An Empirical Analysis of Post‐Merger Organizational Integration

• Author: Kathryn Ierulli,Michael Gibbs,Valerie Smeets
• DOI: http://doi.org/10.1111/sjoe.12161
• Date: 01 July 2016
• Published date: 01 July 2016

Scand. J. of Economics 118(3), 463–493, 2016

DOI: 10.1111/sjoe.12161

An Empirical Analysis of Post-Merger

Organizational Integration∗

Valerie Smeets

Aarhus University, School of Business and Social Sciences, DK-8210 Aarhus, Denmark

vas@asb.d k

Kathryn Ierulli

University of Chicago, Chicago, IL 60637, USA

kierulli@uchicago.edu

Michael Gibbs†

University of Chicago Booth School of Business, Chicago, IL 60637, USA

michael.gibbs@chicagobooth.edu

Abstract

We study post-merger organizational integration using linked employer–employee data. In-

tegration is implemented by reassigning a small number of high-skilled workers, especially

in R&D and management. Workforce mixing is concentrated to establishments set up af-

ter merger, rather than to previously existing establishments. Worker turnover is high after

merger, but new hiring yields stable total employment. Target employees have higher turnover

and reassignment, particularly if the target firm is small relative to the acquiring firm. These

findings might suggest that integration is costly, but can be achieved by focusing on key

employees. Alternatively, the reassignment of a few key employees is sufficient for achieving

integration.

Keywords: Merger; organizational integration

JEL classification:D22; G34; J21; L23; M5; M10

I. Introduction

A merger is a dramatic event for firms and employees, requiring integration

of two organizations. There is a large body of literature on mergers, but it

offers little evidence on how integration is accomplished.1In this paper, we

∗Funding was provided by the European Commission (MEIF-2003-501280), Aarhus School

of Business, Stigler Center, and Moensted Foundation. We thank many people for com-

ments, especially John Burrows, Jed DeVaro, Jeremy Fox, Guido Friebel, Luis Garicano, Ed

Lazear, David Margolis, Canice Prendergast, Imran Rasul, Kathryn Shaw, Chad Syverson,

and Frederic Warzynski.

†Research Fellow of the Center for the Study of Labor (IZA).

1The importance of integration to merger success is often mentioned in the business press

and management literature. For example, the Pricewaterhouse Cooper (2010) annual survey

CThe editors of The Scandinavian Journal of Economics 2016.

464 An empirical analysis of post-merger organizational integration

present such evidence, using Danish matched employer–employee data. The

data are particularly well suited to study integration, because they identify

the physical location where each employee works. Thus, is it possible

to observe when workers are reassigned following a merger, under what

circumstances employees of both firms mix in the workplace, and what the

consequences are.

Our results are as follows. First, there is surprisingly little overall in-

tegration, defined as reassignment of employees to work with colleagues

from the other firm. Three years after merger, only about 8 percent of sur-

viving employees from the acquiring firm, and 15 percent from the target

firm, had moved to a workplace that was in the other firm before merger,

or set up after merger. The rest remain in workplaces existing in their firm

prior to merger, where most colleagues are from their firm. Second, the

merged firm chooses certain types of employees to mix with employees

from the other firm – those who are highly skilled, managers, or those

in R&D, presumably to share knowledge and coordinate between organiza-

tions. Third, there is relatively high turnover in the acquiring firm and even

more in the target firm, but the average size of the combined firm remains

stable due to new hiring. Fourth, integration depends on the relative size of

the merging workforces. The larger the target workforce is relative to the

acquiring workforce, the more target workers are shielded from turnover or

reassignment to the acquiring firm’s establishments.

One interpretation of our results is that, consistent with practitioner

observations, organizational integration is difficult, and mergers are im-

plemented in ways that mitigate the costs. An alternative interpretation

is that integration can be achieved without large-scale integration of the

workforces; instead, it is achieved by reconciling policies and coordinating

across groups without much need to disturb day-to-day operations.

This paper contributes to the literature by highlighting the question of

integration costs in mergers, providing new evidence on how firms inte-

grate after mergers, and suggesting an approach for further research on

these questions. The findings also have broader relevance for the literature

on the economics of organization because post-merger integration is one

interesting example of the issue of coordination within firms.

II. Economics of Organizational Integration

In this section, we present a brief literature review, followed by a discussion

of the costs and benefits of post-merger integration. We do not distinguish

of post-merger integration argues that emphasis on careful integration improves the odds of

success in a merger. They find that “the key integration challenges [. .. ] are motivation of

employees, alignment of cultures, organization and processes as well as IT systems.”

CThe editors of The Scandinavian Journal of Economics 2016.