What Does a Merger or Acquisition Mean for the Target Company’s Employees?

Before a merger-and-acquisition (M&A) deal, each company has its own workers. Following an M&A deal and the resulting restructuring, some employees may become redundant or no longer be necessary. Employees of the newly combined companies may be moved around, laid off, or not even affected.

How Mergers and Acquisitions Impact Employees

Although mergers and acquisitions are typically used as an umbrella term to represent two companies coming together to become one entity, the two terms have slightly different meanings. 

A merger is when two corporations combine to form a new entity. A merger typically involves companies of the same size (called a merger of equals). The stocks of both companies in a merger are surrendered, and new equity shares are issued for the combined entity. 

An acquisition is when one company takes over another, and the acquiring company becomes the owner of the target company. In other words, the acquired company no longer exists following an acquisition since it has been absorbed by the acquirer. The equity shares of the acquiring company continue to trade.

However, the target company’s stock shares no longer trade, and its shareholders receive shares of the acquiring company. However, the ratio of the acquirer’s shares to the target company’s shares is based on the buyout terms. Typically, it is not done on a one-to-one basis.

Understandably, the target company’s employees would feel quite anxious. Those who had hired them are likely no longer making critical labor decisions. Beyond the obvious change of being let go or moved around, the continued performance and loyalty of surviving employees depend on the efficacy of the M&A process itself.

Effects on Target Company Employees

The merger and acquisition process can immediately impact the employees involved. Many mergers need to be approved by local governments, attorneys general, and regulators, which can drag the process out for more than a year. The time it takes to close a merger can be difficult for employees of both companies involved.

Uncertainty

The uncertainty resulting from a merger or acquisition signals risk to the target company’s employees. This uncertainty might manifest in negative ways if the employees disapprove of the transition. It’s reasonable to assume that employees who feel threatened or scared might prove less effective than those who feel secure and content.

Job Losses

Historically, mergers and acquisitions tend to result in job losses. Most of this is attributable to redundant operations and efforts to boost efficiency. The threatened jobs include the target company’s CEO and other senior management, who are often offered a severance package and let go.

However, the management team of the acquiring company will look to maximize cost synergies to help finance the acquisition, which usually translates to job losses for employees in redundant departments.

For example, if two banks merged or if one was acquired, the combined bank would have redundant operations and sales offices. The new institution might not need all of the branches, nor would it need two mortgage departments, two corporate accounting offices, or two proof departments, which process all deposits.

Of course, all redundant positions in the target company wouldn’t get eliminated because the combined entity would have more customers and transactions to process. However, the combined firm may not need all employees from both companies in the redundant areas. In practice, the target company’s employees generally bear the brunt of the layoffs.

Culture Clash

Target company employees are also expected to adapt to the new corporate culture, management structure, and operating system. If the new management team struggles to communicate effectively to aid in the transition, discontent among the employees can occur.

Benefits to Target Company Employees

Although the merger and acquisition process can negatively impact employees, there are some benefits that can be achieved.

Retirement Benefits

By and large, the target company’s employees do not have to fear for their current accumulated retirement benefits. The Employee Retirement Income Security Act protects post-retirement pensions and other benefits.

The acquiring firm knows that it needs to protect the loyalty and reassure the target company’s employees during and after the deal.

The treatment of retirement plans is a complex subject and one that the acquiring company needs to consider heavily before reaching a deal. It often proves very difficult to transfer existing target employee assets into a new retirement system.

Stock Options

In some circumstances, the employees of the newly created entity receive new stock options, such as an employee stock ownership plan or other benefits, as a reward and incentive.

Stock options are contracts that allow an employee the right to buy the stock, at a specific price—called the strike price—at some point in the future. In an employee stock ownership plan, the employees are awarded the options, meaning they don’t have to pay for them as would typically be required in the markets.

However, many plans require the options to be held for a specific amount of time before they can be cashed out, such as one year.

Once the holding period has elapsed, the employees can redeem the option, where they would be awarded the shares of stock, and if they choose, can sell the stock for cash in the market. Stock options can serve as a form of compensation for discontinuing prior benefits.

Stock Price Appreciation

Also, the stock price of the acquired company could rise substantially if the acquirer offered a higher stock price than where the target company’s stock was trading before the deal.

As a result, employees might earn capital gains on any shares that they own. Also, if their shares were held within the company’s 401(k) plan, those capital gains would grow tax-free.

The Bottom Line

The hardest-hit employees are almost certainly those who have lost their jobs as a result of an M&A deal. Impacted employees should be informed in advance of the possibility of staff reductions and given some time to look for new jobs.

The remaining employees will likely find themselves in unfamiliar territory with new coworkers and management. Some employees might need to work harder to catch up with their new contemporaries.

The extent of the challenges faced by the target company’s employees largely depends on the communication between the surviving employees and their new management team. Of all the reasons why M&As fail, poor communication leading to culture clashes is often the most damaging.