PS6 - Research Paper. Rozen-Bakher, Z. Do Labour Unions Protect Employees against Layoffs in Mergers & Acquisitions (M&As)?

Rozen-Bakher, Z. Do Labour Unions Protect Employees against Layoffs in Merger & Acquisitions (M&As)? Research Paper, PS6. https://www.rozen-bakher.com/research-papers/ps6

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Rozen-Bakher, Z.

Do Labour Unions Protect Employees against Layoffs in Mergers & Acquisitions (M&As)?

Abstract

The traditional conflict that exists between labour unions in maintaining jobs and the management in maximizing efficiency intensifies in M&As because of the nature of the M&A strategy that is supposed to lead to a reduction of jobs during the integration. Thereby, this study raises the question if labour unions succeed to protect employees against layoffs during the integration. The study compares M&As without labour unions, M&As when the Buyer has a labour union and M&As when the seller has a labour union. The sample includes 138 companies from 9 countries that were involved in M&As. The results show that only the seller’s labour union succeeds to protect jobs and even lead to an increase in employment during the M&A process. That suggests that the seller’s labour union has the power to prevent layoffs due to the fear of the management getting into industrial relations disputes with the labour unions during the integration. The study even indicates that the fear of conflicts between the management and the seller’s labour union leads the management to act contrary to the nature of the M&A strategy. Thereby, instead of cutting jobs during the integration stage, the management even increased the workforce size to get a smooth M&A process without slowdowns or strikes. The study emphasizes that the implementation of an M&A strategy may not be according to the nature of the integration when labour unions are involved in the deal, especially when the seller has a labour union.

Keywords: Intra-Political Infighting, Labour unions, Layoffs, Management Risk, Mergers and Acquisitions (M&As)

Introduction

The traditional conflict that exists between the labour unions’ interests in maintaining jobs and higher wages and employers’ interests in maximizing efficiency (Becker & Olson, 1989), intensifies in Mergers and Acquisitions (M&As) due to the nature of the integration that is supposed to lead to a reduction of jobs (Deakin & Slinger, 1997; Gibbs 1993; Haspeslagh & Jemison, 1991; Lehto & Böckerman, 2008; O’Shaughnessy & Flanagan, 1998). Thereby, this study raises the question of whether an M&A with a labour union influences differently employment compared to an M&A without a labour union. More specifically, the study explores if a labour union is succeeded to protect employees against layoffs during the integration, or vice versa, if the management is succeeded to reduce jobs as expectedly during the integration, despite that a labour union is involved in the deal.

The M&A strategy has two main objectives – seizing synergy potential (Graebner, 2004; Rozen-Bakher, 2018e; Weber et al., 2011) and improving efficiency through reduction of jobs during the integration process (Deakin & Slinger, 1997; Gibbs, 1993; Haspeslagh & Jemison, 1991; Lehto & Böckerman, 2008; O’Shaughnessy & Flanagan, 1998; Rozen-Bakher, 2018e). However, from the viewpoint of workers, labour unions should protect them from losing their jobs, particularly if they hold permanent positions (Davidsson & Emmenegger, 2013). Therefore, the common concern of the decision-makers who engage in M&As that the deal may end in a failure if a labour union resists the downsizing during the integration stage.

The M&A literature has traditionally focused on strategic and financial factors that influence the M&A activity (Stahl et al., 2013), and more recently, studies have explored the very important socio-cultural and human resource factors (Jap et al., 2017; John et al., 2015; Krishnan et al., 2007; Lehto & Böckerman, 2008; Weber & Drori, 2011; Weber & Tarba, 2013). However, previous M&A studies, especially new studies, have neglected the investigation of the role of labour unions in M&As, particularly how the labour unions influence employment in M&As. There are studies in the M&A literature that examined the relationship between the M&A activity and labour unions (e.g. Armah & Peoples, 1997; Becker & Olson, 1989; Chen et al., 2011, 2012; Doucouliagos & Laroche, 2009; Lee & Mas, 2012; Lommerud et al., 2006; Lommerud et al., 2011; Rosett, 1990; Zeller, 2000). However, these studies focused mainly on the motives for acquiring unionized firms or about the changing of unions’ power in M&As (e.g. Fallick & Hassett, 1996; John et al., 2015), rather than on the influence of labour unions on employment in M&As. Moreover, the M&A literature lacks studies that compare the Buyer’s union and the seller’s union in relation to downsizing during the integration. Therefore, comparing the role of the Buyer's union versus the seller's union in M&As may help to predict if M&As with labour unions require a different approach for reduction of jobs during the integration compared to M&As without labour unions.

