jurnal internasional

The role of human resource management in
cross-border mergers and acquisitions
Ruth V. Aguilera and John C. Dencker

Abstract Cross-border mergers and acquisitions (M&As) have become the dominant
mode of growth for firms seeking competitive advantage in an increasingly complex and
global business economy. Although human resource management (HRM) can play a
value-adding role in the merger process, existing research and evidence does not clearly
demonstrate how it can do so. This paper addresses the neglected human side of M&As by
providing a strategic fit framework to assess the link between M&A strategy and HRM
strategy. Because cross-border M&As are of an order of magnitude more complex than
domestic mergers, we examine contingencies in national contexts that influence outcomes
in the merger process. We draw on recent empirical evidence to highlight HRM roles in
terms of resources, processes and values that reflect the influence of both strategic fit and
national context in the integration stage of cross-border M&A.
Keywords Human resource management; mergers and acquisitions; corporate
governance; international management; varieties of capitalism.
Introduction
Mergers and acquisitions (M&As) have become the dominant mode of growth for firms
seeking competitive advantage in an increasingly complex and global business economy
(Adler, 1997). Nevertheless, M&As are beset by numerous problems (Newburry and
Zeira, 1997), with 50 per cent of domestic acquisitions – and 70 per cent of cross-border
acquisitions – failing to produce intended results (Capron, 1999). Scholars have
examined these problems in terms of strategic market entry choice (Hennart and Park,
1993), market valuations (Jensen and Ruback, 1983), value creation (Haspeslagh and
Jemison, 1991) and firm performance (Galbraith and Stiles, 1984; Chatterjee, 1986;
Blackburn and Lang, 1989), finding that difficulties in M&As trace to a lack of a
compelling strategic rationale, unrealistic expectations of possible synergies and paying
too much for acquired firms. However, although financial and strategic studies have
significantly increased our knowledge of M&As, this research is incomplete, in large
measure due to a failure to account for personnel issues.
Frequent callswithin the human resourcemanagement fieldand international business, to
study the human side of international M&As, have generated studies exploring the role of
HRM in M&As, such as studies of personnel issues surrounding M&As that focus on top
management turnover following an acquisition (Walsh, 1988; Krug and Hegarty, 2001).
The International Journal of Human Resource Management
ISSN 0958-5192 print/ISSN 1466-4399 online q 2004 Taylor & Francis Ltd
http://www.tandf.co.uk/journals
DOI: 10.1080/0958519042000257977
RuthV. Aguilera, Department of Business Administration, College of Business and Institute of Labor
and Industrial Relations, University of Illinois at Urbana-Champaign, 1206 South Sixth Street,
Champaign, IL61820, USA (tel: þ217 333 7090; fax: þ217 244 9290; e-mail: ruth-agu@uiuc.edu).
John C. Dencker, Institute of Labor and Industrial Relations, 504 E. Armory Avenue, Champaign, IL
61820, USA (tel: þ217 333 2383; e-mail: dencker@uiuc.edu).
Int. J. of Human Resource Management 15:8 December 2004 1355–1370
However,most of the existingresearchwithin theHRMfieldrelies onanecdotal evidence of
personnel issues in M&As, resulting in little systematic theory (Hunt and Downing, 1990;
Buono and Bowditch, 1989; Marks and Mirvis, 1998) that focuses on domestic M&As.
Inpart, this lackof attentionwithregardtoHRMinM&As stems fromthemarginal role that
CEOs have designated to the HRMfunction inM&As, particularly in the early stages of the
M&A process. Perhaps reflecting the sometimes low relative standing of the personnel
functionwithin the firm, theM&Aliteraturehas focused primarily on financial duediligence
and strategic issues in the merger process, with HRM being an afterthought that becomes
relevant only in the integration stage of an M&A when the merger is implemented.
The failure to account for personnel issues is somewhat surprising since HRM has the
potential to play an important role in M&A integration, for example, by managing
personnel conflict, reinforcing the newHRM systemand corporate culture and providing
leadership and communication to reduce turnover. Yet, the literature does not tackle from
a theoretical point of view how HRM systems and practices create value by helping to
realize potential post-merger synergies. We argue that the strategic literature provides a
useful starting point, since the role of HRM in an M&A will be conditional upon the
strategic rationale chosen by the merging firms. In particular, HRM strategies in
the integration stage of an M&A should be tightly aligned to the undertaken M&A
strategy in a manner that enhances the likelihood of successful M&A outcomes. For
example, staffing decisions will differ depending on whether the M&A strategy requires
the elimination of redundancies or, conversely, the preservation of human capital and
knowledge. We examine the fit between M&A strategy and HRstrategy by looking at the
effects of organizational resources, processes and values in the M&A integration stage.
