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Published in Journal of Corporate Citizenship, vol. 22, pp. 91-109, April 2006

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The impact of mergers and acquisitionson corporate stakeholder practices

Authors: Sandra A. Waddock, Samuel B. Graves

http://hdl.handle.net/2345/2539

http://escholarship.bc.edu

JCC 22 Summer 2006 91

The Impact of Mergers and Acquisitionson Corporate Stakeholder Practices

Sandra Waddock and Samuel B. GravesCarroll School of Management, USA

One of the intriguing unanswered research questions is ‘what is the impact of merg-ers and acquisitions (M&A) on corporate responsibility?’ This study examines thatquestion empirically. In pre-merger firms, few statistically significant stakeholder-related performance differences exist between the acquirer and target; acquirersshow more strengths in the diversity category and more concerns related to prod-ucts. For pre- and post-merger target and merged firms, the data show more strengthsand concerns related to specific stakeholders for the merged firm compared with thepre-merger target, which seemed to lose some more innovative practices. Similarly,there is a fairly consistent pattern showing both more stakeholder-related strengthsand concerns in merged compared with pre-merger acquiring firms.

l Mergers andacquisitions

l Stakeholderrelationships

l Resource-basedview

l Stakeholderpractices

l Diversity

l Employees

l Environment

l Corporategovernance

*

Sandra Waddock is Professor of Management at Boston College’s CarrollSchool of Management and Senior Research Fellow at BC’s Center for

Corporate Citizenship. She has published extensively on corporateresponsibility, corporate citizenship and inter-sector collaboration in journals

such as The Academy of Management Journal, Academy of ManagementExecutive, Strategic Management Journal, The Journal of Corporate Citizenship,

Human Relations and Business and Society. She is the author of LeadingCorporate Citizens: Vision, Values, Value Added (McGraw–Hill, 2006); and co-

editor of the two-volume series Unfolding Stakeholder Thinking (GreenleafPublishing, 2002–2003) and Learning to Talk, co-edited with Malcolm

McIntosh and Georg Kell (Greenleaf Publishing, 2004). She is a foundingfaculty member of the Leadership for Change Program at Boston College.

u Boston College, Carroll School ofManagement, Chestnut Hill,MA 02467, USA

! [email protected]

< www.bc.edu/corporatecitizenship

Sam Graves is a professor in the Wallace E. Carroll School of Management atBoston College. Professor Graves pursues research interests in the areas ofcorporate social performance and decision analysis. His work in corporate

social performance, in collaboration with Sandra Waddock, has beenpublished in the Academy of Management Journal, Strategic ManagementJournal, and Business and Society, among other places. Professor Graves’

research in decision analysis, much of it focused on R&D portfolio methods,has been published in IEEE Transactions on Engineering Management, Research-

Technology Management, and The European Journal of Operational Researchamong other outlets. Professor Graves currently teaches business statistics

and math for management science.

u Boston College, Carroll School ofManagement, Chestnut Hill,MA 02467, USA

! [email protected]

< www.bc.edu/corporatecitizenship

* The authors gratefully acknowledge the contributions of Don Armstrong, BC MBA 2002, as ourresearch assistant on this paper. We also thank David Murphy and Tom Lee for their helpful com-ments on an earlier draft of this paper.

jcc22waddock.qxd 22/7/06 1:41 pm Page 91

© Greenleaf Publishing 2006

Published in the Journal of Corporate Citizenship 22: 99-109 (2006).

ne of the intriguing unanswered research questions is ‘what isthe impact of mergers and acquisitions (M&A) on innovative corporate stake-holder practices (or corporate responsibility [CR])?’ A literature review reveals lit-tle empirical work exploring that link. Using the resource-based view (RBV) of thefirm (Barney 1991; Barney et al. 2001) and stakeholder theory (Freeman 1984) for

conceptual framing, this study compares merging companies’ stakeholder-related prac-tices pre- and post-merger.

