Acquisition Premiums, Subsequent Workforce Reductions and Post‐Acquisition Performance

Abstract

This study suggests that paying acquisition premiums leads to workforce reductions in the merged firm, which in turn results in poorer post-acquisition performance. This issue is important to scholars and practising managers given the pervasiveness and importance of knowledge and human capital to competitive advantage. In a sample of 174 major related acquisitions completed in the period 1992-98, results show a positive relationship between the premium paid for an acquisition and subsequent workforce reductions, controlling for a number of alternative explanations. Additionally, workforce reduction mediates the negative relationship between premiums and post-acquisition performance. The results suggest that the effects of workforce reductions following large premiums paid for the acquired firm can be detrimental to the interests of the organization.

Employment Change after Takeovers: The Role of Executive Ownership

“…Restructuring is therefore likely to occur after takeovers. On this basis the performance of target companies prior to takeover is expected to predict employment reductions after the transaction, and there is certainly supportive evidence (Hillier et al 2007;Coucke et al 2007;O'Shaughnessy and Flanagan 1997;Krishnan et al 2007). Other studies highlight the extent of similarity between target and acquirer.…”

“…They may seek to recoup the costs of the takeover by in effect transferring them to labour. Krishnan et al (2007) found that the premia paid to mount takeovers is the main predictor of employment reductions post-takeover, and it could be predicted that executives with ownership will be especially concerned to recoup these costs. On the other hand, ownership provides managers 7 with an incentive to grow the firm so as to benefit from increases in value.…”

“…Where related businesses are acquired, there appears to be scope for rationalisation of duplicated activities. Relatedness has predicted lay-off announcements post-takeover (O'Shaughnessy and Flanagan 1998), workforce reductions (Krishnan et al 2007), and reductions in labour demand (Conyon et al 2002a(Conyon et al , 2002bGugler and 6 Yurtoglu 2004). Hostile takeovers also commonly lead to employment reductions (Denis 1994), often because they are aimed at major restructuring of target companies and because high premiums are necessary to buy-off target company shareholders (Sudansanam and Mahate 2006;Goergen and Renneboog 2004).…”

“…Data on lay-offs were collected from the Financial Times and other national newspapers, downloaded via the Nexis ® database, following the methodology adopted in prior research (Hillier et al 2007;Krishnan et al 2007;O'Shaughnessy and Flanagan 1998) iii . Screening newspapers for a period of up to two years from the takeover completion date, we found media reports of employee layoffs in 101 (43 per cent) out of 235 acquisitions iv .…”

“…The extant evidence (Krishnan et al 2007) shows that the proportion of non-executives is an insignificant predictor of post-takeover workforce reductions.…”