An additional difficulty for HRM in merger integration is that realizing synergies is
often much easier in domestic M&As than in cross-border M&As. In particular, given
difficulties inmanaging fit among various HRM practices in individual firms (Wright and
Snell, 1998), integrating HRM systems from different national and organizational
contexts is likely to create a myriad of uncertainties. In principle, we would agree that the
uniqueness of national environments makes the role of HRM in cross-border M&As
differ significantly from M&As occurring within countries. Without claiming a
convergence argument, we acknowledge that differences between firms in the
international arena are largely a matter of degree, as pointed out by Sparrow et al.
(1994). That is, even though evidence indicates that many HRM practices in cross-border
M&As tend to converge on a single best model – making the role of HRM more
predictable – it also demonstrates that other practices implemented in the integration
stage retain the country-specific characteristics of one of the merging firms (Child et al.,
2001; Faulkner et al., 2002). As Child and colleagues note, the issue of integration
‘involves considering not just “how much?” but also “on the basis of which practice?”’
(2001: 17).
In effect, M&A integration is especially difficult in cross-border M&As due to the
embeddedness of firms undergoing acquisitions in their respective national contexts.
Thus, in order to understand the role that HRM plays in contributing to the success of
cross-border M&As, it is important to consider not only the fit between M&A strategy
and HRM strategy, but also the contingencies at the national level in the merger process.
By so doing, we can obtain an assessment of ‘the “fit” between environmental conditions
and the structure and strategies that firms put in place’ (Child et al., 2003: 244).
National contexts have been categorized along many dimensions, such as legal
(La Porta et al., 1998), cultural (Hofstede, 1980), financial (Zysman, 1983), employment
systems (Marsden, 1999), economic organization and control (Whitley, 1999) or
corporate governance regimes (Aguilera and Jackson, 2003). Following Hall and Soskice
1356 The International Journal of Human Resource Management
(2001), we divide countries into two broad categories that encompass most economic and
social aspects of firm life. We propose that, when the two merging firms belong to the
same country group, HRM strategic fit will be different than when the two merging firms
belong to two different country groups.
In sum, we suggest that it is incumbent to further understand not only the ‘what’ and
‘how’ of acquisition strategy – such as the role the HRM function plays – but also
‘which’ HRM elements lead to expected outcomes for cross-border merged firms. This
paper is a theoretical attempt to get at these issues. We begin by analysing strategic
rationales for different types of M&As, examining the fit between M&A strategies and
HRM strategies. We then consider how personnel issues are contingent upon the
embeddedness of mergers within the broader institutional context. Based on these
contingencies and strategies, we specify broad roles of HRM in the integration stage of a
cross-border M&A as they relate to organizational resources, processes and values when
a merger takes place within as well as across national groups. Finally, because the HRM
practices that we discuss do not exhaust all possible types, we conclude by discussing the
validity of our framework in other contexts.
Strategic fit between M&As and HRM
The strategicHRMliterature posits the importance of aligning a firm’sHRMstrategy toits
business strategy (Fombrun et al., 1984; Schuler and Jackson, 1987). Based on Chandler’s
(1962) notion that organizational structure follows an organization’s strategy, Fombrun
and colleagues (1984) emphasize that there is a tight fit between strategy, structure and
HRM, with strategy being the dominant force. Schuler and Jackson (1987) confirm this
strategic fit notion, showing that firms that differed in their strategies would use the same
HRM practices in different ways and that firms that changed strategies were likely to
change their HRM practices. Similarly, Sanz-Valle and colleagues (1999) find a link
between some HRM practices and business strategy in a study of Spanish companies.
We argue that, for merging firms to integrate successfully, they need to align their
HRM strategy to their M&A strategy. Thus, it is important to have a clear understanding
of M&A strategies to be able to specify the role that HRM should play. Moreover, in
order to consider the fit between M&A and HRM strategies, and to help make sense of
HRM challenges in the different types of M&As, we rely on three conceptual tools:
resources, processes and values (Bower, 2001). Resources are defined as tangible assets,
such as money and people, and intangible assets, such as brands and relationships. In the
context of HRM in M&As, decisions about resources involve staffing and retention
issues, with termination decisions being particularly important. Processes refer to
activities that firms use to convert the resources into valuable goods and services. For
example, in our case, these would be training and development programmes as well as
appraisal and rewards systems. Finally, values are the way in which employees think
about what they do and why they do it. Values shape employees’ priorities and decisionmaking.
Below, we analyse key issues in the strategic literature with regard to M&As in light
of recent research by Bower (2001) and on M&A strategies. We identify the fit between
this M&A typology and HRM strategies and practices by using the resources, processes
and values framework.
Strategies for M&As
Firms can undertake a number of common M&A strategies in order to obtain competitive
advantage. For example, scholars have profitably used the Federal Trade Commission
Aguilera and Dencker: HRM in cross-border mergers and acquisitions 1357
(FTC) typology of M&As developed in the 1970s – namely horizontal, vertical, product
extension, market extension and unrelated M&As (Federal Trade Commission, 1975) –
to study the M&A process (Buono and Bowditch, 1989). However, the merger climate of
the 1990s has led to the creation of newforms of M&A strategies that are not adequately
captured in the FTC framework. Thus, in this article we refer to Bower’s (2001) recent
strategic M&A typology, which was established by a group of scholars who conducted an
extensive yearlong study of firms involved in M&As. This typology captures effectively
the nature of cross-border M&As that were occurring during the 1990s, and it allows us
to provide the necessary theoretical link between business and HRM strategies through
considering decisions of firms involved in this transaction process.