In light of that, two important research questions arise: Firstly, are there differences between M&As with labour unions and M&As without labour unions in relation to downsizing during the integration? Secondly, are there differences between the Buyer’s union and the seller’s union regarding their ability to protect jobs during the integration?

Considering the above, this study aims to fill the gaps in the existing literature outlined above by exploring if labour unions succeed to protect employees against layoffs during the Integration in Merger & Acquisitions. Thereby, based on the literature, the research model and hypotheses are developed and tested using a sample of 138 manufacturing companies from 9 countries that were involved in M&As.

The paper is organized as follows: the next section lays down the theoretical background and hypotheses. The following sections discuss and present the methodology, the results and the discussion. The final sections present the conclusions and discuss the limitations of the study including recommendations for future studies.

Theoretical Background and Hypotheses

Figure 1 presents the developed research model that serves as a directive for this study. The research model includes three variables of labour unions − M&As without unions, Buyer’s union and seller’s union – to reveal how each of them separately affects the downsizing during the three stages of the M&A process: the pre-M&A stage, the integration stage and the post-M&A stage (Caiazza & Volpe, 2015).

The Influence of the Labour Union on Firm's Success: Low Firm Profitability Vs. High Labour Productivity

The existing literature argues that unionization has been associated with poorer financial performance in the workplace (Laroche & Wechtler, 2011). Previous studies suggested that labour unions reduce firm profitability (Doucouliagos & Laroche, 2009; Laroche & Wechtler, 2011; Saavedra-Chanduví & Torero, 2002) because of the continuous striving of labour unions to raise wages, resulting in a negative impact on firm profits, particularly if labour unions produce no other effects to offset the higher wage levels (Hirsch, 1991). Saavedra-Chanduví & Torero (2002) even argued that the lower the profits are, the higher the union density within the firm. Given that, the impact of labour unions on financial performance is related to the bargaining power of labour unions (Doucouliagos & Laroche, 2009). However, equally, labour unions contribute to more satisfied, cooperative, and productive workforces, which may balance the negative impact of labour unions on wage levels (Doucouliagos & Laroche, 2009; Laroche & Wechtler, 2011). Nevertheless, industrial relations disputes (e.g. slowdowns and strikes) can reduce the productivity in unionized firms (Hirsch, 1991).

In spite of the above, previous studies argued that labour unions may contribute to productivity because of several main reasons (Doucouliagos & Laroche, 2009; Laroche & Wechtler, 2011). Firstly, workers of unionized firms are more committed to the firm with a lower rate of turnover. Secondly, labour unions contribute to the improvement of communication between unionized employees and management. Thirdly, labour unions have the ability to provide more information about the workers’ preferences, which allows the management to develop a better human resource policy (e.g. working conditions) that will be more fit for the firm’s employees. Fourthly, labour unions can contribute to the motivation of employees by representing the dissatisfied workers.

The Conflict between Labour Unions and Management during the Integration: Cutting Jobs by Management Vs. Protecting Jobs by Labour Unions

The M&A strategy creates an opportunity to gain short-term profit if the management of the Buyer succeeds to reduce the seller’s workforce (Kubo & Saito, 2012) during the integration process. Therefore, a reduction of union costs could be a source of potential profits (Armah & Peoples, 1997; Heywood & Peoples, 1994), especially in the case of unprofitable unionized firms. The desire to deal with workforce inefficiency in M&As becomes more noticeable, particularly in big labour-intense seller firms (Froud et al., 2000) which more applies in the manufacturing sector. An M&A with a labour union may also create an opportunity to repudiate union representation to avoid paying union earnings premiums or to remove the obligation to labour unions, or even altogether if a labour union stop representing the majority of the workforce in the post-M&A period (Armah & Peoples, 1997). Hence, if the motive for the M&A is acquiring an unprofitable seller with a labour union, then it's supposed to lead to cost-cutting (Rhoades, 1998) and workforce reduction to improve the profitability (Vennet, 1996).

