Communication, Executive Retention,

and Employee Stress as Predictors

of Acquisition Performance:
An Empirical Evidence
Siddhartha S Brahma* and Kailash B L Srivastava**

The study was conducted in five Indian acquisitions to understand the role of communication,
executive retention and employee stress on acquisition performance. The results confirmed
that both communication and executive retention have a positive impact, whereas employee
stress has a negative impact on acquisition performance. It was also examined whether the
degree of integration had any moderating role on each of the mentioned variables in
predicting performance. The findings indicated that, the degree of integration does moderate
communication and executive retention in predicting acquisition performance. However, the
relationship between employee stress and performance was not moderated by the degree
of integration. The study is important as it gives a complete picture of the relation between
these variables and performance.

Introduction
The growth of mergers and acquisitions is relentless, as managers perceive this
strategy as the easiest way to quick expansion. Despite their preference in favor
of this inorganic growth strategy, the outcome of mergers and acquisitions is not
encouraging. Research shows that on an average 50-75% of all mergers and
acquisitions fail (Papadakis, 2005). The performance variability has been examined
from different standpoints by the management researchers. Perhaps, the most
controversial issue is whether related diversifications outperform unrelated ones.
The central theme of this body of literature is that the more the strategic fit
(product-market compatibility) between the acquirer and the target, the better
will be the performance. Still others (Datta, 1991) put forth the concept
of organizational fit to explain performance variability in mergers and
acquisitions. Recently researchers are looking at the softer side of the deal
to examine how they affect performance. For instance, cultural clash was
frequently cited as a potential source of problem in merger and acquisition
integration. Executive departure is another area that has got considerable
attention in mergers and acquisitions literature. Employee reactions to the
mergers, i.e., anxiety, stress and uncertainty, are also well documented by the
behavioral researchers. The role of communication is a not-so-well-researched
area, though it is considered to be critical by experts.

The views expressed in this article are those of the authors and do not reflect the official policy or position
of SIDF or Government of Saudi Arabia.
* Instructor, Training Division, Human Resource Department, Saudi Industrial Development Fund, Saudi Arabia.
E-mail: ssbrahma@rediffmail.com
** Professor, Department of Humanities and Social Sciences, Indian Institute of Technology, Kharagpur, India.
E-mail: kbls@nss.iitkgp.ernet.in

2007 The Icfai University Press. All Rights Reserved.

Communication, Executive Retention, and Employee Stress as Predictors 7
of Acquisition Performance: An Empirical Evidence
 Though learning in this area is substantive, there is a paucity of research
in a broader perspective to examine the impact of the softer side on performance.
There are many (Marks, 1982; Napier, 1989; and Love, 2000) who have voiced
their concern over the softer side of mergers and acquisitions to explain the
reasons for the failure of mergers. However, the impact of soft issues on the
success or failure of mergers has got considerably less attention by practicing
managers (Schuler and Jackson, 2001), primarily because they are more
ambiguous and subjective and, therefore, open to challenge (Jemison and Sitkin,
1986). Earlier studies were concerned with exclusively one or at the most two
variables or factors. Moreover, they do not reveal the exact nature of relationships
between the antecedents of acquisition performance and performance per se. The
study tries to fill this gap by examining the three common factors on the people
side of the deal and their relationship, both individually and collectively, to the
performance of the acquiring firm. The three factors are communication, executive
retention and employee stress. These research gaps are addressed by developing
theory based hypotheses, and employing empirical survey methodology to test
them. In addition, an attempt has been made to explore the moderating effect
of the degree of integration on the above relationships.
First, the paper critically reviews the literature and develops hypotheses, then
it presents the research method by a brief discussion about the sample,
a detailed discussion of the measures of the study variables, and their respective
reliability and validity. Later, certain multivariate statistical analyses to test the
hypotheses were conducted, followed by a detailed evaluation and exploration
of the findings.

Literature and Hypotheses

Communication
Communication is a critical factor throughout the Mergers or Acquisitions (M&As)
process. Poor communication between people at all levels of the organization, and
between the two organizations that are merging, is one of the principal reasons
for the failure of mergers (Schuler and Jackson, 2001; and Key Strategy, 2003).
Watson Wyatt, a global consulting firms 1998/99 mergers and acquisitions survey
(Devine, 2003, p. 31), revealed that effective communication is rated as the second
most important contributor to successful merger integration. Marks and Mirvis
(1998) explained how an effective communication system works. First, it reduces
the energy expended by employees in search of answers for their questions.
Second, it helps the employees to accept the changes. And finally, it explains
matters and provides the underlying rationale to the employees.

