VCU study: Mergers and acquisitions disrupt management

When companies merge, key top executives are often pushed out, according to a recently published study by a Virginia Commonwealth University business professor.

Jeffrey Krug, associate professor of strategic management at the VCU School of Business, and Walt Shill, managing director at Accenture, followed the careers of more than 23,000 executives in more than 1,000 companies over 17 years. A number of the companies studied were based in Virginia. (Specific names were kept secret.)

The study, published in the latest issue of the Journal of Business Strategy, showed that mergers often result in the loss of top management and can lead to a host of other problems for the combined company, including disgruntled workers and disoriented customers.

On average, CEOs left companies 24.3% of the time within the ten years following an acquisition. Non-merged firms experienced an average annual turnover rate of 9.8%, or less than half the rate of churn.

The study also found that firms acquired multiple times lost an average of 48% of their executives in the first year after an acquisition. During the ten years that followed, the firms lost an average of 32% of executives per year, or 12% higher than the average experienced by firms acquired once.

So what kinds of factors are at work behind this high turnover among top executives?

Often times, one way one company does business may be considerably different then the customs at another company. Humans are creatures of habit, and changing routines can be upsetting and costly.

Geography can also present irreconcilable differences. Companies separated by many miles often have a much harder time communicating and gelling, Krug said.

“One Houston executives was saying things like ‘They don’t know how we do things down here,’ and that shows a problem that wouldn’t be there for merged firms in similar regions.”

But even strong regional ties can’t guarantee a smooth acquisition. If executives from merged firms can’t co-exist, turnover is likely, usually at the cost of the acquired firm.

This can lead to communication problems at the top levels, which in turn creates a ripple of instability throughout the firm.

Krug said that losing leaders can be damaging to large and small businesses alike.

“For a place like Richmond, where you have employees who have been working for a specific company all of their lives and who have no education and no other opportunities, the loss of top executives that they are familiar with can be detrimental.”

Employees at acquired companies face a great deal of anxiety and stress in trying to work through mergers. These employees will have no one to turn if their familiar supervisors have been let go, Krug said.

“The executives that remain in their positions can act as a buffer between the old company and the new company,” said Krug, and this is essential for mainstream workers. It’s also sometimes a requirement in the terms of a deal.

Turnover in management can also upset local consumers and trusted suppliers, which can hurt brand loyalty.

For companies like Anheuser-Busch, which was recently acquired by Belgian brewer InBev, the transition should be smoother, Krug said. InBev understands the beer industry, and recognizes the fact that beer requires a local approach on many levels due to the expenses and perishability of the product. InBev has said it will be keeping local bottling plants, breweries, and distribution centers open.

However, according to Krug, InBev may undervalue other Anheuser-Busch properties, like Busch Gardens in Williamsburg.

“Anheuser-Busch uses Busch Gardens to improve its brand loyalty and awareness,” said Krug. “Think of the Bald Eagle preserve that they have there; it’s tremendously positive, because of the national associations of the animal, but InBev doesn’t know or care about the Bald Eagles.”

Krug said that InBev doesn’t understand the local culture associated with the Anheuser-Busch brand, and this could eventually lead to severe alienation within the Williamsburg community.

So why aren’t companies figuring out ways to properly integrate and merge? Krug said it’s a lot like marriage.

“They say that 55% of first marriages fail, 65% of second marriages fail, and 75% of third marriages fail, so where is the experience coming into play?”

Because the risks are so high, companies need to be careful. Without stability at the top executive levels, companies cannot effectively integrate workers, implement systems, and manage products.

So what’s an acquiring firm to do?

“Reestablishing stability among executive team members is one of the most important factors in any acquisition,” said Krug.

Companies should try to integrate by looking at several factors, including corporate structure, motivation, current state of the industry, and the composition of management teams, said Krug. They need to examine everything, including the firm that they are acquiring, the industry that they are in, and the consumers that they have.

Companies that acquire should also look to retain valuable members of the acquired firm’s management teams.

“It’s complicated, but executives with million dollar salaries have trouble figuring this stuff out,” said Krug.

“The idea is simply to integrate as smoothly as possible.”

Watch Professor Krug here talk about his findings here:

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