Advances in Mergers and Acquisitions: Volume 4

Although mergers and acquisitions have been a fundamental part of business for the last three decades, they have been increasingly used in recent times as a strategic tool for growth, dealing with excess resource capacity, enhancing the base and scale of operations for competitive advantage and the like. One area of increasing concern in M&A research, however, has been in the area of understanding the integration process and how this might lead to enhanced performance and to the “2+2=5” hoped-for effect of M&As.

Most research of post-acquisition integration examines integration of individual business units. The research pays less attention to corporate level integration processes, by which we mean the standardization of integration routines and synchronization of integration activities across a firm’s business units. We argue that corporate level acquisition activities and post-acquisition integration processes strongly influence long term corporate performance, particularly as a firm which comprises interdependent business units becomes geographically diffuse. Acquisitions tend to increase system diversity and goal diversity across business units. Some goal diversity is beneficial, but excessive goal diversity and the existence of system diversity can reduce long run corporate performance by requiring greater managerial effort and increasing the opportunity cost of managerial efforts. The negative effects become stronger as a firm becomes geographically diffuse or if business units are interdependent. Firms that employ active corporate level integration processes – particularly firms that acquire frequently and have interdependent business units – can enhance the benefits and eliminate some of the problems of diversity.

The diversification phase observed in the American economy since 1975 (Leontiades, 1980) has led to significant questioning about the dimensions constituting related diversification. During the 1980s, the disappointing performances of businesses that had implemented related diversifications pushed researchers to take a closer look at the challenges involved in integration to discover commonalities in progressing from potential synergy to synergy achieved. As a result, many recent research endeavors have attempted to describe the management and integration process best suited to the context (Haspelagh & Jemison, 1991; Marks & Mirvis, 1998; Pablo, 1994; Shrivastava, 1986). Obviously, their attention focused primarily on initiatives targeting integration on the functional, structural, and operational levels, without really taking into account the historical, cognitive, and cultural baggage that each business carries around with it.

This research is intended to provide a better understanding of the factors that contribute to creating synergies between companies undertaking an integration process involving related diversification. Based on the cognitive approach, it is premised on the notion that creating synergy primarily depends on reconciling the collective representations of the companies involved rather than on simply implementing measures designed to achieve technical and operational integration.

This study places particular emphasis on the concept of collective representations, which recognizes that organizational players come to adopt a relatively homogeneous view of the world. It proposes an analysis framework and research method enabling it to go beyond the limits of attempts that, up until now, have strived to quantify and substantiate the mental schemata of organizations involved in merger acquisition. Moreover, these attempts have been criticized as being too vague (Côté, Langley & Pasquero, 1999; Grant, 1988; Lampel & Shamsie, 2000).

In order to characterize the content of collective representations specific to each of the organizations undergoing integration, we propose applying a new approach in the sociology of organizations called the theory of conventions (Boltanski & Thévenot, 1991, 1994). The convention theory posits that organizational players share representation systems that help forge interaction rules. Collective, concerted action is made possible by mobilizing common frameworks, that is, conventions. These conventions are characterized by higher principles specific to each city. The outcome can be agreement or conflict, depending on whether player justifications are rooted in the same city or not.

Through the longitudinal analysis of the case of related diversification, specifically a Canadian chartered bank’s acquisition of two brokerage subsidiaries (1987, 1994), this study examines the evolution of the integration initiatives and collective representations of the businesses involved. We made two significant observations in examining the various integration initiatives undertaken by the bank during the period under study. First, the integration initiatives could be described as falling into the technical, structural, and operational categories. Second, their outcomes, both qualitatively and quantitatively, were far from conclusive.

Concurrent analysis of justificatory fragments of the three organizations, during the period under studied, revealed divergence between the justification modes that each of the businesses opted for. This divergence of dominant collective representations enabled us to interpret the issues encountered during these initiatives and posit a new explanation for their qualified success.

