operating at the highest level possible, and keep the disturbances to a minimal for

the organization’s internal and external customers.

Scope of the Study

Further exploration of the human element in M & As is needed, and value should be

placed on this aspect of the merger by senior executives within organizations. Merging

companies need to identify the best team from both organizations to assist with addressing the

human element, help employees to embrace the gradual culture change, and have a support staff

that employees can turn to during the M & A process. If the human element is neglected during

the M & A, the once thought strategic asset, may turn into an organizational disaster. In this

thesis, I discuss strategies for combining organizations that plan to merge.

Definition of Terms

Acculturation: Berry (1980) states that acculturation is explained as change resulting

from a connection between two groups of a distinguishing culture as cited by (Lupina-Wegener,

Schneider, & Rolf, 2011).

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Acquisition: An acquisition is a circumstance when an investor owned acquirer purchases

another organization where the integration desire is to reflect a positive return on investment, and

economies of scale produce decreased operating costs (Ault, Childs, Wainright, Young, &

Williams, 2011).

Cultural assimilation: This occurs when one organization absorbs the other organization

(Marks & Mirvis, 2011a).

Culture clash: A term to describe the conflict that can occur between merged companies

(Mohibullah, 2009).

Cultural fit: The compatibility level between the organizations that are involved in the

M & A which can determine succeeding integration process (Cartwright& Cooper, 1993).

Cultural integration: Companies that become partners blend their current cultures

together (Marks & Mirvis, 2011a).

Cultural involvement: In reference to an M & A, culture involvement refers to the

leaders of the organization’s culture, commitment, and involvement in the organization during

the entire M & A process (before, during, and after) while assessing and reducing cultural

differences in the workplace (Tarba & Weber, 2012).

Due diligence: This term can be defined as an organizational process to seek sufficient

information about an organizational entity’s financial, legal and operational information by a

parent organization to reach an informed decision on their desire and negotiation power to pursue

and complete an M & A transaction (Clayton, 2010).

Human element/relations: Human relations are known as the other important element of

work psychology, and it is concerned with the multifaceted interplay between individuals,

groups, organizations and work (Arnold & Silvester, 2009).

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Integration: Integration is a general term used when two companies become one

through an acquisition or merger (Dauber, 2012).

Merger: A merger is two organizations that join into one company, adopting

efficient resources and operational procedures that provide a better product or service for

customers (Blair & Haynes, 2011).

Merger stress: When an employee’s steady state in their work activities and level of

comfort they have with their position is disturbed, this can be defined as merger stress. (Marks,

1988). Uncertainty, insecurity, fears concerning job loss, job changes, job transfers,

compensation changes, power, status change, and prestige changes can all contribute to merger

stress in an individual (Schweiger & Ivancevich 1985).

Organizational culture: Organizational Culture is an assembly of various elements such

as operational practices, a mutual set of values, and the employees form of socialization within

the organization (Fortado & Fadil, 2012).

Organizational identification: The concept of belongingness to an organization, where

the person defines him or herself in the conditions of the organization (Ashforth & Mael, 1989).

Psychology of emotions: As cited in Kiefer (2002) psychology of emotions views

emotions primarily as a reaction to an event, indicating an incident of importance to the

individual (Parkinson, 1995; Scherer, 1984).

Social identity: Individuals may classify themselves and others amongst various social

categories, organizational memberships, religious affiliation, gender or age cohort (Ashforth &

Mael, 1989). This classification can occur as an individual’s social identity is connected to their

organization. His identity could further be derived from his work group, department, or even

lunch group.

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Summary and Organization of the Remaining Chapters

The remaining chapters to follow will consist of a critical review of the literature. The

organization of thesis will include a summary of the published studies pertaining to the

importance of considering the general human element involved in the blending of two

organizations together through the M & A process. M & As are a complex and challenging task

for any organization, big or small. Therefore, it requires the leaders in the organization to

understand all elements of the process. The research will be summarized to show how it is

crucial for an organization to have trained staff available for the employees during the emotional

process that typically occurs during the M & A process. The organization’s operational

efficiency and performance stand a better chance for success during the M & A process if the

employees’ emotional well-being is adhered to.

An overview will be provided of the analysis, and a presentation of the strategies and

justifications for analyzing the data acquired for this study. Methods will be discussed in regards

to key words used to assist in the search of the thesis topic, along with the search engines utilized

to find studies. Lastly, conclusions will be discussed based on the findings, and suggestions will

be offered in providing a more successful transitioning process in the M & A process.

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Chapter Two

Literature Review

This chapter will include a comprehensive analysis of the research on mergers and

acquisitions (M & A). Generally, the vast amount of research on M & As has focused on the

financial and strategic elements of the M & A process. Company executives are consumed with

the time they spend on the financial and operational aspects of the M & A, and a lower priority is

given to the human element (Marks & Mirvis, 2011a; Muchinsky & Culbertson, 2015; Sanda &

Adjei-Benin, 2011; Schuler & Jackson, 2001).

During the M & A progression, the human element can consist of the psychological stress

the employees are undergoing, and the struggle they experience when two organizational

cultures are trying to become one. Cartwright and Cooper (1996) indicate the oversight and

underestimating these two elements is a major oversight in the integration efforts as cited by

(Marks & Mirvis 2011a). The human element aspects of an M & A should not receive less

attention than the financial and operational aspects.

In particular, the literature reviewed for this study will focus on the importance of

including the human element on the list of “things to do” in addition to the financial and

operational due diligence that is currently already being performed. The lack of attention to the

human element during an M & A will prove to have a negative impact on the employee’s

behavior and productivity. Consequently, financial and operational integration is still necessary,

but the human element needs to be added in order to predict a successful M & A integration.

The human element can encompass the element of work psychology, and it is concerned

with the multifaceted interplay between individuals, groups, organizations and work (Arnold &

Silvester, 2009). In addition, cultural fit can be categorized as a human element because it

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involves the individuals within the organizations, and the compatibility level that is desired

during the M & A process. Each organization will adhere to a different culture. This sought after

compatibility level during the M & A process can determine succeeding integration process

(Cartwright& Cooper, 1993).

Mergers and Acquisitions

Merger and acquisition activity consist of a significant amount of organizational change,

and they continue to take place at a high rate all over the world (Cartwright & Schoenberg, 2006;

Datta, 1991; Kyei-Poku & Miller, 2013; Marks, 1997). The literature examined in reference to

M & A often use the term as a similar event. However, there is a distinct difference between a

merger and an acquisition. A merger occurs when there is a joining of two organizations of equal

status and power. This joining together is typically agreed upon by both organizations. They

both retain the belief that they will be more prosperous if they are integrated (Muchinsky &

Culbertson, 2015).

Regardless, mergers and acquisitions are both challenging operations. Managers are

often aware of the challenges involved in an M & A. However, other employees may not have a

clear understanding of the challenges that are about to occur in the organization, and may

consider it to be a severe personal threat. They begin to feel uncertain about their current role

with the organization. Research reveals there will be growth and prosperity, but there may also

be numerous pitfalls and risks upon combination of two formerly independent organizations

(Miczka & & Größler, 2010). This lack of understanding may bring distress to the employees.

An acquisition occurs when an organization sets out to obtain the property of another

organization. The dominant role is defined as the purchasing organization, and they will take on

a more powerful role (Muchinsky & Culbertson, 2015). The less dominant organization, referred

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to as target or acquired organization, typically is not the organization implementing the changes.

That role of change is taken on by the more powerful organization, sometimes referred to as the

parent (Muchinsky & Culbertson, 2015). The intention of both events, merger and acquisition,

have a shared purpose. The purpose in a merger and an acquisition is for the organizations to

achieve better efficiencies, achieve greater competitive advantage over other like businesses, and

acquire additional innovations and resources (Datta, 1991; Jayesh, 2013; Moffat & McLean,

2010, Sanda & Adjei-Benin, 2011, Waddock & Graves, 2006).