The literature review revealed that communication minimizes the negative

reactions of the acquired employees, and lack of communication increases
uncertainty (Schweiger and Denisi, 1991; and Vedpuriswar, 2004). Bastien (1987)
also asserted that, failure to communicate will increase uncertainty and employee
anxiety, and communication is the only way to reduce that. Napier
et al. (1989) conducted a study on the merger of two banks, and found that
though the type of information needed may vary from one group of employees
to another group, communication was always felt to be insufficient. The staff
needed honest and repeated communication from the top management when

8 The Icfai Journal of Mergers&Acquisitions, Vol. IV, No. 4, 2007

there was confusion and anxiety. Therefore, communication is vital in the success
of merger and acquisition (Papadakis, 2005), and accordingly, the following
hypothesis was framed:

H1: Communication would positively predict acquisition performance.

Executive Retention
Researchers frequently raise a question regarding the departure of a large
number of target company executives and talents soon after the acquisition.
This is a pertinent question because, a survey by Kay and Shelton (2000) revealed
that among 190 top executives identified, retaining key talents and key managers
were two critical ingredients of a merger. Others (Schuler and Jackson, 2001; and
Key Strategy, 2003) have identified that key talent retention is one of the major
reasons for success in M&As.

Key people are those who add the most value to the organization and are also
hard to be replaced. At the onset of a merger, these people eagerly look for
the future reporting structure, relocation decisions, stay packages, etc.
If uncertainty exists, they tend to think that their career is being left to the whims
of someone, and they begin looking at other alternatives. The best and the
brightest persons among the workforce, with skills and talents, are the most
marketable and most likely to walk away first. In addition, the headhunters move
in immediately to recruit the key people who are unsure of their career
opportunities in the organization. The severity of the loss of key talent is clear
in an experienced managers statement, If you run out of money, you may be
able to borrow more. But, if you lose people, youre dead (Marks and Mirvis,
1998, p. 46).

Several studies have examined the possible reasons of executive departure.

Walsh (1988) contended that top management turnover rate following a merger,
is significantly higher than normal top management turnover rate. He further
concluded that the type of merger does not account the variation in top
management turnover rates, and it is the best (executives) who depart first.
In another study, Cannella and Hambrick (1993a) put forth the concept of relative
standing to understand the departure of acquired executives. They argued that
when acquired executives feel inferior, the acquirers perceive the acquired
executives as inferior and themselves as superior, autonomy and status is removed,
and a climate of acrimony prevails. The greater these conditions, the higher the
rate of departure of acquired executives. In an attempt to explain why talents
leave after a merger, Krug and Hegarty (2001) in their study indicated that
(i) executives perceptions of the merger announcement, (ii) interactions with the
managers of the acquiring company after the merger, and (iii) long-term effect
of the merger, each had a significant effect on determining whether executives
stay or leave.

Attempts have been made to examine the departure-performance relationship.

Cannella and Hambricks (1993b) empirical work supported the hypothesis that
executive departures and acquisition performance are negatively related,
confirming Pitts (1976); and Jemison and Sitkins (1986) view that executives are

Communication, Executive Retention, and Employee Stress as Predictors 9

of Acquisition Performance: An Empirical Evidence
an important resource and their retention is critical to acquisition success.
They further concluded that the departure of the senior-most executives had the
greatest effect on the subsequent performance. Love (2000) also found that
unplanned executive turnover is positively associated with merger and acquisition
failure. In addition, it was observed that the rate of unplanned turnover
of executives was much higher among the failures than those of the successful
M&As. Interestingly, Bergh (2001) conducted a research on executive retention
and found that the probability of an acquisition outcome is increased if the
acquirer retains longer tenured top executives than by retaining shorter tenured
ones. These executives may show rigidity, and have difficulty in adapting
uncertainty, still they add higher value as compared to the shorter tenured
executives.

Prior researches tested both the possible causes and consequences

of executive retention (or departure). However, considering Walshs (1988),
contention that future research needs to check whether executive departure
affects subsequent company performance, it was hypothesized that:

H2: Executive retention would positively predict acquisition performance.

Employee Stress
Merger has often been described as a major life change by the organizational
researchers and considerable attention is paid by them to understand how
employees react in this situation. In general, there are several common (mostly
negative) reactions, typically attributed to employees of the acquired firm.
One such reaction is uncertainty (Sineter, 1981; and Marks, 1982). Uncertainty
prevails during both pre and post merger phases. Uncertainty is mainly expressed
in terms of job security, fear of diminished power and control. Uncertainty
produces many dysfunctional outcomes among employees and one of such
outcome is stress (Marks and Mirvis, 1985; Ivancevich et al., 1987; Napier, 1989;
and Cartwright and Cooper, 1990). A study (Schweiger and Denisi, 1991) reported
that stress increases with an increase in employee uncertainty. Cartwright and
Cooper (1992) observed that potential sources of stress emanates from six work
related behaviorsjob intrinsic, role in the organization, work relationships,
career prospects, organizational culture, and homework interface. Ivancevich
et al. (1987) suggested a model which stated that employees make an appraisal
of the situation. If the appraisal is negative, i.e., potentially threatening or likely
to harm individuals, stress will be experienced. The above discussion led to the
conclusion that M&As create considerable amount of stress among employees of
the acquired firm, resulting in a negative impact on employee performance
(Marks, 1982; and Blake and Mouton, 1985). Research indicates that at least two
hours of productive work per employee per man-day is lost during mergers and
acquisitions activity in the organizations. Thus, it would be logical to hypothesize
that stress, being counterproductive in nature, would adversely affect the
acquisition performance. Unfortunately, though widely prescribed, there is no
empirical study conducted yet to examine the impact of employee stress on
acquisition performance. Therefore, the next hypothesis examined in this study
is perceived as follows:
H3: Employee stress is negatively related to acquisition performance.