Moreover, the nature of the M&A strategy creates many opportunities for removing redundancies through the elimination of duplicate jobs and overlapping activities (Lehto & Böckerman, 2008), as well as through consolidation of functions (Krishnan & Park, 2002), especially in the case of buying an unprofitable seller, resulting in a decrease in employment (Deakin & Slinger, 1997; Lehto & Böckerman, 2008), particularly during the integration stage (Haspeslagh & Jemison, 1991). However, the success of the integration depends mainly on the abilities of both firms – the Buyer and the seller – to work together and collaborate to create successful integration between the two firms. However, the nature of the integration can lead to a culture clash (Weber et al., 2011) and political infighting between the managers of the Buyer and the employees of the seller (Calandro, 2008), particularly if the M&A involves labour unions. Firms and labour unions generally have conflicting interests, particularly related to M&A decisions (Lommerud et al., 2006) because one of the main goals of labour unions is to protect jobs. Therefore, the need to eliminate duplicate jobs and operations at the integration stage may lead to political in-fighting between the management and labour unions, which may hinder the cutting of jobs to avoid disputes, such as the resistance to the integration change by the employees of the seller (Piske, 2002; Schweizer, 2005), especially in a case that the seller has a labour union. Nevertheless, the potential for conflict scenarios with the labour union of the seller may deter the management of the Buyer to cut jobs in the unionized seller's workforce, particularly if the union threatens with slowdowns and strikes (Adams & Neely, 2000).  Besides, layoffs of unionized employees of the seller can serve as an excuse to withdraw from the obligation that the firm should have a labour union, especially if the layoffs lead to the elimination of the majority of the union workers (Armah & Peoples, 1997; Heywood & Peoples, 1994). In other words, an M&A may signal the beginning of the efforts to replace unionized workers to reduce the union’s bargaining power (Heywood & Peoples, 1994) in order to allow the new management to rescind the existing labour contracts, resulting in downsizing (Lehto & Böckerman, 2006). Given that, labour unions view M&As as a threat to the collective agreements (Fallick & Hassett, 1996), so layoffs of unionized workers may not be smooth during the M&A process (Zeller, 2000) due to the resistance of labour unions to cutting jobs. That’s may result in a failure of M&A with labour unions due to the inability to cut jobs and improve efficiency.

Considering the arguments outlined above, the following hypotheses have been developed:

• M&As without labour unions have a negative influence on employment during the M&A process.

Methodology

Research Method

Evaluation Method. The M&A literature typically encompasses three main methods for micro-performance evaluation in M&A studies (Rozen-Bakher, 2018e, 2018a): the event study method, the accounting research method, and the respondents’ self-estimated rating method (see e.g. Rozen-Bakher, 2018e, for a full comparison between the three methods). The present study is based on the accounting research method by analysing the annual reports (10-K) of the public firms that are included in the sample. The advantage of the accounting research method lies in the reliable source for ‘hard data’, namely annual reports of the firms.

Time Series Analysis. The study includes time-series analyses in relation to the M&A process (Rozen-Bakher, 2018a). Thereby, the study examines the research model through the three stages of the M&A process (Rozen-Bakher 2017, 2018a), namely the pre-M&A stage, the integration stage and the post-M&A stage (Caiazza & Volpe, 2015).

Sample and Data Sources

The sample included 138 manufacturing listed companies that were involved in M&A deals. These listed companies have traded in the Nasdaq Stock Market (NASDAQ) or the New York Stock Exchange (NYSE) (NASDAQ, 2018; NYSE, 2018). Besides, the firms included in the sample are from 9 countries, such as Canada, Chile, France, Germany, Switzerland, the United Kingdom and the United States.

The sample of the study is based only on the manufacturing sector (production) due to the nature of this sector, which is included many unionized firms (46.4% unionized M&As of the sample), and in particular, unionized firms with a big workforce. The average number of employees of the sample before the M&A took place was 45,898 employees of the Buyers, while it was 5,515 employees of the sellers. The classification of the manufacturing sector of the study is based on the International Standard Industrial Classification (ISIC) classification of the United Nations industry classification system (UNSD, 2018). Hence, the sample is based on category D of ISIC and it refers to the type of activity of the seller firm before the M&A took place.

