Advances in Mergers and Acquisitions 9781781908372, 9781781908365

Citation preview

ADVANCES IN MERGERS AND ACQUISITIONS

ADVANCES IN MERGERS AND ACQUISITIONS Series Editors: Sydney Finkelstein and Cary L. Cooper Recent Volumes: Volumes 1–2:

Edited by Cary L. Cooper and Alan Gregory

Volumes 3–11:

Edited by Sydney Finkelstein and Cary L. Cooper

ADVANCES IN MERGERS AND ACQUISITIONS VOLUME 12

ADVANCES IN MERGERS AND ACQUISITIONS EDITED BY

CARY L. COOPER Lancaster University Management School, Lancaster University, UK

SYDNEY FINKELSTEIN Tuck School of Business, Dartmouth College, USA

United Kingdom – North America – Japan India – Malaysia – China

Emerald Group Publishing Limited Howard House, Wagon Lane, Bingley BD16 1WA, UK First edition 2013 Copyright r 2013 Emerald Group Publishing Limited Reprints and permission service Contact: [email protected] No part of this book may be reproduced, stored in a retrieval system, transmitted in any form or by any means electronic, mechanical, photocopying, recording or otherwise without either the prior written permission of the publisher or a licence permitting restricted copying issued in the UK by The Copyright Licensing Agency and in the USA by The Copyright Clearance Center. Any opinions expressed in the chapters are those of the authors. Whilst Emerald makes every effort to ensure the quality and accuracy of its content, Emerald makes no representation implied or otherwise, as to the chapters’ suitability and application and disclaims any warranties, express or implied, to their use. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library ISBN: 978-1-78190-836-5 ISSN: 1479-361X (Series)

ISOQAR certified Management System, awarded to Emerald for adherence to Environmental standard ISO 14001:2004. Certificate Number 1985 ISO 14001

CONTENTS LIST OF CONTRIBUTORS

vii

INTRODUCTION

ix

HUMAN IMPACTS ON THE PERFORMANCE OF MERGERS AND ACQUISITIONS Nicola Mirc

1

M&A NEGOTIATION STAGE: A REVIEW AND FUTURE RESEARCH DIRECTIONS Heather Parola and Kimberly M. Ellis

33

CUSTOMER ROLES IN MERGERS AND ACQUISITIONS: A SYSTEMATIC LITERATURE REVIEW Christina O¨berg

59

POST-ACQUISITION INTEGRATION: A TWO-LEVEL FRAMEWORK LESSONS FROM INTEGRATION MANAGEMENT OF CROSS-BORDER ACQUISITIONS IN THE GLOBAL AUTOMOBILE INDUSTRY Xiaoying (Catherine) Zhang and Bruce W. Stening

75

CROSS-BORDER MERGERS AND ACQUISITIONS: MODELLING SYNERGY FOR VALUE CREATION Kamal Ghosh Ray and Sangita Ghosh Ray

113

THE IMPACT OF CULTURE ON MERGERS AND ACQUISITIONS: A THIRD OF A CENTURY OF RESEARCH Daniel Rottig, Taco H. Reus and Shlomo Y. Tarba

135

v

vi

INSIGHTS OF SIGNALING THEORY FOR ACQUISITIONS RESEARCH Cheng-Wei Wu, Jeffrey J. Reuer and Roberto Ragozzino MIXED METHODS: A RELEVANT RESEARCH DESIGN TO INVESTIGATE MERGERS AND ACQUISITIONS Audrey Rouzies

CONTENTS

173

193

LIST OF CONTRIBUTORS Cary L. Cooper

Lancaster University Management School, Lancaster University, Lancaster, UK

Kimberly M. Ellis

Florida Atlantic University, Boca Raton, FL, USA

Sydney Finkelstein

Tuck School of Business at Dartmouth College, Hanover, NH, USA

Nicola Mirc

Toulouse Graduate School of Management, University of Toulouse, France & PREG-CRG, Ecole polytechnique, Palaiseau, France

Christina O¨berg

Lund University, Lund, Sweden & University of Exeter Business School, Exeter, UK

Heather Parola

Florida Atlantic University, Boca Raton, FL, USA

Roberto Ragozzino

ESADE Business School, Ramon Llull University, Barcelona, Spain

Kamal Ghosh Ray

Vignana Jyothi Institute of Management, Hyderabad, India

Sangita Ghosh Ray

Management Accounting Consultant, Hyderabad, India

Jeffrey J. Reuer

Krannert School of Management, Purdue University, West Lafayette, USA

Taco H. Reus

Rotterdam School of Management, Erasmus University, Rotterdam, The Netherlands

Daniel Rottig

Lutgert College of Business, Florida Gulf Coast University, Fort Myers, FL, USA vii

viii

LIST OF CONTRIBUTORS

Audrey Rouzies

Toulouse Graduate School of Management, University of Toulouse, France

Bruce W. Stening

Vlerick School of Business, Peking University, Beijing, China

Shlomo Y. Tarba

Management School, The University of Sheffield, Sheffield, UK

Cheng-Wei Wu

School of Business, University of Hong Kong, Hong Kong, China

Xiaoying (Catherine) Zhang

National School of Development, Peking University, China

INTRODUCTION With many economies still bumping along the bottom of GDP growth, the ideas of cost savings and scale synergies of a merger or acquisition seems an attractive proposition. In addition, we have the growth of the emerging BRIC economies and other new entrants who are becoming more acquisitive in markets that are showing slow growth. For these reasons, the field of M&As is as buoyant as it was prior to the economic downturn of 2008. Nevertheless, we are still seeing that the ‘two plus two equals five’ assumptions behind many M&A decisions is not bearing the kind of fruit it should. Research is growing however to explain why this might not be the case, and how M&A marriages can be more successful, from exploring how the cultures fit, how employees are engaged, now negotiations are undertaken, how role conflicts are resolved, and how post integration is implemented. This volume is the 12th in the this annual series exploring issues like human impacts on the performance of M&As, the M&A negotiation stage, customer role in M&As, research linking M&As with strategic alliances, post acquisition integration, mixed methods to assess M&A research, modelling value creation in cross border M&As, and signalling theory in acquisition research. The volume starts with a chapter on how employees impact the performance of M&As, from three different perspectives; individual, organizational and managerial, as the authors attempt to assess these on post-acquisition outcomes. The next chapter reviews the research on M&A negotiation stage, highlighting the major components of this stage and offering insights into future research on areas that need more focus. One area that has almost been wholly ignored in the field is customer roles in M&As. The next contribution discusses the critical role of the customer as a stakeholder in the M&A process, providing a systematic literature review of what is available. Although there has been a great deal of research on postacquisition integration, the next chapter attempts to overcome existing research in this area by adopting a more holistic and dynamic examination of the process, by illustrating work through four case studies in the global automobile industry. ix

x

INTRODUCTION

The next chapter explores a modelling approach to finding out the value creation of cross border M&As, which also explores the motives for cross-border M&As and the application of the synergy model. This is followed by a comprehensive review of research in the impact of culture on mergers and acquisitions, which focusses on the last 32 years of scholarly work. The next two contributions look at different approaches to doing M&A research. The first of these explores signalling theory for acquisition research, particularly in coping with information asymmetries when engaging in acquisitions. This chapter should help signal particular risks associated with acquisitions, and more research showing causal links in the data as a means of minimising, as the authors suggest, of the ‘hazards and inefficiencies involved in this type of corporate expansion’. The final contribution highlights the importance of mixed methods approach in research designs in M&A research. They show the pros and cons of this research design in an effort to improve on existing research and understanding why so many mergers and acquisitions may fail. The research outlined in this volume, and all the past Advances in M&As books, is an important body of scholarship that should help minimize the negative consequences of M&As in the future, whether in terms of personal, organizational or financial outcomes. The global environment after 2008 is a very different one than pre banking crisis, one in which more joint ventures, M&As and partnerships will emerge as businesses look for growth and value creation. Cary L. Cooper Sydney Finkelstein Editors

HUMAN IMPACTS ON THE PERFORMANCE OF MERGERS AND ACQUISITIONS Nicola Mirc ABSTRACT The contribution revisits existing research on human impacts on the performance of mergers and acquisitions. Findings are grouped into three categories: individual-, organizational- and managerial-related factors. Results show that while research seems various and abounding, influential factors are often studied as static setting approached in isolation, without measuring their direct relation to post-acquisition outcomes. Keywords: mergers and acquisitions; human impacts; post-acquisition performance; organizational integration

INTRODUCTION From the outset, the literature on mergers and acquisitions (M&As) has concentrated on post-operation performance. An ongoing issue has been the disappointment in observing that most M&As were reducing rather than enhancing firm value (e.g., Dickerson, Gibson, & Tsakalotost, 1997).

Advances in Mergers and Acquisitions, Volume 12, 1–31 Copyright r 2013 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1479-361X/doi:10.1108/S1479-361X(2013)0000012004

1

2

NICOLA MIRC

In order to get a better understanding of M&A performance variations, scholars have developed a special focus on the way humans may impact on M&A outcomes. Since strategic, economic, or financial factors do not seem sufficient to understand the phenomena, reasons for M&A failure are more and more associated with the way people inside the merging organizations deal with and react to the deal. Studies mainly in the field of organizational behavior, and to a lower extend in HRM, sociology, and psychology identified a multitude of ways, humans might impact M&A performance. In this paper, we will present the main findings related by this research. For the literature review, we selected all papers published in leading management journals since 1990 that address human-related issues in M&A, in a direct or indirect relationship to post-acquisition performance. The final sample comprises 92 papers published in 17 journals (see Table 1 for the detailed number of selected papers/journal). Two-thirds of the papers were published after 2000, and we can note a significant increase after 2005 that seems to hold on until today the increased number of papers in 2005 and 2006 is partly due to special issues on human-related issues in M&A in ‘‘Organization Studies’’ and the ‘‘British Journal of Management’’ (see Fig. 1). The literature review has led to the identification of three main ways in which humans may impact on M&A performance. A first group of scholars focused on individual-related aspects of the merger process, and in particular on the psychological effects, M&A can induce on employees. They further focused on factors influencing turnover and on post-acquisition organizational identification issues.

Table 1.

Number of Papers/Journal.

Academy of Management Executive Academy of Management Journal British Journal of Management Human Relations Human Resource Management Human Resource Management Journal International Journal of Human Resource Management Journal of Applied Behavioral Science Journal of International Business Studies

2 9 10 7 3 2 10

Journal of Management Journal of Management Studies Management Science Organization Science Organization Studies Personnel Psychology Personnel Review

3

Strategic Journal of Management

7

TOTAL

3 9 1 10 8 1 1 6 92

Human Impacts on the Performance of Mergers and Acquisitions

3

12 10 8 6 4 2 0

Fig. 1. Number of Papers/Year.

A second set of research concerns organization-related issues. Here, the emphasis is on cultural differences between the merging companies, corporate as well as national, and the organizational capacity of transferring resources between the acquirer and the acquired company, notably in terms of knowledge and technology resources. A third category of research discusses the impact of managerial action and decision-making processes during the acquisition process. These actions and decisions made by the managers of both firms are found to have a highly structuring impact on the success of the operations they engaged and planned. By deciding whether and whom to acquire or to be acquired, by planning and controlling the integration process and determining integration policies (as, for instance, the need for downsizing or the functional equality between firms), and by setting up the degree of integration to be achieved (level of coordination/autonomy granted to the acquired firm), managers as humans influence actively and extensively the whole acquisition process and its outcomes. A special focus here has been set on HR representatives and the way the HR function accompanies and influences the post-acquisition integration process. In the following, we will develop main findings of all three categories in a detailed way.

INDIVIDUAL FACTORS The first identified category of research has focused on the way individuals are affected by the merger. Three main issues are addressed in this regard: the negative psychological consequences of M&A on employees, their lack of identification with the new merged firm, and the high turnover of top managers, in particular, of the acquired firm.

4

NICOLA MIRC

Psychological Effects on Employees Psychological effects of mergers and acquisitions (M&A) on employees have first been addressed by scholars like Buono and Bowditch (1989), Marks and Mirvis (1985), or Cartwright and Cooper (1990, 1993). They pointed out the increased stress and anxiety that M&A induced on the personnel of the merging firms, due to changes in work practices and tasks, managerial routines, colleagues, environment, the hierarchy, and so on. Furthermore, M&A often introduce an uncertainty climate among employees about potential job losses and future career development. The high stress level caused by M&A was demonstrated by Cartwright and Cooper (1993) in their study of changing mental health states of middle managers after they experienced the merger of two building societies in the United Kingdom. The post-acquisition measurement of mental health indicated indeed major health impacts and a significantly deteriorated wellbeing of the interviewed employees, even though the cultural differences were said to be minor in the given operation. In an earlier contribution, the authors put forward that the negative impact of psychological effects on M&A performance are primarily caused by the fact that employees experience acquisitions as a major loss due to a modification of the psychological contract that links them to their company, resulting in amplified preoccupation, lower work commitment, and higher employee turnover (Cartwright & Cooper, 1990). As argued by Wickramasinghe and Karunaratne (2009), psychological effects are not homogeneous throughout the organization but depend on the employee’s perception and interpretation of the merger situation. This assumption might seem trivial but merits, however, to be studied in detail. As the authors show, individual characteristics like an employee’s age, gender, and marital status influence his perception of the merger. Furthermore, the study revealed that collaboration mergers (in the sense of Napier, 1989) were more likely to create dissatisfaction among the personnel than extension mergers. None of the identified studies tried to measure the direct relationship between psychological effects on employees and M&A performance. However, the assumption of a certain interdependence between both variables underlies each study and was actually treated by all scholars in a comprehensive, indirect manner. Stress and uncertainty may lead to employee resistance to change, a high staff turnover, absenteeism, and a lack of commitment to work and to the organization, which in turn are associated with a negative impact on

Human Impacts on the Performance of Mergers and Acquisitions

5

M&A performance (Cartwright & Cooper, 1990; Gutknecht & Keys, 1993). Employee resistance to the merger prevents the building up of a wellfunctioning organization and of a constructive cooperative environment. A high staff turnover brings about important losses of knowledge for the firm and effects M&A performance especially in those cases where the operation intended to acquire people assets, their knowledge, and skills, as for instance in technology or R&D-based acquisitions. A lower work commitment might have a negative impact on individual and organizational performance in terms of productivity, quality, and service (Cartwright & Cooper, 1996; Gutknecht & Keys, 1993). On the opposite side of the argument, satisfied employees are presumed to work harder, better, and longer with higher productivity records. Even though a direct relationship between job satisfaction and corporate performance remains to be established with certainty (Rusu, Miettinen, & Varjonen, 2006), it appears that lower job satisfaction is a cause of higher absenteeism – which in turn is shown to have a negative influence on organizational performance (Sousa-Poza & Sousa-Poza, 2000). Even though M&A effects on employees are mostly dealt with as negative, several scholars point out cases in which the merger had a positive influence on employees mentality and satisfaction. M&A can indeed offer opportunities for new responsibilities and career development (Buono & Bowditch, 1989; Empson, 2001), increased job security (especially in the cases where the acquisition prevented a target from bankruptcy), greater job satisfaction, and more varied work tasks (Napier, 1989).

Top Management Turnover As pointed out in the section above, M&As increase employee turnover. Departing might be volunteer if employees decide to leave, for instance, because they feel uncertain about their future in the company, or nonvolunteer in the case of post-merger lay-off plans. In the existing literature, the turnover of one group of actors in particular has received a quite important level of attention: the turnover of top management. Several factors have been identified as amplifying the degree of top management turnover. Buchholtz, Ribbens, and Houle (2003), by applying a human capital framework, found that the departure of the CEO of the target firm was significantly influenced by his age (CEO turnover is less likely until the age of 54, but more likely after that) and by the degree of relatedness between

6

NICOLA MIRC

the merging firms, the CEO’s skill set being in that case ‘‘more likely to be redundant with skills already available within the acquiring firm. This redundancy lessens the value the CEO’s human capital holds for the firm and increases the likelihood the firm will initiate CEO departure.’’ (Buchholtz et al., 2003, p. 508). The positive relationship between relatedness and CEO turnover has also been discovered by Lee and Alexander (1998) who state that CEO succession can in this case be used as a promoter of acquisition integration. The acquirer may ‘‘encourage CEO succession as an integrative mechanism to introduce its values, strategic priorities and operational procedures into the new subsidiary’’ (Lee & Alexander, 1998, p. 181). Although Buchholtz et al. (2003) found no significant relationship between a CEO’s tenure duration and post-acquisition departure, Lee and Alexander (1998) observed in the case of related acquisitions that CEOs with longer tenure than their counterparts in the acquiring firm were more likely to leave the firm due, as argued by the authors, to their attachment to stability and inflexibility to accept change. Other scholars studied more closely the consequences of the way top managers perceived the acquisition process in order to explain whether they stayed or left the merged firm. The perceptions of strong cultural differences and of a limited autonomy granted to the top management of the acquired company (Lubatkin, Schweiger, & Weber, 1999) as well as regarding the quality of interactions with the acquiring company’s top management team, the way the deal was announced, and the likeliness of long-term effects of the merger (Krug & Hegarty, 2001), were found to promote CEO turnover during the post-acquisition period. The linkage between top management turnover and M&A performance is only indirectly addressed. The relevance of the treated subject for performance issues is, however, the underlying motivation for these studies. In all related studies, the identification of factors that induce top management turnover during M&A is actually based on the premise that high top management turnover has a direct impact on M&A outcomes. Yet, as for the question whether this impact is positive or negative, scholars appear divided, depending on the adopted perspective. Whereas several scholars assume a negative relationship, arguing that high turnover induces important losses in terms of human capital, skills, and knowledge and therefore reduces organizational capacities and efficiencies, leading to a negative effect on M&A performance, others advance that CEO succession might be necessary to reduce resource redundancy and to successfully integrate different cultures and organizational processes.

Human Impacts on the Performance of Mergers and Acquisitions

7

Identity and Identification A growing body of scholars approaches human impacts on post-acquisition integration by looking into identification issues that employees may face with regard to the new organization. The emphasis is on the contributions of social identity theory, considering the level of employees’ social identification with the organization’s identity as crucial for successful post-acquisition integration. Several factors have been identified as favoring the identification with the new organization following M&A. One frequently studied relationship has been the one between pre- and post-merger identification. Results appear inconclusive, since scholars found evidence for both possible effects. Bartles and colleagues (2006) found that a strong identification with the former organization positively influenced the identification with the post-merger organization. Maguire and Phillips (2008), on the contrary, relate evidence where a high identification level led to a weak identification in the post-merger situation. Van Leeuwen, van Knippenberg, and Ellemers (2003) moderate these contradictory findings by stating that there is indeed evidence of a direct relationship between pre- and post-merger identification, but that the effect, positive or negative, of the first on the second depends on the perceived identity fit between the former and the new organization. Employees that perceived only minor discrepancies identified more easily with the new organization, whereas those who experienced more substantial changes were less likely to do so. Other influential factors on post-merger identification include a perceived high level of job insecurity (Van Dick, Ullrich, & Tissington, 2006), the expected utility of the merger (Bartles, Douwes, De Jong, & Pruyn, 2006), the sense of continuity of the change process during the acquisition implementation (Bartles et al., 2006; Ullrich, Wieseke, & Van Dick, 2005), and satisfaction of employees with the amount and quality of communication about the merger (Bartles et al., 2006). As for psychological effects and top management turnover, performance implications of employees’ identification with the post-acquisition organization are only indirectly assessed. The main assumption is that the more employees identify with the new merged firm, the more they are supposed to show increased work effort and productivity as well as a more substantial involvement in positive organizational citizenship (Bartles et al., 2006), resulting in positive effects on M&A performance.

8

NICOLA MIRC

ORGANIZATIONAL FACTORS A second category of studies shifts from the individual to the organizational level. One very prominent topic is the cultural fit between the merging companies and the negative effects that cultural differences may have on M&A performance. A second topic of interest has been the study of knowledge transfer processes between acquirer and target as determinant of the innovative capacity of the post-acquisition firm, particularly in the case of R&D and technology-based acquisitions.

Cultural Differences Considering human impacts in relation to the firm culture has been a prominent topic under study. However, no clear-cut findings about the impact on performance have yet emerged. Cultural differences look like playing both ways, although distant cultural environments are supposed to make the integration process harder. Cultural differences are approached either with regard to the corporate level, that is, variations between corporate cultures, or on the cross-border level, that is, regarding differences of national cultures. In general, the lack of culture fit or cultural compatibility has often been used to explain M&A failure. Cultural differences are considered a source of lower commitment to work, making co-operation more difficult, particularly from employees of the acquired firm (Marks & Mirvis, 1985). By the same token, scholars found evidence of cultural differences driving to ‘‘crosscultural work alienation’’ (Brannen & Peterson, 2009) and ‘‘cultural anxieties’’ (Styhre, Bo¨rjesson, & Wickenberg, 2006), leading in turn to lower employee productivity and increased employee turnover that may weigh on performance. Furthermore, the lack of culture fit has been shown reinforcing organizational conflicts (Olie, 1990), which might lower individual and organizational performance as preventing co-operation to materialize. In this regard, scholars have largely given account of the lack of co-operation momentum stemming from a ‘‘we’’ versus ‘‘them’’ attitude, resulting in hostility among employees (e.g., Cartwright & Cooper, 1996). Therefore, it is not surprising that strong cultural differences are usually associated with a negative impact on M&A performance, since the integration process is less easy and deals with higher employee resistance,

Human Impacts on the Performance of Mergers and Acquisitions

9

communication problems, and lower interest in co-operation (Datta, 1991; Chatterjee et al., 1992; Haspeslagh & Jemison, 1991; Nahavandi & Malekzadeh, 1988). Scholars have identified the building up of a common culture as essential for the success of M&A. In other words, should employees stick to their own organizational culture and do not adhere to a shared vision, then the performance of the merged firm might be adversely affected. The emergence of a common culture, also designated as acculturation (Larsson & Lubatkin, 2001) or cultural identity building (Vaara, Tienari, & Sa¨ntti, 2003), might be facilitated by practices such as a federating leadership, extensive communication, and a transparent change process (Kavanagh & Ashkanasy, 2006) or socializing events such as common training programs and seminars, cross visits, shared retreats, or celebrations (Larsson & Lubatkin, 2001). Another attribute under scrutiny from a cultural perspective has been ‘‘management styles,’’ viewed as essential elements of the culture of an organization. Several characteristics are attached to a management style, as for instance a management group’s attitude toward risk, their decisionmaking approach, and preferred control and communication patterns (Datta, 1991). Management styles are unique to organizations and may differ considerably across firms (e.g., Blake & Mouton, 1964). Differences in management style between the merging firms may have a negative impact on M&A success (Datta, 1991; Schoenberg, 2004). As a matter of fact, in an acquisition process, a significant aspect is bringing together distinct management groups. Significant difference may contribute to what Buono, Bowditch, and Lewis (1985) refer to as ‘‘cultural ambiguity,’’ a situation characterized by uncertainties where style and culture are main attributes. Generally, the acquiring firm management ends up imposing its own style on the management at the acquired firm. This may result in a loss of identity among the acquired firm’s management, and in turn in anxiety, distrust, and conflict, culminating in a ‘‘merger standstill,’’ with declining productivity and poor post-acquisition performance (Schweiger et al., 1987). Noticeably, differences in management styles and organizational cultures are likely to be more prominent in cross-national than domestic acquisitions (Lubatkin, Calori, Very, & Veiga, 1998), since such mergers bring together not only two firms that have different corporate cultures but also corporate cultures rooted in national diversity. An important amount of research has addressed the impact of divergent national cultures on the integration process. These studies, in contrast to

10

NICOLA MIRC

those focusing on corporate culture, often seek to directly measure the effect of cultural distance on M&A performance. Notwithstanding, findings on the relationship between national culture and performance are inconclusive and ambivalent (see Schweiger & Goulet, 2005; Stahl & Voigt, 2005; and Teerikangas & Very, 2006, for reviews). Whereas scholars like Datta and Puia (1995) found evidence of the common assumption of a negative impact of national cultural differences on M&A performance, others observed a positive relationship (Chakrabarti, GuptaMukherjee & Jayaraman, 2009; Morosini, Shane, & Singh, 1998). The apparent contradictions between research findings led some researchers to approach cultural differences as more complex phenomena, and to look for factors that might explain how they might play both ways during a single merger event. Reus & Lamont (2009) found, for instance, in their study of crossborder acquisitions of US companies evidence for what they refer to as a ‘‘double-edged sword effect’’ (see also Stahl & Voigt, 2008) of cultural distance, that is, the fact that cultural distance may show at the same time destructive and beneficial effects. On the one hand, cultural distance constraints communication and understanding between the acquiring and acquired entities and thus makes it more difficult to transfer resources and integrate companies successfully. Research that has focused on increased cultural integration issues due to different corporate languages supports this finding (Vaara, Tienari, Piekkari, & Sa¨ntti, 2005). On the other hand, cultural distance also enriches learning opportunities and resource diversity between the merging partners which is associated with a positive effect on post-acquisition performance (Cartwright & Cooper, 1996; Reus & Lamont, 2009). Stahl and Voigt (2008) report in their meta-analysis of 46 studies similar results and precise that cultural differences can be both, an asset and a liability in M&A, depending on the degree of relatedness between the merging entities as well as the dimension of cultural differences (national or organizational). The results suggest that ‘‘in related M&A that require higher levels of integration, cultural differences – especially those at the organizational level – can create obstacles to reaping integration benefits by exacerbating socio-cultural problems in the post-merger integration phase. In M&A that require lower levels of integration, cultural differences – especially those at the national level in cross-border M&A – were found to be positively associated with integration benefits, without leading to major socio-cultural integration problems that can undermine the realization of projected synergies’’ (Stahl & Voigt, 2008, p. 172).

Human Impacts on the Performance of Mergers and Acquisitions

11

Knowledge Transfer Processes and Innovation Capacity A second group of research that approached human issues on the organizational level focused on knowledge transfer processes between both firms and the way these affect outcomes in terms of innovative capacities. Scholars generally point out a positive relationship between post-acquisition performance and effective knowledge transfer. Organizations that succeed in transferring their knowledge bases in the course of a merger have better performance outcomes than those where knowledge transfer had not been achieved (Ahuja & Katila, 2001; Zollo & Singh, 2004). The two main knowledge-related factors generally identified as influential prerequisites on post-acquisition performance are the firm’s prior acquisition experience, and the ability to keep on board talented people (as key knowledge holders) within the organization. With regard to the first prerequisite of acquisition experience, the findings are at variance. For instance, Hunt (1988) found that experienced buyers performed no better than first time acquirers. By contrast, scholars such as Zollo and Singh (2004), Haleblian and Finkelstein (1999), Hayward (2002), and Schoenberg (2001) have concluded that previous experience is associated with superior performance. The experienced firms are assumed to have learned how to codify and centralize knowledge in their previous operations, which should facilitate interorganizational knowledge transfer in subsequent takeovers. The findings may be brought in line with studies that have found that a poor relationship prior to the operation shapes up the transfer of knowledge in making it more difficult, creating an ensuing causal ambiguity about the nature of the knowledge to be transferred (Schoenberg, 2001). The second decisive prerequisite, the retention of talented people, has been brought forward by researchers like Ranft and Lord (2000). The contention is based on the assumption that knowledge is primarily embedded in individual capabilities. When knowledgeable individuals leave the firm, the firm loses part of its strategic assets. The capabilities cover technical and operational skills and expertise, and also knowledge of the organization, which are important items in view of maintaining a wellbalanced functioning of the firm – that is, in particular with regard to informal decision making and information dissemination and so on. Finally, an additional stream has been more normative. Factors as transparent management, continued communication, and the use of integrative instruments – for example, cross-division integration teams, common meetings, job rotation – appear facilitating the transfer of knowledge (e.g., Bresman, Birkinshaw, & Nobel, 1999).

12

NICOLA MIRC

However, if the relationship between effective knowledge transfer and post-acquisition performance has been a prominent subject in recent M&A research, the process of knowledge transfer in M&A itself has received less attention. On that ground, research carried out by scholars like Empson (2001) and Greenberg and Guinan (2004) appears a noticeable exception. In her thorough study about the merging of professional service firms, Empson (2001) has identified several factors, although at the individual level, as being essential for a successful transfer of knowledge. A first factor is the individual’s perception of the quality of the merging partner, which influences the willingness to exchange knowledge with other members of the organization (a phenomenon the author refers to as fear of contamination). The second one relates more directly to the individual position in the hierarchy. If the individual feels that the sharing of knowledge might translate into losing power in the organization (leading to a fear of exploitation), the knowledge transfer will be inhibited. Returning to the organizational level, Greenberg and Guinan (2004) have centered their analysis on the importance of emergent social relations among individuals through the perspective of communities of practice. They have concluded that autonomous regrouping of individuals in such communities of practice facilitates the transfer of knowledge as it helps building up a shared organizational identity endorsed by members.

MANAGERIAL FACTORS A third set of research has specifically addressed managerial control and decision-making processes during the acquisition process and found evidence of numerous ways in which managers influence by their actions and decisions post-acquisition performance. We have divided them into three sub-categories: (1) the initial acquisition decision-making process, (2) the foreseen level of integration of the acquired firm and the formulated integration policy and design, and (3) the role played by the HR function during the integration process.

Acquisition Decision-Making Process The assumption that managerial decision-making processes have a highly structuring influence on M&A outcomes was first put forward by Haspeslagh

Human Impacts on the Performance of Mergers and Acquisitions

13

and Jemison (1991). Their ‘‘process approach’’ considers that the understanding of acquisition activities and consequences requires to approach M&A as a series of decision-making processes that have a cascading influence on the different acquisition phases as well as their outcomes. The initial decision to acquire a given target thus has impacts on all other phases. The first stages of the acquisition process rise several key questions that have to be faced by the management of the bidder: first of all, whether to acquire or not, then if positive, who to acquire, for what price, through which payment method, in what timeframe, and so on. The ways these issues are resolved are considered impacting directly on the success of the undertaken acquisition. Therefore, the consideration of the way managers make actually their decisions on these matters and of the factors that might influence them in their decision-making process seems to be of valuable interest. Concerning the question whether or not to acquire as well as the selection and evaluation of acquisitions candidates, Pablo, Sitkin, and Jemison (1996) underlined the impact of decision makers’ risk propensities and perceptions. The term risk propensities refers to the general tendency of an individual to either take or avoid risks, the way s/he evaluates risk and decides what risks are acceptable; risk perception regards an individual’s assessment of the risk inherent in a given situation through evaluation of the extension and controllability of the identified risks. In their conceptual model, the authors outline that the higher the decision maker’s risk propensity, the less issues raised by weak strategic or organizational fit between the bidder and the target or by increases in resource requirements will lead to the abortion of the deal. On the other hand, the more risk averse the decision maker, the more these factors will increase the perceived riskiness and, finally, the elimination of the potential target. Another influential factor here is the decision maker’s commitment to a given target. Notably, Haunschild, Davis-Blake, and Fichman (1994) found that a manager’s commitment to targets, resulting from personal responsibility for the decision to acquire the target, the fact that there are several competitors for a same target or that the decision-making process is publically related, has a negative impact on M&A performance since it decreases a manager’s capacity to objectively evaluate and take into account the negative aspects of the planned deal. Interpersonal relationships between managers of both firms also play an influential role. The perceived trustworthiness of a given target has been found key to an acquirer’s decision to conclude the deal (Graebner, 2009). Moreover, mutual perceived trust of bidder and target enhance the quality of their partnership and collaboration, and in turn of the post-acquisition

14

NICOLA MIRC

performance (Graebner, 2009). In addition, shared social networks by executives of both firms have been identified to promote target manager’s willingness to cooperate, especially if they hold less prestigious relationships than the managers of the acquiring firm (D’Aveni & Kesner, 1993). With regard to the decision whether to acquire and whom, scholars have pointed out the strong influence of third parties, notably M&A professionals. Parvinen and Tikkanen (2007) introduced here the notion of the ‘‘lemon problem,’’ referring to incentive asymmetries, defined as conflicts of interest between two parties regarding a course of action or economic outcome, between owners, managers, and M&A professionals during the screening and selection process of potential targets. Professionals often having a better understanding of potential M&A candidates and how to identify them hold a certain control over the selection process. Incentive asymmetries, due to hidden or unbalanced information, bounded rationality, different risk perceptions, or pure self-interest, may lead to professionals ‘‘owning’’ the M&A project and potentially exercising opportunistic behavior, that is, directing managers’ attention to targets which are most appropriate for fulfilling their own interests. As for the impact of incentive asymmetries on M&A success, the authors found evidence of prolonged contract-writing phases, biased financial evaluations, and acquisition price escalation, as well as undermined post-acquisition integration plans in those cases where stakeholders had conflicting motivations to engage in the process (Parvinen & Tikkanen, 2007). Another influential factor that has been identified is the chosen payment method and notably the amount of premiums paid for an acquisition. Krishnan, Hitt, and Park (2007) found that the higher the premium paid, the more likely workforce reductions are to occur, which in turn has been found to decrease post-acquisition performance due to the loss of valuable resources and human capital.

Integration Policy and Design Once the decision to acquire has been made, the integration policy has to be developed. Managers by deciding on the extent of structural integration of the acquired firm, the allocation of resources, the pace of integration, organizational restructuring and downsizing, and so on, highly structure the post-acquisition process and its outcomes. An important amount of research has been dedicated to the question whether the level of integration, that is, the extent to which the acquired firm

Human Impacts on the Performance of Mergers and Acquisitions

15

remains independent after the merger, may explain M&A performance variations. The coordination-autonomy dilemma is frequently put forward in order to address encountered difficulties to release synergistic benefits between the merged entities. A high level of structural integration has often been associated with a negative effect on M&A performance, notably in the case of technologybased acquisitions (e.g., Schweizer, 2005) and unrelated acquisitions (Datta & Grant, 1990). The preservation of the target’s autonomy, especially when it has only a weak innovation experience, turns out necessary in order to preserve its exploration capacity (Puranam, Singh, & Zollo, 2006). The risk of a negative effect of a high level of integration has also been addressed in terms of tie embeddedness. Managerial decisions regarding the communication about the merger, a high personnel turnover, and deteriorated interpersonal relationships may weaken a target’s embedded ties (i.e., the social relationships enhancing its capacity of joint problem solving, conflict resolution, and information transfer), and in turn its organizational performance (Spedale, Van den Bosch, & Volberda, 2007). The managerial decision-making process on the level of integration to be achieved has been found to be influenced by several factors. As Pablo (1994) points out, managers are influenced by task, cultural, and political characteristics of acquisitions. While task-relatedness has the strongest impact on a manager’s decision about the appropriate level of integration, that is, the perceived need for coordinated resource sharing through structural integration versus a high degree of organizational autonomy granted in order to preserve unique resources of the acquired firm, cultural and political issues also play an important role. According to the author, multicultural acquirers tend to choose a lower level of integration since they value cultural diversity and have a better understanding of the benefits of autonomy in the resource sharing process across national and organizational boundaries. In addition, the more the acquisition objectives and ‘‘visions’’ of acquirer and acquired converge and the less there is a power differential between both parties, more managers will be likely to opt for a low integration level. Another, partly linked, important design feature to decide on is the distribution of resources between acquirer and target after the merger. One important domain of scholars’ interest has been the adoption of equality policies. The strategy to equally allocate resources, and notably functions and hierarchical positions to both firms, generally aims to promote a positive social climate by sending out the signal that the acquired firm’s assets and personnel remain valued and respected in the new merged entity. However, research on the effects of equality policies on organizational

16

NICOLA MIRC

members found evidence of a rather negative relationship between equality policy and M&A success. Indeed, as Meyer (2001) points out, equality policies turn out to reduce economic profitability at long term, mainly because they extend the integration process and prevent from an effective talent oriented allocation of human resources throughout the organization. In a later study, the author underlines the negative impact of equality policies on social integration through the creation of perceptual and structural fallacies (Meyer & Altenbord, 2007). The perception of unfairness led to a decrease in employees’ motivation and organizational commitment, and the lack of strategic HR allocation, that is, based on organizational origin or seniority rather than on skills or talent-based criteria, reduced the effectiveness of decision making and collaboration across organizational units. Vaara (2003) in his study of a merger between a large Finnish furniture manufacturer and three smaller Swedish furniture companies adopts a sensemaking perspective, underlining that the post-acquisition decision making has to be understood as a complex sociopolitical and contextual process, where managers face uncertainties, ambiguity, and political tensions. Specific integration concerns are socially constructed within the postacquisition organization and the emphasis should therefore be on how they are interpreted and set up by the different actors involved in the process as well as the irrational factors that influence the latter’s decision making. The author identifies several irrational features that impacted on the managers’ effective decision making, leading eventually to unsuccessful post-acquisition integration results. First, ambiguity concerning the roles of the different units and the organizational changes necessary to the creation of synergies created an important barrier for effective integration. This situation is reinforced by cultural differences between the merging companies, leading to confusion and misunderstandings about the definition and the resolution of integration-related issues. These are not sufficiently treated and ‘‘get easily lost’’ in routine decision-making forums, a phenomena that Vaara qualifies as ‘‘organizational hypocrisy.’’ Finally, integration issues become objects of strategic and political struggles between decision makers, ‘‘leading to the strengthening of internal divisions and increasing confrontation between various units within the organization’’ (Vaara, 2003, p. 860). In the first two sections, the focus was rather on managers and the way they, as humans, influence by their actions and decision making the M&A outcome. The next section focuses particularly on the role of the HR function during the acquisition process.

Human Impacts on the Performance of Mergers and Acquisitions

17

Role of the HR Function Given the extent of human-related issues pointed out in existing research, it might seem curious that the HR function itself and the role it plays in corporate M&A have only recently become a matter of interest for research. With exception of Hunt and Downing’s paper written in 1990, the first study found on the subject was published by Faulkner, Pitkethly, and Child in 2002. As Aguilera and Dencker (2004) state, maybe this lack of attention toward HRM in M&A stems from the marginal role that CEOs have designated to the HRM function in planning and carrying out the acquisition process. The HR function is generally said to play only a secondary, nonstrategic role in the integration process (see, for instance, Bjo¨rkman & Soderberg, 2006). However, several studies conducted in the last decade relate cases where the HR function played an active strategic and value-adding role in the merging process. As for instance Marks and Vansteenkiste (2008) found in their case study, HR played a decisive role in assuring that business could continue effectively through strategic talent-management, on the one hand, and psychological preparation and assistance of employees, on the other, helping them to move forward and to ‘‘overwhelm their grief about the death’’ of their former employer. Nikandrou and Papalexandris (2007) compared well performing to less performing acquirers and found that the degree of involvement of the HR function was an important discriminating factor. Companies where HR representatives had the opportunity to participate to strategic decision making and where HR practices such as training, employee development programs, and internal recruitment practices were formalized and implemented throughout the whole merged company, handled the integration process more effectively and had better performance outcomes than those who did not involve HR managers in the process. Antila (2006) analyzed the implication of HR managers at different stages of the acquisition process by applying the ‘‘four HR roles’’ framework developed by Ulrich (1997). Those are Strategic Partner (responsibility for the management of strategic HR issues), Administrative Expert (the management of the firm’s infrastructure), Employee Champion (the management of employee contribution), and Change Agent (the management of transformation and change). In her study of the merger of three Finnish international industrial companies, the author finds that already in the pre-combination, HR managers are assigned to evaluate organizational

18

NICOLA MIRC

compatibilities and possible future HR issues, and play an active part in the due diligence process: ‘‘Personnel structure and costs as well as HRM practices like recruitment, assessment, compensation, training and development, and communication are all analyzed and then compared to Company A’s own practices. Employees’ health and safety issues as well as industrial relations are critical since these can have direct financial effects if, for example, there is some legal claims or if layoffs are going to be very difficult. A very sensitive issue is the target company’s management resources, because their motivation towards acquisitions and their commitment is essential in the integration phase. In addition, the future of HR issues in a target company is analyzed, upon which the HR strategy can be determined’’ (Antila, 2006, p. 1007). The role of HR is strategic as well as administrative and employee related. In the following stages, integration and post-integration, HR managers continued to act as administrative experts and employee champions. They worked closely with the target’s HR managers to integrate HR practices and accompany employees’ new affectations inside the organization. They further kept close contacts with the target’s labor unions, were responsible for communication with employees, and acted as consultants by helping line managers to carry out the task integration in their departments. Several scholars looked specifically into the impact of national differences regarding the HR practices and their role played during the integration process. In their research, Faulkner, Pitkethly, and Child (2002) investigate how HRM practices were used as integration tools in cross-border M&A and how their use differed according to the national origin of the acquirer. Whereas German acquirers were found to make little or no use of HRM policies to promote organizational integration, US and UK companies were identified drawing systematically on HR policies and practices to integrate, control, and align acquired units. Japanese acquirers also made use of HR practices to promote integration, but were found to be less directive than their American and British counterparts. French companies, finally, used HR practices as compensation schemes and career-development management to encourage post-acquisition integration. Interestingly, the authors found that German companies were less successful in their integration efforts, a result that they attribute directly to the lack of use made of HRM during the post-acquisition process. As those studies point out, active HR management is globally associated with a positive effect on M&A performance. However, as for managerial factors in general, this relationship is rather indirectly than directly addressed.

Human Impacts on the Performance of Mergers and Acquisitions

19

DISCUSSION AND CONCLUSION In contrast to quantitative measurements from finance and economics, the research which has focused on the organizational and human side of M&A have mostly engaged in qualitative studies, identifying ways humans play a role in the integration process of the merging entities and on the successful implementation of the operation. Several dimensions have been identified as having an important impact on M&A performance. They have been grouped into three categories: individual-related factors (such as psychological effects on employees, turnover, and post-acquisition organizational identification issues), organizational factors (cultural difference and knowledge-transfer processes), and managerial factors (such as acquisition decision-making processes, integration policy and design, and the role of the HR department during integration planning and implementation). Table 2 resumes the approached dominant categories by each of the selected articles. The literature review points out three main shortcomings of the existing research. First, the research body appears rather heteroclite with studies addressing isolated factors (either psychological effects or cultural differences, to give one example). As summarized in Table 3, most of the papers actually address only one category (59, i.e., 64% of all papers). Only about one-third (i.e., 33) of the papers discuss human impacts on M&A on a multilevel, and only five of them span all three dimensions of analysis, that is, individual, organizational, and managerial (namely, Allred, Boal, & Holstein, 2005; Antila, 2006; Larsson & Finkelstein, 1999; Lubatkin et al., 1999; Zollo & Singh, 2004). Cultural differences and the management/design of the integration process are by far the most popular topics of investigation (addressed in, respectively, 36 and 35 papers). They are followed by knowledge transfer processes and psychological effects as the third and fourth most prominent topics addressed (respectively, 18 and 14 papers). The acquisition decisionmaking process, the HR function’s role, top management turnover, as well as identification issues appear less studied (between six and nine papers focused on these matters). Given the fact that all identified factors and levels of analysis appear to be highly interdependent, the prevalent isolated focus may in fact limit the factual strength of the undertaken investigations. What is missing to a large extent is the development of analytic frameworks that integrate these factors

Aguilera and Dencker (2004) Allred et al. (2005) Antila (2006) Barkema and Schijven (2008) Bartles et al. (2006) Birkinshaw, Bresman, and Ha˚kanson (2000) Bjo¨rkman and Soderberg (2006) Brannen and Peterson (2009) Bresman et al. (1999) Buchholtz et al. (2003) Caroli, Lubatkin, and Very (1994) Cartwright and Cooper (1990) Cartwright and Cooper (1993) Castro and Neira (2005) Chakrabarti et al. (2009) Child, Pikethly, and Faulkner (1999) Cording, Christmann, and King (2008) D’Aveni and Kesner (1993) Dackert, Jackson, Brenner, and Johansson (2003) Datta and Grant (1990) Datta (1991) Elsass and Veiga (1994) Empson (2001) Faulkner et al. (2002)

Table 2.

X

X

X X

X

X

Psychological Effects

X

Top Management Turnover

Individual Factors

X

X

Organ. Identity/ Identification

X

X X

X

X X

X

X

X

X X

Cultural Difference

X

X

X X

Knowledge Transfer/ Innovation Capacity

Organizational Factors

X

Acquisition Decision Making

X

X

X

X

X X X

X

Integration Policy/Design

Managerial Factors

Authors’ Dominant Approach of Human Impacts on M&A Performance.