10 The Icfai Journal of Mergers&Acquisitions, Vol. IV, No. 4, 2007

The Moderating Role of Organizational Integration

The role of integration in mergers and acquisitions has become a separate

research interest since poor integration has been cited as one of the causes
of acquisition failure (Kitching, 1967). Various types of integration have also been
discussed in the mergers and acquisitions literature. Napier (1989); and Hunt
(1990) advocated two types of integrationhigh and low. Shrivastava (1986)
distinguished between three types of integration. Procedural integration is done
to standardize work procedures. Physical integration captures synergy through
the mutually exclusive assets of the merging firms. Managerial and sociocultural
integration involves combining structures, cultures, transfer of executives, and
motivating people.

The previous three hypotheses assumed that the relationships would not be
affected by the level of integration achieved by the acquirer. However, this
assumption may not be correct. For instance, the greater the integration, the
greater would be the scope of communication as: (i) organization integration is
often defined by the degree of interaction and coordination between the two firms
involved in a merger or acquisition (Larsson and Finkelstein, 1999), and (ii) the
need for communication is more where there is high integration (Napier, 1989).
On the other hand, their relationship may not be strong as in low integration
acquisitions, when the acquirer takes a hands off approach, the effectiveness
of communication may be actually less than what is expected. As integration
brings changes in the two firms functional activity designs, systems, structures,
and cultures (Pablo, 1994) top level executive departure becomes a major
problem. This is because greater integration may lead to inter-organizational,
inter-group conflicts and as controversial decisions are made regarding employee
selection and displacement, there could be high rate top executive departure.
In fact, Cannella and Hambrick (1993) have found that more-senior executives
departure rate was higher than less-senior executives departure. Top executives
generally possess firm specific knowledge and losing them causes more harm
to the performance than losing middle level talents. In case of low integration,
top executives are less likely to live, as their autonomy is not removed. Even if,
middle or bottom level executive retention is low, its harmful effect on performance
would not be as severe as with senior level executive departure.

As integration involves changes, individuals often have difficulty dealing with

these changes. This is particularly true for the acquired firm, which faces
something akin to a re-creation (Tushman and Romanelli, 1985). Napier (1989)
contended that in extension mergers, where the integration is low, low level
of anxiety is elicited, whereas redesign mergers characterized by higher integration
are more likely to exhibit considerable anxiety and consequently more stress among
employees. There is also evidence in the literature, which states that
in integration, certain activitiesrestructuring, consolidating functions, etc.,
increase stress among employees because the existence of their departments
and jobs are threatened (Larsson and Finkelstein, 1999). However, as we argued
previously that greater integration also increases the scope of availability
of information through communication, peoples ability to cope with stress is also
likely to be increased by changing their perception by getting more information

Communication, Executive Retention, and Employee Stress as Predictors 11

of Acquisition Performance: An Empirical Evidence
(Cohen, 1987; and Edwards, 1988). Therefore, the harmful effect of stress
on performance may not remain the same in acquisitions characterized by high
and low integration. The above arguments suggest that the relationships
of communication, executive retention and employee stress with acquisition
performance would be moderated likely by the different levels of integration and
accordingly the following hypotheses were conceived:

H4: The relationship between communication and acquisition performance

would be moderated by the high and low levels of integration.

H5: The relationship between executive retention and acquisition performance

would be moderated by high and low levels of integration.

H6: The relationship between employee stress and acquisition performance

would be moderated by high and low levels of integration.

Method
Sample

From a list of acquisitions of the Securities and Exchange Board of India (SEBI),
12 acquisitions were selected in the state of West Bengal (India). This was mainly
done taking into account the time and convenience factors. Two conditions were
imposed upon selected firms. First, all partial acquisitions were excluded and
second, a minimum integration period of two years was allowed. So the sample
was restricted to those acquisitions which were completed by December, 2004.
Letters of request were then sent to those organizations but the responses were
disappointing and consequently, the organizations had to be approached
personally. Finally, five organizations had given their consent to participate in the
survey. Those who did not participate mostly cited confidentiality and policy
of non-participation in surveys as reasons for their non-participation. The decision
to use convenience sampling was not unjustified as (i) convenience sample is very
common in organizational survey research (Mitchell, 1985), (ii) a low response
rate is typical of mergers and acquisitions research (Marks, 1982), and (iii) firm
level survey research in India indicated typically very low response rate, a range
of 6-12% (Roy, 2003).

