The Role of Human Resource Management in Mergers and Acquisitions

From the beginning of 20th Century, mergers and acquisitions have prevailed in almost all economies across the world. All these times, it has played a vital role in influencing the decisions made by firms. In many occasions, researchers have agreed that mergers and acquisitions (M&A) is one of the key factors that dictate a firm’s value and performance. In addition, it has been added that a firm’s market price and the premium paid by acquire is always reflected in the value paid in M&A. However, the average M&A transaction creates value for the target or acquired firm’s shareholders, but destroys value for the acquiring firm’s shareholders. It break-evens after when evaluating the combine firm after merger (Cartwright and Cary 2014). Despite the fact that the acquiring firms break even after the merger, they continue to “incur overpayments that may range from 30% to 50% of the acquired firm’s market value” (Chou, Tian, and Yin 2010). Previous studies on this topic have cited limited evidence supporting the positive long-term effect of M&A on the acquiring firm’s value and performance.

The paper seeks the extent to which real earnings management (REM) influences mergers and acquisition (M&A) premiums and why acquisition companies continue to pay high premiums. In order to answer the research questions and validate the formulated hypotheses, the introduction gives the brief background of mergers and acquisitions and further relates M&A premiums to real earning management among acquisition. The literature review sections outline the theoretical and empirical literature thereby providing an overview of the link between escalating real earning management. Research methodology sections outlines and justify the research techniques that were used to collect the data needed to answer the research questions. Data analysis techniques are discussed under the data analysis section.

Problem Statement

Since the end of the great depression, the mergers and acquisition activities have constantly increased among different companies. Although researchers have cited the relevance of M&A in business decision making process, there are emerging issues regarding keeping staff engaged after post-merger and avoiding HR related pitfalls. Due to such concerns, it is relevant to investigate the extent to which companies need to keep their employees engaged and why acquisition companies continue to pay higher mergers and acquisition premiums.

Aim of the Study

The primary aim of the study to establish the extent to which human resource management influences mergers and acquisition premiums and why acquisition companies continue to pay higher premiums. The secondary aim is to examine the literature, unravel the controversies, and add to the body of knowledge.

Objectives of the Study

The overall study objective is to further an understanding on the dynamics that plays critical roles in the determination of mergers and acquisition success. In addition, it seeks to establish the role of companies in ensuring employees concern during a merger are meet. The specific objectives include:

- To determine how human resource issues, affect mergers and acquisition premiums

- To find out why acquisition companies engage in mergers and acquisitions

- To determine the correlation between employee’s satisfaction and M&A premiums

2. Research Question

a) How to keep staff engaged after post-merger? and avoid further pitfalls?

b) How to avoid further pitfalls associated with M&A?

c) What is the relationship between employee’s satisfaction and M&A?

3. Literature Review

The section will explore the existing theoretical and empirical literature regarding the topic. It seeks to explore the theories and provide a description of the prior studies that analyses the relationship between real earning management and M&A premiums. First, the reasons for acquisition companies’ engagement in M&A activities are discussed to expose the motivating factors that drive company mangers into acquisition. Next, the relationship between real earnings management and M&A premiums is expired. Based on the literature and the research questions, the study hypotheses are developed.

A study by Pastor and Pietro (2003) points out the uncertainty that involved vin coming up with a company’s valuation parameters over the given financial period based on its initial public offering. To some extent, the study establishes a link between the valuation parameters and the prices for acquisition premiums. Moreover, Pastor and Pietro (2003) formulates alternative frameworks through which various acquires accomplish their desire to gain exposure to the target firms’ valuations and its effects on the actual value of premiums paid for acquisitions. Since participants in the industry or market tend to accumulate as much information as possible so to enable them gain much knowledge about the target firms, the level of uncertainty on the value of premiums paid during mergers and acquisition transactions also tend to decline. The arguments can be linked to acquirer firms’ shareholders motives in which they tend to understand the target company’s valuation models before the initial public announcements are made.

Cooney, Moeller and Stegemoller (2009) argues that a decline in the acquires’ ability to learn and understand the valuation models used by target firms may negatively affect their benefit from the merger or acquisition transaction since they will not be able to predict the target firms’ real earnings and valuation of premiums. Previous studies by Dechow and Skinner (2000) on this topic have reported the relevance of earnings data and real earnings management in determination of the stock prices adopted during M&A transactions between the acquired and acquisition companies. Prospective investors use earnings data to predict future returns from the investments. Dechow and Skinner (2000) suggest that aacquisition companies find such information useful in evaluating their move to acquire stocks of another company so to improve their power and performance in the market.