The database of the sample is based on 276 annual reports (10-K). The 10-K annual report gives a comprehensive summary of the financial performance of the firm (SEC, 2009), which is considered a reliable source for information about the firm's financial performances and characteristics (Rozen-Bakher, 2018e). These annual reports required by the U.S. Securities and Exchange Commission (SEC) (SEC, 2009; Rozen-Bakher, 2018e),  which allow comparison among many public firms because the SEC requires the same financial measures from all the public firms that traded on the stock exchanges in the USA (SEC, 2009; Rozen-Bakher, 2018e). Besides, according to the SEC, any public firms that traded on the stock exchanges in the USA must publish these annual reports to the public (SEC, 2009; Rozen-Bakher, 2018c). Thereby, these annual reports usually can be found on the websites of the public firms or on websites that provide annual reports of various public firms.

Measures

Dependent variables. The study included two dependent variables to examine the employment change during the M&A process:

• Employment change, Pre-M&A stage to Integration Stage. The first dependent variable examined the employment change at the integration stage by measuring the change in the number of employees between the pre-M&A stage and the integration stage.

• Employment change, Pre-M&A stage to Post-M&A Stage. The second dependent variable examined the employment change during the whole M&A process by measuring the change in the number of employees between the pre-M&A stage and the post-M&A stage (Dragan & Dušan, 2016).

Independent variables. The study included three independent variables to examine the influence of labour unions on employment during the M&A process. In this study, the labour union variables were defined as dummy variables. These variables were based on the status of the labour unions before the M&A took place.

• M&As without Unions. For this variable, 1 represents M&As without labour unions in both the Buyer and the seller and 0 represents other.

• Buyer’s Union. For this variable, 1 represents a labour union of the Buyer and 0 represents the other.

• Seller’s Union. For this variable, 1 represents a labour union of the seller and 0 represents the other.

Control variables. The study included four control variables.

• International M&As. The M&A literature suggests that it’s more difficult to achieve M&A success between two firms from home different countries due to the institutional and cultural distances between the two home countries (Chen & Wang, 2014; Child et al., 2001; House et al., 2002; Shimizu et al., 2004; Weber et al., 2011, 2012). More importantly, the literature argues that labour unions trying to avoid involvement in international M&As (Guillén, 2000; Lommerud et al., 2006) because the management of multinational firms more often trying to reduce the power of the union (Lawler et al., 2013; Straume, 2003). Therefore, this study assumed that the labour unions may hinder the ability of the management to reduce jobs in international M&As, particularly when the seller has a labour union. The international M&A was defined in this study as a dummy variable, where 1 represents international M&A, and o represents domestic M&A. International M&A is based on the status of the Buyer and the seller before the M&A took place in relation to the differences between their origin countries (Rozen-Bakher, 2018d).

• Conglomerate M&As. Conglomerate M&As refers to M&A that involve a Buyer and a seller that produce unrelated products-market diversification, which is neither substitutes nor complements (King et al., 2004; Rozen-Bakher, 2018a; Tremblay & Tremblay, 2012). Consolidation of operations and human resources in conglomerate M&As are more complicated due to the diversity and un-relatedness activities (Rozen-Bakher, 2018a), which influence the ability to cut jobs during the M&A process. Moreover, the diversity may also complicate the integration stage, and as a result, it may cause an intense cultural clash and human resource problems (Puranam et al., 2009; Weber et al., 2011). Considering that, this study assumes that conglomerate M&As are supposed to hinder the ability to reduce the workforce size during the M&A process. Conglomerate M&As was measured in this study by the industries' dissimilarities of the Buyer and the seller, based on the two-digit level of the ISIC.

• M&A Performance. The M&A performance of the study is measured by the value creation of the M&A. The value creation of the combined firm in the post-M&A stage is supposed to be greater than the sum of the value creation of the individual firms in the pre-M&A stage (Seth et al., 2002). Thus, this variable was examined by using the revenue change (millions of US$) between the pre-M&A stage and the post-M&A stage. The calculation of this variable is based on the last annual reports of the Buyer and the seller before the M&A took place, as well as on the second annual report of the Buyer after the M&A took place.