After initially selecting the firms, the researcher met the head of human
resource to ask for the names of approximately 30-35 key respondents from each
of the acquired firm. Key respondents would be those senior or top executives
of the acquired firms, who took active part in the acquisition process. Using key
respondent for data collection would enable the researcher to ensure that these
executives were adequately knowledgeable about acquisitions. Finally a questionnaire
was administered to all the selected respondents. During the data collection,
a total of 155 questionnaires were administered among the executives of the
five acquired firms. Initially, a period of one week was provided to each survey
respondent to complete the questionnaire. After the expiry of one week,
respondents were given reminders every alternate week for a maximum of one
month until all the completed questionnaires were received. The total number
of responses that were finally received was 139, representing a response rate
of 89.7%. Out of these, five questionnaires had to be rejected because of high

12 The Icfai Journal of Mergers&Acquisitions, Vol. IV, No. 4, 2007

rate of missing data. And, data on all the variables were completed only in 134
out of the 139 responses. Out of 134 respondents, 28% belonged to top
managerial level whereas, 72% belonged to senior/middle managerial level.
The overall average age of participants was 43.56 years. The average work
experience of the participants in their respective companies was 12 years.

Non-response Bias and Sample Representativeness

As the researchers had no control over selecting the key respondents, a concern
still existed whether all the respondents were equally knowledgeable or not.
Therefore, a t-test was conducted between the two levels of respondentstop
level and senior levelwhich showed no significant differences in means along
the study variables. Moreover, the sample was subjected to a test of
non-response bias. For this, the total number of respondents was categorized
into two groupsrespondents (N = 134) and non-respondents (N = 21).
The non-respondents were those who were either designated as late
respondents (Armstrong and Overton, 1977), who responded after the third
reminder or whose responses were rejected due to high rate of missing data.
A two sample Kolmogorov-Smirnov test was done among respondents and
non-respondents along age and years of experience. For both these variables,
no significant differences were found between the two groups, with p-values
being 0.63 and 0.95 respectively. All the above results, while by no means
definitive, give some evidence that the sample represents the population.

Measures

All the variables were conceived as unidimensional except organizational

integration. A five-point (Likert type) scale was used, for the sake of uniformity,
to measure all the variables under the study. Items were retained or deleted
based on item-analysis. Item-total correlation was calculated to determine how
each item was related to the overall total score. An item having low correlation
(r < 0.20) with the item-total was dropped from all the scales as correlation equal
or more than the above cut-off has been suggested to indicate that the single
item had good correlation within the domain.

Reliability of a scale refers to the consistency with which an instrument measures

characteristics. The underlying concept is that, if items of an instrument measure
the same concept, they should respond in a consistent manner. Cronbach alpha
coefficient (Cronbach, 1951) was calculated for each of the domain scores from all
respondents to measure the internal consistency of the scales.
Communication

The scale of this variable was constructed specifically for the study due to
non-availability of validated measures in mergers and acquisitions context.
Communication was assessed mainly from the perspective of the acquiring firm
to the acquired firm. Though there is no consensus on what information is to be
communicated, it has been inferred from the literature that communicating the
rationale of merger, job intrinsic changes, and the feelings of the employees of
the acquired firm are crucial. Each item was carefully constructed to elicit
responses whether such information was communicated. This measure consisted

Communication, Executive Retention, and Employee Stress as Predictors 13

of Acquisition Performance: An Empirical Evidence
of 11 items. Item analysis revealed that all the items should be retained.
The range of the scale was from 11-55. Cronbach alpha of this instrument was
0.63. An aggregate measure of communication scale was thus obtained by
averaging the scores of all items in the questionnaire.

Executive Retention
An objective measure on the basis of employment register of the acquired firm
would have been the best choice, but due to the inaccessibility to the employment
register of the respective firms, it was not possible. Therefore, a two-item scale
measured executive retention of the acquired firm on the basis of perception
of the respondents. Both the items were retained. The range of score was
from 2-10. The Cronbach alpha of this measure was 0.69. To validate this
measure, a separate scale comprising three items was constructed which
measures the managerial effort to retain talents. When this score was correlated
with the original measure of executive retention, it was found to be significant
(r = 0.47, p < 0.01) indicating the measure to be reasonably valid.
Employee Stress
Stress of employees of the acquired firm was measured by a 14-item scale
developed by Cohen et al. (1983). This scale measured the global degree of stress
that the employees experienced by eliciting their reactions and feelings during
the period of acquisition. The scale was also used in a previous study (Schweiger
and Denisi, 1991) in mergers and acquisitions context and was found to be
reliable and valid. In this study, one item was later deleted, as its correlation with
the item-total was below 0.20. Finally, 13 items were retained for further analysis.
The range of the scale was from 13-65. The Cronbach alpha was 0.60. As the
scale comprised a single domain, an aggregate measure of this scale was
obtained by averaging the scores of all items in the questionnaire.