Bower (2001) proposes five distinct M&A strategies: (1) the overcapacity M&A;
(2) the geographic roll-up M&A; (3) the product or market extension M&A; (4) the
M&A as R&D; and (5) the industry convergence M&A. We discuss each of themin turn,
highlighting the potential general HRM implications in terms of resources, processes and
values.
An overcapacity M&A occurs when an acquiring company seeks to eliminate excess
capacity to create a more efficient corporation. In effect, the acquiring company’s
strategic goal is to achieve economies of scale in order to gain market share, doing so in
part by eliminating human resources. This type of M&A often arises in oligopolistic
industries characterized by excess capacity and involves firms of similar size. For
example, there have been a number of overcapacity M&As in the petroleum sector (e.g.
British Petroleum’s acquisition of Amoco) and the automobile sector (e.g. Daimler’s
acquisition of Chrysler). An important concern in this type of M&A is that, although
processes and values of the merging entities are frequently similar, relative status
differences stemming from a merger of near equals can create problems in M&A
integration.
A geographic roll-up M&A takes place when companies seek to expand
geographically, often with operating units remaining at the local level. In many
instances, large companies acquire smaller companies that they try to keep intact and
therefore these firms tend to retain local managers. These types of M&As are common in
the banking sector, as exemplified by Banc One’s acquisitions of several regional banks.
Although these M&As are similar to overcapacity M&As in that both involve
consolidation of businesses, they differ significantly in that geographic roll-up M&As are
more likely to occur at an earlier point in an industry’s life-cycle. Strategically, roll-ups
‘are designed to achieve economies of scale and scope and are associated with the
building of industry giants’ (Bower, 2001: 98), while overcapacity M&As seek to reduce
capacity and duplication. Although in geographic roll-up M&As human resources are
less disposable, the processes and values of the merging entities are likely to differ more
than in the overcapacity M&A. Nevertheless, since the size of the acquirer tends to be
greater than that of the acquired firm, conflict stemming from status differences is
possibly not as prevalent as in the overcapacity M&A.
A product or market extension M&A involves expanding product lines or expanding
geographically across borders. This type of M&A occurs when the acquiring and
acquired companies are functionally related in production and/or distribution but sell
products that do not compete directly with one another, or when a company seeks to
diversify geographically, such as when two companies manufacture the same product,
yet sell it in different markets (Buono and Bowditch, 1989: 63). In effect, in this type of
M&A, firms seek to achieve long-term strategic goals by investing in less saturated
markets – often doing so to obtain economies of scale necessary for global competition
(Weston et al., 2001: 350). The likelihood of success of product or market extension
1358 The International Journal of Human Resource Management
M&As depends on the relative size of the merging firms and the experience of the
acquired firm in M&As. For example, large firms such as GE acquire many relatively
small firms, thereby increasing their chances of subsequent successful mergers.
Similarly to in the geographic roll-up M&A, human resources in product or market
extension M&As frequently remain unchanged in the newentity. However, in product or
market extension mergers, some firms have difficulties in changing the processes and
values of acquired firms, particularly in cross-border M&As. For example, Marks &
Spencer experienced geographical distribution problems when it acquired the Canadian
firm Peoples Department Stores (Bower, 2001). By contrast, when GE acquired the
Italian engine producer Nuovo Pignone in 1992, it introduced its systems only
sequentially over time (Bower, 2001). What GE felt was most crucial in the short term
was for Nuovo Pignone’s managers to use GE’s resources to develop their business.
An M&A as a substitute for R&D occurs when acquisitions are used as a means of
gaining access to new R&D knowledge or technological capabilities by acquiring
innovative firms rather than producing the knowledge in-house (Granstrand and
Sjolander, 1990). Acquiring firms in this type of M&A tend to be larger than the acquired
firm, and sometimes have significant practical merger experience, as in the case of
Microsoft and Cisco Systems.
In anM&Aas a substitute for R&D, the retention of human resources and knowledge is
a paramount goal. Processes andvalues of the newly formed entitywill, however, probably
need to be changed, a complex proposition since the entrepreneurial employees often feel
their values are constrained by the more bureaucratic structure of the acquiring firm.
The success of this type of cross-border M&A will therefore depend on the acquired
firm’s integration capabilities andthe acquiringfirm’s learningcapacity. Integration issues
will, however, be industry contingent. For example, the product development cycle is
often much shorter in information technology (IT) firms than in pharmaceutical firms,
indicating the need for more rapid integration in M&As in the IT industry.