X

X

X

X

HR Function’s Role

20 NICOLA MIRC

Fugate, Kinicki, and Schneck (2002) Graebner (2004) Graebner (2009) Greenwood, Hinings, and Brown (1994) Gutknecht and Keys (1993) Haunschild et al. (1994) He´bert, Very, and Beamish (2005) Hunt and Downing (1990) Jing, Shin, and Cannella (2008) Jisun, Engleman, and Van de Ven (2005) Kapoor and Kwanghui (2007) Kavanagh and Ashkanasy (2006) Kiessling and Harvey (2006) Kovoor-Misra and Smith (2008) Krishnan, Hitt, and Park (2007) Krug and Hegarty (2001) Larsson and Finkelstein (1999) Larsson and Lubatkin (2001) Lee and Alexander (1998) Leroy and Ramanantsoa (1997) Lubatkin et al. (1998) Lubatkin et al. (1999) Maguire and Phillips (2008) Marks and Vansteenkiste (2008) McDonald, Westphal, and Graebner (2008) Meyer and Altenborg (2007) Meyer and Lieb-Doczy (2003) Meyer (2001) Morosini et al. (1998) Myeong-Gu and Hill (2005) Napier, Schweiger, and Kosglow (1993)

X

X

X

X

X

X

X

X

X

X

X

X

X X

X X

X

X

X

X

X

X

X

X

X

X

X

X

X

X X X

X

X

X X

X

X

X

X

Human Impacts on the Performance of Mergers and Acquisitions 21

Nikandrou and Papalexandris (2007) Olie (1994) Pablo et al. (1996) Pablo (1994) Paruchuri, Nerkar, and Hambrick (2006) Parvinen and Tikkanen (2007) Piekkari, Vaara, Tienari, and Sa¨ntti (2005) Pioch (2007) Puranam et al. (2006) Puranam, Singh, and Saikat (2009) Puranam (2007) Ranft and Lord (2000) Rees and Edwards (2009) Reus and Lamont (2009) Riad (2005) Schweiger and Denisi (1991) Schweiger and Goulet (2005) Schweizer (2005) Siehl and Smith (1990) Spedale et al. (2007) Stahl and Voigt (2008) Styhre et al. (2006) Sudarsanam and Mahate (2006) Teerikangas and Very, (2006)

X

Psychological Effects

X

X

Top Management Turnover

Individual Factors Organ. Identity/ Identification

X

X X

X

X X X

X

X

X X X

Cultural Difference

X

X

X

X

X

X X

X

X

Integration Policy/Design

X X

X

X

Acquisition Decision Making

Managerial Factors

X X

X

Knowledge Transfer/ Innovation Capacity

Organizational Factors

Table 2. (Continued )

X

X

X

HR Function’s Role

22 NICOLA MIRC

Total

Ullrich et al. (2005) Vaara et al. (2003) Vaara et al. (2005) Vaara and Monin (2010) Vaara (2003) Van Dick et al. (2006) Verbeke (2010) Villinger (1996) Weber and Shenkar (1996) Weber (1996) Wickramasinghe and Karunaratne (2009) Zander and Zander (2010) Zollo and Singh (2004)

14

X

7 27

X 6

X

X

36

X X X

X

X X

54

18

X X

X

9

X

35 53

X

X X

X X X

X

9

Human Impacts on the Performance of Mergers and Acquisitions 23

24

NICOLA MIRC

Table 3. One Category 59

Number of Categories Approached by Articles. Two Categories

Three Categories

Total

28

5

92

in a comprehensive multi-level perspective, addressing the interaction of factors on the individual, the micro level, such as psychological effects, with those on the organizational, the macro level, such as cultural differences or managerial coordination. The need for integrative approaches spanning over different perspectives in order to view the human factor’s role in a comprehensive way has in this regard been frequently pointed out in recent contributions (e.g., Cartwright & Schoenberg, 2006). Second, these factors and the way they influence each other are likely to evolve in time. Organizational integration is notably commonly referred to as a process, that is, an organizational setting that is not static but by definition dynamic in nature. However, longitudinal studies of the way organizational integration develops in time are overly rare, very probably due to methodological difficulties of producing long-term datasets in such sensitive situations as mergers or acquisitions. As a consequence, the evolutionary character of post-acquisition integration has mainly been rather intuitively assumed than empirically demonstrated. Several studies present here an exception. Schweizer (2005), for instance, argues for a hybrid post-acquisition integration approach, based on simultaneous short- and long-term objectives, allowing the acquired unit to maintain a certain degree of autonomy. Meyer and Lieb-Do´czy (2003) defend the necessity for an evolutionary approach to organizational integration by relinquishing on short-term gains through radical organizational change and downsizing and by promoting and developing the acquired firm’s specific local assets and culture. Birkinshaw et al. (2000) also point out the need for a soft gradual integration approach and propose a two-phase process. In a first phase, tasks are only partly integrated so that the acquired firm maintains a certain degree of autonomy while interactions between people become, however, necessary, inducing this way a smooth rapprochement of organizational members. The so achieved human integration allows in a second phase for a more substantial integration of tasks and operations. Third, even though the great majority of research on human and organizational issues in the implementation of acquisitions is motivated by

Human Impacts on the Performance of Mergers and Acquisitions

25

identifying their impact on the success of these operations, the way they actually promote or impede on value creation is most often only indirectly addressed. Cause-effect relations between human reactions and postacquisition outcomes are seldom explicitly studied. For instance, the linkage between psychological stress experienced by employees and negative acquisition outcomes is rather intuitively assumed than actually demonstrated. Only 13 of the 92 papers measured the direct relationship between the human factor related variable and post-acquisition performance. In the other cases, this relationship was indirectly approached (explicitly or implicitly) and scholars often justified the interest and pertinence of the factors they have chosen to investigate with the possible impact those might have on M&A performance. This is less the case for studies addressing the influence of cultural differences where most research focused on assessing correlations between the degree of cultural distance and postacquisition outcomes. Out of the 13 papers, nearly one half approach the impact of national cultural differences on M&A performance, the other half effects of M&A on the innovation capacity of the acquired or the merged entity. The development of more integrative analyses that take into account organizational dynamics as processes evolving in time appears key in deepening our understanding of human impacts on M&A.

REFERENCES Aguilera, R., & Dencker, J. C. (2004). The role of human resource management in cross-border mergers and acquisitions. International Journal of Human Resource Management, 15, 1355–1370. Ahuja, G., & Katila, R. (2001). Technological acquisitions and the innovation performance of acquiring firms: A longitudinal study. Strategic Management Journal, 22, 197–220. Allred, B. B., Boal, K., & Holstein, W. K. (2005). Corporations as step families: A new metaphor for explaining the fate of merged and acquired companies. Academy of Management Executive, 19, 23–37. Antila, E. M. (2006). The role of HR managers in international mergers and acquisitions: A multiple case study. International Journal of Human Resource Management, 17, 999–1020. Barkema, H., & Schijven, M. (2008). Toward unlocking the full potential of acquisitions: The role of organizational restructuring. Academy of Management Journal, 51, 696–722. Bartles, J., Douwes, R., De Jong, M., & Pruyn, A. (2006). Organizational identification during a merger: Determinants of employees’ expected identification with the new organization. British Journal of Management, 17, S49–S67.

26

NICOLA MIRC

Birkinshaw, J., Bresman, H., & Ha˚kanson, L. (2000). Managing the post-acquisition integration process: How the human integration and task integration processes interact to foster value creation. Journal of Management Studies, 37, 395–425. Bjo¨rkman, I., & Soderberg, A. (2006). The HR function in large-scale mergers and acquisitions: The case study of Nordea. Personnel Review, 35, 654–670. Blake, R., & Mouton, J. (1964). The managerial grid: The key to leadership excellence. Houston, TX: Gulf Publishing Co. Brannen, M. Y., & Peterson, M. F. (2009). Merging without alienating: Interventions promoting cross-cultural organizational integration and their limitations. Journal of International Business Studies, 40, 468–489. Bresman, H., Birkinshaw, J., & Nobel, R. (1999). Knowledge transfer in international acquisitions. Journal of International Business Studies, 30, 439–462. Buchholtz, A. K., Ribbens, B. A., & Houle, I. T. (2003). The role of human capital in postacquisition CEO departure. Academy of Management Journal, 46, 506–514. Buono, A., & Bowditch, J. (1989). Human side of mergers and acquisitions: Managing collisions between people and organisations. Washington, DC: Edit. Beard Books. Buono, A., Bowditch, J., & Lewis, J. W. (1985). When cultures collide: The anatomy of a merger. Human Relations, Vol. 38, 477–500. Calori, R., Lubatkin, M., & Very, P. (1994). Control mechanisms in cross-border acquisitions: An international comparison. Organization Studies, 15, 361–380. Cartwright, S., & Cooper, C. L. (1990). The impact of mergers and acquisitions on people at work. British Journal of Management, 1, 65–76. Cartwright, S., & Cooper, C. L. (1993). The psychological impact of merger and acquisition on the individual: A study of building society managers. Human Relations, 46, 327–347. Cartwright, S., & Cooper, C. L. (1996). Managing mergers, acquisitions and strategic alliances: Integrating people and culture. Oxford: Buttlerworth-Heinemann. Cartwright, S., & Schoenberg, R. (2006). Thirty years of mergers and acquisitions research: Recent advances and future opportunities. British Journal of Management, 17, S1–S5. Castro, C., & Neira, E. (2005). Knowledge transfer: Analysis of three Internet acquisitions. International Journal of Human Resource Management, 16, 120–135. Chakrabarti, R., Gupta-Mukherjee, S., & Jayaraman, N. (2009). Mars-Venus marriages: Culture and cross-border M&A. Journal of International Business Studies, 40, 216–236. Child, J., Pikethly, R., & Faulkner, D. (1999). Changes in management practice and the post-acquisition performance achieved by direct investors in the UK. British Journal of Management, 10, 185–198. Cording, M., Christmann, P., & King, D. R. (2008). Reducing causal ambiguity in acquisition integration: Intermediate goals as mediators of integration decisions and acquisition performance. Academy of Management Journal, 51, 744–767. Dackert, I., Jackson, P., Brenner, S., & Johansson, C. (2003). Eliciting and analysing employees expectations of a merger. Human Relations, 56, 705–725. Datta, D. (1991). Organisational fit and acquisition performance: Effects of post-acquisition integration. Strategic Management Journal, 12, 281–297. Datta, D., & Grant, J. (1990). Relationship between type of acquisition, the autonomy given to the acquired firm, and acquisition success: An empirical analysis. Journal of Management, 16, 23–45.

Human Impacts on the Performance of Mergers and Acquisitions

27

Datta, D., & Puia, K. G. (1995). Cross-border acquisitions: An examination of the influence of relatedness and cultural fit on shareholder value creation in U.S., acquiring firms. Management Intermit. Review, 35, 337–359. D’Aveni, R., & Kesner, I. (1993). Top managerial prestige, power and tender offer response: A study of elite social networks and target firm’s cooperation during takeovers. Organization Science, 4, 123–151. Dickerson, A., Gibson, H., Tsakalotos, E. (1997). The impact of acquisitions on company performance: Evidence from a large panel of UK firms. Oxford Economic Papers: New Series, 49, 344–361. Elsass, P., & Veiga, J. (1994). Acculturation in acquired organizations: A force-field perspective. Human Relations, 47, 431–454. Empson, L. (2001). Fear of exploitation and fear of contamination: Impediments to knowledge transfer in mergers between professional service firms. Human Relations, 54, 839–862. Faulkner, D., Pitkethly, R., & Child, J. (2002). International mergers and acquisitions in the OK 1985–94: A comparison of national HRM practices. International Journal of Human Resource Management, 13, 106–122. Fugate, M., Kinicki, A., & Schneck, C. (2002). Coping with an organizational merger over four stages. Personnel Psychology, 55, 905–928. Graebner, M. (2004). Momentum and serendipity: How acquired leaders create value in the integration of technology firms. Strategic Management Journal, 25, 751–777. Graebner, M. (2009). Caveat Venditor: Trust asymmetries in acquisitions of entrepreneurial firms. Academy of Management Journal, 52, 435–472. Greenberg, D., & Guinan, P. J. (2004). Mergers and acquisitions in technology-intensive industries: The emergent process of knowledge transfer. In A. Pablo & M. Javidan (Eds.), Mergers and acquisitions: Creating integrative knowledge. Oxford: Blackwell Publishing. Greenwood, R., Hinings, C., & Brown, J. (1994). Merging professional service firms. Organization Science, 5, 239–257. Gutknecht, J., & Keys, J. (1993). Mergers, acquisitions and takeovers: Maintaining morale of survivors and protecting employees. Academy of Management Executives, 7, 26–36. Haleblian, J., & Finkelstein, S. (1999). The influence of organization acquisition experience on acquisition performance: A behavioural learning theory perspective. Administrative Science Quarterly, 44, 29–56. Haspeslagh, P., & Jemison, D. B. (1991). Managing acquisition: Creating value through corporate renewal. New York: The Free Press. Haunschild, P., Davis-Blake, A., & Fichman, M. (1994). Managerial overcommitment in corporate acquisition processes. Organization Science, 5, 528–540. Hayward, M. (2002). When do firms learn from their acquisition experience? Evidence from 1990–1995. Strategic Management Journal, 23, 21–40. He´bert, L., Very, P., & Beamish, P. (2005). Expatriation as a bridge over troubled water: A knowledge-based perspective applied to cross-border acquisitions. Organization Studies, 26, 1455–1476. Hunt, J. (1988, Summer). Managing the successful acquisition: A people question. London Business School Journal, 2–15. Hunt, J. W., & Dowing, S. (1990). Mergers, acquisitions and human resource management. International Journal of Human Resource Management, 1, 195–209.

28

NICOLA MIRC

Jing, Z., Shin, S., & Cannella, A., Jr. (2008). Employee self-perceived creativity after mergers and acquisitions: Interactive effects of threat-opportunity perception, access to resources, and support for creativity. Journal of Applied Behavioral Science, 44, 397–421. Jisun, Y., Engleman, R., & Van de Ven, A. (2005). The integration journey: An attentionbased view of the merger and acquisition integration process. Organization Studies, 26, 1501–1528. Kapoor, R., & Kwanghui, L. (2007). The impact of acquisitions on the productivity of inventors at semiconductor firms: A synthesis of knowledge-based and incentive-based perspectives. Academy of Management Journal, 50, 1133–1155. Kavanagh, M., & Ashkanasy, N. (2006). The impact of leadership and change management strategy on organizational culture and individual acceptance of change during a merger. British Journal of Management, 17, S81–S103. Kiessling, T., & Harvey, M. (2006). The human resource management issues during an acquisition: The target firm’s top management team and key managers. International Journal of Human Resource Management, 17, 1307–1320. Kovoor-Misra, S., & Smith, M. (2008). In the aftermath of an acquisition: Triggers and effects on perceived organizational identity. Journal of Applied Behavioral Science, 44, 442–444. Krishnan, H., Hitt, M. A., & Park, D. (2007). Acquisition premiums, subsequent workforce reductions and post-acquisition performance. Journal of Management Studies, 44, 709–732. Krug, J. A., & Hegarty, W. H. (2001). Predicting who stays and leaves after an acquisition: A study of top managers in multinational firms. Strategic Management Journal, 22, 185–196. Larsson, R., & Finkelstein, L. (1999). Integrating strategic, organizational and human resource perspectives on mergers and acquisitions: A case of synergy realization. Organization Science, 10, 1–26. Larsson, R., & Lubatkin, M. (2001). Achieving acculturation in mergers and acquisitions: An international case survey. Human Relations, 54, 1573–1607. Lee, S. D., & Alexander, J. A. (1998). Using CEO succession to integrate acquired organizations: A contingency analysis. British Journal of Management, 9, 181–197. Leroy, F., & Ramanantsoa, B. (1997). The cognitive and behavioural dimensions of organizational learning in a merger: An empirical study. Journal of Management Studies, 34, 871–894. Lubatkin, M., Calori, R., Very, P., & Veiga, J. (1998). Managing mergers across borders: A two-nation exploration of a nationally bound administrative heritage. Organization Science, 9, 670–684. Lubatkin, M., Schweiger, D., & Weber, Y. (1999). Top management turnover in related M&A’s: An additional test of the Theory of Relative Standing. Journal of Management, 25, 55–73. Maguire, S., & Phillips, N. (2008). Citibankers at Citigroup: A study of the loss of institutional trust after a merger. Journal of Management Studies, 45, 372–401. Marks, M., & Mirvis, P. (1985). Merger syndrome: Stress and uncertainty. Mergers and Acquisitions, 20, 50–55. Marks, M., & Vansteenkiste, R. (2008). Preparing for organizational death: Proactive HR engagement in an organizational transition. Human Resource Management, 47, 809–827. McDonald, M. L., Westphal, J. D., & Graebner, M. E. (2008). What do they know? The effects of outside director acquisition experience on firm acquisition performance. Strategic Management Journal, 29, 1155–1177.

Human Impacts on the Performance of Mergers and Acquisitions

29

Meyer, C. B. (2001). Allocation processes in mergers and acquisitions: An organizational justice perspective. British Journal of Management, 12, 47–67. Meyer, C. B., & Altenbord, E. (2007). The disintegrating effects of equality: A study of a failed international merger. British Journal of Management, 18, 257–271. Meyer, K., & Lieb-Do´czy, E. (2003). Post-acquisition restructuring as evolutionary process. Journal of Management Studies, 40, 459–482. Morosini, P., Shane, S., & Singh, H. (1998). National cultural distance and cross-border acquisition performance. Journal of International Business Studies, 29, 137–158. Myeong-Gu, S., & Hill, N. S. (2005). Understanding the human side of a merger and acquisition. Journal of Applied Behavioral Science, 41, 422–443. Napier, N. (1989). Mergers and acquisitions, human resource issues and outcomes: A review and suggested typology. Journal of Management Studies, 26, 271–289. Napier, N., Schweiger, D., & Kosglow, J. (1993). Managing organizational diversity: Observations from cross-border acquisitions. Human Resource Management, 32, 505–523. Nikandrou, I., & Papalexandris, N. (2007). The impact of M&A experience on strategic HRM practices and organisational effectiveness: Evidence from Greek firms. Human Resource Management Journal, 17, 155–177. Olie, R. (1990). Culture and integration problems in international mergers and acquisitions. European Management Journal, 8, 206–215. Olie, R. (1994). Shades of culture and institutions in international mergers. Organization Studies, 15, 381–406. Pablo, A. (1994). Determinants of acquisition integration level: A decision-making perspective. Academy of Management Journal, 37, 803–836. Pablo, A., Sitkin, S., & Jemison, D. (1996). Acquisition decision-making processes: The central role of risk. Journal of Management, 22, 723–747. Parvinen, P., & Tikkanen, H. (2007). Incentive asymmetries in the mergers and acquisitions process. Journal of Management Studies, 44, 759–787. Paruchuri, S., Nerkar, R., & Hambrick, D. (2006). Acquisition integration and productivity losses in technical core: Disruption of inventors in acquired companies. Organization Science, 17, 545–562. Piekkari, R., Vaara, E., Tienari, J., & Sa¨ntti, R. (2005). Integration or disintegration? Human resource implications of a common corporate language decision in a cross-border merger, International. Journal of Human Resource Management, 16, 330–344. Pioch, E. (2007). Business as usual? Retail employee perceptions of organizational life following cross-border acquisitions. International Journal of Human Resource Management, 18, 209–231. Puranam, P. (2007). What they know vs. what they do: How acquires leverage technology acquisitions. Strategic Management Journal, 28, 805–825. Puranam, P., Singh, H., & Saikat, C. (2009). Integrating acquired capabilities: When structural integration is (un)necessary. Organization Science, 20, 313–328. Puranam, P., Singh, H., & Zollo, M. (2006). Organizing for innovation: Managing the coordination-autonomy dilemma in technology acquisitions. Academy of Management Journal, 49, 263–280. Ranft, A. L., & Lord, M. D. (2000). Acquiring new knowledge: The role of retaining human capital in acquisitions of high-tech firms. Journal of High Technology Management Research, 11, 295–319.

30

NICOLA MIRC

Rees, C., & Edwards, T. (2009). Management strategy and HR in international mergers: Choice, constraint and pragmatism. Human Resource Management Journal, 19, 24–39. Reus, T. H., & Lamont, B. T. (2009). The double-edged sword of cultural distance in international acquisitions. Journal of International Business Studies, 40, 1298–1316. Riad, S. (2005). The power of organizational culture as a discursive formation in merger integration. Organization Studies, 26, 1529–1554. Rusu M., Miettinen, A., & Varjonen A. (2006). HRM and firm’s performance after a merger: A longitudinal study. 21st workshop on strategic human resource management, March 30–31, Aston, UK. Schoenberg, R. (2001). Knowledge transfer and resource sharing as value creation mechanisms in inbound continental European acquisitions. Journal of Euromarketing, 10, 99–115. Schoenberg, R. (2004). Management style compatibility and cross-border acquisition outcome. In C. Cooper & S. Finkelstein (Eds.), Advances in mergers and acquisitions (Vol. 3, pp. 149–175). Schweiger, D., & Denisi, A. (1991). Communication with employees following a merger: A longitudinal field experiment. Academy of Management Journal, 34, 110–135. Schweiger, D., & Goulet, P. K. (2005). Facilitating acquisition integration through deep-level cultural learning interventions: A longitudinal field experiment. Organization Studies, 26, 1477–1499. Schweizer, L. (2005). Organizational integration of acquired biotechnology companies into pharmaceutical companies: The need for a hybrid approach. Academy of Management Journal, 48, 1051–1074. Siehl, C., & Smith, D. (1990). Avoiding the loss of a gain: Retaining top managers in an acquisition. Human Resource Management, 29, 167–185. Sousa-Poza, A., & Sousa-Poza, A. (2000). Well-being at work: A cross-national analysis of the levels and determinants of job satisfaction. Journal of Socio-Economics, 29, 517–538. Spedale, S., Van den Bosch, F., & Volberda, H. (2007). Preservation versus dissolution of the target firm’s embedded ties in acquisitions. Organization Studies, 28, 1169–1196. Stahl, G. K., & Voigt, A. (2005). The performance impact of cultural differences in mergers and acquisitions: A critical research review and an integrative model. In C. L. Cooper & S. Finkelstein (Eds.), Advances in Mergers and Acquisitions (Vol. 4, pp. 51–83). New York, NY: JAI Press. Stahl, G. K., & Voigt, A. (2008). Do cultural differences matter in mergers and acquisitions? A tentative model and examination. Organization Science, 19, 160–176. Styhre, A., Bo¨rjesson, S., & Wickenberg, J. (2006). Managed by the other: Cultural anxieties in two Anglo-Americanized Swedish firms. International Journal of Human Resource Management, 17, 1293–1306. Sudarsanam, S., & Mahate, A. (2006). Are friendly acquisitions too bad for shareholders and managers? Long term value creation and top management turnover in hostile and friendly acquirers. British Journal of Management, 17, S7–S30. Teerikangas, S., & Very, P. (2006). The culture-performance relationship in M&A: From Yes/ No to How. British Journal of Management, 17, S31–S48. Ulrich, D. (1997). Measuring human resources: An overview of practice and a prescription for results. Human Resource Management, 36, 303–320. Ullrich, J., Wieseke, J., & Van Dick, R. (2005). Continuity and change in mergers and acquisitions: A social identity case study of a German industrial merger. Journal of Management Studies, 42, 1549–1569.

Human Impacts on the Performance of Mergers and Acquisitions

31

Vaara, E. (2003). Post-acquisition integration as sensemaking: Glimpses of ambiguity, confusion, hypocrisy, and politicization. Journal of Management Studies, 40, 859–894. Vaara, E., & Monin, P. (2010). A recursive perspective on discursive legitimation and organizational action in mergers and acquisitions. Organizational Science, 21, 3–22. Vaara, E., Tienari, J., Piekkari, R., & Sa¨ntti, R. (2005). Language and the circuits of power in a merging multinational corporation. Journal of Management Studies, 42, 595–623. Vaara, E., Tienari, J., & Sa¨ntti, R. (2003). The international match: Metaphors as vehicles of social identity-building in cross-border mergers. Human Relations, 56, 419–452. Van Dick, R., Ullrich, J., & Tissington, P. (2006). Working under a black cloud: How to sustain organizational identification after a merger. British Journal of Management, 17, S69–S79. Van Leeuwen, E., Van Knippenberg, D., & Ellemers, N. (2003). Continuing and changing group identities: The effects of merging on social identification and ingroup bias. Personality and Social Psychology Bulletin, 29, 679–690. Verbeke, A. (2010). International acquisition success: Social community and dominant logic dimensions. Journal of International Business Studies, 41, 38–46. Villinger, R. (1996). Post-acquisition managerial learning in Central East Europe. Organization Studies, 17, 181–207. Weber, Y. (1996). Corporate cultural fit and performance in mergers and acquisitions. Human Relations, 49, 1181–1203. Weber, Y., & Shenkar, O. (1996). National and corporate cultural fit in mergers/acquisitions: An exploratory study. Management Science, 42, 1215–1227. Wickramasinghe, V., & Karunaratne, C. (2009). People management in mergers and acquisitions in Sri Lanka: Employee perceptions. International Journal of Human Resource Management, 20, 694–715. Zander, U., & Zander, L. (2010). Opening the grey box: Social communities, knowledge and culture in acquisitions. Journal of International Business Studies, 41, 27–37. Zollo, M., & Singh, H. (2004). Deliberate learning in corporate acquisitions: Post-acquisition strategies and integration capability in U.S. bank mergers. Strategic Management Journal, 25, 1233–1256.

THE M&A NEGOTIATION STAGE: A REVIEW AND FUTURE RESEARCH DIRECTIONS Heather Parola and Kimberly M. Ellis ABSTRACT Despite the number of articles over the past two decades mentioning the importance of the negotiation stage in the M&A process, there has been very limited theoretical development and empirical analysis emphasizing multiple factors critical to M&A negotiations. The purpose of our paper is twofold. First, we provide a review of the extant academic literature on negotiations in the M&A process. Then, drawing on the M&A process perspective and classical negotiation theory, we develop a framework to highlight major components of the M&A negotiation stage examined in existing studies and offer key insights of how this underdeveloped area of study is ripe with opportunities for future theoretical development and empirical research. Keywords: M&A process; negotiation stage The negotiation stage in mergers and acquisitions (M&As), a distinct stage where information sharing and concession making occur between the target firm and the acquiring firm to obtain the ultimate goal of reaching an agreement that leads to deal completion, is often mentioned as being crucial

Advances in Mergers and Acquisitions, Volume 12, 33–57 Copyright r 2013 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1479-361X/doi:10.1108/S1479-361X(2013)0000012005

33

34

HEATHER PAROLA AND KIMBERLY M. ELLIS

to the success or failure of a deal (e.g., Cartwright & Schoenberg, 2006; Greenwood, Hinings, & Brown, 1994; Jemison & Sitkin, 1986; Marks & Mirvis, 2001; Neal, 1998; Pablo, Sitkin, & Jemison, 1996; Zollo & Singh, 2004). While the M&A integration stage has received increasing attention (e.g., Cartwright & Cooper, 1996; Haspeslagh & Jemison, 1991; Pablo, 1994; Zollo & Singh, 2004) thereby expanding the process perspective of M&As, there is still a dearth of studies examining the negotiation stage. In the studies that do exist, researchers often allude to the importance of negotiations and provide more normative accounts of topics of discussion in negotiations as well as several outcomes of negotiations. However, few have developed theoretical models explicating the actual process of M&A negotiations, its key dimensions, its antecedents, or its effects. In order to fill this gap, we build on the process perspective of M&As (Jemison & Sitkin, 1986) and classical negotiation theory (Pruitt, 1981) to review the current literature pertaining to the M&A negotiation stage and develop a framework of the M&A negotiation process. Then, we discuss future research opportunities aimed at facilitating the development of theoretical models and encouraging empirical research that examine aspects of the negotiation stage in more detail and incorporate components of both the negotiation and integration stages of the M&A process to better understand their complex interrelationships (e.g., Greenwood, Hinings, & Brown, 1994).

CLASSICAL NEGOTIATION THEORY Negotiation is defined as ‘‘a process by which a joint decision is made by two or more parties (Pruitt, 1981, p. 1).’’ Building on Pruitt’s (1981) seminal work, the negotiation process can be characterized by several steps. First, the parties must verbalize their contradictory demands. In the M&A context, this involves placing initial bids or offers. The second step involves concession making, the search for new alternatives, or some combination of the two. In the M&A context, concession making reflects the demand level of the parties as well as determines time pressures, deal limitations, and time elapsed in the negotiation. The search for new alternatives in the negotiation process includes factors that enhance the speed and likelihood of reaching an agreement. In the M&A context, these factors can include earnouts, termination fees, or unscheduled award payments. Also, concession making and search for new alternatives are related. If a concession cannot be determined, then the search for new alternatives occurs. Further, the search of new alternatives may produce matching which leads back to efforts to

The M&A Negotiation Stage: A Review and Future Research Directions

35

make concessions in order for agreement to be reached. The last step in the negotiation process is agreement which occurs when all necessary concessions have been made. In the M&A context, this occurs when both parties have settled on all deal terms, board endorsement is obtained, regulatory approval has been granted, and if necessary shareholders have consented – all resulting in final deal consummation. Two other factors influencing the evolution of the negotiation process are firm-level competitive behavior and cooperative behavior (Pruitt, 1981). Negotiation theory suggests that as time elapses, behavior will switch from competitive to cooperative behavior (Pruitt, 1981). Competitive behavior, which is witnessed at the beginning stages of the negotiation process, involves imposing time pressures, reducing other’s influences, and using power tactics. For example, in the M&A context firms may make extreme offers, establish deadlines for the terms to be accepted, and institute actions such as poison pills and greenmail. Cooperative behavior involves information exchanges and cost-cutting concessions that enhance the likelihood of agreement (Pruitt, 1981). Firms experience cooperative behavior in the M&A context through increased information sharing and the agreement to be involved in one-on-one negotiations in order to reduce auction costs. Fig. 1 outlines the process model of negotiations. Utilizing this framework to analyze the current literature on M&A negotiations allows us to make

Step 2

Step 1

Step 3

Concession Making Verbalize Contradictory Demands

Agreement Search for New Alternatives

Cooperative Behavior

Competitive Behavior TIME

Fig. 1. M&A Negotiation Stage Model.

36

HEATHER PAROLA AND KIMBERLY M. ELLIS

three contributions. First, we contribute to the research on the pre-deal stage of M&As. With the majority of recent M&A process-oriented research focusing on the post-deal integration stage, the pre-deal stage of M&As has been relatively neglected. Our review extends the work of other researchers in highlighting the importance of analyzing several specific components of the negotiation stage to develop a more comprehensive process theory of M&As (e.g., Jemison & Sitkin, 1986). Second, we contribute to both the strategic management and negotiation literatures by integrating these two traditionally disparate streams. M&As provide an excellent context where strategy theorists and negotiation theorists can come together to enhance our understanding of this critical aspect of the M&A process. Third, we present a framework M&A scholars can readily utilize to expand the body of research on the negotiation stage of M&As as well as offer numerous suggestions of future research.

STUDIES ON M&A NEGOTIATION STAGE We followed several steps in order to gain a credible number and consistent coverage of articles emphasizing aspects of the M&A integration stage. First, we searched for the keywords negotiation, and merger or acquisition in the citation and abstract of the ABI Inform Complete database. This yielded 369 articles. Second, in order to ensure that we captured relevant management articles, we searched for keywords negotiation in document text, and merger or acquisition in the citation and abstract, and the keywords management, administrative, or organization in publication title. This search yielded 424 articles. Forty-three articles overlapped between the two searches, resulting in a total of 750 articles. Third, we reviewed the articles for general fit and relevance. Eliminations were made for articles being off topic (e.g., information acquisition or negotiations of unions: 199 articles). Fourth, we excluded articles relating to special types of acquisitions such as hospital M&As (62 articles) and cross-border M&As (201 articles). Hospital M&As represent a specific type of deal that follows a different negotiation process than corporate acquisitions because of their singular nature and the non-profit context. Cross-border M&As were eliminated due to their heavy emphasis on national cultural differences. Fifth, we reviewed the remaining articles to ensure a focus on one of the central aspects of the negotiation stage identified in our framework (additional 259 articles excluded, many of which are normative in nature). In particular, the majority of the articles excluded either made reference to the negotiation process but did not

The M&A Negotiation Stage: A Review and Future Research Directions

37

formally theorize or develop specific hypotheses about negotiation factors (e.g., Datta, 1991; Hayward & Hambrick, 1997; Hitt, Hoskisson, Harrison, & Summers, 1994; Hitt, Hoskisson, & Ireland, 1990) or only mentioned negotiation as an area of needed future research (e.g., Haunschild, 1993; Ragozzino & Reuer, 2010; Zollo & Singh, 2004). This process resulted in a final set of 29 articles that directly examined components of the M&A negotiation stage. Table 1 summarizes select information about each article and identifies where it aids in explaining aspects of the M&A negotiation stage. Some articles place emphasis on multiple aspects and therefore are included in the table more than one time.

M&A NEGOTIATION PROCESS MODEL Verbalize Contradictory Demands: What Do We Know About Initial M&A Bidding? The negotiation stage begins when the representatives for the respective parties verbalize their demands. In the M&A context, this occurs in the bidding process where those negotiating on the behalf of the acquiring and target firms discuss their respective requirements for the deal to be considered. The start of negotiations is often operationalized when the bidding process begins (e.g., Fich, Cai, & Tran, 2011). The finance and economic literature draw a distinction between negotiations and auctions, where negotiations are those talks with a single buyer and auctions are those with multiple buyers (e.g., Aktas, de Bodt, & Roll, 2010). Remaining consistent with this definition, most research concentrates on why a target firm would limit bidding to one-on-one negotiations rather than increase competitive bidding through an auction. Recent research suggests this is due to auction costs (e.g., Aktas et al., 2010; Boone & Mulherin, 2007). Although latent competition increases the bid premium offered in negotiated deals, auction costs reduce the bid premium (Aktas et al., 2010). Boone and Mulherin (2007) examine wealth effects differences of target shareholders in pre-public takeovers and found the results to be consistent across auctions and single firm negotiations. Thus, it appears the presence of a single buyer or multiple buyers does not significantly affect stock market reaction. When verbalizing contradictory demands, toehold bidding is another possibility. Toehold bidding occurs in higher frequency in hostile takeovers, when the bid is a tender offer rather than a merger, and when the bidder is privately held as opposed to publicly traded (Betton, Eckbo, & Thornburn,

Management Management Management

Theoretical Empirical Empirical

Empirical Empirical

Concession making Bastien (1987) Coff (1999)

Jemison & Sitkin (1986)

Haspeslagh & Jemison (1987) Hsieh and Tsai (2005) Hunt (1990)

Finance

Empirical

Boone and Mulherin (2007) Chi (1994) Hunt (1990) Kesner et al. (1994)

Management

Empirical

Management

Management

Empirical

Theoretical

Management

Normative

Management Management

Finance/Economics

Empirical

Betton et al. (2009)

Discipline

Finance/Economics

Type of Study

Secret negotiations can help alleviate some of the effects of time pressures Longer negotiation frames are needed in knowledge-intensive industries; Unrelated buyers do not use lengthy negotiations for targets in knowledgeintensive industries Time pressure increases the focus of negotiations to technical, legal, and financial perspective. Strategic fit is neglected due to time pressure When the buyer and seller have similar corporate strategies, the negotiation time will be shorter and trust will be increased Amicable deals help alleviate some of the effects of time pressures – negotiations can be lengthened Momentum is slowed when board approval is lagged, the target uses legal issues in order to resist, regulatory obstacles interfere, and the management team has prior experience. Momentum is increased when the deal is very large or very small, secrecy is necessary, the target firm is public, and negotiators are driven by self interests

Auction costs explain why targets enter into one-on-one negotiations and voluntarily accept limited competition for bids Toehold bidding occurs in higher frequency in hostile takeovers, when the bid is a tender offer, and when the bidder is private Wealth effects in pre-public takeovers for shareholders are consistent in auctions and negotiations Moral hazards occur in the bidding process due to information asymmetry The tone of the deal has an effect on the bidding process Investment bankers’ goals may not be aligned with acquirer’s goals in the bidding process

Key Finding

Review of Literature on M&A Negotiation Stage.

Verbalize contradictory demands Aktas et al. (2010) Empirical

Component of the Negotiation Stage

Table 1.

38 HEATHER PAROLA AND KIMBERLY M. ELLIS

Management

Theoretical

Empirical

Empirical

Agreement Adelaja et al. (1999)

Levi et al. (2010)

Boatsman et al. (1983) Cain et al. (2010)

Competitive behavior Bates and Lemmon (2003) Betton et al. (2009)

Economics

Empirical

Management

Accounting/ Economics

Empirical

Finance/Economics

Empirical

Empirical

Finance

Empirical

Management

Economics

Economics

Empirical

Empirical

Finance

Normative

Dierickx and Koza (1991) Fich et al. (2011)

Gilson and Schwartz (2005) Wulf (2004)

Management

Empirical

Datar et al. (2001)

Accounting/ Economics Economics

Finance

Accounting/Finance

Empirical

Search for new alternatives Bates and Lemmon Empirical (2003) Cain et al. (2010) Empirical

Merrett and Houghton (1999) Pablo et al. (1996)

Termination fees can increase competitive behavior forcing the incumbent bidder to pay for information Toehold bidding increases valuation of the target firm by discouraging aggressive bidding Resource combinations translate into negotiation capabilities providing power to those firm’s with the capabilities Earnouts are contingent of post-acquisition performance (mostly for target) and are designed to minimize uncertainty and moral hazard in negotiations

Takeover negotiations fail when firms are involved in other simultaneous takeovers Testosterone levels can increase the probability to withdraw from negotiations

CEOs trade lower premiums for increased power in mergers of equals

Unscheduled option awards (secret negotiations) affect the likelihood of merger completion MAC and MAE clauses offer alternatives to ensure agreement

Termination fees have a substantial positive effect on the probability of deal agreement Earnouts are contingent of post-acquisition performance (mostly for target) and are designed to minimize uncertainty and moral hazard in negotiations Earnouts are utilized to overcome valuation disagreements between acquiring firms and target firms Earnout clauses help increase concessions

Target CEOs sought to maximize bid, but accepted a lower bid price in order to preserve the interests of their staff Acquirers will lengthen the negotiation time frame when target firms appear risky

The M&A Negotiation Stage: A Review and Future Research Directions 39

Economics

Empirical

Theoretical

Empirical

Pierce and Doughtery (2002) Schnitzer (1996)

Cooperative behavior Aktas et al. (2010)

Dierickx and Koza (1991)

De Noble et al. (1988) Healy et al. (1997)

Boone and Mulherin (2007) Coff (1999)

Management

Theoretical Empirical Empirical

Chi (1994) Levi et al. (2010) Officer (2003)

Management

Management

Empirical

Normative

Management

Management

Empirical

Normative

Finance

Empirical

Finance/Economics

Management Management Finance/Economics

Management

Empirical

Carow et al. (2004)

Discipline

Type of Study

Component of the Negotiation Stage

Key Finding

Acquiring managers of friendly strategic takeovers had more information to better value the target firm Friendly negotiations occur at arm’s length with those companies who have established historic relationships which reduces information asymmetry

Buyers increase information through lengthy negotiations and by avoiding tender offers Information exchange is important in order to reduce ambiguity

Auction costs explain why targets enter into one-on-one negotiations and voluntarily accept limited competition for bids Target firm agrees to one-on-one negotiations to cut auction costs

Raider has info about the scope of efficiency gains, then the raider may prefer a hostile acquisition even if the transaction costs for a friendly takeover are smaller

Pioneer firms utilize information advantages to prevent target firm from expropriating all the acquisition gains in the negotiation process Information asymmetry can lead to moral hazard and holdup Testosterone levels can perpetuate dominance in negotiations Termination fees can increase competitive behavior by limiting alternatives for the target firm Power is enacted through dominance by resources control in negotiations

Table 1. (Continued )

40 HEATHER PAROLA AND KIMBERLY M. ELLIS

The M&A Negotiation Stage: A Review and Future Research Directions

41

2009). Betton et al. (2009) assert that takeovers are always singular, but they are overshadowed by the presence and threat of an auction. This looming threat of an auction compensates for the increased valuation of the target firm that the toehold position creates (Betton et al., 2009). Toehold bidding may present a special case in the bidding process because of the hostile tone of the deal. The process of verbalizing contradictory demands will be surpassed by the competitive nature of using power tactics. The tone (hostile or friendly) of the deal also dictates how verbalizing demands are received. Hunt (1990) suggests that in amicable bidding processes, the first bid is likely to be accepted, as opposed to hostile bids, when it may not be until the fifth or sixth bid that acceptance is reached. Another issue in bidding is that of agency when an investment bank is utilized. Investment bankers play a vital role in helping firms to express their respective demands and expectations. When investment bankers are in charge of the bidding procedure, the alignment of goals between the representative and the bidder may not be congruent. Kesner, Shapiro, and Sharma (1994) found a positive relationship between compensation of investment bankers and premium paid in a deal for both the target and the acquiring firms, suggesting a misalignment of goals between the investment bankers and the acquiring firms with regard to bidding. Similar to agency issues, moral hazard issues are present in bidding in that information asymmetry allows for unfair bids to be accepted and lead to hold-up situations (Chi, 1994). As such, information asymmetry has direct effects on the bidding and verbalization of demands in M&As.

Concession Making: How Do Limits or Time Pressures Come Into Play When Assessing Offers? Concessions in negotiations are thought to hasten the agreement, prevent the other party from leaving the negotiation, or encourage the other party to make reciprocal concessions (Pruitt, 1981). This belief does not necessarily need to be correct, as there may be an apparent divergence of interests and demand level between the two parties (Pruitt, 1981). After the contradictory bids are verbalized based on initial demand levels, there is an opportunity to respond to offers and offer amounts can be revised in a series of concession makings (Boone & Mulherin, 2007). The demand level in negotiations is influenced by the limit, the time elapsed, and the time pressure. The negotiator’s limit is a function of perceived outcomes of failing to reach an agreement (Kelley, Beckman, & Fischer, 1967) as well as the available

42

HEATHER PAROLA AND KIMBERLY M. ELLIS

alternatives to the focal deal (Pruitt, 1981). Limit can be described as the level of benefit beyond which the negotiator is willing to concede (Pruitt, 1981). In the M&A context, this suggests that a firm with options to acquire other firms have a higher limit and thus higher expectations and make fewer concessions. For example, Merrett and Houghton (1999) found that target CEOs accepted lower bid prices in order to preserve the interests of their staff demonstrating how the target CEOs’ limit was higher with the interests of the staff, but lower with the bid price, and thus a concession was made with the bid price. Negotiation theory offers that as time elapses demand diminishes (Pruitt, 1981). This is due to concession making and increased time pressure to meet a deadline. In the M&A context, escalating momentum of the deal (Jemison & Sitkin, 1986) is an important factor in concession making and has direct influence on negotiations. As escalating momentum increases, it hastens the early stages of the M&A process which include negotiations, creating time pressures that become a critical issue in concession making. When concessions are made hastily, specific issues such as those pertaining to evaluations of organizational fit are often neglected in negotiations which can ultimately lower overall post-acquisition performance (Datta, 1991). In the M&A context, negotiation time can vary by industry, deal attributes, and acquisition experience. High levels of uncertainty and information processing tend to lengthen negotiation frames. Coff (1999) found that longer negotiation frames are needed in knowledge-intense industries in order to share and process the difficult information in these industries. Pablo et al. (1996) propose that acquirers will lengthen the negotiation time frame when target firms appear risky due to the uncertainty of the deal. Jemison and Sitkin (1986) suggest that momentum is slowed and thus negotiations lengthened when board approval is lagged, the target uses legal issues to resist, regulatory obstacles exist, and the management team has engaged in prior acquisitions. While Jemison and Sitkin (1986) suggest experience will slow negotiations, other researchers have suggested that negotiation time will be quicker with experienced acquirers (e.g., Bruton, Oviatt, & White, 1994). Hunt (1990) offers that contingency factors should be considered when evaluating negotiations because contextual variables alone such as experience do not explain the success or failure of deals. Other factors proposed to shorten negotiation length include greater degree of strategic fit among the two firms (Hsieh & Tsai, 2005), the public status of the target firm (Jemison & Sitkin, 1986), and the deal size being either very large or very small (Jemison & Sitkin, 1986).

The M&A Negotiation Stage: A Review and Future Research Directions

43

The time pressures set on a deal also influence the demand of the parties involved (Pruitt, 1981). Secret negotiations often occur and can help eliminate some of the effects of time pressure by allowing the important decisions to be discussed and decided upon prior to the negotiation announcement as well as preventing employees from experiencing negative reactions and worry during lengthy public negotiations (Bastien, 1987). Secrecy can also increase time pressure though, specifically when the target is public and there is a fear of the target resistance (Jemison & Sitkin, 1986). In this case, the negotiators want the deal completed as quickly as possible, increasing the momentum of the deal. Other factors that will increase the momentum of the negotiations are self interests of the participants and overconfidence of the TMT members (Jemison & Sitkin, 1986). Moreover, time pressure not only shifts the focus of negotiations to technical, legal, and financial perspectives, while neglecting issues of strategic fit, but also can lead to endorsements of ambiguity as parties will ‘‘agree to disagree’’ and postponements of important decisions until the integration stage (Haspeslagh & Jemison, 1987).