• Labour Productivity Ratio. Labour productivity is defined as the total output divided by the labour inputs (Samuelson & Nordhaus, 1989; Rozen-Bakher, 2018e), which indicates the efficiency of the labour force in creating the output of the firm (Datta et al., 2005; Rozen-Bakher, 2018e). Labour productivity is considered a crucial indicator for workforce performance (Delery & Shaw, 2001) in terms of the effectiveness of the human resources systems (Datta et al., 2005). Therefore, labour productivity can serve as an important control variable in labour union studies because of the argument that labour unions positively influence labour productivity (Doucouliagos & Laroche, 2009; Laroche & Wechtler, 2011). The labour productivity in this study is examined by using the ratio (Hagedoorn & Duysters, 2002; Kemal, 2011; Rozen-Bakher, 2018a) of labour productivity of the Buyer and the seller in the pre-M&A period, based on the indicator 'revenue per employees' (Piske, 2002; Rozen-Bakher, 2018e). A higher ratio implies a greater difference in size between the Buyer and the seller, and in particular, that the seller is smaller than the Buyer.

Test analysis

The study examined the hypotheses of the study, based on tests of multiple linear regression. Each of the labour unions variables was tested separately in a different regression. This allows an examination of a set of independent variables with a high correlation between them, but with the prediction of a different effect in relation to the dependent variables (e.g. Rozen-Bakher, 2018b). Hence, the study included three multiple linear regressions for the three labour unions variables. The study also included a variance inflation factor (VIF) test to identify a multicollinearity problem in the multiple linear regressions (Chatterjee & Price, 1991; Hopkins & Ferguson, 2014; Mansfield & Helms, 1982; Rozen-Bakher, 2018b).

Results

Tables 1–3 show the results of the hypotheses of the study. Table 1 shows the descriptive statistics of the research variables, while Table 2 shows the correlation matrix between the research variables. Tables 3 shows the results of the multiple regressions. The results support the hypotheses of the study. The results show that only the seller’s union is significantly and positively associated with employment in relation to the two stages examine in the study, while the Buyer’s union shows no significant results.

Moreover, the results in relation to the control variables show, that conglomerate M&As and M&A performance are significantly and positively associated with the two dependent variables of employment.   However, the results regarding international M&As and labour productivity ratio show no significant results in relation to the two variables of employment.

Discussion

The analysis of the study brings to light the novelty of this study. The common assumption of managers and policymakers that the implementation of M&A strategy is supposed to lead to a reduction of the labour union’s power along with cutting unionized jobs (Armah and Peoples 1997), especially when involved in the deal a seller with a labour union. That’s turned out to be a false assumption according to this study. On the contrary, this study reveals that the seller’s union can prevent the cutting of jobs during the M&A process, and even increase the jobs during the integration stage (opposite to the nature of the integration), which signal the failure of M&A strategy when involved a seller’s union in the deal.

Looking in-depth at the results reveals that the seller’s union has the power to prevent layoffs during the M&A process, which is contrary to the nature of the integration process that is supposed to lead to a reduction of jobs (Deakin & Slinger, 1997; Haspeslagh & Jemison, 1991; Krishnan & Park, 2002; Lehto & Böckerman, 2008). Furthermore, the results even reveal that the seller’s union has more power to prevent the cutting of jobs compared to the Buyer’s union. These results are particularly surprising because the sample of the study included 46.4% labour unions in the Buyer’s firms, while only 26.1% labour unions in the seller’s firms. Despite it, the results show, that only the seller’s union leads to an increase in employment during the M&A process, especially during the integration stage, while the Buyer’s union nor M&As without labour unions do not lead to an increase in employment. In contrast, the results show based on the correlation matrix that M&As without labour unions leads to a decrease in employment, as expectedly to the nature of the integration process that is supposed to lead to removing redundancies through the elimination of duplicate jobs and overlapping activities (Lehto & Böckerman, 2008).

Considering the above, this study suggests that labour unions have the power to prevent the cutting of jobs due to the fear of the management getting into industrial relations disputes with the labour unions during the M&A process. The study even suggests that the fear of conflicts between the management and the seller’s union leads the management to act contrary to the nature of the M&A strategy, namely instead that the management will decrease the jobs during the M&A process, then the management even increased the workforce to avoid industrial relations dispute with the seller’s union.

