Resource-based view—enabling human capital to contribute to M&A success

The resource-based view (RBV) asserts that an organization’s competitive advantage lies within the valuable, rare, inimitable and non-substitutable resources at its disposal (Barney 1991). These resources can reside in ‘physical capital’, such as technology and locations, or ‘organizational capital’, including internal structures, processes, and procedures. The organization’s most precious resource, however, is arguably its ability to acquire and apply knowledge in order to get the best out of its physical and organizational capital, a capability that is inherent to the organization’s ‘human capital’, or the knowledge, skills, and abilities possessed by its employees (Nordhaug and Gronhaug 1994; Penrose 1959; Prahalad and Hamel 1990).

The use of M&As to gain a competitive advantage through organizational resources appears in the earliest conceptions of the RBV (see Wernerfelt 1984). In line with this perspective, M&As are now widely viewed as a way for organizations to gain new markets, master new technologies, and gain operational efficiencies, both within and across borders. M&A is also increasingly used as a means to enhance the organization’s human resource capabilities, particularly in knowledge-based organizations (Lin et al. 2006). Achieving a competitive advantage though M&As is a challenge, however, as many M&A initiatives fail to produce the intended results (Cartwright and Schoenberg 2006; Rees and Edwards 2009). On the other hand, empirical research indicates that combined organizations with high levels of human capital perform better than other merged organizations, which is likely due to their superior capability for inter-organizational learning and knowledge integration (Lin et al. 2006). Research also indicates that M&As are most successful when human capital issues resulting from the merger activity are managed effectively (Nikandrou and Papalexandris 2007; Schuler and Jackson 2001). As such, the role of HRM in facilitating M&A success by enabling human capital advantage is a topic about which there has been considerable discourse.

According to strategic HRM scholars, the primary role of HRM is to ‘deliver “added-value” through the strategic development of the organization’s rare, inimitable, and non-substitutable internal resources embodied—literally—in its staff’ (Boselie et al. 2005: 71). Thus, building the organization’s human capital and influencing the kind of employee behavior that constitutes a competitive advantage is a primary goal of HRM (Boxall and Steeneveld, 1999: 445). In M&As, in particular, HRM is shown to play a critical role in developing human capital and motivating the employee behaviors that are needed for M&A success. For example, training and development practices that prepare employees to respond effectively to job and technology changes imposed by M&A activity are indicated to differentiate top-performing merged organizations from their less effective counterparts (Nikandrou and Papalexandris 2007). Training can also be used to foster the self-awareness and cultural sensitivity that are necessary for successful integration of cross-national M&As (Harper and Cormeraie 1995).

HRM practices that are used to acquire and retain human capital resources, especially those ‘exceptional human talent[s], latent with productive possibilities’ (Boxall 1996: 81), are also necessary in M&As. High turnover rates plague many M&As, requiring sufficient selection procedures to be in place to fill important gaps (Nikandrou and Papalexandris 2007). Financial incentives and other transactional benefits could also be necessary to retain key employees, especially in the acquired organization (Schuler and Jackson 2001), although empirical findings of a positive relationship between the use of financial incentives and M&A success are inconsistent (see Nikandrou and Papalexandris 2007). Further, how selection and retention incentives are used will differ depending on the M&A strategy (Aguilera and Dencker 2004). While some M&As seek to create human capital synergies, others are aimed at reducing human capital overcapacity. In overcapacity M&As, HRM initiatives such as outplacement programs become more critical (Aguilera and Dencker 2004). In particular, programs that help individuals become more employable in the external job market could enable voluntary resignations and reduce negative feelings toward organizational change and dismissal (Baruch 2001; De Cuyper et al. 2008). However, even when human capital reduction is not the primary M&A strategy, layoffs in M&As are common, and the threat of redundancy and job insecurity can be very disruptive if these career concerns are not adequately addressed (Lupina-Wegener 2013; Nikandrou and Papalexandris 2007). Thus, the existence of career opportunities in the internal labor market and career management initiatives are necessary to improve employees’ support for M&A initiatives as well as their retention (Appelbaum et al. 2002; Bourantas and Nikandrou 1998). Indeed, research indicates that providing internal career opportunities is a mark of top-performing M&As (Nikandrou and Papalexandris 2007).