Managers’ motivation to manipulate real earnings for the stated period has also been documented to be very significant in determination of M&A transaction deals. In fact, pre-acquisition earnings management appears in various literature as a key motivator to managers’ earnings manipulation. It is because manipulation of the pre-merger/ pre-acquisition information helps the managers in striking deals at premium prices that ensure that their companies benefit from the M&A activities. Evidence from research done by Dionne, La Haye and Bergerès (2014) have shown that management of acquirer’s real earnings upwards tend to inflate the prices of its shares with an aim of lowering the cost of the M&A deals. Although such managers often succeed in influencing the financial reports, the empirical evidence doesn’t ascertain managers’ success in influencing the decisions of well-informed acquisition companies.

Why Acquisition Companies Engage in M&A

M&A activities have been ruling business pages since the recent past. The rate at which firms are signing M&A transaction deals have increased over the years (Cartwright and Cary 2014). Currently, both the target and the acquisition company analyses the future expectation from the mergers and acquisition deals (Cartwright and Cary 2014). The increased competition in international and regional markets, internal management pressures among other factors are some of the motivating factors for firms to engage in M&A transactions (Cartwright and Cary 2014). The involvement of acquisition companies in (M&A) activities have been explained by the three different theories. They include the market power theory, the efficiency theory, and the market for corporate control theory (Bena and Li, 2014). The efficiency theory holds that synergy gained through mergers and acquisitions are very important in determining how acquisition companies attain their production targets to enjoy the economies of scale.

According to Bena and Li (2014), the market power theory emphasizes that acquisition companies can gain additional profits thereby raising its market share through mergers and acquisitions (Bena and Li, 2014). On the other hand, market for corporate control theory argues that stronger and better performing acquisition companies acquire the weaker companies so to replace their managements and maker larger profits (Bena and Li, 2014). Previous studies by Louis and Sun (2015) on firms from the automotive industry supports the theories. Louis and Sun (2015) argues that in most cases where acquisitions dominated the mergers and acquisition activities, the reasons for the involvements were seen as efficiency, corporate control, and market power.

4. Methodology

This section will describe the research design, sampling methods and procedures adopted in the paper, validity, and reliability of the instruments, and ethical considerations during the research. The information on employee’s satisfaction will be obtained through questionnaires and interviews in companies which have undergone M&A. The sample size will depend on the availability of such companies and the willingness of employees to participate in the survey. The research will be based on explanatory research design. The approach aims at identification of the extent and nature of cause-and-effect relationships. The causal research will be conducted to assess the impact of M&A on employees’ satisfaction. The data will be analyzed based on time series methods using R-studio or SPSS. Time series plots and descriptive statistic will form part of the results.

5. Foreseen Limitations

The study data will be obtained through questionnaires filled by employees of a company that have undergone mergers and acquisition. Therefore, the employees might fail to give their dissatisfactions. Moreover, Selection of acquisition and target companies whose data will be used in the analysis of findings might induced some aspects of biases. Since the period of M&A activities, company managers may be more motivated to engage in manipulation of company financial reports.

6. Delimitation of the Study

The researcher should do follow up to ensure that out of the employees willing to participate 99 percent accurately complete the questionnaire.

7. Structure of the Study

The research will be divided into chapters.

Chapter

Title (Description)

One

Introduction – The general information on the research area

Two

Literature review- Information from existing studies

Three

Methodology – Research design, data, sampling technique and summary of data analysis

Four

Results and Analysis

Five

Discussions, Conclusions and Limitations

References

List of sources used in the study

Appendix

Materials used in the study such as questionnaires

References

Bena, J. and Li, K., 2014. Corporate innovations and mergers and acquisitions. The Journal of Finance, 69(5), pp.1923-1960.

Cartwright, S. and Cooper, C.L., 2014. Mergers and acquisitions: The human factor. Butterworth-Heinemann.

Chou, H.I., Tian, G.Y. and Yin, X., 2010. Rumors of mergers and acquisitions: Market efficiency and markup pricing.

Dechow, P.M. and Skinner, D.J., 2000. Earnings management: Reconciling the views of accounting academics, practitioners, and regulators. Accounting horizons, 14(2), pp.235-250.

Dionne, G., La Haye, M. and Bergères, A.S., 2014. Does Asymmetric Information Affect the Premium in Mergers and Acquisitions?.

Louis, H. and Sun, A.X., 2015. Abnormal Accruals and Managerial Intent: Evidence from the Timing of Merger Announcements and Completions. Contemporary Accounting Research.

Pastor, L. and P. Veronesi, 2003. Stock valuation and learning about profitability. Journal of Finance 58, 1749-1789.

Cooney, J., T. Moeller, and M. Stegemoller, 2009.The underpricing of private targets. Journal of Financial Economics 93, 55-66.