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Mergers | Peer-Reviewed Research

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After Firms Merge, How Does The New Company’s Practices Affect Outcomes?

Based on research by Robert E. Hoskisson (George R. Brown Emeritus Professor of Management), Margaret Cording, Jeffery S. Harrison and Karsten Jonsen

After Firms Merge, How Does The New Company’s Practices Affect Outcomes?

  • For a successful transition, companies need to promise employees only what they can deliver.
  • Building and maintaining the trust of employees in their employers is especially important at the time of a corporate merger.
  • Productivity rises when a firm actually acts on its stated values — and that, in turn, improves shareholder value. 

Corporate mergers usually promise results based on brass-tacks changes like lower costs. But projected cost savings are only part of the alchemy when companies are combined. To get the most out of a merger, according to Rice Business Emeritus Professor Robert E. Hoskisson, leaders need to pay serious attention to goals that may seem secondary. In particular, the values of the dominant company, especially the way it treats its workers and clients, are a potent force in a profitable merger. 

To reach his conclusions, Hoskisson joined Margaret Cording and Karsten Jonsen, both of the International Institute for Management Development, and Jeffrey S. Harrison of the Robins School of Business at the University of Richmond to analyze 129 post-merger outcomes. Mergers, the researchers note, wash waves of uncertainty over everyone linked to the companies involved: employees, executives, shareholders and customers. Employees worry about losing their jobs; executives puzzle about how to create a unified new company; shareholders fret about their stock losing value; and customers wonder if the new firm will continue to serve their needs. 

Building and holding trust is essential for managing the anxieties of these stakeholders. And perhaps the single fastest way to show that trust is deserved is to state corporate values clearly — then practice them. 
The performance of a firm following a merger is ultimately shaped by consistency between words and deeds, Hoskisson and his team argue. “Organizational authenticity,” as this match is called, is a litmus test employees use to judge the company’s fairness. This consistency is crucial for a newly merged firm. Saying, and then doing, signals to employees and shareholders alike that the firm will deliver on its other promises.

It’s not as easy as it sounds. As the merger advances, “there is much temptation for the newly combined firm to disregard espoused values,” the researchers write. Maybe a manager wants to withhold gloomy information that could affect the stock price. Or maybe layoffs are looming despite the firm’s promise to treat long-term employees like family. 

Such lapses in candor can be costly. To learn more about how company values and actions affect output, the researchers surveyed top executives and managers of 129 mergers between U.S.-based corporations. Each company in a given merger shared at least one product line, meaning the firms had to integrate part of their operations. To gauge the new firm’s performance, Hoskisson’s team measured employee productivity and, in turn, the subsequent effect on stock price for the acquiring firm for the three years following the merger. 

Employee productivity clearly reflected the match — or mismatch — between words and deeds, the researchers found. Promises set up implicit contracts with employees, so when those promises are not kept, employees renege on their own implicit promises to perform. So profound is the importance of trust that employees underperform even when the new practices are actually better than those the company had promised. 

Employee productivity hit bottom, Hoskisson’s team discovered, when the company’s stated values were especially lofty and their practices fell far short. In other words, the bigger the broken promise, the fiercer the employee backlash.

Not surprisingly, productivity also plunged when a company’s stated values were shoddy in the first place — and the firm then surpassed that low bar. Under-promising, the researchers note, is not a useful strategy for boosting productivity. “Employee productivity is higher for firms that under-promise relative to firms that over-promise,” they added. 

The relationship of a company’s values to its treatment of clients had an even greater influence on productivity than did its treatment of employees. In both cases, it was the workers’ impressions of the how well a company’s words matched its deeds that mattered: Employee response to a merger, the researchers found, had a “significant effect” on the new company’s performance. 

What that means is that a newly merged firm can’t just talk the talk. It has to walk the walk as well. Workers have their eyes not just on how they’re treated, but also on how well a firm upholds its implicit contract with customers. If firms in a merger falter in these relationships, employee productivity can slip and ultimately reduce the financial outcome for shareholders. 

Conventional wisdom holds that mergers give managers a free pass to run roughshod over employees. Managers need to know better. After a merger, Hoskisson’s research shows, employee performance, and thus company outcome, actually hinge on the corporation meeting its previously espoused value positions. There may be no more critical time in the life of a business for its executives to be real.  


Robert E. Hoskisson is the George R. Brown Emeritus Professor of Management at Jones Graduate School of Business at Rice University.

To learn more, please see: Cording, M., Harrison, J. S., Hoskisson, R. E., & Jonsen, K. (2014). Walking the talk: A multistakeholder exploration of organizational authenticity, employee productivity and post-merger performance. The Academy of Management Perspectives, 28(1), 38–56.

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