Stakeholder relationships as resources

The RBV (Barney 1991; Barney et al. 2001) argues that competitive advantage can begained by companies that have rare, valuable, non-imitable and non-substitutableresources. Recent work on companies’ stakeholder-related and environmental practicesindicates that CR as operationalised through stakeholder practices results in no loss infinancial performance and some light gains (see Margolis and Walsh 2001, 2003; Orl-itzky et al. 2003). Some empirical studies have found that corporate reputation as wellas financial performance can be enhanced when stakeholder relationships or the prac-tices that support them are better (Waddock and Graves 1997a, b; Berman et al. 1999).The implication is that better stakeholder practices can potentially create better stake-holder relationships that serve as a strategic resource, meeting the RBV of the firm’s cri-teria of rareness, valuable, non-substitutability and non-imitability.

Stakeholders are groups or individuals ‘who can affect or [are] affected by the achieve-ment of the firm’s objectives’ (Freeman 1984: 25). Generally speaking, primary stake-holders are considered to be investors, customers, employees and suppliers, whilegovernment and community are typically thought of as secondary stakeholders (Clark-son 1995; Waddock 2006). Stakeholder relationships are important because stakehold-ers can make legitimate claims on companies (Hill and Jones 1992), because they takerisks with respect to companies (Waddock 2006), or because they can otherwise influ-ence companies as a result of various sources of power, urgency or legitimacy (Mitchellet al. 1997). Additionally, company policies, processes and procedures with respect tostakeholders clearly have an impact on stakeholders and the natural environment, form-ing the basis of a relationship that can potentially contribute to the company’s successor detract from it: that is, a resource for the company. Companies that are recognisedas good corporate citizens are typically those that are seen as having progressive or inno-vative stakeholder-related practices (e.g. Waddock and Smith 2000).

Because stakeholders are affected by and can affect company practices, proponentsof instrumental stakeholder theory consider that companies develop good stakeholder-related practices because it is in their best interests from a bottom-line perspective (e.g.Donaldson and Preston 1995; Jones 1995). Others believe that such practices representways of developing sound long-term relationships with stakeholder groups that are inte-grally based on normative or ethical considerations (Freeman 1999) and cannot (andshould not) be separated into instrumental, normative or descriptive rationales (Don-aldson and Preston 1995). Regardless of whether the reasons are based in ethics orinstrumentality, because good relationships are hard to develop, good stakeholder prac-tices can potentially provide a basis for the type of valuable, rare, inimitable and non-substitutable resource that serves as a source of competitive advantage under the RBV

of the firm. To the extent that M&A is disruptive, absorbs management attention or creates sig-

nificant transition and transaction costs (e.g. Hitt et al. 1991; Hoskisson et al. 1994;Ahuja and Katila 2001), some stakeholder-related practices may be eliminated or

sandra waddock and samuel b. graves

92 JCC 22 Summer 2006

O



changed following M&A. The net impact of merger might be to eliminate some pro-gressive stakeholder-related practices, possibly as cost-reduction measures.

Shareholder performance implications of M&A

The extensive literature on the implications of M&A produces mixed results regardingthe merits of M&A on outcomes for specific stakeholder groups, with most attentiongoing to shareholders (Jensen and Ruback 1983; Davidson et al. 1989; Lajoux andWeston 1998). Acquiring-firm shareholders may suffer from overpayment, while tar-get-firm shareholders may benefit in the short term, although some claim that the ques-tion remains unsettled (Jensen and Ruback 1983; Lajoux and Weston 1998; Rau andVermaelen 1998). In an exhaustive study, Agrawal et al. (1992), testing Jensen andRuback’s (1983) findings, determined that the efficient market hypothesis, which sug-gests that M&A should be profitable for shareholders, remains unresolved, finding thatacquiring-firm shareholders actually lost approximately 10% of their market value inthe five years post-merger, rather than gaining (see also Davidson et al. 1989; Kohersand Kohers 2001). Another study, using a control group of non-acquired companies,finds that post-merger performances of both the non-acquired and target/merged firmsis similar (Langetieg 1978), a result consistent with related research (Lev and Mandelker1972; Malatesta 1983; Franks et al. 1991). Acquiring-firm shareholders and other stake-holders may benefit less or experience neutral returns (Jensen and Ruback 1983),because they incur the costs of acquisition, problems of integrating the target firm, andservicing debt (see also Davidson 1989; Hitt et al. 1991; Ahuja and Katila 2001).

