Master Thesis
Mergers and Acquisitions: The Social Impact on the Local Community
Bahare Taleghani S4244052
MSc BA Change Management
Faculty of Economics & Business, University of Groningen Supervisor: Prof. Jordi Surroca
Co-assessor: Dr. Ileana Maris-de Bresser January 18, 2021
Word count: 11006
Abstract
The current study used the stakeholder theory to study possible influential effects of Merger and Acquisitions (M&As) on a crucial stakeholder group: the local community. Thus, the study predicted that M&As have a negative impact on the well-being of the community (Hypothesis 1) and additional changes of the management team present an even stronger negative impact on the local community (Hypothesis 2). The hypotheses were empirically tested in a panel data set including 80 US-firms of different industry sectors during a period from 2010-2019. The obtained evidence did not meet the studied expectations as the overall results did not support the predictions. However, a few interesting findings could be recognized in the results, which may indicate a possible influential effect of M&As on the local community.
It is recommended for future research to adjust the research through creating a more controlled environment by implementing control variables of different perspectives and, more importantly, to generate access to a larger sample to increase the possibility of finding significant influences. Moreover, it can be advised to thoroughly study and select the variables representative of a community’s well-being before conducting future research as the authentic and reliable value and of these ‘community variables’ seem to be debatable.
Keywords: Corporate Social Responsibility, Local Community, Merger & Acquisition,
Stakeholder Theory, Strategic Management
Mergers and Acquisitions: The social impact on the local community
In 2019, the worldwide number of Merger and Acquisition (M&As) deals were approximately 40500 deals with a total value of approximately 3.8 trillion U.S. dollars, according to the Institution for Mergers, Acquisitions, and Alliances (IMAA, 2020). These exceptionally high numbers of M&As and their inconceivable value in transactions illustrate the importance of this strategy in today’s corporate world (Sherman & Milledge, 2006). In today's newspaper, one is often confronted with headlines stating insights on possible mergers or new details on the acquisitions of one major company by another powerful company (BBC, 2019; Ewing et al., 2019). Therefore, as the attention around this ‘M&A movement’ is rising, discussions on purpose and the accurate impact of mergers and acquisitions are also rising.
As technology has evolved and globalization has emerged, a fast-paced economic market has been created (Clement, 2005), pressuring and forcing corporations to change their strategic management methods, resulting in M&As becoming attractive as an influential strategy to enhance growth (Griffin, 2018). A ‘merger’ can be characterized as an alliance of two or more companies to create a new corporation (Bruner, 2005). As a result, the merger may create potential synergies benefiting both firms (Robert et al., 2016). At the same time, as ownership and management control are shared and need to be reorganized collaboratively (Coyle, 2000), complications and difficulties may arise through the process (Robert et al., 2016). An acquisition, on the other hand, describes a takeover of one business by another business (Machiraju, 2007). Thereby, a change of ownership, control, organizational structure, and cultural environment will follow (Coyle, 2000). By joining resources, the resulting firm may gain the ability to develop innovations and unite their competences more efficiently while decreasing costs (Alam et. al., 2014) and create a better basis for companies to grow to a sustainable successful business (McDonald et al., 2005). Both mergers and acquisitions are strategies used in strategic management to enhance the potential of firms by uniting the strength of companies and increasing their power towards their competitors in today’s business environment (Alam et. al., 2014).
The reasons for engaging in M&As have evolved. Initially, M&As were conceived to increase the financial assets (Alam et al., 2014) of stable companies or, in the opposite case, to support companies, which were in debt and had no other way to survive (Bruner, 2011).
Nowadays, the initial purpose is more complex as M&As today are initiated based on
strategic and operational purposes (Galpin & Herndon, 2010) rather than for mainly financial
reasons. However, these claims are constantly debated. It can be noted that the original
behavior of buying other firms' assets still applies, however it can be identified in a broader sense as nowadays this implies acquiring not mainly financial assets but rather assets like
"customer bases, better distribution channels, larger geographic boundaries, organizational competencies and a variety of new talents" (Alam et al., 2014).
Another transition that can be observed is society and stakeholders are more demanding towards companies’ roles within the society (Carroll & Buchholz, 2008) and have therefore created stronger expectations towards businesses regarding their attitude, practices, and products. According to Deloitte’s global millennial survey in 2019, “Millennials, born between 1983 and 1994, invest their time and money in corporations that prioritize employees, society, and the environment over generating profits”. Similar to that,
“Generation Zers, born between 1995 and 2002, are also mindful of conscious capitalism”, which has presented corporations with the need to “engage more actively with stakeholders to connect with the next generation of employees and consumers” (Deloitte, 2019, p. 5).
Therefore, prominent executive managers, such as Jeff Bezos of Amazon and Jamie Dimon of JPMorgan Chase (Hazan, 2020) have participated in the signing of the statement on the purpose of corporations (Bus. Roundtable, 2019), advocating to companies’ directors to take responsibility for their firms’ activities and to imply appropriate business practices to contribute to our society and environment.
This way of corporate thinking was first introduced by the Stanford Research Institute (SRI) in 1960, suggesting the management to analyze, consider and interact not only with their business shareholders but all stakeholders. This initial statement created a discussion on the role of stakeholders in various disciplines by different scholars. Thereby, Freeman, as the leading figure in this discussion, created the stakeholder theory (Freeman, 1984). Elaborations of the theoretical concept illustrate that relationships with stakeholders are essential to create the effect to benefit both businesses and society (Parmar et al., 2010; Porter & Kramer, 2011).
Additionally, scholars present that implementing stakeholder thinking in business practices in an appropriate manner can create value for all stakeholders (Rahdari, 2016). Therefore, to meet these expectations of society and generate organizational value continuingly, companies are challenged to change their business practices to create sustainable impact, both environmentally and socially (Rhodes et al., 2014).
While it seems that stakeholder theory provides an extensive theoretical framework
and discursive device within the literature (Fairfax, 2006; Noland & Phillips, 2010), critics
argue that the theory is lacking to provide a viable platform to all its stakeholders. Companies
have been influenced by stakeholder theory and are aware of the fundamental value of stakeholder’s participation in decision making (Cadman at el., 2017) and their impact on creating sustainable development (Subbarao & Lloyd, 2011). However, evidence still shows that the practical implication of involving stakeholders, particularly the group of the local community, is often not considered during the process concerning M&As (Benites-Lazaro &
Mello-Théry, 2018). Adding to that, the literature on corporate law presents evidence that shareholder’s interests in the context of M&As are still the main priority (Hazan, 2020).