Finally, HRM processes that facilitate knowledge sharing and transfer are necessary in order to realize the synergies sought in merging human capital (Aguilera and Dencker 2004; Ranft 2006; Schuler and Jackson 2001) while minimizing conflict between the combining groups (Weber and Fried 2011). Designing integration work around teams can encourage knowledge sharing by giving employees from each of the combining organizations the opportunity to work together (Cabrera and Cabrera 2007). Empirical research supports the proposition that the creation of integration teams across key areas of business, and the selection of an integration manager to oversee this activity, is often found in organizations that enjoy M&A success (Schuler and Jackson 2001). Formalized socialization programs also provide fora in which knowledge can be shared, while also facilitating the creation of shared norms that are important for successful M&A integration (Aguilera et al. 2006; Cabrera and Cabrera 2007). On the other hand, HRM practices aimed at appraising and rewarding knowledge sharing, while often found in successful mergers (Schuler and Jackson 2001), should be used with caution. Financial rewards in particular could be perceived as controlling, decreasing employees’ intrinsic motivation for engaging in knowledge-sharing behavior (Gagné and Deci 2005). Offering rewards that are low in salience could signal to employees that knowledge sharing is valued, without appearing to be controlling (Cabrera and Cabrera 2007). Still, research extending beyond the M&A domain indicates that incentives that are provided based on group or organizational results, when coupled with internal labor markets, team building, and developmental performance appraisals (i.e., ‘commitment-based HRM practices’), are better suited to facilitate knowledge exchange and application, as they create a social climate that emphasizes trust and cooperation (Collins and Smith 2006).

To summarize, the RBV provides a strategic perspective in explaining why organizations engage in M&A activity and utilize HRM practices to enable M&A success. However, while the above discussion indicates that there are some universal ‘best practices’ that can be applied to manage M&A integration effectively, the relationships between these practices and M&A success are not always consistent. Much of the extant research investigating the link between human capital-enhancing HRM practices and M&A success has been conducted in a single country or has made certain assumptions about the merger strategy. Research suggests, however, that both merger strategy and national culture could impact the effectiveness of certain HRM practices in generating human capital synergies and M&A performance (Aguilera and Dencker 2004; Weber and Fried 2011; Weber and Tarba 2010). Future empirical research that accounts for the interactions between HRM initiatives, M&A strategy, and national culture is therefore needed to improve our understanding of these contingencies.

Social identity theory—facilitating post-acquisition identification

M&As viewed through the lens of social identity theory draw attention to the fact that M&A success requires employees to accept a new ‘post-acquisition identity’ and that certain features of social context facilitate the internalization of the newly combined organization’s values and goals into employees’ self-concept. Social identity theory describes individuals as social beings whose self-concepts are influenced by the social groups to which they belong (Tajfel and Turner 1986), such as a work organization (Ashforth and Mael 1989; Hogg and Terry 2000). Identification with a favorable group can enhance an individual’s sense of self-worth (Brown 2000). When a threat to a group’s social identity is perceived, however, individuals are likely to try to protect their group identity in order to maintain their positive self-concept (Tajfel et al. 1971).

Perceived changes in organizational identity due to a merger (i.e., a low sense of continuity; see Rousseau 1989) are known to elicit feelings of a threatened social identity among employees (Bartels et al. 2006; Giessner 2011; Ullrich et al. 2005). This threat has been shown to trigger anxiety and stress in individuals (Buono and Bowditch 1989; Cartwright and Cooper 1993), change resistance (Jemison and Sitkin 1986), and generate organizational conflict (Marks and Mirvis 1985; Olie 2005), all of which can negatively impact post-acquisition identification. Given that the two combining entities are usually unequal in terms of their status, it is often the case that the employees from at least one merger partner experience a discontinuity of their identity (Giessner et al. 2006). It is recognized that employees from organizations with higher statuses are prone to adopt an attitude of superiority and treat employees from the lower-status organization as inferior (see Hambrick and Cannella 1993; Jemison and Sitkin 1986), because they might feel threatened that the low-status organization’s reputation will drag down their status (Hornsey et al. 2003). In contrast, employees of the low-status organization are most often dominated and feel that their position within the organization is less legitimate (Giessner et al. 2012). Feelings of social identity threat and distrust may be amplified by national cultural stereotyping and xenophobia in international M&As (Krug and Nigh 2001; van Knippenberg et al. 2002).

