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(originally published by Booz & Company)


A “Psychological Contract” for M&A Success

Another reason to start the process as early as possible: The global nature of the supply chain and differences in local cultures can make it daunting to forge psychological contracts. Indeed, the authors found that the larger firms in their study had a much more difficult time retaining and integrating key managers.

The need to connect psychologically with acquired managers becomes greater during times of economic upheaval, the authors found, when dynamism in the market leads to increased competition for talent.

“Although outsourcing, off shoring, etc., are occurring, many firms are still acquiring to strengthen and leverage their competencies globally,” the authors conclude. “Thus the dynamic global environment in which all firms are competing will require the development of the psychological contract, especially in the hypercompetitive industries where products, services, [and] customer needs are constantly changing and the supply [chain] management becomes even more critical.”

Bottom Line:
When acquiring a firm, a company should identify and retain the target’s key managers in order to achieve better financial performance. The managers’ experience, connections, and insider knowledge are vital. But a bigger paycheck isn’t necessarily the best way to secure their loyalty, and acquiring firms that forge a psychological bond with new employees, based on shared goals, are more likely to hang on to important managers.

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