Consequently, stakeholders’ interests are seen to be less important as they are not protected by appropriate legal practices (Hazan, 2020). Hence, companies use their power and practices to create benefits for their shareholders rather than for all stakeholders (Griffin, 2018), rising social and environmental issues at the expense of society, particularly the community (Clark
& North, 2006; Frynas, 2005; Idemudia, 2009).
In order to draw further conclusions, it is essential to have access to adequate information presenting the effects of corporate strategies like M&As on all stakeholders.
While research on the impact of M&As has increased its range by addressing social factors, a review of the existing literature still presents a limited perspective on the information concerning the social impact of M&As.
It can be determined that a significant amount of literature on the social aspects in M&As focuses on presenting advice to the firm's management to enhance the organizational transformation (e.g., Myeong-Gu & Hill, 2005; Kansal & Chandani, 2014) rather than presenting the social impact of corporate strategies on its stakeholders. Additionally, research on the social impact of M&As concentrates predominantly on the relationships between companies and their customers or employees (e.g., Griffin, 2018; Hazan, 2020), whereas research on other stakeholders, like the local community appears to be rarely represented in the literature. Therefore, it can be stated that even when scholars have increased their focus on social aspects within the M&A literature, there is still a clear gap in providing information on the impact of all stakeholders.
Consequently, one essential stakeholder group, presented to be significantly affected
due to corporate activities following M&As, is the local community. Hazan’s (2020) study on
the legislative situation of M&As on stakeholders underlines that “communities can be worse
off because M&A can contribute to economic inequality; typically, wealthy shareholders
benefit while other stakeholders bear the hidden costs of M&A” (p. 798). The study continued
to present the need to implement legislative protection for all its stakeholders. Therefore, it
can be assumed that stakeholders like the local community are misrepresented both in the
practical implementation of M&As and the theoretical education on the potential negative outcomes.
In conclusion, it can be noted that existing literature on the social impact of M&As still is lacking to provide adequate information on the role of local communities in our corporate world and to present factors affecting all stakeholders, particularly the local community, when strategic decisions resulting in an organizational change are made. Based on these findings, this study addresses the following research question:
What is the social impact of M&As on the local communitiy?
This study aims to expand the understanding of stakeholder management in a case of organizational change following an M&A. Thus, drawing on the stakeholder theory (Freeman, 1984; Parmar et al., 2010), the study’s purpose is to provide new information and empirical evidence to support stakeholder-proponents concerning the “shareholder-stakeholder debate”.
Additionally, this study seeks to extend the range of existing literature on corporate strategies, like M&As by researching their power on social groups. Thereby, the focus of this study is predominantly on the possible implications on the well-being of local communities.
The emanating objective of this study is to contribute additional information and a new perspective to existing discussions. Accordingly, these findings may support understanding of the power of business practices and managerial behavior, following an M&A, in a socio-economic context and express the need to consider all stakeholders, including the community. Furthermore, this thesis aims to contribute its findings to support the existing discussions on the need for change in corporate law (Hazan, 2020) to enhance stakeholder thinking instead of shareholder wealth maximization in today’s corporate world.
This study uses empirical research to investigate the research question, therefore the following hypotheses are created. First, the study hypothesizes that M&As will reduce the local community’s well-being. Based on the stakeholder theory (Parmar et al., 2010; Freeman, 1984), outlined in the following theoretical part, this study assumes that corporate strategies in form of M&As affect stakeholders, such as employees and the local community.
Correspondingly, multiple studies have identified that companies’ behavior can, for instance, create or eliminate income for employees, which has an additional leverage effect on financial and social capital within a community (e.g., Alvarado et al., 2017; Clark & North, 2006;
Iamsiraroj, 2016; Lehto & Böckerman, 2008; O’Shaughnessy & Flanagan, 1998). Therefore,
in line with this literature, it can be assumed that corporate strategies like M&As may influence a company’s behavior and thereby impact the well-being of a community.
Second, it is presumed that a change in the management team resulting from a Merger and Acquisition will increase the negative impact on the local community’s well-being. In line with the social identity theory in terms of organization (Ashforth & Mael, 1989; Kramer, 1991), organizational theory (Hogg & Terry, 2000) and additional literature (Myeong-Gu &
Hill, 2005), this study expects that individuals, in this case, managers, are likely to create a relationship and connection within a certain group over time. This can be portrayed by an organization or local community. With a change of management, a new managerial behavior emerges (Burnes, 2017), which may break prevailing agreement or commitments made by prior management towards their group, here, the local community (Brehm et al., 2013).
Therefore, this study expects a change in the management team to create negative implications for the local community. The derivation of the hypotheses is described in depth and literature-based in the literature review section of this study.
The significant presence of M&A deals presents a dominant and influential trend within the corporate world while it displays limited information within the literature on the social implications of M&As on its stakeholders, specifically the local community. Hence, this presents a gap in the M&A literature and motivates this thesis to provide further research.
This paper contributes to scientific research in three ways.
The first contribution is to support the M&A literature by extending the scope of research. As can be seen, most M&A works of literature focus on the financial impact.
Regarding the social impact of M&As, existing literature very strongly focused on one stakeholder group: the employees. Contrarily, the M&A impact on local communities has not been studied yet, despite its fundamental value as communities are an association of individuals, as one social group representing society. To provide a better understanding and a new narrative on the role of local communities, this research aims to present further information and to create new discussions to extend the available information on the social impact of M&As.
The second contribution is to provide empirical information to expand the knowledge on M&A activities and the influence on its stakeholder, mainly local communities. Scholars of various fields of research have discussed that the number of publications providing empirical evidence is limited as “research aimed at exploring broader data sets is missing…”
indicating that “…more research efforts are needed to further the understanding” (Pedrini &
Ferri, 2017, p. 54). This can be explained by the inadequate access to necessary data causing scholars to use the case study approach within their research (Ashenfelter et al., 2014).
Consequently, studies may display limitations in their range (Ashenfelter et al., 2014) creating biased results (Blonigen & Pierce, 2016). Therefore, this study’s approach to examining a suitable dataset will provide adequate research on M&A activities and their influence on stakeholder relationships.