Due to the large amount of time and energy spent on the financial aspects during the M &

A process, it is common for the employee issues to be overlooked, causing the human element to

often be ignored. Alone, physical and financial resources will not improve efficiency of an

organization by themselves; the human element is needed to enhance productivity (Jayesh,

2013). It is important to note that employee issues being dismissed have been identified as an

element that can potentially lead to a failed M & A (Datta, 1991; Sanda & Benin, 2011;

Kavanagh & Ashkanasy, 2006; Kyei-Poku & Miller, 2013; Schuler & Jackson, 2001; Sethi,

Mishra, & Dash, 2010).

Phases of Mergers and Acquisitions

Marks (2002) described the three different phases of the M & A process as being

precombination, combination, and postcombination as cited by (Muchinsky & Cublertson, 2015).

While failure can occur in the precombination phase, which focuses more on the financial issues,

there is little thought at this time directed to the psychological or cultural issues. The second

stage, combination stage, is where the human element begins to become introduced. Lastly, it is

the postcombination phase that the importance becomes crucial in integrating the two

organizational cultures. M & As can fail at any one of the different phases of the organization’s

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integration according to the different research findings. However, there are important human

elements that are involved in all phases of the M & A integration stages. Prior to the

precombination phase, senior leadership of the organization should be discussing the human

element.

The study will not focus on the financial systems and operational processes of the M &

A, but instead the organizational integration as it relates to employee communication, leadership,

culture and stress. Applebaum, Lefrancois, Tonna & Shapiro (2007) associates M & A

integration success or failure to these above variables. Financial and operational elements

remain relevant to the success or failure of an M & A. However, research suggests that the

human element can attribute to post-merger integration failure if ignored (Appelbaum et al.,

2007; Bouchikhi & Kimberly, 2012; Kyei-Poku & Miller, 2013; Lupina-Wegener, Schneider &

Rolf, 2011; Sanda & Adjei-Benin, 2011; Schuler & Jackson, 2001). Therefore, all elements are

important to consider throughout the process, and to ignore the human element would be

detrimental to the success of the M & A.

During the precombination stage, Schuler and Jackson (2001) marked the importance of

the organization to have a dedicated leader and team in place that is skillful in the understanding

and knowledge of the M & A activities as related to the potential human element implications.

Having this educated team in place early on in the process will provide the organization a more

successful outcome throughout their M & A activities. This team could be organized before an

official announcement about the M & A has been announced. The team can be responsible for

employee and cultural assessments, which involve describing and evaluating the two

organizations’ philosophies and values regarding various operational styles.

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The activities carried out in the precombination stage will set the groundwork for the M

& A process. Boxall and Purcell (2003) confirm that beginning at the M & A implementation

stage, complications achieving organizational fit can come about as cited by (Abugre, 2014).

Hence, it is important for the organization to start the proper assessments and preparation steps

for the combination of the two organizations. Documentation should be created in regards to the

human resources elements and cultural fit early in the first stage of the M & A process. Marks

and Mirvis (2011b) found three important elements in an M & A that deserve attention. First is

the tendency for the organization to not fully take into account the human side of the M & A,

second mistake is coordinating ill-equipped teams together to handle the process, and lastly the

clash of cultures tends to be ignored.

Communication

Preparation for communication strategies should be discussed prior to the announcement

to the employees. The prior discussion of communication strategies will better prepare the

leadership of the organization for the actual announcement. From the moment the M & A is

announced to the employees, it will undoubtedly bring about levels of perceived transformational

change and disruption in an organization. This initial communication to the employees may

bring about fear, uneasiness, and a lot of questions. Therefore, the initial communication to the

employees is very important. The leadership should be prepared for the heightened emotions

and questions from the employees.

The uneasiness an employee may feel may be due to an employee’s own personal

experience or vicariously seeing what happened to a friend, relative or neighbor, employees have

possibly learned a negative side of M & As (Marks, 1997). Past experiences may contribute to

the development of fear within an employee. Employees may also be fearful because the

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leadership in the organization is unwilling or unable to discuss changes, which leaves the

employee feeling uncertain about their future (Schweiger & DeNisi, 1991). It is often because of

this uncertainty the employee feels stressed, rather than the change itself causing the stress.

Uncertainty of whether or not the person is going to keep their job, or if their current status will

change within the organization, is more than enough reason to cause worry in an individual.

Given the horrible track record of past merger and acquisition activities, it is only natural

that individuals feel threatened and insecure when they hear a merger announcement involving

their organization. They are more fearful about losing their current company perks, and

concerned about the status of their employment. They have no interest in hearing about the new

organizational benefits with all of the other concerns (Marks, 1997). The bias the employee

holds about M & As may contribute to their insecurities, and cause them to shut off from

communication about the new and improved organization.

Before rumors or inaccurate information begins to spread within the organization, it is

important for the leaders of the organization to provide accurate information, and communicate

to the employees in a thorough format immediately. A valuable way to retain and motivate the

employees is to manage the communication process from the start. This will play a critical role

in the process of change and integration of the two organizations (Schuler & Jackson, 2001). To

reduce anxiety and uncertainty amongst the employees, the leadership needs to communicate

with the employees immediately about the changes they can expect to occur. Failure to do so will

only increase the anxiety and stress amongst the employees, and will bring on dysfunction such

as stress, job dissatisfaction, low trust in the organization and commitment.

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The development of these dysfunctions in the employees may diminish productivity,

increase turnover, and result in absenteeism (Schweiger & DeNisi, 1991). The production within

the organization will suffer if the employees are experiencing too much fear and doubt because

of lack of communication. In contrast, if the employees are kept informed about the processes

and have an understanding why certain changes will occur, they will act more favorably towards

the new organization.

A priority should be placed on implementing and communicating any restructuring that

will need to take place within the organization such as key roles, reporting structure,

management structure, and layoffs. However, nothing should be dismantled until the process is

understood and there is a replacement plan ready (Schuler & Jackson, 2001). Potential changes

and uncertainty can create anxiety and can have debilitating effects. The activities carried out in

the second stage will be the events that make the activity come to life.

Schweiger and DeNisi (1991) indicate that truthful communication throughout the M &

A process, which conveys a realistic preview of the M & A course, can help the employees get

through the process. The truthful and open communication can help employees cope with the

uncertainty of the current situation, and help shield them from some of the possible negative

effects of M & As. When the employees consider the communication they are given as

forthcoming, the employees will feel less uncertainty. In addition, they will view the new

organization as trustworthy, honest, and caring. The employees will find more comfort when

they are provided with open and honest communication. Clayton (2010) suggests that the

changes that occur during an M & A can place a great amount of stress on personnel, and that

openness can create a positive emotional environment by providing precise information,

resolving conflicts, and constructing relationships.

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Accordingly, Greenberg (1987) notes that social justice studies indicate if an individual

understands a process through fair and open communication, even if they are unhappy about a

given outcome of a process, they will have less dissatisfaction and fewer dysfunctions as cited by

Schweiger & DeNisi (1991). However, if an employee is lacking ample information, they may

create the information themselves, which will cause more stress and create toxic effects within

the organization. Therefore, it is imperative for the employees to receive a collection of

information, and the information should be accurate, honest, open, and without contradictions

(Applebaum et al., 2000).

Undesirable conditions for the employee can be brought on during the M & A if the

communication is superficial or limited, a lack of justice and lack of trustworthiness develops,

and a discordancy of the two organizations develops (Bellou, 2007). Employees will be better

equipped to cope with the effects of an M & A if the leadership team uses open and honest

communication throughout the integration process. In addition, this forthcoming communication

will lessen the negative impact the M & A activities can have on the organization’s overall

effectiveness (Schweiger & DeNisi, 1991).