An industry convergence M&A involves creating a new industry from existing
industries whose boundaries are eroding. An example of this type of M&A is the Viacom
acquisition of Paramount and Blockbuster. Although this type of merger will probably
increase in the future, it is rare and not yet fully understood, making it difficult to analyse.
In addition, acquired companies in this type of merger are typically given wide berth,
perhaps to a greater extent than in the M&As as a substitute for R&D, with integration
driven by a need to create value rather than a desire to create a symmetrical organization.
In sum, the brief discussion above demonstrates that each M&A strategy would
involve different HRM strategies. In the next section, we include another layer of
complexity by bringing in the influence of the national context.
The environmental context of cross-border M&As
Contingency theory suggests that firm strategies and structures will be dependent upon
environmental conditions, the more varied the environment the more differentiated the
structure (Lawrence and Lorsch, 1967). As certain parts of an organization are more open
to environmental influences, the effect of the broader context on organizational structure
will vary within organizations. For example, Schuler and Jackson (1987) argue that
managerial practices need to be aligned with environmental demands so that desired
work behaviours arise, and Schuler (2001) shows how this notion can be effectively
implemented in international joint ventures.
In effect, organizations are embedded in national and supra-national environments
that can provide a source of competitive advantage for, as well as act as a constraint on,
Aguilera and Dencker: HRM in cross-border mergers and acquisitions 1359
cross-border M&As. For example, environments influence business practices through
legal systems such as the case of the European Commission, which objected to the $37
million marriage between two American telephone companies, MCI and WorldCom.
The result is that organizations do not operate in a vacuum; rather, they are located within
certain national boundaries. The key therefore is to discern when and how the national
environment influences cross-border M&As.
The notion of embeddedness suggests that environmental characteristics such as
institutions or culture influence organizational strategies and structures. National culture
is often reflected in a country’s organizational and managerial practices, such as
individual performance awards, team-oriented, short-term results and decentralized and
informal organizational structures (Schneider, 1989). Countries perceived to be similar
or compatible along national cultural dimensions and business styles tend to engage in a
higher rate of business partnerships among themselves (Cartwright and Cooper, 1993).
Firms that engage in cross-border M&As therefore need to be aware of the possible
consequences of national cultural differences, as is suggested by cross-cultural
managerial studies showing that behaviours such as individualism and openness to
foreign cultures differ across national boundaries (Adler et al., 1986) and might influence
cross-border M&As (Gersten et al., 1998).
National cultures are part of a broader institutional environment that also
influences how much room for transformation that merging firms have.
National institutional effects include but are not limited to: the country characteristics
of the state; the financial system; education and training systems; labour–management
relations (Berger and Dore, 1996; Hollingsworth and Boyer, 1997; Whitley and
Kristensen, 1997). All of these nationally embedded institutional settings will
differ across countries, providing country-specific firm capabilities and performance
profiles (Porter, 1990; Sorge, 1991; Whitley, 1999). Consequently, when two
firms belonging to two different countries merge, we should expect some influence
from the national environment, although the contingent environmental effects
will depend on how different these two countries are along a number of
important dimensions. At an abstract level, nations can be divided into two types
based on the institutions characterizing their financial and labour market systems: liberal
market economies (LME) and co-ordinated market economies (CME) (Hall and Soskice,
2001; Gospel and Pendleton, 2003).
LME countries are distinguished by competitive market arrangements, with supply
and demand forces having a large impact on organizational outcomes and processes.
In terms of financial systems, LMEs often are seen as ‘shareholder value’ nations,
with performance measured by market value, returns evaluated on a short-term basis
and the state rarely intervening in the economy. In effect, in these nations, the market
for corporate governance focuses on current earnings, with regulatory regimes being
tolerant of M&As. Hall and Soskice (2001) note that, among OECD nations, the
following countries can be classified as LMEs: Britain, the US, Australia, Canada,
New Zealand and Ireland.
In contrast to LMEs, CMEs – such as Germany, Japan, Switzerland and the Benelux
and Scandinavian countries – are characterized by non-market relationships (Hall and
Soskice, 2001). In these ‘stakeholder capitalism’ national models, employees, suppliers,
customers and financial institutions are part of the context within which the overall firm
is judged. The market for corporate governance is such that firms are not entirely
dependent on publicly available financial data or current returns. Thus, firms can be more
long-term oriented and the network of relationships among stakeholders will restrict
M&As in a number of ways.
1360 The International Journal of Human Resource Management
Arecent example highlighting the differences in corporate governance between LMEs
and CMEs is the successful hostile takeover bid of Mannesmann (German) by Vodafone
(English) in 1999. Vodafone not only had to deal with codetermination, but also with an
entirely different ownership structure influenced by banks, opaque accounting and
disclosure rules, a two-tiered board structure with a strong orientation towards consensus
decision-making, different company laws, a German corporate culture with a strong
orientation towards production and engineering, and a relatively weak ‘equity culture’
(Hopner and Jackson, 2001).