Third, this thesis provides new information to revive past discussions and create new ones. As new hard and soft principles like CSR, corporate governance code, or corporate law regulations have emerged and been discussed more frequently in the past (e.g., Ismail, 2009;
Rhodes et al., 2014), it becomes visible that M&As are business practices that have a significant effect on society. Debates surface on the commitment of corporations to take responsibility, and other debates have discussed the need to set stricter legal restrictions to protect society. Therefore, the findings of the study may contribute to the discussion by pointing out new factors and solid results on possible effects.
Literature Review
Mergers and Acquisitions
Changes in the economic world resulting from globalization and technological advancement affected not only the expectations and demands of the society but also triggered new challenges for companies to be able to further compete. In addition, growth is often set as the primary goal of businesses in today’s corporate environment (Alam et al., 2014). One way to both generate growth and adapt to the challenges of the emerged new environment has been through Mergers and Acquisitions.
Alam et al. (2014) have researched this strategy in today’s corporate world and introduced M&As as a critical strategy in restructuring corporations. Supporting this claim, Sherman and Hart (2006) state that M&As have risen to become a powerful and crucial strategy for companies of all sizes and from different industries to ensure growth (Sherman &
Hart, 2006). As a contribution to strategic management literature, Alam et al. (2014) have
studied multiple aspects regarding the management of this corporate strategy. As a result, they
discuss that gaining assets and control of undervalued businesses were the main motivation of
M&As in the past. That way, companies were able to create a higher value for their
shareholders by reducing costs, saving taxes, rising their market shares, and weakening their
competition (Alam et al. 2014). Multiple scholars explain this drive by stating the common
belief of the initial purpose of corporations were the maximization of shareholder wealth (Friedman, 1970), which may also explain that the majority of existing research had set its focus on investigating and presenting the financial impact of M&As.
However, discussions on the prioritization of shareholder wealth maximization have emerged over the years and introduced the need to change corporate beliefs and behaviors since strategic management literature has presented the significance of strategic and operational planning (Galpin et al., 2010) in the current corporate world. Accordingly, many scholars strongly propose that to avoid resistance and the failure of the planned change, management needs to analyze the situation and involve stakeholders actively in an adequate way (Cawsey et al., 2012). This way of strategic planning has been presented as an essential tool in not only creating a collaborative and thereby supportive environment, but also to achieve long-term business success (McDonald et al, 2005). In the case of M&As, Sherman (2011) states that with limited preparation, expectations of resulting synergies can turn out as illusions, causing M&As to become a failure rather than a success. This way of thinking has been supported by multiple theorists creating discussions about a newly emerged paradigm and increasing attention around the importance of different stakeholders in the context of business, environmental and judicial disciplines (Carroll, 1989; Donaldson & Preston, 1995;
Freeman, 1984).
Stakeholder Theory and M&As
Stakeholder theory, originally introduced by Freeman (1984), explains that when
relationships between companies and their stakeholders are included in the unit of analyses,
problems within the corporation can be dealt with more effectively. The theory defines
stakeholders as „any group or individual who can affect or is affected by the achievement of
the organization’s objectives“ (Freeman, 1984, p. 46). Multiple scholars have contributed
their definition to the stakeholder theory (Clarkson, 2010; Mitchell et al. 1997; Renn et al.,
1993; Soma & Vatn, 2014; Winterfelt, 1992). They demonstrated that identifying
stakeholders is not simple (Vos, 2003) but it is important to observe and considerably manage
the relationships with stakeholders (Elijido-ten et al., 2010) as they are ”…having a specific
stake in a certain decision“ (Soma & Vatn, 2014, p. 12). Adding to that, Donaldson and
Preston (1995) have addressed multiple aspects elemental to create an efficient relationship
with stakeholders. According to them, companies can generate better competencies and
become more competitive by showing proactive behavior towards identifying and engaging
with stakeholders. This implies actively exploring the relationship with social groups like
„employees, customers, the community, suppliers, shareholders, and the natural environment“
(Rhodes et al., 2014) to enable the strategic change even further increasing firms’ wealth substantially (Donaldson & Preston, 1995; Post et al., 2002). Hence, these findings of numerous scholars identify the need for managers to create a strong relationship with their stakeholders to benefit from corporate strategies like M&As. Due to the introduction of
‘stakeholder thinking’, stakeholder management (SM) has risen in its popularity. It has increased the attention on presenting and discussing methods, which may enhance the organization of relationships with different stakeholders. This can also enable the firm’s ability to respond to stakeholders’ expectations (Habisch et. al., 2011). These developments have not only created new discussions about the influence of SM on the performance of organizations, but also valuable insight to understand the impact stakeholders can have on business objectives (Heikkurinen & Bonnedahl, 2013; Matos & Silvestre, 2013; Ranängen &
Zobel, 2014).
One elemental concept that embodies stakeholder-thinking in today’s economic world is corporate social responsibility (CSR). CSR is defined as “the ways in which a company’s operating practices (policies, processes, and procedures) affect its stakeholders and the natural environment“ (Waddock & Bodwelll, 2004, p. 25). According to CSR, organizations are not only responsible for their direct business activities, but also for protecting the interest of society (Sechina et al., 2016). Therefore, organizations are obligated to “comply with legislation and voluntarily take initiatives to improve the well-being of their employees and their families as well as for the local community and society at large” (Ismail, 2009, p. 2).
Stout (2013) argues that stakeholder theory can create wealth for both society and corporations in the long run. This may also explain the observations that positive CSR activities can improve financial performance (Callan & Thomas, 2009; Mishra & Suar, 2010;
Waddock & Graves, 1997) as the CSR concept is derived from stakeholder theory. Also, research shows that CSR creates a positive image (Liu et al., 2010) of the company and its services or products while engaging with customers and employees (Hoeffler et al., 2010).
Accordingly, overall long-term risks for the corporation can be reduced (Fifka, 2013), as CSR
contains practices that enable companies to ensure that “customers want their products,
employees want to work for them, suppliers want them as partners, shareholders want to buy
their stock, and communities want their presence” (Hazan, 2020). Supporting these
arguments, Rhodes et al. (2014, p. 6) state that to create long-term success organizations must
develop “a stakeholder perspective, rather than purely a shareholder perspective“. Thus,
Rhodes et al. (2014) further present the importance of considering stakeholder relationships
and highlight that corporate strategies, like M&As, can increase their influence on companies’
success when implemented sufficiently. Thereby, they indicate that an adequate way means a responsible consideration of the company's impact on society.