Effective employee communication, though very difficult to achieve, is one of the

important elements to consider during mergers. The communication is an important element in

the M & A process, and if not handled properly can contribute negatively to the morale of the

employees. Since it is human nature for employees to want to know what is happening in their

organizations, they become anxious and then stressful when they sense that important

information that could significantly impact on their future well-being is being hidden by their

management (Sanda & Adjei-Benin, 2011).

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Hence, to create synergy amongst the two organizations, it is best to start the

communication strategies early on in the M & A process. In addition, make sure the

communication provided to the employees is as open and honest as possible. It will be helpful to

alleviate the employees’ guessing about what is about to occur in the M & A process. Rafferty

and Restubog (2009) found when employees received timely, accurate, and appropriate

information about the M & A processes of change, they were less anxious about the changes and

reported a higher level of commitment. Hence, Rubino and Vitolla (2014) stated that the leaders

of the organization should strive for thorough communication. The literature indicates that

effective and transparent communications to the employees were valuable elements contributing

to the success of the M & A.

Human Element/Relations

Human relations are known as the other important element of work psychology, and it is

concerned with the multifaceted interplay between individuals, groups, organizations and work

(Arnold & Silvester, 2009). Employees hold beliefs about the obligation of the organization to

them as well as their obligation to the organization. Often, the employee and organization have,

what is described, as a psychological contract. The psychological contract is not a written

contract, but instead an inferred relationship based on mutual contributions (Muchinsky &

Culbertson, 2015). When drastic changes occur at work, such as an M & A, the employee’s

belief of what was promised begins to get compromised. Therefore, the employee may view this

change, to what was once promised, as a violation to their psychological contract with the

organization. Consequently, it may be difficult for the employee to let go of the organization and

his old contract, and accept the new organization.

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There is an obvious change in identity during an M & A. The employees of both

organizations, after the M & A, get anxious and psychosomatic (Kemal & Shahid, 2012). The

leaders of the acquiring organization need to take this potential identity crisis into consideration.

The way in which the acquiring organization handles the various events involved in the M & A

will have an impact on the employees’ self-beliefs, the members of the acquiring organization,

and the acquiring organization as a whole. The employees’ altered beliefs will affect the outcome

of the M & A process (Ravasi & Schultz, 2006). The old identity that was associated with the old

organization is changing, and there will be a new identity that will develop in time with the new

organization. Their in-group is changing, and this may a difficult adjustment for the employees

to make.

Social identification involves the perception of belonging to a group. As individuals

identify to the group, they will perceive themselves as being psychologically meshed with the

outcome of the group, sharing its common destiny, and experiencing its successes and failures.

Furthermore, social identification can be perceived as an attachment to an organization (Ashforth

& Mael, 1989). According to Mael and Ashforth (1995) in the social identity theory, the success

or failure of an organization is shared by the employee. Therefore, activities that occur during

the M & A integration process will influence the social identification of the employees, and their

organizational identification will change, too. If the outcomes in the process begin to turn

negative, it is possible the employee will take on this negativity.

The social identity theory proposes that when an individual identifies themselves more

strongly to their previous organization, they will tend to feel a strong sense of loss, anger, and

grief when facing M & As. Typically, the employees’ organizational social identity becomes

lost during a merger and acquisition, for at least one of the partnering organizations. Therefore,

20


they will be less likely to handle the change initiatives that come with an M & A (Sanda &

Adjei-Benin, 2011). Potentially, these feelings of the employees will be disastrous if ignored.

The employee may begin to disengage from their daily job duties, and various negative emotions

may begin to develop. If the employee becomes doubtful and anxious they may begin to indulge

in various survival-seeking behaviors’, which may affect their performances and productivities

negatively. Generally, employees experience a high degree of anxiety when they are faced with

the possible occurrence of mergers (Cartwright & Cooper, 1993; Sanda, Adjei-Benin, 2011).

The social identity framework has been used often to explain employees’ responses during

merger integration (Makri, 2012).

Studies have claimed that the identity of the organization, and the employees involved

will be a factor in the integration process, and can hinder or facilitate a successful outcome of an

M & A (Antilla & Kakkonen, 2008; Buono & Bowditch, 1989; Empson, 2004; Marks & Mirvis,

1998; Paruchuri, Nerkar, & Hambrick, 2006; Schweiger & DeNisi, 1991). During and M & A,

the employee will begin to make adjustments by starting with an emotional and cognitive

separation from the acquired organization, and will begin to start adjusting their self to the new

organization (Weick & Quinn, 1999). The goal should be for the employee to experience as little

stress as possible, and to make the adjustment to the new organization with little disruption.

When an organization is going through an M & A, the process can be quite traumatic for

employees involved. There is no surprise that with an M & A there will, inadvertently, bring

change to an organization. Typically, there are major organizational changes during an M & A

in several areas within an organization such as management styles, staffing, procedures, and

various departmental policies (Bellou, 2007). Organizational change can create a feeling of

vulnerability, fear, and insecurity for the employees involved. Väänänen, Ahola, Koskinen,

21


Pahkin and Kouvonen (2011) found that a negative change in work organization during an M &

A may increase the risk for an individual’s psychiatric morbidity. In addition, data has shown

that the stressful negative events during a merger can lead to an elevated risk of psychiatric

events even years past the most hectic M & A activity (Pahkin & Kouvonen, 2011)

The major organizational changes that occur in an M & A will significantly influence an

individual’s opinion of their employment relationship. Bellou (2007) found the employees who

feel confident in handling organizational changes are more prone to believe that their

psychological contract has been replaced by a new, subordinate one. Therefore, it is imperative

that the leadership within the organization protect the employees against the negative impact of

an M & A by developing coping with changes skills, since change is inevitable. Since an

employee’s organizational obligations and contributions change during and M & A, it is

important to understand how an employee will react to change.

It is not uncommon for ordinary organizational changes to create a form of stress and job

insecurity amongst employees. However, mergers are predominantly stressful due to the

enormous nature of the changes that occur, the swift timing of the change, the uncertainty, the

need for employees to relinquish the organizational identity that they once held as important, and

the need to shift their allegiance to the new organization (Amiot, Terry, Jimmieson, & Callan,

2006). Lazarus and Folkman (1984) refer to the cognitive-phenomenological model of stress and

coping by suggesting stress outcomes reflect the interaction between stable and situational

factors as cited by (Amiot et al., 2006).

As a result of the changes that occur during an event, such as an M & A, the process of

implementing the M & A will likely have an impact on the employees’ reactions and their

adjustment to the change. Amiot et al. (2006) indicate employees’ participation in the decision

22


making process, the management leadership, and the communication provided to the employees

about the merger are key elements that will likely have an impact on the employees’ stress and

coping manners. Each individual handles stress differently, so it is wise for the leadership in the

organization to know and understand their employees.

These same employees can experience a shift in their thoughts from performing their job,

to becoming increasingly more preoccupied with what the integration of the two organizations

means for them, their incomes, and their careers within the organization (Bellou, 2007). The

trauma they experience during the integration can be similar to the way one may react to the loss

of a loved one. Bellou (2007) established that the crisis an employee feels may manifest itself as

listlessness, apathy, a preoccupation with the past, lacking of commitment to the new culture,

fear, and/or active resistance to the new system. Negative attitudes and behaviors develop and

the job suffers, organizational commitment diminishes, and employees become disengaged

(Bellou, 2007).

The stress of an M & A can begin as early as the pre-merger stage, and the stress of such

an event is determined by individual’s subjective perceptions, instead of objective reality.

Management needs to be able to clearly identify these subjective perceptions (Applebaum et al.,

2000). Employees going through an M & A often feel they have lost control, and in their attempt

to gain control back, they often withdraw. This withdrawal increases the stress within the

individual, which in turn leads to lessening of productivity in their job and decreased job

satisfaction (Applebaum et al., 2000). According to Applebaum et al. (2000), there are

unsettling realities that occur during an M & A such as lack of control and uncertainty of the

future.

