The industrial relations impact of cross-border mergers and acquisitions

The scale of cross-border mergers and acquisitions has increased rapidly in recent years. The UK is more involved in this process than any other EU country: UK-based multinational companies have purchased more firms abroad than any other nationality, while Britain has also been the largest seller of firms to foreign multinationals. This feature examines the implications of this growth for employees and trade unions - implications which are particularly relevant in late 1998 when, for example, the effects of BMW's takeover of Rover in terms of cutting costs and increase flexibility have hit the headlines.

In recent years the scale of mergers and acquisitions at the international level has risen to unprecedented heights. The United Nations estimates that cross-border mergers and acquisitions amounted to USD 275 billion in 1996, a three-fold increase in five years. In 1998, there have been a number of "mega-mergers" between firms from different systems: the tie-ups between Daimler and Chrysler (USD 41 billion) (DE9805264N) and BP and Amoco (USD 48 billion) are two of the largest cross-border mergers in history. International mergers are concentrated in North America and Europe, each region accounting for almost one third of the sales. Within Europe, the UK is by far the largest seller of firms to foreign multinationals: 41% of the cross-border mergers and acquisitions in Europe in the period 1994 to 1996 involved the sale of British companies. This feature examines the implications for industrial relations of the prevalence of international acquisitions in Britain.

It is possible to identify three distinct effects on employees and their representatives of this international merger activity: the general "acquisition effect"; the "multinational effect"; and the "nationality effect".

The general acquisition effect

Some mergers are accompanied by new investment to upgrade existing assets and acquire new ones. In other cases, the rationale for mergers is to redeploy and intensify the way existing assets are utilised. Other mergers may involve operations being slimmed down or disposed of altogether. The general "acquisition effect" is a characteristic of all acquisitions rather than being specific to those at the international level. One consequence of the general acquisition effect is for many mergers and acquisitions to lead to substantial redundancies.

This tendency is particularly evident in domestic mergers in Britain (UK9807136F) and is also evident in international mergers involving British firms. The financial sector is one in which this is particularly marked, with a wave of mergers being accompanied by large-scale job losses. For example, the recent merger between British American Financial Services and Zurich Insurance was followed by 1,600 jobs being lost in their British operations. The oil sector has also been affected by some huge mergers, many of which have led to redundancies. The tie-up between BP and Amoco is expected to see 6,000 jobs being cut worldwide, with some of these occurring in Britain.

The multinational effect

The second effect that international mergers have on industrial relations can be termed a "multinational effect". One source of power that managements in multinationals enjoy in relation to worker representatives is their ability to "divide and rule" their international workforce. A growing trend is for the headquarters of multinationals to overcome potential resistance to change on the part of unions at plant level by linking the performance of subsidiaries to investment decisions, a process referred to as "coercive comparisons". Cross-border mergers and acquisitions may create a multinational out of two companies which were previously based solely at the national level, introducing the multinational effect to both parties for the first time. Alternatively, where a multinational acquires a national firm, the acquired party becomes exposed to this effect. Moreover, where one multinational acquires or merges with another, the geographical scope and spread of the merged firm is likely to be greater than that of each of the two firms prior to merger, increasing the force of the multinational effect.

A topical illustration of the multinational effect of international mergers in the UK is the case of Rover, which was acquired by BMW in 1994. Since the acquisition, the pressure to cut costs and increase flexibility has steadily increased, with the German parent company making explicit comparisons between the British and German plants. Recently, BMW used the threat of closing the huge Longbridge production plant to secure the agreement of unions to a package of measures including significant changes to working practices and 2,500 redundancies.

The nationality effect

The third impact that cross-border acquisitions have on workforces is a "nationality effect". Despite claims by some writers that globalisation has led to a convergence in patterns of organisation between countries, substantial differences remain in the nature of "national business systems" in which firms are embedded. One area in which these differences are stark is that of corporate governance and control. In particular, the characteristics and role of financial institutions, such as stock markets and banks, differ markedly across countries, while hostile takeovers are much more common in some systems than in others. Differences by nationality in the way that firms are governed and financed leads to different pressures being exerted on management. One key distinction is between the "Anglo-Saxon" system which creates a short-term orientation towards financial results and the continental European system which allows management greater freedom to pursue long-term goals such as growth in market share. Thus, the impact on a British firm of being taken over by a foreign multinational will be shaped by the nationality of the acquirer.

The nationality effect is illustrated in differences in the approach to industrial relations of multinational companies from America and Germany. Where American firms have made acquisitions in Britain there appears to be: an emphasis on frequent financial reporting; hostility to trade unions, especially for white-collar workers; and a tendency to intensify the use of labour. The picture in the electricity supply industry in Britain, where a majority of the regional electricity companies have been acquired by American firms, is consistent with this. German acquisitions of British firms, on the other hand, have brought a different effect to bear, involving: a long-term approach to planning and investment; evidence of "partnership" and "cooperation" in managing their workforces; and a willingness to devote significant resources to training. The ways in which German multinationals such as Continental and Hoechst manage their international workforces demonstrate that this approach remains even in highly internationalised firms.

Commentary

It is clear that cross-border mergers and acquisitions present considerable challenges to employees and trade unions. In part, these stem from the restructuring and redundancies that commonly follow mergers in general, not just those that are international in nature. The challenges also arise from the competitive pressures generated by comparisons with plants in other countries, something which tends to increase following cross-border mergers. The final source of these challenges is the nationality effect in which the acquisition brings a new management style to bear. The nature of the impact that this exerts will vary according to the nationality of the acquirer: employees and trade unions may view the consequences of takeovers by some companies as more beneficial than takeovers by others.

This analysis raises important policy issues. Arguably, one reason why the UK attracts such a large share of cross-border acquisitions is that the legal and institutional barriers to takeovers are weaker in the UK than in most of the rest of Europe. One motivation for governments in continental Europe to weaken these legal and institutional barriers, as appears to be happening in the Netherlands (NL9801154F), is to attract more of this form of foreign direct investment. However, it is clear that increasing the ease with which cross-border mergers and acquisitions take place would involve significant challenges to national systems of industrial relations. Given that the benefits of cross-border acquisitions are more limited than investments in greenfield sites - they do not create new employment in the same way, for example - many observers may consider these challenges too high a price to pay. (Tony Edwards, IRRU)