Empirica 26: 39–54, 1999. © 1999 Kluwer Academic Publishers. Printed in the Netherlands. 39 Merger Activity and Employment: Evidence from the UK Mutual Sector MICHELLE HAYNES 1 and STEVE THOMPSON 2⋆ 1 Department of Economics, University of Nottingham, Nottingham, NG7 2RD, UK 2 Department of Economics, University of Leicester, Leicester LE1 7RH, UK Abstract. This paper approaches the performance consequences of mergers from a new direction; namely by analysing their impact on the acquiring firm’s demand for labour. It employs a dynamic labour demand model, with an unbalanced panel of UK financial mutuals over the period 1981–1993. The data relate strictly to core financial intermediation activity and are thus particularly appropriate for the paper’s purposes. The results are strongly supportive of an efficiency-enhancing interpretation of merger activity. A significant positive initial impact on the acquirer’s demand for labour is followed by three years of significant negative effects, a result consistent with the acquisition and subsequent digestion of less efficient targets. Key words: Mergers, employment, labour demand, mutuals JEL codes: G21, G34, J23 I. Introduction Merger activity continues to pose a paradox for industrial economists: on the one hand stock market studies of the shareholder wealth effects of merger announce- ments (the ex ante evidence) generally show significant gains (see Jarrell et al. (1988) for a review), albeit gains which fall disproportionately to the acquired firm’s shareholders; on the other the ex post evidence from financial and economic performance data is generally pessimistic (for a survey see Hughes (1993)). This confusing picture is further complicated by the evidence from the merger prediction studies (see Palepu (1985)) most of which, but by no means all, suggests that a firm’s profitability is significantly and negatively related to the probability of it being acquired, implying that the takeover process is at least successful in finding the right targets. This seems tosuggest, as Vander Vennet (1996, p. 1553) recently ⋆ This work has benefited substantially from detailed comments by Kevin Dowd, Paul Mizen and Mike Wright and through the authors’ discussions with Martin Conyon, Sourafel Girma and Peter Wright, none of whom is in any way responsible for the remaining errors. Financial support for Thompson from the Leverhulme Trust (project on “Strategic Alliances and Diversification”) is acknowledged with gratitude.