Throughout the last decade, observations on companies' CSR activities register a transition as many scholars in varying disciplines and powerful corporate executive officers publicly advocate companies to take responsibility for all their stakeholders. Consequently, the attention on the importance and effectiveness of creating a stakeholder relationship has increased. However, critical discussion on CSR practices has emerged over time. According to Porter and Kramer (2011), CSR policies mainly focus on the reputation and philanthropy of companies rather than presenting the investments of businesses for the communities.
Therefore, it can be assumed that stakeholder-oriented policies, like CSR, are currently not able to fully reach the goal to guide and monitor companies to pay as much tribute to society and the environment as they do to their shareholders.
Especially, in the context of M&As, it can be observed that business practices
prioritize maximizing shareholder wealth above generating benefits for the stakeholders. This
can be seen in a recent study by Hazan (2020), in which corporate law regulations on
stakeholders in M&As have been studied and missing legal representation of stakeholder
interests in M&As have been identified. The paper discusses a corporation’s responsibility,
shareholder primacy in corporate law, and the newly risen voices urging corporate law to
protect stakeholders' interests in cases of M&As. Thereby, many powerful executives, like
Jeff Bezos of Amazon and Jamie Dimon of JPMorgan Chase express their view on
management's responsibility to „create value for all stakeholders, including customers,
employees, suppliers, communities, and shareholders'' (Hazan, 2020, p. 751). Throughout the
analysis, the author elaborates on the shareholder-stakeholder debate and identifies that past
M&As conflicts have legally protected the shareholder's interest above those of the
stakeholders. Therefore, the paper continues, to display the urgency of a change in the
corporate legal system to protect stakeholders’ interest as communities and other stakeholders
are essential to generate a successful societal and economical system. Hence, the paper
determines the need to implement stakeholders in business processes and decisions
concerning M&As and suggests that the legal system and firm management need to balance
the expectation of stakeholders through implementing regulations representing the need “to
make stakeholder theory viable in M&As'' (Hazan, 2020, p. 800).
Mergers and Acquisitions and Local Communities
Even when communities are included in the group of key stakeholders, like costumer, employees, or suppliers, affected or affecting companies (Freeman, 1984), it can be seen that the impact of strategies like M&As on the local community is rarely presented in the literature. To provide a better understanding of the role of the community and the potentially significant impact M&As may have on communities, the following will highlight the existing literature on communities within different disciplines and help to identify the hypotheses of this research.
There is a wide range of concepts trying to define a ‘community’. Accordingly, Hillary (1995) presents a review of ninety-four variations and emphasizes that communities can be differentiated in many ways as they represent various aspects depending on the person, the time, and the location. In this study, communities are understood as individuals united in a social group which are connected by living and socializing in the same physical location and sharing similar standards, and creating organizations (Cnaan et al, 2007). Cnaan et al. (2007) further state that “communities are affected, and in a sense defined by, forces that affect community members and their spaces” (p. 2). These forces are displayed as external powers coming from the government, corporation, or single individuals entering the physical location and thereby changing and creating new dynamics within the community (Cnaan et al., 2007).
Thus, corporate strategies like M&As can be seen as an external factor creating changes, which may influence the community’s well-being.
Given the obtained information on M&A's original goal to increase the operating efficiency, M&As typically involve a rationalization of operations, which often results in different implications, one of them being employee layoffs (Lehto & Böckerman, 2008;
O'Shaughnessy & Flanagan, 1998).
Several studies present evidence that employee-layoff are likely to occur after
acquisitions (e.g., (Lehto & Böckerman, 2008; Yaprak et al., 2018) and mergers, whereas
others present contradictory results (Budros, 1997, 2004; Wagar, 1997). However,
discrepancies in research findings could result from differences in methodology or samples
(e.g., cultural and legislative differences). Correspondingly, it is important to keep in mind
that multiple possible factors are leading to employee layoffs. Hence, O’Shaughnessy and
Flanagan (1998) found that when similar firms merge, forces are joined. This allows the
reduction of duplication and overlap within the workforce and thereby eliminates costs to
realize operational synergies. Moreover, the literature suggests that M&As financed with
debts are more likely to lead to employee layoffs to cut costs and cover the consequent debt
payments (O’Shaughnessy & Flanagan, 1998). Beyond that, organizational restructuring after an M&A involves a cultural change within the new firm. Consequently, some employees are not suitable, or cannot adapt to the culture of the new company (Society for Human Resource Management Foundation, 2010), leading to layoffs. Additionally, as previously noted, managers, especially firms with poor performances, might also use downsizing to reduce costs to protect their shareholder’s interest in wealth maximization (Morck et al., 1989). Thus, in conclusion, there is sufficient reason to believe that employee layoffs may follow from M&As.
Whilst downsizing, after an M&A, might create financial benefits for the firm’s shareholders, other stakeholders like employees and the community can be affected negatively.
As a local community is portrayed by individuals connected by living and socializing at the same physical location and creating an organization (Cnaan et al., 2007) it can be supposed that employees are included in the group of the local community. It seems logical, therefore, to expect that due to the employee’s layoffs, unemployment will increase for the individuals within the local community creating financial problems and thereby negatively impacting the community’s well-being (Hazan, 2020).
Additionally, as obtained before, policies like CSR oblige companies to create value for their stakeholders like communities. Research identifies that companies can play an essential role in creating financial value for a community by implementing projects and investing in the region (Alvarado et al., 2017; Iamsiraroj, 2016). These investments and donations can enhance a positive impact on the well-being of communities. However, corporate strategies like M&As lead to organizational changes, which may imply organisational restructuring or changing management’s priority and thereby their commitment towards CSR duties for the local community. This may not only cause employees to lose their jobs but also missing investments, donations, or support of social projects creating a significant negative impact on the local community (Hazan, 2020).