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Numerous studies have indicated that employment relations and human resource issues

are handled poorly in M & As (Abugre, 2014; Applebaum et al., 2000; Cartwright & Cooper,

1996; Sanda & Adjei-Benin, 2011; Schuler & Jackson, 2001). In particular, Cartwright and

Schoenberg (2006) suggest that human resource inefficiencies play a part in inappropriate

decision making, negotiation, and integration process. Hence, this can lead to inferior outcomes

in an M & A. Dowling (2011) concluded parties involved in a merger or acquisition deal can

never afford to plunge into the M & A process, and sort out the employee issues afterwards.

Kyei-Poku and Miller (2013) found in their study that the more satisfied the employees

are their involvement will be at a higher level, they will feel more obligated to remain with the

organization, and their intent to leave the organization will diminish. Their findings supported

that the employee satisfaction with the merger is an important precursor, and can promote high

affective and normative commitments, which will alleviate some of the negative effects of other

disengaging cognitions the employee may feel during the M & A process.

The research indicates that close attention must be given to the people issues during and

after mergers. If the attention is not given to people issues, the employees’ motivation will

decline (Sanda & Adjei-Benin, 2011). The organization wants to strive for good communication

of the merger, good management of the employee stress, and overall fair treatment through the

M & A process to ensure employee satisfaction. If the employees become anxious they may

indulge in various survival seeking behaviors, which in turn will negatively affect their

performance and productivity (Sanda & Adjei-Benin, 2011). Therefore, it is in the best interest

of the organization to pay close attention to the way they handle their employees during M & A.

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A fair amount of the literature that pertains to merger activity shows a large emphasis

being put on the financial and organizational dimensions, which are often referred to as the “hard

issues”. However, the human impact of an M & A, such as emotions, behaviors and cultural fit,

is fast becoming an emerging field of inquiry (Lawlor, 2013). It is quite clear from the current

research that employees are dealing with various psychological stresses during an M & A, and

business executives will be better served if they understand the importance, and keep the human

element at the forefront during the integration process.

Culture

Moffat and McLean (2010) define the concept of organizational culture as being the

characteristic patterns of thinking, talking, and behaving that have a distinctive, recognizable and

increasingly stable and taken-for-granted quality to them. In addition, the idea of a shared

understanding is another defining characteristic of culture. Every company retains their own

unique culture, and often it is the people occupying the organization who will define the culture

within the organization (Muchinsky & Culbertson, 2015).

Similar to the attention needed on the human element, attention also needs to be given to

cultural fit of the two organizations. Dauber (2012) argues that while strategic fit is necessary,

cultural fit may enable or disable the synergies needed in the combination efforts. Therefore,

efforts need to be made in the precombination stage to learn about the culture of the target

organization. A screening process of the different organizational cultures that exist should take

place early on.

It is imperative for the organizational leaders to understand the existing cultures of both

organizations in order to proper carry out the steps involved in merging the organizations into a

single entity (Warren, Gaspar & Laufer, 2014). It will not matter how great the strategizing or

25


planning is if the two organizations cannot overcome intense divergent organizational

philosophies (Marks, 1997). Cultural decisions will need to be made by the leadership in regards

to how they will handle the desired cultural segment of the transition. The differences between

the two organizational cultures should not be ignored.

If organizational cultures are ignored, culture clash is an event that can occur during an M

& A. Culture clash can be explained in light of the social identity theory, which suggests that

individuals will display a positive bias towards members of their own group, and tend to display

a negative view about the members of an “out-group’ (Stahl & Voight, 2005). It is not

uncommon with and M & A for two organizations to have various cultural differences. Hence,

the cultural clash and external threat may develop because of the in-group bias and the “us

against them” mentality amongst the employees.

However, Marks and Mirvis, (2011a) share a contrasting point of view that cultural

differences do not have to produce a cultural clash, and they can be a valuable source of creation

and learning within the organizations. An increased knowledge, innovation, and new

opportunities can develop in a combination because of these very differences. Therefore,

leadership can take the cultural differences that may exist between the two organizations and

transmit it to the employees in a positive manner.

Shortly after the precombination phase, leadership can promote discussion to prepare

employees for the potential culture clash that may occur. Culture clash can occur when there is a

focus placed on the differences of the organizations, evaluating using terms of good and bad,

viewing one’s organization as superior to the other organization, and plotting to promote one’s

own culture while criticizing the other (Marks, 1997). Educating the employees early on the

organizational cultural differences, such as the different values, beliefs and concepts may be

26


helpful in the integration process. When communicating to the employees about the

organizational culture it is stressed that the charismatic leaders within the organization could be

used to convey this message through speeches, visits, and inspirational actions. The charismatic

leaders can offer a more enthusiastic outlook of the future which can help in creating harmony,

confidence, and optimism (Fortado & Fadil, 2012).

It is important for all of the leadership team within an organization, consultant,

executives and managers to understand the critical issues related to employee stress,

management crisis and culture clash in order to increase the success rate of organizational

blending (Marks, 1997). Shook and Roth (2011) claim the executive team often thinks the

convergence of the two organizations is complete once the deal closes, and the payrolls are

combined. However, this is not the case, the integration work continues. Evidence from research

shows that numerous problems of cultural clashes, confusion, and internal disruptions occur

when two organizations are merged (Epstein, 2005), leading to a decline in employee, customer

satisfaction, and a significant decline in profitability as cited by (Abugre, 2014).

Culture change is very difficult because of human resistance, and it may be beneficial for

an organization to get their human resources staff involved. Adomako, Basor and Danso (2013)

indicates the importance of the human resources team as an intrinsic part of the integration team

in any M & A, because they have the ability to appraise the corporate cultures compatibility, and

the various options available to assist in joining the two organizations. Human resources

managers may be better equipped and trained in identifying the challenges such as cultural

incompatibilities, communication, redundancies, and staffing the new company (Adomako,

Gasor, & Danso, 2013).

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Stahl and Voight (2005) indicate that findings over many years suggest that the influence

of culture on the M & A assimilation process is crucial. The timing of and how drastic the

assimilation process is will depend on the impact it has on the employees. Assimilation happens

when the acquired organization’s identity is intentionally dissolved such as being stripped of

their name and visual organizational identity (Bouchikhi & Kimberly, 2012). The employees of

the acquired organization are asked to adhere to those of the new parent company, and a signal is

sent to the employees that they are expected to adjust, and be loyal to their new employer. The

way things once were done in the target organization will now change. Again, their identity and

symbolic objects may be lost in the transition such as their company name, logo, and emblem

(Fortado & Fadil, 2012).

When it comes to culture, often it is the buying company that controls the workplace

environment (Shook & Roth, 2011). Analysts have realized that when organizations expand,

merge or acquire other businesses, cultural compatibility is just as important as financial

compatibility (Fortado & Fadil, 2012). Much of the literature focuses on the last stage of the M

& A in regards to cultural fit, but it should be addressed throughout all stages. To start the

cultural integration process, the management team from both organizations needs to provide an

aspiring image of the new organization.

Often, executives are not particularly clear on the concept of culture and it is difficult for

them to implement in practice (Weber & Tarba, 2010). Therefore, managers in both

organizations should be in place with the necessary skills to facilitate the cultural integration

process of the M & A. The managers should start the cultural integration strategizing process

prior to the announcement by educating themselves on the culture of the target organization. This

preparation by the management staff will help them be prepared to facilitate a more successful

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“marriage” between the two organizations. They cannot expect the employees of the target

organization to give up their identity too quickly. The goal in achieving a successful cultural fit

will be for the leadership to work with the employees of the target organization in giving up their

old identification, and assist them in embracing the new identification (Empson, 2004).

