VCU study identifies causes of executive turnover after M&As

By Tom Gresham

Pre-merger performance and the nature of merger negotiations are among the key indicators of long-term leadership instability in target companies following mergers and acquisitions, according to a Virginia Commonwealth University study in the Journal of Business Strategy.

The study, “Brain Drain: Why Top Management Bolts After M&As,” analyzes factors that can lead to abnormally high turnover rates among target company executives – turnover that may continue for 10 or more years after the acquisition. The new research examines a range of factors that can promote long-term leadership instability such as merger characteristics, the nature of merger negotiations, growth and profitability of the target company, headquarters location of the acquirer – whether foreign or domestic – and the foreign investment experience of the acquirer.

“Most firms involved in merger integration understand the importance of reestablishing an effective top management team after an acquisition,” said Jeffrey A. Krug, Ph.D., associate professor of strategic management in the VCU School of Business and author of the study, which appears in Vol. 30, issue 6, November/December issue of the journal. “However, few firms understand the causes of long-term executive turnover after a deal and how to manage it.”

Among Krug’s findings:

• The nature of merger negotiations is especially critical. Unfriendly negotiations, for instance, “create ill feelings among incumbent executives that often spill over to executives who join the firm years later.”
• Poor performance in target companies before an acquisition foreshadows higher-than-normal executive turnover rates that can last 10 or more years after a deal. This suggests that poor performance and leadership instability can become embedded in a firm’s culture. Improving performance in the firm becomes a difficult task for an acquirer when such leadership instability exists.
• Cross-border transactions slow the integration process. Foreign acquirers tend to take the first two years following the deal to observe the target’s operations before initiating major strategic changes; domestic acquirers move more quickly.

“Brain Drain” follows Krug’s 2008 study, “The Big Exit: Executive Churn in the Wake of M&As,” also published in the Journal of Business Strategy (Vol. 29, Issue 4, July/August 2008). This study analyzed patterns of target company executive turnover in more than 1,000 firms and demonstrated that many mergers and acquisitions destroy leadership continuity in target companies’ top management teams for at least a decade following the deal.

Complete copies of both “The Big Exit” and “Brain Drain” are available at http://www.emeraldinsight.com/jbs.htm, the web site of the Journal of Business Strategy, published by Emerald Group Publishing Limited.