Pre-merger practices: the context of acquisition

Some ethicists hypothesise that M&A, particularly hostile takeovers, may be harmful to(non-investor) stakeholders because M&A externalises some costs to certain stakehold-ers thereby reducing the level of innovative stakeholder practices (e.g. laid-off employ-ees, reduced donations to local communities or even lost customers resulting fromservice impairment) (e.g. Chase et al. 1997). In contrast, proponents of M&A claim thatmergers benefit society and stakeholders because they create more efficient markets andimprove managerial performance (Chase et al. 1997). Additionally, some researchersclaim that measurement problems associated with assessing post-merger performanceaccount for mixed results (Brouthers et al. 1998).

M&A occurs to achieve greater efficiency (Avkiran 1999; Town 2001) or to reduce com-petition or excess supply in a market (Town 2001). Diversification is another commonrationale. Sometimes an acquiring firm believes that it can improve the performance ofthe target or acquire innovations and unique resources leading to competitive advan-tage (e.g. Ahuja and Katila 2001). Because stakeholders are affected by and can affectcompany practices, proponents of instrumental stakeholder theory consider that com-panies develop good stakeholder-related practices because it is in their best interestsfrom a bottom-line perspective (e.g. Donaldson and Preston 1995; Jones 1995). Othersbelieve that such practices represent ways of developing sound long-term relationshipswith stakeholder groups that are integrally based in normative or ethical considerations(Freeman 1999).

The RBV implies that M&A may take place to acquire innovation, technology or, wepropose, better stakeholder-related practices (e.g. more progressive employee practices,better community relations, fewer problems in the supply chain, and so on), which may


the impact of mergers and acquisitions on corporate stakeholder practices



have emerged in possibly smaller, less bureaucratic and more innovative target firms.Thus, it is possible that firms become targets because they have certain strengths (bet-ter-rated stakeholder practices) or fewer concerns about those practices (cf. Ahuja andKatila 2001).

The present study focuses on six categories of stakeholder practices (beyondinvestors) related to different stakeholder groups and the natural environment (Wad-dock and Graves 1997b) (e.g. Berman et al. 1999). The six categories, which have beenused extensively in published studies (e.g. Waddock and Graves 1997a, b; Berman et al.1999; McWilliams and Siegel 2000), represent both primary and secondary stakehold-ers (Clarkson 1995): communities, minority groups (diversity), employees, customers(product), environment, and owner concerns about corporate governance. Following thegeneral reasoning above, H1 tests the hypothesis that acquiring firms will exhibit fewerstrengths and more concerns in measures of corporate responsibility (gathered by a US-based social research firm on large US companies) than do target firms. H1 is presentedbelow and summarised in Table 1 with the other hypotheses outlined below.

H1: Acquiring firms will exhibit fewer strengths and more concerns with respectto specific stakeholders than target firms.

Post-merger practices

Hitt et al. (1998) found that post-acquisition success was related to pre-merger friend-liness and resource complementarities, as well as debt. Earlier, Hitt and colleagues hadfound that, post M&A, innovation was inhibited, possibly because of agency problems(Jensen 1986). Management commitment to the former innovative practices or timecommitments related to the acquisition diminished (Hitt et al. 1991, 1996). A frequentconsequence of a takeover is high levels of debt in the resulting or merged firm, whichcould reduce expenditures on innovative stakeholder-related practices.



