Making and Keeping Commitments to Employees After a Merger

The Art of M&A® / Post-Merger Integration and Divestitures
An excerpt from The Art of M&A, Fifth Edition: A Merger, Acquisition, and Buyout Guide by Alexandra Reed Lajoux



Why is it important to make and keep commitments to employees? 

Once again, as in the case of other stakeholders, the answer involves ethics, law, and economics. Breaking a promise is not only wrong (and sometimes illegal), but it is likely to have negative economic consequences. For example, key employees may leave because they lose trust in the new organization.

If employees leave, can’t the new company just hire new people to replace them, or outsource their work?

Yes, but each of these alternatives can be costly. Existing employees have already been recruited and trained. Replacing them with equally qualified employees is not economically neutral, because it usually means that a company must pay for recruitment and training a second time for the same positions.

In addition, there are the negative multiplier effects of employee departures, whether voluntary or involuntary. For example, remaining employees may feel guilt with respect to the employees who lose their jobs—either personal guilt because they (as managers) axed jobs or survivor guilt because their own jobs were spared.

Some acquirers turn to outsourcing, but it is not a magic bullet. It takes a lot of management time communicating with a vendor about expectations. Also, vendors have their own overhead to cover, and the hourly rate of their employees or contractors reflects that charge.

What if the target company already outsources its technology management?

The acquirer will need to decide whether to retain any or all of these vendors. Functions that may be outsourced include employee records and pay (HRIS and payroll systems), sales and service (CX software), customer billing (ERP and finance systems), and procurement (supply chain and asset management systems). Retaining these vendors may be critical to the success of the merger.

What is the financial impact of downsizing?

Generally speaking, it is a fairly balanced equation as follows: On the positive side, there are savings from a smaller payroll. On the negative side, there are costs of early retirement packages, termination benefits (usually taken as a one-time charge), disability claims, and so forth. Also, the impact on morale is usually negative. Finally, companies with fewer employees generally get less done.

How do pension funds respond to downsizing after mergers? Do they ever vote against mergers because they might cause downsizing?

Pension funds are not supposed to vote for the interests of current employees; they are supposed to vote for the interests of retirees. Under ERISA, which covers funds for employees in the private sector, fiduciaries have an affirmative duty to vote in the interests of beneficiaries. This can mean voting in favor of a merger, even if it will cause layoffs.

When employees sue companies, what do they sue for?

  • Wrongful termination
  • Discrimination
  • Breach of employment contract (not termination)
  • Harassment or humiliation
  • Employee benefits
  • Defamation
  • Workplace safety

What other legal and regulatory issues should managers look out for after a merger?

Pensions continue to be an important area in the United States where companies have special duties to employees present and past as administrators of their employee pension plans under ERISA. Now, after more than four decades, this law is receiving renewed attention from all three branches of the US government. 

  • The Supreme Court made it more difficult for plaintiffs to challenge a company pension fund's investment in its own stock in Fifth Third Bancorp v. Dudenhoeffer, 134 S. Ct. 2459 (2014).50 The ruling raised the pleading standard and inspire several subsequent lower court cases to do the same.
  • Department of Labor rules effective April 2018 streamline the filing of disability claims under ERISA.51
  • The FASB voted in March 2018 to change the disclosure requirements for defined benefits plans. For example it clarified that the disclosure about aggregate information for underfunded (including unfunded) pension plans should be based on both the projected benefit obligation (PBO) and the accumulated benefit obligation (ABO) benchmarks. 

How does the existence of collective bargaining agreements affect postmerger management?

Obviously, collective bargaining agreements are a major source of obligations for new management when it comes to working conditions—including hours, safety, and staffing. Also, some agreements stipulate that companies must consult with employees in a change of control. In such cases, employee leverage prior to deal closing may help preserve or improve employee working conditions. Agreements negotiated by labor organizations in the United States are enforced by the National Labor Relations Board (NLRB), which offers alternative dispute resolution as an option for resolving conflicts.52

What role can job training and development play in the postmerger phase?

Training programs are the fastest way to reassure employees of both the acquired and the acquiring company that their jobs are secure. These training programs should have two aspects.

First, the management of the newly combined companies can start by educating all employees in the values, vision, and mission of the newly combined companies. These elements should reflect the histories of both companies, even if their framework is derived largely from the acquirer.

Training in information security is particularly critical to prevent cyberthefts during the integration phase, when companies are vulnerable. Employees should be trained to refrain from opening suspicious emails or sharing passwords. From day one of the merged company, there should be continuous monitoring of the corporate network.

What are some relocation issues newly combined companies should consider?

Five questions will arise in the relocation of a company’s headquarters, plant, or branch. In order of importance, these are: Why is it relocating? Where is it going? Who will be asked to relocate? How will the acquirer handle relocation? What support will be provided? Also, facts and figures about the new locations should be disseminated. Comparative information can lessen the shock and trauma of relocation—and may even make it appealing. At the very least, it will enable employees to make good decisions.

In any event, the acquirer should establish a detailed relocation policy that includes adequate reimbursement of expense and job security following the move. Several companies provide such information. One established company, Economic Research Institute (ERI) of Irvine, California, provides cost-of-living comparisons between any 9,000 Canadian and US cities.53

What would be an example of a relocation policy?

GM’s relocation policy offers a good example. Under its current contract with the United Auto Workers, GM pays a minimum of $5,000 for a standard relocation, and $30,000 for an enhanced relocation.54




Learn more about employee experience during mergers and acquisitions at our upcoming training session:

"The Art of M&A® for HR Leaders / Live-Online" - December 5-7, 2023, via Zoom. 


Lajoux, Alexandra Reed with Capital Expert Services.  The Art of M&A, Fifth Edition: A Merger, Acquisition, and Buyout Guide. United States of America: McGraw Hill, 2019. Pp. 849-853. Print.