Search for New Alternatives: What Deal Terms/Conditions are Necessary to Move Forward? Alternatives can provide a way of concession making and ultimately lead to agreement for the parties involved in the negotiations. Some alternatives may be more viable than others due to normative principles, regulations, and experience. Distributive justice becomes increasingly important when searching for alternatives (Pruitt, 1981) as equality and salience of the outcomes allow the negotiators to choose between alternatives such as earnouts or termination fees. In the M&A negotiation context, alternatives enhance the likelihood of an agreement by mitigating moral hazard and encouraging concessions. Fich et al. (2011) provide empirical evidence that unscheduled option awards for the CEO of the target firm increase the likelihood of a merger completion. The secret negotiations which ended in option awards provided an alternative for golden parachutes and supplemented the target CEO’s compensation after the deal. Gilson and Schwartz (2005) propose that material adverse change (MAC) clauses and material adverse effect (MAE) clauses permit a buyer to cancel a deal if a sudden change occurs without cost. These clauses attempt to mitigate moral hazard between the parties and enhance the likelihood of a merger (Gilson & Schwartz, 2005). The

44

HEATHER PAROLA AND KIMBERLY M. ELLIS

termination fee, which compensates bidders for negotiation costs and information sharing if the deal is cancelled, is another alternative that increases the likelihood of agreement. In support of this, Bates and Lemmon (2003) empirically demonstrate that termination fees have a substantial and positive effect on the probability of deal completion. Earnout clauses help increase concessions, particularly when information asymmetry is high (Datar, Frankel, & Wolfson, 2001; Dierickx & Koza, 1991). Earnout clauses are typically used if the target is a small private firm in a different industry than the acquirer (Datar et al., 2001). Datar et al. (2001) found that earnouts are primarily used to bridge valuation disagreements and for tax and accounting considerations. More recently, Cain et al. (2010) show earnouts are designed to minimize uncertainty and moral hazard in negotiations and contingent on post-acquisition performance. However, it is important to note that earnouts are not without issue, as the target TMT member receiving the earnouts may not be retained in the combined firm and therefore cannot control outcomes on which the clause is based (Dierickx & Koza, 1991). Another factor that increases concession is the target CEO’s power to premium ratio. Wulf (2004) found that target CEOs trade lower premiums for increased power in mergers of equals. When this occurred, it was not beneficial for the shareholders, but the alternative did result in an increased likelihood of a deal.

Agreement: Do We Have a Completed Deal or Not? Agreement is reached when one party reaches a deadline, one party perceives that the other has made all the concessions it can be expected to make, or a mutually prominent alternative emerges (Pruitt, 1981). Agreement in M&As results when both parties agree on deal terms, board and/or shareholder approval is received, and regulatory agencies consent. Agreement, or the end of the negotiation process, has been operationalized as the day the announcement is made (e.g., Fich et al., 2011) or the date that the transaction closes (Coff, 1999). We argue that agreement occurs on the date the transaction closes because negotiations continue until the board and regulatory agencies approve the deal (Jemison & Sitkin, 1986), which may not occur until after the announcement is made. Negotiations fail to reach agreement when the parties cannot agree and fail to make appropriate concessions. Takeover attempts are likely to fail if simultaneous takeover negotiations occur (Adelaja, Nayga, & Faroq, 1999)

The M&A Negotiation Stage: A Review and Future Research Directions

45

and withdrawals of bids often occur when agreements cannot be made. Behaviors Exhibited During the Negotiation Stage: Moving Beyond Deal Tone Negotiation theory suggests that as time elapses, behavior will switch from competitive to cooperative behavior (Pruitt, 1981). This is apparent in the above discussion that the initial bidding step engenders more competitive behavior while concession making, which leads to agreement, promotes more of a cooperative stance. It is important to note that competitive and cooperative behaviors should not be confused with the tone of the deal. The negotiation process moves from competitive to cooperative behaviors in both friendly and hostile deals. The tone of the deal may moderate how quickly this shift occurs, but the process of the negotiations begins in a competitive way. For example, Dierickx and Koza (1991) suggest that friendly negotiations occur at arm’s length and will be successful if the two firms have a historic relationship in order to reduce information asymmetry. This may be true, but the negotiation process will begin in a competitive manner when the two parties verbalize contradictory demands. If the two parties instantly agreed, then negotiations would not be required. Also, deals that start out hostile in tone due to the unsolicited nature of the initial bid can eventually reach a point where cooperative behavior occurs (D’Aveni & Kesner, 1993). Competitive Behavior Specific competitive behaviors include imposing time pressures, reducing other’s influence to concession making, appearing unwilling to concede, and utilizing power tactics (Pruitt, 1981). The inclusion of termination fees can induce competitive behavior as they force competing bidders to pay for the information revealed by the incumbent bidder (Officer, 2003). By limiting other bidders’ influence and eliminating options available for the target firm, termination fees can lower the demand limit of the target firm. Termination fees are included to protect information of the bidding party (Bates & Lemmon, 2003; Officer, 2003), and also to enhance competitive behavior through limiting alternatives. Because toehold positions typically occur in hostile takeovers, the aim is to increase the valuation of the target firm in order to discourage aggressive bidding from others (Betton et al., 2009).

46

HEATHER PAROLA AND KIMBERLY M. ELLIS

As such, toehold bidding increases competitive behavior by reducing the influence of target firms and outsider bidders on concession making. Displaying power in negotiations is another means of competitive behavior. Power can be expressed by individual characteristics of the negotiators, structural factors of the negotiation, and attributes of the firms involved in the negotiation (Thompson, Wang, & Gunia, 2010). For example, Levi, Li, and Zhang (2010) provide evidence that testosterone levels in young male CEOs perpetuate dominance in the negotiation process by either withdrawing a bid or forcing the bidder to resort to a tender offer. Toehold acquisitions increase the bidder’s power over the target firm which promotes competitive behavior. Resources can also provide power in negotiations with disparate resource contributions being translated into distinct negotiation capabilities for firms (Boatsman, Hansen, & Kimbrell, 1983) and resource control in negotiations resulting in one party’s dominance (Pierce & Doughtery, 2002). Using information as a resource, Schnitzer (1996) proposes that if a raider has information on the scope of efficiency gains, then the raider utilizes this knowledge as power and prefers a hostile acquisition over a friendly acquisition even when the friendly acquisition may have less transaction costs. Moreover, Carow, Heron, and Saxton (2004) find that pioneer firms utilize information advantages to prevent target firms from expropriating all the acquisition gains in the negotiation process. Such competitive behaviors can adversely affect aspects of the M&A negotiation stage.

Cooperative Behavior As the negotiations turn toward concession making and searching for alternatives, the parties display more cooperative behavior. Cooperative behavior is witnessed through integrative agreements which include costcutting considerations, compensation arrangements, and increased information exchanges. One example of a cost-cutting consideration is when the target firm agrees to a one-on-one negotiation with a bidder rather than realizing auction costs (Aktas et al., 2010; Boone & Mulherin, 2007). This decision is made in concession making after the contradictory demands have been verbalized and may be a turning point as to when the process becomes more cooperative than competitive. Another form of cooperative behavior is compensation offerings. Unscheduled award options (Fich et al., 2011) and earnouts that are contingent upon post-acquisition performance (Cain et al., 2010) are examples of such compensation arrangements.

The M&A Negotiation Stage: A Review and Future Research Directions

47

The better informed the acquiring firm is of the target firm and its key strategic leaders, the better are the chances of deriving the greatest benefits from the negotiation process (Datta & Yu, 1991). Information exchange is perhaps the most important form of cooperative behavior as it can assist in eliminating ambiguity (De Noble, Gustafson, & Hergert, 1988) and lessen information asymmetry (Dierickx & Koza, 1991). The success of the due diligence process often hinges on the cooperation of the target firm in terms of information sharing. In-depth due diligence is critical for the success of a deal and at times the terms of a deal must be renegotiated as new information is shared (Tanner, 1991). Although termination fees can be considered as a competitive behavior to block alternatives, cooperative behavior follows by allowing information exchange. Termination fees encourage the acquirer to share private information enlisting cooperative behavior (Bates & Lemmon, 2003; Officer, 2003). Coff (1999) reports that information sharing is increased in knowledge-intensive industries when the negotiations were lengthened and tender offers were avoided. The lengthening of negotiation expectations can slow momentum and allow the negotiators to share and process information without time pressures.

A LOOK AHEAD Developing a process perspective to negotiations in M&As unveils many gaps and avenues for future research. Because M&A negotiation research is scattered across several business disciplines and underdeveloped from a positivist view, there are numerous opportunities for theory development emphasizing this critical stage of the M&A process. Below we suggest some important and interesting areas of future directions for the study of M&A negotiations. Table 2 provides a summary of our future research suggestions.

Verbalizing Contradictory Demands The bidding process of M&As remains an area ripe for theoretical development. A research stream is being developed in finance and economics which explains differences that occur between focused negotiations and auctions (e.g., Aktas, de Bodt, & Roll, 2010; Fich et al., 2011), while a recent management study offers a non-traditional and interesting look at the effects of hormones on the bidding process (Levi et al., 2010). Various moderators are possible in the bidding process, including contesting

48

HEATHER PAROLA AND KIMBERLY M. ELLIS

Table 2. Component of the Negotiation Stage Verbalize contradictory demands

Future Research Opportunities. Future Research Questions

 To what extent does verbalizing the demands in M&A negotiations set the tone of the deal?  What effect do different parties (e.g., target firm managers, advisors, etc.) have on verbalizing demands in M&A negotiations? Who is verbalizing the demands?  How do fragmented perspectives affect the demands that are verbalized in M&A negotiations?

Process of concession making

 To what extent do slowed negotiations assist in the integration stages of an M&A?  To what extend do slowed negotiations assist in eliminating ambiguity in the M&A process?  How does firm-level learning derived from prior M&A experience affect negotiations when time pressures are present?

Search for new alternatives

 How are alternatives uncovered?  Is the search for new alternatives greater when the deal is hostile versus friendly?  What effects do networks (e.g., CEO interlocks and use of consultants) have on providing and identifying new alternatives?

Agreement

 How do various factors affect agreement (e.g., managerial hubris, uncertainty, and desperation)?

Competitive behavior

 What types of resources are most important in gaining power in negotiations of M&As?  Do perceptions of relative standing begin in the negotiation stage and how do these perceptions affect the overall negotiation process?

Cooperative behavior

 What kinds of negotiation strategies result in the greatest information flows?  To what extent does who is present at negotiation meetings facilitate information flow?  Is there a punctuated equilibrium when the negotiation teams display more cooperative behavior?  Do fairness perceptions influence cooperativeness during negotiations?

The M&A Negotiation Stage: A Review and Future Research Directions

49

bids or industry effects which could in effect change the way that bidding occurs. What is particularly interesting is how verbalizing bids can possibly set the tone of negotiations and whether extreme bids may set the tone for competitive behaviors to last longer in the negotiation process and how this affects various forms of concession making. Because we know in negotiations that opponents have the ability to respond to offers and the ability to revise offer amounts (Boone & Mulherin, 2007), future research should consider the role of bidding as it connects to concession making by both parties. Future research should also consider who is verbalizing the contradictory demands. Is it typical to have the CEO, investment bank representative, or appointed member of a negotiation team make the demands, and does the person who makes the demands matter? Bargaining history has an effect on the negotiation process, which places importance on examining how experience indicators of the individual who verbalizes the demands affects bidding. Structure has also been posited to play a part in terms of how many members are on the team and the makeup of the team. In particular, Jemison and Sitkin (1986) point out that as more members are involved in the negotiation process, their fragmented perspectives become difficult to manage. Future research should analyze how fragmented perspectives stemming from the composition of the negotiation team at the beginning stages of the bidding influence the duration of the negotiations. .

Concession Making The effects of time elapsed and time pressures appear to be fruitful areas of study. Jemison and Sitkin (1986) propose that if momentum is slowed, either by the board of directors or the top management teams, that strategic fit, organizational fit, and integration issues are given more consideration. Marks and Mirvis (2001) suggested that successful deals focus on issues of strategic and organizational fit over that of a sole focus on financial and legal aspects. This suggests that as negotiations are slowed down, a full range of issues will be uncovered, leading to more effective integration efforts and higher levels of post-acquisition performance. Coff (1999) found that buyers in knowledge-intensive industries lengthen negotiations in order to concentrate on processing information and reducing ambiguity, while in the international context, Vaara and Tienari (2011) discover that as the pre-merger process continued in length, the top management team increasingly focused on synergy benefits between the two firms. These

50

HEATHER PAROLA AND KIMBERLY M. ELLIS

studies provide initial evidence that reduced time pressures allow for slowed negotiations that assist in lessening uncertainty and identifying sources of value creation which are critical during the integration stage. Now, studies are needed that build on these findings and investigate their linkages to postintegration outcomes such as performance. Other areas of future research should concentrate on the conflicting views found with experience. Negotiation research suggests that bargaining history of the negotiator plays a role in future negotiations (O’Connor, Arnold, & Burris, 2005; Thompson, Wang, & Gunia, 2010). Experience of the acquirer should affect the negotiation length in two major ways: it should allow the negotiator to recognize key factors that will affect integration which will lengthen negotiations (Jemison & Sitkin, 1986) and it should provide the acquirer with key tacit knowledge and negotiation skills which will shorten the negotiations (Bruton et al., 1994). Future research should empirically test and bring together these views to provide a richer understanding of how acquisition experience can affect the negotiation length. Future research should also consider how M&A experience affects other areas of concession making such as determining demand limit and the effects of time pressures. For example, M&A negotiation experience may moderate the negative effects of time pressures increased tacit knowledge that increases the ability to speed up negotiations effectively. Also, M&A negotiation experience may provide experiential lessons that provide the negotiators with realistic expectations of demand limit.

Search for New Alternatives The search for alternative components of M&A negotiations also presents several future research opportunities. There is very limited understanding of the extent to which regulations dictate which options are more or less viable and how this may vary by industry or deal characteristics. Also, more studies are needed to determine how alternatives are uncovered. Investment bankers represent an actor group that plays a crucial role in the search for alternatives. Bowers and Miller (1990) find that certain investment bankers developed expertise in identifying potential target firms. Such expertise may also facilitate their ability to search for integrative alternatives in a similar manner. Thus, the effects of investment bankers’ reputation, learning effects, and relationship longevity may be of considerable importance in uncovering alternatives and thus should be examined both theoretically and empirically.

The M&A Negotiation Stage: A Review and Future Research Directions

51

Agreement One of the most analyzed outcomes of agreement in the negotiation stage is the acquisition premium paid. A premium is the difference in the percentage between the trading price of the target firm’s stock before the announcement of the deal and the price per share paid by the acquiring firm. Various studies have looked at acquisition premiums as being affected by organizational learning (e.g., Beckmann & Haunschild, 2002; Haunschild, 1994; Haunschild & Beckmann, 1998), desperation (e.g., Kim, Haleblian, & Finkelstein, 2011), managerial hubris (e.g., Hayward & Hambrick, 1997), target competition (e.g., Varaiya, 1988; Varaiya & Ferris, 1987), and uncertainty (Laamanen, 2007). Analyzing these factors in light of how they evolve during the negotiation stage and influence different components of the negotiation stage would provide various avenues for future research.

Competitive Behaviors and Cooperative Behaviors Negotiation theory offers that behavior shifts from competitive toward cooperative as the negotiations continue and the process of concession making takes place. One question that becomes important in M&A negotiations is whether there is a punctuated equilibrium in which the behavior shifts. Gersick (1988, 1989) found a punctuated equilibrium in how members approached their teamwork at the midpoint of the project. This model would be interesting to analyze in light of M&A negotiations when teams are used to negotiate. This approach should be blended with the idea of fragmented perspectives as well (Jemison & Sitkin, 1986) in order to capture a full view of the processes unfolding. The uses of power in M&A negotiations should be explored in future research. Power enactments in terms of gender, ethnic background, negotiation team composition, and reputation would be fruitful avenues that will contribute greatly to the research on power and negotiations. We also echo Pierce and Doughtery’s (2002) call for research on analyzing the role of resources in the exercise of power during negotiations in the M&A context. We know that disparate resource contributions are translated into distinct negotiation capabilities for firms (Boatsman et al., 1983) and that some CEOs will agree to lower premiums in order to gain more power in the combined firm (Wulf, 2004), but it is necessary to understand which specific resources are beneficial in negotiations and how these vary in power

52

HEATHER PAROLA AND KIMBERLY M. ELLIS

distributions by deal characteristics (e.g., deal size, deal relatedness, relative size, and TMT involvement). Finally, the principles of relative standing (Frank, 1985) would be interesting to examine as power dynamics take shape during the M&A negotiation stage. Target TMT turnover after an M&A occurs when target managers feel inferior due to the loss of autonomy, rank, and status (Cannella & Hambrick, 1993; Hambrick & Cannella, 1993). These perceptions may begin early in the negotiation stage and affect not only concession making and time required to reach agreement but also post-deal integration efforts and actual power distributions in the combined firm. The link between cooperation and information sharing during the negotiation stage of M&As is also deserving of researchers’ attention. Future research should examine when information flows and what type of information flows between parties are most essential during negotiations by considering different deal characteristics. Where and when negotiation talks take place can also inform the type and magnitude of information flow between parties. Future research should extend this idea to information sharing to investigate conditions under which the place, time, tone, and number of meetings, as well as who is involved in the meetings can dictate how much information is shared and how information shared during the negotiation stage affects post-deal integration decisions such as the composition of the combined firm’s top management team. Such research would advance the earlier work of Hayes (1975) who showed how negotiation talks that took place on both social and business levels led to higher TMT retention. Finally, research is emerging, which examines how justice perceptions influence cooperativeness during negotiations. In a recent study, Conlon and Ross (2012) theorize how parties might use various justice-enhancing strategies in negotiations characterized by an integrative approach where cooperative behaviors are needed to reach a mutually satisfying agreement. In a similar vein, emerging M&A process literature shows that actions initiated to create perceptions of fairness influence the postintegration process and performance outcomes (Ellis, Reus, & Lamont, 2009; Monin, Noorderhaven, Vaara, & Kroon, 2013). Considered collectively, these studies point to several future research opportunities to investigate not only whether justice perceptions facilitate more cooperative behaviors among firms involved in a M&A as well as influence several dimensions of the negotiation stage but also if the importance of justice perceptions differs across stages of the M&A process or evolves over time.

The M&A Negotiation Stage: A Review and Future Research Directions

53

CONCLUSIONS The process perspective of M&As provides a useful way to build and test theory in strategic management as well as enhance our understanding of one of the most complex strategic phenomena frequently utilized as a key mechanism for firm growth. While numerous recent studies have examined varying aspects of the integration stage, the literature on the negotiation stage of the M&A process has been treated in a rather superficial manner in that many articles simply mention that negotiations in M&As are important. This review highlights the importance of negotiations in the M&A process and by building upon Pruitt’s (1981) classical work on the negotiation process unveils many issues that are theoretically and empirically underdeveloped in the existing M&A process research. In doing so, our paper makes three important contributions to the literature. First, we advance research on the pre-deal stages of M&As by identifying key components of the negotiation stage. The pre-deal stage has been repeatedly cited as being important and critical to the success of an M&A (e.g., Haspeslagh & Jemison, 1991; Jemison & Sitkin, 1986; Marks & Mirvis, 2001); yet, limited research seeks to explain the specific aspects of negotiations that unfold during the early stages of the M&A process. Our focus on reviewing existing literature pertaining to the negotiation stage distinguishes four main sets of factors – those influencing the initial bid, the making of concessions in light of divergent demands and time pressures, the search for alternative provisions that move negotiations forward, and agreement being reached to complete the deal. Also, our review affirms that more researched examining this early stage of the M&A process is definitely warranted. Second, we contribute to the overall M&A literature and the negotiation literature by integrating these two traditionally distinct research streams. Through such integration, a fuller, richer perspective of the various aspects of M&A negotiations emerges and a greater understanding of the overall M&A process is gained. Also, the negotiation literature is advanced by considering macro-level processes of negotiation within the context of M&As. Moreover, the integration of these two research streams allows us to respond to previous calls for research that considers both the economic and behavioral sides of strategy (Hirsch et al., 1990), which often remain segregated (Lane, Cannella, & Lubatkin, 1999). Third, we utilize classical negotiation theory to provide a framework to analyze the key components of the negotiation stage of the M&A process and highlight gaps in the literature. As such, the presented framework is

54

HEATHER PAROLA AND KIMBERLY M. ELLIS

important to practitioners and academicians alike. Practitioners gain insight into the importance of considering multiple factors during the M&A negotiation stage, which allows the acquiring and target firms to reach an agreement that better positions the combined firm to create value following the deal. Also, understanding key components of the negotiation stage and their effects can help practitioners, especially those planning to engage in multiple deals, to focus efforts on certain negotiation practices while becoming more successful in M&A negotiations. Likewise, academicians gain insight into existing literature in M&A negotiations as well as future research opportunities aimed at better grasping the complex interrelationships between components of the negotiation, integration, and post-deal stages. Such understanding is critical to developing a more comprehensive theory of M&As. Through our review and discussion of future research opportunities, we trust that we have explicated the importance of developing theoretically motivated models that examine components of the M&A negotiation stage in more depth. Will you as an M&A scholar join us in the quest for enhanced understanding of this underexplored stage of the M&A process?

REFERENCES Adelaja, A., Nayga, R., Jr., & Faroq, Z. (1999). Predicting mergers and acquisitions in the food industry. Agribusiness, 15(1), 1–23. Aktas, N., de Bodt, E., & Roll, R. (2010). Negotiations under the threat of an auction. Journal of Financial Economics, 98(2), 241–255. Bastien, D. T. (1987). Common patterns of behavior and communication in corporate mergers and acquisitions. Human Resource Management, 26(1), 20–33. Bates, T. W., & Lemmon, M. L. (2003). Breaking up is hard to do? An analysis of termination fee provisions and merger outcomes. Journal of Financial Economics, 69, 469–504. Beckmann, C. M., & Haunschild, P. R. (2002). Network learning: The effects of partners’ heterogeneity of experiences on corporate acquisitions. Administrative Science Quarterly, 47, 92–124. Betton, S., Eckbo, E., & Thorburn, K. (2009). Merger negotiations and the toehold puzzle. Journal of Financial Economics, 91(2), 158–178. Boatsman, J. R., Hansen, D. R., & Kimbrell, J. I. (1983). Negotiating corporate combinations: A theory and evidence. Journal of Management, 9(2), 127–143. Boone, A. L., & Mulherin, J. H. (2007). How are firms sold? Journal of Finance, 62, 847–875. Bowers, H. M., & Miller, R. E. (1990). Choice of investment banker and shareholders’ wealth of firms involved in acquisitions. Financial Management, 19(4), 34–44. Bruton, G. D., Oviatt, B. M., & White, M. A. (1994). Performance of acquisitions of distressed firms. Academy of Management Journal, 37(4), 972–989.

The M&A Negotiation Stage: A Review and Future Research Directions

55

Cain, M., Denis, D., & Denis, D. (2010). Earnouts: A study of financial contracting in acquisition agreements. Journal of Accounting & Economics, 51, 151–170. Cannella, A. A., & Hambrick, D. C. (1993). Effects of executive departures on the performance of acquired firms. Strategic Management Journal, 14, 137–152. Carow, K., Heron, R., & Saxton, T. (2004). Do early birds get the returns? An empirical investigation of early-mover advantages in acquisitions. Strategic Management Journal, 25, 563–585. Cartwright, S., & Cooper, C. L. (1996). Managing mergers, acquisitions, and strategic alliances: Integrating people and cultures. Oxford: Butterworth-Heinemann. Cartwright, S., & Schoenberg, R. (2006). Thirty years of mergers and acquisitions research: Recent advances and future opportunities. British Journal of Management, 17, S1–S5. Chi, T. (1994). Trading in strategic resources: Necessary conditions, transaction cost problems, and choice of exchange structure. Strategic Management Journal, 15, 271–290. Coff, R. W. (1999). How buyers cope with uncertainty when acquiring firms in knowledgeintensive industries: Caveat emptor. Organization Science, 10(2), 144–161. Conlon, D. E., & Ross, W. H. (2012). The effect of perceived/felt (in)justice on cooperativeness: Implications for negotiators as ‘‘justice-enhancing communicators’’ in an era of social networking. In B. M. Goldman & D. Shapiro (Eds.), The psychology of negotiations in the 21st century: New challenges and new solutions (pp. 17–44). New York: Routledge. D’Aveni, R. A., & Kesner, I. F. (1993). Top managerial prestige, power, and tender offer response: A study of elite social networks and target firm cooperation during takeovers. Organization Science, 4, 123–161. Datar, S., Frankel, R., & Wolfson, M. (2001). Earnouts: The effects of adverse selection and agency costs on acquisition techniques. Journal of Law Economics & Organization, 17, 201–238. Datta, D. K. (1991). Organizational fit and acquisition performance: Effects of post-acquisition integration. Strategic Management Journal, 12, 281–297. Datta, D. K., & Yu, P. L. (1991). Corporate acquisitions: The merging of habitual domains. Human Systems Management, 10(1), 47–60. De Noble, A. F., Gustafson, L. T., & Hergert, M. (1988). Planning for post-merger integration – Eight lessons for merger success. Long Range Planning, 21(4), 82–85. Dierickx, I., & Koza, M. P. (1991). Information asymmetries – How not to ‘‘buy a lemon’’ in negotiating mergers and acquisitions. European Management Journal, 9, 229–234. Ellis, K. M., Reus, T. H., & Lamont, B. T. (2009). The effects of procedural and informational justice in the integration of related acquisitions. Strategic Management Journal, 30, 137–161. Fich, E., Cai, J., & Tran, A. (2011). Stock option grants to target CEOs during private merger negotiations. Journal of Financial Economics, 101, 413–430. Frank, R. H. (1985). Choosing the right pond: Human behavior and the quest for status. New York: Oxford University Press. Gersick, C. J. (1988). Time and transition in work teams: Toward a new model of group development. Academy of Management Journal, 31, 9–41. Gersick, C. J. (1989). Marking time: Predictable transitions in task groups. Academy of Management Journal, 32, 274–309. Gilson, R. J., & Schwartz, A. (2005). Understanding MACs: Moral hazard in acquisitions. Journal of Law Economics & Organization, 21, 330–358.

56

HEATHER PAROLA AND KIMBERLY M. ELLIS

Greenwood, R., Hinings, C. R., & Brown, J. (1994). Merging professional service firms. Organization Science, 5, 239–257. Hambrick, D. C., & Cannella, A. A., Jr. (1993). Relative standing: A framework for understanding departures. Academy of Management Journal, 36, 733–762. Haspeslagh, P. C., & Jemison, D. B. (1987). Acquisitions myths and reality. Sloan Management Review, 28, 53–58. Haspeslagh, P. C., & Jemison, D. B. (1991). Managing Acquisitions. New York: Free Press. Haunschild, P. R. (1993). Interorganizational imitation: The impact of interlocks on corporate acquisition activity. Administrative Science Quarterly, 38, 564–592. Haunschild, P. R. (1994). How much is that company worth: Interorganizational relationships, uncertainty, and acquisition premiums. Administrative Science Quarterly, 39, 391–411. Haunschild, P. R., & Beckmann, C. M. (1998). When do interlocks matter? Alternate sources of information and interlock influence. Administrative Science Quarterly, 43, 815–844. Hayes, R. H. (1975). The human side of acquisitions. Management Review, 68, 41–46. Hayward, M. L. A., & Hambrick, D. C. (1997). Explaining the premiums paid for large acquisitions: Evidence of CEO hubris. Administrative Science Quarterly, 42, 103–127. Healy, P. M., Palepu, K. G., & Ruback, R. S. (1997). Which takeovers are profitable? Strategic or financial. Sloan Management Review, 38(4), 45–57. Hirsch, P. M., Friedman, R., & Koza, M. P. (1990). Collaboration or paradigm shift? Caveat emptor and the risk of romance with economic models for strategy and policy research. Organization Science, 1(1), 87–97. Hitt, M., Hoskisson, R. E., Harrison, J. S., & Summers, T. P. (1994). Human capital and strategic competitiveness in the 1990s. Journal of Management Development, 13(1), 35–47. Hitt, M., Hoskisson, R. E., & Ireland, D. (1990). Mergers and acquisitions and managerial commitment to innovation in M-form firms. Strategic Management Journal, 11, 29–48. Hsieh, L., & Tsai, Y. (2005). Technology investment mode of innovative technological corporations: M&A strategies intended to facilitate innovation. Journal of American Academy of Business, Cambridge, 6(1), 185–194. Hunt, J. W. (1990). Changing pattern of acquisition behavior in takeovers and the consequences for acquisition processes. Strategic Management Journal, 11, 69–77. Jemison, D. B., & Sitkin, S. B. (1986). Corporate acquisitions: A process perspective. Academy of Management Review, 11, 145–163. Kelley, H. H., Beckman, L. L., & Fischer, C. S. (1967). Negotiation the division of reward under incomplete information. Journal of Experimental Social Psychology, 3, 361–398. Kesner, I. F., Shapiro, D. L., & Sharma, A. (1994). Brokering mergers: An agency theory perspective on the role of representatives. Academy of Management Journal, 37, 703–721. Kim, J., Haleblian, J., & Finkelstein, S. (2011). When firms are desperate to grow via acquisition: The effect of growth patterns and acquisition experience on acquisition premiums. Administrative Science Quarterly, 56, 26–60. Laamanen, T. (2007). On the role of acquisition premium in acquisition research. Strategic Management Journal, 28, 1359–1369. Lane, P. J., Cannella, A. A., & Lubatkin, M. H. (1999). Ownership structure and corporate strategy: One question viewed from two different worlds. Strategic Management Journal, 20, 1077–1086. Levi, M., Li, K., & Zhang, F. (2010). Deal or no deal: Hormones and the mergers and acquisitions game. Management Science, 56, 1462–1483.

The M&A Negotiation Stage: A Review and Future Research Directions

57

Marks, M. L., & Mirvis, P. H. (2001). Making mergers and acquisitions work: Strategic and psychological preparation. Academy of Management Executive, 15(2), 80–92. Merrett, D. T., & Houghton, K. A. (1999). Takeovers and corporate governance: Whose interests do directors serve? Abacus, 35, 223–240. Monin, P., Noorderhaven, N, Vaara, E., & Kroon D. (2013). Giving sense to and making sense of justice in post-merger integration. Academy of Management Journal, 56, 256–284. Neal, M. (1998). The cultural factor: cross-national management and the Foreign venture. London: Macmillan Press. O’Connor, K. M., Arnold, J. A., & Burris, E. R. (2005). Negotiators’ bargaining histories and their effects on future negotiation performance. Journal of Applied Psychology, 90, 350–362. Officer, M. S. (2003). Termination fees in mergers and acquisitions. Journal of Financial Economics, 69(3), 431–467. Pablo, A. L. (1994). Determinants of acquisition integration level: A decision-making perspective. Academy of Management Journal, 37, 803–836. Pablo, A. L., Sitkin, S. B., & Jemison, D. B. (1996). Acquisition decision-making processes: The central role of risk. Journal of Management, 22, 723–746. Pierce, T., & Doughtery, D. S. (2002). The construction, enactment, and maintenance of poweras-domination through an acquisition. Management Communication Quarterly, 16(2), 129–164. Pruitt, D. G. (1981). Negotiation Behavior. New York: Academic Press. Ragozzino, R., & Reuer, J. J. (2010). The opportunities and challenges of entrepreneurial acquisitions. European Management Review, 7(2), 80–90. Schnitzer, M. (1996). Hostile versus friendly takeovers. Economica, 63(249), 37–55. Tanner, D. A. (1991). Seven deadly sins of strategic acquisition. Management Review, 80(6), 50–53. Thompson, L. L., Wang, J., & Gunia, B. C. (2010). Negotiation. Annual Review of Psychology, 61, 491–515. Vaara, E., & Tienari, J. (2011). On the narrative construction of multinational corporations: An antenarrative analysis of legitimation and resistance in a cross-border merger. Organization Science, 22, 370–390. Varaiya, N. P. (1988). The ‘winner’s curse’ hypothesis and corporate takeovers. Managerial and Decision Economics, 9, 209–219. Varaiya, N. P., & Ferris, K. R. (1987). Overpaying in corporate takeovers: The winner’s curse. Financial Analysts Journal, May-June, 64–70. Wulf, J. (2004). Do CEOs in mergers trade power for premium? Evidence from ‘‘mergers of equals’’. Journal of Law Economics & Organization, 20(1), 60–101. Zollo, M., & Singh, H. (2004). Deliberate learning in corporate acquisitions: Post-acquisition strategies and integration capability in U.S. bank mergers. Strategic Management Journal, 25, 1233–1256.

CUSTOMER ROLES IN MERGERS AND ACQUISITIONS: A SYSTEMATIC LITERATURE REVIEW Christina O¨berg ABSTRACT Customers are important stakeholders for any company; yet, they seem not to be widely discussed in merger and acquisition research. This chapter synthesizes the current body of research on customers in mergers and acquisitions through presenting a systematic literature review. The chapter is based on a systematic literature review resulting from a search in EBSCO Host for any research item that refers to ‘‘customer’’ and ‘‘consolidation or merger of corporation.’’ All articles were coded to specify how customers are described, with a focus on whether customers are expected to affect and/or be affected by the merger or acquisition. Articles were compared with regard to their year of issue and research disciplines of publishing journals. The review indicates how customers continue to be discussed only to limited extent. The customer roles array from them as an acquirable customer base to customers as actors, whose activities become the very reason to merge or acquire. Literature also

Advances in Mergers and Acquisitions, Volume 12, 59–74 Copyright r 2013 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1479-361X/doi:10.1108/S1479-361X(2013)0000012006

59

CHRISTINA O¨BERG

60

refers to them as victims and affected by the merger or acquisition, and reacting parties. In addition to the description of welfare transfer from consumers to acquirers in law and economics studies, the different ways of referring to customers extend beyond specific research disciplines. The literature review indicates more multifaceted ways of describing customers in recent research. No systematic literature review on customers in merger and acquisition literature has previously been conducted. The comparison of research disciplines, years of issue, and customer roles provides new insights into developments in the merger and acquisition field of research. Keywords: Customer; literature review; relationship; research disciplines

INTRODUCTION For any company, the customers, or ability to attract new ones, are vital for the survival and prosperity (Gordon, 1998; Spencer, 2004). Strategic plans are often directed at extending a company’s market coverage or penetration, with the intention to contribute wealth to shareholders of the firm (Hunt & Lambe, 2000). Researchers have increasingly discussed other stakeholders to the firm – employees, customers, suppliers, and so forth (Freeman, 1984) and how they affect and are affected by decisions made by the focal firm. The mutual influences mean that for a firm to accomplish its strategic intentions, different stakeholders may need to be considered: the ability to attract and retain customers relates to customers’ decisions, and only if they comply with the firm’s intention, value will be created for shareholders. Value creation has been widely discussed in merger and acquisition (M&A) research (Fortune, 2004; Schweiger & Very, 2003), and then normally relates to the shareholders’ wealth (Chatterjee, Lubatkin, Schweiger, & Weber, 1992; Haspeslagh & Jemison, 1991; Limmack, 2003; Sudarsanam, 2000). Such value creation would be achieved through improving cash flows of the firm (Copeland, Koller, & Murrin, 2000), and is in turn a consequence of efficiency gains and added revenues (Kaul, 2012; Trautwein, 1990; Walter & Barney, 1990). According to Kelly, Cook, and Spitzer (2003) market-related reasons dominate as M&A motives, and customers play a critical role for such motives’ fulfillment. Still, voice has

Customers in M&As – A Literature Review

61

been raised that marketing issues are rarely discussed in M&A research (Homburg & Bucerius, 2005). As put forth by Mazur (2001, p. 1): Nothing illustrates the undervalued role of marketing than what happens during a merger or acquisition. Unless the new company can create more consumer value than the component parts, it is doomed to fail. Yet while chief executives may think this is what they are doing, the results often suggest they were deluding themselves.

Ryde´n (1972) points to severe customer losses following M&As, but despite that researchers have pointed to how the M&A and marketing literature rarely discusses the marketing dimension and customers in M&As (Anderson, Havila, & Salmi, 2001; Homburg & Bucerius, 2005), little attempt has been made to translate these findings systematically into a review that summarizes current knowledge. With market-related motives forming one of the key reasons for M&As (Kelly et al., 2003), and an increased interest for other stakeholders than owners in M&A research (Anderson, Havila, & Nilsson, 2012), this chapter presents a literature review on customers in M&A research. The M&A literature is multidisciplinary in how studies appear in different research domains (Cartwright & Schoenberg, 2006), including economics, strategy, and marketing, and M&As are thereby viewed from different lenses and perspectives (Meglio & Risberg, 2010) that would expectedly also be reflected in what stakeholders are considered and how they are described. The following questions are asked:  Are and how are customers described in the M&A literature?  How has the inclusion and description of customers developed over time?  How does the description of customers relate to different research disciplines? The chapter synthesizes the current body of research on customers in M&As through presenting a systematic literature review (Tranfield, Denyer, & Smart, 2003). In addition to forming an understanding for whether or not the literature deals with customers, the chapter discusses the roles customers are expected to play in M&As, and which research disciplines (economics, strategic management, etc.) report on customers. The roles refer to the extent customers affect or are affected by the M&A (cf. Freeman, 1984). The systematic literature review provides a basis to discuss to which capacities such expectations are raised in the literature and enables the identification of areas for further research. The chapter is structured as follows: Following this introduction, the method of the review is described. The review combines systematic steps

62

CHRISTINA O¨BERG

with iterative coding of data. Following the method section, findings are described in terms of frequency, research disciplines, and customer roles. The chapter ends with a concluding discussion including suggestions for further research.

METHOD – A SYSTEMATIC LITERATURE REVIEW Several studies have indicated research gaps in the domain of marketing and M&As. A narrative review on M&As in marketing journals verify the limited amount of studies that concern M&As and marketing (O¨berg, 2008) as pointed out by Mazur (2001) and Homburg and Bucerius (2005). Other researchers have pointed to the lack of research that focuses on business relationships (including relations with customers) in M&As (Anderson et al., 2001). The relevance for studies that capture customers relates to how customers are often referred to in motives (as the notion of markets or as specific customer relationships) (Kelly et al., 2003), and the studies that indicate customer losses following M&As (Ryde´n, 1972) and thereby failures to meet targets in such endeavors. A systematic review describes a proces aimed to be replicable, scientific, and transparent (Cook, Mulrow, & Haynes, 1997) and that captures the breath of published items in the chosen field of study (Tranfield et al., 2003). The review was produced as a number of steps to identify sources, evaluate whether they in terms of format and content met the purpose of the chapter, analyze their content through the combination and recombination of data (Glaser & Strauss, 1967) along with an iteration toward previous research (Dubois & Gadde, 2002), and decide what types of customer roles the literature indicated, along with a classification of articles based on the journals that published them and their years of issue. The steps are described below. To capture research on M&As that deals with customers, the electronic database EBSCO Host Business Source Complete was used. The search items contained ‘‘consolidation,’’ and ‘‘merger of corporation’’ captured through the thesaurus of the database. These items were combined with an open search for ‘‘customer’’ in the database. The search was limited to scholarly articles and was performed on October 29, 2012. This part of the review resulted in 293 items. Alternative ways to refer to customers were considered and evaluated separately through a narrative review including market, customer, consumer, stakeholder, buyer, sales, revenue, demand, network

Customers in M&As – A Literature Review

63

partners/relationships, client, and retailer (see O¨berg, 2004). That review revealed how those other ways of describing customers often included other parties than customers, or they appeared together with ‘‘customer’’ in the search fields. To condense the items, an evaluation was made as to whether they were journal articles (included), book reviews (excluded), or short notes and cover stories (excluded). For the decisions whether they were only research notes, a page minimum of the items were set to be above three pages with items below that number of pages potentially being research notes and thereby excluded. Any item meeting this page constraint was evaluated to ensure that it was not a journal article. This step of the review reduced the items for further review to 183 articles. A frequency analysis describing their years of issue was developed based on these items. In the step that followed thereafter, the journals were grouped based on their research discipline. This coding departed from the titles of the journals and descriptions of them. In the coding of articles (see below), no attention was paid to the journals that published them, while the coding of journals was used so as to see whether frequencies of publication on customers and differences in customer roles could be explained by the discipline of research. Parallel to the coding of the journals, a first-order coding was conducted of the articles (Pratt, 2009) based on their abstracts. Codes were iteratively developed during this step and compared among the items to ensure that each code was exclusive and that the same code was used for items with similar ways to refer to customers. The initial codes were reduced through the combination and recombination of codes in several steps (Glaser & Strauss, 1967). For each recoding, the original source was addressed so as to ensure that the higher level of code was representative for that source. The final codes followed from iteration on how the customer was expected to affect or be affected by the M&A, so as to connect the roles of customers to them as possible stakeholders (Freeman, 1984). This coding revealed that 47 articles referred to customers in such ways did not relate them to M&As, such as general descriptions of industries, or the customer appeared as the acquired party or to define vertical integration (Hennessy Jr, 1978; Rajgopal, Venkatachalam & Kotha, 2002). These articles were consequently not included in the further analysis. The analysis concluded with comparing articles based on their journal source, year of publication, and customer roles portrayed in them, so as to see whether developments or research disciplines helped to explain how customers were described. A diagram was constructed to create an overview and facilitate this final step of the analysis (Pratt, 2009).

CHRISTINA O¨BERG

64

FINDINGS This section outlines the findings from the literature review. It does so through briefly describing and presenting the development in terms of number of items that refer to customers, research disciplines of the journals, and then goes on to present the different customer roles according to the review. In its final part, the section combines the development over time and in different research disciplines with the roles to discuss whether the roles of customers are different between disciplines and/or have developed over time.

Customers in M&A Literature – A Frequency Analysis Among the articles including customers, the oldest one was published in 1931; the most recent one appeared in print in December 2012. Table 1 summarizes the number of articles per decade. The number of articles that include customers has increased during the past ten years (from 2003 onward, with nine to fifteen articles per year since then), but remains a limited amount of the total publications on M&As.

Research Fields – Frequencies of Journals As for the journals, McKinsey Quarterly (11 articles) is the most frequent to publish items on customers, followed by Industrial Marketing Management (8 articles), American Economic Review (6 articles), Journal of Financial Economics (4 articles), and Journal of Business Strategy (4 articles), with 95 different journals only containing one item on customers during their entire course of publishing. This indicates that no specific journal has driven the debate on customers in M&As, and that customers appear in strategic (McKinsey Quarterly, Journal of Business Strategy), marketing (Industrial Marketing Management), and economics journals (American Economic Review, Journal of Financial Economics). In Table 2, the different journals are categorized based on their research disciplines. Figures refer to number of articles on customers and M&As. The table indicates how law and economics were the research disciplines to first relate to customers in M&As. Together with strategic management, they also represent the discipline with most articles on customers in M&As. The marketing literature sees an increase in output during the past 10 years, with the questioning of the lack of research on marketing in M&As (Anderson

65

Customers in M&As – A Literature Review

Table 1. Years

Frequency of Publications.

Number of Articles Referring to Customer

Number of Articles on M&As (Total)

Percent

– –

– – – 8 – – 2 1 1 1 2 2 2

1901–1909 1910–1919 1920–1929 1930–1939 1940–1949 1950–1959 1960–1969 1970–1979 1980–1989 1990–1999 2000–2009 2010–2012

1 – – 7 5 12 22 101 35

4 4 5 13 4 30 289 490 965 1,959 5,635 1,822

Total

183

11,220

Table 2. Frequencies Per Journal Research Discipline. Years

Accounting

Law and Economics

Strategic Management

Marketing (Incl. Logistics)

Sector Studies

Total Number of Articles Referring to Customer

1930–1939 1940–1949 1950–1959 1960–1969 1970–1979 1980–1989 1990–1999 2000–2009 2010–2012

– – – – – – 2 2 –

1 – – 6 2 8 4 33 18

– – – 1 1 2 12 47 10

– – – – 2 2 2 11 5

– – – – – – 2 8 2

7 5 12 22 101 35

Total

4

72

73

22

12

183

1 – –

et al., 2001; Homburg & Bucerius, 2005) as a repeated theme. Sector studies refer to journals in specific areas such as Construction Management & Economics, Civil Engineering, and Energy Journal. Such journals may surely be oriented toward a specific research discipline, but may also publish cross-disciplinary items.

CHRISTINA O¨BERG

66

Customer Roles The customer as a potential stakeholder in M&As could be related to whether and how the customer is considered to be neutral, affected by, or affecting the M&A. The customer roles hence indicate the impacting powers (Jessop, 2005) and expectations raised on customer behaviors. Table 3 summarizes the roles that are further described below.

Table 3.

Customer Roles – Stepwise Coding.

