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Likely losses of M&As

The executive churn

onsultants and executives involved in mergers and acquisitions (M&A) will be interested in the recently published ndings of a ten-year study into the close relationship between takeovers and executive churn. Jeffrey A. Krug of Virginia Commonwealth University and Walt Shill of Accenture, Virginia, have assembled a large volume of data in order to investigate what happens to executives following an acquisition. It makes for unsettling reading for anyone considering an M&A.

Four key observations

The rst nding is that an acquisition will likely more than double the turnover rate of the top management team in each of the ten years following the acquisition. The 1,019 rms under question, in all sectors and employing just over 23,000 executives between them, lost an average of 24.3 percent of senior managers each year for a decade. By contrast, non-merged comparable companies saw only 9.7 percent turnover. The second claim is that although most target company top management teams are relatively stable before an acquisition, after the event leadership continuity is permanently altered. Companies that had been subject to several takeovers over the 17 years studied showed consistently high levels of executive churn. If a rm is acquired multiple times then the turnover rate will increase more and more each time. In the year before a merger, rms that had experienced the process before lost an average of 48 percent of executives. Firms that were being acquired for the rst time lost an average of 24 percent. The trend continues after takeover, with 32 percent of senior management leaving each year after a multiple takeover, compared with 21 percent in rms acquired only once. Comparing the patterns of data for M&As in the 1980s with the 1990s and 2000s showed that pre-merger disruption has increased notably more recently. After the merger, the average turnover rate has gone up from 20 percent in the 1980s to 22 percent in the 1990s and 2000s. Taken together, almost three decades of data show that long-term instability is a result of most mergers, whenever they have taken place.

Explanations and implications

Krug and Shill argue that acquisitions lead to instability because of poor attempts at synergy. Acquiring companies that buy rms specializing in different areas underestimate or misread problems of integration and fail to manage target employees well. Often this will lead to poor post-merger performance and, ultimately, failure in over half of all M&As. The fate of the leadership team is key in this pattern: losing key players means losing exactly the



VOL. 25 NO. 1 2008, pp. 24-25, Q Emerald Group Publishing Limited, ISSN 0258-0543

DOI 10.1108/02580540910921897

The rise in pre-merger instability in the 1990s and 2000s as compared with the 1980s is explained with reference to recent trends in competition, globalization and technology.

rm-specic knowledge that could help to make a merger a success, and this has a knock-on effect on the condence of shareholders. Currently, it is clear that too little attention is given to leadership stability in planning and executing mergers, but further analysis of Krug and Shills data will be required to pinpoint what causes the instability of merging rms in greater detail. The rise in pre-merger instability in the 1990s and 2000s as compared with the 1980s is explained with reference to recent trends in competition, globalization and technology. Japanese rms in particular have provided some real competition to USA rms in a wide variety of sectors and industry turbulence has increased with changing consumer preferences, negotiations with large multinational suppliers and a greater variety of products in the marketplace. Krug and Shill link instability among top management with these global trends in business, but again further study is required to make precise and substantive claims about the nature and implications of this link. The writers nish with a series of useful questions that their data may also help them answer in time, but that should also be considered by anyone considering the long-term consequences of an M&A. Has the rm already been acquired before? Is poor performance involved in the reasons why a rm is being divested? What is the motivation for acquisition? What is the current state of stability within the target rms top management team? Any merger is likely to be followed by an increased rate in executive churn, but serious consideration of these questions alongside clear efforts at integration and management stability may help to hinder future poor performance.

This is a review of The big exit: executive churn in the wake of M&As, by Jeffrey A. Krug and Walt Shill. Interested in the association between executive turnover and poor post-merger performance, the authors investigated more closely what happens to executives following an acquisition. They spent ten years compiling data on executive turnover in close to 5,000 M&As, and in this article present results and some initial observations. Acquisition appears to have a signicant effect on stability at the top when compared to companies who have remained static. The paper offers some insights on the practical implications of these ndings, as well as calling for further study in the area if consultants are to better predict and control long-term performance after a merger.

Keywords: Acquisitions and mergers, Senior management, Leadership

Krug, J.A. and Shill, W. (2008), The big exit: executive churn in the wake of M&As, Journal of Business Strategy, Vol. 29 No. 4, pp. 15-21.

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