Adjustments to the national institutional environment are also salient in the HRM
field. For instance, HRM practices in CMEs ‘include more restricted employer
autonomy, difficult hiring and firing decisions, lower geographic and professional
employee mobility, and a stronger link between type of education and career
progression’ (Sparrow et al., 1994: 286). In CMEs, firms are obligated to protect
employee rights, collective bargaining tends to be co-ordinated, minority shareholders
are poorly protected in favour of large owners and corporate returns tend to be measured
on a long-term basis. For instance, in German industrial organization, works councils
police collective bargaining agreements and training policies inside the companies and
have a legal right to intervene in work reorganization (Casper and Hancke´, 1999).
In addition, German workers tend to have flexible portable skills learned through the
vocational training system. By contrast, in LMEs, industrial relations are characterized
primarily by open labour market relationships, with firms having the freedom to hire and
fire employees almost at will and collective bargaining being uncoordinated and taking
place at the firm level. Training and education in LMEs frequently occurs in schools and
universities, with skills acquired by employees being relatively general, in part because
investment in firm-specific skills can be lost due to poaching.
In the next section, we examine how M&A strategies determine the role of the HRM
function for merged entities in these two main national groups: liberal market economies
(LME) and co-ordinated market economies (CME). Although the countries we examine
do not exhaust all possible types, firms within these market economies have undertaken
the majority of large cross-border M&As in the industrialized world. Perhaps as a result,
evidence on HRM practices and policies that are enacted during the M&A process are
most prevalent for countries in these two economic types (Larsson and Finkelstein, 1999;
Birkinshaw and Bresman, 2000; Child et al., 2001; Faulkner et al., 2002).
The role of HRM in cross-border M&As
Before conducting our analysis, we briefly review the nature of the merger process.
The literature has dissected the M&A process into three main stages: pre-announcement;
pre-merger; and integration. The pre-announcement stage involves due diligence. Issues
discussed among potential merging firms in this stage areM&A strategy and the financial
structure of the deal. The pre-merger stage occurs between the announcement of the
merger and its closing date and includes planning for the integration, such as
communicating expected roles in the newly formed entity. The integration stage implies
the physical integration of the various elements of the M&A following the closing date,
including personnel.
In theory, HRM can have an influence on the success of M&As in each stage of the
process. For example, during the pre-merger stages, HRM tends to focus on ensuring
legal compliance, such as with regard to equal opportunity and collective bargaining
agreements (Mirvis and Marks, 1992). HRM can also begin the planning process
following deal announcement, for instance by managing retention agreements and
Aguilera and Dencker: HRM in cross-border mergers and acquisitions 1361
assessing compensation differences between the potentially merging entities. Nevertheless,
evidence and practice indicate that the main role in which HR can influence
M&As is in the integration stage, when M&A practices and policies are implemented.
As Child and colleagues (2001) state, the attention ‘to human resources is particularly
important following an acquisition, the more so if cultural differences are involved’.
As noted, these differences will affect many of the firm practices and policies, often due
to variation in the nature of integration across countries. In the following section, we
examine the role of HR in the integration phase of cross-border M&As.
Integration stage
An important consideration for HRM in implementing M&As is the level and speed of
integration. Two key dimensions identified by Haspeslagh and Jemison (1991) are
important in this regard: the need for strategic interdependence or fit and the need for
structural autonomy. Based on these two dimensions, they created a four-fold typology of
the degree of integration, which also depends on the size of the acquiring firm relative
to the acquired firm. With respect to cross-border M&As, Child and colleagues (2001)
find differing levels of integration across countries, ranging from no integration, to
partial integration, to full integration. For example, they demonstrate that firms in the US
and the UK integrate their subsidiaries to a greater extent than do firms in Japan,
Germany and France. Similar cross-country variation may be found in terms of
integration speed, as Empson (2000) argues that gradual integration is important for
success in mergers between professional service firms.
We examine the role of HRM in the integration phase of cross-border M&As through
the lens of the resources, processes and values framework. This framework encompasses
HRM practices and policies, such as Poole’s (1990) culture, organizational structure,
performance management, resources and communication and corporate responsibility
categories and Pucik’s (1988) HR planning, staffing, training and development, appraisal
and rewards and organizational design and control dimensions. As the number of HRM
practices involved in an M&A can be endless, we pay particular attention to staffing and
retention when we refer to resources, to training and development, appraisal and reward,
as well as other HRM systems and practices when we refer to processes, and to national
and organizational culture at work when we refer to values. In addition, we focus on the
followingM&A strategies: overcapacity M&As, product or market extension M&As and
M&A as R&D. We do not discuss the geographic roll-up M&A because these mergers
rarely take place across borders, and we do not discuss the industry convergence M&A as
it is relatively new and occurs infrequently. For comparative purposes, we begin our
analysis of each M&A strategy within the same country group (i.e. CME–CME or
LME–LME) and continue with a discussion of M&A strategy between firms belonging
to different national groups (i.e. CME–LME or LME–CME). This systematic
comparison of the three M&A strategies, as exemplified in Table 1, allows us to draw
sharp comparisons of how national contexts influence cross-border M&As.