Table 1 specific hypotheses sub-tests



Particularly for hostile takeovers, stakeholder interests (and, arguably, the corporatepractices associated with them) may be damaged during M&A, social harms may followtakeovers, and value within companies can be transferred from other stakeholders toshareholders, which could create loss of innovative stakeholder practices or new prob-lems. Other factors that can create pre- and post-merger differences include issues ofcultural ‘fit’ between the merging companies and resource constraints, which can hin-der integration of innovative or progressive stakeholder practices (Weber 1996). Onerecent study found that hostile bidders may be particularly prone to ‘take necessary steps’to ensure company performance post-acquisition, creating significant restructuring(and possible reduction of expenditures on stakeholder-related practices) within thecompany post-merger (Rajand and Forsyth 2002). The attendant implications of restruc-turing (e.g. down- or ‘right’-sizing lay-offs and related community impacts) could read-ily result in reduced support for employees, communities and even customers throughchanges in product quality or service, creating more stakeholder-related problems orconcerns as well as reducing innovation. A study of Australian banks, for example, foundthat post-merger firms may be less efficient than they were pre-merger (Avkiran 1999).These findings indicate that customers post-merger are being less well treated, theremay be more pressure for performance placed on (possibly fewer) employees, and vol-untary programmes may be cut back.

Extending these ideas, perhaps post-merger performance with respect to stakeholderand environmental practices may also be weaker than pre-merger performance becausecompanies have assumed more debt, are experiencing integration problems, or aremore focused on market consolidation and cost efficiencies. Taking the lessons fromthe research discussed above, we generally expect to see fewer strengths (less innova-tive practices) and more concerns (more problems) in stakeholder and environmentalpractices post-merger (see Table 1) than existed pre-merger. Thus:

H2/3: Merged firms will exhibit fewer stakeholder-related strengths and more con-cerns than pre-merger (acquirer and target) firms in stakeholder arenas.

Community

Companies create and maintain jobs and facilities, request or put into place commu-nity-related infrastructure, pay taxes, provide a potential source of leaders for local non-profit boards and civic associations, and create community relations, philanthropic andvolunteer programmes (Groshen and Grothe 1989; Burke 1999). M&A may result in adecline in innovative community-related corporate practices, such as giving pro-grammes and other forms of civic involvement. When two companies merge, one head-quarters disappears. Since innovative corporate giving, volunteer and communityrelations programmes are frequently dominant in headquarters communities, the com-munity of the target firm could experience a reduction of corporate community involve-ment.

Employees

A major expectation from M&A is that the merged company will be more efficient andits employees more productive. Some empirical evidence exists to supports this expec-tation (e.g. Groshen and Grothe 1989; Avkiran 1999), although gains are not necessar-ily passed on to consumers or the general public (Avkiran 1999). Avkiran (1999) alsodetermined that acquiring firms may be more efficient than targets. This finding sug-gests that perhaps the acquiring firm has more innovative or progressive humanresource- or employee-related policies initially than the target firm, which then domi-





nate in the merged firm. Pfeffer and Veiga (1999) demonstrated that progressiveemployee practices result in higher productivity, yet the disruption of M&A may resultin attenuation of existing employee resource advantage in pre-merger companies.

The expectations of employees certainly shift in the wake of M&A. One study foundthat acquiring foreign firms pay employees more than their domestic predecessors withcorresponding increased levels of productivity (Conyon et al. 2002). Downsizing is a fre-quent consequence of mergers (Rajand and Forsyth 2002). Integration issues alsopotentially have a negative impact on innovative employee practices and create lay-offsituations (Weber 1996). So frequent is downsizing following mergers, takeovers andacquisitions that a literature on survivors has developed (e.g. Gutknecht and Keys 1993;Appelbaum et al. 1997).

Diversity

Employee diversity is widely held to be a possible source of strategic advantage for US

companies such as those in the present study (Cox and Blake 1991; Cox 1994; Hubbard1999). Some research suggests that cultural diversity within companies can potentiallycontribute to firm competitive advantage (Hubbard 1999; Orlando 2000), despite theattendant conflicts (Cox 1991; Larkey 1996). The rationale is that companies with pro-gressive practices will attract a better workforce and will have potential advantages increativity, problem-solving and capacity to cope with change (Cox and Blake 1991). Addi-tionally, increasing globalisation means that diverse organisations may be betterequipped to deal with the many cultures within which facilities are located (Hubbard1999). Cost containment efforts resulting in a smaller labour pool may result in lessattention to diversity or management attention to this issue may be reduced because ofthe pressures of the acquisition (cf. Hitt et al. 1991).

