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Mergers and Acquisitions: The Human Capital Imperative

Mergers and Acquisitions: The Human Capital Imperative. Michael A. HitT. NCIOP February 2009. Introduction. Popular Strategy for Many Years. M&As = $4.5 Trillion in 2007 ($3.6 Trillion in 2006) (Hitt, Ireland & Hoskisson, 2009; Ireland, Hoskisson & Hitt, 2009).

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Mergers and Acquisitions: The Human Capital Imperative

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  1. Mergers and Acquisitions:The Human Capital Imperative Michael A. HitT NCIOPFebruary 2009

  2. Introduction Popular Strategy for Many Years M&As = $4.5 Trillion in 2007 ($3.6 Trillion in 2006) (Hitt, Ireland & Hoskisson, 2009; Ireland, Hoskisson & Hitt, 2009) Commonly an Action Used in Response to the Competitive Landscape and Uncertainty However, Research Shows that M&A Returns Average Close to Zero (Reuer, 2005; Cool & Van de Laar, 2006; Tuch & O’Sullivan, 2007)

  3. Reasons for Acquisitions Increased Market Power Access to New Markets Reduced Cost & Risk Reshaping the Firm’s Competitive Scope Building New Capabilities Integrating Complementary Resources to Create Synergy thereby Providing More Value to the Customer (Competitive Advantage) and Enriching Long-term Firm Performance

  4. Potential Problems(Hitt, Harrison & Ireland, 2001) Managerial Hubris Lack of Due Diligence(Unrecognized Problems; Select Wrong Target) Too High Cost(Price & Financing) Poor Integration of the Firms • Culture Conflict • Different IS Structures • Managing Human Capital Loss of Human Capital (Walsh, 1988; Walsh & Ellwood, 1991)

  5. Premiums Premium: Amount of Price Paid for Acquisition that Exceeds the Acquired Firm’s Market Value Average Premium Paid (1985-2005) 40+% Reasons for Premiums Managerial Hubris Competing Bids Investment Advisors Motivation for Target to Sell Large Premiums Place Pressure on Executives to Create Positive Returns from Acquisitions Executives Can Enhance Performance in the Short-Term by Significant Cost Reductions

  6. Premiums (cont’d) + Krishnan, Hitt & Park (2007) __ Premium Layoffs Layoffs Long-term Performance Nixon, Hitt, Lee & Jeong (2004) __ Downsizing Performance + Careful Downsizing Performance

  7. Integration Protecting and Maintaining the Best Human Capital • Careful Evaluation and Selection • Providing Full Information • Avoiding Survivor Guilt Positive Acquisition(Friendly rather than Hostile) Overcome Cultural Gaps Build Cooperative Spirit Create a “Team” Culture Integration Teams • Experienced Teams • Representatives from Both Firms CiscoCapturing Intellectual Capital

  8. Contrarian Hiring Strategy Counter-Cyclical Hiring (Greer & Ireland, 1992; Greer, Ireland & Wingender, 2001) Hiring during Recessions and Economic Downturns Advantages • Access to High Quality Candidates • Reasonable Cost • Better Prepared to Take Advantage of Growth Opportunities when Economy Revives High Quality Human Capital = Competitive Advantage (Hitt, Bierman, Shimizu & Kochhar, 2001; Hitt, Bierman, Uhlenbruck & Shimizu, 2006)

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