Organizational Psychology of Mergers and Acquisitions

Examining Leadership and Employee Perspectives

Camelia Oancea, Caroline Kamau

• Publisher: Routledge
• Year: 2020
• ISBN:
  9781317600473
• Edition: 1
• Topic: Negocios y empresa
• Subtopic: Fusiones y adquisiciones

Organizational Psychology of Mergers and Acquisitions provides a comprehensive perspective that helps you understand, empathise and protect the wellbeing of employees who experience mergers and acquisitions. This book gives a state-of-the-art review that crosses different subjects within psychology including psychobiology, neuroscience, social psychology, interpersonal relationships, and organizational psychology.

This book discusses why many employees think of mergers or acquisitions as scary or threatening events, why negative emotions are prevalent, their psychobiological impact and how to assess employees' emotional responses using a new toolkit. It helps readers learn what counts as good leadership, considering the role of charisma, personality, context and information processing abilities. This book includes the issue of organizational learning, and the relevance of occupational health and safety to due diligence about mergers and acquisitions through case studies about organizations sued for cancer or cancer-related mortality after a merger or acquisition.

This book is mandatory reading for students, academics, and practitioners working with organizations experiencing a merger or an acquisition such as consultants, human resource professionals, psychologists, occupational health professionals, and employees involved in strategy, management, or people development.

1 Understanding and classifying different types of mergers and acquisitions

This chapter will introduce you to different types of mergers and acquisitions, helping you understand the reasons that inspire organizations to engage in them. A merger or acquisition is a legal transaction in which one organization transfers or combines some or all of its operations to or with another organization. In an acquisition, one organization transfers operations “upwards” to another organization that becomes its legal “parent.” In a merger, two organizations transfer “sideways” to a new organization that is the sum of its two parts and they often rebrand the name of the organization with a new name, a hyphenated name, or one of the two organizations’ names. By “operations” we mean an organization’s stock (e.g. products to sell to customers), assets (e.g. buildings, equipment, vehicles, or staff), liabilities (e.g. debts), and equity (e.g. net profit). This chapter will start by discussing commonly used words in mergers or acquisitions to extrapolate what different words really mean and whether they are useful or superfluous (not necessary). We will discuss ways in which the media and public sometimes confuse mergers with acquisitions, and how organizations sometimes misrepresent acquisitions as mergers because acquisitions are stereotyped as “hostile” whereas mergers are stereotyped as “friendly.” We will then discuss five types of mergers, with examples from real organizations that have combined their brands and operations in such deals. We will discuss horizontal mergers, market extension mergers, vertical mergers, product extension mergers, and conglomerate mergers, and we will briefly discuss the psychological implications for employees as an introduction to this book. After this, we will present a new taxonomy defining different types of acquisitions in 15 ways, with examples from organizations that have embarked on such deals. We will also draw some conclusions about the psychological implications of acquisitions for employees as an introduction to this book. Finally, we will summarise the conclusions you can draw from this chapter. Let us start by understanding what mergers and acquisitions are and how they differ.

Understanding how mergers differ from acquisitions

When you read press releases and news reports about mergers or acquisitions, you will probably come across organizations describing something that is an acquisition as a merger. Even more confusing is the conflation in media reports between the word merger and words that allude to acquisitions, such as takeovers. Organizations that describe acquisitions as mergers might do this for public relations reasons, because mergers sound like “friendlier” events than acquisitions, which are often stereotyped as “hostile” or “takeovers.” You might also come across words such as “consolidation,” which can literally mean two different organizations becoming legally recognised as a new organization, or it can be used as a metaphor by organizations to describe their new partnership while leaving researchers unsure about whether the deal is a merger or an acquisition. You may also read words like “synergy,” which is the idea that the two organizations combining will reduce their average costs while increasing profits. The word synergy is sometimes used in a way that leaves you uncertain about whether an acquisition or a merger has taken place. It is therefore important for you to probe a lot deeper than press releases and news reports by looking at government or court websites showing the details of a merger or acquisition, and company registration information, in order to understand whether indeed a merger has taken place or whether it is an acquisition. A key difference between a merger and acquisition is in the legal aspects of the transaction, and this depends on the laws set by the relevant country or countries. In some countries, a proposed merger or acquisition may need to be approved by the government because of competition laws that are designed to prevent some organizations from becoming too large in terms of their share of a specific product or service market.

Typically, an acquired organization becomes a legal entity that is subsumed within the parent organization, which means that the acquired organization becomes a subsidiary. Sometimes, acquired organizations cease to be known by their previous names but, often, acquired organizations continue trading with their previous name because it is commercially useful to keep the brand identity that customers are familiar with, even if the organization is actually owned by the acquiring organization. For example, after Apple acquired Shazam in 2018 for $400 million, Shazam continued to trade as Shazam, but legally, Shazam is actually registered as an Apple subsidiary. Likewise, Pixar continued to be known as Pixar even after being acquired by Disney in 2006 for $7.4 billion dollars. You can see why people in the public can remain unaware that an organization has been acquired, and why some people in the public might assume that the deal was a merger. An example is the 2017 acquisition by Amazon of Whole Foods for an estimated $13.7 billion. Whole Foods is a supermarket chain with stores in the US, UK, and Canada, and the acquisition gave Amazon (an internet-based retailer) important diversification into “bricks and mortar” retail, which means that Amazon can now sell products online and on shop floors. “Diversification” is when an organization broadens its operations from X to X+Y, where Y refers to additional stock, assets, or equity gained from the organization to be acquired and that are different from X in type, source, or size. In this example, X was comprised of Amazon’s operations before the acquisition as a largely online retailer, and Y was comprised of Whole Food’s operations before the acquisition as a supermarket chain. Therefore, we see that an acquisition enhances an organization’s existing operations by giving it a new type of revenue, helping it cushion itself against risks within its existing revenue streams, such as problems with retaining consumers that make profits unpredictable. That said, consumers might remain unaware about most acquisitions because their experiences as consumers in terms of the branding of a product or service often stay the same.