For many of the same reasons that employees might be expected to suffer diminishedexpectations following a merger, the merged company’s diversity initiatives might alsofalter. Therefore, there should be fewer diversity-related strengths and innovations andmore concerns or problems in the merged company than in either the target or acquirerpre-merger.

Environment

Systemic approaches to progressive environmental management, comparable to qual-ity management systems (Curkovic et al. 2000), are expected to have positive perfor-mance outcomes (Feldman et al. 1997; Dowell et al. 2000; Freeman et al. 2000). Indeed,research suggests that progressive environmental practices also represent a resource forcompetitive advantage (Russo and Fouts 1997).

Despite the attention to environmental management systems, there is also evidencethat most companies do not take environmental management issues into account whenundertaking an acquisition or merger (Shimela 1991). Cost containment initiativescould conceivably reduce a company’s attention to environmental management, result-ing in a reduction in environmental responsibility.

Customers (product)

The implications for responsibility for product quality and availability after M&A areundetermined. Product availability may be diminished, through market and companyconsolidation and streamlining. One study of the telecommunications broadcasting sec-tor found that variety of programming actually increased (Barry and Waldfogel 2001).Another study indicates that, despite some efficiency gains, the availability of products





is diminished in the aftermath of the market concentration that M&A produces (Town2001). Another study finds that there are mixed outcomes regarding technological inno-vations (Ahuja and Katila 2001). Relationships between companies and customers maynot be substitutable following a merger (Anderson et al. 2001), pointing to possible neg-ative outcomes related to customers following a merger.

Owner concerns about governance

Although the empirical evidence is limited, one study of corporate governance finds norelationship between board composition and post-merger shareholder wealth, thoughthere may be a strong relationship between ownership structure and target value inmergers that do not go through (Davidson et al. 2002). Studies on the impact of merg-ers on CEO compensation find that CEO compensation increased after mergers (Kroll etal. 1990; Bliss and Rosen 2001).

Methods

Measures of stakeholder practices before and after the merger/acquisition wereobtained from the independent US-based social research firm of KLD Research and Ana-lytics (KLD). KLD’s database has been widely used in empirical research and representsthe currently accepted standard for measuring corporate responsibility and specificstakeholder practices for US companies (e.g. Waddock and Graves 1997; Berman et al.1999; McWilliams and Siegel 2000; Hillman and Keim 2001). To be included in thestudy, both target and acquiring companies needed to be listed in the KLD database ofapproximately 640 (the Standard & Poor’s 500 companies plus those additional com-panies included in the Domini Social Index) companies with two years’ lead time beforethe merger and two years’ lag time after the merger/acquisition. Pre- and post-mergerstrengths and concerns are measured separately to avoid averaging out differences instrengths and concerns.

Data on mergers/acquisitions were gathered from 1993 to 1997, a period of numer-ous mergers and acquisitions. Merger information was taken from the top 100 US-basedmergers by dollar value listed from 1993 to 1997 in Mergers and Acquisition. Mergingcompanies represent a wide variety of industries, including pharmaceuticals, financialservices companies and large industrial manufacturers. This dataset represents theentire population of companies included in KLD’s database during, before and after thestudy years with the appropriate lead and lag times. Thirty-five (after merger; 70 pre-merger) companies met this criterion. KLD assesses companies on ten measures of cor-porate responsibility. Six are related to stakeholder and environmental practices:community, diversity, employee, environment, product and corporate governance;strengths and concerns were assessed separately in this study. The Appendix providesdetails of the criteria used by this social research firm to determine strengths and con-cerns.

To analyse this data, correlation analysis was performed on all data, including com-pany size (sales in millions of dollars and number of employees), net income and KLD

measures separated into strengths and concerns (see Table 2). Then t-tests and Wilcoxontests were performed to determine differences in stakeholder performance (strengthsand concerns) between the companies before merger/acquisition with a one- and two-year lead or lag time. Finally, t-tests and the Wilcoxon tests were performed to assess dif-ferences between the target or acquirer and merged firm lagged by both one and twoyears.