Overcapacity M&As
Resources In overcapacity M&As, large-scale lay-offs are inevitable. Thus, the HRM
function will have to decide quickly upon a downsizing strategy, with planning and
staffing duties – such as outplacement programmes – critical to the success of the
merger. The focus on human resources is not, however, solely on downsizing, as
retention issues might also play a key role. For example, Walsh (1988) and Buono and
Bowditch (1989) argue that top management turnover will be higher in related mergers
1362 The International Journal of Human Resource Management
Aguilera and Dencker: HRM in cross-border mergers and acquisitions 1363
(e.g. overcapacity M&As) than in unrelated ones because management is familiar with
the acquired firm’s business in related mergers.
Downsizing in overcapacity M&As will also be contingent on the countries involved
in the M&A, with LMEs having fewer institutional constraints on lay-offs than CMEs –
although some variation exists in the use of lay-offs within market economies.
For example, within LMEs, firms in the US tend to have a more short-term focus with
respect to recruitment and termination than do UK firms (Child et al., 2001). However, in
the case of M&As involving countries from two different market economies, acquiring
firms will be more constrained when the acquired firm is in a CME, in large part because
of legal protection offered in these countries to employees, but also due to a long-term
view of employment relations among actors in these labour markets.
Processes In domestic overcapacity M&As, there is often little change made to HRM
processes. For example, Child et al. (2001: 89) show that, in mergers between UK firms,
the acquiring firm made relatively few changes to their practices relative to changes
made by foreign firms that purchased UK firms. Similarly, when firms belong to the same
market economy type, they will also experience little transformation in processes. Thus,
UK firms were found to be closely related to US firms in the nature of their HRM
systems, such as the use of pay for performance systems, as well as other practices and
management styles (Child et al., 2001: 178). These similarities stem in part from
common values held by firms that are located in the same country type.
When an M&A occurs across market economies, strategic fit issues become more
complex, as exemplified in the well-known example of a CME firm purchasing an LME
firm – the Daimler-Chrysler M&A. This merger shows similar characteristics to
domestic overcapacity M&As in that it was a merger of near equals, with conflict arising
over numerous issues, including HRM. For example, Daimler-Benz paid executives
much less than did Chrysler, making it necessary to adjust the various performance
systems. This issue also highlights the contingency of transformation processes on the
nationality of the acquiring firm, with firms in LMEs more likely to change processes in
acquired firms than firms in CMEs. In the Daimler-Chrysler M&A, Daimler executives
felt that it would be impossible to raise the pay of German executives to the level
received by the American executives, in no small part because of pressures that would
arise from German works councils. Nevertheless, there is some evidence of convergence
among other practices – particularly in terms of increased use of teams and training
systems – for LME firms in cross-border M&As, as Child and colleagues (2001) find in
the case of Japanese and German CME firms that acquired firms in the UK.
Values Bower (2001) notes that overcapacity M&As are predominantly mergers of
near equals, with slight differences in values creating conflict and therefore difficulties in
integrating the merging firms. In particular, overcapacity M&As can be difficult to
accomplish because of the entrenched processes and values of the firms in the industries
in which overcapacity is common. For example, problems may occur in this type of
merger strategy because the ‘loser’ in this situation may make things difficult for the
acquiring firm.
The Daimler-Chrysler merger highlights how national differences across market
economies can exacerbate conflict stemming from a merger of near equals. For example,
typical of large German firms, Daimler was a bureaucratic organization that relied
heavily on rules and procedures to manage employees. By contrast, Chrysler had a more
decentralized decision-making apparatus and was more flexible. Thus, in addition to
national culture differences (e.g. having wine with lunch), variation in ways of managing
and organizational values created problems in the human dimension of this merger
1364 The International Journal of Human Resource Management
(Vlasic and Stertz, 2000). Obviously, in M&As, plans may change as the merger process
unfolds. However, as seems to be evident in the Daimler-Chrysler merger, top managers
at Daimler Benz knew from the beginning that they would eventually possess all top
positions in the merged entity, but neglected to make this known until a few years into the
merger. As a result, a number of key executives have left the firm, highlighting
the important role that both trust and communication play in the merger process,
particularly in M&As across market economies.
Product or market extension M&As
Resources In terms of human resources, HRM strategies in product or market
extension M&As often involve lay-offs, although the focus will be primarily on
retention. That is, lay-offs will not be the overriding goal of acquiring firms since there
tends to be little overlap between firms due to the strategic intent of the merger, which
involves purchasing new product lines or expanding into new markets.
