Employee Wages - acquisition of competitor

seeker

We are in the initial decision-making phase on a potential acquisition of a competitor. Our company has about 100 employees in 2 locations - both in large cities. We only do businss in Texas. The potential acquisition is located in a small town in Texas between our current 2 locations, about 100 miles west of the main office. The potential acquisition has 25 employees.

Here's the problem:
The potential acquisition pays its employees significantly (15% to 20%) less than we pay our employees. If we buy the company & maintain their current wages, those employees will of course become aware of the difference.
If we would be forced to increase their wages to our current level, it would be a deal-killer - the acquisition would not happen.

Question:
Can anyone suggest a way to deal with this employee wage issue so we can move forward with the purchase?

System

I'll make the asumption that the acquisition will happen because it's a lucrative thing to do. The competitor must be making some profit, but not enough to cover 15 - 20% wage increases. What about scheduled, graduated increases over a period of 1 year to 18 months. For example, 4% at 90 days, 4% at 6 months, 4% at 1 year. Or 3% spread out over time. All increases would be based upon performance, of course. But at least it gives your company time to incorporate it into the budget.

marc

Acquisition strategies are as varied as they come. There are myriad ways to structure this, but it takes some high level planning with respect to your intentions post merger. One easy way to do it is to keep them as a separate company with their own accounting, payroll, etc. Then the two payrolls don't mix. Of course, there are lots of things with that strategy that could be a downside, such as not being able to centralize administrative functions, which by themselves should generate some savings.

seeker

Well, we can consider all that, but that doesn't really resolve the main issue, which is an employee-relations issue. The employees at the potential acquisition would inevitably communicate with our current employees, and would not be happy with making less money. It could turn into an HR nightmare and kill that entity's ability to function.

marc

Of course it would be difficult. The EEs in the acquisition company are currently makeing less than your EEs. If the acquired companies are kept legally separate then their knowledge should not be any different than it is today. You indicated that raising the wages would be a deal breaker. Apparently the high margins that attracted the acquisition interest are directly tied to the lower wages. If you cannot conceive of ways to segregate the information flow and thereby maintain the lower wages, then perhaps you should pass on this acquisition.

This was just one thought, I am sure you have examined potential savings by centralizing administrative functions - that should allow you to eliminate a couple of positions at the acquired company. Those savings could be used to augment wages in the acquired company and perhaps help protect the bottom line that makes the acquisition attractive. There must be a number of other things to consider, such as the sales momentum generated by a larger market share, improved cost efficiencies for being able to buy larger quantities of raw materials. None of us on this forum can know all of the ins and outs of bringing these companies together - that's why I started with the thought that acquisition strategies are numerous, but it would take a significant feasibility study to really understand if acquiring the new company makes sense. Examining one factor, such as wage differential, is like dressing for dinner in the jungle - a bit pointless.

Not meaning to offend, just throwing out ideas.