A merger that looks good on the face of it can lose value when too many employees in the target company get panicky about what life will be like after the deal closes.
In almost all types of corporate combinations - be it a merger, acquisition or spin-off, friendly or hostile, domestic or cross-border, a human reaction to the corporate change, or “merger syndrome”, should be expected. Employee attrition is a primary cause of disappointing outcomes in seemingly otherwise well-conceived mergers and acquisitions. Commonly, questions will crop us as to the nature of the culture of the acquiring firm, the size of the firm and the way the target will continue to do business. If not managed properly, employees’ emotional stress can pose a significant risk to the success of a merger.
The term "merger syndrome" describes employees’ reactions to a merger or acquisition. Usually the employees of the acquired firm are more affected by the restructure and so "merger syndrome" is generally more intensively felt in the subsumed organisation.
"Merger syndrome" initially manifests when the murmuring of an impending transaction starts, but it is amplified in the post-merger phase, presumably because managers maintain strict silence on upcoming decisions in the pre-merger planning stage. During the post-merger phase, high workload and uncertainty tend to cause manager teams of both companies to slide into crisis management mode. Bad communication and centralised decision-making makes the situation worse.
Job alternatives
The consequences of the "merger syndrome" are decreased motivation, lower job satisfaction and reduced commitment towards the company. There is also usually an increase in employees searching for job alternatives. Usually the best qualified employees leave the company first, and this contributes to further uncertainty and sometimes a mass exodus.
The residual employees, to cope with all these challenging events, start to talk, gossip and distract each other from their work. This gets reinforced when top-down information is not clear or considered to be insufficient.
The rumour mill starts and worst-case scenarios boom because no news is usually decoded as bad news.
What can an acquiring company do to manage this risk?
Check the old employee contracts. During the due diligence phase, check whether the target company has its key people under enforceable restraint of trade contracts.
Will you be able to enforce the old contracts after the deal closes? Even if there are non-compete agreements in the file for the right groups of employees, you must determine whether you - as the acquiring entity - will have the right to enforce the old non-competes after the deal closes.
New employment contacts. If you find that many of the old contracts are not enforceable, then you should build into the negotiation a strategy for getting newer and better agreements from the key people, especially for executives you want to retain after the merger.
Consideration for new agreements. If new contracts are required, you must address issues of timing and consideration.
Don’t forget to use carrots with your sticks. The company is better off if employees decide to stay on board and are happy about doing so.
Rolling out an attractive employee retention plan designed to induce important players at all levels to stay around long enough get to know what is good about your company can be very effective. Consider stay-bonuses, with repayment obligations that kick in after a certain amount of time.
Communicate your retention offers early. Retention packages are more effective tools when deployed rapidly and when their benefits are communicated effectively. Deal with this immediately after announcement of the pending merger.
Employee attrition will always be a risk factor in mergers and acquisitions, but careful attention to employment contracts and retention packages can go a long way toward minimising those risks.
Lauren Salt is Senior Associate, Employment Practice, Baker McKenzie South Africa.