However, organizations that manage to have employees with stronger post-acquisition identification have been shown to increase job satisfaction (Terry et al. 2001; Van Dick et al. 2004), organizational citizenship behavior (Lipponen et al. 2004; Van Dick et al. 2004), and organizational commitment (Terry et al. 2001), as well as reduce turnover intentions (Van Dick et al. 2004). Pre-acquisition identification (Bartels et al. 2006; van Knippenberg et al. 2002), high group status, and inter-group permeability (Terry et al. 2001) have been shown to impact post-acquisition identification positively. As mentioned above, a sense of continuity can increase post-acquisition identification. However, as some employees are likely to experience a discontinuity of their identity (Giessner et al. 2006), researchers have also focused on further antecedents. A qualitative study by Ullrich et al. (2005) on mid-level managers during a large industrial merger found that some of the managers seemed to identify with the merged organization even when they perceived an observable change in social identity. What motivated them was a clear direction for the future and an outline of how to get there. Ullrich et al. termed this ‘projected continuity’. Further research seemed to confirm this by showing that perceived utility or necessity of the merger can increase post-acquisition identification (Bartels et al. 2006; Lupina-Wegener et al. 2014). This provides a potential way for HRM communication efforts to increase post-acquisition identification for those employees experiencing a discontinuity of their observable identity (Giessner 2011). Thus, these findings indicate that communication efforts aimed at influencing employees’ perceptions of the continuity of their identity, and the necessity and utility of the merger for the future of the organization, are important for eliciting post-acquisition identification.

In addition, perceptions that the distribution of resources and outcomes during the M&A process (i.e., distributive justice) are fair, as well as the practices used to facilitate the integration (i.e., procedural justice), represent central HRM efforts that are needed to increase and maintain post-acquisition identification during the M&A integration process (Lipponen et al., 2004; Monin et al. 2013; see Giessner et al. Forthcoming for a review). Such indications resonate with the research of Bowen and Ostroff (2004), who argue that the perceived relevance and fairness of HRM initiatives are critical for creating a work climate that influences desired employee attitudes and behavior. Bowen and Ostroff’s assertion builds on the assumption that perceived relevance promotes the internalization of externally sanctioned behavior into one’s self-concept. Perceived relevance is said to be fostered by the prestige and ability of an influencing agent (e.g., the M&A integration manager) to provide expert knowledge, allocate resources, or apply sanctions (Bowen and Ostroff 2004). The fairness element of Bowen and Ostroff’s model builds on the principles of organizational justice and research that links various justice perceptions to positive employee outcomes (see Colquitt et al. 2001 for a meta-analytic review of various justice perceptions and their correlates). This research generally indicates that being transparent about the rules of reward distributions and involving employees in decision-making processes can foster fairness perceptions (see also Citera and Rentsch 1993). A recent meta-analysis indicates that justice perceptions induce positive employee outcomes by fostering affective organizational commitment and other characteristic features of trust-based social exchange relationships (Colquitt et al. 2013). Organizational commitment is strongly related to the construct of organizational identification (Riketta 2005). Thus, there is considerable support for the suggestion that fairness perceptions could relate directly to identification with the merged organization and, in turn, provide positive post-acquisition outcomes (Lipponen et al. 2004; Edwards and Edwards 2012).

Acculturation—managing post-acquisition organizational culture

Organizational culture refers to a symbolic set of values, beliefs, and assumptions that are held by organizational members and guide the way in which they, and in aggregate the organization, operates (Denison 1996). While efforts to manage the organizational culture during the M&A process may concern the softer, human side of M&A integration, organizational culture can also be a strategic resource for deriving value and competitive advantage from the post-acquisition organization (Barney 1986). Indeed, research indicates that efforts that are aimed at managing post-acquisition organizational culture are critical to achieving desired M&A outcomes (Schweiger and Goulet 2005; Nahavandi and Malekzadeh 1988). Efforts aimed at hindering culture clashes between the combining entities are particularly important, as clashes are shown to negatively impact the realization of strategic M&A objectives (Cartwright and Price 2003; Very et al. 1996), effectiveness of system integration (Weber and Pliskin 1996), and post-acquisition stock price performance (Chatterjee et al. 1992). Despite its importance, however, companies do not often set a high priority on post-acquisition organizational culture management (Marks and Mirvis 2011).