Analysing the control variables also reveals a contradiction in relation to the nature of the M&A strategy. Unexpectedly, the results show no significant relationships between the international M&As and M&As with labour unions. This suggests that the management succeed to reduce jobs during the M&A process in the case of international M&A without labour unions, while in the case of international M&A with labour unions, then the downsizing won't be smooth as expected.

In sum, this study highlights the importance of the industrial relations factor that influences M&A activity. Most of the M&A studies look at the ‘visible factors (e.g the financial factors), while this study tried to look at the ‘invisible factors’ (e.g. the industrial relations factor) that influence the implementation of M&A strategy. Nevertheless, the study emphasizes the need for more future studies that will explore the role of labour unions in M&A activity.

Conclusions

This study raises the question if labour unions succeed to protect unionized employees against layoffs during the M&A process, or vice versa, the management succeed to reduce the jobs as expectedly to the nature of the integration. This investigation is especially essential due to the struggle to understand why the M&A strategy ends with a failure in numerous M&A deals (King et al., 2004; Kumar & Sharma, 2019; Kummer & Steger, 2008; Matsumoto, 2019; Renneboog & Vansteenkiste, 2019; Rozen-Bakher, 2018a, 2018c; Venema, 2015; Thelisson, 2020; Tichy, 2001; Weber et al., 2012).

The results of the study show, that only the seller’s union leads to an increase in employment both at the integration stage and at the post-M&A stage, while the Buyer’s union and the M&As without labour unions, do not lead to a change in employment at the integration stage nor at the post-M&A stage. These results bring to light the importance of this pioneering research. First, the study does not confirm the common assumption that the implementation of the M&A strategy is supposed to lead to a reduction of labour union’s power along with a reduction of unionized jobs. On the contrary, the study reveals that the seller’s union has the power to prevent the cutting of jobs during the M&A process, and in particular, during the integration stage. More importantly, the study reveals that the seller’s union has the power to increase jobs during the integration stage, which is contrary to the nature of the integration that is supposed to end in a reduction of jobs (Deakin & Slinger, 1997; Haspeslagh & Jemison, 1991; Krishnan & Park, 2002; Lehto & Böckerman, 2008). These results suggest that the seller’s union has the power to prevent the cutting of jobs due to fear of the management getting into industrial relations disputes with the labour unions during the integration stage. This even suggests that the fear of conflicts between the management and the seller’s union leads the management to act contrary to the nature of the M&A strategy. Thereby, instead of cutting jobs during the integration stage, then the management even increased the workforce size to get a smooth M&A process without slowdowns or strikes.

In light of that, the study emphasizes that the implementation of an M&A strategy may not be according to the nature of the integration when a labour union is involved in the deal, especially when the seller has a labour union. The study concludes that the industrial relations factor may give a supplementary explanation for the failure of M&A strategy.

Limitations of the Study and Future Research

The study has two main limitations: First, the existing literature has a few studies that deal with this topic, especially new ones, which limits the ability to compare the results of this study with the results of previous studies, as well as to lay down a solid theoretical background, based on previous studies. Second, the existing literature lacks studies that compare between the Buyer’s union and the seller’s union in relation to the impact of M&A activity on employment.

Considering the limitations outlined above, there are tremendous opportunities for future studies. First, this study highlights the need for theoretical future studies that will develop a well-grounded theoretical foundation regarding the role of labour unions in M&A strategy. Neither the M&A literature nor the labour union literature provides solid explanations about how the labour unions affect the implementation of M&A strategy. Second, this study raises the need for a comparison between additional labour unions variables, such as between M&A with one union versus M&A with two unions in order to explore if these variables influence the M&A activity. Third, additional variables can be examined based on the research model of this study, such as additional types of M&A (e.g. horizontal M&As) (Tremblay & Tremblay, 2012). Finally, this study highlights the need to examine the research model of this study in other sectors, such as in the service sector (Tsoukatos, 2008) or in the telecommunication sector that has gone dramatic change (Levi-Faur & Rozen-Bachar, 2011), nonetheless, these sectors still include many big firms with labour unions.

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