Final Codes – Customer Roles

Stepwise Codes

Number of Articles

Customer base – transferable asset

Assets Customer base (motive) Customer base (value) Customer orientation Outcome measured as customers

28

Victims – consumers affected by welfare transfer (price raises, fewer choices)

Consumers harmed through decreased competition, welfare transfer Customers in competition evaluations Define market

47

Customers affected – sales staff or managers play mitigating role

Communication Managers mitigate customer reactions Effects on customers – different mitigating variables M&As lead to extended offerings Repositioning

32

Customers as reactors – they respond to the M&As or integration

Customers react Customers react to brands Customer losses

12

Customers as actors – customers proactively changes business conditions

Affects innovativeness, due to changed relationships Customers as actors in knowledge transfer Customers drive M&A

17

Not related – customers and M&As described in parallel or customers as acquired party

Acquired party Customers and M&As mentioned in parallel in description of general industry development

47

Total

183

Customers in M&As – A Literature Review

67

Customer Base – Transferable Assets Customer base indicates customers as assets on a portfolio level. Customers being described as assets of the acquired party indicate how they are transferable to the acquirer following the M&A. Contracts between the acquired party and the customers may explain this way of referring to customers, but in general it depicts customers as an uncomplicated issue in M&As. This way of describing customers foremost occurs in descriptions of motives and valuations of targets. Fogg (1976) and Pavlou (2003) refer to the customer base as one of several M&A motives, and Goettinger (1969) and James, Mendonca, Peters, and Wilson (1997) describe the reach of a loan base, and customers and distribution, respectively, in bank acquisitions. Scheig and Perrone (2004) refer to customer relationships as assets to consider in valuation processes. Haenlein, Kaplan, and Beeser (2007) and Johnson (2002) discuss customer life-time value, whereas Johnson (2002) relates such value to loyalty. Victims – The Consumer Affected by Welfare Transfer In competition authority evaluations of M&As, attention is brought to how a highly concentrated market offsets competition and creates welfare transfer from consumers to the M&A parties (Anderson, Holtstro¨m, & O¨berg, 2012). This way of describing M&A effects on customers indicate how they are price takers in economic systems and is frequent in the literature that elaborates on competition effects of M&As, policies/competition laws, and buying power gains of M&As (Barriger, 1968; Comanor, 1967; Feea & Thomas, 2004; Filer, Herren, Hollas, & Zebe, 1984; Stillman, 1983). In these descriptions, the customers are treated as a homogeneous group that acts independently of one another and their suppliers. Acquisitions are made to enable price raises, or they result in such effects. Customer Affected – M&A Parties Mitigating This group describes customers as affected, but staff or other circumstances of the acquiring or acquired party impact the effects. It acknowledges customers’ relationships, loyalty, and preferences. While the customers are affected, they are not described to react in ways that changes the course of the M&A. Mitigating effects include how sales contacts remain, the continuation of middle management and relationship marketing managers (Richey, Kiessling, Tokman, & Dalela, 2008; Towers, 1996). The literature also suggests the opposite: harm caused to customers based on sales staff changes (Moorman, 2008). Want (2003) describes how cultural clashes impact customer services, thus using culture and its impact on offerings as

68

CHRISTINA O¨BERG

explanations to effects on customers. Koskinen and Hilmola (2008) describe how the complexity of distribution increases following an M&A, and Lukkari (2011) refers to how M&As affect prioritizations in CRM systems, where certain customers may be excluded since they are considered to be too small for the combined company. One recurrent division of customers is between large and small ones, where the literature tends to suggest that small customers are more frequent to experience negative effects of the M&A (Carow, Kane, & Narayanan, 2006), while it is also stated that small or middle-sized companies are better at serving their customers (Duska, 2001) or the reverse (Wacht, 1968). This literature further describes how M&As may have positive effects on customers, leading to satisfaction among them (Heller, Mercer, & Fujimoto, 2006; Myong Jae & Geddie, 2006). Customers as Reactors Customers as reactors refer to how customers respond to the M&A in such ways that may offset its intended outcome. One such reaction is their decision to leave the M&A parties. Shin (2008) and Karim, Ameen, and Ayaz (2011) describe how customers may take their business elsewhere following an M&A, while de Haldevang (2009) provides advice on how to merge without losing customers. As for what causes the reactions, the literature describes how customers react to brands. Sˇtrach and Everett (2006) point to how different brands impact one another to change customers’ perception of them, and Jaju, Joiner, and Reddy (2006) refer to consumers’ reactions to brand strategies of the M&A parties. Knudsen, Finskud, To¨rnblom, and Hogna (1997) point to customers’ confusion with regard to the integration of brands. Customers as Actors The last group indicates the most active customers. They do not only react to the M&A but also act proactively to it, may be its reason, or affect such items as post-M&A innovativeness through how they act in innovation processes. The connection between customers’ activities and the M&As is more or less strict in these articles, but the shared feature of them is how customers’ activities precede their suppliers’ M&As and also become motives for them. Goldman, Knable Gotts, and Piaskoski (2003) point to how customer preferences for fully integrated services lead to M&As among suppliers; Zofnass (1998) describes how one-stop shopping trends among customers drive M&As; and O¨berg, Henneberg, and Mouzas (2007) indicate how perceived customers’ needs guide M&A activities. One specific activity

Customers in M&As – A Literature Review

69

among customers that may drive their suppliers’ M&As is when the customers themselves merge or acquire. O¨berg and Holtstro¨m (2006) elaborate on M&As as contagious and explain such contagion through power-balance, matching, and dependence. Bhattacharyya and Nain (2011) indicate similar patterns and emphasize buying power in their analysis.

Customer Roles, Theoretical Fields, and Developments As described in the introduction of this chapter, M&A research is multidisciplinary and Table 2 referred to how customers were included in such different disciplines of M&A research as accounting, law and economics, strategic management, marketing, and sector studies. Table 2 further pointed to how law and economics journals were the first to include customers, at least partly the consequence of how research in the other domains has grown also in general terms more recently. Combining the different research disciplines with the years of issue of the articles and the customer roles described above, a somewhat overlapping pattern appears on how customers are treated in different disciplines and also how the description of customers in M&As has evolved over time. Fig. 1 illustrates this. As indicated by Fig. 1, most customer roles appear in more than one research discipline, where marketing and strategic management are frequent to share ways of describing customers. The way of referring to customers that appears within all fields, and which indicates how they are not problematized but expected to be there, is then as a customer base. The customer as actor appears more frequently in marketing journals than in the strategy journals, and is at least partly underpinned by networks and relationship studies. The customer as a reactor is equally shared between strategy and marketing. Fig. 1 indicates that the customers as an actor and reactor are the most recent developments of how customers are described in the research. Literature also continues to describe the customer as affected and as a victim. Customers as affected by M&As appear in research on strategy and marketing. Strategic management journals point to the potential of achieving synergies, how M&As are performed to improve customer services, and they indicate how management of the acquiring and acquired party are important in such fulfillment (through creating links to customers). The customer as a victim is largely concentrated to research applying an economics perspective to M&As. The economics and law

CHRISTINA O¨BERG

70

Fig. 1.

Customer Roles – Clusters Per Research Discipline and Years.

journals have published items on the regulations of M&As, welfare transfers from consumers as their consequence, and also appear with frequent publications on the bank sector. The customer as a victim also resonates with how customers were early depicted in the M&A literature. As shown in Fig. 1, the ways of describing customers in M&A research have recently become increasingly diverse and cross-disciplinary. Time and expected cross-fertilization among research domains, rather than theoretical foundations, seem to explain whether and how customers are referred to in M&A studies. The description on customers, however, remains fragmented, and they still only appear as stakeholders in a fraction of the M&A literature (less than 2% of the publications).

CONCLUSIONS The introduction of this chapter raised three questions: (1) Are and how are customers described in the M&A literature? (2) How has the inclusion and description of customers developed over time? (3) How does the description of

Customers in M&As – A Literature Review

71

customers relate to different research disciplines? The literature review indicates how customers are rarely included in the M&A literature. When they are, their roles array from transferable assets and victims to customers as actors that constitute an M&A motive. The development over time indicates a movement from descriptions of consumers as victims of welfare transfer to more complex and diverse roles as actors and reactors. There is no distinct separation of how customers are described among different research disciplines. Rather and increasingly so in more recent research, roles overlap between disciplines, indicating a cross-fertilization of ideas. The continued limited attention to customers in M&A research, while the research indicates several complicating matters related to customers, opens up interesting avenues for further research. A general area for further research is that of stakeholders and their inclusion in M&A research: how do they affect perspectives taken and what are their implications? For customers, many studies still focus on them as a transferable asset, describe them as homogeneous, or base the studies on motives of the M&As rather than their outcomes. Mitigating factors, comparisons between motives, and outcomes, the study of individual customer relationships and how their characteristics impact M&A decisions and outcome, are but few suggestions for further research. Studies could also concentrate on specific industries (where much of the present research suggests an orientation to bank and finance), and compare product, service, consumer, and B2B offerings, and customer roles. Further literature reviews could focus on tracing crossreferencing among disciplines to find sources and spread of customer ideas in the M&A research.

REFERENCES Anderson, H., Havila, V., & Nilsson, F. (Eds.). (2012). Mergers and acquisitions: The critical role of stakeholders. London: Routledge. Anderson, H., Havila, V., & Salmi, A. (2001). Can you buy a business relationship? – On the importance of customer and supplier relationships in acquisitions. Industrial Marketing Management, 30(7), 575–586. Anderson, H., Holtstro¨m, J., & O¨berg, C. (2012). Do competition authorities consider business relationships? Journal of Business to Business Marketing, 19(1), 67–92. Barriger, J. W. (1968). The effect of mergers on competition. Transportation Journal, 7(3), 5–17. Bhattacharyya, S., & Nain, A. (2011). Horizontal acquisitions and buying power: A product market analysis. Journal of Financial Economics, 99(1), 97–115. Carow, K. A., Kane, E. J., & Narayanan, R. P. (2006). How have borrowers fared in banking megamergers? Journal of Money, Credit & Banking, 38(3), 821–836.

72

CHRISTINA O¨BERG

Cartwright, S., & Schoenberg, R. (2006). Thirty years of mergers and acquisitions research: Recent advances and future opportunities. British Journal of Management, 17, S1–S5. Chatterjee, S., Lubatkin, M., Schweiger, D. M., & Weber, Y. (1992). Cultural differences and shareholder value in related mergers: Linking equity and human capital. Strategic Management Journal, 13(5), 319–334. Comanor, W. S. (1967). Vertical mergers, market powers, and the antitrust laws. American Economic Review, 57(2), 254. Cook, D. J., Mulrow, C. D., & Haynes, R. B. (1997). Systematic reviews: Syntheses of best evidence for clinical decisions. Annals of Internal Medicine, 126(5), 376–380. Copeland, T., Koller, T., & Murrin, J. (2000). Valuation: Measuring and managing the value of companies – University edition (3rd ed.). New York: John Wiley & Sons, Inc. de Haldevang, B. (2009). A new direction in M&A integration: How companies find solutions to value destruction in people-based activity. Global Business and Organizational Excellence, 28(4), 6–28. Dubois, A., & Gadde, L.-E. (2002). Systematic combining: An abductive approach to case research. Journal of Business Research, 55(7), 553–560. Duska, R. F. (2001). When bigger is not better. Journal of Financial Service Professionals, 55(5), 33–35. Feea, C. E., & Thomas, S. (2004). Sources of gains in horizontal mergers: Evidence from customer, supplier, and rival firms. Journal of Financial Economics, 74(3), 423–460. Filer, J. E., Herren, R. S., Hollas, D. R., & Zebe, P. K. (1984). Impact of regulation on vertical integration in the electric industry. Review of Industrial Organization, 1(3), 216–231. Fogg, C. D. (1976). New business planning: The acquisition process. Industrial Marketing Management, 5(2), 95–113. Fortune, A. (2004). Acquisition as a mechanism of market evolution: An evolutionary perspective on how acquisition creates value. Advances in Mergers & Acquisitions, 4(1), 151–162. Freeman, R. E. (1984). Strategic management: A stakeholder approach. Boston: Pitman. Glaser, B. G., & Strauss, A. L. (1967). The discovery of grounded theory – Strategies for qualitative research. London: Weidenfeld & Nicolson. Goettinger, R. B. (1969). Mergers and acquisitions. Business Horizons, 12(4), 71–75. Goldman, C. S., Knable Gotts, I., & Piaskoski, M. E. (2003). The role of efficiencies in telecommunications merger review. Federal Communications Law Journal, 56(1), 87–154. Gordon, L. (1998). Relationship marketing: New strategies, techniques and technologies to win the customers you want and keep them forever. Ontario: John Wiley & Sons. Haenlein, M., Kaplan, A. M., & Beeser, A. J. (2007). A model to determine customer lifetime value in a retail banking context. European Management Journal, 25(3), 221–234. Haspeslagh, P. C., & Jemison, D. B. (1991). Managing acquisitions: Creating value through corporate renewal. New York: Free Press. Heller, D. A., Mercer, G., & Fujimoto, T. (2006). The long-term value of M&A activity that enhances learning organisations. International Journal of Automotive Technology & Management, 6(2), 157–176. Hennessy, E. L., Jr. (1978). Growth through acquisition at United Technologies. Industrial Marketing Management, 7(5), 396–401. Homburg, C., & Bucerius, M. (2005). A marketing perspective on mergers and acquisitions: How marketing integration affects postmerger performance. Journal of Marketing, 69, 95–113.

Customers in M&As – A Literature Review

73

Hunt, S. D., & Lambe, C. J. (2000). Marketing’s contribution to business strategy: Market orientation, relationship marketing and resource-advantage theory. International Journal of Management Reviews, 2(1), 17–43. Jaju, A., Joiner, C., & Reddy, S. K. (2006). Consumer evaluations of corporate brand redeployments. Journal of the Academy of Marketing Science, 34(2), 206–215. James, M., Mendonca, L. T., Peters, J., & Wilson, G. (1997). Playing to the endgame in financial services. McKinsey Quarterly, 4, 170–185. Jessop, B. (2005). Critical realism and strategic-relational approach. Critical Realism Today, 56, 40–53. Johnson, L. K. (2002). The real value of customer loyalty. MIT Sloan Management Review, 43(2), 14–17. Karim, N., Ameen, A., & Ayaz, M. (2011). Mergers and acquisitions: An impact on financial performance. Interdisciplinary Journal of Contemporary Research in Business, 3, 804–813. Kaul, A. (2012). Technology and corporate scope: Firm and rival innovation as antecedents of corporate transactions. Strategic Management Journal, 33(4), 347–367. Kelly, J., Cook, C., & Spitzer, D. (2003). Unlocking shareholder value: The keys to success – Mergers and acquisitions: A global research report. Annapolis, MD: KPMG. Knudsen, T. R., Finskud, L., To¨rnblom, R., & Hogna, E. (1997). Brand consolidation makes a lot of economic sense. McKinsey Quarterly, 4, 189–193. Koskinen, P., & Hilmola, O.-P. (2008). Supply chain challenges of North-European paper industry. Industrial Management & Data Systems, 108(2), 208–227. Limmack, R. (2003). Shareholder wealth effects of diversification strategies: A review of recent literature. Advances in Mergers and Acquisitions, 2(1), 177–205. Lukkari, P. (2011). Merger: institutional interplay with customer relationship management. Management Research Review, 34(1), 17–33. Mazur, L. (2001). Does this acquisition create customer value. Market Leader, 13, 1–11. Meglio, O., & Risberg, A. (2010). Mergers and acquisitions – Time for a methodological rejuvenation of the field? Scandinavian Journal of Management, 26, 87–95. Moorman, M. (2008). Sales force integration is vital. Financial Executive, 24(6), 46–48. Myong Jae, L., & Geddie, M. W. (2006). Impact of an airline merger on customer satisfaction: The case of American Airlines/Trans World Airlines (TWA) merger. International Journal of Hospitality and Tourism Administration, 7(1), 47–61. O¨berg, C. (2004). On customers in mergers and acquisitions. Linko¨ping: Linko¨ping University. O¨berg, C. (2008). The importance of customers in mergers and acquisitions. Linko¨ping: Linko¨ping University. O¨berg, C., Henneberg, S. C., & Mouzas, S. (2007). Changing network pictures: Evidence from mergers and acquisitions. Industrial Marketing Management, 36(7), 926–940. O¨berg, C., & Holtstro¨m, J. (2006). Are mergers and acquisitions contagious? Journal of Business Research, 59(12), 1267–1275. Pavlou, A. K. (2003). Biotechnology M&A insight: Deals and strategies. Journal of Commercial Biotechnology, 10(1), 85–91. Pratt, M. G. (2009). From the editors: For the lack of boilerplate: tips on writing up (and reviewing) qualitative research. Academy of Management Journal 52, 856–862. Rajgopal, S., Venkatachalam, M., & Kotha, S. (2002). Managerial actions, stock returns, and earnings: The case of business-to-business internet firms. Journal of Accounting Research, 40(2), 529–556.

74

CHRISTINA O¨BERG

Richey, R. G., Kiessling, T. S., Tokman, M., & Dalela, V. (2008). Market growth through mergers and acquisitions: The role of the relationship marketing manager in sustaining performance. Industrial Marketing Management, 37(4), 394–406. Ryde´n, B. (1972). Mergers in Swedish industry – An empirical analysis of corporate mergers in Swedish industry, 1946–69. Uppsala: Almqvist & Wiksell. Scheig, G. E., & Perrone, D. J. (2004). Bringing intangible assets into focus: Customer relationships. Natural Gas and Electricity, 20(12), 18–23. Schweiger, D. M., & Very, P. (2003). Creating value through merger and acquisition integration. Advances in Mergers and Acquisitions, 2(1), 1–26. Shin, M. (2008). Green targets. Corporate Knights Magazine, 6(3), 14–17. Spencer, R. (2004). Strategic management of customer relationships – A network perspective on key account management. Uppsala: Uppsala University. Stillman, R. (1983). Examining antitrust policy towards horizontal mergers. Journal of Financial Economics, 11(1–4), 225–240. Sˇtrach, P., & Everett, A. M. (2006). Brand corrosion: Mass-marketing’s threat to luxury automobile brands after merger and acquisition. Journal of Product and Brand Management, 15(2/3), 106–120. Sudarsanam, S. (2000). Corporate governance, corporate control and takeovers. Advances in Mergers and Acquisitions, 1(1), 119–155. Towers, S. (1996). Re-engineering: Middle managers are the key asset. Management Services, 40(12), 17–18. Tranfield, D., Denyer, D., & Smart, P. (2003). Towards a methodology for developing evidenceinformed management knowledge by means of systematic review. British Journal of Management, 14, 207–222. Trautwein, F. (1990). Merger motives and merger prescriptions. Strategic Management Journal, 11(4), 283–295. Wacht, R. F. (1968). Branch banking and risk. Journal of Financial and Quantitative Analysis, 3(1), 97–107. Walter, G., & Barney, J. (1990). Research notes and communications: Management objectives in mergers and acquisitions. Strategic Management Journal, 11(1), 79–86. Want, J. (2003). When world collide: Culture clash. Journal of Business Strategy, 24(4), 14–21. Zofnass, P. J. (1998). The new environment for consolidation. Civil Engineering, 68(10), 80–83.

POST-ACQUISITION INTEGRATION: A TWO-LEVEL FRAMEWORK LESSONS FROM INTEGRATION MANAGEMENT OF CROSS-BORDER ACQUISITIONS IN THE GLOBAL AUTOMOBILE INDUSTRY Xiaoying (Catherine) Zhang and Bruce W. Stening ABSTRACT This paper explores what differentiates success from failure in postacquisition integration. It seeks to overcome some of the limitations of previous research by adopting a more holistic and dynamic examination of the process and by focusing on aspects that can be readily applied in practice. Four cases of mergers and acquisitions (M&A) in the global automobile industry are examined using secondary data and taking a grounded theory approach. The four cases comprise two pairs of successes and two pairs of failures. Two of the pairs comprise established multinational companies, while two others comprise emerging

Advances in Mergers and Acquisitions, Volume 12, 75–111 Copyright r 2013 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1479-361X/doi:10.1108/S1479-361X(2013)0000012007

75

76

XIAOYING (CATHERINE) ZHANG AND BRUCE W. STENING

multinational companies’ acquisitions of Korean automakers; in each case, there was one successful M&A and one failure. It is inducted that what differentiates the successful cases from the failures is their different approaches to two common tensions in post-acquisition integration, namely, their approaches to integration strategy and people issues. A two-level framework is proposed in which post-integration is managed simultaneously and dynamically at the strategic and people levels. These inductive findings, if verified by a more broadly based empirical examination, will extend M&A theory by providing a more integrated and dynamic approach to post-acquisition integration, in which strategic and people perspectives are jointly taken into account and interact with each other, thereby creating value for both acquiring and acquired firms. Keywords: Post-acquisition integration; integration strategy; crossborder acquisitions

INTRODUCTION In this increasingly globalized world, cross-border acquisitions play a critical role in corporate growth and renewal. Traditionally, multinational companies from developed countries (‘‘Established MNCs’’) have used cross-border acquisitions to expand geographical coverage and to extend their competitive advantages in overseas markets. Recently, companies from emerging economies (‘‘Emerging MNCs’’) have become active in pursuing outbound acquisitions to build their capabilities and to access resources outside home markets. Though the different strategic intentions that underlie various crossborder acquisitions vary, all Established and Emerging MNCs have to tackle post-acquisition integration, which is deemed the ‘‘real source of value creation’’ in cross-border acquisitions (Haspeslagh & Jemison, 1991). No matter how sound the underlying strategic intentions are, or how great the synergies a cross-border acquisition is expected to result in, much depends on post-acquisition integration to realize the strategic intentions, to bring forth the expected synergies, and ultimately to create value. Although post-acquisition integration is of great significance for value creation, it poses huge challenges for both corporate practice and academic research given that post-acquisition is not only fraught with intricacies, uncertainties, and subtleties but is also a highly dynamic process.

Post-Acquisition Integration

77

Though there are no precise statistics regarding the success rate for mergers and acquisitions (‘‘M&A’’), a general view from integration advisors is that ‘‘on the whole, acquirers have less than a 50-50 chance of being successful in merger/acquisition ventures’’ (Pritchett, Robinson, & Clarkson, 1997, p. 5). An even more conservative estimation from corporate managers is that ‘‘only 20% of companies actually succeed in reaching the goals they had set themselves in merging or making an important acquisition’’ (Siegenthaler, 2009, p. 14). Despite numerous academic M&A research studies that have been conducted from different perspectives, a meta-analysis of 93 empirical studies on the determinants of acquisition performance by King, Dalton, Daily, and Covin (2004) concluded (p. 188) that ‘‘our results indicate that post-acquisition performance is moderated by variables unspecified in existing research. y An implication is that changes to both M&A theory and research methods may be needed.’’ To address such challenges, this paper explores what differentiates success from failure in post-acquisition integration. Through a comparison of four cases in the global automobile industry (composed of two pairs of successes and two pairs of failures, covering both Established and Emerging MNCs), the paper offers a unique way to look into post-acquisition integration in practice, and draws the following key findings. First, it is observed from those four cases that there are two common tensions in post-acquisition integration, namely, tensions on strategy and tensions on people, which interact with each other, and constitute the key challenges in post-acquisition integration. Second, after comparison between the success and failure cases, what differentiates the successes of both Established and Emerging MNCs from their counterpart failures is how those two common tensions are addressed, that is, the different approaches to the tensions on strategy and the tensions on people, respectively. Based on these findings, the paper proposes an integrated two-level framework, in which post-acquisition integration shall be managed simultaneously and dynamically at the strategic and people levels. The rest of the paper presents the theoretical grounding and case comparisons on which the inductive findings are based. The first section reviews the relevant literature and identifies the limitations of existing studies. The second section lays out the research methodology the paper adopts. In the third section, the four cases are compared in detail, which leads to the inductive findings. The fourth section, based on such findings, proposes and elaborates an integrated two-level framework for

78

XIAOYING (CATHERINE) ZHANG AND BRUCE W. STENING

post-acquisition integration. In the final section, various overall conclusions are drawn from the study.

EXISTING LITERATURE AND LIMITATIONS For the past three decades, there has been a growing body of research on M&A from different perspectives. Birkinshaw, Bresman, and Hakanson (2000) categorized M&A research into four major streams: (i) financial economics (which focuses on the wealth creation impact of M&A for shareholders and for society), (ii) strategic management (which explores the strategic intentions underlying M&A, types of synergies that result from M&A, and possible determinants of M&A success), (iii) organizational behavior (which focuses on the human and cultural sides of M&A such as organizational fit and cultural compatibility), and (iv) process perspectives (which view post-acquisition integration as an interactive and gradual process that management needs to handle in an effective way to create value). Post-acquisition integration: a process perspective As an important strand of thinking on post-acquisition integration, Haspeslagh and Jemison (1991, p. 106) defined post-acquisition integration as ‘‘an interactive and gradual process in which individuals from two organizations learn to work together and cooperate in the transfer of strategic capabilities.’’ The post-acquisition integration process put forward by Haspeslagh and Jemison (1991) is summarized in Fig. 1. Haspeslagh and Jemison (1991, p. 107) held the view that the real challenge in managing post-acquisition integration is that ‘‘the acquiring firm must give systematic attention to the interactions between the firms that create the atmosphere needed for capability transfer and successful integration.’’ Furthermore, based on the relationship between two key factors (the need for strategic interdependence and the need for organizational autonomy), Haspeslagh and Jemison (1991) categorized postacquisition integration into three types: (i) preservation (limited strategic interdependence but a high need for organizational autonomy, in which ‘‘the primary task of management is to keep the source of the acquired benefits intact’’); (ii) absorption (with low need for organizational autonomy but high need for strategic interdependence, this type implies ‘‘a full

79

Post-Acquisition Integration

Interactions

Acquiring Firm

Substantive Administrative Symbolic Acquired Firm

Fig. 1.

Atmosphere for Capability Transfer

Transfer of Strategic Capabilities

• Reciprocal understanding

• Operational resource sharing

• Willingness

• Functional skill transfer

Problems in the Integration Process

• Determinism • Value destruction • Leadership vacuum

• Capacity • Slack resources • Cause-effect understanding

Improved Competitive Advantage

• General management skill transfer • Combination benefits

The Process of Post-Acquisition Integration. Source: Based on Haspeslagh and Jemison (1991, pp. 106-110, 123).

consolidation, over time, of the operations, organizations, and culture of both organizations’’); and (iii) symbiosis (with high needs for both strategic interdependence and operational autonomy, ‘‘the two organizations first coexist and then gradually become increasingly interdependent’’). Post-acquisition integration for symbiosis acquisitions: various frameworks According to Haspeslagh and Jemison (1991, p. 149), symbiosis acquisitions represent the most complex managerial challenges because of the ‘‘tension arising from the conflicting needs for strategic capability transfer and the maintenance of each organization’s autonomy and culture.’’ As a result of these challenges, there are various conceptual frameworks that try to explain best practice in symbiosis acquisitions. The framework proposed by Haspeslagh and Jemison (1991) for symbiosis acquisitions comprises four stages of interactions between acquiring and acquired firms: first the acquiring firm starts with preservation of the acquired company; it then gradually encourages interactions between the two organizations (ideally at the initiative of the acquired firm’s managers); after which strategic control over the acquired firm is affirmed, while the operational responsibilities are increased at the acquired firm; and, finally, the stage is set for a gradual amalgamation of the two organizations. Building upon the process perspective, Birkinshaw et al. (2000) split the integration process into two sub-processes, task integration and human integration. Through empirical studies of three foreign acquisitions made by Swedish multinationals, they concluded that the effective integration in the

80

XIAOYING (CATHERINE) ZHANG AND BRUCE W. STENING

three cases of symbiosis acquisitions was achieved through a two-phase process. ‘‘In phase one, task integration led to a satisficing solution that limited the interaction between acquired and acquiring units, while human integration proceeded smoothly and led to cultural convergence and mutual respect. In phase two, there was renewed task integration built on the success of the human integration that had been achieved, which led to much greater interdependencies between acquired and acquiring units’’ (p. 395). Recently, with the increasing number of cross-border acquisitions by Emerging MNCs, Kale, Singh, and Raman (2009) have reflected on and drawn insights from the ‘‘innovative’’ approach to post-acquisition integration of Emerging MNCs. They defined this as ‘‘partnering,’’ which ‘‘entails keeping an acquisition structurally separate and maintaining its own identity and organization’’ (p. 109). There are two key differentiating features of this ‘‘partnering’’ approach: (i) acquired firms are allowed to remain separate organizations with operational autonomy and (ii) synergies between acquiring and acquired firms, though not foregone entirely, are sought selectively and in stages. It can be argued that the ‘‘partnering’’ approach has been adopted not only by Emerging MNCs but also by some Established MNCs (such as Renault and Cisco), and is more applicable to M&A where the value creation comes from revenue growth gained by entering new markets or new products, and sharing best practices, and where acquired companies have complementary, superior, or unique resources. In this sense, the ‘‘partnering’’ approach works in situations where there are high needs for both strategic interdependence and organizational autonomy (i.e., the symbiosis type in Haspeslagh and Jemison’s terminology). According to Kale et al. (2009, p. 115), the ‘‘partnering’’ approach may be more suitable for acquiring firms that are collaborative long-term players, with inclusive cultures, and a willingness to learn, as opposed to hierarchical acquirers with low tolerance for ambiguity, plus a desire to teach, and an emphasis on getting results.

Limitations of previous research and research challenges Despite numerous M&A research studies from different perspectives and the various conceptual frameworks that have been put forward to explain best practices in post-acquisition integration, the key factors for success, and the reasons why M&A often fail, remain poorly understood. A meta-analysis of 93 empirical studies on the determinants of acquisition performance by

Post-Acquisition Integration

81

King et al. (2004) finds that anticipated synergies are often not realized, and that unidentified variables explain significant variance in acquisition performance. Such limitations of the existing M&A literature may be attributable to several research challenges in this area.

Research challenge 1: fragmented approach to integrated process It is noteworthy that the current mainstream of M&A research tends to examine issues from their own perspective, and accordingly lack a holistic approach that could integrate financial, strategic, organizational, and process perspectives. Such a fragmented approach represents an exceptional challenge for research on post-acquisition integration because, by its nature, post-acquisition integration is an interactive and integrated process where different components come into play together. In practice, post-acquisition integration cannot be fragmented into standalone components, such as strategy, organizational behavior, and process management, among others. Rather, all these factors interact with each other, and the joint forces coming out of such interactions lead to the final success or failure of post-acquisition integration. Lack of a holistic and integrated approach in existing research on postacquisition integration significantly limits its effectiveness in application.

Research challenge 2: static approach to dynamic reality Another obvious shortcoming of the current research on post-acquisition integration is that it tends to take a mechanistic process approach. As Haspeslagh and Jemison (1991) acknowledged, post-acquisition integration is pregnant with ‘‘incomplete information and unexpected problems and opportunities,’’ and therefore, ‘‘it must be viewed as a highly dynamic process of adjustment’’ (p. 168). Nevertheless, the process perspective, when put into practice, may lead to a mechanistic and static approach, and accordingly lose the flexibility, adaptability, and constant adjustments that are required in post-acquisition integration. For instance, their framework of four-staged interactions may work in particular instances, but, when abstracted out of context, may be exposed to the risk of mechanical application in practice. In this sense, the existing frameworks for symbiosis integration are out of touch with the dynamics of post-acquisition integration.

82

XIAOYING (CATHERINE) ZHANG AND BRUCE W. STENING

Research challenge 3: simplified approach to diverse practice Another criticism of current research on post-acquisition integration is the difficulty of putting it into practice. Despite all the efforts to form conceptual frameworks, they are generally over-simplified, particularly when they adopt a fragmented and static approach. Given the diversity of M&A, plus the complexities embedded in their post-acquisition integration, there is clearly no ‘‘one-size-fits-all’’ approach. Further, the current conceptual frameworks are generally drawn from cases of post-acquisition integration, and try to draw best practices from them. However, such case studies are, more often than not, randomly selected depending on which companies researchers can gain access to. Such an approach may easily lead to comparison of the incomparable. With the comparability of the cases challenged, questions will be raised about the findings drawn from such comparisons, and whether it is premature to formulate conceptual frameworks, particularly given the diverse practice of post-acquisition integration.

RESEARCH METHODOLOGY This paper explores what differentiates success from failure in postacquisition integration. To address this issue, the paper builds upon the process perspective of post-acquisition integration (Birkinshaw et al., 2000; Haspeslagh and Jemison, 1991), taking into consideration possible different approaches by Established and Emerging MNCs (Kale et al., 2009), and tries to overcome the identified research challenges by taking a more holistic and dynamic approach. The underlying logic of this research is grounded theory building, which involves inducting insights from case data. A grounded theory approach was adopted because the study focused on the ‘‘unspecified’’ differentiating factors in post-acquisition integration. In such situations, a grounded theory-building approach is more likely to generate novel and meaningful insights into the complexities of post-acquisition integration, rather than reliance on either past research or office-bound thought experiments (Glaser and Strauss, 1967). Case comparison Central to the research design to facilitate grounded theory building is a multiple-case comparison, in which the cases are treated as a series of

Post-Acquisition Integration

83

independent experiments that confirm or disconfirm emerging conceptual insights. In response to the aforementioned research challenges, this paper paid careful attention to selecting cases that are comparable and that permit ‘‘replication’’ logic (Yin, 1984) in order to draw meaningful inductions and to formulate a valuable conceptual framework. The following two steps were carried out before the four cases under comparison were finally chosen. Step 1: choice of industry In the first place, this paper focused its case selection on firms in the global automobile industry, where cross-border M&A activity abounds, and where both Established and Emerging MNCs have their own success and failure stories. The megamerger between Daimler-Benz (‘‘Daimler’’) and Chrysler in 1998, the Renault-Nissan alliance, and Ford Motor’s acquisition of Volvo Cars in 1999 were examples of the global consolidation race in this industry. Since the mid-2000s, Emerging MNCs from India and China have also become active in pursuing acquisition targets in the global automobile industry. In 2004, Tata Motors (‘‘Tata’’) of India acquired Daewoo Commercial Vehicle Company (‘‘Daewoo’’) of Korea, and Shanghai Automotive Industry Corporation (‘‘SAIC’’) from China acquired majority equity in Ssang Yong Motor Company (‘‘Ssang Yong’’) of Korea. More recently, during the automobile industry crisis of 2008-2010, Tata from India and Geely Holding Group (‘‘Geely’’) of China, respectively, bought Land Rover & Jaguar and Volvo Cars (‘‘Volvo’’) from Ford Motor in 2008 and 2010. In such a controlled industry context, it is easier to locate success and failure stories with similar conditions or variables so that meaningful comparisons can be made. Step 2: other control variables After listing various cross-border M&As in the global automobile industry, the case selection was further narrowed down to cover apparent success and failure stories by both Established and Emerging MNCs (those cross-border M&As whose post-acquisition integration are either too controversial or too early to tell their results were intentionally avoided, such as Tata’s acquisition of Land Rover & Jaguar, and Geely’s acquisition of Volvo). The selection also tried to control as many other variables as possible (such as acquisition type, timing of transaction, strategic rationale, condition of the acquiring, and acquired firms, among others) to enhance the comparability of selected cases so that valuable inductions could be drawn.

84

XIAOYING (CATHERINE) ZHANG AND BRUCE W. STENING

Using the selection criteria described, the four cases outlined in Table 1 were chosen based on the following rationale. First, all four cases are cross-border M&A in the automobile industry clustered in two time periods (i.e., the late 1990s and 2004). Therefore, these four cases are comparable as they are in the same industry, have a similar time context, and share common issues in international M&As. Second, these four cases are all symbiosis acquisitions in which there were high needs for both strategic interdependence and organizational autonomy (as opposed to preservation or absorption acquisitions). Therefore, these four cases represent similar managerial challenges for symbiosis acquisitions, and their post-acquisition integration challenges are comparable. Third, these four cases can also be categorized into two pairs:  Established MNCs (1998/1999): Daimler/Chrysler versus Renault/Nissan and  Emerging MNCs (2004): Tata/Daewoo versus SAIC/Ssang Yong. The first pair comprises two Established MNCs’ mega deals, while the second pair comprises two Emerging MNCs’ acquisitions of Korean automakers. Moreover, each of these two pairs represents one apparent success and one apparent failure story in terms of their respective integration results. Therefore, the comparison within each pair of success and failure stories represents a unique way to look into different approaches by Established and Emerging MNCs, and with similar conditioning within each pair (including same acquisition type, same industry and time context, similar type of acquiring firms, and similar strategic rationale, among others), each pair of cases is more comparable between themselves, facilitating exploration of why one succeeded while the other failed. Furthermore, when re-grouping the four cases as two successes (Renault/ Nissan and Tata/Daewoo) versus two failures (Daimler/Chrysler and SAIC/ Ssang Yong), this research also presents a unique opportunity to explore what factors are shared in the success stories of both Established and Emerging MNCs that differentiate them from their comparable failure cases in order to draw inductive insights on what really differentiates success from failure in post-acquisition integration.

Data collection and analysis Given the sensitivity of post-acquisition integration, and limited opportunity for first-hand interviews on the four cases, the case comparison is based

Daimler-Benz (Germany)

Renault (France)

Tata Motor (India)

Shanghai Automotive Industry Corporation (China)

1999

2004

2004

Acquiring Firm

1998

Year

Acquired Firm

Ssang Yong Motor Company (Korea)

Daewoo Commercial Vehicles Company (Korea)

Nissan (Japan)

Acquisition

Acquisition

Alliance

Merger of equals

Acquisition Mode

Basic Description of the Cases.

Chrysler (United States)

Table 1.

$500 million

$102 million

$5.4 billion

$36 billion

Purchase Price

Failure

Success

Success

Failure

Integration Results

Post-Acquisition Integration 85

86

XIAOYING (CATHERINE) ZHANG AND BRUCE W. STENING

on an array of secondary sources, including business school cases, news reports, and research papers, among others. As is typical in inductive research, the case data analysis started from building individual case studies from various sources of case data, and then making comparisons across cases to construct a conceptual framework (Eisenhardt, 1989). With no prior hypotheses in mind, the case comparison initially took the form of creating a huge table listing a wide range of possible dimensions and comparing the four cases descriptively, summarizing what/ how they did in terms of such dimensions, and then looking for similarities and differences to develop emerging constructs and theoretical logic. In parallel with the case comparison exercise, semi-structured interviews were conducted with business leaders and legal counsels who have been involved in cross-border acquisitions. Ten such individuals were personally interviewed, the focus being on the interviewees’ respective experiences in post-acquisition integration in cross-border M&A, what they had learned from those experiences, and what they believe are the differentiating factors between success and failure in post-acquisition integration. All of the interviews were conducted in China, but the interviews were with both Chinese nationals and foreigners. These interviews, though not directly related to the four cases being compared, provided helpful first-hand experiences and field data for analyzing post-acquisition integration. Furthermore, such interactive interviews and first-hand field data helped the case comparison conceptually, and contributed to the formulation of the emergent conceptual framework. As the analysis evolved, the level of abstraction was raised, and the data collection, case comparison, and in-person interviews leading to the inductive findings follow.

POST-ACQUISITION INTEGRATION: DIFFERENT APPROACHES TO COMMON TENSIONS What emerged from the case data was twofold. First, in all of the four symbiosis acquisitions being compared, significant challenges in postacquisition integration were faced, which can be categorized into two common tensions, that is, tensions on strategy and tensions on people. Second, through the four-case comparison, the successes of both Established and Emerging MNCs (Renault/Nissan and Tata/Daewoo) differed substantially from their comparable failures (Daimler/Chrysler and SAIC/Ssang Yong) with respect to their approaches to addressing those two common

87

Post-Acquisition Integration

tensions. The following sub-sections elaborate on these inductive findings and describe their grounding in case data.

Tensions on strategy Cross-border M&As are costly, and any sensible decision to carry out a cross-border acquisition should be backed with solid and realistic strategic goals for the M&A. It is often the case that target companies are strategically sought and strategically stalked; however, few acquiring companies have strategically orchestrated action plans for post-acquisition integration or a well-crafted integration strategy. As shown in Table 2, it is clear that the acquiring companies in all four cases had strategic goals underlying their cross-border M&A. For Established MNCs like Daimler and Renault, the strategic goals were generally focused on seeking synergies from costs and revenues, while Emerging MNCs such as Tata and SAIC were carrying out cross-border acquisitions to obtain advanced technologies and achieve market expansion. The four acquiring firms all faced tensions in relation to integration strategy, such as how to tackle the post-acquisition integration strategically, what strategic goals to pursue in the post-acquisition integration, and in what time horizon. Regrettably, without a carefully thought-through strategy for post-acquisition integration, the strategic goals for cross-border M&A that looked perfect when pursuing the target company and the expected synergies between the two firms would not come into being automatically. While the strategic goals of both Established and Emerging MNCs were similar, the final results of post-acquisition integration varied. Through comparison of the two pairs of cases of Established and Emerging MNCs, both success stories differed substantially from the comparable failures in terms of their strategic approach to post-acquisition integration as outlined in Table 2 and elaborated in detail below. Established MNCs: Daimler/Chrysler versus Renault/Nissan In the comparison between the Daimler/Chrysler and Renault/Nissan cases, it is worth noting that at the time of those transactions, the Daimler/ Chrysler merger was widely proclaimed as a ‘‘merger of equals’’ combining two leading global car manufacturers in 1998, while the Renault/Nissan alliance was viewed as ‘‘a marriage of desperation for both parties’’ as both Renault and Nissan were jilted partners in the global automobile industry of the mid-1990s.

 Win-win case for Tata and Daewoo  Success of the ‘‘World Truck’’ program with Daewoo’s key role in product design  Lose-lose case for the SAIC and Ssang Yong  Ssang Yong went bankrupt

 To revive Nissan  To focus on fixing Nissan exclusively  To rekindle the innovative spirit of design and product excellence within Nissan  Alliance actions and global structures to create synergies  No rush to extract synergies and win confidence and trust first  Daewoo – not an Indian firm in Korea, but a Korean firm in Korea  Gradual exposure to management  Initially planned for a gradual approach to win trust first, but failed  Eager to obtain technology from Ssang Yong

 To leverage common synergies through custom-built process from design to engineering, and from product development to distribution

 To build and stretch capabilities  Joint R&D for the ‘‘World Truck’’ program  To access the Korean market and nearby markets in the region

 Product complementary, and technology transfer  To access international market

Renault/Nissan

Tata/Daewoo

SAIC/Ssang Yong

 Nissan revival  Win-win case for Renault/ Nissan

 ‘‘Over-estimated’’ synergies never realized  Non-performing Chrysler sold off

 Proclaimed ‘‘merger of equals,’’ but domination by one partner over the other in reality  Lack of clearly defined integration strategies

 Cost reduction synergy  Joint R&D synergy  Global market expansion

Daimler/Chrysler

Integration Result

Strategic Approaches to Integration

Comparison of Goals for M&A and Strategic Approach to Integration.

Goals for M&A

Table 2.

88 XIAOYING (CATHERINE) ZHANG AND BRUCE W. STENING

Post-Acquisition Integration

89

In the context of the 1990s’ global competition in the automobile industry, Daimler and Chrysler saw the merger as a unique opportunity to streamline their operations worldwide, including joint research and development (‘‘R&D’’) opportunities, access to emerging markets, and rationalization in manufacturing. Nevertheless, apart from the proclaimed ‘‘merger of equals’’ and the resulting co-chairmen and co-CEOs arrangement (Herr Schrempp and Mr. Eaton), the integration efforts, without clearly defined goals, turned out to be ‘‘a domination by one partner over the other, which domination filtered down through the rank and file’’ (Krebs, 2007). After the merger, Daimler moved the headquarters to Stuttgart, and ‘‘Chrysler’s operations in the United States took a downturn because of management shakeup, disagreements on joint vision, collective strategies, production and branding issues’’ (Deresky, 2009b, p. 329). Furthermore, it was claimed that ‘‘Schrempp’s strategy and vision for the new company fell apart before it was begun,’’ and in the end, Schrempp was forced out and Chrysler was once again a standalone entity under private ownership. In contrast, when Renault bought a 36.6% stake in Nissan for US$5.4 billion to form an alliance between the two companies, there was a flood of negative comment alleging, ‘‘two mules don’t make a race-horse.’’ Nevertheless, when Carlos Ghosn accepted the mission to head to Japan to lead the integration, he had a clear goal in mind, namely, to revive Nissan. It is worth noting that for the Renault-Nissan alliance deal, the goal was to achieve synergies between the two firms; however, for Ghosn, the integration leader, his first goal for the integration was to turn around Nissan, as he told the audience at his first annual meeting in Japan: I have not come to Japan for Renault, but for Nissan. I will do everything in my power to bring Nissan back to profitability at the earliest date possible and revive it as a highly attractive company. (Ramaswamy, 2009, p. 7)

Therefore, all the integration efforts led by Ghosn were clustered around this strategic goal for integration, and he wanted his team to convey the same message and to ‘‘focus on fixing Nissan exclusively without getting mired in social debates about prevailing business custom and practice in the country’’ (Ramaswamy, 2009, p. 6). With such a clearly defined strategic goal for integration, Ghosn introduced the Nissan Revival Plan in July 1999 (merely four months after the deal signing), which aimed to radically strengthen the company’s ‘‘common glue’’ around the mission of revival, and included clear quantitative and qualitative targets requiring the involvement of Nissan’s component areas (Deresky, 2009a, p. 316). Central to this major transformation was a

90

XIAOYING (CATHERINE) ZHANG AND BRUCE W. STENING

‘‘rekindling of the innovative spirit of design and product excellence’’ within Nissan, and that is why ‘‘Ghosn announced that Nissan would be reviving the ‘Z’, an icon of design and engineering prowess that had been discontinued due to a lack of funding’’ (Ramaswamy, 2009, p. 8). Due to such strategically orchestrated efforts, Ghosn had not only fulfilled most of the key promises he made in the Nissan Revival Plan, but in fact delivered the promises in a much shorter time frame than expected. With the initial goal for integration as Nissan revival, Ghosn did not stop there, as the strategic goal for the Renault-Nissan alliance was to create and leverage synergies between the two firms. For that purpose, the governance structure originally created to develop the Nissan Revival Plan was continued because ‘‘it seemed to offer a good approach to bringing the best of both companies together’’ (Ramaswamy, 2009, p. 8). Moreover, the exchange of ideas between Renault and Nissan was fostered through various alliance actions (such as joint purchasing, common platforms, and joint R&D, to name a few) and global structures (such as a global marketing team and global supplier account managers, among others). Emerging MNCs: Tata/Daewoo versus SAIC/Ssang Yong When comparing the Tata/Daewoo and SAIC/Ssang Yong cases, it is noteworthy that, sharing similar goals underlying their respective crossborder acquisitions, their strategic approaches to integration were far from the same. As part of the Tata Group, which ‘‘was at the leading edge of emerging market companies asserting themselves more aggressively in a booming global market for M&A’’ (Khanna, Palepu, & Bullock, 2009, p. 2), Tata’s strategic approach to post-acquisition integration was not to rush for the extraction of synergies but, instead, to win confidence and trust from the management and employees of Daewoo. For Tata, the integration plan was guided by two key considerations: first, Daewoo would not be an Indian firm in Korea, but would be a Korean firm in Korea and second, managers would be exposed gradually, as S.U.K. Menon, one of the integration leaders, explained: What we were trying to do was to get a sense of confidence in management and employees that we were not going to upset what they were doing. And we could do that with a sense of comfort because we knew first from our due diligence and later after we arrived, that the TDCV [Tata Daewoo Commercial Vehicle Co., Ltd.] processes and controls were good, documentation was excellent and the chain of command beyond question. So you don’t need to rattle things. We let them do things that they wanted to, and then we slowly brought in key concepts and tools from Tata. (Singh, Harish, & Singh, 2008b, p. 2)

91

Post-Acquisition Integration

Given that Tata’s strategic goal for integration was to win confidence and trust first, this explained why Tata adopted a policy of minimizing changes and avoiding deep involvement in Daewoo’s operations in the six months following the acquisition. When the confidence and trust was obtained from Daewoo, Tata moved on to more in-depth integration in terms of management systems and operational issues. Specifically, Tata confirmed Daewoo’s key role in its World Truck program, which was an important reason for the acquisition. It is worth noting that Tata did not go for integration of the product design system immediately after acquisition, even though the strong product design skill of Daewoo was definitely a strength that Tata wanted to leverage. This was a clear-minded and well-staged integration strategy because any effective integration in product design and joint R&D for the new World Truck was highly dependent on the willingness of the parties to cooperate, which was hard to realize without obtaining confidence and trust from Daewoo first. In the SAIC/Ssang Yong case, the SAIC, as an Emerging MNC, also acquired a Korean firm, one of the main purposes being to gain access to advanced technologies and to leverage the R&D strength of Ssang Yong (a similar strategic goal for M&A to that in the Tata/Daewoo deal). Initially, the SAIC also hoped to take a gradual approach to win trust from Ssang Yong. However, the SAIC not only failed to win trust from the acquired firm; it raised serious suspicions from Ssang Yong’s employees and labor union when the SAIC removed the Korean CEO who was said to be blocking technology transfer and to have conflict of interest issues. Despite the concerns from Ssang Yong with respect to possible technology transfer to China, and the associated fear of losing jobs to China, the SAIC insisted on launching the ‘‘S100’’ Project to manufacture Ssang Yong products in China. It was also reported that in July 2006, the SAIC executed a contract for ‘‘L-Project’’ to transfer technology from Ssang Yong, which contributed to a continuous strike by the labor union of Ssang Yong. It seemed that the SAIC was keen to have the relevant technologies transferred, and the SAIC’s goal for integration was simply pegged onto its goal for M&A.