As previously shown, the corporation's predominant focus on shareholder wealth
maximization also takes part in influencing these operational decisions due to favoring
shareholder's interests rather than those of all stakeholders. According to Benites-Lazaro and
Mello-Théry’s (2018) research on local communities’ participation in clean development
mechanisms (CDM), many projects have an opposite impact on local communities than they
initially aimed. The study on 625 projects shows that the project representatives still focus
more strongly on the financial aspects of the project than focusing on stakeholders and their
participation in these processes (Benites-Lazaro et al., 2018; Lazaro & Gremaud, 2017; ). The study shows that processes to enhance the role of the local community is based mainly on operational reason (Benites-Lazaro et al., 2018) supporting critics blaming companies for causing social and environmental problems at the expense of local communities while increasing their shareholders' wealth at the same time (Clark & North, 2006; Frynas, 2005;
Idemudia, 2009). This shows that the practical implication of stakeholder theory is still not viable due to the company’s significant focus on shareholder wealth maximization. Therefore, business practices fail to protect stakeholders, like local communities, and beyond that, to create positive and beneficial well-being.
Given the previous evaluation of employee layoffs, disinvestments, and missing engagement with stakeholders, the potential impact of corporate strategies like M&As can be predicted as harmful and negative towards the community’s well-being. Considering this, the first hypothesis presenting the basis of this research is:
H1: Merger and Acquisitions reduce local community’s well-being
Consequences of Changes in the Top Management
There are also other possible factors that have an influence on the organizational structure after an M&A. Due to a transition of the ownership structure, the new firms’
executives can decide to relocate the old management team to another location or replace them with a new management team. Consequently, the new management team, entering from the outside, can change the prevailing connection and previously described ‘agreements’
between the prior management and the community due to its different managerial approach.
Therefore, depending on the new managerial behavior negative or positive implications for stakeholders, in particular, the local community can emerge.
As obtained before, shareholder wealth maximization is still an essential priority for
the management and therefore predominantly influencing strategic decisions. However, as
previously noted, societal demands have emerged challenging companies to adopt responsible
and ethical behavior within their organizations. Additionally, as aforementioned, communities
have the power to contribute by creating financial capital. Despite this, the community’s
contribution can also include implementing social projects, donating, and providing support
through voluntary work. These implications will not only create a positive image of the
company increasing their popularity for customers, but also have a significant positive impact
on the community’s well-being.
Nevertheless, to gain this positive impact, scholars have identified that “managers need to behave differently: they need to put the policies and good intentions into practice”
(Burnes, 2017, p. 495). Throughout the examination of the role of managers, Burnes (2017) concludes that the management of an organization can profoundly influence both its company and the society, among them the local community. Therefore, it can be noted that a company’s management has not only the responsibility but more importantly the initial power to implement business practices, which create an impact on the well-being of stakeholders like communities. Hence, changes in the management team can lead to changes in the managerial behavior, which can impact the community’s well-being significantly, particularly following an M&A. Due to M&As initial goal to create growth and success for the companies (Sherman, 2011) the new management may prefer business practices that enable eliminating costs or additional workforces to maximize their shareholder's wealth. Thus, in conclusion, it can be assumed that the new management will change the managerial commitments and adapt different, less beneficial practices, that may be harmful to the local community.
Contributing to this, social identity theory (Ashforth & Mael, 1989; Kramer, 1991) identifies that membership in a group, for example, in an organization or community contributes to some part of the identity of every individual. Thereby, ‘organizational identity’
describes individuals association of distinctive aspects with the members in the group (Hogg
& Terry, 2000). This implies that it is common for individuals, including managers to create a significant connection and relationship within a certain group. Correspondingly, the research presents that individuals are more likely to protect their community when it is meaningful to them (Brehm et al, 2013). Hence, this attachment becomes stronger with an individual’s perception of their social identity, making them care about the community even more.
Therefore, it can be assumed that strategies like M&A impact these organizational identities and their commitments towards the local community as new management may abandon the past identity of the organization (Myeong-Gu & Hill, 2005). This can result in changes in the managerial behaviors leading to neglecting prior social projects, voluntary engagement, and financial investments. Consequently, the community’s well-being will be negatively affected.
In addition to neglecting past priorities and commitments, the new management can imply
different priorities and adapt new ways to manage the organization. For example, concerning
increasing operational efficiency, management can decide to use outsourcing, which will
eliminate in-house positions. While the management can register benefits from cutting costs,
the members of the local communities will be negatively affected by the resulting layoffs and
financial distress.
Thus, in conclusion, a change from old to new management strategies can have a significant impact on the local community. This can be assumed as prior managers have developed an organizational identity and thereby evolved a certain commitment and responsibility towards the local community. In comparison, the new management has newly entered the ‘membership’ and therefore, does not feel any, or just little, obligations towards the group of individuals creating the local community. Also, due to different interests, particularly following an M&A, the company’s management is more likely to introduce business practices, which will impact the community’s well-being rather negatively.
Consequently, this study proposes, as obtained in the literature, that with a transition of the management team the connection towards the community will decrease, which proposes the following hypothesis:
H2: A change of the management team resulting from a Merger and Acquisition will increase the negative impact on the local community’s well being
Methodology
Research Design
The hypotheses were tested with a quantitative research design using a panel data set.
The study purpose is to extend the M&A literature by researching the possible impact of M&As on the well-being of the local community. Additionally, the research aims to gain information on a possible effect of additional changes, in particular a change within the management team, on the community’s well-being. Thereby, community well-being is measured mainly in three ways: 1) the value of financial donations, as well as voluntary work, and product donations made by a company 2) the change of the number of employees and 3) the firms’ involvement in CSR policies and, correspondingly, the rating of their performance.
This set of dependent variables allows to generate a broader perspective on possible influential effects following an M&A and may support to ensure an informative analysis.
To accomplish an objectively accurate analysis, this study carefully designed a valid sample under controlled conditions using propensity score matching to enable a more reliable research. Following this process, the hypotheses were tested by a linear regression analysis.
Therefore, companies involved in an M&A have been compared with matching companies
that do not involve in an M&A in terms of the dependent variables. All data for the variable at
interest have been obtained from various databases, namely, Zephyr, Orbis, and Thomson
Reuter Eikon (Eikon).
The following segment will present the specific sampling process of this study.
Additionally, data generation and measurement will be discussed. Lastly, the statistical analysis of the study will be introduced.