Leadership role

One of the greatest effects of M & As is for people management. Thus, the human

elements that arise from the integration of organizations should be properly addressed for

efficient management of the people in M & As. If the integration of the two organizations is not

handled properly in the viewpoint of the employees, it may cause serious problems (Jayesh,

2013). Therefore, prior to the announcement of the M & A, the leadership in the organization

should be prepared for the demands of leading the employees through the M & A integration

process. Even in the smoothest ran M & As, the employees will still experience stress and

merger syndrome reactions (Marks, 1997). Employee stress is normal and should be expected

during the M & A integration. Therefore, the managers need to be educated and trained to

prepare them for the work ahead.

The leadership in the organization should be prepared to minimize the downside of the

integration and change by reducing the stress experienced by employees, and help them cope

with its effects. They can start this process by maximizing the benefits of the M & A by building

the employees understanding of and commitment to the combining of the two organizations, the

reasoning behind it, and the new opportunities it will provide (Marks, 1997). In addition,

organizational leaders can set the process immediately by providing effective communication to

the employees.

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In some cases, it is beneficial for a consultant to be hired to assist and coach the

leadership of the organization. The consultant can offer empathy to the employees in regards to

the stress and uncertainty they are dealing with, and point out how the leadership understands

what the employees are going through. This will demonstrate a respect for the individuals and

their current situation, and will create an employee respect for a cognizant and insightful

leadership (Marks, 1997). The management team should look for and be able to recognize any

signs of distress in their employees. Therefore, it is important for the management staff to have

an understanding of the merger syndrome to help them recognize the signs of stress. The

management staff should acknowledge any stress the employee is undergoing, and provide them

with a stress reliever. The manager’s involvement at the time of the employee’s distress will

show that management has a commitment to the employees.

A stress reliever leadership can introduce to ease the pain of the employees during the M

& A integration is to allow the employees to vent their frustrations. By providing a venting

forum for the employees they will be allowed to let go of their anger, cynicism, distrust and any

other negative emotions that they are experiencing. The venting forum can assist employees in

accepting the challenges and the opportunities moving forward into the integration instead of

concentrating on the negative elements of the M & A (Marks, 1997). Allowing the employees to

vent their emotions may be helpful for them to cope with the changes that are occurring. From a

psychology of emotions viewpoint, emotions should not be considered dysfunction, but instead

the way an individual adapts to a difficult situation in their environment (Kiefer, 2002).

Top-level leadership will be crucial in contributing to merger success. The CEO and the

senior management team are the individuals responsible for driving the integration process in an

M & A (Marks, 1997). The employees will model the behaviors of the leadership. Hence, it is

30


important for the managers to be open and timely with their communication, and have the proper

skills needed for an integration of two organizations. If the managers are showing a positive

outlook, the employees will tend to follow. Since, these are the behaviors that will get reinforced

throughout the organization and important for the employees to emulate.

An international study by Antila and Kakkonen (2008) indicated if the M & A deal was

small and not affecting many individuals, human resources managers were not part of the

process, but if the M & A had a significant importance and the combinational process was

higher, then the human resources manager was often more involved. Depending on the size of

the organizational should determine on whether or not assistance is needed from other

departments such as the personnel from the human resources department. The role of the human

resources department can be quite diverse. The human resources personnel can provide

assistance in identifying stress, change management assistance, advisor to the leadership staff,

and overseeing communications (Adomako, Gasor, & Danso, 2013; Antila & Kakkonen, 2008;

Schuler & Jackson, 2001).

Schweiger & DeNisi (1991) determined there were significant declines in job

satisfaction, commitment, perceptions of the company’s trustworthiness, and honesty as a direct

result of the merger activities. These are activities that leaders need to concern themselves with

during an M & A. Leaders of an organization need to understand that the employees are said to

be the ultimate asset. Regardless of how proficient your technology or resources are in the

organization, it will not match the effectiveness and efficiencies of your employees.

Therefore, keeping your employees highly motivated and engaged during the M & A will

provide a better opportunity for the organization to attain their corporate goals, and continue with

uninterrupted output of the organization (Sanda & Adjei-Benin, 2011). It is crucial for the

31


management of the organization to build an image of fairness and communicate in a positive

manner that the M & A is a new phase in the development of the organization (Jayesh, 2013).

The integration process can be challenging, and employees are human beings. During the

stresses of an M & A these human beings may tend to display irrational thoughts and actions.

By depicting the M & A event as one that will offer new opportunities, and will be an

exciting time for the employees will keep them engaged. Management will be more successful if

they implement innovative strategies to help provide a benefit to the employees during the M &

A experience, and accept feedback from individuals in the newly created organization (Jayesh,

2013). Trustworthiness is important to establish with the employees at this crucial time of

change, and it is important for employees to have trust in their leadership. Employees will gain

trust in their managers if the managers are thought to be competent enough to make correct

decisions and manage fairly during the M & A process (Nikolaou, Vakola & Bourantas, 2011).

The leaders of the organization are the individuals responsible in heading up the

development of vision, planning, setting company strategy, and building the organizational

culture and teams. People issues are important and the leaders of the organization need to handle

them properly. If employee satisfaction suffers, there can be severe repercussions to productivity

and the success of the merger (Sanda & Adjei-Benin, 2011). Osarenkhoe and Hyder (2015)

found that a leadership who acted with a hands-on approach, a bias for action, encouraged staff

involvement, a continued focus on the customer, and open and honest communication with the

employees experienced a successful integration process.

Managing the people related issues during a combination of two organizations is a

difficult task. The change that occurs within an organization during an M & A is completely

different than any other type of organizational change. Therefore, it is important for the

32


management team to create processes for the changes that will occur during the combination

process. This combination process will involve addressing, at the same time, both the intra-

organizational dynamics and the inter-organizational dynamics of blending two distinctive

organizations into one organization (Sanda & Adejei-Benin, 2011).

Merger Syndrome

Similar to other syndromes that exhibit a predictable, characteristic pattern of behavior or

action that may occur under certain circumstances, the merger syndrome is no different. Marks

and Mirvis (2011a) indicate that the merger syndrome is a combination of uncertainty and the

likelihood of change that can be both favorable and unfavorable. This can produce stress and

eventually affects individuals’ perceptions and judgments, interpersonal relationship, and other

dynamics involved in the M & A. This syndrome, at the organizational level, will manifest itself

by increased centralization and lessened communication which leaves the employees in the dark

about the joining of organizations, and will precipitate rumors and insecurities. As the

insecurities of the employees increase over time, a hindering of the integration may occur along

with a reduction in productivity, and turnover of key people may occur (Marks & Mirvis 2011a).

The merger syndrome can be reduced if a timeline is created which includes detailed

information regarding the blending of the two organizations, how it may affect employees, and

other relevant information (Marks & Mirvis, 2011a). Providing the employees with a more

realistic preview of the combination plan will allow them to rebound more quickly from the

negative effects in areas such as job attitudes, trust toward the organization, and job performance

(Schweiger & DeNisi, 1991). Other possible mediation methods may include educating the

employees through articles, presentations, or discussions of human factors in an M & A. An

interactive method for employees can be through a merger sensitization workshop, role plays,

33


and other practical activities that help employees develop a true feeling of what it feels like to be

acquired by another organization (Marks & Mirvis, 2011a). Throughout an M & A the necessity

for strong leadership in the organization is a must have requirement. Without a strong leadership

to guide the employees can cause them to be confused. The leaders of the organization must be

sensitive and be able to identify the strengths and weakness of both organizations (Jayesh, 2013).

A strong leadership in place is essential to the M & A success.

Summary

The purpose of this study was to examine the potential conflicts that can occur when

there is a disregard to the human element and cultural fit, and to gain insight on the best options

available to produce a better result in the M & A process. Much of the literature is still focused

primarily on the financial prospective of the M & A, there remains to be another perspective that

deserves equal attention, and that is the human element (Antilla & Kakkonen, 2008; Buono &

Bowditch, 1989; Marks & Mirvis, 1998; Sanda & Adjei-Benin, 2011; Schuler & Jackson, 2001;

Schweiger & DeNisi, 1991 authors).