Tensions on people Apart from strategic challenges, post-acquisition integration, by its nature, imposes tensions on people involved in cross-border M&A (particularly on

92

XIAOYING (CATHERINE) ZHANG AND BRUCE W. STENING

the acquired firm’s side). Such tensions on people include both psychological and cultural shocks. As Pritchett et al. (1997) summarized, there are typically several types of psychological shock waves that people experience in post-acquisition integration (see also Cartwright & Cooper, 1990). To begin with, ambiguity is almost inherent to M&A, as these dramatic events bring together people of various backgrounds and social identities who are likely to interpret specific issues in different ways (see also Risberg, 1998). Furthermore, post-acquisition integration commonly imposes various changes on the acquired firm. When the ambiguity permeates, and various demands for change escalate, people, by nature, feel insecure psychologically, professionally, and even financially, and they fear the new as well as the unknown. ‘‘These uncertainties, fears, and inner tensions do distinct damage to individual productivity. Anxiety sets in, which inhibits creativity, interferes with one’s ability to concentrate, acts as a drain on physical energy, and frequently lowers the person’s frustration tolerance’’ (Pritchett et al., 1997, p. 43). Similarly, cultural shock is almost inevitable in cross-border M&A, and such shock comes from differences in both national cultures and organizational cultures. National cultures can be distinguished from various dimensions, such as power distance, individualism-collectivism, masculinityfemininity, uncertainty avoidance, and approach toward time (see Hofstede, 2005). Corporate (or organizational) culture can be defined as ‘‘a peculiar blend of an organization’s values, traditions, beliefs, and priorities,’’ and it constitutes ‘‘a socio-logical dimension that shapes management style as well as operating philosophies and practice’’ (Pritchett et al., 1997, p. 10). In all of the four cases being compared, the people involved experienced such psychological and cultural shocks. Nevertheless, as shown in Table 3, for both Established and Emerging MNCs, the success stories differed substantially from their comparable failures with respect to their approach to people. Established MNCs: Daimler/Chrysler versus Renault/Nissan In the Daimler/Chrysler case, it is generally accepted that the ‘‘cultural mismatch’’ between the two firms eventually created various problems in the post-acquisition integration. ‘‘Daimler was viewed as a conservative and rigid company regarding its corporate bureaucracy, product development, and quality standards – a corporate culture reflective of Germany’s national culture,’’ while, on the other hand, ‘‘Chrysler’ corporate culture was typical American – informal, outward oriented, and somewhat less rigid in its

93

Post-Acquisition Integration

Table 3.

Comparison of Psychological/Cultural Shock and Approach to People. Psychological/Cultural Shock

Approach to People

Daimler/Chrysler

 Proclaimed ‘‘merger of equals,’’ but in reality, domination by one partner over the other  Different cultures in terms of nationalities and management styles

 Lack of vision and leadership to overcome the differences

Renault/Nissan

 ‘‘Marriage of the poor’’  Pre-signing joint studies  Different cultures in terms of nationalities and management styles

 Leadership with organizational latitude and selected winning team  Respect, trust, open-minded, and transparent  No direct challenge to the cultural heritage – implicit change efforts  CCTs and CFTs to drive and guard alliance/revival

Tata/Daewoo

 Negative sentiment for being acquired by an Indian firm  Different cultures in terms of nationalities and management styles

 Sensitive to people issues since pre-signing  Put aside ego and pride, be open to ideas, and be willing to learn from each other  No push but understand and build on cultural affinity

SAIC/Ssang Yong

 Negative sentiment for being acquired by a Chinese firm  Concerns over technology transfer to China and fear of losing jobs to China  Different cultures in terms of nationalities and management styles

 Limited understanding of Korean culture  Underestimated the seriousness of labor union in Korea  Labor union’s further suspicion, distrust, and resistance triggered by the change of Korean CEO

operations and more risk-taking’’ (Deresky, 2009b, p. 329). Furthermore, the widely proclaimed ‘‘merger of equals’’ of the Daimler/Chrysler case turned out to be ‘‘a domination by one partner over the other,’’ which automatically weakened trust, increased self-protective behaviors and ‘‘hidden agendas,’’ and resulted in executive departures, loss of purpose, and reduced efficiencies.

94

XIAOYING (CATHERINE) ZHANG AND BRUCE W. STENING

Merging Daimler and Chrysler into a transnational company, dealing with two national cultures with distinct business practices (underlying which were different corporate values and operational philosophies) was inevitably a daunting task; however, ‘‘neither of the companies’ executives was ready for the changes that were to take place in the transnational structure.’’ It is reported that ‘‘American managers disliked Daimler-Benz’s control and majority ownership, especially seeing the new entity’s headquarters moving to Germany,’’ while, on the other hand, ‘‘the German managers balked at the much higher salaries of Chrysler’s managers’’ (Deresky, 2009b, p. 329). In hindsight, at the very least the leadership team of Daimler/Chrysler should have shown greater respect for the way the post-acquisition integration activities intruded on the corporate culture of both firms, and could have handled the people issues more wisely. The Renault/Nissan case, as a large corporate marriage between a Western and an Eastern partner, represented an unprecedented challenge about which Ghosn expressed his sense of concern as follows: Much has been made of the culture clash between [the May 1998 merging partners] Daimler and Chrysler but it will be nothing compared to Nissan and Renault. At their core, they are both nationalistic and patriotic, and each believes its way is the right way to do things. We will have quite a teething period for the first year or two as they feel each other out. (Deresky, 2009a, p. 311)

Faced with such unprecedented challenges in cultural differences, the Renault/Nissan alliance represented an exemplary case in dealing with people tensions in cross-border M&A. When accepting the integration task, Ghosn first obtained organizational latitude from Renault headquarters so that decisions could be made locally in Japan without reverting to Paris, and he handpicked 17 French executives from Renault and brought them to Japan. Ghosn explained his criteria for the integration team as follows: I chose people who were around 40 years old, experts in their field, very open minded and coaches, not people who wanted to play it solo y [Before coming to Japan I told them:] we are not missionaries. We are not going there to teach the Japanese [about] the role of women in Japanese business. We are there to help fix Nissan, that’s all. Any issue that does not contribute to that is of no concern to us. (Deresky, 2009a, p. 315)

After arriving in Japan, Ghosn started engaging in various conversations ‘‘with the entire cadre of the company, ranging from shop floor employees to executives,’’ and even with Nissan dealers. All those conversations ‘‘were characterized by respect and trust, the twin qualities that Ghosn believed were essential in cementing inter-organizational relationships.’’

Post-Acquisition Integration

95

Furthermore, Ghosn urged his top management team to be transparent in thought, word, and action. ‘‘What we think, what we say, and what we do must be the same. We have to be impeccable in ensuring that our words correspond to our actions. If there are discrepancies between what we profess and how we behave, that will spell disaster’’ (Ramaswamy, 2009, p. 6-7). Ghosn created a structure around Cross-Company Teams (‘‘CCTs’’) and Cross-Functional Teams (‘‘CFTs’’) to enable exchanges between Renault and Nissan, with the former as key drivers for synergies and creating a revival plan, and the latter as guardians of the alliance. Faced with the administrative heritage of Nissan (such as a seniority system of career growth and advancement, plus a culture of blame), which constituted a major impediment in the transformation, Ghosn did not want to challenge the system directly. Instead, he made sure all nominations for promotions and compensation rewards would be based entirely on performance. It is also noteworthy that given the psychological shock people experienced in the massive changes, Ghosn ‘‘focused his energies almost exclusively within the company to keep the employees motivated and driven to succeed,’’ and realizing the significant uncertainties that such changes bring forth, he ‘‘assured all employees that everyone would have a role in Nissan, provided that they were willing to abide by the new performance expectations and keep the best interests of the company in mind’’ (Ramaswamy, 2009, p. 8). Emerging MNCs: Tata/Daewoo versus SAIC/Ssang Yong In both the Tata/Daewoo and SAIC/Ssang Yong cases, Tata and the SAIC experienced negative sentiment from their respective Korean targets with respect to being acquired by an Emerging MNC, which resulted from Korean pride and attitudes toward Indian and Chinese acquirers. In the SAIC/Ssang Yong case, the SAIC encountered resistance from the labor union of Ssang Yong at the deal-negotiating stage, and despite such early signals of resistance, the integration leaders from the SAIC still headed to Korea with a limited understanding of Korean culture and management style, and even underestimated the seriousness of labor unions in Korea. Furthermore, the SAIC was caught in a common trap of ‘‘violation of expectations’’ in its acquisition of Ssang Yong, which created waves of psychological trouble. At the deal negotiation stage, the resistance from the labor union of Ssang Yong was compromised by the SAIC’s commitment to retain the then current management and employees of Ssang Yong. However, when the competition became increasingly intense, the SAIC was considering to right-size Ssang Yong, which raised concerns and suspicion

96

XIAOYING (CATHERINE) ZHANG AND BRUCE W. STENING

among the employees and the labor union of Ssang Yong. Such ‘‘violations of expectations’’ alienate people and weaken trust in cross-border acquisitions. Often, when an acquirer raises false hope by assuring employees of the acquired firm that nothing will change, this is a promise on which the acquirer could not deliver. In this particular case, when the expectations were violated, antagonism toward the SAIC mounted, and the employees of the acquired firm felt insecure, and became very emotional. The suspicion, distrust, and antagonism that had been accumulated from those psychological shock waves resulted in repeated strikes at Ssang Yong, which severely disturbed the SAIC, and eventually led to the failure of the integration. Similarly, Tata also sensed that Daewoo had ‘‘a preference to be acquired by a European firm with the technological and financial resources that Daewoo required.’’ Ravi Kant, the leader of Tata’s due diligence team, realized this challenge at the bidding stage: I realized it was not about bidding high. I immediately decided that the challenge was as much about selling and marketing Tata Group and TM [Tata Motors] to the Koreans as it was to buy DCVC [Daewoo Commercial Vehicle Company]. Even if we bought the company, it would not work out unless they accepted us. We were buying the company but at the same time we were selling ourselves. Clinching the deal was about winning the confidence of the Korean managers and unions. Unless there was a two way process, the acquisition would not work. (Singh, Harish, & Singh, 2008a, p. 6)

When Tata was dealing with similar negative sentiments and a strong labor union in a Korean target, it adopted a much wiser approach to people compared with the SAIC. From the very beginning (even before the deal signing), Tata had been very sensitive to people issues, and when managing the post-acquisition integration, the Tata leadership took into consideration the ‘‘sense of pride and sense of achievement’’ of Daewoo, so they decided to maintain the existing system after acquisition. Furthermore, Tata also faced a significant challenge in integrating the different work and corporate cultures of Korea and India. The ‘‘Daewoo spirit’’ emphasized ‘‘a commitment to creativity, challenge and sacrifice,’’ while Tata believed that Daewoo ‘‘was unused to multitasking and multiskilling.’’ Nevertheless, Tata’s approach to such issues was not to change them immediately; instead, Tata recognized the important strength of Daewoo and made an effort to accommodate differences in work styles, as Menon explained: The Koreans initially found it difficult to work on many initiatives simultaneously. We have to keep their speed in mind; not push them, yet help them understand.

Post-Acquisition Integration

97

The language in which we conduct our business is different. We have to give them time. (Singh, Harish, & Singh, 2008b, p. 4)

In addition, Tata believed that both firms could learn from each other’s operations, with Tata superior at information technology and management systems, and Daewoo advanced in product and manufacturing technology. Staff exchanges between India and Korea were introduced to nurture mutual learning. Substantial adjustments were also required, as C.V. Singh, one of the integration leaders, reflected: The system is more rigid and has pre-set systems. You have to put aside egos and personal agendas, be open to new ideas and experiences, put in long hours and go out of your way to prove commitment to TDCV [Tata Daewoo Commercial Vehicle Co., Ltd.]. Unless you can contribute and TDCV perceives your contribution, they will not accept you. (Singh, Harish, & Singh, 2008b, p. 4)

What differentiates success from failure: different approaches to common tensions As shown above, all four cases shared common tensions on strategy and people in their post-acquisition integration. When re-grouping the four cases as two successes (Renault/Nissan and Tata/Daewoo) and two failures (Daimler/Chrysler and SAIC/Ssang Yong), it is worth noting that the success stories of both Established and Emerging MNCs differ substantially from their comparable failures with respect to their respective approaches to the two common tensions. As shown in Table 4, the Renault/Nissan and Tata/Daewoo cases share a number of common traits in handling the strategic and people challenges, which contributed significantly to their great success; while in their counterpart cases, neither of the acquiring firms responded well to those two tensions, which led to the ultimate failure to integrate. Different approaches to tensions on strategy Derived from the comparisons above, the tensions on strategy in postacquisition integration are threefold, and the acquiring firms in the success and failure stories responded to such challenges very differently. First, even when M&A strategies have been carefully thought-through to identify and evaluate the strategic goals, few firms put emphasis on integration strategies, or merely equate the M&A goals to integration goals. As shown in the Daimler/Chrysler case – a widely proclaimed mega merger – without a well-crafted integration strategy, the post-acquisition

98

XIAOYING (CATHERINE) ZHANG AND BRUCE W. STENING

Table 4.

Different Approaches to Two Common Tensions.

Failure (Daimler/Chrysler; SAIC/ Ssang Yong)

Success (Renault/Nissan; Tata/ Daewoo)

Tension on Strategy

 Lack of clearly defined integration strategy  Equate the integration goal to M&A goal  Lack of prioritization  Neglected/ignored the strengths of the acquired firm  Only took the acquiring firm’s perspective

 Clearly crafted integration strategy, with strategic goals for integration  Staged approach, with different goals at different stages  Focused on the strengths of the acquired firm to maintain, develop, and leverage the same  Took perspectives from both acquiring and acquired firms

Tension on People

 Lack of leadership and vision to overcome the differences  Not sensitive to people issues  Neglected/ignored or failed to handle the psychological shock waves  Lack of respect, trust, or transparency  Impose changes that constitute a direct challenge to the acquired company

 Leadership and vision which provides the direction and sense of purpose that overcomes differences  Sensitive to people issues  Respect, trust, open-minded, and transparent  No direct challenge to the cultural heritage, instead implicit change efforts  Organizational innovation to encourage exchange and integration

integration could fail. When the integration did, in fact, fail, it was commented that the expected synergies were ‘‘over-estimated’’; however, in hindsight, it is questionable whether those expected synergies were really ‘‘over-estimated’’ or were ‘‘under-delivered’’ due to the ineffective postacquisition integration. Furthermore, the strategic goals for integration should be separately crafted based on the conditions of both the acquiring and the acquired firm, rather than simply being pegged on to the strategic goals for the M&A (which are generally crafted from the acquiring company’s perspective). In both the Renault/Nissan and the Tata/Daewoo cases, the initial goals for integration were different from their respective goals for the M&A, and this design was clear-minded and pragmatic, which eventually contributed to the realization of their M&A goals. By contrast, the SAIC equated its integration goal to the M&A goal, and accordingly was very keen to transfer technologies to China despite the unfavorable context and serious concerns expressed by the acquired firm.

Post-Acquisition Integration

99

Second, integration strategy needs to be evaluated not only from the acquiring firm’s perspective but also from the acquired firms’ perspective. In symbiosis acquisitions, where high needs for strategic interdependence exist, the target company must have certain strengths that the acquiring firm values and hopes to leverage. However, in practice, when the integration team rushes into the post-acquisition integration, there is a natural tendency to consider integration from the acquiring firm’s perspective, and to try to extract value out of the acquired firm as quickly as possible. In this situation, the strengths of the acquired firm may be neglected or even ignored, and such negligence or ignorance may lead to value destruction. For instance, when the Daimler/Chrysler deal ended in divorce amidst claims that the synergies were over-estimated, it remained a critical question as to whether Daimler had spent enough time and energy to maintain, develop, and leverage the strengths of Chrysler. By contrast, the Renault/Nissan case set an exemplary example in rekindling the strength of Nissan, which was central to the Nissan revival and greatly contributed to the synergies between these two firms. Third, integration strategies are not static, but need to adopt a staged approach based on the conditions in both firms. As shown in the Renault/Nissan and Tata/Daewoo cases, both Renault and Tata adopted a staged approach to their integration strategies. At the first stage, the integration goal for Renault was to revive Nissan, and to rekindle the innovative spirit of design and product excellence within Nissan, and after partly achieving the initial integration goal, the synergies between Renault and Nissan could be effectively sought. Similarly, Tata did not immediately go for product design integration (which was part of the major goal for the M&A), but chose to win confidence and trust from Daewoo as its first goal for integration, which turned out to be the important foundation for the second-stage integration (including operational integration and joint R&D on the World Truck program). On the other hand, neither Daimler/Chrysler nor the SAIC/Ssang Yong paid much attention to prioritizing their various integration efforts or adopting a gradual and staged approach to their respective post-acquisition integration. Different approaches to tensions on people Similarly, the tensions on people in post-acquisition integration (including both psychological and cultural shocks) can be disastrous for cross-border M&A as shown in the two failure cases of Daimler/Chrysler and SAIC/ Ssang Yong, while, in contrast, the success cases of Renault/Nissan and Tata/Daewoo managed the tensions on people well, and even leveraged some of the energies underlying such tensions to their mutual benefit.

100

XIAOYING (CATHERINE) ZHANG AND BRUCE W. STENING

First, it is natural that people are looking for predictability; however, common to cross-border M&A, the ambiguity inherent in such situations leads to confusion, suspicion, and insecurity. In the Renault/Nissan case, Ghosn and his team were aware of how such psychological waves could impact negatively on people, and therefore, took a transparent approach. Ambiguities or uncertainties are inevitable, but the transparency that the integration leadership and management created within Nissan gave people reassurance that things would be handled fairly. In contrast, in both the Daimler/Chrysler and SAIC/Ssang Yong cases, the acquiring firms were caught in the common trap of ‘‘violation of expectations,’’ which significantly worsened the psychological challenges that such cross-border M&A impose on people. When the expectations were violated, people were alienated, more suspicions were raised with a weakened level of trust, and people tended to be more emotional, which led to prejudice and antagonism. Second, it is natural that people psychologically need stability and sometimes fear change (particularly when unexpected); however, changes are inevitable in post-acquisition integration. Any promise to an acquired firm’s employees that nothing would change after the M&A raises false hope, ending with a ‘‘violation of expectations’’ and resulting psychological waves, which could be disastrous, as shown in the SAIC/Ssang Yong case. On the other hand, the post-acquisition integration can also serve as a rare opportunity to bring in changes that are hard to realize in normal times. For example, in both the Renault/Nissan and Tata/Daewoo cases, positive changes were successfully brought forth to the acquired firms, such as improving the multitasking capabilities of Daewoo and bringing performance-based systems to Nissan. It is noteworthy that when Renault and Tata instituted such changes in their acquired firms, they adopted a gradual and discreet approach by giving them time, and without challenging the existing system directly. Further, it is also noted that such changes were based on the trust and confidence that Renault and Tata had established among the acquired firms. Furthermore, the Renault/Nissan case was also exemplary in showing how integration leadership can leverage the energy underlying such tensions to set fresh and high goals for the acquired firm, and imbue them with the passion and confidence to achieve that. As Ghosn concluded: We all shared a dream; a dream for reconstructed and revived company, a dream of a thoughtful and bold Nissan on track to perform profitable growth in a balanced alliance with Renault to create a major global player in the world car industry. (Deresky, 2009a, p. 317)

Post-Acquisition Integration

101

Third, people in the acquired firm are generally familiar with the culture they have been working in and are happy with such homogeneity. However, when different cultures collide in cross-border M&A, people tend to first become confused, then frustrated, and later resistant to change. As shown in the Daimler/Chrysler and SAIC/Ssang Yong cases, such cultural differences (in terms of both national and organizational cultures), when poorly managed, can become roots for distrust, suspicion, and even antagonism. The success of the Renault/Nissan alliance, by contrast, revealed that the French and Japanese managers cooperated effectively across national and corporate culture divides, and such success was achieved by adopting an approach of ‘‘not forging a common culture,’’ which did not prevent them from nurturing a strong ‘‘common glue’’ between themselves (Deresky, 2009a, p. 321). Similarly, when faced with the same challenge of dealing with a Korean target (which had a strong sense of pride and a strong labor union), compared with the SAIC, Tata handled the people challenges well by being sensitive to people issues from the very beginning, showing respect to the ‘‘Daewoo spirit,’’ and eventually turned such differences into an opportunity for mutual learning. Dynamic interactions between the approaches to tensions Apart from the different approaches to two common tensions, it is also worth noting that the two tensions (including how acquiring firms address such tensions) interact with each other in post-acquisition integration. On the one hand, if a post-acquisition integration lacks a well-crafted integration strategy or simply equates integration goals to M&A goals, people involved would probably experience greater ambiguity and uncertainty, which would result in more psychological challenges, and demotivate people because they do not see hope or purpose. Similarly, if the integration strategy lacks focus or fails to prioritize, it is likely to impose massive changes (including unnecessary, inappropriate, or poorly timed ones) upon the acquired firm, which bring forth more cultural shocks, and put people of the acquired firm on the defensive, leading to resistance, antagonism, and ‘‘hidden agendas.’’ In this sense, people at the acquired firm need the acquiring company to provide them with a sense of purpose, and imbue them with a sense of achievement, which the integration strategy should deliberately address. If the people issues are not tackled well, the psychological shock waves (particularly, the weakened trust and self-preservation mode) put more challenges on strategy implementation at the acquired firm because people simply do not accept the acquiring company, and refuse to cooperate.

102

XIAOYING (CATHERINE) ZHANG AND BRUCE W. STENING

Besides, the cultural shock, if not managed well, results in cultural confusion and misunderstandings between the parties, which become major impediments for the acquiring company to implement its integration strategy. After all, no matter how sound the integration strategy is crafted, it depends on people to make it happen, not only people from the acquiring side but also employees of the acquired firm. In this sense, it is clearly observed from the Daimler/Chrysler and SAIC/ Ssang Yong cases that the poorly crafted integration strategies increased the tensions on people psychologically and culturally, while the lack of sensitivity to people issues further enhanced the strategic challenges and difficulties. Such combined effects of poor responses to those two tensions, which were interacting with and contributing to each other, eventually became a vicious cycle, resulting in the failure in both cases to realize their M&A goals. The success stories of Renault/Nissan and Tata/Daewoo cases represent the opposite to their counterparts’ failures. In each case, a clearminded integration strategy provided the people involved with a renewed sense of purpose or direction, which not only moved them away from the nostalgia of ‘‘what they were’’ but also motivated them to realize their potential. Similarly, a well-managed people side not only reduced psychological or cultural obstacles for implementing the integration strategy but also released energy underlying such tensions that became a new source of value creation as part of the updated integration strategy. Since the strategic and people tensions were well managed, the positive effects, interacting with each other, formed a virtuous cycle, and eventually led to the great success of those two cases despite the fact that they faced similar (if not greater) challenges than their counterpart failures.

PROPOSED FRAMEWORK: AN INTEGRATED AND DYNAMIC TWO-LEVEL APPROACH Based on this four-case comparison, it is inducted that what differentiates the successes of Renault/Nissan and Tata/Daewoo from the failures of Daimler/ Chrysler and SAIC/Ssang Yong is their different approaches to the two common tensions in post-acquisition integration, namely, their approaches to integration strategy and people issues. On the basis of such inductive findings, this paper proposes a two-level framework, shown in Fig. 2, in which post-acquisition integration is managed simultaneously and dynamically at the strategic and people levels.

103

Post-Acquisition Integration

Common Tensions

Post-Acquisition Integration

The Two-Level Framework

Approaches to Tensions on Strategy

Tensions on Strategy -M&A goals vs. Integration goals -Acquiring vs. Acquired -Short-term vs. Long-term

Strategic Level Acquiring Firm

-Clearly-defined integration goals -Acquiring and Acquired perspective -Prioritized and staged approach

Interaction

Integration Leadership

Acquired Management/ Employees

Tensions on People -Predictability vs. Uncertainty -Stability vs. Change -Homogeneity vs. Difference

Integration Team/ Interface Level

Acquired Firm

People Level - Transparent & trust-building - Open-minded & motivated - Respect & mutual learning

Approaches to Tensions on People

Fig. 2.

Proposed Two-Level Framework for Post-Acquisition Integration.

Strategic level In the broadest sense, strategy is the means by which individuals or organizations achieve their objectives (Grant, 2010). In this sense, for a sensible strategy to be crafted, there must be a reasonable goal under pursuit, and to achieve that goal, one has to develop and leverage its strength, and also to make a series of deliberate choices and actions. In the context of postacquisition integration, a similar logic can be applied at the strategic level. Clearly defined integration goals At the strategic level, the first issue is to determine the strategic goals for post-acquisition integration. What is the goal for post-acquisition integration? At a higher level, it could be ‘‘value creation.’’ Taking account of differences in various M&A, this could be interpreted as achieving the strategic goals underlying the M&A, and realizing the synergies expected out of the transaction. However, these are related more to the M&A goals rather than integration goals. As shown in the SAIC/Ssang Yong case, confusion between M&A goals and integration goals can lead to disaster. It is true that part of the M&A goal was to gain advanced technologies, and the SAIC had been very keen to achieve that goal; however, post-acquisition integration, as a distinct stage in M&A, has its own tensions to deal with, and a separate goal for integration should have been crafted to ensure the success of integration

104

XIAOYING (CATHERINE) ZHANG AND BRUCE W. STENING

(‘‘The Integration between the SAIC and Ssang Yong’’; ‘‘Lack of Integration Experience Led the SAIC to the Ssang Yong Trap’’). In both the Renault/Nissan and Tata/Daewoo cases, they crafted their initial integration goals based on the conditions of the acquiring and acquired firms, which were different from their respective M&A goals. Therefore, post-acquisition integration deserves its own strategic goal, which should not simply equate to the M&A goals. Some of the M&A goals (such as synergy creation in the Renault/Nissan case and joint R&D on the World Truck program in the Tata/Daewoo case) may not be practical in the short term, and rushing for such longer term M&A goals would be destructive to post-acquisition integration. Furthermore, when defining the goals for post-acquisition integration, serious strategic analysis should be exercised, and the goals must be designed based on a realistic assessment of the conditions of both acquiring and acquired firms. Acquiring and acquired perspectives To achieve the strategic goals, one has to develop and leverage its strengths. In the context of post-acquisition integration, such strengths include those from both the acquiring and acquired firms, particularly in symbiosis acquisitions where high needs for strategic interdependence exist. Therefore, it is equally important to maintain and develop the strengths of the acquired firm, and to evaluate/develop an integration strategy taking into consideration the perspectives from both acquiring and acquired firms. When faced with various complexities, ambiguities, and uncertainties in post-acquisition integration, it is more than likely that acquiring companies (such as the Daimler/Chrysler case) neglect or even ignore the strengths of their acquired firms that they value at the time of transaction. Besides, the SAIC/Ssang Yong case also taught a lesson that if the strengths of the acquired company are to be leveraged, the acquired company must ‘‘accept’’ the acquiring firm first with a reasonable level of trust and confidence in the acquiring firm; otherwise, the strengths of the acquired company are not only hard to leverage but even harder to maintain (if not destroyed). In this aspect, the integration team from Renault did an exemplary job in emphasizing and rekindling the strengths of Nissan, while in the Tata/ Daewoo case, Tata was cautious in maintaining the strengths of Daewoo without upsetting what they were doing in the post-acquisition integration. Furthermore, the success stories of Renault/Nissan and Tata/Daewoo shared a unique trait in that the strategic approach that the acquiring company used was to add value to the acquired company before extracting value for itself out of the acquisition.

Post-Acquisition Integration

105

It is natural for an acquiring company to be eager to extract value from a cross-border acquisition as quickly as possible, particularly when coupled with a short-term view. Nevertheless, this approach is generally destructive to value creation in post-acquisition integration as such short-term value extraction will further undermine the common tensions on people. Therefore, when crafting integration strategies, it is vital for the acquiring company to look into the post-acquisition integration not only from the acquirer’s perspective but also from the acquired company’s perspective, and to contemplate questions such as the value the acquiring company brings to the acquired, and how the acquiring company can help the acquired to create more value. Prioritized and staged approach A clear-minded integration strategy involves a series of deliberate choices and actions, and given the changing dynamics of post-acquisition integration, a staged approach, with different goals and prioritizations at different stages, should be adopted. In post-acquisition integration, it is vital to evaluate priorities early in the process. Otherwise, it is easy to throw in some ‘‘nice-to-have’’ add-ons, and accordingly lose focus on the real ‘‘must-haves’’ where special attention is warranted. For instance, in the Tata/Daewoo case, the top priority was to win confidence and trust from employees and management of Daewoo. Given that, it was unnecessary for Tata to immediately throw in the system changes it expected, but instead wait until the second stage when the time was right to introduce more substantive changes to Daewoo. A similar staged approach was undertaken in the Renault/Nissan case, where the first integration goal was to revive Nissan; after that, the synergies between Renault and Nissan were sought more effectively. People level In any post-acquisition integration, tensions on people (including psychological and cultural shocks) are inevitable. Therefore, the primary goal at the people level is not to deny such unavoidable uncertainties, changes, or differences, or to give false hope that nothing would change. On the contrary, all the efforts at the people level are to help people deal with such challenges and, if possible, turn such challenges into opportunities for both the acquiring and acquired firms. Transparency and trust building Dealing with the uncertainties and ambiguities that permeate postacquisition integration, the acquiring firm needs to create an atmosphere

106

XIAOYING (CATHERINE) ZHANG AND BRUCE W. STENING

of transparency, which will be helpful to build trust among management and employees of the acquired firm. The comparison between Tata/Daewoo and SAIC/Ssang Yong presented a rare opportunity to study how things can go differently when an Emerging MNC encountered the same resistance from a Korean target and from a strong labor union. SAIC initially had the plan to obtain trust from Ssang Yong, but this soon gave way to its keen intent to obtain advanced technologies, which weakened the trust level immediately and triggered enormous concerns and suspicions among the employees of Ssang Yong. Tata’s approach to people was just the opposite, as Menon explained: Sometimes we took decisions that cost us a lot of money but helped us to be seen as a company which is open to their ideas and willing to make investments in Korea. It helped integrate the thought process of the two companies. We proved that we were in for the long haul. (Singh, Harish, & Singh, 2008b, p. 7)

Similarly, the integration leadership in Renault/Nissan put significant emphasis on being transparent and consistent in thoughts, words, and actions. Such transparency and the leadership’s commitment to ‘‘walk the talk’’ were trust building, which helped to alleviate among people (particularly the acquired employees) the tensions arising from their fear of the unknown. Open-minded and motivated In post-acquisition integration, an acquired firm and its employees are always requested to adapt to various changes. On the one hand, a lot depends on having a clear-minded integration strategy to bring in appropriate and well-timed changes that contribute to the strategic goals for integration. On the other hand, the integration leadership from the acquiring firm should be equipped with an open mind during all stages of post-acquisition integration. As Ghosn observed: You must start with a clean sheet of paper, because the worst thing you can have is prefabricated solutions y you have to start with a zero base of thinking, cleaning everything out of your mind. You have to have the approach of a scientist. [A scientist] has a lot of knowledge, but his knowledge is only a tool. Observation of fact brings him the solution. (Ramaswamy, 2009, p. 6)

Even with such an open mind, positive interactions between acquiring and acquired firms do not happen automatically. It is also important to build in certain organizational innovation at the interface level so that such ‘‘controlled’’ interactions are set up for easier success. For instance, in the Renault/Nissan case, the creation of CCTs provided an approach that

Post-Acquisition Integration

107

allowed Renault and Nissan to go through a social initiation experience first, and then move into more formal frameworks of collaboration and knowledge exchanges on a case-by-case basis. Such an ‘‘innovative’’ governance structure became an effective channel that enabled exchanges between both firms, and facilitated mindset changes. Gradually, the cultures on both sides became more receptive to new ideas, new ways for looking at existing obstacles, and creative approaches to leveraging new opportunities that were emerging. Furthermore, as clearly shown in the Renault/Nissan case, through the ‘‘shared dream’’ that Ghosn imbued in the acquired firm, the integration team successfully moved people to focus on the future rather than allowing them to wallow in the nostalgia of ‘‘the way we were.’’ The power of such ‘‘shared dreams’’ not only reduced tensions on people but also motivated people to change, to stretch, and to realize their potential. Respect and mutual learning Cultural differences between acquiring and acquired firms are inevitable. Though better ‘‘cultural compatibility’’ or ‘‘organizational fit’’ is argued as a determinant for easier integration, the four-case comparison has clearly shown that what really matters is not how well they fit but, rather, how willing they are to fit. Therefore, it is more important to respect each other in the post-acquisition integration than to find a ‘‘culturally compatible’’ partner. In both the Renault/Nissan and Tata/Daewoo cases, the acquirers showed great respect for the strengths and spirit of the acquired firms. Further, they were not trying to impose themselves upon the acquired firms; instead, they valued the differences that the acquired firms brought in. In fact, Renault’s approach of ‘‘not forging a common culture’’ did not prevent Renault and Nissan from nurturing strong ‘‘common glue’’ between them. In this sense, it is not a must to forge common or identical cultures between acquiring and acquired firms; what is more important is to create ‘‘common glue’’ between them, such as the ‘‘shared dream’’ Ghosn promoted at Nissan. Furthermore, the mutual respect for distinctive cultures between acquiring and acquired firms can also turn such differences into mutual learning, which is a new source of value creation. As clearly shown in both the Renault/ Nissan and Tata/Daewoo cases, after recognizing and respecting the culture and strengths of their acquired firms, the managers and employees of the acquired firms were more willing to accept the acquiring firms. With such acceptance, an interactive process of mutual learning and synergy creation took place naturally between the acquiring and acquired firms.

108

XIAOYING (CATHERINE) ZHANG AND BRUCE W. STENING

An integrated and dynamic approach This proposed two-level framework shown in Fig. 2 builds upon the existing frameworks for post-acquisition integration in symbiosis acquisitions (as mentioned in the section above on existing literature), and adopts a more integrated and dynamic approach to post-acquisition integration. Integration of various perspectives The proposed framework incorporates various streams of M&A research, including strategy, organizational behavior/people, and process perspectives. It builds upon the process perspective and proposes that postacquisition integration should be managed simultaneously and dynamically at the strategic and people levels. At the strategic level, this framework emphasizes that post-acquisition integration deserves its own strategic goals, which should not be simply equated with the M&A goals. The acquiring firm should carefully craft the integration strategy from both the acquiring and acquired firms’ perspectives, and adopt a staged approach, with different integration goals and prioritization at different stages. At the people level, the framework highlights that psychological and cultural shocks are inevitable in post-acquisition integration, and the acquiring firm should arm itself with an open mind, be transparent, and fully respect the acquired firm so as to help the acquired employees better cope with those uncertainties, changes, and cultural differences and to motivate them toward the renewed sense of direction. Dynamic interactions between two levels This framework acknowledges the process perspective (Haspeslagh and Jemison, 1991) to the extent that post-acquisition integration is an interactive and gradual process that takes place through interactions between individuals from acquiring and acquired firms. Consistent with the process perspective, this framework also recognizes the significant role of the interface management. However, this framework does not try to lay out integration tasks step by step (which, as mentioned above, may lead to static and mechanical application), but only provides key guideposts or principles to be adopted when crafting integration strategy and tackling people issues. The rationale underlying such approach is a result of the dynamic relationships that this framework embraces and manages.

109

Post-Acquisition Integration

This framework envisions dynamic interactions between the strategic and people levels. As elaborated above, the two common tensions (including approaches to such tensions) dynamically interact with each other in postacquisition integration. Furthermore, the framework also envisions that as a result of the dynamic interactions between individuals from the acquiring and acquired firms, combined with changing external factors (such as market competition, political/economic environment, among others), the conditions in both the acquiring and acquired firms are also constantly changing during the different stages of the post-acquisition integration. Such dynamic changes will surely impact the two levels in the framework, and therefore, the integration strategy and approach to people also require dynamic adjustment based on changing conditions in the acquiring and acquired firms.

CONCLUSIONS This paper has explored what differentiates success from failure in postacquisition integration. Through a comparison of four cases (covering both Established and Emerging MNCs) in the context of the global automobile industry, the paper has offered a unique way to look into post-acquisition integration in practice. It was observed that there are two common tensions in post-acquisition integration, namely, tensions on strategy and tensions on people, which interact with each other. It was inducted from the four-case comparison that what differentiates the success of both Established and Emerging MNCs from failures is how those two common tensions are managed. Based on such inductive findings, the paper further proposed an integrated two-level framework, in which post-acquisition integration is managed simultaneously and dynamically at the strategic and people levels. This framework tries to capture the dynamic relationships among different components in post-acquisition integration, including (i) the interactions between individuals from acquiring and acquired firms, and their resulting changing conditions; (ii) the interactions between the two common tensions; and (iii) the interactions between the two levels of integration strategy and approach to people that address the two common tensions. Given the highly dynamic and constantly changing process of postacquisition integration, this framework does not provide any step-by-step process that may inhibit flexibility or creativity, but instead offers general

110

XIAOYING (CATHERINE) ZHANG AND BRUCE W. STENING

guideposts or principles at the two levels, with the hope that such a framework will be more practical. It should be noted that all four cases discussed in the paper belong to the category of symbiosis acquisitions, according to Haspeslagh and Jemison’s (1991) typology. It is, therefore, premature to extend the findings in this paper or the proposed framework beyond symbiosis acquisitions, where high needs for strategic interdependence and organizational autonomy exist. It is also noted that these findings and the proposed framework were abstracted from the post-acquisition integration experiences of four cross border M&As in the global automobile industry. It is important that the findings and framework are tested in other industries and by more broadly based empirical studies. On the basis of this initial exploratory study, the paper has outlined several propositions that can form the basis of that further investigation. It is recommended that such further research or investigation be undertaken from the perspectives of both Established and Emerging MNCs. All in all, as the paper proposes, if the two common tensions on strategy and people are well managed in the post-acquisition integration, the mutually reinforcing interactions should form a virtuous cycle that helps acquirers to achieve their M&A goals, realize expected synergies, and create value for both acquiring and acquired firms.

REFERENCES Birkinshaw, J., Bresman, H., & Hakanson, L. (2000). Managing the post-acquisition integration process: How the human integration and task integration process interact to foster value creation. Journal of Management Studies, 37(3), 395–425. Cartwright, S., & Cooper, C. L. (1990). The impact of mergers and acquisitions on people at work: Existing research and issues. British Journal of Management, 1, 65–76. Deresky, H. (2009a). Case 10: Renault-Nissan: The paradoxical alliance. In H. Deresky (Ed.), International management: Managing across borders and cultures texts and cases. (6th ed., pp. 311–323). Upper Saddle River, NJ: Pearson Education International. Deresky, H. (2009b). Case 11: Daimler Chrysler AG: A decade of global strategic challenges leads to divorce in 2007. In H. Deresky (Ed.), International management: Managing across borders and cultures texts and cases. (6th ed., pp. 323–337). Upper Saddle River, NJ: Pearson Education International. Eisenhardt, K. M. (1989). Building theories from case study research. Academy of Management Review, 14, 532–550. Glaser, B. G., & Strauss, A. L. (1967). The discovery of grounded theory: Strategies for qualitative research. London: Weidenfeld and Nicholson. Grant, R. M. (2010). Contemporary strategy analysis (7th ed.). Chichester, West Sussex, UK: John Wiley & Sons, Ltd.

Post-Acquisition Integration

111

Haspeslagh, P. C., & Jemison, D. B. (1991). Managing acquisitions: Creating value through corporate renewal. New York: Free Press. Hofstede, G. (2005). Cultures and organizations: Software of the mind. London: McGraw-Hill. Kale, P., Singh, H., & Raman, A. P. (2009). Don’t integrate your acquisitions, partner with them. Harvard Business Review, December, 2009, 109–115. Khanna, T., Palepu, K. G., and Bullock, R. J. (2009). House of Tata: Acquiring a global footprint (9-708-446), Harvard Business School, Rev: June 30, 2009. King, D., Dalton, D., Daily, C., & Covin, J. (2004). Meta-analysis of post acquisition performance indications of unidentified moderators. Strategic Management Journal, 25, 187–200. Krebs, M. (2007), Daimler-Chrysler: Why the marriage failed. Available at http://www. autoobserver.com/2007/05/daimler-chrysler-why-the-marriage-failed.html. Accessed on June 25, 2012. Pritchett, P., Robinson, D., & Clarkson, R. (1997). After the merger: The authoritative guide for integration success (revised edition). New York: McGraw-Hill. Ramaswamy, K. (2009). Renault-Nissan: The challenge of sustaining strategic change (TB0047), Thunderbird School of Global Management, January 5, 2009. Risberg, A. (1998). Ambiguities thereafter: An interpretive approach to acquisitions. Malmo, Sweden: Lund University Press. Siegenthaler, P. (2009). Perfect M&As: The art of business integration. Penryn, Cornwall, UK: Ecademy Press. Singh, S., Harish, M., & Singh, K. (2008a). Tata Motor’s acquisition of Daewoo Commercial Vehicle Company (908M94), Richard Ivey School of Business, Version (A) 2008-12-04. Singh, S., Harish, M., & Singh, K. (2008b). Tata Motor’s integration of Daewoo Commercial Vehicle Company (908M95), Richard Ivey School of Business, Version (A) 2008-12-04. Yin, R. K. (1984). Case study research: Design and methods (Applied Social Research Methods Series Volume 5). London: Sage Publications. The Integration between the SAIC and Ssang Yong ( ). Available at http:// finance.sina.com.cn/leadership/case/20061017/13222993651.shtml. Accessed July 10, 2012. Lack of Integration Experience Led the SAIC to the Ssang Yong Trap ( , ). Available at http://news.bitauto.com/ touzibinggou/20090824/1005014987.html. Accessed July 10, 2012.

