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(originally published by Booz & Company)


How M&A Affects Employee Wages

Mergers and acquisitions have traditionally been considered a means to reducing labor costs, but this research finds the opposite may be true.

Mergers and Employee Wages

Paige Parker Ouimet (University of North Carolina at Chapel Hill) and Rebecca Zarutskie (Duke University)


Date Published: 
March 2010

In today’s knowledge-based economy, acquiring top talent is increasingly a firm’s key rationale for buying a competitor or a company in a new market that it wants to enter. Indeed, the central role of labor in M&A can now be deduced from what happens to wages after the deal is closed, according to the authors of this paper. To wit, employees at acquired firms often receive a significant salary bump. These findings contradict a widespread belief that one of the primary motivations for mergers and acquisitions is to reduce labor costs. (As early as 1988, Larry Summers, currently President Obama’s top economic advisor, published research making such a claim.)

To examine the impact of M&A on wages, the authors used a sample of nearly 1,500 U.S. companies that completed deals between 1982 and 2001. They found that although compensation at the acquiring firm actually dropped slightly (0.7 percent), employees at acquired firms enjoyed wage increases of an average of 9.3 percent after the takeover. Moreover, when companies were generous with raises, the turnover rate fell by 20 percent.

The authors found that wage hikes were especially pronounced at acquired firms that had a high percentage of college graduates, which suggests that acquiring companies are relying on mergers to recruit skilled employees. The researchers say these conclusions should be taken into account when determining the true value of both sides in a deal. As talent becomes a more precious asset, valuation models must carefully consider how post-takeover surpluses will be split between acquired employees and shareholders.

Bottom Line:
Mergers and acquisitions can be a prime opportunity to grab talented workers if the acquiring company is willing to offer wage hikes as an incentive to remain with the new organization.

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