Mergers made a surprising comeback last month. Executives should start thinking about how to do them effectively -- and keep employees engaged in the process.
Back in January, no one would have predicted that August 2010 would have been the busiest deal-making month of the year. But according to data from Thomson Reuters, August saw the most mergers and acquisitions in more than a decade. "Announced deals and offers during the typically slow month of August surged to $262 billion worldwide," the company said. "It is the highest value of deals and offers announced during an August since 1999 when the value reached $275 billion."
Why the sudden surge in activity? Companies are sitting on unprecedented amounts of cash.
Why the sudden surge in activity? Companies that dialed back on expenditures as the economy soured are sitting on unprecedented amounts of cash. S&P 500 companies alone closed the second quarter with $1.63 trillion in cash holdings -- the highest for any quarter on record. As executives look for ways to ensure growth, purchasing it with available reserves may be the easiest way for them to achieve their goal. And as those merger-minded executives begin to look for places to invest their savings, they should consider an overlooked but powerful corporate asset: employee engagement.
Benefits of engaged employees
Workplace engagement is the core of the unwritten social contract between employers and employees. It begins at a local level, usually in the relationship between a manager and his or her employees. Engagement results from the fulfillment of 12 universal human needs. And when those needs are met, workers are engaged. (See graphics "The Three Types of Employees" and "The Twelve Elements of Great Managing.")
What benefits do engaged employees bring to their organizations? Gallup research shows that business units in the top quartile of Gallup's engagement database have 37% less absenteeism, 25% less turnover in high-turnover organizations (such as retail), 49% less turnover in low-turnover organizations, 27% less shrinkage, 49% fewer safety incidents, and 60% fewer product defects when compared to business units in the bottom quartile. Top-quartile business units also have 12% higher customer metrics, 18% higher productivity, and 16% higher profitability than business units in the bottom quartile.
For publicly traded companies, employee engagement can be a strong competitive advantage. Gallup examined the relationship between organizational-level employee engagement and earnings per share (EPS) from 2004 to 2008 in 56 publicly traded companies in its database. It found that those with a highly engaged workforce not only exceeded the EPS of their competition, they also widened the gap with the competition during the recession.
From 2007 to 2008, companies with engagement below the top quartile had a ratio of 2.2 engaged employees for every actively disengaged employee, while those in the top quartile of the database had a ratio of 5.8 engaged employees for every actively disengaged employee. Companies in the top decile of the database, however, had a ratio of eight engaged employees for every actively disengaged employee.
Companies with the highest levels of engagement also saw significant benefits to their EPS. For those scoring below the top quartile in employee engagement, earnings fell 9.4% below their competition's earnings from 2007 to 2008. Companies in the top quartile of employee engagement exceeded their competition by 28% in EPS, and those in the top decile exceeded their competition by 72%.
It's important to note that top-decile and top-quartile organizations exceeded their competition at the baseline measure of EPS, suggesting that they were well-run at the outset of the study. However, the study's findings show that an engaged workforce might accelerate financial improvement relative to the competition. From 2007 to 2008, the growth trajectory for top-quartile organizations was 2.5 times that of the competition, and for top-decile companies, the growth trajectory was 3.9 times the competition's growth trajectory.
Engagement is even more valuable when viewed through the lens of the recession: When it comes to EPS, companies with a critical mass of engaged employees seem to have been cushioned from the general downward trend of the overall economy. From 2007 to 2008, top-quartile organizations that were trailing the competition before the recession held their own and surpassed their competition in 2008. Top-decile organizations, while already ahead of the competition in 2007, widened the gap even further in 2008. Organizations that were below the top quartile in 2007, in contrast, followed the same downward trend as their competition during the recession.
Can companies create or increase engagement throughout a merger or acquisition? It's possible, Gallup says.
So business leaders who are considering a merger or acquisition would be wise to consider the employee engagement levels in their target companies. According to Gallup research, in 2009, 28% of American workers were engaged, 54% were not engaged, and 18% were actively disengaged. The engagement percentages among individual companies -- and within individual business units in those companies -- can vary widely. If the engagement levels of the employees in the target company are high, that company could bring benefits in enhanced earnings. If the target company is full of not engaged or actively disengaged workers, however, that asset might not be so valuable.
Engaging employees through change
Can companies create or increase engagement throughout a merger or acquisition? Gallup research suggests that it's possible, particularly if employees are engaged to begin with. From July 2008 to March 2009 -- during the heart of the recession -- Gallup tracked a large sample of employees. The research found that 1.5% of the respondents worked for companies that had been acquired by another company after July 2008, while 6.5% worked for companies that had recently acquired another company during the same time frame.
Among the employees whose companies had been acquired, 27% were engaged prior to the acquisition, but 30% were engaged following it, and the percentage of workers who were actively disengaged increased from 22% to 24%. A similar pattern was observed in employees whose companies were on the purchasing side of the equation: 27% were engaged prior to their companies' purchase of another organization, and 29% were engaged following it. Among employees whose companies did not experience a merger or acquisition, engagement actually slipped a bit: 32% of employees were engaged in July 2008, but 30% were engaged in March 2009.
Culture of collaboration
Beyond the engagement advantage, what companies are best suited for a successful merger or acquisition? The ones that have both a culture of engagement and a culture of collaboration, says Ari Canter, president and executive director of the Association of Strategic Alliance Professionals, a membership association dedicated to alliance formation.
Companies that lack a collaborative nature have to work harder to forge a successful alliance, Canter believes. They also are in even greater need of people with the right skills to facilitate the process: from the ability to decide what needs to be accomplished and the necessary milestones and metrics to determine if it has been to the capacity to know what the two companies need now and what they'll need after the alliance to how often the negotiators need to meet. The whole purpose of the alliance, says Canter, is to minimize risk and maximize market readiness. But without the right skills, the negotiators will focus too closely on the purpose and not closely enough on the process.
"Up until a number of years ago, most partnerships failed," says Canter. "They failed because they were just legal documents. People hadn't met on a regular basis, hadn't developed trust. You need skilled practitioners on both sides of the table who are working to ensure that not only are both companies' interests being met but that relationships are developed between the companies as partners. There is a science to strategic alliances, and it's framed by relationships."
In short, endeavors are most successful when the people involved can create productive relationships. The most important of those relationships in an M&A, says Canter, is trust. "You can't get much done in an atmosphere of distrust," says Denise McLain, a Gallup principal. "Leaders create an environment of trust by being as transparent as possible. When leaders communicate everything they can about their competitive environment, their long-term strategies, and what employees can expect, they show they can be trusted. When people feel that their colleagues are being treated in fair and just ways, that shows that there is dignity and respect for all employees, and that's the foundation of trust."