CROSS-BORDER MERGERS AND ACQUISITIONS: MODELLING SYNERGY FOR VALUE CREATION Kamal Ghosh Ray and Sangita Ghosh Ray ABSTRACT Cross-border mergers and acquisitions are now the fundamental mechanisms of globalization and considered as prime vehicles for business engagement across the countries through the foreign direct investment route. Significant amounts of foreign funds are crossing the country borders for acquisitions with the objectives of earning super normal returns. But realizing super normal returns from foreign acquisitions are far more difficult than that of foreign greenfield projects or domestic M&As or greenfield projects. The super normal profit itself is ‘‘synergy’’ which is the main driving force for any M&A including the cross-border one. Even though foreign policies of individual countries affect crossborder M&A decisions, corporate and market-driven financial numbers significantly influence the synergy estimation. Synergy should bring in all round greater efficiency and value addition to all stakeholders. But if the cross-border deal is not financially crafted properly, it may fall flat causing more distress to the acquirer compared to domestic acquisition. The theory of synergy is well developed which mostly applies to the domestic M&As. But due to inherent differences between cross-border

Advances in Mergers and Acquisitions, Volume 12, 113–134 Copyright r 2013 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1479-361X/doi:10.1108/S1479-361X(2013)0000012008

113

114

KAMAL GHOSH RAY AND SANGITA GHOSH RAY

and domestic M&As, the same synergy theory may not apply equally to the cross-border ones. Therefore, a different connotation of synergy is propounded in this work for cross-border M&As, which can be a corollary to the conventional theory of synergy. This alternative theory of synergy aims at helping the companies in developing their own financial strategies before making their strategic decisions for cross-border M&A deals. Keywords: FDI; cross-border M&A; free trade agreement; synergy; leveraged buyout; winner’s curse

INTRODUCTION Over the past two decades, globalization has made the corporations search for competitive advantages. Consequential economic, legal, and political integrations and treaties among the countries have spurred deregulation and privatization, leading to unprecedented surge in cross-border in-bound as well as out-bound mergers and acquisitions. Today, acquisitions across the national borders have become the fundamental characteristics of foreign direct investment (FDI) that changed the international business landscape. While the motivation for cross-border acquisitions is primarily growth, the critical success factor remains the realization of synergy in terms of improving efficiency and managerial competence so as to create value for the stakeholders (Hopkins, 1999). An efficient bidder of the home country (domestic country) may acquire a relatively inefficient target in the local country (foreign country) because it can improve the efficiency of the target. At the same time, a reverse can also happen due to its inherent competencies. Besides various known sources, synergy (or efficiency gains) may come from effective global competition, growth opportunities outside domestic market, favorable input costs, improved distribution network, lower cost of funds, industry/country-specific returns on investments, favorable political and regulatory policies in the local country, as well as favorable currency exchange rates (Picot, 2002). Of late, developed and developing countries are becoming increasingly interdependent and consequentially, their capital markets are getting interlinked due to reduction in trade barriers, removal of control on capital flows, harmonization of tax laws, competition laws, and free convertibility of currencies (Manne, 1965). Adoption or convergence of International

Cross-Border Mergers and Acquisitions

115

Financial Reporting Standards (IFRS) and improved corporate governance practices are also encouraging cross-border investments in the form of new projects or M&As. As a result, foreign companies are finding it easy to raise capital in both domestic and foreign capital markets. This is creating competition among the lenders and fund providers leading to decrease in transaction costs due to better flow of information to the markets. Capital market efficiency in developed countries has been one of the reasons for increasing cross-border acquisitions also.

TRENDS OF FDI AND CROSS-BORDER MERGERS AND ACQUISITIONS The global FDI comprises mainly greenfield investments and cross-border mergers and acquisitions. Cross-border M&A (CBMA) is a substantial contributor to the FDI inflows. According to the United Nations Conference on Trade and Development (UNCTAD),1 the world is poised for recording $1.6 trillion FDI flows by the end of 2012 (up from $1.5 trillion in 2011 and $1.5 trillion in 2010) and it has projected that the global FDI will reach $1.8 trillion in 2013 and $1.9 trillion in 2014, barring any macroeconomic shocks. UNCTAD observed that while the increase in FDI in developing and transition economies was mainly driven by greenfield projects, the growth in developed economies was largely due to CBMAs. The main factors driving the CBMAs included corporate restructuring, stabilization and rationalization of companies’ operations, improvements in capital usage, and reductions in costs. The growth in FDI has been the results of increased reinvested earnings, part of which was retained in foreign affiliates in cash reserves, which can be transformed into capital expenditure immediately. Greenfield investments and M&A differ in their impacts on host economies, especially in the initial stages of FDI. In the short run, M&As do not bring the same economic developments as greenfield FDI2 does in terms of creation of new productive capacity, additional value added, employment, and so forth. The effect of M&As on, for example, host country employment can even be negative, in cases of restructuring to achieve synergies. In special circumstances, M&As can bring short-term benefits not dissimilar to greenfield investments, for example, where the alternative for acquired assets would be closure. But over a longer period, M&As are often followed by sequential investments yielding benefits similar to greenfield investments, such as employment and

2006

5,747 625,320 1,463,351 2,354 333,337 585,030 1,380 165,591 297,430 1,219 89,163 427,163 107 11,181 36,783 854 65,250 290,907

Region/Economy

World No. of M&A deals Value of M&A deals (million $) FDI inflows (million $)

European Union No. of M&A deals Value of M&A deals (million $) FDI inflows (million $)

North America No. of M&A deals Value of M&A deals (million $) FDI inflows (million $)

Developing economies No. of M&A deals Value of M&A deals (million $) FDI inflows(million $)

Africa No. of M&A deals Value of M&A deals (million $) FDI inflows (million $)

Asia No. of M&A deals Value of M&A deals (million $) FDI inflows (million $) 999 71,423 349,412

116 8,076 51,479

1,552 100,381 574,311

1,717 265,866 330,604

2,717 527,718 853,966

7,018 1,022,725 1,975,537

2007

1,011 68,909 380,360

106 21,193 57,842

1,501 104,812 650,017

1,491 262,698 363,543

2,419 251,169 542,242

6,425 706,543 1,790,706

2008

693 38,291 315,238

58 5,140 52,645

975 39,077 519,225

1,013 51,475 165,010

1,344 116,226 356,631

4,239 249,732 1,197,824

2009

Table 1. Cross-Border M&As (Net Sales).

829 36,873 384,063

79 8,072 43,122

1,323 82,378 616,661

1,234 97,914 221,318

1,796 115,974 318,277

5,484 344,029 1,309,001

2010

893 55,302 423,157

129 7,205 42,652

1,458 83,220 684,399

1,278 164,365 267,869

2,093 172,257 420,715

5,769 525,881 1,524,422

2011

116 KAMAL GHOSH RAY AND SANGITA GHOSH RAY

202 9,005 54,318

Transition economies No. of M&A deals Value of M&A deals (million $) FDI inflows (million $) 279 30,448 90,800

425 20,648 172,281 321 20,337 121,041

378 15,452 209,517 343 7,125 72,386

221 4,358 149,402 493 4,499 73,755

408 28,414 187,401 316 32,970 92,163

431 20,689 216,988

Source: Compiled from World Investment Report 2012: Towards a new generation of investment policies, UNCTAD. Note: Net cross-border M&A sales in a host economy=Sales of companies in the host economy to foreign TNCsSales of foreign affiliates in the host economy. The data cover only those deals that involved an acquisition of an equity stake of more than 10%.

250 12,768 98,175

Latin America and the Caribbean No. of M&A deals Value of M&A deals (million $) FDI inflows (million $)

Cross-Border Mergers and Acquisitions 117

118

KAMAL GHOSH RAY AND SANGITA GHOSH RAY

technology dissemination. UNCTAD has observed the rising trends in CBMAs over the years, in spite of volatility, which is evident from Table 1.

CHARACTERISTICS OF CROSS-BORDER M&As Uncommon with the domestic M&As, cross-border M&As (CBMAs) have the following characteristics: 1. It is meaningful if the acquirer has substantial export position or he or she wants to take position in international market for the products and services. 2. By and large, the target generally goes private and becomes a standalone 100% subsidiary of the foreign acquirer, unless the acquirer wants to partner with any one.3 If acquired 100%, by the foreign acquirer, the acquired company de-lists from the stock exchanges and gets re-registered as a private company. Table 2 shows that during 2011, 68% of deals in value and 60% in number of the mega CBMAs acquired 100% of the shares in the target. 3. The incumbent management of the target may continue to manage the operations of the target in the post-acquisition period. 4. Problems of cultural integration are the minimum as the incumbent management runs the acquired company as before and there may not be a mix of work force from the two companies in two counties. 5. The purchase price tends to be very high as the acquirer suffers from managerial hubris, leading to winner’s curse. 6. Purchase through share exchange does not take place as in many countries in the normal circumstances; shares are not allowed to be issued to foreign nationals. Also, there are difficulties in trading in stock exchanges across countries. But dual listing in some countries can do away with this problem. Interconnectedness of capital markets in two countries can have significant positive impacts on the cross-border acquisitions. 7. Only cash deals are possible and the cash for acquisition is mostly arranged through leveraged buyout leading to high risk. 8. Economies of scale can rarely be achieved, but chances of gaining through economies of scope are very high. 9. Forward and backward integrations are possible provided cost efficiency is achieved through better processes or techniques or practices.

119

Cross-Border Mergers and Acquisitions

Table 2.

Cross-Border M&A Deals Worth $3 Billion and Above in 2011.

% of Shares of Targets Acquired

Value of Deals ($ Billion)

No. of Deals

Average Value Per Deal

12 15 19 22 25 30 40 46 49 52 54 62 66 70 73 75 83 90 96 98 100

4.0 4.7 3.8 11.1 5.4 16.8 3.1 6.0 5.0 3.6 7.1 3.8 3.8 3.5 6.3 4.2 5.5 7.1 5.6 12.1 258.3

1 1 1 2 1 3 1 1 1 1 1 1 1 1 1 1 1 2 1 2 37

4.0 4.7 3.8 5.6 5.4 5.6 3.1 6.0 5.0 3.6 7.1 3.8 3.8 3.5 6.3 4.2 5.5 3.6 5.6 6.0 7.0

Total

380.8

62

6.1

Source: Compiled from World Investment Report 2012: Towards a new generation of investment policies, UNCTAD.

10. Periodic business and enterprise valuations of both the acquirer and the acquired are necessary to understand the post-acquisition financial success as well as synergy effects.

MOTIVES FOR CROSS-BORDER M&As: LITERATURE REVIEW CBMAs are being driven by several motivating factors. Growth is one of the most important motives for international mergers and very important for creating shareholder value (Baumol, 1959). Harding and Rovit (2004) observe a strong correlation between multinationalization and product

120

KAMAL GHOSH RAY AND SANGITA GHOSH RAY

differentiation. If the acquirer has developed a reputation for superior products in the domestic market, the acquirer may find acceptance for its products in the foreign market too, which acts as a motivation for international acquisition. Government policy in the form of tariff and nontariff restrictions can encourage international mergers, especially when the market to be protected is large (Gary, Kahl, & Rosen, 2006). Foreign exchange rates may affect cross-border acquisitions in terms of the effective price paid for the acquisition, its financing, production costs, and the value of repatriated profits to the parent. The currency exchange rate can have an impact on the accounting conventions giving rise to currency translation profits or losses (Chanmugam, Shill, Mann, Ficery, & Pursche, 2005). Relative political and economic stability of the country is an important phenomenon in attracting foreign buyers. Any political and economic instability in foreign country can increase the risk of investments of the acquirer (Fama & French, 1997). Cross-border acquisitions provide scope for diversification geographically and by product line. Considering the fact that various economies are not perfectly correlated, international acquisitions may reduce both systematic and non-systematic earnings risk, inherent in the domestic economy (Ang & Yingmei, 2003). A technologically superior domestic firm may make acquisitions abroad to exploit its technological advantage. At the same time, a technologically inferior domestic corporation may acquire an overseas target with superior technology to enhance its competitive position (Ghosh Ray, 2010). Dunning (1993) found that foreign investors go for CBMAs based on the motives such as resource seeking, market seeking, efficiency seeking, strategic assets seeking, and capability seeking from the targets. In general, cross-border acquisitions are not seen as value creators, even though there is evidence that some of them add value (Ericson & Pakes, 1995; Seth, 1990). One of the most difficult aspects of evaluation of a cross-border acquisition transaction is estimating the potential value of synergies which should necessarily be the result of increase in cash flows in addition to what two companies can generate independently (Ghosh Ray, 2010). The acquirers need to make incremental investments planning before realizing the return on capital realizable through synergies (Weston, Chung, & Siu, 1998), otherwise there is bound to be an overvaluation of the target, which may lead to ‘‘winner’s curse’’4 causing value destruction for the acquirer (Dong, 2010). A cross-border acquisition does not take place in a vacuum. Very often, the market reacts in a manner that impacts the assumptions behind the valuation of the potential synergies of the transaction (Puranam & Srikanth, 2007). Such reactions can change the

Cross-Border Mergers and Acquisitions

121

fundamentals that drive an acquisition price and should be considered during the valuation analysis of the company, business as well as synergy. Post-acquisition integration processes are vital to achieving value creation through synergies. However, they also create another level of risk for both the acquirer and the target, which may not be reflected in the target’s cost of capital or the required rate of return for the cross-border acquisition (Ghosh Ray, 2010).

FREE TRADE AGREEMENTS AND CROSS-BORDER M&As Any free trade agreement (FTA) between two countries triggers profitable opportunities in the overseas markets in the following ways: 1. 2. 3. 4.

Exporting to the overseas market. Licensing an overseas company to produce the goods. Setting up greenfield project for producing goods in foreign land. Forming joint venture or other form of strategic alliance with a firm operating in the overseas market. 5. Acquiring companies in the foreign countries. The last three of the above are generally referred to as FDI and these entail different factors like costs, benefits, and risks to the firms. In the wake of economic liberalization and FTAs between countries, companies are inclined to invest outside their countries of origin through FDI routes in the form of greenfield projects or CBMAs. They need to analyze the attractiveness of the region, country, and sector or industry. In addition to these, company attractiveness is one of the most vital strategies for CBMA decisions. The first consideration in developing an appropriate strategy for growth is to decide whether the company will set up a new project or will go for an acquisition or even a merger. CBMAs are undoubtedly the tools for corporate growth. Today, M&A has taken the forefront because it is relatively easy and quick, but requires more of complex and intellectual decisions rather than clear-cut, long-term project decision starting with formulation and ending with implementation. In the case of M&A, it is very clear that there is hardly any opportunity for increasing the overall production capacity, whereas a new project gives rise to generation of new capacity. Which decision management will take; new project or M&A will require further discussion in the following paragraphs.

122

KAMAL GHOSH RAY AND SANGITA GHOSH RAY

STRATEGIC FINANCIAL MODEL FOR FDI AS GREENFIELD PROJECTS A company may set up brand new production facilities in a foreign country to increase its overall profits and shareholder value (Cohen, 2007). Of course, FTA between the countries may have some impacts on the cash flow generation in the foreign soil in the long run.5 When FDI thus flows outside the country, the project costs are incurred in the local country for the future cash flow generation from such facilities. The project cost equation in the local country (foreign country) can be expressed as: TPClocal country ¼ FAlocal country þ WCMlocal country þ PElocal country where TPClocal country is the total project cost in the local country, FAlocal country is the fixed assets in the local country, WCMlocal country is the working capital margin in the local country, and PElocal country is the preoperative expenses in the local country. The means of finance to be arranged or raised in the home country for investment in the local country, that is, FDI to be flown to foreign country, can be explained as: TPFhome country ¼ Ehome country þ Dhome country where TPFhome country is the total project finance in the home country, Ehome country is the project equity, and Dhome country is the project debt in the home country. Hence, initial new project investment in the local country in the form of FDI is given by FDIGFP (local country), which is the cash outflow needed for the greenfield project in local country or investments to be made by home country in foreign country. In other words, TPClocal country=FDIGFP(local country)=TPFhome country. Therefore, FAlocal country þ WCMlocal country þ PElocal country ¼ FDIlocal country ¼ TPFhome country ¼ Ehome country þ FDIGFPðlocal countryÞ : Simple capital budgeting technique can be applied to understand the financial viability of the FDI in the form of greenfield project. It is important to know the cost of financing or cost of capital for the FDI in order to determine the net present value (NPV) of the cash flow generated by the project in the local country. The cash inflow from the new greenfield

Cross-Border Mergers and Acquisitions

123

project in local country is to be discounted for the finite period, generally called explicit period. Therefore, the present value of the future cash flow from the greenfield FDI project in the local country would be given by: PVFCFPðlocal countryÞ ¼ S½FCFPtðlocal countryÞ Cð1 þ WACChome country Þt  where PVFCFP (local country) is the present value of free cash flow6 from greenfield project in the local country; WACChome country is the weighted average cost of capital in the home country; t is the 1, 2, 3 y n years for which discounting would be done; and n is the explicit period for which projected free cash flow can be ascertained with reasonably high degree of certainty. In the case of new or greenfield project, ‘‘n’’ can be as short as possible, depending upon the expectation from the FDI project in the country where FDI has been made. The ‘‘n’’ is expected to be the period of time by which the project can attain maturity and stabilize the uncertainty. Therefore, going by the simple capital budgeting techniques, the NPV of the FDI (NPVGFP (local country)) of the new greenfield project in the local country is expressed as: NPVGFPðlocal countryÞ ¼ S½FCFPtðlocal countryÞ Cð1 þ WACChome country Þt   ½FDIGFPðlocal countryÞ  ¼ S½FCFPtðlocal countryÞ Cð1 þ WACChome country Þt   ½Ehome country þ Dhome country 

STRATEGIC FINANCIAL MODEL FOR FDI AS CROSS-BORDER M&As Regional FTAs are supposed to act as catalysts in CBMAs, which has not captured much of attention of academic theorists as well as policy makers.7 It is supposed that for obtaining fast and equal growth opportunities through outright acquisition of a company in the foreign country, the acquirer in the home country is inclined to pay even more than what he gets. The FDI investor receives the following from the target company in the local country: a. Fixed assets (FAlocal country); b. Working capital (WClocal country), that is, [current assets (CAlocal country) less current liabilities (CLlocal country)]; and c. Intangible assets (IAlocal country) like goodwill, brands, work force, customer relationships, etc.

124

KAMAL GHOSH RAY AND SANGITA GHOSH RAY

The acquirer pays a price (Phome country) for the assets which may include a premium, if any, depending upon his bargaining power. Therefore, the agreed price of a CBMA can be expressed as: Phome country ¼ FDICBMAðlocal countryÞ ¼ FAlocal country þ WClocal country þ IAlocal country : A careful acquirer (or the FDI investor) also needs to consider two very important aspects immediately on acquisition. These are as follows: 1. Some capital expenditures (ERlocal country) to be made for the organizational restructuring including downsizing of surplus work force or revamping any plant and machineries, etc., and 2. Imminent divestitures of strategic business units, if any, and not falling under core competency and not being financially viable. Under such situations, the foreign acquirer obtains some cash flows in local country (CFDlocal country) and resorts to assets stripping by converting some of the assets into cash and reducing the effective buying cost. The acquirer may also incur expenses paid from home country (EXhome country) toward various advisory services, executive travel, legal and regulatory matters, etc. Hence, the cash outflow needed for acquisition in the local country is given by: Phome country þ EXhome country ¼ FDICBMAðlocal countryÞ ¼ FAlocal country þ WClocal country þ IAlocal country þ ERlocal country  CFDlocal country : Following the capital budgeting technique, the cash inflow from the acquisition of the company in the local country is to be the discounted for a finite period, generally an explicit period, in order to obtain the present value of the free cash flow to the acquirer. Therefore, the present value of the future cash flow to the acquirer (PVFCFA) in the local country would be given by: PVFCFAðlocal countryÞ ¼ S½FCFAtðlocal countryÞ Cð1 þ WACChome country Þt  where FCFAlocal country is the free cash flow to the acquirer in the local country; WACChome country is the weighted average cost of capital in the

Cross-Border Mergers and Acquisitions

125

home country; t is the 1, 2, 3 y n years for which discounting would be done; and ‘‘n’’ is the explicit period for which projected free cash flow can be ascertained with reasonably high degree of certainty. Unlike business valuation of the target, ‘‘continuing valuation’’ is not desirable for financial evaluation. Going by the simple capital budgeting techniques, the NPV from the acquisition is: NPVCBMAðlocal countryÞ ¼ S½FCFAtðlocal countryÞ Cð1 þ WACChome country Þt   ½FDICBMAðlocal countryÞ :

THUMB RULES FOR FDI DECISION Analyzing the above strategic financial models, the following thumb rules can be applied by the partner countries toward FDI decisions: 1. If NPVCBMA(local country)WNPVGFP(local country), acquisition can be a preferred form of FDI by the foreign country. 2. If NPVCBMA(local country)oNPVGFP(local country), greenfield project can be a preferred form of FDI by the foreign country. 3. If NPVCBMA(local country)=NPVGFP(local country), an indifferent choice can arise and may be difficult to decide. Other commercial, economic, political, and legal factors are to be taken into considerations for FDI decisions by the foreign country.

GENERIC THEORIES OF SYNERGY AS APPLIED TO CROSS-BORDER M&As Synergy is a much loved and overworked management jargon and sometimes loosely used to describe a mysterious chemistry between the target and acquiring entities. In fact, the term refers to the combination of various physical, financial, and intellectual assets such that their combined value is greater than the sum of their individual worth. Sirower Mark (1997) observed that the easiest way to lose the acquisition game is by failing to define synergy in terms of real and measurable improvements in competitive advantage, such as cash flows. In general, the following are the types of synergies, which the acquirers need to pay serious heed before they decide to go for the M&A deals.

126

KAMAL GHOSH RAY AND SANGITA GHOSH RAY

Operating synergy Firms merge with or acquire other firms in order to gain competitive advantage over the rivals through cost reduction, increased market power, enhanced knowledge, and so on. Ability of the firm to create and maintain competitive advantage depends on competitive structure of the market in which it sells its output and its competitive tools depend upon the expected reactions of the rivals (Ravenscraft & Scherer, 1987). In a competitive market, the firm has to compete on price and can maintain its competitive advantage only by being the cost leader or least cost producer. Acquiring for monopoly is no longer sustainable due to stricter competition/antitrust laws. Superior profitability can be achieved by the combined entity through increased market power with the concomitant ability to dictate the cost, price, and quality (Perry & Herd, 2004). Operating synergy assumes that economies of scale, scope, and learning are possible in CBMA decisions. Economies of scale arises because of individualities such as men, machinery, and overhead, if spread over a large number of units they result in lower costs (Cassell, 2006). Acquisition provides opportunities for optimal utilization of plants and equipment. In the case of a single product company competing in a single market, cost leadership can be achieved through economies of scale or vertical integration (Shank John & Govindrajan, 1993). A multiproduct firm can also achieve cost reduction through either economies of scale or scope or both. Economies of scale refers to the notion of increasing efficiencies with corresponding decrease in average cost of production due to spreading of fixed costs over more number of goods or services produced. Due to economies of scale, the ‘‘virtually merged entity’’ has greater access to the market with larger geographic reach enabling to reduce fixed components of marketing, selling and distribution, warehousing, after-sales services costs, and so on over a large volume of operations (David & Thomas, 2003). For these opportunities of achieving economies of scale, many CBMAs are proved to be justified. Economies of scope refers to efficiencies primarily associated with the demand side changes such as increasing or decreasing the scope of marketing and distribution of different types of products. Economies of scope exists when the total cost of producing and selling several products by the multi-product firm is less than the sum of the costs of producing and selling the same products by individual firms specializing in each of those products. Economies of scope include benefits from research and development, single brand umbrella to sell several products, selling several products through common distribution channels, and so on. Multiple products of

Cross-Border Mergers and Acquisitions

127

firms across nations can achieve economies of scope easily. It is dependent on the existence of certain competencies and resources that have common applicability across several products. Some products have common technology base, some have common geographical spreads or customer groups, and some may have common managerial capabilities. Due to these features, there exists rationale for a firm to merge with another for making unrelated or conglomerate diversification. Economies of scope is manifested in the form of increased revenues and profits rather than reduction in unit average cost of individual products. Effective use of common capabilities and critical resources creates added value through increased volume game instead of increasing efficiency level. Revenue enhancement through economies of scope can be a strategic move for M&As for the foreign firms even in the unrelated products or services. Economies of learning provides another phenomenon offering operating synergy. A firm can reduce its cost of production through effective learning in the form of efficient production scheduling, reducing waste, better team building and team work, avoidance of past mistakes, increasing first-pass yield, quality enhancements, and so on. Continual improvements in a firm will exemplify application of learning economy to cost of production. As the cumulative production increases over time, the learning curve becomes less steep and the marginal value of learning increases with the increase of each incremental unit of production (Sodersten & Reed, 2006). Acquisitions can bring about economies of learning by sharing of rich experience and knowledge of the work force of the merging firms. While economies of scale is concerned about the cost reduction in one period, economies of learning is concerned with cumulative cost savings for the same class of products through technology transfer and sharing best practices.

Financial synergy Financial synergy complements between management capabilities in terms of investment opportunities and cash flows. A firm in declining industry may produce large cash flows because there are a few attractive investment opportunities, whereas a firm in growth industry has more investment opportunities for growth. The ‘‘virtually merged’’ firm can lower the cost of capital due to lower cost of internal funds by lowering risk, savings in floatation cost, and improving capital allocation. So, one of the sources of financial synergy is the lowering of the cost of internal financing in comparison with the external financing (Ross, Westerfield, & Jaffe, 2005).

128

KAMAL GHOSH RAY AND SANGITA GHOSH RAY

Firms with low internal funds and high growth opportunities have need for additional financing and the combined firm should have the ability to raise the required funds. There is a possibility of achieving economies of scale in flotation and transaction costs of securities. A potentially more important source of the lower cost of capital is internal funds. Internal funds do not involve transaction costs of the flotation process and may have differential tax advantages over external funds. Further, internal financing can have an advantage over external financing if insiders (managers) have more information on the value of the firm’s assets than outside investors and act in the interest of the current shareholders. The acquiring firms may supply low-cost FDI to the acquired firm in the foreign country. Further, the acquired firms will typically have low free cash flows because high expected demand growth in their industries requires greater investments. The low free cash flows of the acquired firms provide synergistic opportunities in financing. Hence, the pure conglomerate merger represents a process of redeploying capital. An important implication of the financial synergy is that the possibility of reducing the cost of capital will be greater. This is true when the higher cost of capital of the acquired firm results from its greater bankruptcy probability, smaller amount of internal funds, and smaller size. In any acquisition deal, financial synergy is a motivation that internalizes the investment opportunities in the acquired firm’s industry by initially lowering the cost of capital of the combined firm (Banerjee & James, 1992). Investment opportunities in the industry of the acquired firm are greater when the growth rate of its demand is higher. Reduction in costs of funds to be invested in the acquired firm’s operation is greater when the pre-merger cost of fund for the acquired firm is higher and when the acquiring firm’s cost is lower because of one or more of the possibilities hypothesized (Rau & Vermaelen, 1998).

MODELLING SYNERGY IN CROSS-BORDER M&As The single and most sought after objective of any CBMA is incrementalism, which is nothing but synergy. Any prudent management does not commit fund for CBMA unless they think that they can create and realize synergy soon after the deal. In a typical CBMA, the target company in local country and the acquiring company in the home country do not actually merge or combine in real terms. Therefore, simply the conventional theory of synergy (2+2=5)8 does not hold good and the acquiring company tends to oversimplify it by considering that the ‘‘virtual combination’’ will always

Cross-Border Mergers and Acquisitions

129

create greater shareholder value for the acquiring company. As there are obvious departures from the conventional theories of synergy in case of CBMAs, the author makes two propositions of synergy estimation and synergy valuation in the pre- and post-phases of the CBMA deals. The propositions are discussed in the following paragraphs.

Proposition I To put it simply, there should be economic gains to both: the acquired company in foreign country as well as the acquirer company in the domestic country. In other words, target company’s gain is given by: GTlocal country ¼ ½EVTpost-acquisitionðlocal countryÞ  EVTpre-acquisitionðlocal countryÞ  where GTlocal country is the gain to the target company in the local country, EVTpost-acquisition(local country) is the enterprise value of the target in the local country in the post-acquisition period, and EVTpre-acquisition(local country) is the enterprise value of the target in the local country in the pre-acquisition period. And acquiring company’s gain is expressed by: GAhome country ¼ ½EVApost-acquisitionðhome countryÞ  EVApre-acquisitionðhome countryÞ  where GAhome country is the gain to the acquiring company in the home country, EVApost-acquisition (home country) is the enterprise value of the acquirer in the home country in the post-acquisition period, and EVApre-acquisition (home country) is the enterprise value of the acquirer in the home country in the pre-acquisition period. Therefore, the combined value of synergy from the CBMAs would be given by: Vsynergy ¼ GTlocal country þ GAhome country where Vsynergy is the combined value of synergy. However, in a CBMA, unless the ‘‘perceived GAhome country’’ is more than ‘‘perceived GTlocal country,’’ the acquirer may not be motivated to commit

130

KAMAL GHOSH RAY AND SANGITA GHOSH RAY

out bound FDI in the target in the foreign company. But in any case, in order to make a successful CBMA, ‘‘actual Vsynergy’’ has to be equal or more than the ‘‘perceived Vsynergy.’’ Proposition II There is an interesting syndrome of ‘‘cost of capital differentiation’’ which may exist in the developed, developing, and emerging economies. Companies in the developed economies with lower cost of invested capital (COIC) can leverage their positions with higher COIC of the companies in the emerging economies through FDI in CBMA routes. As long as there are differences between ‘‘weighted average cost of capital’’ (WACC) in the respective companies in respective countries, there will be FDI flow from ‘‘low-WACC’’ countries/companies to ‘‘high-WACC’’ countries/companies, provided the return on investment (ROI) of the target is more than that of the acquirer company. The country attractiveness or the company attractiveness will lie in the presence of lower WACC or higher ROI. In this regard, the following thumb rules can be applied: 1. If WACChome countryoWACClocal country, FDI will tend to flow from home country to local country and ‘‘financial synergy’’ would be created. 2. If ROIhome countryoROIlocal country, FDI will tend to flow from home country to local country and ‘‘operating synergy’’ would be created. 3. If ‘‘value added in the local country,’’ that is, (ROIlocal country– WACChome country)W‘‘value added in the home country,’’ that is, (ROIhome country–WACChome country), there would be high probability that the company in the home country will gain both ‘‘financial synergy’’ as well as ‘‘operating synergy’’ and create more shareholder value and thus improve enterprise valuation. 4. If ROIlocal countryoWACChome country and ROIhome countryoWACChome country, there would be high probability that the CBMA will have negative synergy (anergy) and huge destruction of shareholder’s wealth.

APPLICATION OF THE SYNERGY MODELS Empirical researches are recommended using the simple models. Various macro- and microeconomic and corporate financial aspects like risk-free return, risk-premium, country-premium, inflation, GDP growth, government

Cross-Border Mergers and Acquisitions

131

policies, FTAs, interest rates, exchange rates, political stabilities, productivity of labor, cost structure, capacity utilization, etc., can be factored into the propositions I and II of the synergy model to determine the country attractiveness, industry attractiveness, and company attractiveness before deciding CBMAs. The results as obtained can be applied independently and or simultaneously with the due diligence process by the managements of the willing acquirers in the home country. In general, the companies in the developed economies (e.g., Western Europe and North America) may find the BRIC (Brazil, Russia, India, and China) countries as attractive destinations for FDI through M&As. But, taking advantages of favorable differentiations of WACC and or ROI, some companies in the developing countries may also find developed countries as attractive FDI destinations for CBMAs.

CONCLUSION One of the most difficult aspects of evaluation of a CBMA transaction is the estimation of the potential value of synergies which should necessarily be the result of increase in cash flows in addition to what the two companies can generate independently. The acquirer needs to make incremental investments planning before realizing the synergies. The incremental investments are the hidden costs and if these are ignored, there is bound to be an overvaluation of the target, which may lead to ‘‘winner’s curse’’ resulting in value destruction for the acquirer. A CBMA cannot take place in a vacuum. Very often the market reacts in a manner that impacts the assumptions behind the valuation of the potential synergies of the transaction. Such reactions can change the valuation fundamentals, which drive an acquisition price and should be considered during the valuation analysis of the company, business, as well as synergy. Post-acquisition integration processes are vital in achieving value creation through synergies. However, they also create another level of risk for both the acquirer and the target, which may not be reflected in the target’s cost of capital or the required rate of return for the CBMA. It is well known that cross-border mergers and acquisitions, despite their high failure rates and the negative statistics, offer excellent ways to realize the growth plans of many domestic companies. Post-acquisition integration is the key to professionally unlocking the growth opportunities. It must be done properly, thoroughly, and decisively, otherwise negative synergy would follow. Factors like pure synergy, ‘‘winners curse’’ (managerial hubris), agency problems, business valuations, and funding for CBMAs

132

KAMAL GHOSH RAY AND SANGITA GHOSH RAY

generally impact the total value of the ‘‘virtually combined entity’’ and gains to the acquiring company’s shareholders. A prudent management can identify the sources from where the benefits will accrue. The value chains of the two companies in two countries are to be calibrated in such a way that the most efficient value drivers are handpicked from the two companies to construct the new ‘‘virtual’’ value chain to form a critical mass for sustainable value creation for all.

NOTES 1. World Investment report 2012, UNCTAD. 2. Ibid. 3. Target company shareholders may not want to hold shares in the acquiring company in the foreign country. In some cross-border acquisitions involving stockfor-stock transactions, the target company shareholders sell their shares back to the country of issuance as a preference for their domestic shares, causing decline in the price of the acquirer’s shares. Such decline leads to increased cost of acquisition for the acquirer and the phenomenon is called as domestic market ‘‘flowback.’’ 4. ‘‘Winner’s Curse’’ represents a winning bid likely to commit positive valuation error for target’s acquisition. Postulating strong market efficiency in all markets, the prevailing market price of the target already reflects the full value of the firm. The bidder makes higher estimates of the true value of the target due to excessive self-confidence, pride, or arrogance and the price paid for the target is much higher than its economic value leading to destruction of the post-merger value of the combined entity. This phenomenon is called winner’s curse for which hubris is one of the predominant factors. In a common value auction, the value of the object being competed for is the same for all bidders, but the different bidders estimate different values and the bid prices differ. The winner’s curse hypothesis states that the winner of a sealed bid overestimates the auctioned object and the winner is likely to be cursed by the over-bidding. In order to avoid winner’s curse, the bidder should scale down his estimates to make his bid by proper analysis of the economic value of the target. So, a bidder is advised to independently value the target and is not required to adjust for winner’s curse, without affecting the chances of winning the auction. 5. It is generally found that an FTA between a developed and a developing country would result in the elimination of tariff barriers in the developing country causing huge flow of FDI in green field projects in the developing nation. But there may arise considerable loss of revenue to the developing nation due to reduction in taxes & duties. This may seriously affect the spending in the social sectors like health, education, and so on. As a result, the developing nation may increase domestic taxes to recoup the revenue loss. This situation may create differentiated motives behind withdrawal or reduction in FDI in greenfield projects in the local country. 6. Free cash flow can be computed in two ways: (a) indirect method and (b) direct method. Under the indirect method, free cash flow=net income (i.e., earnings after tax)+depreciation+decrease in accounts receivable (or minus increase)+decrease in

Cross-Border Mergers and Acquisitions

133

inventories (or minus increase)+increase in accounts payable (or minus decrease)+ increase in taxes payable (or minus decrease)+after-tax interest expenses–gross investments in plant, machinery, equipment at cost, etc. Alternatively, as per direct method, free cash flow=sales–(cost of goods sold+selling, general and administration expenses)–taxes on income+depreciation+decrease in accounts receivable (or minus increase)+decrease in inventories (or minus increase)+increase in accounts payable (or minus decrease)+increase in taxes payable (or minus decrease)+aftertax interest expenses–gross investments in plant, machinery, equipment at cost, etc. 7. As discussed in footnote 5, the initial elimination of tariff barriers in the local developing country due to FTA may prompt the local government to raise domestic taxes to recoup the revenue loss. And such an increase in domestic taxes will affect the post-acquisition cash flows, meaning thereby ‘‘synergy neutral’’ effect toward M&As. 8. Value of synergy=[value of the post-merger combined entity]–[value of premerger acquirer+value of pre-merger target].

REFERENCES Ang, J. S., & Yingmei, C. (2003). Direct evidence on the market-driven acquisitions theory. Working paper, Florida State University, Florida. Banerjee, A., & James, O. (1992). Wealth reduction in white knight bids. Financial Management, 21(3), 48–57. Baumol, W. (1959). Business behavior, value and growth. New York: Macmillan. Cassell, C. (2006). Qualitative methods in management research. Bradford, UK: Emerald Group Publishing Limited. Chanmugam, R., Shill, W., Mann, D., Ficery, K., & Pursche, B. (2005). The intelligent clean room: Ensuring value capture in mergers and acquisition. Journal of Business Strategy, 26(3), 43–49. Cohen, S. D. (2007). Multinational corporations and foreign direct investment. New York: Oxford University Press, Inc. David, P. A., & Thomas, M. (2003). The economic future in historical perspective. New York: Oxford University Press, Inc. Dong, M. (2010). Mergers & acquisitions in behavioral finance: Investors, corporations and markets. In H. K. Baker & J. R. Nofsinger (Eds.). Hoboken, NJ: Wiley. Dunning, J. H. (1993). Multinational enterprises and the global economy. Wokingham, England: Addison-Wesley Publishing Company. Ericson, R., & Pakes, A. (1995). An alternative theory of firm and industry dynamics. Review of Economic Studies, Vol 62(pp), 53–82. Fama, E., & French, K. (1997). Industry costs of equity. Journal of Financial Economics, 43(2), 153–193. Gary, G., Kahl, M., & Rosen, R. J. (2006). Eat or be eaten: a theory of mergers and firm size, Working Paper Series, WP-06-14, Federal Reserve Bank of Chicago. Ghosh Ray, K. (2010). Mergers and acquisitions: Strategy, valuation and Integration. New Delhi, India: PHI Learning. Harding, D., & Rovit, S. (2004). Building deals on bedrock. Harvard Business Review, 82(9), 121–128.

134

KAMAL GHOSH RAY AND SANGITA GHOSH RAY

Hopkins, H. D. (1999). Cross-border mergers and acquisitions. Global and Regional Perspectives, 5(3), 207–239. Manne, H. (1965). Mergers and the market for corporate control. Journal of Political Economy, 75, 110–126. Perry, J. S., & Herd, T. J. (2004). Mergers and acquisitions: Reducing M&A risk through improved due diligence. Strategy and Leadership, 32(2), 12–19. Picot, G. (Ed.). (2002). Handbook of international mergers and acquisitions: Preparation, implementation and integration. Basingstoke: Palgrave Macmillan. Puranam, P., & Srikanth, K. (2007). What they know vs. what they do: How acquirers leverage technology acquisitions. Strategic Management Journal., 28, 805–825. Rau, R., & Vermaelen, T. (1998). Glamour, value and the post-acquisition performance of acquiring firms. Journal of Financial Economics, 49, 223–253. Ravenscraft, D. J., & Scherer, F. M. (1987). Life after takeover. Journal of Industrial Economics, 36(2), 147–156. Ross, S. A., Westerfield, R. W., & Jaffe, J. F. (2005). Corporate finance. Boston, MA: McGraw-Hill. Seth, A. (1990). Sources of value creation in acquisitions: An empirical investigation. Strategic Management Journal, 11(6), 431–446. Shank John, K., & Govindrajan, Vijay (1993). Strategic cost management: The new tool for competitive advantage. New York: The Free Press. Sirower Mark, L. (1997). The synergy trap: How companies lose the acquisition game. New York: Free Press. Sodersten, B. O., & Reed, G. (2006). International economics. London: Macmillan Press. Weston, J. F., Chung, K. S., & Siu, J. A. (1998). Takeovers, restructuring, and corporate governance. Upper Saddle River, NJ: Prentice Hall.

THE IMPACT OF CULTURE ON MERGERS AND ACQUISITIONS: A THIRD OF A CENTURY OF RESEARCH Daniel Rottig, Taco H. Reus and Shlomo Y. Tarba ABSTRACT This chapter aims to make sense of the growing research that examines the role of culture in mergers and acquisitions. We provide a detailed review of the many related but distinct constructs that have been introduced to the literature. While each construct has contributed to our understanding of the role of culture, the lack of connections made among constructs has limited the consolidation of contributions. The review shows what these constructs mean for mergers and acquisitions, what major findings have been discovered, and, most importantly, how constructs interrelate. Our discussion provides several opportunities to foster the needed consolidation of this research. Keywords: National culture; organizational (corporate) culture; M&A performance

Advances in Mergers and Acquisitions, Volume 12, 135–172 Copyright r 2013 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1479-361X/doi:10.1108/S1479-361X(2013)0000012009

135

136

DANIEL ROTTIG ET AL.

INTRODUCTION Culture has an important and multi-faceted role in mergers and acquisitions (M&As) (Cartwright & Cooper, 1996; King, Dalton, Daily, & Covin, 2004; Kogut & Singh, 1988; Reus & Lamont, 2009; Rottig, 2007, 2013; Stahl & Voigt, 2008; Weber, Tarba, & Reichel, 2011). Organizational and national cultural differences between M&A partners, and resistance to cultural change, are frequently stressed as barriers to post-M&A integration success (Cartwright & Cooper, 1993a; David & Singh, 1993; Rottig, 2007; Stahl & Voigt, 2008). Although cultural influences on M&As are widely recognized by academicians and practitioners (Angwin, 2001; KPMG, 1999), there are mixed arguments and findings about how culture affects M&As, how to effectively manage cultural differences, and how to successfully integrate culturally distinct organizations. Moreover, the plethora of concepts and measures used complicates understanding the contributions of the field. As some researchers in the field have already emphasized (Rottig, 2009; Vaara, Tienari, & Sa¨ntti, 2003; Weber, 1996), there is scant research that systematically analyzes the effect of culture on M&As. However, there are many studies that have begun to incorporate some form of influence of culture in their research programs. While the many studies have been beneficial to our knowledge development of the topic of culture in M&As, the scattered approach of this field has hurt the consolidation of ideas. Given the interdisciplinary nature of this research, which covers organizational behavior, management, strategy, international business, and psychology, this is to be expected. Yet, this complicates the academic discourse on the topic. In particular, studies use numerous constructs to explain the impact of culture on M&As, such as culture clash, culture gap, cultural fit, cultural conflict, cultural compatibility, cultural collision, cultural discomfort, cultural shock, and so on. This variety of constructs creates ambiguity and confusion. Moreover, empirical support for the role of culture is mixed, and shows contradictory findings. In an effort to make sense of this vast but scattered field, this chapter reviews and integrates the literature on the impact of culture on M&As within the past 33 years. In particular, we will focus on all constructs used under the umbrella concept of ‘‘culture.’’ This will help us better understand how culture affects M&As, and facilitates understanding the mixed findings that characterize the field. In this process, we point out that some concepts that describe the same phenomenon should be consolidated, while other concepts that are often used interchangeably are better kept separately.

The Impact of Culture on Mergers and Acquisitions

137

We highlight that culture both at the national and the organizational level impacts M&As through various ways, which provides the rationale for the use of various constructs. Some of these constructs say something about the context in which an M&A takes place, and other constructs provide indicators of the manner in which culture is dealt with during the integration process. We will also discuss the manner in which these concepts are measured, and identify that concepts change meaning depending on the measurement approach taken. Before we discuss the different constructs, at different levels, and through different measures, we shortly describe the approach we took to cumulate M&A research that focuses on cultural issues.

EMERGENCE OF A BODY OF CULTURE ON M&A RESEARCH 1980–2012 To be able to capture the scattered field, we conducted an extensive literature search to identify studies that explicitly investigated the impact of culture on M&As published in academic journals available in the United States. The starting year in our review is 1980 because of three reasons. First, beginning in the early 1980s, M&A transactions across different national markets increased significantly (Jansen & Mu¨ller-Stewens, 2000; Tetenbaum, 1999). Second, in the late 1970s and early 1980s, practitioners and scholars became interested in the concept of ‘‘organizational culture.’’ In particular, Japanese organizational practices were considered the drivers of Japan’s economic success following the oil crises in the 1970s (Brannen & Kleinberg, 2000). Third, in 1980, Geert Hofstede published his landmarking study of work-related values, which provided numerical scores to measure national cultural differences along four now ubiquitous cultural dimensions (Peterson, 2003; Triandis, 1982). This study had great impact on M&A research given that most M&A scholars based their conceptual and empirical investigations on Hofstede’s findings. We identified 84 studies that explicitly investigate the impact of culture on M&As, which are published in 40 different academic journals (these studies are marked with an asterisk in the reference section). Tables 1, 2, and 3 provide an overview of the empirical studies, the culture constructs, measures, and methods used, as well as their main findings. Most of the empirical studies (30) focus on the role of national culture on cross-border M&As. Thirteen studies focus on organizational culture, and eight studies examine influences of both national and organizational culture. It is important to note that while some references were made to the impact of

Cultural distance

Brouthers and Brouthers (2000) Calori et al. (1994)

Kogut and Singh (1988)

Cultural distance

Cultural distance

Datta and Puia (1995)

David and Singh (1993)

Cultural distance (descriptive)

Hofstede (1980)

Cultural distance

Kogut and Singh (1988); Ronen and Shenkar (1985) Kogut and Singh (1988) Hofstede (1980)

Hofstede (1980)

House et al. (2004)

Source

112 cross-border chemical M&As 9 cross-border and domestic M&As

136 cross-border M&As 75 UK, US, and French acquisitions 1157 crossborder acquisitions

142 cross-border M&As 116 cross-border M&As

65 cross-border M&As

Sample

Case studies

Archival

Event study

Descriptive

Archival

Archival

Descriptive

Survey

Method

Shareholder value change

Buy-and-hold abnormal returns and cumulative abnormal returns (CAR)

Entry mode choice Integration process

Longevity of acquisition

Financial performance

DV(s)

Cultural distance significantly impacts merger and acquisition performance. Organizations that respond to cultural distance issues in post-acquisition management can develop synergies better

Acquisitions perform better in the long run if the acquirer and the target come from countries that are culturally more disparate. The overall cultural distance rather than dimension-wise differences seems to drive these results, though the difference in masculinity appears to hurt performance slightly, presumably through integration problems Cultural distance is negatively associated with abnormal return

Cultural distance is not significantly related to entry mode choice Cultural differences determine the type of control mechanisms acquirers use

Cultural distance constrains communication between acquirers and acquired units, bringing about a negative indirect effect on acquisition performance. However, cultural distance enriches acquisitions by enhancing the positive effects of communication on performance Acquiring firms attached low importance to assessment of cultural fit as part of due diligence Firms that expand gradually have longer lasting acquisitions than firm that randomly expand

Results

Studies that Examine the Role of National Culture in Mergers and Acquisitions.