Managing a post-acquisition organizational culture is not necessarily about creating a new, cohesive organizational culture (Seo and Hill 2005). In fact, four approaches to acculturation, referring to the cultural changes induced by one group or both, resulting in interactions between the two combining organizational cultures, have been identified (Marks and Mirvis 2011). ‘Cultural transformation’ involves the abandonment of previously held cultures and the adoption of new values and norms (Marks and Mirvis 2011). On the other hand, ‘cultural pluralism’ is concerned with the coexistence of cultures in the combining organizations and requires no or minimal culture changes (Marks and Mirvis 2011), ‘cultural integration’ involves blending together the current organizational cultures (Berry 1983), and ‘cultural assimilation’ refers to a unilateral process by which one culture absorbs the other (Nahavandi and Malekzadeh 1988).

There are two perspectives in the current literature concerning M&A culture management. On the one hand, scholars who value cultural differences believe that a variety of people and practices may facilitate innovative idea generation and implementation in organizations (Cox 1993). Further, the unique capabilities embedded in different organizational cultures create the positive conflicts needed for synergies and learning (Vermeulen and Barkema 2001), which, in turn, break down rigidities in the combining entities to enrich market and management knowledge (Schreyögg 2005; Olie and Verwaal 2004). Indeed, evidence from M&A research indicates that differences in style and practices can be positively related to post-M&A performance (Vermeulen 2005), sales growth (Morosini et al. 1998), reduced employee resistance (Larsson and Finkelstein 1999), creative problem solving, innovation (Mirvis and Marks 2003), and increased synergies (Weber et al. 1996). Another line of M&A research, however, looks at the ‘dark side’ of organizational culture differences. Scholars in this area suggest that the differences between two combining entities can lead to ethnocentrism, stereotyping, and domination of the higher-status group over the lower-status group (Sales and Mirvis 1984).

It is recognized that HRM has a role in facilitating the different approaches towards M&A acculturation (Lakshman 2011). The HR function can, for instance, help to map out potential cultural gaps between the two combining organizations (Marks and Mirvis 2011), design activities for social integration (Ranft and Lord 2002), manage the expectations of the two combining organizations to reduce acculturative stress (Marks 2003), create a safe environment for venting stress (Marks 2003), and coach leaders to align their model behaviors with the desired culture (Chatman and Cha 2003). The involvement of HRM in regards to culture management is vital to M&A success, not only in the implementation stage but also in the planning stage, when integration strategies are to be decided (Marks and Mirvis 2011).

Organization sensemaking—setting expectations via communication

Organizational sensemaking refers to a process of social construction in which organizational members interpret and explain what occurs in the environment in and through discursive interactions with others (Maitlis 2005). Sensemaking is a critical organizational activity (Weick 2005), particularly in ambiguous work contexts where people are thrust into unfamiliar roles and task settings (Weick 1993). Thus, it is understandable that sensemaking is an important activity to foster in the context of M&A integration.

The process of comparing M&A integration practices versus expectations could trigger sensemaking processes. Expectations are believed to be a directive element for sensemaking (Weick 2005). Employees constantly scan their environment, seeking information to help them form comparative judgments (Vidyarthi et al. 2010). The subsequent process of confirming one’s expectations, which are grounded in one’s own beliefs, versus what is interpreted from cues in the environment, is considered to be important for driving individual judgments of the situation and, in turn, behavior with regards to dealing with these situations (Weick 2005). Thus, the perception of M&A integration practices should elicit a comparison of perceived M&A experiences versus expectations (Oliver et al. 1994). The extent to which these expectations are met determines the perceived disconfirmation experience (Oliver 1977) in that a gap arises when the expectations are ‘better than’ or ‘worse than’ perceived experiences. Experiences that fall short of expectation (negative disconfirmation) foster disappointment and reduce satisfaction (Irving and Montes 2009).

