Keeping The Right People

Sloan Management Review
Peter Gwynne

Retaining top executives can improve the performance of acquired companies - as long as they're the right executives. Few corporate acquisitions occur without a figurative spilling of blood. Studies of several industries have shown that more than half the top executives of acquired companies leave within three years after the takeover. Five years after, that fraction has exceeded three-quarters.

Those statistics are hardly surprising. Takeover executives frequently reason that their acquisitions wouldn't have become targets had the managers done their jobs effectively. So the executives bring in their own people to run the acquisitions. Meanwhile, many managers of acquired companies choose to leave even if their jobs are not threatened, because they feel marginalized in the new corporate culture.

Do the departures improve the performance of acquired companies? Generally, no. "We have very strong evidence that keeping these people around is one key to better acquisition performance," says Donald D. Bergh, an associate professor at Pennsylvania State University's Smeal College of Business Administration. However, he believes that which people are kept matters too.

In recent research, Bergh confronted two opposing hypotheses favored by representatives of acquiring companies. One asserts that individuals with long tenure offer obvious advantages to their new bosses. They have a greater understanding of the acquired company's culture, mode of operation and day-to-day details. Hence they can run the company more smoothly than their colleagues with less experience. The other hypothesis focuses on the downside of long-tenured executives. They are more likely to adhere to the old way of operating and to have difficulty adapting to the new situation created by the acquisition. By contrast, this hypothesis states, executives with shorter service in the acquired company have less commitment to the old culture and are thus more likely to welcome the organizational changes that come with the acquisition.

In "Executive Retention and Acquisition Outcomes: A Test of Opposing Views on the Influence of Organizational Tenure," published in the December 2001 issue of The Journal of Management, Bergh examined 104 acquisitions over a five-year post-acquisition period, using logistic regression analysis to determine the effect of the tenure of retained executives on overall performance. His conclusion: "Our results indicate that the probability of retaining an acquired company is increased by retaining longer-tenured top executives."

Why do managers with longer service have the advantage? "It appears that their idiosyncratic knowledge of what the organization can do and their ability to implement it outweigh the likelihood that they will be rigid when faced with uncertainty," Bergh explains. "The shorter-tenured guys are saddled with a lack of social capital and an inadequate knowledge of the organization." Bergh cautions that no group of managers will do a perfect job but that "the tenure variable is three times as important as any other."

Bergh argues that the same thinking can be applied to other organizational changes. "I believe that the logic from my study applies to reorganizations and downsizings," he says. "The primary argument is that uncertainty carries risks that need to be managed effectively. In these conditions the experiences and knowledge base of long organizational tenure seem to have benefits that exceed those of the less tenured executives."

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REPORTERS & EDITORS: For more information, please contact Wyatt DuBois in the Smeal College of Business Media Relations Office at 814-863-3798 or wed112@psu.edu .

Penn State's Smeal College of Business offers highly ranked undergraduate, MBA, executive MBA, Ph.D., and executive education opportunities to more than 5,500 students at all levels. Featuring academic departments of accounting, finance, marketing, insurance and real estate, management, and supply chain and information systems, the college is also home to major research centers such as the Center for Supply Chain Research, the Institute for the Study of Business Markets, the eBusiness Research Center, the Farrell Center for Corporate Innovation and Entrepreneurship, the Center for Global Business Studies, and the Center for the Management of Technological and Organizational Change.

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