Reframing Mergers and Acquisitions around Stakeholder Relationships

Economic, Political and Social Processes

Simon Segal, James Guthrie, John Dumay

• Publisher: Routledge
• Year: 2022
• ISBN:
  9781000613773
• Edition: 1
• Topic: Betriebswirtschaft
• Subtopic: Fusionen & Übernahmen

Among the significant repercussions of the coronavirus pandemic is escalating public questioning of the desirability and sustainability of the market economy and the societal role of business. These concerns are linked to merger and acquisition (M&A) activity, with significant disruptive consequences for stakeholder relationships and their management. This book explores these changes, moving away from the traditional focus on the financial and strategic aspects of M&A and its rational, technocratic approach.

Viewing M&A activity as economic, political, and social (EPS) processes, Segal provides a dialectic understanding of stakeholder relationships around M&A activity and challenges the view that M&A activity is static, linear, and predictable. He develops a conceptual framework to enable practitioners, researchers and policymakers to identify, understand and address the stakeholder and management implications of M&A activity. This is applied to four case studies that make explicit how complex stakeholder relationships play out around M&A and how these power dynamics were managed with different balances.

Useful for academics, researchers, managers, advisors, investors, analysts, and other stakeholders, this book highlights the need to understand the EPS implications and processes involved around M&A.

1 Introduction

DOI: 10.4324/9781003265184-1

1.1 EPS and eps in M&A

Amid changing attitudes to the broader economic, political, and social (EPS) consequences of corporate activities, this book explores the EPS implications and processes involved in merger and acquisition activity (hereafter referred to as M&A¹) from a stakeholder perspective. It reframes M&A more broadly around stakeholder relationships that affect, and are affected by, M&A than the focus on the connection between M&A and earnings per share (eps, the bottom line on a company’s income statement, crudely used here as a figurative representation of the many ways to understand financial value around M&A) variety that dominates M&A practice. Indeed, by narrowly focusing on “eps” metrics and shareholders, M&A practitioners fail to capture the complexity and multitude of factors impacting the appraisal, process, and outcome of M&A. This “bottom-line” way of seeing is shaped and limited by conventions or frames and habits of practice. A stakeholder frame or way of seeing opens up new possibilities and discloses new worlds that can improve M&A outcomes for multiple stakeholders.

As a massive and consequential global phenomenon, M&A fundamentally affects, and is affected by, multiple stakeholder groups. Global M&A volume was a record USD5.65 trillion in 2021 (compared to USD3–4 trillion in each of the previous five years), thanks to low interest rates, easy access to capital and recovering economies worldwide, easily beating the previous USD4.55 trillion record set in 2007 just before the global financial crisis (Dealogic, 2022). Not only is M&A massive but an M&A event has dramatic and disruptive consequences on corporate life (Larsson and Finkelstein, 1999), growth strategy (Hitt et al., 2001), strategic renewal (Bruner, 2004), forms of change (Cartwright et al., 2012), and ability to meet market challenges (Agrawal and Jain, 2015). Bruner (2004: 3), for instance, states that “M&A is one of the most important means by which companies respond to changing conditions… M&A is one of the most aggressive change agents in the business economy: volatile and disruptive.”

M&A finance researchers and practitioners primarily explore the context and parameters concerning the “how” of M&A. They largely focus around the financial/strategic logic and outcomes through a shareholder lens, analysing and describing related empirical facts about M&A, be it to initiate a transaction, drive the process, or determine the outcome. An alternative, stakeholder approach concerns the meaning of M&A for stakeholder relationships. Through a stakeholder lens, a big picture, holistic approach can be taken to M&A – to contextualise (place in context of the bigger picture), decontextualise (see new possibilities in the context), and recontextualise (set in a new context) M&A as involving EPS processes with EPS implications. This book develops a conceptual stakeholder relationship framework for identifying, understanding, and managing stakeholder relationships as disruptive of, and disrupted by, M&A. These complex relationships are multi-directional between and among stakeholders and involve power balances. Such a framework locates M&A beyond rational, linear, predictable, and controllable events but as ambiguous, nuanced, and dynamic process that evolves around stakeholder relationships in a broader EPS context. To understand and manage M&A is to know and reflect on how these stakeholder relationships work and change. The framework is put forward not as a quick fix, “how to” manual but as a problem-solving tool for academics and practitioners to analyse and understand stakeholder relationships around M&A, as a tool to link the questioning of M&A that occurs in the stakeholder relationships disrupted by M&A, and as a tool to frame a new way of seeing M&A.

1.2 Questioning of market economy

An examination of stakeholder relationships around M&A is timely and motivated amid a global trend towards more socially responsible or sustainable management practices amid widespread questioning of the desirability and sustainability of the market economy and concerns around corporate behaviour and the societal role of business (Norman, 2018; Winston, 2019; Dimon, 2020; Fink, 2020; Thomson, 2020).

In democratic societies where community expectations influence policies, companies are responding to the growing concern about criticism of and hostility towards corporate power. For instance, in 2019, the Business Roundtable, representing the chief executives of 181 of the world’s largest companies, notably declared that the purpose of a corporation is not just to serve shareholders (their official position since 1997) but “to create value for all our stakeholders” (Roundtable, 2019). In a “significant shift” (Durkin, 2019), following member consultation around governance practices and standards, Shareholder primacy, the core operating principle of public companies for about 50 years since economist Milton Friedman famously declared “the social responsibility of business is to increase its profits,” is being challenged (Winston, 2019: 1).