Organizational Integration
To measure this variable, a 13-item scale was developed which covered four areas
of possible integration operational integration, financial/accounting integration,
marketing integration, and administrative integration. The items of manufacturing
and marketing integrations were adopted from Datta (1991) and those
of administration were adopted from Chatterjee et al. (1992). The items
of accounts/finance were derived from the literature. Item analysis revealed that
all the items under each group were highly correlated (r > 0.20) with their
respective item-total. Thus, all the items were retained. The Cronbach alpha
values were 0.42 for operational integration, 0.62 for marketing integration,
0.53 for accounting/financial integration and 0.60 for administrative integration
sub-scales. A principal component factor analysis with varimax rotation also
extracted four factors, each of which had an eigen value greater than unity, with
appropriate items loaded significantly on specific factors. The above factors
altogether explained 60.70% of the variance. Composite average scores were
calculated for each of the four factors to represent integration scale. These four
average composite scores were then used to categorize an acquisition into high
or low integration subgroups. When at least two of the four factors average
scores were more than three (mid point of the scale), an acquisition was classified

14 The Icfai Journal of Mergers&Acquisitions, Vol. IV, No. 4, 2007

as high integration and if otherwise, it was classified as low integration
acquisition. About 59 responses were identified as high integration and 75 as
low integration acquisition.
Acquisition Performance

There has been considerable debate regarding the most appropriate and accurate
way to assess acquisition performance. Consequently, a plethora of empirical studies,
which have examined the financial performance of acquisitions, using various criteria
such as subjective assessment, accounting measure, and movements of share prices
were put forth. In this study, the acquirers performance on acquisition was
measured by the assessment of respondents. They were asked the extent
to which the acquisition was able to achieve prior expectations in terms of its
impact on the performance of the acquiring firm on a five-point Likert type scale
(1 = very unsuccessful; 5 = very successful). Performance was measured along
five itemsearning per share, stock price, sales growth, cash flows, and overall
performance of the acquiring firm, all of which had been widely used in prior
organizational researches. The items of this scale show a strong evidence
of convergent validity. For instance, the Cronbach alpha of this measure was 0.78.
Moreover, a principal component factor analysis with varimax rotation of these
five items extracted a single factor with eigen value greater than one. The above
items together explained 54.22% of the variance. This suggests the unidimensionality
of the scale. An aggregate measure of acquisition performance was, therefore,
calculated by averaging the scores of all the items in the questionnaire.

Perceptual measure for performance was used because there was a difficulty
in measuring acquisition performance by using objective measure (Kitching, 1967;
Porter, 1987; and Datta, 1991). Using pure accounting data to isolate the impact
of acquisition is criticized for the reason that there may be window-dressing
(Cartwright and Cooper, 1992) and most publicly available accounting information
is highly aggregated, which makes it difficult to isolate the effects of individual
and relatively small events (Montgomery and Wilson, 1986; and Datta, 1991).
Event study method for assessing the acquisition performance does not measure
it as an outcome, but merely reflect the security markets a priori expectations.
They were ex-ante measures, not ex-post measure (Montgomery and Wilson,
1986). Moreover, an event study methodology is criticized on the ground that it
potentially ignores the other dimensions of firm performance (King et al., 2004).
As an alternative, it was expected that the subjective approach would provide
a real picture of the performance. Dess and Robinson (1984), advocate the use
of subjective measures when appropriate objective measures are not available,
as in this case.

Generally, Cronbach alpha 0.60 and greater is considered good in organizational

research (Eisenhardt, 1988; and Larsson and Finkelstein, 1999) and the absolute
minimum cut-off is 0.50 (Nunnally, 1967). Thus, all the variables in this study crossed
the above threshold except that of operational integration subscale.

Analysis and Results

All the descriptive statistics and regression were performed with Statistical
Package for the Social Sciences (SPSS) Version 12.0. Pearsons correlation

Communication, Executive Retention, and Employee Stress as Predictors 15

of Acquisition Performance: An Empirical Evidence
coefficients were used to explore the relationships among the study variables.
Thereafter, a multiple regression analysis was conducted to test the individual
hypotheses. And, p < 0.05 was adopted as the minimum level to establish
statistical significance.

Table 1 shows the means, standard deviations and correlations among the
study variables. The correlation coefficients of the entire sample (Table 1A) gives
some preliminary support of hypothesized relationships. Communication (r = 0.24,
p < 0.01), executive retention (r = 0.41, p < 0.01), and employee stress (r = 0.35,
p < 0.01), were all significantly associated with acquisition performance. All the
hypothesized directions were also supported by the signs of correlation
coefficients. Interestingly, in high integration group (Table 1B), all the above
relationships were also strong and significant. In low integration group (Table 1C),
except stress (r = 0.27, p < 0.05), none of the relationships were found to be
significant. The strengths of correlation among dependent and independent measures
between high and low integration subgroups are suggestive of the existence of
some moderator effects. These results will, later on, substantiate the findings in
the discussion part.