Chakrabarti, GuptaMukherjee, and Jayaraman, (2009)

Cultural differences

Cultural differences Cultural distance

Angwin (2001)

Barkema et al. (1996)

Cultural distance

Construct

Ahammad and Glaister (2011a)

Study

Table 1.

Cultural differences

Cultural differences

Cultural differences

Cultural distance

Culture clash

Cultural distance

Larsson and Lubatkin (2001)

Lubatkin et al. (1998)

Markides and Ittner (1994)

Monk (2000)

Morosini et al. (1998) Morosini and Singh (1994)

Olie (1994)

Cultural distance

Kogut and Singh (1988) Krug and Nigh (1998) Krug and Hegarty (1997)

Cultural differences

Cultural differences

Cultural distance

Cultural differences

Kanter and Corn (1994)

Hofstede (1980)

Kogut and Singh (1988) Hofstede (1980)

Cultural differences (descriptive)

Hofstede (1980); Kluckhohn and Strodtbeck (1961) Hofstede (1980)

Dummy variable for nationality

Cultural differences (descriptive) Kogut and Singh (1988) Kogut and Singh (1988) Dummy variable for domestic vs. foreign

3 German-Dutch mergers

276 cross-border acquisitions in US 1 cross-border JapanAustralian merger 52 cross-border acquisitions 52 cross-border acquisitions

103 cross-border acquisitions 390 acquiring and nonacquiring US companies Domestic and cross-border acquisitions 83 cross-border UK and French acquisitions

228 entries

8 cross-border acquisitions

Various integration characteristics

Archival

Case studies (interviews)

Archival

Archival

Case study

Archival

Historical account of each merger

Profitability and productivity growth

Sales growth

Shareholder value change

Achieved acculturation

Archival (50 cases)

Survey

Archival

Archival

Integration success or failure Entry mode choice Top management departure rate TMT turnover rate

Interviews

There is a positive relation between national cultural distance and the performance of cross-border M&As Higher uncertainty avoidance and independence leads to positive profitability growth, whereas integration and restructuring are associated with negative profitability growth one year after the acquisition Cultural differences are a principal factor for the failure of mergers

Patience is crucial for merger success and skill to work with the slow, long-term pace of cultural transformation

No support for a negative effect of cultural distance on value creation

Acculturation can be controlled (managed) in postacquisition period and is best achieved when the buying firms rely on social controls Administrative approaches used during merger integration partially reflect different heritages

National cultural differences have not been found to impact the integration of acquired companies and their organizational effectiveness Cultural distance and uncertainty avoidance are negatively associated with acquisition entry mode Cultural distance is positively associated with postacquisition top executive turnover rate Cross-border acquisitions are associated with higher top management turnover over time when compared to domestic acquisitions

Cultural distance

Cultural distance

Cultural distance

Cultural distance

Cultural identity building

Cultural discourse

Rottig and Reus (2009)

Slangen (2006)

Uhlenbruck (2004)

Vaara et al. (2003)

Vaara (2002)

Construct

Reus and Lamont (2009)

Study

Story telling

Kogut and Singh (1988); Trompenaars (1994) Cultural differences (descriptive)

Kogut and Singh (1988)

Kogut and Singh (1988); House et al. (2004)

Kogut and Singh (1988); House et al. (2004)

Source

8 Fin-Swedish acquisitions

172 acquisitions in Central and Eastern Europe 1 Fin-Swedish merger

Interviews

Metaphor exercise

Archival

Survey

Post-merger cultural identity building Acquisition integration success or failure

Sales level, market share, profit level, and overall performance Sales growth

CAR

Archival

247 foreign acquisitions in the US 119 cross-border acquisitions by 111 Dutch firms

Accounting performance and CAR)

Survey, archival, and event study

118 cross-border acquisitions

DV(s)

Method

Sample

Table 1. (Continued )

Cultural differences affect subjective interpretation of employees about the acquisition integration process and therefore influence confrontation

Cross-border merger with dramatic cultural changes triggers strong emotional responses, which in international settings are easily linked with ordinary nationalism

Cultural distance impedes understandability of key capabilities that need to be transferred, and constrains communication between acquirers and their acquired units, thus having a negative indirect effect on acquisition performance. Cultural distance also enriches acquisitions by enhancing the positive effects of understandability and communication on acquisition performance Cultural distance was found to have a negative indirect effect on acquisition performance through its adverse effect on the legitimacy (in form of media endorsement) of a foreign acquirer in the US The planned level of post-acquisition integration moderates the relationship between national cultural distance and acquisition performance. Cultural distance has a negative impact on acquisition performance at high levels of planned integration and a positive impact at low levels Cultural distance reduces the extent to which acquirers learn from experiences abroad and impedes the sales growth of acquired firms

Results

Cultural compatibility

Acculturative stress

Cultural compatibility

Very et al. (1996)

Very et al. (1997)

Culture sensemaking processes Cultural distance

Veiga et al. (2000)

Vasilaki (2011)

Vaara (2000)

PCC

Developed measure

PCC

Kogut and Singh (1988)

Hofstede (1980)

106 cross-border and domestic acquisitions 106 cross-border and domestic acquisitions

106 cross-border acquisitions

109 cross-border acquisitions

8 Fin-Swedish acquisitions

Financial performance Financial performance

Survey

Financial and non-financial organizational performance Financial performance

Survey

Survey

Survey

Descriptive

Acquisition performance is associated with target employees’ perception of compatibility of their old culture and the new culture Cultural differences may elicit perceptions of attractiveness rather than stress, depending on acculturative stress and the nationalities of the acquirer and the target The more the target’s managers identify with culture of the acquiring organization, the higher post-acquisition performance

Transformational leadership positively moderates the relationship between cultural distance and organizational performance

Examination of cultural sense-making processes helps understand acquisition performance

Cultural differences

Cultural differences Cultural fit/ compatibility

Cultural differences

Acculturation

Cultural differences

Multiculturalism

Perceived interorganizational differences

Appelbaum and Gandell (2003)

Buono et al. (1985)

Chatterjee et al. (1992)

Dackert et al. (2003)

Datta (1991)

Pablo (1994)

Van Knippenberg et al. (2002)

Cartwright and Cooper (1993a)

Cultural differences

Construct

Ahammad and Glaister (2011b)

Study

Developed scale

Developed measure

Developed scale

Developed scale

Developed scale

Cultural differences (descriptive) Harrison’s (1987) typology

Chatterjee et al. (1992); Datta (1991) Cultural differences (descriptive)

Source

56 domestic acquisitions 2 domestic US acquisitions

173 domestic US acquisitions

1 domestic Swedish acquisition

30 domestic US acquisitions

2 domestic UK acquisitions

1 domestic merger

1 domestic merger

65 cross-border M&As

Sample

Survey

Survey

Survey

Survey

Survey

Descriptive

Case study

Descriptive

Survey

Method

Post-merger identification

Level of integration chosen

Financial Performance

Anticipated acculturation

Shareholder value change

Financial performance

DV(s)

Limited support for a negative effect of organizational cultural differences on acquisition performance Actively managing cultural differences during all stages of a merger minimizes culture clash Culture shock lowered satisfaction and commitment of employees Cultural similarity between the organizations facilitated the development of a new culture Perception of cultural differences negatively influence shareholder value creation through M&As Success of the integration process depends on how employees of the merger partners perceive the culture of both organizations and on the expectations (anticipated acculturation) employees have of the new organization Differences in management styles (an element of organizational culture) are negatively related to post-merger performance Multiculturalism is negatively related to the level of M&A integration chosen Interorganizational differences were negatively related to post-merger identification for the dominated group and positively for the dominant group

Results

Table 2. Studies that Examine the Role of Organizational (Corporate) Culture in Mergers and Acquisitions.

Cultural conflict

Cultural differences Cultural differences

Weber and Camerer (2003)

Weber (1996)

Weber Tarba and Rozen Bachar (2011)

Cultural differences

Very and Schweiger (2001)

Chatterjee et al. (1992) Chatterjee et al. (1992)

Experiment

Developed themes

73 domestic US acquisitions 52 Israeli acquisitions

26 cross-border and domestic acquisitions Not applicable

Survey

Survey

Experiment, survey

In-depth interviews

Integration effectiveness

Financial performance

Individual performance

Integration problems

Both national and organizational cultural differences are major sources of integration problems in M&As Cultural conflict decreases employee performance of both the acquirer and acquired organization Cultural differences are not associated with financial performance The positive effect of synergy potential and negative effect of cultural differences are transmitted through the appropriate integration approach (symbiosis) to create high integration effectiveness

Cultural distance, cultural differences

Cultural differences

Cultural differences

Very and Schweiger (2001)

Weber et al. (1996)

Hofstede (1980); Chatterjee et al. (1992)

Developed measure

House et al. (2004); Chatterjee et al. (1992); Elsass and Veiga (1994)

House et al. (2004); Chatterjee et al. (1992)

Cultural distance, cultural differences

Vaara, Sarala, Stahl, and Bjo¨rkman (2012)

Cultural differences (descriptive)

Cultural differences

Mayo and Hadaway (1994) Sarala and Vaara (2010)

Developed measure

Source

Cultural differences

Construct

52 cross-border and domestic acquisitions

26 cross-border and domestic acquisitions

123 cross-border acquisitions

1 cross-border UK-Finnish merger 133 cross-border acquisitions

142 cross-border and domestic acquisitions

Sample

Survey

In-depth interviews

Survey

Survey

Autonomy removal, stress, attitudes toward cooperating with other top management team, group attitude toward new organization, commitment, cooperation

Integration problems

Social conflict, knowledge transfer

Knowledge transfer

Cooperation and commitment

Surveys, interviews

Case study

DV(s)

Method

Both national and organizational cultural differences diminished cooperation between top management and decreased ability and willingness of target’s executives to support the postacquisition organization Success is function of building shared visions and values, and letting a new culture develop spontaneously Positive relationship between cultural distance and knowledge transfer, no significant effect found between organizational cultural differences and knowledge transfer Organizational cultural differences are positively related to social conflict and knowledge transfer. Cultural distance decreases social conflict but is positively associated with knowledge transfer Both national and organizational cultural differences are major sources of integration problems in M&As In international M&As, national cultural differentials better predict stress, negative attitudes toward the merger, and actual cooperation than organizational cultural differentials do

Results

Studies that Examine the Role of National and Organizational Culture in Mergers and Acquisitions.

Krug and Nigh (2001)

Study

Table 3.

Hofstede (1980); Chatterjee et al. (1992)

Hofstede (1980); Chatterjee et al. (1992)

Cultural distance, cultural differences

Cultural distance, cultural differences

Weber and Tarba (2011)

Weber, Tarba, and Rozen Bachar (2012)

Case study

Case study

1 cross-border merger

1 cross-border merger

Effectiveness of postacquisition integration

Effectiveness of postacquisition integration

Culture clashes at both the national and organizational culture levels result in post-merger integration issues and conflict between the involved organizations Cultural distance and organizational cultural differences, if not properly handled during both pre- and postacquisition integration processes, can negatively impact the effectiveness of post-acquisition integration (in terms of low commitment and cooperation, and high turnover of top executives and key talent from the acquired firm)

146

DANIEL ROTTIG ET AL.

culture in M&As by Hofstede (1980) and others, research on the topic surged in the late 1980s after Buono, Bowditch, and Lewis (1985) described the anatomy of the role of organizational culture collisions following a merger; Nahavandi and Malekzadeh (1988) described the process of acculturation; Jemison and Sitkin (1986) identified the importance of cultural fit beyond mere strategic fit in the process of acquisition integration; and Kogut and Singh (1988) developed the measure of cultural distance and examined its effect on foreign market entry mode choice.

CULTURAL CONSTRUCTS As mentioned earlier, over the years, M&A research has introduced numerous constructs that in some way capture the role of culture. In this section, we discuss these different terms and clarify their relationships. Before we address these cultural constructs as they refer to the context of M&As, we shortly discuss the meaning of culture in general. Culture has been defined in many ways. More than 60 years ago, Kroeber & Kluckhohn (1952) identified 164 different definitions of culture. More have been added since then, as the term became more popular in the management literature (Lees, 2003). In 1871, Tylor defined culture as ‘‘that complex whole which includes knowledge, belief, art, morals, law, customs, and any other capabilities and habits acquired by man as a member of society.’’ Sathe (1985, p. 6) asserted that culture is ‘‘the set of important understandings (often unstated) that members of a community share in common.’’ A widely used definition of culture is the one offered by Hofstede, which views culture as the ‘‘collective programming of the mind that distinguishes the members of one group or category of people from another’’ (2001, p. 9). The principal investigators of the large culture project ‘‘GLOBE’’ use a more specific definition. They assert that ‘‘the most parsimonious operationalizations of societal culture consist of commonly experiences language, ideological belief systems (including religion and political belief systems), ethnic heritage, and history’’ and that ‘‘the most parsimonious operationalizations of organizational culture consist of commonly used nomenclature within an organization, shared organizational values, and organizational history’’ (House, Hanges, Javidan, Dorfman, & Gupta, 2004, pp. 15-16). This definition distinguishes two levels of culture, societal (or national) and organizational (or corporate) culture, which are also noticeably distinguished in the M&A literature.

147

The Impact of Culture on Mergers and Acquisitions

Scholars investigating the impact of culture in M&As use numerous constructs for similar but distinct cultural concepts. In the following, we disentangle these different constructs by categorizing the various cultural constructs used in the literature and by defining their meanings. Given that cultural research in the context of M&As primarily focuses on two main layers or levels of culture, national and organizational culture, we will first subsume the various cultural contexts in these categories and then discuss cultural constructs related to the process of M&A integration. Table 4 provides an overview of these various culture constructs. National Culture and Mergers and Acquisitions National culture in the definition of Hofstede (1980) refers to the collective programming of the minds of people from one nation. In cross-border M&As, the involved workforces come from different nations, and their national cultures are therefore expected to differ. Concept of Cultural Distance Since national culture is by its very nature intangible and subtle, it has been difficult to conceptualize and scale (Shenkar, 2001; Shenkar, Luo, & Yeheskel, 2008). Perhaps the earliest studies that began to examine the role of national culture in foreign investment strategies were conducted by Yoshino (1976) and Ozawa (1979). These studies found that Japanese foreign direct investment (FDI) in Western markets was constraint by high cultural distance. These findings resulted in a theory of ‘‘familiarity’’ which suggests that corporations are more likely to invest in culturally similar markets and less likely to invest in culturally distant markets (Shenkar, 2001).

Table 4.

Culture Constructs Used in the Merger and Acquisition Literature.

National Culture and M&As

The concept of cultural distance National cultural dimensions Operationalization of cultural distance

Organizational Culture and M&As

Culture and the Process of M&A Integration

Cultural differences Culture clash/conflict/shock Cultural compatibility Cultural fit Multiculturalism

Acculturation Acculturative stress Sociocultural integration Culture identity building Cultural discourse

148

DANIEL ROTTIG ET AL.

Building on this theory of ‘‘familiarity,’’ Johanson and Vahlne (1977) introduced the construct of psychic distance. These researchers developed a model of the internationalization process in which foreign market commitment depends on the knowledge developed about these markets. Psychic distance is defined as the degree to which an organization is uncertain of the characteristics of a foreign market as a result of cultural and language differences between the home and host countries. Johanson and Vahlne (1977) analyzed the relationship of FDI patterns to the psychic distance between countries, and found that Swedish companies gradually entered foreign markets with greater psychic distance. Given that Johanson and Vahlne were researchers at the Swedish University of Uppsala, the concept of psychic distance became known as the Uppsala process model, or the ‘‘Scandinavian School.’’ This model has been used to explain the influence of national cultural differences on entry modes and to predict the sequence of multiple entries of an organization in foreign markets (Engwall, 1984; Luostarinen, 1980). However, the theory of psychic distance has received little support and some criticism (Shenkar, 2001). Psychic distance suggests that cultural distance is a barrier to successful implementation and integration of international M&As. This suggestion has been based solely on theoretical reasoning and no representative samples across culturally distant nations existed by 1960 (Duijker & Frijda, 1960). Given this lack of empirical evidence, the term psychic distance lost its appeal. Cultural distance was not looked at anymore through the lens of psychic distance and a somewhat related and eventually more influential term evolved: cultural dimensions. Scholars attempted to identify cultural dimensions in order to be able to better assess cultural differences across nations. National Cultural Dimensions Universal national cultural dimensions are based either on theoretical arguments or on empirical analysis (Doney, Cannon, & Mullen, 1998). Studies that derived cultural dimensions based on theoretical approaches are, for example, Inkeles and Levinson’s (1969) examination of national character and Kluckhohn and Strodtbeck’s (1961) exploration of variations in value orientations. Empirical studies have derived cultural dimensions based on data from cross-national samples. Exemplary studies using this approach are Hofstede’s (1980) study of work-related values across 40 nations, and House and colleagues’ (2004) project GLOBE which explored national cultural differences in 62 societies based on 9 cultural dimensions. Hofstede’s (1980)

The Impact of Culture on Mergers and Acquisitions

149

study has been widely used by researchers investigating cross-border M&As, and therefore will be discussed in more detail. In his initial analysis of data from 40 countries, Hofstede (1980) developed his well-known four cultural dimensions. To recapitulate, power distance refers to the extent to which the less powerful members of organizations accept and expect that power is distributed unequally, reflecting the extent of social inequality in a society. The dimension of individualism and collectivism refers to the extent to which individuals are integrated into groups. The masculinity and femininity dimension refers to the degree of assertiveness, achievement, and competitiveness as opposed to modesty, care, and social goals. Uncertainty avoidance refers to the degree to which people of a country tolerate ambiguity. In 1988, based on a smaller sample of 23 countries by Bond, Hofstede added a fifth dimension labeled long-term versus short-term orientation. This dimension refers to (long) term thrift and perseverance versus (short-term) respect for tradition, fulfillment of social obligations, and protection of one’s ‘‘face’’ (Hofstede & Bond, 1988). More recently, a sixth dimension, indulgence versus restraint, which measures the subjective wellbeing (or happiness) in a society, was added to Hofstede’s cultural dimension framework (Hofstede, Hofstede, & Minkov, 2010). Perhaps due to the relative brevity of this latter dimension’s existence in the literature, research on the impact of culture on M&As based on this dimension is scant, and we could not identify a single study using this dimension in M&A research. As is shown in Tables 1 and 3, Hofstede’s first five dimensions of culture have been widely used as the theoretical foundation to study the impact on national cultural differences on M&As (Angwin, 2001; Apfelthaler, Muller, & Rehder, 2002; Calori, Lubatkin, & Very, 1994; Kanter & Corn, 1994; Krug & Hegarty, 1997; Lubatkin, Calori, Very, & Veiga, 1998; Markides & Ittner, 1994; Morosini & Singh, 1994; Ross, 1999; Vaara, 2000; Weber, Shenkar, & Raveh, 1996). For example, Hofstede’s (1980) original four dimensions were used by Calori and colleagues (1994) who found that national cultural differences determine the type of control mechanism acquirers use. Markides and Ittner (1994) also measured national cultural differences along these four dimensions but did not discover that culture significantly affected the financial performance of M&As. Apfelthaler et al. (2002) compared the national cultures of the United States, Germany, and Japan based on Hofstede’s first five cultural dimensions and revealed that experts from these diverging cultures complemented each other when working on a joint project. Other studies used only selected cultural dimensions, such as individualism and collectivism combined with power

150

DANIEL ROTTIG ET AL.

distance (Kanter & Corn, 1994) or uncertainty avoidance (Morosini et al., 1994). Both studies did not find that culture significantly affects M&As. However, it is important to note that Hofstede’s work has been criticized over the years for a number of reasons. First, some critics disparage Hofstede’s data given that they only represent subsidiaries of a single company, and note that the data are old and obsolete since they were collected in the end of the 1960s and beginning of the 1970s. Other critics of Hofstede’s original work have mentioned that four dimensions would not be enough to capture subtle differences in national cultures. Relatedly, the methodological tools and statistical techniques (i.e., survey method and factor analysis techniques, respectively) that Hofstede used have received criticism in the literature as to their appropriateness for the measurement of cultural differences, and the formulation of valid dimensions. Finally, some critics claim that nations are at best haphazardly chosen units for measuring culture, and at worst nonexistent units of culture (see Hofstede, 2001, p. 73, for a brief discussion and response to these critiques). While Hofstede’s (1980) seminal work remains the most popular basis for the examination of cultural effects on M&As, the aforementioned critical issues suggest that research may benefit from the incorporation of multiple measures of cultural dimensions, which have lately become available through the GLOBE project (House et al., 2004). For example, a meaningful distinction has been made between in-group collectivism and out-group collectivism (Triandis, 1995). Whereas in-group collectivism reflects the degree to which people have pride and loyalty to their immediate in-groups (family, organization), out-group collectivism refers to a more collective behavior of a broader society. Project GLOBE developed scales to measure in-group and out-group (or institutional) collectivism, which may provide additional insights when compared to a unidimensional collectivism scale. Operationalization of Cultural Distance Based on Hofstede’s work, Kogut and Singh (1988) introduced a measure of cultural distance. These authors developed a composite index measure which estimates cultural distance by cumulating the deviations of a focal country and the United States along the original four cultural dimensions developed by Hofstede (1980). The deviations are corrected for differences in variance of each dimension and then arithmetically averaged.1 Kogut and Singh’s operationalization has been widely utilized to investigate the impact of cultural distance on M&As (Barkema, Bell, & Pennings, 1996; Brouthers & Brouthers, 2000; Datta & Puia, 1995; David & Singh, 1993;

The Impact of Culture on Mergers and Acquisitions

151

Kogut et al., 1988b; Krug & Nigh, 1998; Markides & Ittner, 1994; Morosini, Shane, & Singh, 1998; Uhlenbruck, 2004). As is shown in Table 1, the findings of these studies are mixed. While, for example, Barkema et al. (1996) and Uhlenbruck (2004) found a negative relation between cultural distance and M&A performance, Morosini et al. (1998) identified a positive effect. Brouthers and Brouthers (2000) studied 136 entries of Japanese firms into Western Europe using the cultural distance measure (adjusted for Japan as the base country), and did not find a negative effect of cultural distance on entry mode choice. Still other research shows that cultural distance either has no direct effect on M&A performance (Markides & Ittner, 1994) or is one of the least significant variables affecting the performance of these transactions (Kanter & Corn, 1994). Despite its popularity in M&A research across different national cultures, the term cultural distance and its operationalization have been criticized based on conceptual and methodological issues. The concept’s implicit assumption of cultural incongruence has been questioned, given that cultural congruence is not necessarily achieved by cultural similarity, and may be achieved by complementarity of different cultures as well (Weber et al., 1996). Further, the concept of cultural distance leads to an illusion of symmetry, stability, linearity, causality, and discordance, and its operationalization is based on the questionable assumptions of corporate homogeneity, spatial homogeneity, and equivalence (for a detailed discussion, see Shenkar, 2001). Given that the measure of cultural distance is based on the original four cultural dimensions developed by Hofstede (1980), it has been exposed to the same critiques that inundated Hofstede’s work. In addition, the cultural distance measure has certain psychometric shortcomings, such as its questionable reliability, given that the measure is centered on the ranking for the United States. The measure heavily depends on the data point for the United States, and whether this data point has been captured correctly at the point of time when it was measured initially remains questionable. Moreover, given that the score of the United States (a constant) is subtracted from the dimension scores of the country of interest, and then squared, comparisons among different countries of interest are distorted, unless the constant scores for the United States were ranked at the extreme end of the scales of each dimension, which, however, is true only for the individualism and collectivism dimension. Given these critical issues, researcher should attempt to improve the cultural distance measure. For example, given that the measure is based on national-level data, researchers may additionally use cognitive data, such as

152

DANIEL ROTTIG ET AL.

retrospective evaluations of cultural differences by managers who have worked and lived in different national cultures. In so doing, researchers are more likely to capture subtle, yet important, differences in national cultures. Moreover, we suggest the combined use of quantitative and qualitative measures. This is particularly recommended for studies comparing nations that on the surface appear culturally alike. Quantitative measures are less likely to capture the subtle differences between apparently similar cultures (e.g., United States and Canada) and should therefore be complemented by qualitative methods.

Organizational Culture and Mergers and Acquisitions Organizational culture in the definition of Hofstede (1980) refers to the collective programming of the minds of the members of an organization. As mentioned before, the concept of organizational culture did not become widely used until 1980. In the early 1980s, several books introduced the term organizational culture, or corporate culture (e.g., Deal & Kennedy, 1982; Peters & Waterman, 1982). Since organizations have unique cultures, M&As are transactions that involve workforces characterized, at various degrees, by different organizational cultures. Cultural Differences The term ‘‘cultural differences’’ refers to the dissimilarity of important – often unstated – assumptions that organizational members share (Chatterjee, Lubatkin, Schweiger, & Weber, 1992; Sathe, 1985). How different members of one organization are from those affiliated with another organization does not become salient until the two organizations interact. This especially is the case in M&As, when organizations with different cultures need to be integrated. The contact of two cultures and the typical dominance of one organization, combined with the natural tendency of people to resist change from a stable to a relatively uncertain state, create a major barrier to the successful implementation and integration of M&As (Weber, 1988). Many studies investigating the impact of organizational culture on M&As utilize the concept of cultural differences (Appelbaum & Gandell, 2003; Buono et al., 1985; Chatterjee et al., 1992; Krug & Nigh, 2001; Mayo & Hadaway, 1994; Olie, 1990; Very, Calori, & Lubatkin, 1993; Weber, 1996, 2000; Weber & Schweiger, 1992; Weber et al., 1996). Given that top management teams of organizations are the initial point of contact in M&As, and top managers are considered to represent their organization’s culture,

The Impact of Culture on Mergers and Acquisitions

153

most studies focus on differences between top management cultures in these transactions (Chatterjee et al., 1992; Datta, 1991; Datta, Grant, & Rajagopalan, 1991; Krug & Hegarty, 1997; Krug et al., 2001; Weber, 1988, 2000). For example, as is shown in Tables 1 and 2, Krug & Hegarty (1997), Krug & Nigh (1998, 2001) reveal that cultural differences are detrimental to the target management’s cooperation and commitment, and lead to a high level of turnover. Chatterjee et al. (1992) and Weber (2000) found that cultural differences are positively related to top management turnover and negatively influence shareholder value creation. Culture Clash/Conflict/Shock The term culture clash is closely related to the concept of cultural differences. It can be considered the negative side or outcome of cultural differences, given that the term often implies that the contact between differing cultures will lead to conflict. Culture clashes are discussed in various forms, such as clashes in style and personality of top managers, environmental and diversity clashes (Bryan & Buck, 1989; Love & Gibson, 1999). Culture clash is detrimental to shareholder value creation in M&As (Chatterjee et al., 1992) because it reduces commitment to the transaction and cooperation among employees and increases voluntary turnover of the acquired top managers (Buono et al., 1985; Hambrick & Cannella, 1993; Lubatkin, Schweiger, & Weber, 1999; Sales & Mirvis, 1984). Moreover, culture clash decreases the operating performance of the combined corporation (Shelton, Hall, & Darling, 2003; Very, Lubatkin, Calori, & Veiga, 1997; Weber, 1996). Closely related to the construct of a culture clash are cultural shock and cultural conflict. Cultural shock refers to the clashing of incompatible cultures (Cartwright & Cooper, 1990; Frederick & De la Fuente, 1994). Cultural conflict occurs when organizations differ in their cultural characteristics and creates a misunderstanding that prevents the combined firm from realizing economic efficiency. Such conflict has been found to decrease employee performance of the involved organizations (Weber & Camerer, 2003). Because of cultural conflict, employees tend to attribute M&A failure to members of the other firm rather than to situational difficulties created by conflicting cultures (Weber & Camerer, 2003). As the definitions of the terms illustrate, culture clash, cultural conflict, and cultural shock have similar meanings and basically describe the same phenomenon. The use of different constructs creates confusion and makes it more difficult to compare and relate the findings of different studies. We therefore suggest consolidating these terms and use a single construct in order to avoid cultural confusion.

154

DANIEL ROTTIG ET AL.

Cultural Compatibility Cultural differences may not necessarily result in a culture clash, but may actually lead to cultural attraction (Very, Lubatkin, & Calori, 1996) and stimulate cultural change (Brooks & Dawes, 1999). A moderate degree of cultural distinctiveness may benefit rather than harm M&As because the involved firms can learn from each other’s cultures (Marks, 1999). Thus, looking at cultural differences from a positive angle, different cultures may be compatible and, therefore, beneficial for M&As. Cultural compatibility can be defined as the congruence of the culture of the acquiring organization and the culture managers of the target company perceive to be ideal. If managers of the target perceive the culture of the acquirer or the culture of the combined organization as compatible with their organization’s culture, they will be more cooperative and committed to the new organization, which facilitates cultural integration and increases post-M&A performance (Veiga, Lubatkin, Calori, & Very, 2000; Very et al., 1997). Cultural Fit The term cultural fit emerged from the construct of organizational fit, which refers to the compatibility of administrative practices, personal characteristics, and cultural characteristics of the acquiring and target organizations (Jemison & Sitkin, 1986). Cultural fit is a sub-dimension of organizational fit, and can be defined as the degree of compatibility of the involved organizational cultures (Cartwright & Cooper, 1994; Olie, 1994). In the literature, cultural fit and cultural compatibility are often used synonymously (Cartwright & Cooper, 1995; Cartwright & Cooper, 1993b, 1993c, 1994; Cartwright & Cooper, 1993a; Guptara, 1992; Schraeder & Self, 2003; Veiga et al., 2000; Very et al., 1997; Zaheer, Schomaker, & Genc, 2003). However, both concepts have distinct meanings. Whereas cultural compatibility refers to the extent to which the culture of the acquirer or combined organization is close to the perceived ideal culture of the acquired organization’s members, cultural fit refers to cultures that are compatible per se. Given this synonymous use of constructs that have different meanings, it becomes difficult to assess whether studies investigating the impact of culture in M&As all measure the same phenomenon. Hence, a distinction is needed and both terms should therefore be used and measured separately. Multiculturalism The construct of ‘‘multiculturalism’’ refers to the diversity of values, philosophies, and beliefs within an organization. Cultural differences are less of a problem if the acquiring company tolerates cultural diversity and is willing to encourage it (Nahavandi & Malekzadeh, 1988). Accordingly,

The Impact of Culture on Mergers and Acquisitions

155

Pablo (1994) found that multiculturalism can facilitate M&A integration and performance. Other studies have revealed that when an acquirer’s top management tolerates and encourages multiculturalism, the adverse effect of cultural differences (i.e., culture clash) will be minimized (Chatterjee et al., 1992). Hence, a high level of multiculturalism will enable more successful integration of culturally different targets, and therefore increase M&A performance. Culture and the Process of Merger and Acquisition Integration Most constructs mentioned so far (except for culture clash/conflict/shock) refer to characteristics of the context of M&As. Cultural context factors are considered pre-M&A attributes that lie outside of the involved organizations managements’ control in the post-M&A implementation and integration phase (Cartwright & Cooper, 1992, 1993b; Cartwright et al., 1993a). Researchers who study contextual factors subscribe to a realist perspective, which accepts real cultural differences as given and relates them to post-M&A integration and performance. Most studies investigating the impact of culture on M&As are characterized by this realistic conception of cultural differences (Vaara, 2000). However, the integration of distinct organizational and national cultures occurs in the post-M&A period. Most M&A failures are attributed to poor management of the implementation and integration process, which is typically due to the neglect of the ‘‘soft facts,’’ that is, the more subtle and emergent people-related issues of integrating operations of two organizations (Jemison & Sitkin, 1986). For example, building on a model that includes national cultural dimensions, organizational cultural differences, and the synergy potential between the combining companies, Gomes et al. (2011) and Weber et al. (2009, 2011) propose that the observed negative performance track record of acquirers resulted from these companies’ unwillingness or failure to implement the required integration approach. Furthermore, in a detailed analysis of the merger between the Israeli Lannet and British Madge in the high-tech sector, Weber et al. (2012) outline the importance of the proper post-M&A integration approach used by the acquiring company on the ultimate success of an M&A. Acculturation A common and widely used term in the literature investigating the impact of culture on M&As is acculturation. The term originated from the fields of anthropology and cross-cultural psychology, and is defined as the extent to

156

DANIEL ROTTIG ET AL.

which there are ‘‘changes induced in (two cultural) systems as a result of the diffusion of cultural elements in both directions’’ (Berry, 1980). Simply put, acculturation is the outcome of a process that forms a jointly determined culture (Larsson & Lubatkin, 2001). Based on the work by Berry (1983, 1984), Nahavandi and Malekzadeh (1988) developed an interdisciplinary acculturation model of the planning and implementation of M&As. In so doing, Nahavandi and Malekzadeh introduced the term acculturation to the management literature. These authors explained the role of acculturation in the context of M&As as a twoway flow, which occurs at the group and individual levels in the three stages of contact, conflict, and adaptation. The acculturation model comprises four modes that capture different ways in which two organizations involved in an acquisition adapt to each other and resolve emergent conflicts. These four modes are integration (a process characterized by structural assimilation of two cultures that, however, preserves the cultures and identities of both the acquirer and the acquired organization), assimilation (a unilateral process whereby the acquired organization willingly relinquishes its culture and identity by adapting to the culture of the acquirer), separation (where minimal cultural exchange between an acquirer and acquired organization ensures that both cultures remain completely separated), and deculturation (a process whereby the acquired organization disintegrates as a cultural entity, but refuses to be assimilated into the culture of the acquirer). In order to successfully implement an acquisition between culturally dissimilar organizations, not the mode of acculturation per se but the level of congruence between the acquirer and acquiree’s preferred modes of acculturation is important (Malekzadeh & Nahavandi, 1990; Nahavandi & Malekzadeh, 1988). If managers and employees of both organizations involved in an M&A agree on the preferred mode of acculturation, then the different cultures are compatible. In contrast, divergence about preferred modes of acculturation leads to cultural conflict. Acculturative Stress Nahavandi and Malekzadeh (1988) explain that the relationship between the level of congruence of the acculturation mode and successful M&A implementation is mediated by acculturative stress. Acculturative stress refers to organizational members’ psychological states and behaviors that are mildly pathological and disruptive (Berry, 1980), and may be the result of contact between organizations engaged in M&As. In case the members of the organizations involved in an M&A agree on the mode of acculturation, less acculturative stress is likely to occur, which contributes to a successful

The Impact of Culture on Mergers and Acquisitions

157

implementation. If the members of these organizations do not converge in their preferred modes of acculturation, however, a high level of acculturative stress will occur, leading to disruption in individual and group functioning and poor resolution of conflict (Nahavandi & Malekzadeh, 1988). This will in turn lower the chances of a successful M&A implementation. Studies using the acculturation model to investigate the impact of culture in M&As revealed that the success of the integration process depends on how employees of M&A partners perceive the culture of both organizations, and on the expectations employees have of the newly combined organization (Dackert, Jackson, Brenner, & Johansson, 2003). A meta-analysis of 32 case studies suggested that acculturative stress can be controlled in the post-acquisition period, and that successful acculturation can be achieved when the acquirer relies on social controls through introduction programs, training, cross-visits, retreats, celebrations, and similar socialization rituals (Larsson & Lubatkin, 2001). Conceptual studies have further refined the model and proposed a model of acculturative dynamics as a theoretical tool for explaining and predicting acculturative patterns (Elsass & Veiga, 1994). These studies highlight that acculturation is an ongoing, cyclical change process, which influences and is influenced by post-acquisition organizational performance, rather than just an outcome. A synonymous term used to discuss acculturation in the literature is cultural change process (Bijlsma-Frankema, 2001; Brooks & Dawes, 1999; Kaplan, 2001; Smith, 2000). Applicability of Acculturation Model. The aforementioned work on acculturation primarily focuses on domestic M&As, in which it seems likely for the involved managers and workforces to find congruence between their preferred modes of acculturation. In international M&As, however, this seems less likely given that these transactions are often complicated by stereotypes, prejudices, and nationalism (Olie, 1990; Vaara et al., 2003) that may entail conflict, lack of trust, and reduced commitment which, in turn, may lead to acculturative stress (Rottig, 2007). It seems, for example, quite difficult to imagine that a local target company would agree to completely adopt a foreign acquirer’s organizational and national cultural characteristics (assimilation mode of acculturation) or disintegrate as a cultural unit and give up its own cultural identity (deculturation mode of acculturation). It seems equally improbably that a foreign acquirer would agree to the separation mode of acculturation, given that some extent of cultural exchange and integration is often needed in international M&As to achieve the objectives of these transactions, such as the transfer of

158

DANIEL ROTTIG ET AL.

knowledge, resources and capabilities, the acquisition of valuable routines and repertoires that are embedded in a foreign culture, and access to valuable location-specific knowledge and information. Rottig noted that ‘‘[t]he applicability of the acculturation model to international acquisitions, therefore, seems very limited’’ (2007, p. 102). Sociocultural Integration In the context of international M&As, research has therefore focused less on the acculturation model but more on the sociocultural integration process. Sociocultural integration is a more encompassing process and can be described as ‘‘the effective acculturation and combination of different organizational and national cultures leading to the creation of a shared organizational identity and a sense of commitment to the combined firm among the involved workforces’’ (Rottig, 2011, p. 416). Research indicates that sociocultural integration is a key determinant of the performance of M&As (Birkinshaw, Bresman, & Hakanson, 2000; Rottig, 2007, 2011; Shrivastava, 1986; Stahl & Voigt, 2008), and therefore constitutes an important cultural construct. In a meta-analysis of 46 studies that were examining the effect of culture on M&As, Stahl and Voigt (2008) found a negative relationship between cultural differences of the involved organizations and their successful sociocultural integration. Rottig (2007) developed a five-C’s framework for sociocultural integration in international M&As, which describes the key determinants of successful cultural combination (the first C of the framework) in these transactions: cultural due diligence, cross-cultural combination, control, and connection. The latter determinant, connection, which refers to the involved organizations’ structural and relational social ties and networks, is particularly valuable for the successful cultural combination process (Rottig, 2007). Further developing this notion, Rottig (2011) developed a social capital perspective of international M&As. This perspective suggests that the negative relationship between cultural differences and successful sociocultural integration, which has been recognized by the aforementioned meta-analysis by Stahl and Voigt (2008), is positively moderated by an acquirer’s internal and external social capital. Hence, these internal and external relationships and network ties constitute valuable resources that facilitate the sociocultural integration process in international M&As. More recently, researchers have pointed out that the sociocultural integration process is not limited to the post-acquisition phase, as is often suggested in the literature. For example, Rottig (2013) suggests that the

The Impact of Culture on Mergers and Acquisitions

159

sociocultural integration process spans the entire spectrum of an M&A, that is, the pre-acquisition, closing, and post-acquisition phases. Drawing on the social constructivist perspective (Berger & Luckmann, 1967), he illustrates this notion based on a marriage metaphor model that describes the key determinants of a successful sociocultural integration across three key phases of an M&A: the dating (pre-M&A phase), mating (closing phase), and creating (post-M&A phase). However, research on the sociocultural integration process across all phases of an M&A transaction and its importance, relevance, and possible distinct determinants and consequences for each of these phases remains in its infancy, and promises to be a fruitful avenue for future scholarly investigation. Culture Identity Building Researchers have also built on the sense-making perspective (Weick, 1995) to explain the acquisition process (Gertsen, Soderberg, & Torp, 1998; Kleppesto, 1998; Vaara, 2000). Studies based on this perspective primarily look at the post-M&A period and the organizational actors’ interpretations of cultural differences in the acquisition integration and implementation process (Vaara, 2000). According to this perspective, cultural differences per se do not determine M&A success, but rather how the involved managers and employees perceive these differences during the integration process. The construct of ‘‘culture identity building’’ refers to such a sense-making process of organizational members. This process involves self-categorization in which a person places oneself into a category of either an in-group or out-group (Vaara et al., 2003) based on two possible cultural identitybuilding processes: construction of a difference and construction of a common future identity. These processes are expected to be crucial for the understanding of how individuals cognitively and emotionally respond to cultural differences and planned or anticipated changes. Comprehension of the culture identity building during the implementation of an M&A transaction facilitates understanding of emerging forces (such as enthusiasm or resistance) within the acquired organization (Vaara et al., 2003). It is expected that if members of the acquired organization positively respond to cultural differences, then both organizations’ cultures become compatible and less acculturative stress occurs. However, if organizational members interpret cultural differences as negative and resist cultural change, then both cultures are likely to clash and a high level of acculturative stress occurs. This notion exemplifies the interrelation between process-related and contextrelated factors, that is, how post-M&A identity building (a process factor)

160

DANIEL ROTTIG ET AL.

may determine the effect of pre-M&A cultural differences (a context factor) on the performance of these transactions. Cultural Discourse Cultural discourse is another process-related factor important in the implementation and integration of M&As. Cultural discourses provide opportunities for different (re)constructions and (re)interpretations of postM&A integration processes. It explains the process of (re)framing the success (or failure) and justification of actions required from organizational members (Vaara, 2002). Cultural discourses could problematize and relativize performance of M&As and illustrate confrontation between different levels of culture (i.e., national, organizational, and sub-cultures). For example, the failure of the integration of an acquired organization because of structural or situational factors could be (re)constructed or (re)interpreted by the involved managers and employees as caused by cultural differences. This is likely to result in a high level of acculturative stress and eventually lead to a culture clash. This, again, exemplifies the interrelation between contextual and process-related variables in studying the impact of culture on M&As.

DIVERSITY OF METHODS OF CULTURAL DIFFERENCES The variety of methods used also fosters differences between the constructs that the methods aim to measure. In general, measures can be classified as subjective or objective. The former, which rely on case studies, self-reported survey data, and interviews, overwhelmingly confirm the assumption of cultural differences as an impeding force to successful international M&As (Cartwright et al., 1993c; Chatterjee et al., 1992; Datta et al., 1991b; Olie, 1994; Very & Schweiger, 2001; Weber et al., 2003). However, these subjective measures may be influenced by biases in measurement and thought processing of research subjects. For example, because of a common belief among respondents that cultural differences represent cultural problems, respondents may be more likely to emphasize the negative impact of cultural differences. This belief is reflected in the measures, such as surveys that explicitly ask respondents to indicate what problems cultural differences caused (Chatterjee et al., 1992; Kanter & Corn, 1994; Krug et al., 2001; Van Knippenberg, Van Knippenberg, Monden, & De Lima, 2002).

The Impact of Culture on Mergers and Acquisitions

161

Similarly, interviewers may specifically encourage interviewees to discuss cultural differences and their seemingly inevitable negative consequences (e.g., Vaara, 2002; Very & Schweiger, 2001). Accordingly, the measures seem like a self-fulfilling prophecy – researchers who ask for problems created by cultural differences have respondents who concentrate on and thus report these problems. Researchers are not only likely to stimulate respondents to think about problems but also intensify the existing subjective bias individuals typically possess throughout and after M&As. This bias was pointed out by Sales and Mirvis (1984, p. 115) who stated that ‘‘interviewees did not describe the two cultures by emphasizing the unique characteristics of each, but rather used the same dimensions in describing both of them in order to highlight contrasts. As interviewees would place the two organizations along a continuum, they tended to push them to extreme opposite poles.’’ Objective measures do not have this bias. However, these measures will be less likely to capture the subtle differences in culture. Provided these differences in methods, studies that used subjective measures show much more support for a negative impact of cultural differences on M&A performance than do studies that used objective measures. As is shown in Tables 1, 2, and 3, all but one of the studies using a subjective measure found support for the negative impact of cultural differences. The one study that found no effect on M&A performance (Weber, 1996), however, also indicated that cultural differences decrease the effectiveness of post-M&A integration. Studies that used objective measures resulted in more mixed findings. Most of these studies did not find a negative effect (Brouthers & Brouthers, 2000; Calori et al., 1994; Lubatkin et al., 1998; Markides & Ittner, 1994; Morosini & Singh, 1994) and one study found a positive effect (Morosini et al., 1998). This latter study argued that combining organizations from different cultures can actually lead to the development of more unique routines and repertoires that are embedded in different national cultures, and consequently affect the value creation of more culturally distant acquisitions positively. Slangen (2006) argued that these positive effects depend on the level of post-merger integration. Reus and Lamont (2009) developed an integration capability view to argue that cultural differences have both negative and positive effects on post-M&A performance. On the one hand, cultural differences impede the development of integration capabilities, such as inter-firm communication, which negatively affects post-merger performance. On the other hand, if acquirers can develop such integration capabilities, cultural differences strengthen their positive impact on M&A performance.