Influential corporate executives involved in M&A are also expressing concern around shareholder primacy and the social role of business. For example, Larry Fink (2018: 1), chairman of the world’s largest fund manager BlackRock (USD7 trillion in assets), argues that “society is demanding that companies serve a social purpose … Companies must benefit all of their stakeholders.” Also, Jamie Dimon (2020), chairman of JPMorgan Chase, the largest US bank (assets of USD2.7 trillion), is concerned that

capitalism may be at a tipping point. For too long, policymakers, governments and business leaders have done a poor job of helping those who have been left behind, and lost sight of how capitalism can create more opportunity for all … Many businesses are rethinking their role in society …Capitalism must be modified to do a job of creating a healthier society, one that is more inclusive and creates more opportunity for more people.

Such views are significant for M&A, decisions, discussions, and possible trends as Blackrock and JPMorgan hold influential positions in the global M&A investment and advisory world.

Winston (2019) highlights four reasons why business leaders are feeling pressure to rethink the role of business in society.

• – Social norms are changing, and employees, customers, and investors have higher expectations.
• – There is growing realisation that a focus on one key stakeholder is flawed.
• – Investors are increasingly pressing firms to focus on their purpose and how they contribute to society.
• – Business is feeling the global challenges of climate change, growing inequality, resource scarcity, and environmental damage.

Winston (2019: 3) argues: “Companies are increasingly expected to play a positive role in society and take responsibility for the broader effects of their actions and products.” Research showing an overall positive association between an acquirers’ stakeholder orientation and acquisition performance suggests an M&A focus on why business leaders are feeling pressure to rethink their societal role (Bettinazzi and Zollo, 2017).

1.3 Coronavirus pandemic

While the evidence is yet to emerge, the coronavirus pandemic could intensify such pressures on management and the market economy. The economic devastation wrought by the coronavirus pandemic is the latest blow to the demise of capitalism (Kaufman, 2020). Oxford University professor Ian Goldin (2021) argues that the pandemic is compounding economic inequalities with rich countries finding over USD17 trillion to sustain their businesses, retain jobs, and reinforce safety nets, while poor countries have little capacity to do likewise leading to over 100 million people being pushed into extreme poverty and a further 118 million faced chronic hunger “making the economic consequences of Covid-19 more deadly than the virus itself … This fuels anger against an increasingly unfair system and deepens support for populist politicians who offer the false promise of cocooning citizens from global threats” (Goldin, 2021).

One response to the coronavirus pandemic is big tech using its “moneybags and muscle” to stifle competition by buying more enterprising rivals (The Economist, 2020). Former Governor of the Bank of England Mark Carney (2020) highlights that traditional value drivers have been shaken by the pandemic, and new ones are gaining prominence, making it possible that the gulf between what markets value and what people value will close. After decades during which economic growth was the main criterion for planners and their planning, the political and moral dimensions of human affairs have come back to the forefront of our societies (Illouz, 2020).

Such concerns around market concentration, corporate power, inequality, and the societal role of business motivate this book. These concerns are widespread and not confined to anti-business sentiment but incorporate pro-business groups responding to such matters – official inquiries, the financial media, global institutions, economists, and corporates themselves. The concerns partly reflect a failure of M&A, which, in a capitalist-oriented and stock market-based economy, is a core means for corporate asset accumulation, expansion, and power contributing to the various disruptions described. These concerns are inextricably linked to M&A, significant corporate events fundamental to driving the market economy with disruptive consequences for stakeholder relationships. In this context, M&A is of interest to the broader public and has public relevance that needs to be made more explicit.

As a driver of a market economy, M&A connects management, capitalism, and stakeholders. It can be identified, understood, and managed as EPS events with broad stakeholder consequences. Yet, M&A finance research and practice is primarily focused around financial/strategic logic and outcomes through a shareholder lens.

M&A is initiated with the expectation of change and disruption and as such is a significant and complex EPS event in corporations’ lives. M&A unevenly disrupts and is disrupted by various stakeholders with ensuing EPS consequences. While various stakeholders can benefit (e.g., bidder shareholders with higher valuations, managers with enhanced power and wealth, advisors with fees), others can be disadvantaged (e.g., employees losing jobs, target shareholders receiving reduced value, consumers paying more). Stakeholders often resist, even derail, M&A due to insufficient anticipation, appreciation, and flexibility around stakeholder concerns. It is not uncommon that shareholders vote M&A down, employees protest, senior managers resist, regulators intervene, and competitors react, to cite a few stakeholder disruptions I have witnessed in my journalistic career. The academic and management challenges are to identify and understand stakeholder relationships around M&A that balances these often competing and conflicting stakeholder interests.

1.4 Environmental, social, and governance interest

Pressures being felt to rethink the role of business in society is manifest in rising concerns around environmental, social, and governance (ESG) issues which are becoming a major factor behind corporate investment and asset management decisions. ESG is distinct from its precursor corporate social responsibility (CSR) in that while CSR aims to make a business accountable, ESG criteria make such business efforts measurable. ESG captures the engagement of firms in CSR and expands CSR to provide quantifiable indicators as to how companies, for example, treat their employees, manage supply chains, respond to climate change, and support communities.

From a corporate perspective, sustainability consulting and research firm the Governance & Accountability Institute reports that in 2019 (Governance & Accountability Institute, 2021), 90% (Governance & Accountability Institute, 2021) of S&P 500 firms released sustainability or corporate responsibility reports compared with just under 20% in 2011. G&A adds that the volume of reporting has steadily increased since 2011 and the contents of the reports dramatically expanded.

From an investor perspective, the Global Sustainable Investment Alliance (GSIA), an international collaboration of membership-based sustainable investment organisations, finds at the start of 2020 that global sustainable investment assets under management (AUM) reached USD35.3 trillion, up 15% since 2018 and 35.9% of total assets under management (Global Sustainable Investment Alliance, 2021). Similarly, US head-quartered financial services group Morningstar (2021) highlights that global assets in sustainable fu...