Table 1A: Overall Means, Standard Deviations and Correlations

of Study Variables (N = 134)

Variables M ean S. D. 1 2 3 4
Communication 2.84 0.48 1.00
Executive Retention 2.49 0.69 0.19* 1.00
Employee Stress 2.81 0.36 0.01 0.20* 1.00
Acquisition Performance 3.16 0.64 0.24** 0.41** 0.36** 1.00

Table 1B: Means, Standard Deviations and Correlations

of Study Variables in High Integration Subgroup (N = 59)
Variables M ean S. D. 1 2 3 4
Communication 2.94 0.53 1.00
Executive Retention 2.32 0.82 0.47** 1.00
Employee Stress 2.94 0.40 0.02 0.17 1.00
Acquisition Performance 3.01 0.73 0.55** 0.61** 0.33** 1.00

Table 1C: Means, Standard Deviations and Correlations

of Study Variables in Low Integration Subgroup (N = 75)
Variables M ean S D 1 2 3 4
Communication 2.77 0.44 1.00
Executive Retention 2.63 0.54 0.10 1.00
Employee Stress 2.71 0.32 0.15 0.10 1.00
Acquisition Performance 3.27 0.54 0.06 0.02 0.27* 1.00
Note: * p < 0.05, ** p < 0.01.

16 The Icfai Journal of Mergers&Acquisitions, Vol. IV, No. 4, 2007

 Hypotheses 1, 2, and 3 were tested using the following regression equation:

ACPERF 0 1 COM 2 EXRETEN 3 ESTRS 1

Where, ACPERF = Acquisition Performance; COM = Communication; EXRETEN =

Executive Retention and ESTRS = Employee Stress.

The regression results are given in Table 2. Communication was significantly

related to acquisition performance ( = 0.18, p < 0.05). Executive retention also
had emerged as significant with beta-coefficient of 0.32 (p < 0.01). As consistent
with the theory, employee stress was found to be negatively related to acquisition
performance ( = 0.28, p < 0.01). Thus, the first three hypothesesH1, H2 and
H3 were accepted. The three predictors together explained 27% of the
performance variation. Several diagnostic tests were conducted to examine the
existence of multicollinearity1 and the underlying assumptions of regression in the
data. First, looking at the correlation matrix, there was no such indication
of collinearity as none of the correlations were above 0.90. On a multivariate level,
in no case, the tolerance values were less than 0.10 or the corresponding
VIF exceeded 10 (Hair et al., 1995). Moreover, all the condition indices were below
the threshold of 30 (Hair et al., 1995) which lend support to the fact that there
was no such problem of multicollinearity in the data set. In addition to the above,
residual analyses and normal probability plots of the model were analyzed in
detail. In all the cases, the residuals fall more or less within a random pattern.
No substantial departures were noticed in the normal probability plots
of the residuals. At the most, it can be said that all the conditions of the regression
were met.

Table 2: Regression Results

Criterion Variable (Acquisition Performance)

Predictor Variables
t p
Communication 0.18 2.31 0.020
Executive Retention 0.32 4.12 0.001
Employee Stress 0.28 -3.68 0.001
R2 0.27
Adjusted R 2
0.25
F 16.04 0.001

The moderating effect of degree of integration as indicated by hypotheses 4, 5

and 6 were tested by using the hierarchical regression method (Frazier et al., 2004).
In the first step, the moderator variable as represented by a dummy code
(1,1) and, the predictor variable were entered to predict the outcome variable.
In the next step, the interaction term of the predictor and the moderator was
introduced and the outcome variable was again regressed on the predictor,
moderator, and the interaction term. The change in the R-square was noted.
If the change was significant, a moderator effect was indicated. The results are
presented in Table 3.
1
Multicollinearity occurs when there is a strong relationship between two or more independent variables,
which results in unstable estimates.

Communication, Executive Retention, and Employee Stress as Predictors 17

of Acquisition Performance: An Empirical Evidence
 Table 3: Moderating Effect of Integration among Relationship
of Communication, Executive Retention, Employee Stress and Acquisition Performance
Moderating Effect of Integration between the Relationship
of Communication and Acquisition Performance
Step and Variable B SE B R2
Effects Coding (High Integration 1, Low Integration 1)
Step I
Integration 0.15 0.05 0.24*
=
Communication (z Score) 0.17 0.05 0.28* 0.11**
Step II
Integration X Communication 0.20 0.05 0.31** 0.10**

Moderating Effect of Integration between the Relationship

of Executive Retention and Acquisition Performance
Step and Variable B SE B R2
Effects Coding (High Integration 1, Low Integration 1)
Step I
Integration 0.07 0.05 0.11
=
Executive Retention (z Score) 0.25 0.05 0.39** 0.18**
Step II
Integration X Communication 0.18 0.05 0.27* 0.07*

Moderating Effect of Integration between the Relationship

of Employee Stress and Acquisition Performance

Step and Variable B SE B R2

Effects Coding (High Integration 1, Low Integration 1)
Step I
Integration 0.06 0.06 0.10
Employee Stress (z Score)= 0.20 0.06 0.31** 0.13
Step II
Integration X Communication 0.03 0.06 0.05 0.00

Note: * p < 0.01, ** p < 0.001.

standardizing the continuous predictor scales (i.e., communication, executive retention, stress)
reduces multicolinearity among the variables in the regression equations and also helps in plotting
moderating effects.