As in overcapacity M&As, there is some variation across countries in the extent of
lay-offs in product or market extension M&As. For example, within LMEs, firms tend to
be more short-term oriented towards resources, with US firms that acquired UK firms
more likely to reduce staff than in acquisitions across market economies (Child et al.,
2001). By contrast, Child and colleagues show that when CME firms purchase LME
firms, they take a laissez faire attitude, with German and Japanese firms tending to leave
the UK acquisitions as they were, reflecting the CME long-term orientation to staffing
and, to a certain extent, cultural traits. Although there is less empirical evidence for the
case of acquisitions of CME firms by LME firms, there is perhaps a discernible trend
towards retention of human resources. For example, GE often takes a long-term focus
when it undertakes cross-borderM&As, in part as a response to past negative experiences.
The protection offered to employees in CMEs also plays a role in this regard.
Processes There is more variation in processes across firms in product or market
extension M&As than in overcapacity M&As, thus suggesting the need for altering
business and HRM systems and practices. That is, although the products among merging
firms do not overlap, processes related to the manufacture and distribution of these
products may necessitate some changes in other systems. For example, advertising and
distribution processes in Quaker Oats were unsuited for Snapple’s product line
(Bower, 2001), with these systems being changed in an attempt to make the merger work.
This tendency to integrate processes held for M&As within LMEs, with US firms
transforming a number of HRM practices in UK firms, for example, by reducing
the number of managerial hierarchical levels and by increasing the use of job rotation
(Child et al., 2001).
In general, the desire for process transformation will reflect the market economy of the
acquiring firm, with LMEs much more likely to integrate an acquired company fully
relative to CMEs. As noted, the literature shows that Japanese and German firms were
more likely to bring acquired UK firms into the fold only slowly, if at all, although
they were more likely to increase the use of training than acquiring firms from LMEs.
For example, Child and colleagues (2001) illustrate how a German pharmaceutical firm
obtained a new product line by acquiring a UK firm. The UK firm retained autonomy
over many decisions and practices, but the German firm did set up a training programme
in the UK firm.
Obviously, the long-term focus by CME acquiring firms reflects country-specific
characteristics, but it may also stem from a lack of experience on the part of acquiring
firm, as was the case for a number of Japanese acquisitions of UK firms in the Child
Aguilera and Dencker: HRM in cross-border mergers and acquisitions 1365
study. Similarly, acquisitions of CME firms by LME firms involve less integration than
acquisitions of LME firms by other LME firms. For example, GE takes a more gradual
approach to transforming processes in acquisitions of CME firms than they do in
domestic acquisitions.
Values Bower notes that organizational values tend to differ more for firms engaged in
product or market extension M&As compared to firms engaged in overcapacity M&As.
However, conflict over resources and processes may be relatively lower in product or
market extension M&As, especially when the acquiring firm is larger than the acquired
firm. For instance, although Japanese firms are known for their collective-oriented values,
empirical evidence indicates that they are unlikely to force those values on acquired firms,
taking instead a subtle or soft approach to integration (Child et al., 2001). With respect
to acquisitions of CMEfirms byLMEfirms, the GE case illustrates the desire on the part of
large, experienced firms to refrain from imposing values on the acquired firm, and instead
bringing processes in line with the GE way slowly over time. Conversely, US firms were
more likely to reproduce their values in acquisitions of other LME firms.
M&A as a substitute for R&D
Resources In an M&A as a substitute for R&D, a critical component of the HRM
function is to retain valued employees. In this type of M&A strategy, acquiring firms will
purchase a company in order to obtain knowledge that is held by employees of the
acquired firm. The HRM function’s crucial role will therefore be to hold on to human and
social capital. Retention can be a challenge though, since employees in acquired firms
often receive a large remuneration from their stock sale, as was the case in many M&As
in IT firms recently.
When the M&A as a substitute for R&D involves firms from different market
economy types, the focus in terms of resources will be on employee retention to much the
same extent as in domestic M&As of this type. For example, a German manufacturing
firm that acquired an entrepreneurial UK firm retained the entrepreneur (Child et al.,
2001). Similarly, three Swedish CME firms made a concerted effort to retain employees
in acquisitions of US and UK R&D firms, with retention percentages ranging from 90 to
100 per cent of acquired employees (Birkinshaw and Bresman, 2000). This finding was
also true for firms in LMEs that acquired CME firms. For example, in Microsoft’s
purchase of the Japanese firm TITUS, Microsoft strongly supported the management
team they acquired, with a similar outcome in Cisco System’s acquisition of the Israeli
firm Pentacom.
Processes A key factor in obtaining a successful M&A as a substitute for R&D is that
HRM will be called on to set up systems to facilitate the transfer of knowledge from
the acquired firm to the acquiring firm. Specifically, the HRM function should enable
the lines of communication and develop learning processes. In addition, Bower (2001)
notes that the M&A as a substitute for R&D allows little time for slow assimilation,
because the terrain in R&D shifts rather quickly, particularly in IT-related M&As.
Thus, HRM may need to bring the new systems online quickly. One firm that
does an exceptional job in assimilating new employees is Cisco Systems. As Child et al.