Sample and Data
The analysis started with an initial sample of around 25.000 companies located in the US and Europe. While this would have provided a valuable starting point due to its large sample size, it should be noted that differences in terms of company characteristics were not considered. Therefore, we performed a sample selecting procedure to ensure that the researched sample consists of a comparable set of firms providing a reliable basis for this analysis. First, data concerning CSR behaviors were obtained for a period of 10 years from the Eikon database. Eikon’s database provides a broad range of accessible data on various fields of research. There, crucial for this study, a selection of social variables in form of ratings, scores or financial values can be obtained from this database. Additionally, information on specific community variables can be generated for every individual firm. For instance, firm’s involvement in CSR-related policies and activities, their contributions to society through donation or investments, and other aspects in terms of the workforce can be observed in relation to a community.
After the obtained data on firms’ CSR scores was added to the initial sample, a majority of companies were eliminated due to missing data. Consequently, adjustments were made which resulted in a smaller sample of approximately 800 firms. Following the process, data on M&A activities was obtained from Zephyr’s database. Zephyr is a crucial database for information on past and current M&A deals. Thereby, data on deal types, dates, status or values of deal are presented. Currently, Zephyr provides data from 2011-2019.
The new additional information on M&A activities were added to the latest sample, which consequently, constructed a new sample of approximately 240 firms. This sample contained both firms which completed an M&A and firms which have not been involved in an M&A or have withdrawn from a deal. Adding to this sample, data identifying the characteristics of the companies were obtained from the Orbis database and operationalized by their size (Number of Employees), performance (Return of Equity- ROE), profit (Total Asset) and CSR behavior. Orbis and Zephyr belong to the same database, therefore Orbis adds a broader set of information on firm characteristics.
Lastly, by using the propensity score matching, a final sample was created in
consideration of the previously obtained data on the firm’s characteristics and their
involvement in M&As. As a result, matches between ‘M&A-firms’ and ‘non-M&A firms’, in this study named panel A and panel B, were generated. Thus, in total, 80 US-firms have been considered as the final sample for analysis. Thereby, 40 firms have been involved in an M&A process, whereas 40 firms have not. Additionally, the sample was adjusted in terms of the geographical location of the industry. Thereby, the study set a focus on US-firms in order to eliminate disturbing factors created due to cultural differences. Moreover, it is important to mention that the final sample includes firms of different industry sectors. This can be explained by two reasons: 1) When implementing the firms industry sector as a control variable, the final sample of this study would have been too small and therefore not suitable for the purpose of this study 2) this research aims to identify possible influential effects of M&As in different industries to gain a better perspective of this strategies impact.
For the empirical analysis, the sample period from 2010-2019 was selected as the majority of M&A deals took place between 2010 and 2015. The data on the community well- being was also obtained from the Eikon database.
Measures
As shown in the previous segment, the final sample included both firms that were involved (panel A) and firms that were not involved in M&As (panel B). Thus, due to the matching sample procedure, firms in panel A and B have been matched, and thereby a firm in panel A has been assigned to a similar firm in panel B. This ensured the study to implement the appropriate data of the firm specific sample period relating to the deal date.
As aforementioned, the date of the M&A deal was obtained through the Orbis database, which allowed the study to acquire the corresponding data for the dependent variables, moderator variable and confounding variables three years after the operation took place. Additionally, this data of the variable (3 years after the M&A) was adjusted by taking the mean for each firm and each variable. As the exact matches between the ‘M&A-firms’
(panel A) and the ‘non-M&A firms’ (panel B) were generated, the study was able to run through the same data collection and measurement procedure for both panels. By presenting the data three years after the M&A through the mean, potential disturbing elements, such as missing data were able to be migrated ensuring a valid testing of the hypotheses.
To deepen the understanding, the following section presents detailed information on
the individual dependent variables in their assigned groups.
Community well-being variables – dependent variable. As explained in the research
design, multiple dependent variables were used to measure the impact of M&As on the local community and its well-being. As aforementioned in the literature segment, various studies suggest that community well-being is influenced by different aspects. This illustrates that it is crucial to generate multiple different observations in order to gain a more reliable view on the possible influence of M&As on the local community’s well-being. This study, therefore, measures community well-being through a diverse set of variables, which can be assigned to three different groups. All relevant data for the measurements of the community well-being variable of this analysis have been obtained from the Eikon database.
The first group contains the variables Donation total and Total donation in revenue.
Both variables represent the amount of donations contributed by the firm. However, there is a difference as Total donation to revenue describes the amount of all donations in relation to the revenue in million, whereas Donation total measures the overall donations made by a company. This includes in addition to the financial contribution also donations made by its foundations or trusts such as product donations, sponsoring or employee volunteer time costs.
The second group includes the variables Delta Employee and Announce Layoffs to
Total Employees Score. Delta Employee measures the change in the number of employees foreach firm. Thereby, as aforementioned, data from three years after the M&A took place was obtained both for panel A and B. The number of employees in the third year after the M&A was deducted from the first year after the M&A, presenting the change in the number after three years. Additionally, the obtained data of the variable Announce Layoffs to Total Employees Score has been generated from the Eikon Database. It measured the total number of announced companies lay-offs divided by the total number of employees.
These dependent variables present the impact of M&As on the local community by analyzing the change in the workforce of firms involved in M&As compared to firms that have not gone through the same operation as it is an essential outcome suggested in various research papers (e.g., Lehto & Böckerman, 2008; Yaprak et al., 2018; Wagar, 1997).
Lastly, the third group includes multiple CSR- and Community Scores highlighting
firms’ ratings on their performances and business activities. As suggested by multiple
researchers, companies’ involvement in CSR-related activities will have an impact on the
stakeholders like the local community. Therefore, this analysis uses CSR-related variables to
display companies’ involvement, commitment and actual performance towards certain
policies, which are intended to create and monitor responsible corporate behavior. Here,
Social Pillar Score, Community Sore, Corporate Responsibility Award Score, Policy Community Involvement Score were selected as representatives and are measured in percentages ranging between 0 and 100. Further details on the measurement can be found in Appendix A, the Social Pillar Score measures management practices considering firms capacity to generate loyalty and trust with its employees, customers, and society. The variable thereby reflects a company's reputation. The Community Score measures the firm's commitment in respecting business ethics by protecting public health and acting according to suggestions of CSR policies. Moreover, the Corporate Responsibility Award Score determines whether companies’ performance has a positive impact in order to receive an award for its social, ethical, community, and environmental activities. The Policy Community Involvement Score describes companies’ involvement in policies that support a positive corporate citizenship. Thereby, involvement in the community is represented and measured by donations, volunteering, community investments and additionally a firm’s involvement in CSR programs supporting education, health, and the environment of the community.
