Attaining 'New' Knowledge: An Analysis of Legal and Economic Mechanisms of Retaining Employees in Relation to Mergers in the Medicinal Industry

Abstract

It is found in this thesis that a pharmaceutical company can acquire a biotechnology company as a strategy for attaining both explicit and tacit knowledge. This can happen as both companies possess different but complementary skills and assets, which together can be joined to generate relational rent. Tacit knowledge is embedded within the employees and the social relations within the company. Retaining employees and teams is therefor a key priority for the pharmaceutical company.The purpose of this thesis is to establish how to successfully transfer knowledge by retaining the employees of the biotech company.In order to retain employees, the acquirer must consider both legal, organisational and economic situations to create incentives for the employees to remain in the new organisation. Firstly, it is required that the acquirer uphold the identity of its company after an acquisition, as any major changes could lead to the failure of basic assumptions of the new employees in relation to their future role in the company and their subsequent termination of their employment contracts. Furthermore, the acquirer must pay certain attention to his duty of cooperation and care for his counter party, as part of his duty of loyal behaviour, and make these an explicit priority in the M&A deal. Organisationally, the acquired company should be given high levels of autonomy in orde to preserve its innovative approach to research and development and to avoid potential integration issues, which is to ensure a successful transfer of knowledge. This is part of showing his commitment to the biotech company. To create incentives for the employees of the acquired company, they must be granted a higher or equivalent status that they had in their previous organisation so as to not make the move feel like a setback in their careers. Further incentives are created by offering the employees a team based and behaviour based financial instrument. This is to combat potential issues related to overconfidence, social comparison and free riding through psychological and sociological mechanisms related to peer pressure and social norms. The financial instrument should be paid as a bonus or a stock-option depending on the teams’ risk profiles, and thus the acquirer must show commitment by letting the employees choose between the two. Finally,the M&A deal must be structured so as to create the highest possible levels of incentives between the two parties to create relational rent. Strategic contracting is a tool to communicate the measures intended to retain the employees in a proactive way, thereby creating mutual incentives, the successful acquisition of new knowledge, and the joint creationof relational rents.