Results

Table 2 presents descriptive statistics. Total sales are highly correlated with number ofemployees, as well as strengths and concerns within a number of KLD categories,notably: community strengths, diversity strengths and concerns, employee strengthsand concerns, environmental strengths and, more modestly, concerns, product strengths,and corporate governance concerns. Size is clearly associated with both strengths andconcerns. Multi-collinearity does not seem to be an issue within the KLD data measur-ing stakeholder performance. Diversity strengths (p < 0.01) are highly correlated withsales and number of employees, while environmental strengths are also significantlycorrelated (p < 0.05) with sales, indicating that larger companies are likely to be payingmore attention to diversity issues than smaller ones. None of the KLD measures is sig-nificantly correlated with others.

Few differences emerge between pre-merger target and acquiring companies (Table3). The only statistically significant difference among the strengths in the stakeholdermeasures is diversity (p < 0.01). At both one and two-year pre-merger stages, contraryto the hypothesis, the acquiring firms’ diversity performance is significantly better thanthat of the targets (i.e. more strengths). These differences are consistent whether thesimple t-test or the non-parametric Wilcoxon p is used. The only other significant dif-ference at p < 0.05 is the one-year pre-merger period in the product concerns category.At the two-year period, this category is significant at p < 0.10, as is employee concernsin both time periods. In these cases, the acquiring firm exhibited more concerns thanthe target. Similarly in the employee category, acquirers, measured at p < 0.10, exhib-ited more concerns than targets. These findings are consistent with the hypotheses,while other hypotheses were largely unsupported.

In all other categories, no significant differences were observed. There is, however, afairly consistent pattern of mean performance of acquiring firms being somewhat (notstatistically significant) greater than target firms on strengths and concerns. Exceptionsoccur in diversity concerns, environmental strengths and corporate governance con-cerns at one year out, where performance is the same.

Table 4 presents the results of one- and two-year post merger stakeholder practicesof acquirers and merged firms. The hypotheses were that merged firms would exhibitfewer strengths and more concerns than acquirers. The hypotheses were not supported,although some significant differences emerged. Merged firms showed significantlymore strengths in diversity (p < 0.01, both tests) than acquirers in one- and two-yeartime periods. This finding suggests that company size plays a role in innovative diver-sity strategies and is consistent with the pre-merger status of the companies. Similarresults hold for environment, where merged firms show more strengths (p < 0.05, bothtests) than acquirers, with size possibly accounting for the result. No differences wereobserved between acquiring and merged firms for community, employee, product andcorporate governance strengths. Generally, the significant findings on strengths con-tradict the hypotheses and findings of no difference provide no support for the hypothe-ses.

Some support for the hypotheses was found in three categories of concerns. In diver-sity, acquirers showed fewer concerns, as hypothesised, than did the resulting mergedfirm (p < 0.05, both tests) in the one- and two-year lag periods. In environmental con-cerns, merged firms exhibit significantly more concerns (p < 0.05, both tests) than theacquiring firm, as hypothesised. Merged firms showed significantly more concerns(p < 0.05, both tests) in corporate governance at both the one- and two-year period thandid acquirers. No significant differences were found between acquirers and mergedfirms in concerns on community, employees and product. Thus, partial support for the



jcc22waddock.qxd 22/7/06 1:41 pm 8




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hypothesis emerges from the relationship between acquiring firms and merged firms.As with the pre-merger companies, a consistent pattern tends to emerge overall, thoughit is not statistically significant. Acquiring firms’ mean strengths tend to be lower thanthe mean strengths of the merged firm (except in community) and they also exhibitfewer concerns. The statistically significant results suggest that the hypothesis that themerged firm would exhibit fewer strengths and more concerns was not supported, whilethe hypothesis that the merged firm would show more concerns was partially supported.

Table 5 presents results of the one- and two-year post-merger stakeholder perfor-mance of the target and merged firms. Target firms exhibited significantly fewerstrengths than did merged firms in diversity (p < 0.01, both tests) and environment(p < 0.05 on the t-test, p < 0.10 on the Wilcoxon test at one year, p < 0.10 on both testsat two years). Contrary to the hypothesis, there were no significant differences instrengths displayed between targets and merged firms in community, employee, prod-uct and corporate governance.