As evident from the results, the regression coefficient of integration was

significant (B = 0.16, p < 0.01) only when communication was the predictor.
In the other two cases it was non-significant. The coefficients of communication
(B = 0.18, p < 0.01), executive retention (B = 0.25, p < 0.001) and employee
stress (B = 0.20, p < 0.001), however, were all significant. As integration was
coded by means of effects coding, these first-order effects of each predictor was
at the average level of other predictor variables. The first interaction term
(communication X integration) was found significant (R2 = 0.096, F = 15.87,

18 The Icfai Journal of Mergers&Acquisitions, Vol. IV, No. 4, 2007

p < 0.001) which means that H4 is accepted. H5 was also supported by data
as integration also moderated (R2 = 0.069, F = 11.91, p < 0.01), the relationship
between executive retention and acquisition performance. When the third
interaction term (stress X integration) was tested, it was not found to be
significant (R2 = 0.003, F = 0.39, p = 0.53) and, therefore, H5 was rejected.

Discussion
The results of the regression analyzes suggest that overall communication,
executive retention and employee stress have significant impact on the
performance. In fact, executive retention has emerged as a strongest predictor,
followed by employee stress and communication. The acceptance of the first
hypothesis shows the importance of the role of communication in mergers and
acquisitions. This has also been echoed in the previous studies (Nikandrou et al.,
2000; and Papadakis, 2005). The acceptance of hypothesis 2, confirmed the views
of Cannella and Hambrick (1993b); and Love (2000) which lend support towards
human capital theory as opposed to corporate control theory. Thus, skills and
experiences of executives of the acquired firm should be considered to be a key
resource to the acquirer. In addition to possessing the firm and industry specific
knowledge, they may also have personal relations with customers and suppliers,
which is of great importance for the companys success. The loss of such key
personnel seriously threatens the acquisition performance. The negative
relationship between employee stress and acquisition performance clearly signify
why the human side of a deal is critical for making an acquisition a success.
The concern of Cartwright and Cooper (1992) in this context would be relevant
as they said:
Synergy of mergers and acquisitions are only measured by the conventional
financial indices that appear on the balance sheets, behavioral indices remain little
monitored and are often dismissed as irrelevant, unimportant or even
inevitable, until such time as these cumulative financial costs impact upon the
balance sheet (Cartwright and Cooper, 1992, p. 27).
By establishing the causative effect of stress on performance, one caveat could
be raised. Like physical and procedural integration, human integration is
nonetheless important to realize synergistic potential of corporate acquisitions.
The results of moderating effect were explored further to understand the form
of interaction. Acquisition performance scores were plotted for different levels
of integration at low (1SD), mean (zero) and high (1SD) levels of communication,
executive retention and employee stress (Cohen et al., 2003). Each of these three
interactions is presented in Figures 1, 2 and 3 respectively.
As regards the nature of moderating effect of the degree of integration, the
study offered some interesting insights. The result suggests that integration has
a moderating role on communication in predicting acquisition performance.
The interaction plot (Figure 1) provides two additional findings. First, the effect
of communication on performance is stronger in high integration than in low
integration acquisitions. It has been further confirmed by looking at the strength
of association between communication and acquisition performance in high and
low integration subgroups. The correlation coefficient of communication and
performance in high and low integration subgroups were 0.55 (p < 0.01) and
0.06 (ns) respectively. It was evident that the relation was strong in high
integration acquisitions and poor and non-significant in low integration

Communication, Executive Retention, and Employee Stress as Predictors 19

of Acquisition Performance: An Empirical Evidence
 Figure 1: Interaction Effect: Integration by Communication

3.5
Performance

3.0
2.5

2.0
Acquisition

1.5

1.0

0.5

0
1 2 3
Communication

Note: (Straight Line and Dashed Line Indicate High and Low Integration respectively).

acquisitions. Second, when communication is low, lower level of integration will

provide better performance (Y = 3.28), than in high level of integration (Y = 2.56).
High levels of communication provide very similar performance scores in high
(Y = 3.32) and low (Y = 3.24) levels of integration. Thus, managers should be
wary of the situation where higher integration is associated with low
communication. As communication increases, higher integration reduces the
performance gap between high and low integration subgroups.

The moderation effect of integration on retention-performance linkage is similar

to the previous one (Figure 2). When retention is low, low levels of integration
provide better results and on average or high retention cases, level of integration
hardly affects performance. The results offer one caveat why communication and
executive retention are more related to acquisition performance for high than for
low integration acquisitions.