However, more recent studies have shown a shift towards the human element and cultural

perspectives. As indicated in the literature, organizations that fail to take into account the

employees needs during an M & A can anticipate disappointing results (Bouchikhi & Kimberly,

2012; Kyei-Poku & Miller, 2013; Lawlor, 2013; Sanda & Adjei-Benin, 2011; Schuler &

Jackson, 2001). It is wise for the leadership in the organization to place an emphasis in the

following three areas in order to enhance merger and acquisition performance: assist employees

in managing M & A related stress; manage the crisis of combination; manage culture clash and

post-merger culture building.

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The failure rate for the integration of M & A is still quite high. There are various

reasons for the failure, but the research indicates that there should be a value placed on the

people issues in order to achieve a more successful M & A result (Abugre, 2014; Antilla &

Kakkonen, 2008; Buono & Bowditch, 1989; Cartwright & Cooper, 1996; Marks & Mirvis, 1998;

Sanda & Adjei-Benin, 2011; Schweiger & DeNisi, 1991). For this reason, it is best for

organizations entering into an M & A to understand how to manage the human element during

the integration process.

In order to achieve a competitive advantage, it is imperative that the M & A be

implemented from a financially and legally sound standpoint, as well as from a behavioral

approach (Applebaum et al., 2000). The team that performs the due diligence should add an

important activity to the list, and that would be to become an expert on the human element

during the M & A. This knowledge may help the new organization keep some of their key

employees, and cause less anxiety during the process.

Applebaum et al. (2000) indicates that while some individuals do feel a threat to

happiness and well-being when two organizations are combining, other individuals will view it

as an opportunity in which they can improve their current situation that may be dissatisfying.

However, an employee viewing an M & A as a positive event is not always the case. Therefore,

it is necessary to have the executives of an organization to recognize that both the economic and

psychological synergies need to take place to have an effective merger take place. Quite often the

psychological issues and inadequate employee identification are overlooked or undervalued as

mergers are performed (Bouchikhi & Kimberly, 2012; Humphreys, Haden, Oyler, Cooke, Zhao,

Hayek, & Little, 2012).

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The message stressed here is that with effective education, training and orientation joined

with effective communication and leadership, the challenges of M & As can be lessened

(Adomako, Gasor & Danso, 2013). People issues and cultural difficulties can exist during an M

& A, and they need to be addressed by the leadership of the organization. The literature indicates

that the success of most M & As centers around people, not money (Harding & Rouse, 2007).

The leadership is very important in the change process that occurs during an M & A, because

they are the individuals in charge of directing the activities during the combination. There is no

need to spend a lot of money on integration problems after the fact, when with a little preemptive

M & A planning; the problems can be avoided.

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Chapter Three

Research Method and Procedures

The purpose of this thesis is to explore and describe the human side of an M & A, along

with proposing strategies for M & A success. The main focus of this research will be to highlight

the human element that is often ignored in M & As. In addition, the study’s intent was to explore

strategies leadership, within the organization, need to take in order to unify organizational

cultures involved in an M & A. This unifying process will require a focus on the human

element. This section includes a discussion on research method, methodology, data analysis,

limitations, research findings, summary conclusions, and direction for future research.

In this study, the CalSouthern Library service was utilized. In particular, the Proquest

Psychology, EBSCO Psycarticles, and Proquest Business Article databases were searched for

variations of the terms mergers, acquisitions, human element, psychological contract,

organizational change, cultural clash, and leadership. In addition, I performed searches on the

Google Scholar database. The peer-reviewed research articles for this systematic review were

retrieved relating to all M & A activities involving the cultural integration, human element,

leadership, organizational change, psychological contract, and social identity. Over the course of

a couple weeks, I found over 50 articles relevant to this study by searching for the above terms.

A qualitative approach was used for this thesis, because this approach was more suitable

for the research questions chosen for this study. The interpretive approach is more subjective in

regards to how an individual feels about a certain event that is happening around them (Monette,

Sullivan, Dejong & Hilton, 2014). The research questions chosen were more investigative in

nature. The purpose of the questions was to gain a general insight into the topic of the human

element involved in organizational mergers and acquisitions, and to improve the understanding

37


of the importance of the human element in the M & A integration process. Research on this

topic was best conducted by gathering information from literature that studied the phenomenon

of M & As and the human element. After the gathering of articles, the literature was examined

to investigate the importance of human element, leadership, and cultural fit in the M & A

process.

Methodology

The literature reviewed for this study used a variety of methodologies. A large majority

of the research reviewed for this study used an interpretive approach anchored in a qualitative

methodological approach. Creswell (1994) defines the qualitative approach as a process of

inquiry in an effort to understand a social or human problem. Qualitative research provides a

format to access valuable information, in particular, a deeper and richer understanding of

people’s lives and behavior, which includes knowledge of their experience subjectively

(Monette, et al., 2014).

In addition, it is based on building a complex, holistic view, formed with words,

reporting thorough opinions of informants, and the research is conducted in a natural setting as

cited by (Adomako et al., 2014). Employee attitude surveys, confidential interviews, focus

groups, and manager attended meetings were a format used (Applebaum et al., 2000). Shook

and Roth (2011) utilized a qualitative approach by conducting interviews, and analyzing the data

using a constant comparative method. Narratives were solicited from human resource managers

using a qualitative method (Abugre, 2014). Lawlor (2013) used a phenomenological approach

by conducting 41 comprehensive interviews with employees gaining their personal perspective

on the organizational change.

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The phenomenological research used in the literature that was reviewed, focused on the

various elements experienced during an M & A phenomenon. The research developed

descriptions of the essences and fundamental structures of these human element experiences

during an M & A. Weber and Tarba (2012) felt by using a qualitative research design they could

achieve a detailed understanding of the processes, local contextualization, causal interference,

and the necessity to uncover the points of view of the participants. The survey approach was

used often used in the studies to obtain data in this organizational oriented study.

The participants in the study were selected by the use of convenience sampling which

was a better alternative than statistically-based probability sampling, since it allows for the

theoretical generalization of the findings (Sanda & Adjei-Benin, 2011). The various literature

utilizing case studies involved descriptive accounts as part of the M & A process. The case study

goal is to achieve an understanding through richness and depth of detail (Monette et al., 2014).

Data Analysis

The data analyzed for this study was reviewed in a non-statistical manner. After

obtaining the articles by conducting searches with the key terms, the articles were reviewed

initially by title, and then by the abstract. This allowed a determination to be made as to the

relevancy to the research questions, and if it contained useful and meaningful data. The articles

were then categorized by the various categories, cultural, human element, leadership,

organizational change, and social identity. After categorizing the literature, a more extensive

review of the article was performed, and summarized according to topic. The summary

information was then used to address the research questions.

39


Methodological Assumptions and Limitations

It was assumed that recognition of the human element and cultural fit would be a

necessary element to include in an organization’s strategic plan while going through the M & A

process. These elements being included in the strategic plan, and dealt with along the integration

process would ensure the organization would experience the maximum amount of success in

effectively transitioning during the integration process.

The interpretive phenomenological approach being used in much of the literature

required a researcher to interpret what the participant was relaying about their M & A

experience. In addition, the participant is trying to interpret and convey the meaning of their

experience during an M & A. The researcher did make various subject assumptions during this

study. Therefore, a double hermeneutics is taking place, since there is interpretation taking place

with both the researcher and the participant. The interpretive approach is not a statistical

analysis, but instead focuses more on inductive and idiographic theory construction (Monette et

al., 2014). Interpreting, on behalf of a researcher, can serve as a disadvantage because it does

allow room for bias. The data is heavily impacted by personal viewpoint and values. Therefore,

the primary data generated in interpretivist studies cannot be generalized (Shook & Roth, 2011).