More striking and consistent with the hypotheses are results on concerns, whichappear to increase rather dramatically post-merger. In all categories except communityand diversity, target firms had statistically significantly fewer pre-merger concerns thandid the post-merger companies; these results are consistent for the one- and two-yearlags. The strongest results show up in employee, environment, product and corporategovernance, where targets exhibited significantly fewer concerns (p < 0.05 or higher forboth the t-tests and Wilcoxon tests). In diversity, target firms had significantly fewer con-cerns at the p < 0.10 level at one year, with no significant differences two years out.

Discussion

Key findings focus on the similarity of companies’ stakeholder practices pre-merger,indicating that (unlike innovations, R&D or technology) they are probably not the ratio-nale for the merger. Further, there is an apparent increase in concerns related to stake-holder practices for target firms following the merger.

Pre-merger comparison

Basically, there are few pre-merger differences between acquiring and target firms. Thefew differences that exist are, with the exception of diversity strengths, relatively weak.Diversity strengths are higher in acquiring firms and are also highly correlated withmeasures of size (see Table 2). Since acquirers are likely to be larger than targets anddiversity strengths are positively correlated with size, perhaps this difference can beexplained by the finding that larger firms seem to have implemented more progressivediversity management programmes than smaller (target) firms. It is also possible that,given the emphasis in the US on diversity management in recent years, larger compa-nies have developed more sophisticated approaches to this area because of their verysize.

In product concerns, acquirers have more pre-merger product concerns than targets,at least one year before the merger (with no differences in product strengths), suggest-ing a possible loss of customer-related innovation after merger. One explanation for thisfinding is that the target companies are attractive to acquirers because of the strengthor quality of their products and that the acquisition is taking place because of the desir-ability of the products. Otherwise, few differences in stakeholder practices appear to beat the foundation of mergers and acquisitions.







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Post-merger results

CommunityDifferences between the acquiring and merged firms and the target and merged firmsexist, albeit not always in the predicted direction. No differences were observed for tar-gets or acquirers for community relations. Despite the expectation that community rela-tions programmes might suffer because of the long-term impacts of the loss of aheadquarters company, or possible reductions in community-oriented giving and vol-unteer programmes, no differences exist between the pre-merger companies and theresulting firm. The data show that, in the two years following a merger, merged com-panies appear to maintain community relations practices at roughly the same level asbefore the merger.

DiversityIn diversity, there are conflicting results. The merged firm has significantly morestrengths in diversity than either targets or acquirers. Interestingly, the merged firm alsohas more concerns than either targets or acquirers. Strengths in this category focus onthe appointment of women and minorities to boards and top management positions,as well as programmes such as family benefits, specialised minority contracting,employment of the disabled, and progressive gay and lesbian policies. It is conceivablethat the larger scale of the merged firm permits companies to expand existing pre-merger diversity policies in the post-merger period, possibly in an effort to retain what-ever diversity existed pre-merger.

Merged firms also exhibit more concerns related to diversity than either of the pre-merger companies. Concerns focus on affirmative action controversies and lack of rep-resentation of diverse populations in management and the board. Both acquirer andtarget firms had fewer such problems pre-merger, which may suggest some of the dif-ficulties of the merger process itself in terms of ensuring adequate representation ofminorities and women.

EmployeesEmployee strengths appear to be at the same level for both targets and acquirers andthe merged firm. Expectations to the contrary, post-merger efficiency moves do not seemto affect strengths related to good union relations, employee involvement and cash shar-ing programmes, and strong retirement benefits. In contrast, while there are no differ-ences between the acquiring and merged firms in concerns on employee policies pre-and post-merger, target firms had significantly fewer concerns in the pre-merger periodthan post-merger firms. These concerns emphasise union relations, safety controver-sies, workforce reductions and pension problems, supporting the hypothesis thatemployees suffer in a merger, at least with respect to target firms, since the merged firmhas significantly more of these concerns than the target. To the extent that employeerelationships were strategic resources for targets, it seems that this resource may be lostin the wake of the M&A.

