WRITTEN QUESTION E-1459/03

by Herman Schmid (GUE/NGL) to the Commission

(29 April 2003)

Subject: Employment and economic effects of takeovers

The European Parliament's Directorate General for research has concluded a study on Employment and economic effects of corporate restructuring and takeover (Division for Social and Legal Affairs IV/WIP/2003/01/008). It gives an overview of empirical studies in this field and draws some general conclusions.

Studies in UK, where most mergers and acquisitions (M & A) take place, have found UK takeovers to be associated with significant falls in both employment and output. Employment in the new firms post-takeover drops on average by 11 % in the five years following the bid.

The Parliament study refers to Unctad's World Investment Report 1999: Empirical evidence shows a puzzling result, M & As fail in terms of wealth creation in remarkably high numbers (IV/WIP/2003/01/008 p. 6). It shows that the most common result of a merger is the following: profitability and productivity do not improve, it seems to have a decelerating impact on market share growth, it is likely to have a negative effect on R & D investments, etc. It is beyond any doubt that the employees will be profoundly effected by a merger, due to changes in organisational structure, employment and working conditions and lay-offs.

What is the usefulness of takeovers if they are not empirically and unambiguously found to create wealth?

How does the Commission justify the proposal to have companies inform and consult with employees, although they can be ignored in the final descision, knowing that many of the mergers result in major job losses and profitability does not improve, or improves less than could have been the case without the merger?

Answer given by Mrs Diamantopoulou on behalf of the Commission

(23 June 2003)

It is true that many restructuring operations, mergers and take-overs do not sometimes produce the anticipated result in terms of increasing profitability, competitiveness and productivity of the companies in question. But the question whether this is always the case is a very debated one(1). In fact, some studies have argued that mergers and acquisitions can reduce production costs, increase output, improve product quality, obtain new technologies or provide entirely new products. Some other studies have pointed out that the implementation of a merger is often problematic and difficult, which explains why a large number of mergers fail to deliver their promises in terms of value creation and synergies. One should therefore be cautious about sweeping statements that mergers always fail. Mergers and acquisitions are sometimes the best way for some firms to improve their efficiency. They are generally considered neutral if not beneficial for the economy; for instance, the Community Merger Regulation, in Article 10(6) establishes a general presumption of legality for concentrations of Community dimension. In any case, the conduction of business is a prerogative of management in which the Union should not intervene.

That being said, mergers and acquisitions typically lead to corporate restructuring. The ability of firms to quickly re-deploy their activities is a key factor of competitiveness for the European economy, and consequently for the creation of jobs in the long run. However, it is also true that most of those operations may also have a negative impact in terms of employment, as well as in the surrounding environment, at least in the short run. For that reason, it is important to accompany restructuring operations, to prevent those likely to be affected from suffering from it. The Commission would like to remind that the Union has developed throughout the years a comprehensive policy for dealing adequately with the social consequences of corporate restructuring, including mergers and take-overs. As a result of that on-going policy, every restructuring operation must be preceded by effective information and consultation of employees' representatives with the aim of avoiding or attenuating its social impact, in accordance with Community Directives on Collective Redundancies(2), Transfers of Undertakings(3), European Works Councils(4) and Information and Consultation(5).

More generally, the Commission advocates the idea that companies should always take into account the effects that their decisions can have on their employees as well as on the social and regional context. This has recently been underlined in the Commission Communication concerning Corporate Social Responsibility (CSR) A business contribution to Sustainable Development(6).

Furthermore, the Commission invited the European social partners to engage in a dialogue on anticipating and managing change with a view to apply a dynamic approach to the social aspects of corporate restructuring. The social partners agreed to incorporate this issue in their pluriannual work program 2003-2004. The Commission very much hopes that their joint work in this field results in a Community framework which helps companies and their workers to successfully address the social dimension of corporate restructuring.

(1) For a general review of the evalutaion of mergers and acquisitions, see for instance the working paper No 243 by Paul A. Pautler, Bureau of Economics, Tederal Trade Commission; it can be found on the Internethttp://www.ftc.gov/be/econwork.htm; see also http://www.ftc.gov/be/rt/mergerroundtable.htm.

(2) Council Directive 98/59/EC of 20 July 1998 on the approximation of the laws of the Member States relating to collective redundancies. (This Directive consolidates Directives 75/129/EEC and 92/56/EEC) OJ L 225, 12.8.1998.

(3) Council Directive 2001/23/EC of 12 March 2001 on the approximation of the laws of the Member States relating to the safeguarding of employees' rights in the event of transfers of undertakings, businesses or parts of undertakings or businesses OJ L 82, 22.30.2001.

(4) Council Directive 94/45/EC of 22 September 1994 on the establishment of a European Works Council or a procedure in Community-scale undertakings and Community-scale groups of undertakings for the purposes of informing and consulting employees OJ L 254, 30.9.1994.

(5) Directive 2002/14/EC of the European Parliament and of the Council of 11 March 2002 establishing a general framework for informing and consulting employees in the European Community OJ L 80, 23.3.2002.

(6) COM(2002) 347 final.