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Corporate Mergers and Organizational Leadership

During the first-ten years of the 21st Century, organizational leadership and corporate strategy has embraced the concepts of mergers and acquisitions. Whereas the intent may be to form a larger and perhaps stronger, more efficient business entity, the consequences of corporate mergers (and rumors of corporate mergers) has possibly contributed to a few of our countries most pressing problems such as: fluctuating corporate valuation and corporate greed; mistrust of big business; companies “too big to fail”; and unemployment. This blog entry will address the corporate merger scenario and review its impact.

Corporate Merger Objectives

A corporate merger occurs when two separate, independent companies agree to combine their resources (i.e. assets, liabilities, capital, customers, employees, etc.) and become one company. There are a number of reasons why corporations may agree to merge. The current trend of corporate mergers reveals three potential benefits to the companies involved.

First, a merger can help increase market share. A corporate merger can facilitate the growth of two smaller companies into one larger company. By absorbing a competitor, there is increased market power to set prices for corporate goods and services. A second, desired result of a corporate merger is improved financial performance of the combined entities. Corporate expenses can be reduced by eliminating duplicate operations. Two accounting departments can consolidate into one accounting department. Two marketing or technology or sales teams can consolidate into marketing or technology or sales team.

Third, an opportunity for corporate tax relief is possible. For example, a profitable company may buy an unprofitable company for the purpose of using the unprofitable company’s operating loss for reduced tax liability. There are federal regulations and government oversight on the volume of losses allowed, nonetheless, this is still an acceptable corporate strategy.

Disadvantages of Corporate Mergers

The existing literature and research on corporate mergers has not identified very many positive benefits of this strategy for the communities, citizens, and employees the corporations serve. However, a number of disadvantages and challenges around corporate mergers have been discovered. The ill-conceived notion that corporate mergers produce a larger, improved business entity has resulted in documented cases of failed mergers. This is especially visible where companies with unrelated technologies; misaligned corporate missions; and disparate management styles attempt to consolidate operations. The same reasoning, objectives, and justification for merging companies can also be the liabilities and disadvantages of merging companies.

A corporate merger can increase market share for the newly established company. It will increase market power for setting the price for the company’s goods and services. It may also influence pricing throughout the company’s industry. However, the goal of every company is to make a profit. Increased market power to set prices does not result in lower prices for consumers, but higher prices – and profits for the company (and in some cases, with poorer quality of merchandise). There are no corporate leaders who report their company has set market prices which will lower their corporate profitability!

The second justification for corporate mergers of reducing/eliminating operating expenses is a highly desirable objective. However, reducing and eliminating duplicate operations inevitably translates into workforce layoffs. There are no corporate leaders who report their company has merged with another company in order to hire more employees! The existing labor market and economic environment is fragile. With the U.S. Department of Labor reporting unemployment well over 10%, the labor market cannot withstand more corporate mergers at the expense of increased unemployment.

Finally, the strategy and belief of executing a corporate merger to benefit from reduced tax liability is egregious. There are numerous challenges in identifying innovative and creative initiatives to improve corporate profitability. In today’s business environment, there are also increased challenges in identifying “ethical” innovative and creative initiatives to improve corporate profitability. Using company resources to find unprofitable corporations to possibly merge with will not result in a long-term, profitable company. It will merely offer a short-term tax break, with higher prices on its products and more employee layoffs.

Implications for Leadership

The advantages and disadvantages of corporate mergers is a topic of debate. A study published in the Journal of Business Strategy (July, 2008) found that the target companies in corporate mergers lose 21% of their executives each year after an acquisition for approximately ten years. Because of the loss of executives, there is an impact to leadership continuity. With ever-changing leadership, there is also potential for the lack of knowledge transfer; mixed signals on corporate values, beliefs, and attitudes; and confusion among employees about their role in a newly established company.

When corporations merge, employees in both firms may become stressed or overcome with anxiety. “Survival” in the reorganized, merged company becomes the top priority of employees. They become concerned over job definition, accountability, responsibility, and security. During a corporate merger, there may be signs of uncertainty, or lack of communication on corporate direction. This malady may be particularly prevalent when companies of disparate goals and objectives combine. Employees observe who is selected to remain with the new organization; who is selected to be let go by the new organization; and who is chosen to serve in leadership positions in the new organization. In fact, employees will spend more time observing this phenomenon and discussing it among their peers than they will spend toward actually improving/increasing their productivity and effectiveness.

This scenario is an opportune time for the company leadership to clearly and honestly communicate with the environment in which it operates. Leadership must explain in detail what changes are being made; how/when the changes will be implemented; and how employees (as well as the communities and customers the organization serves) will be affected. Without such communication, employee productivity and effectiveness will suffer, and lack of communication will further exacerbate the challenges corporate mergers present. More information on the effects of mergers can be reviewed in Corporate Leadership Selection: Impact on American Business, Employees, and Society (Authorhouse Publishing).

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