Merger and Acquisition- independent variable. The aim of this study is to research
the impact of M&As on the community’s well-being. Therefore, data was obtained reporting on companies’ involvement with M&As. Thus, the dummy variable M&A identifies whether a particular firm was involved or not involved in an M&A. Accordingly, the variable takes on a value of 1 (panel A) when the company was involved with an M&A and 0 (panel B) if not.
When gathering data, the study has predominantly focused on firms with deals between 2010- 2015, as both Zephyr and Orbis databases provide data exclusively of this time period.
Additionally, the study included mainly Merger and Acquisitions as representative deal types of M&As. For instance, joint ventures have not been considered and eliminated from the sample. While this study does intend to differentiate between Mergers and Acquisition, it is important to keep in mind that firms involved in acquisitions are predominantly represented in this analysis due to its more common occurrence in the used databases.
Change in management - moderator variable. In order to test the second hypothesis,
the study obtained the variable Management Departure from the Eikon Database in the
sample period of 2010-2019. Thereby, Management Departure presents whether a key
member from the management team has announced a voluntary departure (other than
retirement) or has been ousted. Thereby, firms that have experienced a change in the
management team have been coded with 1 (panel C) and firms in which no change in
management took place were coded with 0 (panel D). While this study does not intend to include the reason for a departure in the analysis, yet it is essential to keep this in mind when observing the results.
Firms’ confounding variables. The study has previously determined confounding
variables to construct a matching sample and additionally, ensure the internal validity for the analysis. Thereby, variables such as the Total Asset, ROE and the Number of Employees have been obtained from the Zephyr and Orbis databases. Total Asset determines a firm’s total amount of economic value owned by the company. ROE measures the financial performance of a firm by calculating net income in relation to shareholders’ equity. Number of Employees report, as its name states, the number of employees in a firm operationalizing the workforce of a company. The variables were measured by taking their mean for every individual company.
As previously elaborated, the mean of the variables was used in the analysis.
Statistical Analysis
In order to create a balanced sample of companies with and without M&As, propensity score matching was used. Propensity score matching is a statistical matching procedure used to construct a sample by matching, in this case, a firm with an M&A (M&A=1) with firms without an M&A (M&A=0) due to similar obtained characteristics. This way, bias can be reduced. The sample matching was based on the following variables: Total Assets, ROE and the Number of Employees, which are described above. Thereby, the mean of these variables was determined and used. As a result, the matching procedure yields a final dataset containing 80 matched companies.
To test the hypotheses, multiple linear regressions were performed on the matched sample. The following outcome variables were set: Donation Total, Total Donation in Revenue, Announce Layoffs to Total Employees Score, Delta Employee, Policy Community Involvement Score, Corporate Responsibility Award Score, Social Pillar Score and Community Score.
The models were mutually adjusted for the proposed confounders (Total Asset, ROE and
Number of Employees). All analyses were performed using Stata 16 (Stata Corporation,
College Station, Texas) and considered associations as statistically significant at an alpha
level of < 0.1 due to their relatively small sample.
Results
Descriptive Statistics
A summary statistic for the variables used in our analysis in panel A and B are presented in Table 1. The regression result presenting the findings for the first and second hypothesis-testing are displayed in Table 2 and Table 3. All 8 models have been tested with the same structure, including the independent variable (M&A dummy) and the confounding variables (Total Asset, ROE and Number or Employees). When looking at Table 1, only limited interesting differences between the variables in panel A and B can be observed.
Thereby, Corporate Responsibility Award Score (Model 6) is measured with a mean of 39.59
in panel B, representing the companies without an M&A. In contrast, the same variable is
considered 20 points higher in panel A. At the same time the statistical summary shows quite
similar means in models 5, 7, and 8, representing additional CSR-related variables. Also,
model 4 highlights a difference between the panels. It appears that firms involved in M&As
have increased the number of employees during the sample period of three years after the
operation took place, whereas the companies without an M&A show a decrease in the number
of employees in the same period of time. Thus, even when it has to be noted that no
significant difference can be seen in relation to the magnitude of the difference, but this might
present a conflicting change between the two panels. Moreover, panel B counts a three times
larger mean in model 1 compared to panel A, showing a significant difference concerning
firms financial and additional donation. Thus, in conclusion, the statistical summary of the
means and statistical deviation of this studies’ panel sets A and B appear to be similar
showing no major significant differences.
Table 1
Summary statistics (Panel A (M&A=1): n=40 & Panel B (M&A=0): n=40).
Model Variables Mean Std. Dev. Min Max
1 Donation Total 2.11e+07 5,44e+07 0 2.70e+08
2 Total Donation in Revenue 763.5225 1332.59 0 6476.75
3 Announce Layoffs to Total Employees Score 0.45 1.14. 0 5.74
4 Delta Employee 2146.6 7161.38 -11000 25200
5 Policy Community Involvement Score 55.87 15.23 0 73.75
6 Corporate Responsibility Award Score 59.04 38.18 0 88.53
7 Social Pillar Score 54.60 18.63 0 91.57
8 Community Score 73.05 22.63 0 99.71
9 Number of Employee 36802 46748.54 36 241130
10 Total asset 7.52e+07 1.73e+08 469457 8.37e+08
11 ROE (%) 19.35 14.05. -6.647 58.947
Panel A: M&A=1
Model Variables Mean Std. Dev. Min Max
1 Donation Total 8.61e+07 4.75e+08 0 3.01e+099
2 Total Donation in Revenue 3852.50 15834.34 0 99356.25
3 Announce Layoffs to Total Employees Score 1.24 2.66. 0 12.33
4 Delta Employee -896.55 6842.60 -37000 9500
5 Policy Community Involvement Score 55.30 16.55 0 72.61
6 Corporate Responsibility Award Score 39.59 457.12 0 79.21
7 Social Pillar Score 53.75 18.56 12.39 85.37
8 Community Score 75.62 17.00 29.80 99.39
9 Number of Employee 27806 29730.08 408.44 127177.2
10 Total asset 4.46e+07 1.29e+08 1774433 8.18e+08
11 ROE (%) 26.71 43.56 -4.28 267.67
Panel B: M&A=0
Table 2
Regression results of models 1-8 for Panel A (M&A=1) and Panel B (M&A=0); Testing Hypothesis 1.
Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8
VARIABLES Donation Total Total Donation in Revenue
Announce Layoffs To Total
Employees Score Delta
Employee Social Pillar
Score Community
Score
Corporate Responsibility Award Score
Policy Community Involvement Score
M&A (IV) -8.452e+07 -3545 -.802* 2804* -1.174 -4.015 -5.402 .475
(8.829e+07) (2938) (.476) (1,478) (3.995) (4.307) (8.484) (3.628)
ROE (%) -791,915 -25.37 -.00264 -10.89 -.0450 .0762** .129 .0574
(956,082) (30.63) (.00483) (20.97) (.0488) (.0354) (.0825) (.0413)
Total asset -.0738 -4.93e-06 -3.85e-10 -9.41e-06* 2.53e-08*** 3.05e-08*** 3.86e-08*** 5.31e-09*
(.168) (5.56e-06) (4.38e-10) (4.79e-06) (7.05e-09) (5.58e-09) (9.25e-09) (3.13e-09)
Number
of Employee 1789 .0470 1.15e-06 .0501** .000103* .000119** .000242** 3.96e-05
(1429) (.0481) (3.81e-06) (.0198) (5.26e-05) (5.82e-05) (9.82e-05) (3.63e-05)
Constant 5.942e+07 3405 1.292** -1,617* 50.89*** 68.82*** 42.19*** 52.40***
(6.736e+07) (2256) (.553) (923.0) (3.936) (3.661) (7.681) (4.009)
Observations 80 80 80 80 80 80 80 80
R-squared .055 .048 .039 .126 .133 .161 .120 .029
Robust standard errors in parentheses
*** p<0.01, ** p<0.05, * p<0.1
Table 3
Regression results of model 1-8 for Panel C (Change in management=1); Testing Hypothesis 2.
*(This table continuous on the next page)
Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8
VARIABLES Donation Total Total Donation in Revenue
Announce Layoffs To Total
Employees Score Delta Employee Social Pillar
Score Community
Score
Corporate Responsibility Award Score
Policy Community Involvement Score
M&A (IV) -7062776 -117.5 -.69 5169.87 1.72 -1.92 -41.51** -.19
(8753140) (542.82) (.92) (4445.40) (8.74) (7.96) (8.484) (4.10)
ROE (%) 286297.2 21.03 .01 215.31 .23 .176 .129 -.00
(383143.5) (25.14) (.03) (108.46) (.19) (.53) (.0825) (.10)*
Total asset 1.12 3.00e-0. 3.11e-11. 8.21e-06 3.07e-08 2.97e-08 3.86e-08*** 4.50e-09
(.01) (5.64e-07) (1.46e-09) (6.79e-06) (1.01e-08) (.03)** (9.25e-09) (4.93e-09)
Number
of Employee -206.49 -.01 7.25e-06 .04 -.00 -.00 .000242** -.00
(106.4) (.01)*** (.00)*** (.06)* (.00)*** (.55) (9.82e-05) (.00)***
Constant 7710160 347.38 .72 -9538.27 50.18 74.87 42.19*** 61.50
(7944576) (422.14) (.80) (5466.97) (11.35) (.00) (7.681) (5.41)
Observations 16 16 16 16 16 16 16 16
R-squared .69 .27 .12 .37 .18 .17 .37 .09
Robust standard errors in parentheses
*** p<0.01, ** p<0.05, * p<0.1
Table 3
Regression results of model 1-8 for Panel D (Change in management=0). Testing Hypothesis 2.
Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8
VARIABLES Donation Total Total Donation in Revenue
Announce Layoffs To Total
Employees Score Delta
Employee Social Pillar
Score Community
Score
Corporate Responsibility Award Score
Policy Community Involvement Score
M&A (IV) -1.15e+08 -4580.25 -.70 3459.18 -1.19 -3.62 4.86 1.79
(1.17e+08) (3905.41 (.57) (1735.80) (4.56) (4.94) (10.44) (4.31)
ROE (%) -708295.2 -23.56 -.00 -23.24 -.07 .06 .12 .05
(860520.5) (27.95) (.00)*** (26.15) (.03)** (.03)** (.08)* (.04)**
Total asset -.08 -5.61e-06 -5.82e-10 -.00 2.63e-08 3.20e-08 3.62e-08 2.19e-09
(.18) (5.94e-06) (5.94e-10) (4.38e-06) (1.15e-08) (7.67e-09) (1.44e-08) (4.69e-09)
Number of Employee
2444.60 .07 -1.30e-06 .05 -.00 .00 .00 .00
(2001.17) (.07)* (2.72e-06) (.02)** (.00)*** (.00)*** (.00)*** (.00)***
Constant 6.44e+07 3747.65 1.34 -1269.26 50.95 68.82 38.26 51.94
(7.66e+07) (2584.68) (.64) (915.37) (4.29) (4.08) (8.30) (4.47)
Observations 62 62 62 62 62 62 62 62
R-squared .07 .06 .03 .17 .16 .18 .12 .03
Robust standard errors in parentheses
*** p<0.01, ** p<0.05, * p<0.1
Hypotheses Testing
Table 2 and 3 report the results from the multiple-regression analysis of panel A and B. Thereby, the different models have all been tested independently in relation to their involvement in M&As. Model 1-8 represents the results for the dependent variables, and ROE, Total Asset and Number of Employee represent the confounding variables.
A few significant results can be found in relation to the confounding variables. In particular, model 5, 6 and 7 show a significant result for the variable Total Asset. Further examination presents the following result for testing the Hypotheses:
Hypothesis 1. The results present no support for H1, which anticipates that there is no
significant empirical evidence identifying that M&As may create a negative impact for the well-being of a local community.
While the overall result does not show a strong enough significance to support the hypothesis 1, model 4 shows a slight significance when tested at the 10% level. Here, companies involved with an M&A count an increase in their employees in the three years after the operation took place (ß = 2803, p = .062). Beyond that, no significance can be observed.
Hypothesis 2. The results present no support for H2, which predicted that it is likely that a change in the management team, following an M&A may affect the local community’s well-being in a negative way. While, similar to the first hypothesis, the overall results do not show a significant outcome in order to support the hypothesis 2, however, model 7 reports a slight significance when a change in the management team took place (ß = -41.51, p = .04).
Hence, a change in the management team following a M&A may have a possible negative influence on the CSR performance of a firm involved in an M&A.
Discussion