This paper provides a review of theoretical perspectives and empirical research on the role of culture in mergers and acquisitions [M&A], with a particular focus on the performance implications of cultural differences in M&A. Despite theoretical and anecdotal evidence that cultural differences can create major obstacles to achieving integration benefits, empirical research on the performance impact of cultural differences in M&A yielded mixed results: while some studies found national or organizational cultural differences to be negatively related to measures of M&A performance, others observed a positive relationship or found cultural differences to be unrelated to M&A performance. We offer several explanations for the inconsistent findings of previous research on the performance impact of cultural differences in M&A and develop a model that synthesizes our current understanding of the role of culture in M&A. We conclude that the relationship between cultural differences and M&A performance is more complex than previously thought and propose that, rather than asking if cultural differences have a performance impact, future research endeavors should focus on how cultural differences affect M&A performance.

The article applies upper echelon theory to explain variation in parent firms’ post-acquisition financial performance. We develop and test a latent variable model hypothesizing that top management team (TMT) demographic diversity affects financial outcomes through teams’ collective beliefs. In so doing we identify three constructs which potentially underlie classic TMT demographic diversity measures. Also, we propose two fundamental structural properties of team beliefs extrapolated from individual level cognitive complexity theory. Results show both positive and negative effects on financial outcomes from the TMT demographic diversity constructs through the belief constructs. We discuss the importance of including mediating constructs when attempting to unravel TMT diversity’s effects on firm level outcomes.

This paper reviews the evolving literature on top management team effects in mergers and acquisitions (M&As). Existing research has focused on understanding why incumbent top managers depart at higher rates than normal following an acquisition and why high turnover rates have negative postacquisition performance effects. We explore two new areas of inquiry. First, we discuss the role of newly hired executives – executives hired after the acquisition. Our research indicates that executives who join target companies after an acquisition also depart more quickly than executives who join companies not previously involved in an acquisition. Acquisitions appear to create long-term instability in the target firm’s top management team – both incumbent and new-hire executives depart at higher rates than normal well into the future. Integration of the target firm often intensifies instability within the target company’s top management team. This instability affects performance and leads to further integration efforts as the firm attempts to improve performance. These additional integration activities, in turn, lead to even higher subsequent executive turnover. Second, we examine the topic of director turnover and propose a theoretical framework for understanding the relationship between acquisitions and director retention. Future research that considers the role of directors as well as executives may lead to deeper insight into the nature of turnover and integration effects in mergers and acquisitions.

Merger and acquisition activity generates a substantial amount of discussion within business circles among academics, analysts, and the media. Even though research and experience demonstrates that many mergers and acquisitions fall short of the intended goal of creating shareholder value, mergers and acquisitions still persist in the marketplace. The purpose of this discussion is to suggest that a potential explanation for this dilemma can be found by applying the resource-based rationale of acquisition within an evolutionary framework of business dynamics.

Firms in mature or declining industries are faced with the challenge of redeploying their excess resources to new applications, and M&A strategies can be an important component of this effort. I consider two ways in which excess resources are applied to more attractive business opportunities through M&A, and I analyze these strategies through the lenses of industrial organization economics, resource-based view, evolutionary perspective and agency theory. In the redeployment strategy, firms seek attractive opportunities in related industries, using acquisitions to fill any resource deficiencies. In the consolidation strategy, firms combine with their competitors within the same industry. The resulting larger pool of resources provides greater opportunities for disposing off their under-utilized resources through the market, while enhancing their profitability. Either way, excess resources can find new applications, within the firm in the former strategy and through the market in the latter. I also discuss some implications for future research and practice.

In the strategic management literature, two mechanisms have been proposed to explain how managers generate economic rents: resource selection, and capability building. Resource selection is a Ricardian perspective where the productivity of resources are heterogeneously distributed among firms (Peteraf, 1993; Wernerfelt, 1984), and managers outsmart the factor markets by selecting resources based on their future values (Barney, 1986). The alternative Schumpeterian perspective is capability building, a mechanism that depends on deployment of resources to affect a desired end (Amit & Shoemaker, 1993; Mahoney, 1995). While capability building requires that managers develop a capacity to manage firm specific tangible and intangible processes, the resource selection mechanism demands managers to accurately assess expectations about the future value of resources.