(2001: 3) point out, in the merger between Cisco and Cerent Corporation,
Cisco utilized a transition team that ‘mapped’ Cerent employees into jobs at Cisco,
and communicated this information to these employees. Although integration is costly
for Cisco Systems, it prefers to acquire knowledge through M&As if the development
cycle is longer than six months.
1366 The International Journal of Human Resource Management
It is important to note that the speed of assimilation will be industry specific as well as
specific to the country of the acquiring firm. For example, the development cycle in
pharmaceutical firms is normally slower than it is in IT firms, as is the case in acquisitions
of LME firms by CME firms. Specifically, CME firms that engaged in cross-border
M&As with LME firms as a substitute for R&D tend to leave the processes in the
acquired company as they were. A risk in this hands-off acquisition style with respect to
an M&A as a substitute for R&D is that the acquiring firm may lose out on potential
synergies, as was the case for a Japanese firm that bought a UK pharmaceutical firm
(Child et al., 2001). In effect, in this instance the M&A strategy may be inconsistent
with country-specific characteristics, although it is possible that difficulties resulted
from a lack of experience on the part of the Japanese acquirer. For example, two
German firms also took a hands-off approach in their M&As as a substitute for R&D
(Child et al., 2001), yet were more successful than the Japanese acquisition was.
By contrast, the tendency among US firms – such as Microsoft and Cisco Systems – is to
assimilate the acquired firm, even if the firm is in a CME. These firms will, however,
make exceptions to a full integration policy. For example, Cisco Systems is willing to
pursue a hands-off policy with respect to certain practices if the systems of the acquired
firm are superior to those of Cisco.
Values Assimilation in an M&A as a substitute for R&D can be challenging since the
acquiringfirm is likely to bemorebureaucratic than the acquired firm, andbecausethe values
of themerging firms, while similar, can create negative effects. For example, Bower (2001)
notes that smaller, entrepreneurial firms will probably feel constrained once acquired,
nomatter how much attention is paidto integration. Nevertheless, ingeneral, firms involved
in an M&A as a substitute for R&D may hold similar values irrespective of the countries
in which the firms are headquartered, particularly in IT firms. This similarity in values
reflects the importance of knowledge and ideas in the production process, to the extent that
industry values reduce problems resulting fromdifferences in country-specific values.
Discussion and conclusion
In this paper we develop a strategic fit framework to examine the strategies and
contingencies of cross-border M&As. We do so by aligning the role of HRM crossborder
M&As – in terms of resources, processes and values – to the M&A strategy that
firms adopt, conditional on country-specific characteristics of acquiring and acquired
firms. Confirmation of the usefulness of our framework comes from a variety of broad
empirical studies.
Althoughwehave supported our discussions of strategicfit andcontextual contingencies
with existingrobust empirical studies, there are always exceptions to the rule andvariations
within countries (Whitley, 1999) and country types. In particular, although at a broad level
practices such as pay-for-performance systems are common across market economy
types, at a more refined level there are non-trivial differences that HRM has to
manage. For example, Campbell (1999) notes that the compensation systems in the
BP Amoco merger – which involved two firms in LMEs – had to be redesigned because
theydiffered significantly. He alsonotes that otherHRMprocesseswere altered, such as the
creation of a new job structure framework. Thus, even firms in countries within the same
market economic type will experience some degree of localization in HRMpractices and
policies and therefore may need to adjust the role of HRM accordingly.
The M&As examined in this paper are representative of the majority of the largest
mergers occurring in recent decades in the industrialized world, yet do not exhaust all
such M&As. For example, large M&As are fairly common in what Hall and Soskice
Aguilera and Dencker: HRM in cross-border mergers and acquisitions 1367
(2001) call Mediterranean market economies (MMEs), such as France, Spain and Italy.
MMEs can be seen as a hybrid between CMEs and LMEs, with financial policies being
similar to those in LMEs and labour market policies similar to those in CMEs. Although
we do not consider the MME case here, our strategic fit framework can adequately
capture it. Hence, possibly reflecting the hybrid nature of MMEs, it has been shown that
French firms tend to engage in partial integration of LME firms, with French mangers
having a colonial attitude in their acquisitions of UK firms (Child et al., 2001).
Our framework demonstrates that convergence among certain HRM practices to a best
practice model was consistent with the strategic intent of the merger. However, further
research is needed to consider why a number of other practices retained specific country
characteristics and, perhaps more importantly, the effect that theseunique factors had on the
performance of an M&A. Our framework also sheds light on problems created in M&As,
such as when certain types of M&A strategies are incompatible with country preferences
for the degree and speed of merger integration. In addition, there are other contingencies,
such as experience and size differences between acquiring and acquired firms, that
would be interesting to consider further. For example, as firms in CMEs gain more
experience in conducting M&As, it is an open question whether they will begin to assert
their values and processes to a greater extent, stay on the same course or converge to LME
systems.
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