EnvironmentEnvironment also produces conflicting results. Acquirers had significantly fewer strengthsin environment pre-merger than merged firms, while targets had significantly fewerstrengths measured at one year out (although the Wilcoxon test is significant only at p= 0.06 and at two years out is nearly significant). Strengths include beneficial productsand services, pollution prevention, recycling, alternative fuels and communications.These areas improve in the larger entity that exists post-merger.





Significant differences exist in both time periods (for all tests) in environment con-cerns post-merger for both targets and acquirers, which have fewer concerns than domerged firms. Concerns include hazardous waste, regulatory problems, production ofozone-depleting chemicals, emissions, agricultural chemicals and climate change. Pos-sibly, the larger merged firm may be more exposed simply as a result of its increasedsize, entry into new production or product arenas resulting from the merger, or diver-sification.

ProductAcquirers and merged firms exhibit no differences in strengths or concerns in terms ofproduct. Product strengths, which include indicators of quality, R&D/innovation andbenefits to the economically disadvantaged, do not appear to be affected by merger. Incontrast, targets show no difference in strengths compared with the merged firm, buthave significantly fewer concerns. Concerns focus on product safety, marketing/con-tracting controversy and antitrust issues. Clearly, merging firms are more exposed toantitrust issues, and efficiency moves can potentially generate concerns within otherareas.

Corporate governanceNo differences exist between acquirers and targets with respect to strengths (limitedcompensation, ownership strength) in the corporate governance category as they relateto the merged entity. On the other hand, both targets and acquirers had experiencedfewer concerns related to high CEO compensation, tax disputes and ownership pre-merger than the merged entity. Perhaps this result is not surprising given that themerged entity may need to reward management to bring in a team that can cope effec-tively with the merger. Also the ownership concern focuses on partial ownership of acompany that has a concern to the rating company, thus the acquisition process itselfmight expose a company to new concerns that did not exist before the acquisition.

Conclusions

On the whole, this study makes clear that stakeholder practices do not seem to gener-ally play into acquisition and merger decisions. Few differences exist between target andacquiring firms in their stakeholder practices, hence from an RBV of the firm it does notappear that stakeholder practices are recognised as strategic resources in the M&A

process. Merged firms yield both more strengths and more concerns than did either thetargets or the acquiring firms, while there is a lack of significant differences betweentarget and acquiring firms in the pre-merger phase.

Mergers do, however, make a difference in stakeholder-related practices that mightprovide a strategic advantage, especially for target companies. The results are not alwayspositive with respect to concerns about diversity, employee policies, environment andproduct areas from the perspective of targets. Targets had, overall, fewer concerns thanthe resultant merged firms. For target companies’ stakeholders there appear to be lossesrelated to the M&A process; things get worse rather than better for those stakeholders.Although it would take a different type of study to determine this, it appears from theseresults that the source of competitive advantage the target firm might have had in itsrelationships with stakeholders may be diminished in M&A.

Acquirers exhibit more concerns in three categories than do targets: diversity, envi-ronment and corporate governance, while gaining strengths in diversity and environ-ment. Generally, acquirers are more similar to the resultant merged firm in their





stakeholder practices than were the targets, but targets can expect additional concernsabout stakeholder practices to emerge in conjunction with the merger. Perhaps it is notsurprising that the acquiring firm’s practices dominate in the merged firm, but theincrease in concerns is troubling for companies that hope to improve their competitiveperformance—including their relationships with stakeholders—via the M&A process. Itappears that whatever practices kept concerns off the table for target companies arediminished in the wake of M&A. Acquirers, which are more likely larger and more pow-erful, can impose their policies on the merged firm more readily than the typicallysmaller target firm, but this imposition does not necessarily create improved stakeholderpractices, and may create problems for stakeholders of target firms who find more con-cerns with the merged company’s practices than existed in the target company.

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Appendix KLD reason codes*

* As of 2001. Some reason codes shift over time, so these are provided for information only.

Source: www.kld.com/research, accessed 9 June 2006

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