Ravasi and Schultz (2006) found limitations with their research study similar to the usual

limitations found in case study research. The specific traits of the three organizations they

studied were very similar. Hence, their results may have differed had the organization differed in

some specific traits, such as size of the organization. A case study approach does have a number

of advantages. However, caution is advised in deriving general principles from a case study

(Weber & Tarba, 2011).

40


Considering that the information collected by participants was mostly recollections and

interpretations, a potential bias could have been introduced. Some of the samples were quite

diverse, but could have been slight in some studies due to the selection method of participants.

Interviewing participants with various experience levels and job functions provided a rich

diverse sample, but it could have prevented the identification of important trends among a

particular subset of participants (Clayton, 2010).

Another possible limitation in the study was the constructs that were assessed using the

self-report surveys. Self-reporting is a quick and easy to administer to participants. However,

self-reporting has the problem of over-estimating, and there is no opportunity to probe for more

information (Monette et al., 2010). Lupina-Wegener, Schneider and Rolf (2011) found a

limitation in the cross-sectional design used for their research, indicating future research would

be interesting if it were done observing the process unfold over time. The data for a cross-

sectional research is gathered at one time, and the major weakness is that the changes were not

observed over a period of time (Monette et al., 2014).

Research Findings

The results indicated that the human issues, cultural integration, and leadership

involvement during the M & A preparation are important aspects of mergers and acquisitions. If

these elements of the M & A process are not well handled, the organization may be impacted

negatively. If human issues were ignored, the employee satisfaction dwindled causing

repercussions on productivity, and overall negative effects to the success of the merger. The

leadership of the organization should be properly trained and prepared for involvement in the M

& A process. The leadership personnel are the individuals at the forefront, and serve as the main

source of communication for the employees (Adomako, 2013).

41


Findings indicate that employees can identify more with their pre-merger identities, and

may feel threatened by the new organization’s identity. Lupina-Wegener, Schneider and Rolf

(2011) found the employees of the acquired organization did not have a problem sharing their

new identity with the parent organization, and they did consider their pre-merger identities to be

at stake. However, they did not express these feelings in the survey.

Findings indicated that employees of organizations going through an M & A process had

varying feelings and emotions which were brought on by the practical and personal

manifestations of the change created by the M & A. The emotions felt ranged from excitement to

anxiety and uneasiness. A major message throughout the literature was that change within an

organization can be destabilizing for all employees, and can result in uncertainty, fear,

psychological stress, anxiety and insecurity. Behavioral due diligence is important, and has

shown positive results. Successful organizational acquirers were 40 percent more likely to

implement comprehensive human and cultural due diligence than unsuccessful buyers (Marks &

Mirvis, 2011b).

Various studies have surfaced in the literature indicating several factors that can present

obstacles in the M & A process. Some of the more common obstacles that can occur during and

M & A can be that the culture is improperly integrated, change processes are not being managed

appropriately, technological requirements are ignored, compliance requirements are ignored, and

the human element is ignored. Sanda and Adjei-Benin (2011) realized attention given to the

human element troubles, resulting from changes during the M & A, is extremely important and

key to the success of an M & A. A failure to address the obstacles listed above can affect the

organization in a negative manner, but these disruptions can be reduced if initiatives are

implemented focusing on creating synergy in the newly developed organization (Jayesh, 2013).

42


During an M & A, many employees experience feelings of loss, resentment, and a decline

in their job satisfaction. These various reactions can lead to the failure of the M&A (Appelbaum

et al., 2007; Cartwright & Schoenberg, 2006). Organizations' failure to take into account the

needs of their employees during the combination process may experience disappointing results

(Cartwright et al., 2007). The more negative emotions the employees feel during the M & A

process, the more they will tend to withdraw from their organization. This withdrawal can affect

the efficiencies of the organization in a negative manner.

Summary

Mergers and acquisitions occur as a means for an organization to combine forces with

another organization to improve operational efficiencies, company performance, increase

market-share, increase revenue growth, and acquire new products (Datta, 1991; Jayesh, 2013;

Moffat & McLean, 2009, Sanda & Benin, 2011). Though mergers and acquisitions continue to

grow in their popularity, many of these events fail to achieve the expected goal of increasing

value to the organization. The failure rate for mergers and acquisitions continue to be

exceptionally high (Cartwright & Schoenberg, 2006; Jayesh, 2013; Stahl & Voigt, 2005;

Steynberg & Veldsman, 2011; Weber & Tarba, 2011). The tasks involved in creating a

successful M & A are challenging, and require the leadership of the company to coordinate and

combine the processes of the two organizations with as little disruption as possible.

Stahl and Mendenhall (2005) identified several distinct perspectives on the reactions of

employees to the M & A. One such perspective viewed the reactions in terms of cultural clashes

between the different corporate cultures. Another common perspective views employee

resistance as stemming from communication problems such as lack of information,

misunderstanding, interpreted threats, and negative rumors. Solutions for reducing employee

43


resistance in this regard include offering early precautionary information that can be used in

planning appropriate strategies and in building teams. Kyei-Poku and Miller (2013) suggest in

their study that when the employee perceives satisfaction with the M & A they will develop a

stronger emotional attachment to the organization, and will develop a sense of obligation.

The research indicates a great amount of mergers and acquisitions are not successful.

Organizations tend to spend a great deal of time focusing on the financial and strategic elements

of the M & A, and less time focusing on the human element. The current literature emphasizes

the importance of the psychological well-being of the employees within an organization during

this process of combined realization, and has indicated that a great deal of the M & A failures

can be traced to neglected human resources issues (Datta, 1991; Sanda & Benin, 2011; Kavanagh

& Ashkanasy, 2006; Kyei-Poku & Miller, 2013; Schuler & Jackson, 2001; Sethi, Mishra, &

Dash, 2010). The objective of this study was to explore the importance of the human element,

cultural integration, and leadership’s role during the M & A process. This study points out how

the human element of mergers and acquisitions should be given the same emphasis as the

financial and strategic concerns.

Conclusions

There are numerous conclusions that can be drawn about the neglected human element in

the M & A stages, based off of the systematic review of over 50 articles. It is evident that this

review can offer important information on guiding future potential research in order to enhance

our understanding of the organizational involvement of the human element, cultural integration

process, and M & A leadership involvement that is needed during the M & A process.

Schuler and Jackson (2010) illustrated a Three-Stage Model of M & As which indicates

there are many employee type issues on which can potentially play a role in the relative success

44


or failure of the M & A process. In light of the M & A failures that are documented, Schuler and

Jackson (2010) indicate that only about 35 per cent of senior human resources executives are

involved in the M & A activities. This is a small percentage of resources assigned to the task of

being involved in the M & A activities, considering the importance of the activity. Companies

should assign their best employees to the people issues that often take place during an M & A.

Typically, the best employees to handle people issues within an organization will be residing in

the human resources department.

The thesis is based on the following research questions:

RQ1: During a merger and acquisition what psychological strategies should business

executives use to unite the two organizations with keeping the human element and organizational

culture at the forefront?

As organizations continue to look for avenues to gain market share and grow their

business, it is can be assumed that M & As around the world will continue to take place.

Therefore, it is necessary for the business executives of the organization to prepare early on in

the M & A integration process placing an emphasis on the human element, providing thorough

communication throughout organization, and recruiting the proper resources during the

integration of two organizations. This study clearly indicates the importance of leadership

during the complete change process of an M & A. It is important for the leaders of the

organization to head up the vision development, planning, setting strategy, building the

organizational culture and teams (Sanda, & Adjei-Benin, 2011).