Based on the above theory, setting expectations should be a crucial element in influencing employees’ positive judgments of M&A integration. To this end, communication efforts aimed at conveying the strategic direction of the M&A to employees, and correcting any misconceptions, are particularly valuable. It is well recognized that effective internal organizational communication is important to achieve M&A success (Ager 2011; Armenakis and Bedeian 1999; Schweiger and Denisi 1991). Communication regarding the evolving stages and changes associated with M&As not only helps employees to form expectations of the M&A process (Hubbard and Purcell 2001), but also provides them with assurance and the ability to make informed choices on how to deal with this challenging situation (Schweiger and Denisi 1991; Seo and Hill 2005)

The involvement of the HR function in disseminating relevant communication regarding the M&A is vital not only in the implementation stage, but throughout the M&A process. Prior to the M&A, HR could inform employees about the practical plan of the M&A, future direction, and potential cultural changes associated with the new combined entity (Schweiger and Denisi 1991). Post-acquisition, HR can inform employees about the integration status and strategic direction (Jimmieson and White 2011). Various communication media can be used to share up-to-date information about what is happening with the M&A, including face-to-face communication, company newsletters, and video displays. A study by Schweiger and Denisi (1991) demonstrates that firms that provide a realistic M&A review program, in which employees are informed using different means of communication, enjoy greater employee job satisfaction and organizational commitment and reduced job uncertainty. Other evidence shows that using communication mechanisms enables employees to raise their concerns and leads to successful post-acquisition integration (Nikandrou and Papalexandris 2007; Papadakis 2005). In addition, employees are more likely to perceive a positive atmosphere about the handling of differences in organizational culture (Appelbaum et al. 2002) and the successful management of the integration process (Hubbard 2001).

HR centrality

The extent to which the HR function is involved in M&A strategy formation, referred to as HR centrality, is considered to be a primary condition that is necessary for HR to act as an intrinsic part of the integration team (Bramson 2000). There are two dimensions that define HR centrality: the degree of involvement in the firm’s strategy; and the existence of an HR strategy (Becker and Gerhart 1996). HR centrality is high when HR managers take part in the firm’s strategy formulation as members of top management teams (Nikandrou and Papalexandris 2007). This enables HR managers to have the most up-to-date information about the firm’s business situation and to evaluate whether and how the firm’s current human capital may serve strategic goals (Bramson 2000), both of which are necessary for HR strategy formation.

HR centrality is particularly important in M&As as HR managers can serve as strategic partners in the search for and evaluation of potential M&A partners (Galpin and Herndon 2000; Schuler and Jackson 2001). In this strategic role, HR managers also help the organization to align their human resource capabilities with business needs and trends (Brooks and Dawes 1999). Later in the M&A process, HR managers can help firms to evaluate the compatibility of corporate cultures and, more importantly, to analyze alternative integration options (Bramson 2000).

HR power

Previous studies have demonstrated that HR strategy formulization is positively related to firm (Tregaskis 1997) and individual performance (Weber and Drori 2011; Marmenout 2011). Nevertheless, its effectiveness is contingent. A study by Lupina-Wegner (2013) revealed that the strength of HR power, which refers to the quality of HR strategy development and its execution effectiveness, may moderate the way in which employees of the combining organizations respond to M&A integration. HR power tends to be lower in international M&As, when there is a less clear understanding of the local context. Detrimental consequences of HR integration, such as perceived uncertainty and reduced autonomy, may emerge where there is low HR power. Supporting this, Smith et al. (2013) argue that the intended objective of an HR integration strategy of bringing people together may not necessarily lead to positive employee responses from the two combining firms when they see themselves as different from each other.

Ambiguity

In addition, HR initiatives set by management during M&As might not be evaluated as intended by employees (Khilji and Wang 2006; Risberg 1997). Previous studies provide evidence of discrepancies between the HR practices perceived by managers versus employees (Edgar and Geare 2005; Khilji and Wang 2006). Communication is considered an important means to spell out the meaning of HR practices and minimize potential misconceptions (Den Hartog et al. 2013). For instance, if organizations can get employees to see how the intended HR practices address their concerns, it is more likely that they may respond positively to M&A activity (Lupina-Wegener 2013; Giessner 2011; Ullrich et al. 2005).

Further, giving employees a meaningful rationale and acknowledging conflicting feelings regarding the M&A could foster employee acceptance of organizational change (Gagné et al. 2000). Self-determination theory and research support the proposal that the internalization of externally sanctioned activities, such as those required by M&As, occurs when individuals are placed in an ‘autonomy-supportive’ social context where they are provided with a meaningful rationale for engaging in the activity, they perceive that their feelings concerning the activity are acknowledged, and they have discretion with regards to when or how to carry it out (Deci et al. 1994).