Whereas in an acquisition, one organization takes over and legally incorporates another organization within itself, in a merger, the two organizations become one new legal entity. Typically, after a merger, the two organizations choose a new name or bridge their previous names to form a new name. An example is the 2000 merger between Glaxo Wellcome and SmithKline Beecham that resulted in a new organization name, GlaxoSmithKline or GSK. Another example is the 1999 merger of Exxon and Mobil to become ExxonMobil, now the second-most successful US organization in terms of revenue (Fortune, 2018). Mergers are thus typically better defined than acquisitions from the point of view of consumers. That said, in order to understand whether a certain deal is really a merger or an acquisition, you need to examine the legal procedures that the organizations went through and their subsequent registration(s) as legal entities. This book will start by introducing you to different types of mergers and acquisitions to help you understand the differences among them and the psychological implications of mergers versus acquisitions from the point of view of employees. For example, employees might think of acquisitions as events that threaten more jobs than mergers, and thus they might feel less shocked, angry, and stressed by a merger compared to an acquisition. However, just as stereotypes of acquisitions as “hostile” events are not always true, stereotypes about mergers as “friendly” events between equal organizations are also not strictly true because mergers can be unequal in terms of the proportion of jobs that are cut or the operations that are scaled down in each organization. Let us now examine what mergers are in more detail by looking at five types of mergers and understanding the differences among them.

Understanding the five types of mergers

The Federal Trade Commission provided a five-fold system for classifying mergers and acquisitions (United States Federal Trade Commission, 1984; Brealey & Meyers, 2006) and it is a classification system that is commonly used in the empirical literature (Walsh, 1988; Buono & Bowditch, 1989). Figure 1.1, which follows, shows the five ways of classifying mergers.

Figure 1.1 Five common ways of classifying mergers

1. Product extension mergers

When two organizations produce similar products that can complement each other in a way that increases profits, they engage in a type of merger called a product extension merger. An example is the merger of an organization A that supplies gas and electricity to domestic customers with an organization B that fits “smart” technology to customers so that they can control the heating of their homes remotely, thus creating an organization C. The new organization C has more products than either A or B alone (gas, electricity, and smart technology), and it can sell the smart technology to the gas and electricity customers who are already registered with organization A. Therefore, organizations A and B merge because they have products that complement each other. An example is the merger between DuPont and Dow Chemicals, both of which manufacture chemicals for agriculture and other uses (Reuters, 2015). The merger led to the formation of DowDuPont, although there was a subsequent sub-packaging of the merged company and a break-off that was ostensibly pre-planned at the merger stage, according to the news reported by Reuters. A sub-packaging is a portioning out of an organization’s operations, assets, or other entities in the formation of a new organization or subsidiary, and a break-off means that the new organization or subsidiary becomes independent of the original organization(s) involved in the merger.

2. Vertical mergers

When two organizations produce different products within the same industry, and one organization is “lower” on the supply chain whereas the other organization produces the end product, they engage in a type of merger called a vertical merger. An example is a house building company A that merges with a bricks manufacturing company B, creating organization C that builds houses with cheaper bricks. In this example, organization B is lower on the supply chain than organization A because B manufactures products (bricks) that are needed by A to create the finished products (houses). An example of a vertical merger is that between Heinz and Kraft Foods. Heinz is known for manufacturing condiments such as mayonnaise and ketchup, whereas Kraft Foods manufactures a wider range of groceries. If Kraft Foods were to launch its own line of condiments, that might be less profitable than merging with a popular condiments brand such as Heinz with an established brand and existing manufacturing operations. The well-known investor Warren Buffett and a private equity company called 3G bought both Kraft Foods and Heinz and then, after that, they merged Kraft Foods with Heinz (Treanor, 2015) to form the Kraft Heinz company.

3. Market extension mergers

When two organizations produce similar products but each have access to different consumer markets, they engage in a type of merger called a market extension merger. An example is organization A, a retailer that sells electronics to consumers in Africa, merging with organization B, a retailer that sells electronics to consumers in Asia. This creates organization C, which accesses both consumer markets. A potential example of a market extension merger is the proposed deal between the UK’s Just Eat and the Netherland’s Takeaway, both of which specialise in delivering food to consumers who order online (Kollewe, 2019). The merger would result in the combined company having a large share of the online food delivery market in the UK, the Netherlands, and other countries, although at present, the merger is still under discussion and there might be counter-bids from other organizations. Market extension mergers sometimes get blocked by government bodies when they are concerned that the merged organization will unfairly dominate a certain consumer or service market because this could result in price fixing and less choice for consumers. For example,...