Furthermore, people issues are crucial in every type of process that involves change,

especially those in an M & A. If the human element issues are ignored, the satisfaction of the

employees can be negatively affected, which may result in lessened productivity levels and even

45


jeopardize the success of the M & A. The paper’s finding may help leadership personnel within

an organization who are going through the M & A process to understand the psychological

stresses that exist for the employees, and other identity concerns that may materialize during the

integration of two organizations.

An appropriate way to manage and deal with employees’ reactions to the events of an M

& A can be done through an informed group of business executives who are aware of the

psychological stress employees encounter during the M & A stages. During the M & A process,

an essential role of strategic and human resources planning is for the leadership team of the

organization to have an understanding of the employees’ attitudes and behavior patterns in order

to achieve the best results for organizational combination and performance.

The Psychological Contract Theory is significant during the M & A process, because it

offers the framework in understanding employees’ reaction to organizational change such as an

M & A. By understanding the unwritten agreement the employee perceives having with the

organization can offer valuable information as to how they will react to the M & A. Attention

given to the human element by the leadership of the organization during this time of drastic

organizational change is extremely relevant to the success of the organizations’ integration

process. As hypothesized, it is necessary for the leadership team to be prepared with the

necessary psychological strategies needed to unite the two organizations by addressing the

potentially different organizational cultures and stresses of the employees during the entire M &

A process.

RQ2: What communication strategies are utilized with the employees at the initial phase

and throughout the process of the M & A?

46


Communication with employees following an M & A needs to be a high priority for the

organizations. Schweiger and DeNisi (1991) found that genuine communications within an

organization can offer employees a format to cope with the effects of an M &A, and can help

lessen the negative impact these undertakings can have on organizational effectiveness. The goal

is to create synergy between the two organizations during the integration process, and this can

best be established through open and honest communication with the employees. Adopting an

open and honest communication strategy will alleviate the stress employees tend to feel during

an M & A. In addition, it can create a positive emotional environment when providing

information that is precise (Clayton, 2010). Cartwright and Schoenberg (2006) claim there are

strong indications for organizations to emphasize the importance of communication to reinforce

the positive value of the merger, and to endorse a sense of employees belonging.

The quality and the quantity of communication provided by the organization to the

employees can be expected to affect the realized synergies, and success of a shared identity being

established in an M & A (Schweiger & DeNisi, 1991). Clayton, (2010) found that the same

emphasis should be placed on employee communication during the M & A process as is the time

spent on financial, legal, and operational matters during the activities of an M & A. As

hypothesized the implementation of an array of communication strategies throughout the M & A

integration process will create a synergy between the two organizations. In addition, the

literature indicates that the lack of emphasis being placed on communication may cause a great

portion of M & As to fail unexpectedly due to only part of the processes and risks being

analyzed.

RQ3: What are some of the skills and strategies managers should implement to facilitate

cultural integration during the process?

47


Analyzing the organizational culture prior to the initial stage of the M & A is very

important for the organization to determine the cultural fit between the two organizations.

Typically, organizational culture is explained as a set of values, beliefs, assumptions, and

symbols that describe the way an organization conducts their business (Barney, 1986). Every

organization preserves a unique culture, and the leadership may be the individuals who define

the culture within an organization (Muchinsky & Culbertson, 2015).

When an M & A occurs, the two organizations may not be culturally compatible. The

organizational culture will direct how an organization interacts and conducts their day to day

business. Typically, the acquired organization will have to culturally assimilate to the parent

organization’s culture. Therefore, investigation as to the organizational culture needs to be

thoroughly reviewed to avoid cultural conflict. The leadership can take steps in educating the

employees about the potential organizational cultural differences that may be present, such as

different values, beliefs, and concepts.

The cultural knowledge and involvement of the leadership team is crucial during an M &

A. Furthermore, their commitment to the integration process needs to start early on in the M &

A process. Getting involved and assessing the cultural uniqueness will reduce the cultural

differences during the integration process. As hypothesized, the managers going into the M & A

process with the appropriate skills in understanding and implementing cultural integration will be

able to facilitate a more successful “marriage between the two organizations. The goal for the

leadership team is to complete a successful cultural integration in which the organizations

become partners and blend their cultures together (Marks & Mirvis, 2011a).

RQ4: What can leaders of the company do to improve the M & A process in regards to

the human element?

48


The overall importance of the human element during an M & A is clearly one that cannot

be dismissed. The organization cannot wait until the latter stage of the M & A to start analyzing

the human element. The same time the financials are being analyzed, the leadership team of the

organization should begin planning and evaluating the human element segment of the M & A.

The old identity the employees once held with the acquired organization is changing, and there

will be an adjustment period for the employees to assimilate to the new organization. The

leaders of the organization need to understand the psychological emotions the employee is

experiencing, and the difficult environment they are entering.

The literature clearly states that M & As are stressful because of the vast amount of

changes that take place, the expected timing of the change, the feelings of uncertainty, and the

need for the employees to rid their identity they held with their origination (Amiot et al., 2006).

The leadership needs to be patient and understanding of the employees’ perceptions as they

gradually shift their allegiance to the new organization. The goal should be to keep the

employees engaged and involved in the process. By doing this, the employees will feel more

positive about the experience and remain committed to the organization (Kyei-Poku & Miller,

2013).

Leaders in the organization need to account for the human element and each

organization’s unique culture when trying to create a successful combination of the two

organizations. The research indicates the importance of paying close attention to the people

issues during an M & A. The motivations of the employees will decline if they are ignored.

Honest and fair communication, a skilled management team in place to handle the employee

stress, and overall fair treatment to the employees throughout the M & A process will help

ensure employee satisfaction. By placing an emphasis on these elements in the M & A process

49


will create a more stable workforce within both organizations, and promote a successful

combination of the two organizations.

The human elements that occur during an M & A, such as emotions, behaviors, and

cultural fit are becoming a developing field of research. In contrast to the already large amount

of literature that pertains to the financial and organizational elements of the M & A. The

literature has shown and analyzed the psychological stresses employees are dealing with during

the M & A activities. In addition, the literature is in agreement with the final hypothesis in that

the leadership within the organization will be better served if they are educated and understand

the importance of keeping the human element at the forefront of the integration process. If the

management team puts an emphasis on the human element of an M & A, the company will

experience a more stable workforce within the organization.

Direction for Future Research

This paper began by examining the literature on M & A activity beyond the financial due

diligence element. In particular, a specific reference of the human element during the process of

M & A integration. This study’s contribution offers valuable information pertaining to the

human issues arising from an M & A, by examining the personal and emotional impact an M &

A has on the employee. The element of change within the organization that occurs during the

integration process is impactful to the employee.

Literature remains to hold a major gap concerning the employees’ perspective in the M &

A process (Kavanagh & Ashkanasy, 2006; Kyei-Poku & Miller, 2013; Sanda, & Adjei-Benin,

2011). Further research in this area is needed, and it may be appropriate to adopt a longitudinal

research study by maintaining contact with the employees throughout the entire integration

process. It would offer valuable insight of the long-term impact to employees if the employees

50


were contacted at various intervals in time after the M & A to see how they progressed. There

remains an importance to focus on people issues as emphasized in the literature which argues

that the human element of the strategies involved in the M & A still tends to receive inadequate

attention (Kavanagh & Ashkanasy, 2006; Kyei-Poku & Miller, 2013; Marks, 1997; Sanda &

Benin, 2011; Schuler & Jackson, 2001; Sethi, Mishra, & Dash, 2010).

In terms of a smooth transition taking place during an M & A, the senior staff of an

organization needs to express an interest in the human element that can arise during the whole

process of an M & A, and provide thorough communication to the employees for the purpose of

eliminating any misunderstanding about the process. If the employees feel that they are an

important part of their organization, they will tend to respond in a more product manner to the

change that is occurring during all stages of the M & A (Amiot, Terry, Jimmieson & Callan,

2006). Therefore, future research needs to continue to examine the leadership within the

organization as they take part in an M & A.

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Thesis M & As 2016

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