Figure 2: Interaction Effect: Integration by Executive Retention

4.0

3.5
Performance

3.0
2.5
2.0

1.5
Acquisition

1.0

0.5

0
1 2 3
Executive Retention

Note: (Straight Line and Dashed Line Indicate High and Low Integration respectively).

20 The Icfai Journal of Mergers&Acquisitions, Vol. IV, No. 4, 2007

 However, employee stress was not moderated by the level of integration
(Figure 3). An additional support of this finding was achieved when no statistically
significant difference in the value of correlation coefficients2 between stress and
performance across high and low integration subgroups was found. Therefore,
the effects of employee stress were consistent across integration categories.
Figure 3 substantiates this finding. When employee stress was high, high
integration (Y = 2.87) and low integration (Y = 3.05) produce very similar performance
scores, as did high integration (Y = 3.45) and low integration (Y = 3.39) with low
levels employee stress. Perhaps employees could not cope with stress, as argued,
with increased information sharing as degree of integration increased.

Figure 3: Interaction Effect: Integration by Employee Stress

4.0

3.5
Performance

3.0

2.5

2.0
Acquisition

1.5

1.0

0.5

0
1 2 3
Employee Stress

Note: (Straight Line and Dashed Line Indicate High and Low Integration respectively).

In summary, the present findings contribute to a better understanding of how

the three predictorscommunication, executive retention, and employee stress
affect acquisition performance. The data support all the testable hypotheses except
H6. As far as their individual effect is concerned, all of them emerged as significant
predictors of acquisition performance. Collectively also, they explained a
significant proportion of the performance variation. Besides explaining the main
effects, the study also explored the moderating role of integration that has long
been the bone of contention of mergers and acquisitions research.

Managerial Implications

From the mangers perspective, the study reconfirms why communication, executive
retention and employee stress are critical to extract value out of a deal.
Communication along with its frequency is important (Papadakis, 2005) as much
as the executive retention. Employee stress is also counterproductive in mergers
2
It tests equality of two correlation coefficients between stress and performance in high and low levels of
integration. The test statistic is U = (Z1Z2 )/(1/ n3 + 1/ n3), Z are the Fishers transformations of correlation
coefficients, n = observations in subgroups.

Communication, Executive Retention, and Employee Stress as Predictors 21

of Acquisition Performance: An Empirical Evidence
and acquisitions. The less the acquired staff experience stress, the better would
be the performance.

Some more practical implications stem from the present study. Most previous
studies theorized integration as an antecedent of acquisition performance.
However, the present study examined the moderating influence of integration.
This, to some extent, helps managers to manage the integration process. Where
there is a high possibility of executive departure, high integration may prove costly
to the acquirer. In this circumstance, the acquirer should avoid integrating the
target until proper actions are taken to retain talents. Communication is equally
important where the acquirer desires to fully integrate the acquired firm.
Adequate communication with the acquired staff will have a positive effect on
performance. Thus, a proper planning regarding these variables before going for
integration is highly advisable to the managers.

Limitations of the Study and Future Research Directions

First, there is a concern over the generalizability of the findings. This study was
conducted in five organizations. If more organizations from other industries were
incorporated, they could have provided a better understanding of the
organizational and human resource dynamics in mergers and acquisitions.

Second, the internal validity threats associated with common methods pose
some concern in this study, as measures of variables are retrospective self-report
measures. Respondents may have been unable or unwilling to respond with
complete accuracy. Though steps have been taken to increase the accuracy
of responses as per the guidelines of Huber and Power (1985) these construct
validation threats need to be evaluated in future research.

Finally, this study adopts a subjective measure of acquisition performance.

To increase the robustness of results, certain objective measures of acquisition
performance based on accounting measures or stock price movement
(event study method) of measuring performance could have been employed.

If communication, executive retention, and stress are some of the key

determinants of acquisition performance, then several important questions need
to be pursued in future research. How do frequency of communication and media
of communication affect the acquisition performance? Will they have any
moderating effect on communication-performance relationship? It is also a fertile
research area to examine the different types of executive departure and their
impact on performance (Hungenberg et al., 2005). This study did not support the
moderating role of integration on stress. So researchers could test whether speed
of integration moderates the relationship between stress and performance
in acquisitions. For instance, when the integration process becomes slow,
employees get used to a condition to influence the appraisal of a situation and
as a result they are better equipped to cope with stress. This temporal effect

22 The Icfai Journal of Mergers&Acquisitions, Vol. IV, No. 4, 2007

is often indicated as occupational stress in literature. As more is learnt about the
nature of relationships, mangers would be better able to handle the soft issues
in corporate mergers and acquisitions.

Acknowledgment: The research was partially funded by the University Grants

Commission (10 th
plan) under the Minor Research Project Scheme, allocation no. F. PHW-
032/05-06 (ERO).

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