Richmond, Va. — The last year has seen a spate of mergers and acquisitions of insurers and the vendors that supply them. In April, Boston-based Liberty Mutual Group announced plans to acquire Seattle’s Safeco Corp. This summer, deals have sprouted like dandelions, with well-known insurance vendors such AdminServer, Skywire Software and Clear Technology Inc. all coming under new ownership.
Despite the public air of optimism that pervades every deal, most participants would privately acknowledge the inherent risk in melding disparate entities together. One particularly acute risk is the loss of key personnel in the wake of the deal, which may engender instability and the loss of firm-specific knowledge.
A new study from Virginia Commonwealth University published in the July/August issue of the Journal of Business Strategy addresses this issue. Titled “The Big Exit: Executive Churn in the Wake of M&As,” it contends that mergers and acquisitions do not result in instability among management at target companies solely in the short-term, as is often assumed, but result in abnormally high turnover that lasts much longer.
Jeffrey Krug, associate professor of strategic management in the VCU School of Business and lead author of the study, and co-author Walt Shill, a managing director at Bermuda-based Accenture, say that mergers and acquisitions often destroy leadership continuity in target companies’ top management teams for at least a decade following a deal.
The study finds that poor post-merger performance and unrealized synergy gains cause more than half of all M&As to fail, and that up to one-half of all target firms are subsequently divested.
To compile the report, Krug studied the turnover patterns at more than 1,000 firms, and examined the employment of more than 23,000 executives. He found that target companies lose 21% of their executives each year for at least 10 years following an acquisition – more than double the turnover experienced in non-merged firms.
“These findings are especially important in light of the correlation between the loss of top executives and a company’s poor performance,” Krug says. “Companies involved in these deals need to understand the long-term effect on their executive ranks, and they need to find ways to keep key executives on board.”
Source: Virginia Commonwealth University
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