162

DANIEL ROTTIG ET AL.

DISCUSSION This paper shows the wide variety of constructs that are being used in the literature to make sense of the role of culture in M&As. We hope that our expose´ clarifies the many different ways in which culture influences these transactions, and how organizations involved in M&As can manage these cultural influences. In this discussion, we want to address a few avenues for future research that could greatly benefit our understanding of all these different concepts. First, existing cultural research in the context of M&As primarily focuses on two main levels of culture: national (or societal) and organizational (or corporate) culture. The bodies of literature on national and organizational culture are growing in relative isolation, even though organizational and national cultures are likely to be in some way connected (Weber et al., 1996). Hofstede and Peterson (2000, p. 401) discuss important conceptual distinctions between national and organizational cultures but assert that there is some analogy between the two. Hofstede (1997) suggested that symbols, heroes, and rituals constitute practices that are more closely related to organizational cultures, while values are characteristics of national cultures. Whether an organizational culture outweighs the influence of a national culture may depend on the intensity of the institutional impact on business practices (Arikan, 2004). In countries where national institutions have a significant impact on business practice (such as autarchies or closedeconomy oriented countries), national and organizational cultures will be highly correlated. In contrast, in countries where the intensity of institutional influence on business performance is low, national and organizational cultures may diverge. Hence, we suggest that researchers investigating the impact of culture on M&As simultaneously examine both organizational and national cultures, and uncover the factors that determine which of these two levels of culture become more salient in different contexts, across different cultural settings, as well as for different types of M&As. Second, beyond culture at the national and organizational level, other levels of culture may influence M&As. For example, intra-societal cultures, which are sub-cultures within a nation characterized by distinct cultural features (cf. Lenartowicz & Roth, 2001) could impact the performance of M&As. Similarly, industry cultures that refer to specific cultural characteristics of different industries and industrial clusters (cf. House et al., 2004) and professional cultures that are shared by groups of people working in similar functions or occupations (Apfelthaler et al., 2002; Ross, 1999) may influence unrelated M&As. Further, differences in intra-organizational

The Impact of Culture on Mergers and Acquisitions

163

cultures within organizations (Buono & Bowditch, 1989; Dackert et al., 2003; Monk, 2000; Siehl, Ledford, Silverman, & Fay, 1988; Vaara, 2002) may further complicate the acculturation process. Third, given the numerous cultural constructs discussed in this paper, we suggest the use of common terms for similar concepts as well as the separation of synonymously used terms for different constructs in order to avoid cultural confusion. For example, such terms as culture clash, cultural shock, and cultural conflict describe basically the same phenomenon and should therefore be combined under a common term. Further, the terms cultural compatibility and cultural fit are widely discussed synonymously but in fact describe different concepts. These terms should be used separately from one another. In so doing, researchers may be able to better understand the impact of culture on M&As and facilitate the consolidation of their contributions. Fourth, we recommend that researchers investigating specific cultural constructs relate these to the various other constructs more clearly. As we have shown in our discussion in this paper, the numerous constructs are interrelated and should therefore be discussed in the context of a nomological network. For example, pre-acquisition cultural differences may be influenced by culture identity-building processes, which may lead to perceptions of cultural compatibility in the post-M&A phase. Fifth, based on the aforementioned recommendation, we emphasize the importance of simultaneously studying context and process factors. Most studies overemphasized context factors, which led to an incomplete understanding of the impact of culture on M&As. In combining both context and process-related factors, researcher will be able to better assess the interrelation of the various cultural constructs, which are generally discussed in isolation. This, in turn, will contribute to a better understanding of the impact of culture on M&As. Sixth, another consideration for future research is that studies examine the difference between subjective and objective measures. Do subjective measures adequately tap into the complex construct of cultural differences? How much do pre-determined expectations about the role of culture influence people’s tendency to respond on items that attempt to tap into cultural differences? It is important to carefully consider the impact that this has on the measures used, and the manner in which survey scales are developed. Perhaps different scales can better represent the complexity of culture. For example, one scale could tap into cultural conflicts, and another could tap into cultural compatibility. In any case, it is important to consider how biases can best be avoided in measurement.

164

DANIEL ROTTIG ET AL.

Seventh, against the background of the critical issues with the most widely used measures of cultural differences in M&A research, we call for an improvement of these measures. For example, the cultural distance measure, which is based on national level data, may be improved by adding cognitive data, such as retrospective evaluations of cultural differences by expatriates (Boyacigiller, 1990; Shenkar, 2001). Further, this measure should be used in combination with variables that have been found to correlate with it or mediate the relationship of cultural distance and M&A performance, such as foreign experience, geographical distance, language, level of development, market, and company size (Shenkar, 2001). Additionally, researchers can incorporate multiple measures of cultural dimensions which have become available through the GLOBE project (House et al., 2004). Further, alternative classifications of cultural dimensions, such as Schwartz’s (1994) or Trompenaars’ (1994) may be used to build new aggregate or unidimensional measures. Eighth, we suggest that in addition to quantitative measures, researcher should utilize qualitative measures. Such a multimethod approach is particularly recommended for the examination of the impact of culture on M&As. Given that culture is often subtle, quantitative measures may not be able to capture important cultural characteristics and cross-cultural variations. Hence, the use of qualitative measures, such as interviews, ethnographies, and observations, in addition to quantitative measures will likely improve research results. Ninth, researchers should investigate whether the widely presumed influence of cultural differences on M&As holds universally. There are likely to be situations in which culture may only have a minor impact on these transactions. For example, not all organizations fully integrate following acquisitions (Haspeslagh & Jemison, 1991), which may limit the extent to which cultures come in contact with each other. Even if organizations become integrated after an M&A, certain business units, functions, or even sub-functions may remain independent. Managers and employees in such units may not be as strongly affected by cultural differences as are members of fully integrated units (David & Singh, 1993; Schweiger, 1993). Finally, the field is in urgent need of guidelines for how to deal with cultural differences in M&As. Given the empirical evidence of the high failure rates of M&As, ranging from 50% to 83%, business practitioners are in need of ‘‘know-how’’ to deal with cultural differences based on an integrative model of culture’s consequences for M&As. Academic research is likely to advance our understanding and knowledge in this interesting and

The Impact of Culture on Mergers and Acquisitions

165

important area and we hope that this chapter contributes to the development of such a model.

NOTE P 1. CDj ¼ CDj ¼ 4i¼1 fðI ij I iu Þ2 =V i g=4 [cultural distance measure by Kogut & Singh, 1988] where Iij stands for the index for the ith cultural dimension (i ¼ 1, 2, 3, 4) and jth country and Vi is the variance of the index of the ith cultural dimension and u indicates the United States.

REFERENCES Ahammad, M. F., & Glaister, K. W. (2011a). The double-edged effect of cultural distance on cross-border acquisition performance. European Journal of International Management, 5(4), 327–345. Ahammad, M., & Glaister, K. (2011b). Post-acquisition management and performance of cross-border acquisitions. International Studies of Management and Organization, 41(3), 69–87. Angwin, D. (2001). Mergers and acquisitions across European borders: National perspectives on pre-acquisition due diligence and the use of professional advisors. Journal of World Business, 36(1), 32–57. Apfelthaler, G., Muller, H. J., & Rehder, R. R. (2002). Corporate global culture as competitive advantage: Learning from Germany and Japan in Alabama and Austria? Journal of World Business, 37(2), 108–118. Appelbaum, S. H., & Gandell, J. (2003). A cross method analysis of the impact of culture and communications upon a health care merger: Prescriptions for human resources management. The Journal of Management Development, 22(5/6), 370–409. Arikan, A. M. (2004). Cross-border mergers and acquisitions: What have we learned? In B. J. Punnett & O. Shenkar (Eds.), Handbook for international management research (Vol. 2). Ann Arbor, MI: The University of Michigan Press. Barkema, H. G., Bell, J. H. J., & Pennings, J. M. (1996). Foreign entry, cultural barriers, and learning. Strategic Management Journal, 17(2), 151–166. Berger, P. L., & Luckmann, T. (1967). The social construction of reality. New York, NY: Doubleday. Berry, J. W. (1980). Social and cultural change. In H. C. Triandis & R. W. Brislin (Eds.), Handbook of cross-cultural psychology (Vol. 5, pp. 211–279). Boston, MA: Allyn & Bacon. Berry, J. W. (1983). Acculturation: A comparative analysis of alternative forms. In R. J. Samuda & S. L. Woods (Eds.), Perspectives in immigrant and minority education (pp. 66–77). Lanham, MD: University Press of America. Berry, J. W. (1984). Cultural relations in plural societies: Alternatives to segregation and their sociopsychological implications. In N. Miller & M. B. Brewer (Eds.), Groups in contact (pp. 11–27). Orlando, FL: Academic Press.

166

Bijlsma-Frankema,

DANIEL ROTTIG ET AL.

K. (2001). On managing cultural integration and cultural change processes in mergers and acquisitions. Journal of European Industrial Training, 25(2/3/4), 192. Birkinshaw, J., Bresman, H., & Hakanson, L. (2000). Managing the post-acquisition integration process: How the human integration and task integration processes interact to foster value creation. Journal of Management Studies, 37, 395–425. Boyacigiller, N. (1990). The role of expatriates in the management of interdependence. Journal of International Business Studies, 21(3), 357–381. Brannen, M. Y., & Kleinberg, J. (2000). Images of Japanese management and the development of organizational culture theory. In N. Ashkanasy, C. Wilderom & M. F. Peterson (Eds.), Handbook of organizational culture and climate. Thousand Oaks, CA: Sage. Brooks, I., & Dawes, J. (1999). Merger as a trigger for cultural change in the retail financial services sector. The Service Industries Journal, 19(1), 194–207. Brouthers, K. D., & Brouthers, L. E. (2000). Acquisition or greenfield start-up? Institutional, cultural and transaction cost influences. Strategic Management Journal, 21(1), 89–97. Bryan, R. M., & Buck, P. C. (1989). The cultural pitfalls in cross-border negotiations. Mergers and Acquisitions, 24(2), 61–63. Buono, A. F., & Bowditch, J. L. (1989). The human side of mergers and acquisitions: Managing collisions between people and organizations. San Francisco, CA: Jossey-Bass. Buono, A. F., Bowditch, J. L., & Lewis, J. (1985). When cultures collide: The anatomy of a merger. Human Relations, 38, 477–500. Calori, R., Lubatkin, M., & Very, P. (1994). Control mechanisms in cross-border acquisitions: An international comparison. Organization Studies, 15(3), 361–379. Cartwright, S., & Cooper, C. L. (1990). The impact of mergers and acquisitions on people at work: Existing research and issues. British Journal of Management, 1, 65–76. Cartwright, S., & Cooper, C. L. (1992). Mergers & acquisitions: The human factor. Oxford: Butterworth-Heinemann. Cartwright, S., & Cooper, C. L. (1993a). The psychological impact of merger and acquisition on the individual: A study of building society managers. Human Relations, 46(3), 327–347. Cartwright, S., & Cooper, C. L. (1993b). The role of cultural compatibility in successful organizational marriage. Academy of Management Executive, 7, 57–70. Cartwright, S., & Cooper, C. L. (1993c). Of mergers, marriage, and divorce: The issue of staff retention. Journal of Managerial Psychology, 8(6), 7–10. Cartwright, S., & Cooper, C. L. (1994). The human effect of mergers and acquisitions. Journal of Organizational Behavior, 47–61. Cartwright, S., & Cooper, C. L. (1995). Organizational marriage: ‘‘Hard’’ versus ‘‘soft’’ issues. Personal Review, 24(3), 32–42. Cartwright, S., & Cooper, C. L. (1996). Managing mergers, acquisitions, and strategic alliances: Integrating people and cultures. Boston, MA: Butterworth-Heinemann. Chakrabarti, R., Gupta-Mukherjee, S., & Jayaraman, N. (2009). Mars-Venus marriages: Culture and cross-border M&A. Journal of International Business Studies, 40, 216–236. Chatterjee, S., Lubatkin, M. H., Schweiger, D. M., & Weber, Y. (1992). Cultural differences and shareholder value in related mergers: Linking equity and human capital. Strategic Management Journal, 13, 319–334.

The Impact of Culture on Mergers and Acquisitions

167

Dackert, I., Jackson, P. R., Brenner, S.-O., & Johansson, C. R. (2003). Eliciting and analysing employees’ expectations of a merger. Human Relations, 56(6), 705–725. D. K. (1991). Organizational fit and acquisition performance: Effects of postacquisition integration. Strategic Management Journal, 12, 281–297. Datta, D. K., & Puia, G. (1995). Cross-border acquisitions: An examination of the Influence of relatedness and cultural fit on shareholder value creation in U.S. acquiring firms. Management International Review, 35(4), 337–359. Datta, D. K., Grant, J. H., & Rajagopalan, N. (1991). Management incompatibility and postacquisition autonomy: Effects on acquisition performance. In P. Shrivastava, A. Huff & J. Dutton (Eds.), Advances in strategic management (Vol. 7). Greenwich, CT: JAI Press. David, K., & Singh, H. (1993). Acquisition regimes: Managing cultural risk and relative deprivation in corporate acquisitions. International Review of Strategic Management, 4, 224–276. Deal, T. E., & Kennedy, A. A. (1982). Corporate cultures: The rites and rituals of corporate life. Reading, MA: Addison-Wesley. Doney, P. M., Cannon, J. P., & Mullen, M. R. (1998). Understanding the influence of national culture on the development of trust. Academy of Management Review, 23, 601–620. Duijker, H. C. J., & Frijda, N. H. (1960). National character and national stereotypes. Amsterdam, The Netherlands: North-Holland. Elsass, P. M., & Veiga, J. F. (1994). Acculturation in acquired organizations: A force-field perspective. Human Relations, 47(4), 431–453. Engwall, L. (1984). Uppsala contributions to business research. Uppsala, Sweden: Acta Universitatis Upsaliensis. Frederick, W. R., & De la Fuente, A. R. (1994). A Spanish acquisition in Eastern Germany: Culture shock. The Journal of Management Development, 13(2), 42–49. Gertsen, M. C., Soderberg, A.-M., & Torp, J. E. (1998). Different approaches to understanding of culture in mergers and acquisitions. In M. C. Gertsen, A.-M. Soderberg & J. E. Torp (Eds.), Cultural dimensions of international mergers and acquisitions (pp. 17–38). Berlin, Germany: deGruyter. Gomes, E., Weber, Y., Brown, C., & Tarba, S. (2011). Managing mergers, acquisitions and strategic alliances: Understanding the process. Basingstoke, UK: Palgrave McMillan. Guptara, P. (1992). The role of culture audits and culture portraits in making acquisitions work. European Business Review, 92(2), 1–5. Hambrick, D. C., & Cannella, B. (1993). Relative standing: A framework for understanding departures of acquired executives. Academy of Management Journal, 36(4), 733–762. Harrison, R. (1987). Organisation culture and the quality of service: A strategy for releasing love in the workplace. London: Association for Management Education and Development. Haspeslagh, P., & Jemison, D. B. (1991). Managing acquisitions and creating value through corporate renewal. New York: Free Press. Hofstede, G. (1997). Organization culture. In A. Sorge & M. Warner (Eds.), The IEBM handbook of organizational behavior (pp. 193–210). London: International Thomson Business Press. Hofstede, G. (1980). Culture’s consequences: International differences in work-related values. Beverly Hills, CA: Sage Publications. Hofstede, G. (2001). Culture’s consequences: Comparing values, behaviors, institutions, and organizations across nations (2nd ed.). Thousand Oaks, CA: Sage.

Datta,

168

DANIEL ROTTIG ET AL.

Hofstede, G., & Bond, M. H. (1988). The Confucius connection: From cultural roots to economic growth. Organizational Dynamics, 16(4), 4–21. Hofstede, G., Hofstede, G. J., & Minkov, M. (2010). Cultures and organizations: Software of the mind (3rd ed.). McGraw-Hills. Hofstede, G., & Peterson, M. F. (2000). National culture and organizational culture. In N. Ashkanasy, C. Wilderom & M. F. Peterson (Eds.), Handbook of organizational culture and climate (pp. 401–415). Thousand Oaks, CA: Sage. House, R. J., Hanges, P. J., Javidan, M., Dorfman, P. W., & Gupta, V. (2004). Culture, leadership, and organization: The GLOBE study of 62 societies. Thousand Oaks, CA: Sage Publications. Inkeles, A., & Levinson, D. J. (1969). National character: The study of modal personality and sociocultural systems. In G. Lindzey & E. Aronson (Eds.), The handbook of social psychology (Vol. 4). Reading, MA: Addison-Wesley. Jansen, S. A., & Mu¨ller-Stewens, G. (2000). Endet die fu¨nfte Welle auf dem Markt fu¨r Unternehmensu¨bernahmen in einer neuen Rezession? Frankfurter Allgemeine Zeitung, October 4, pp. 49–50. Jemison, D. B., & Sitkin, S. B. (1986). Corporate acquisitions: A process perspective. Academy of Management Review, 11, 145–163. Johanson, J., & Vahlne, J. E. (1977). The internationalization process of the firm: A model of knowledge development and increasing foreign market commitments. Journal of International Business Studies, 8, 23–32. Kanter, R. M., & Corn, R. I. (1994). Do cultural differences make a business difference? Contextual factors affecting cross-cultural relationship success. Journal of Management Development, 13(2), 5–23. Kaplan, N. (2001). Assimilate, integrate, or leave alone? The Journal of Business Strategy, 22(1), 23–26. King, D. R., Dalton, D. R., Daily, C. M., & Covin, J. G. (2004). Meta-analyses of postacquisition performance: Indications of unidentified moderators. Strategic Management Journal, 25, 187–200. Kleppesto, S. (1998). A quest for social identity – The pragmatics of communication in mergers and acquisitions. In M. C. Gertsen, A.-M. Soderberg & J. E. Torp (Eds.), Cultural dimensions of international mergers and acquisitions (pp. 147–168). Berlin, Germany: deGruyter. Kluckhohn, F. R., & Strodtbeck, F. L. (1961). Variations in value orientations. Evanston, IL: Row, Peterson. van Knippenberg, D., van Knippenberg, B., Monden, L., & de Lima, F. (2002). Organizational identification after a merger: A social identity perspective. British Journal of Social Psychology, 41, 233–252. Kogut, B., & Singh, H. (1988). The effect of national culture on the choice of entry mode. Journal of International Business Studies, 19(3), 411–432. KPMG. (1999). Mergers and acquisitions: Global research report 1999. London: KPMG. Kroeber, F. R., & Kluckhohn, F. L. (1952). Culture: A critical review of concepts and definitions (pp. 1–223). Papers of the peabody museum of american archeology and ethnology (Vol. 47). Cambridge, MA: Harvard University Press. Krug, J. A., & Hegarty, W. H. (1997). Postacquisition turnover among U.S. top management teams: An analysis of the effects of foreign vs. domestic acquisitions of U.S. targets. Strategic Management Journal, 18(8), 667–675.

The Impact of Culture on Mergers and Acquisitions

169

Krug, J. A., & Nigh, G. (1998). Top management departures in cross-border acquisitions: Governance issues in an international context. Journal of International Management, 4(4), 267–287. Krug, J. A., & Nigh, D. (2001). Executive perceptions in foreign and domestic acquisitions: An analysis of foreign ownership and its effect on executive fate. Journal of World Business, 36(1), 85–105. Larsson, R., & Lubatkin, M. (2001). Achieving acculturation in mergers and acquisitions: An international case survey. Human Relations, 54(12), 1573–1607. Lees, S. (2003). Global acquisitions: Strategic integration and the human factor. New York: Palgrave MacMillan. Lenartowicz, T., & Roth, K. (2001). Does subculture within a country matter? A cross-cultural study of motivational domains and business performance in Brazil. Journal of International Business Studies, 32, 305–325. Love, P., & Gibson, S. (1999). Hidden score points that can thwart a culture match. Mergers and Acquisitions, 33(6), 51–56. Lubatkin, M., Calori, R., Very, P., & Veiga, J. F. (1998). Managing mergers across borders: A two-nation exploration of a national administrative heritage. Organization Science, 9(6), 670–684. Lubatkin, M., Schweiger, D. M., & Weber, Y. (1999). Top management turnover in related M&As: An additional test of the theory of relative standing. Journal of Management, 25(1), 55–73. Luostarinen, R. (1980). Internationalization of the Firm. Helsinki: The Helsinki School of Economics. Malekzadeh, A. R., & Nahavandi, A. (1990). Making mergers work by managing cultures. The Journal of Business Strategy, 11(3), 55–58. Markides, C. C., & Ittner, C. D. (1994). Shareholder benefits from corporate international diversification: Evidence from U.S. international acquisitions. Journal of International Business Studies, 25(2), 343–366. Marks, M. L. (1999). Adding cultural fit to your diligence checklist. Mergers and Acquisitions, 34(3), 14–19. Mayo, A., & Hadaway, T. (1994). Cultural adaptation – The ICL-Nokia-Data merger 1991–1992. The Journal of Management Development, 13(2), 59–72. Monk, R. (2000). Culture clash: Takeover of carmaker changes culture. Organization Development Journal, 18(1), 75–82. Morosini, P., & Singh, H. (1994). Post-cross-border acquisitions: Implementing ‘national culture compatible’ strategies to improve performance. European Management Journal, 12(4), 390–400. Morosini, P., Shane, S., & Singh, H. (1998). National cultural distance and cross-border acquisition performance. Journal of International Business Studies, 29(1), 137–158. Nahavandi, A., & Malekzadeh, A. R. (1988). Acculturation in mergers and acquisitions. Academy of Management Review, 13(1), 79–90. Olie, R. (1990). Culture and integration problems in international mergers and acquisitions. European Management Journal, 8, 206–215. Olie, R. (1994). Shades of culture and institutions in international mergers. Organization Studies, 15(3), 381–405. Ozawa, T. (1979). International investment and industrial structure: New theoretical implications from the Japanese experience. Oxford Economic Papers, 31(1), 72–92.

170

Pablo,

DANIEL ROTTIG ET AL.

A. L. (1994). Determinants of acquisition integration level: A decision-making perspective. Academy of Management Journal, 37(4), 803–836. Peters, T. J., & Waterman, R. H., Jr. (1982). In search of excellence: Lessons from America’s best-run companies. New York: Harper & Row. Peterson, M. F. (2003). Review of culture’s consequences. Administrative Science Quarterly, 48, 127–132. Reus, T. H., & Lamont, B. T. (2009). The double-edged sword of cultural distance in international acquisitions. Journal of International Business Studies, 40, 1298–1316. Ronen, S., & Shenkar, O. (1985). Clustering countries on attitudinal dimensions: A review and synthesis. Academy of Management Review, 10(3), 435–454. Ross, D. N. (1999). Culture as a context for multinational business: A framework for assessing the strategy-culture ‘fit’. Multinational Business Review, 7(1), 13–19. Rottig, D. (2007). Successfully managing international mergers and acquisitions: A descriptive framework. International Business: Research Teaching and Practice, 1(1), 103–126. Rottig, D. (2009). Research on international acquisition performance: A critical evaluation and new directions. In G. T. Solomon (Ed.), Best Paper Proceedings of the Sixty-Ninth Annual Meeting of the Academy of Management, pp. 1–6. Rottig, D. (2011). The role of social capital in cross-cultural M&As: A multinational corporation perspective. European Journal of International Management, 5(4), 413–431. Rottig, D. (2013). A marriage metaphor model for sociocultural integration in international mergers and acquisitions. Thunderbird International Business Review, 55(4), 439–451. Rottig, D., & Reus, T. H. (2009). Institutional distance, organizational legitimacy, and the performance of foreign acquisitions in the United States. In G. T. Solomon (Ed.), Best paper proceedings of the sixty-ninth annual meeting of the academy of management. Sales, A. L., & Mirvis, P. H. (1984). When cultures collide: Issues of acquisition. In New futures. In J. R. R. Kimberley & R. E. Quinn (Eds.), Managing Organizational Transitions (pp. 107–133). Homewood, IL: Irwin. Sarala, R. M., & Vaara, E. (2010). Cultural differences, convergence, and crossvergence as explanations of knowledge transfer in international acquisitions. Journal of International Business Studies, 41, 365–1390. Sathe, V. (1985). Culture and related corporate realities. Homewood, IL: Irwin. Schraeder, M., & Self, D. R. (2003). Enhancing the success of mergers and acquisitions: An organizational culture perspective. Management Decision, 41(5/6), 511–522. Schwartz, S. H. (1994). Are there universal aspects in the structure and content of human values? Journal of Social Issues, 50(4), 19–45. Schweiger, D. M. (1993). Commentary: An investigation of national and organizational Culture influences in recent European mergers, P. Very, R. Calori, and M. Lubatkin (Eds.). In P. Shrivastava, A. Huff & J. Dutton (Eds.), Advances in strategic management, Vol. 9, pp. 347–351. London. Shelton, C. D., Hall, R. F., & Darling, J. R. (2003). When cultures collide: The challenge of global integration. European Business Review, 15(5), 312–324. Shenkar, O. (2001). Cultural distance revisited: Towards a more rigorous conceptualization and measurement of cultural differences. Journal of International Business Studies, 32(3), 519–535. Shenkar, O., Luo, Y., & Yeheskel, O. (2008). From ‘distance’ to ‘friction’: Substituting metaphors and redirecting intercultural research. Academy of Management Review, 33(4), 905–923.

The Impact of Culture on Mergers and Acquisitions

171

Shrivastava, P. (1986). Postmerger integration. Journal of Business Strategy, 7(1), 65–76. Siehl, C., Ledford, G., Silverman, R., & Fay, P. (1988). Preventing culture clashes from botching a merger. Mergers and Acquisitions, 22(4), 51–57. Slangen, A. H. L. (2006). National cultural distance and initial foreign acquisition performance: The moderating effect of integration. Journal of World Business, 41, 161–170. Smith, K. W. (2000). A brand-new culture for the merged firm. Mergers and Acquisitions, 35(6), 45. Stahl, G. K., & Voigt, A. (2008). Do cultural differences matter in mergers and acquisitions? A tentative model and examination. Organization Science, 19, 160–176. Tetenbaum, T. J. (1999). Beating the odds of merger & acquisition failure: seven key practices that improve the chance for expected integration and synergies. Organizational Dynamics, 28(2), 22–36. Triandis, H. C. (1982). Review of culture’s consequences: International differences in workrelated values. Human Organization, 41, 86–90. Triandis, H. C. (1995). Individualism and collectivism. Boulder, CO: Westview Press. Trompenaars, F. (1994). Riding the waves of culture: Understanding diversity in global business. Burr Ridge, IL: Irwin Professional Publishing. Tylor, E. B. (1871). Primitive culture: Researches into the development of mythology, philosophy, religion, language, art, and custom. New York: Holt, Rinehart & Winston. Uhlenbruck, K. (2004). Developing acquired foreign subsidiaries: the experience of MNEs in transition economies. Journal of International Business Studies, 35, 109–123. Vaara, E. (2000). Constructions of cultural differences in post-merger change processes: A sensemaking perspective on Finnish-Swedish cases. Management, 3(3), 81–110. Vaara, E. (2002). On the discursive construction of success/failure in narratives of post-merger integration. Organization Studies, 23(2), 211–248. Vaara, E., Sarala, R., Stahl, G., & Bjo¨rkman, I. (2012). The impact of national and organizational cultural differences on social conflict and knowledge transfer in international acquisitions. Journal of Management Studies, 49(1), 1–27. Vaara, E., Tienari, J., & Sa¨ntti, R. (2003). The international match: Metaphors as vehicles of social identity-building in cross-border mergers. Human Relations, 56(4), 419–451. Vasilaki, A. (2011). Culture distance and cross-border acquisition performance: The moderating effect of transformational leadership. European Journal of International Management, 5(4), 394–412. Veiga, J., Lubatkin, M., Calori, R., & Very, P. (2000). Measuring organizational culture clashes: A two-nation post-hoc analysis of a cultural compatibility index. Human Relations, 53(4), 539–557. Very, P., Calori, R., & Lubatkin, M. (1993). An investigation of national and organizational cultural influences on recent European mergers. In P. Shrivastava, A. Huff & J. Dutton (Eds.), Advances in Strategic Management (Vol. 9, pp. 323–346). London: JAI Press. Very, P., Lubatkin, M., & Calori, R. (1996). A cross-national assessment of acculturative stress in recent European mergers. International Studies of Management & Organization, 26(1), 59–87. Very, P., Lubatkin, M., Calori, R., & Veiga, J. (1997). Relative standing and the performance of recently acquired European firms. Strategic Management Journal, 18(8), 593–614. Very, P., & Schweiger, D. M. (2001). The acquisition process as a learning process: Evidence from a study of critical problems and solutions in domestic and cross-border Deals. Journal of World Business, 36(1), 11–31.

172

DANIEL ROTTIG ET AL.

Weber, R. A., & Camerer, C. F. (2003). Cultural conflict and merger failure: An experimental approach. Management Science, 49(4), 400–415.

Weber, Y. (1996). Corporate cultural fit and performance in mergers and acquisitions. Human Relations, 49(9), 1181–1202. Weber, Y. (1988). The effects of top management culture clash on the implementation of mergers and acquisitions. Dissertation, University of South Carolina. Weber, Y. (2000). Measuring cultural fit in mergers and acquisitions. In N. M. Ashkanasy, C. P. M. Wilderom & M. F. Peterson (Eds.), Handbook of organizational culture and climate. Thousand Oaks, CA: Sage. Weber, Y., & Schweiger, D. M. (1992). Top management culture conflict in mergers and acquisitions: A lesson from anthropology. The International Journal of Conflict Management, 3, 1–17. Weber, Y., Shenkar, O., & Raveh, A. (1996). National and corporate cultural fit in mergers/ acquisitions: An exploratory study. Management Science, 42(8), 1215–1227. Weber, Y., & Tarba, S. Y. (2011). Exploring culture clash in related merger: Post-merger integration in the hightech industry. International Journal of Organizational Analysis, 19(3), 202–221. Weber, Y., Tarba, S. Y., & Rozen Bachar, Z. (2011). Mergers and acquisitions performance paradox: The mediating role of integration approach. European Journal of International Management, 5(4), 373–393. Weber, Y., Tarba, S. Y., & Reichel, A. (2011). A model of the influence of culture on integration approaches and international mergers and acquisitions performance. International Studies of Management and Organization, 41(3), 10–28. Weber, Y., Tarba, S. Y., & Rozen Bachar, Z. (2012). The effects of culture clash on international mergers in the high-tech industry. World Review of Entrepreneurship, Management and Sustainable Development, 8(1), 103–118. Weick, K. E. (1995). Sensemaking in organizations. Thousand Oaks, CA: Sage. Yoshino, M. Y. (1976). Japan’s Multinational Enterprises. Cambridge, MS: Harvard University Press. Zaheer, S., Schomaker, M., & Genc, M. (2003). Identity versus culture in mergers of equals. European Management Journal, 21(2), 185–191.

INSIGHTS OF SIGNALING THEORY FOR ACQUISITIONS RESEARCH Cheng-Wei Wu, Jeffrey J. Reuer and Roberto Ragozzino ABSTRACT This paper examines the use of signaling theory in the M&A context. We review some of the most important developments in applications and extensions of this theory to the realm of M&A, indicating how this theory has been used to explain many M&A decisions and outcomes and has offered fresh perspectives in the mature literature on acquisitions. For example, we show how signaling theory provides a new view of the determinants of acquisition premiums, and it can contribute to an improved understanding of firms’ search for acquisition opportunities as well as target selection. We also provide a critique of existing research to identify gaps in understanding on the roles played by signals. For instance, we discuss how signals can create contracting problems during M&A negotiations, how the value of signals might vary across deals, and how bidder heterogeneity and bidders’ own signals matter for certain transactions. Finally, in addition to taking stock of this stream of research, we identify some of the most important areas that deserve research attention. Signaling theory can contribute to an improved understanding of acquisition performance outcomes, and signals need to be investigated along with other solutions to enhance M&A deal making

Advances in Mergers and Acquisitions, Volume 12, 173–191 Copyright r 2013 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1479-361X/doi:10.1108/S1479-361X(2013)0000012010

173

174

CHENG-WEI WU ET AL.

and execution. We identify new research methods that would help to advance signaling theory in the acquisitions literature. Keywords: Mergers and acquisitions; information economics; signals; valuation; deal structuring; negotiations

INTRODUCTION The foundations of an efficient exchange lie with the availability of equal information by the parties involved in the trade. In this scenario, the price of the item exchanged fully reflects its value, and there is no room for misrepresentation. Unfortunately, this condition is rarely met in practice, as sellers often hold better information than buyers, which causes the latter to be exposed to the economic problem of adverse selection, or overpayment risk. In his seminal paper, Akerlof (1970) provides an illustration of this problem, using the market for used cars as the backdrop for his discussion. In his stylized model, there are two types of cars in the market: good quality cars and ‘‘lemons.’’ Buyers cannot tell the two apart and are aware of this, whereas sellers of lemons hold a natural incentive to misrepresent the value of their cars in order to maximize their proceeds from the sale. Thus, absent remedies, buyers must decide whether to bear the risk of overpayment for a car, or otherwise walk away from the transaction, in which case the market does not clear. It is important to emphasize that the problem of adverse selection just described negatively impacts sellers as well, as offer price discounting by buyers occurs (e.g., Milgrom & Stokey, 1982). The relevance and implications of information economics theory have been discussed in a host of market settings (e.g., insurance and bank lending), and its extensions to the M&A context have gained ground in the economics, finance, and strategy literatures. Acquisitions are a widely studied phenomenon, as they represent an important means for firms to gain access to external resources and capabilities and to deploy their own assets and exploit growth opportunities. However, there are significant exchange hazards and inefficiencies involved with this type of corporate expansion. For example, early in the M&A cycle, buyers allocate significant time and effort in carrying out due diligence, but the success of due diligence depends upon the severity of information asymmetry in a deal. For instance, when a target’s value depends heavily on intangible assets (e.g., human capital, brands, and proprietary rights) or when a target is privately held, it may be

Insights of Signaling Theory for Acquisitions Research

175

challenging for buyers to arrive at an accurate valuation of the target. Paralleling the used-car example above, under such circumstances, buyers will face the risk of adverse selection and naturally assume that the seller will inflate its claims about the business’ capabilities and prospects, while hiding information about existing organizational problems or other negative aspects of its resources in various functional areas (Balakrishnan & Koza, 1993). Thus, sellers face a credibility problem in revealing information about their value, even if they are committed to be forthcoming when representing their assets to prospective buyers (Ravenscraft & Scherer, 1987). This suggests that efficient M&A transactions are often not feasible due to asymmetric information between buyers and sellers. The work of Spence (1974) has added additional insights to the information asymmetry problem discussed by Akerlof. More specifically, Spence used the market for human capital as the backdrop of his model and reasoned that employers cannot differentiate more productive recruits from less productive ones, since productivity can be unobservable before an employee is finally hired. While high-quality prospective employees want to reveal their future productivity to garner better wages, their claims will be discounted by employers facing asymmetric information. However, Spence argues that education can function as a signal of an employee’s productivity, to the extent that obtaining an education (1) is costly, with more productive recruits facing a lower cost than less productive ones, and (2) is positively related to an individual’s unobservable productive potential. Therefore, more productive recruits can signal their value to employers by earning an education and thereby separating themselves from their counterparts. In turn, this allows them to obtain higher wages despite the problem of asymmetric information, while less productive individuals cannot offer the same signal to prospective employers. Applications of signaling theory have expanded considerably in the management literature in recent years, and this literature has examined a wide range of potential signals in different market contexts, such as characteristics of corporate boards, top management teams, and competitive actions and announcements (e.g., Certo, 2003; Cohen & Dean, 2005; Heil & Robertson, 1991). In M&A markets, the effectiveness of signals as vehicles to reduce adverse selection has also attracted attention in recent years. For instance, signals can reduce the costs borne by a buyer while searching for exchange partners and assessing their value (e.g., Pollock & Gulati, 2007; Ragozzino & Reuer, 2007), as sellers with signals are more visible in the market and present less valuation uncertainty. In addition, signals can enhance seller gains by reducing offer price discounting that would arise from asymmetric

176

CHENG-WEI WU ET AL.

information between acquirers and targets (e.g., Reuer, Tong, & Wu, 2012). Thus, the presence of signals prevents worthwhile acquisitions from falling through in the M&A market, even when information asymmetries exist. A growing number of studies have used signaling theory as an ancillary approach to understand the various phases of acquisition deal making. This work offers a complementary perspective that adds to other valuable theories that have shed light on how acquisitions unfold. Below we discuss the various stages of M&A from the viewpoint of some of these wellknown theories and then discuss the usefulness of signaling as a complementary theory to help understand various aspects of M&A. Beyond reviewing some of the research in this area to provide examples of contributions, we also intend to provide a critique of existing applications of signaling theory to identify gaps in this research stream in order to locate potential research opportunities.

SEARCH AND TARGET SELECTION Although search and target selection occur early in the acquisition process, the success or failure of acquisitions can ultimately rest on these activities, as pursuing the wrong target can lead to subsequent integration difficulties and the eventual failure to realize intended synergies or opportunities in product markets. Since acquisitions represent an effective vehicle to leverage a buyer’s own assets as well as acquire other firms’ resources and capabilities, research has used the resource-based view of the firm in discussing the motivations held by buyers active in M&A. As one example, buyers can engage in M&A to increase their growth and product market performance by leveraging resources or innovations held by the target firm (e.g., Graebner, 2004; Puranam & Srikanth, 2007; Schweizer, 2005). Moreover, Mitchell and Shaver (2003) showed that firms with greater product scope are more likely to be acquirers, and they are more likely to acquire targets with similar product portfolios as such targets are consistent with their integration capabilities. In addition, prior studies suggested that firms seeking acquisitions for greater innovation outcomes should search for targets with complementary resources (e.g., King, Slotegraaf, & Kesner, 2008; Makri, Hitt, & Lane, 2010). Experience with deals can allow firms to learn how to effectively and successfully acquire other firms, which in turn can have implications for buyers to identify targets. Research has shown that firms experienced in a certain type of acquisitions (e.g., product extension, vertical integration, and

Insights of Signaling Theory for Acquisitions Research

177

horizontal M&A) are more likely to pursue deals of the same type (e.g., Amburgey & Miner, 1992). Specifically, the effect of acquisition experience on the buyer’s propensity to conduct acquisitions is enhanced when recent acquisitions are associated with positive performance (e.g., Haleblian, Kim, & Rajagopolan, 2006). Examining acquisition experience from the target firm’s perspective, scholars have demonstrated that targets’ experience in M&As can present benefits to acquirers, as their familiarity with post-acquisition integration could facilitate buyers’ realization of gains from M&A (Porrini, 2004). A large body of work in financial economics has studied M&A as both a remedy to and consequence of agency problems. On the one hand, firms managed by ineffective and overcompensated managers have been found to be more likely to be acquisition targets, as in these cases acquisitions can enhance value by protecting target shareholders from poor management (e.g., Agrawal & Walking, 1994; Jensen, 1986; Jensen & Ruback, 1983). On the other hand, empire building and hubris on the buy side also contribute to acquisitions, which themselves are manifestations of moral hazard and therefore run counter to value-maximizing behavior by agents (e.g., Hayward & Hambrick, 1997; Roll, 1986). When self-seeking motives underlie M&A, buyers are less concerned with performing careful target screening, as they tend to be overconfident in their own ability to extract value from a deal, or they are otherwise careless about the resources they expend to execute these deals. Given that adverse selection is a very pervasive concern in M&A (e.g., Dierickx & Koza, 1991), it is also useful to examine the search and selection stages of a transaction using the perspective of information economics and signaling theory, and this theoretical tradition offers a valuable addition to the resource-based and agency theoretic perspectives outlined above. The basic logic of the theory is that firms sending signals present a lower risk of adverse selection for buyers and they are therefore more likely to be pursued in M&A markets. For example, recent work has investigated newly public firms as potential acquisition targets and it has found that undergoing an IPO, as well as receiving the endorsements of prominent financial intermediaries, can provide valuable signals that increase the likelihood of post-IPO acquisitions (e.g., Brau and Fawcett, 2006; Field and Karpoff, 2002; Pagano et al., 1998; Ragozzino & Reuer, 2007). Given that there exist numerous signaling opportunities in the IPO context, and that firms are heterogeneous with respect to the signals they convey, the findings of this work underscore the usefulness of signaling theory for acquisitions.

178

CHENG-WEI WU ET AL.

Similarly, recent research has considered how the effects of geographic distance might shape target selection (e.g., Grote & Umber, 2006). This work has suggested that the costs associated with due diligence are inversely related to the proximity between buyers and sellers. Specifically, acquirers that are close to targets benefit from an information advantage vis-a-vis more distant buyers, so the former are more likely to end up buying these firms. Interestingly, because signals can reduce the effects of information asymmetry in M&A markets, when targets feature signals that help alleviate adverse selection concerns for geographically remote prospective buyers, the effects of distance described above tend to weaken (e.g., Ragozzino & Reuer, 2011). This recent research suggests that opportunities exist to examine the earliest stages of acquisition deal making, and that signaling theory and more broadly information economics hold the potential to inform search processes and target selection. These topics also take on importance because so much current M&A research takes an acquisition target as given, but the exchange partner and its attributes are endogenous to the search and selection considerations presented above. Information economics, and signaling theory in particular, also has important implications for the structuring of acquisition deals prior to M&A implementation, a point we turn to in the sections below.

DETERMINANTS OF ACQUISITION PREMIUMS If a buyer successfully identifies a viable acquisition target, it then faces the challenges associated with valuation. The size of the premium – defined as the difference between the market value of a target and the price paid for the target – can clearly have a very important effect on the value captured by both parties, so a great deal of work has studied the determinants of M&A premiums. As an illustration, over the years financial economics has associated such items as product-market relatedness and financial considerations like the presence of excess liquidity and debt capacity with the size of the premium paid by acquirers (e.g., Nielsen & Melicher, 1973; Kaufman, 1988; Varaiya, 1987). Other related work on target firm considerations has emphasized the implications of agency costs, such as how management resistance to acquisitions and characteristics of boards might also affect acquisition premiums. For instance, entrenched managers might resist acquisition offers to ensure their job security and personal benefits unless they are compensated for their loss of control. Therefore,

Insights of Signaling Theory for Acquisitions Research

179

managers who have higher bargaining power due to the firm’s ownership structure or board composition can negotiate greater acquisition premiums or certain employment positions in the merged firm (e.g., Bange & Mazzeo, 2004; Comment & Schwert, 1995; Song & Walking, 1993). In addition to agency concerns, management scholars have emphasized the roles of managerial considerations and organizational learning as determinants of premium. For example, managers who are overconfident in their abilities to generate returns or are keen to boost their growth through acquisitions are more likely to pay higher acquisition premiums (e.g., Hayward & Hambrick, 1997; Kim, Haleblian, & Finkelstein, 2011). As a second example, previous research suggests that acquirers’ network ties with other organizations (e.g., via interlocking directorates and acquisition advisors) and acquirers’ learning from such organizations’ experiences influence their decisions on premiums (e.g., Beckman & Haunschild, 2002; Haunschild, 1994). Notably, Haleblian et al. (2009) observe that management scholars have contributed unique insights into how acquirer-side considerations affect acquisition premiums, but this research has devoted less attention to the role of target firms. Turning to the potential contributions of signaling theory, this theory has empirical implications for the bid premiums that sellers can receive. Under conditions of asymmetric information, buyers will tend to discount their offer prices, so high-quality targets will gain less from acquisitions than they would if no asymmetric information existed. To help address this problem, signals can add credibility to the target’s claims and provide the buyer greater confidence regarding the target’s resources and prospects. Moreover, given the need to plan for the integration of the target resources following an acquisition, signals can also reduce the buyers’ concerns about this crucial aspect of deal making. Since signals are available to other potential bidders and reduce their risk of adverse selection, this can also enhance the reservation price of the seller during negotiations. It is therefore no surprise that when targets are able to send signals – such as affiliations with alliance partners, reputable underwriters, and venture capitalists – they tend to receive higher acquisitions premiums than firms that do not have such affiliations, on average (Reuer, Tong, & Wu, 2012). Signaling theory therefore complements other theories used in management and finance to understand the root determinants of acquisition premiums. Management research has tended to focus on the characteristics of acquirers, whereas finance research that has emphasized the role of target firm characteristics has tended to rely on agency theory. Signaling theory

180

CHENG-WEI WU ET AL.

therefore represents a valuable target-side perspective on how firms might capture more value when selling their companies to other firms.

GAPS IN CURRENT UNDERSTANDING AND APPLICATIONS OF SIGNALING THEORY IN M&A RESEARCH The previous review of M&A studies presents a number of implications arising from signaling theory with respect to how firms might cope with information asymmetries when conducting acquisitions. Comparisons between signaling theory and other theoretical perspectives also show that M&A research using signaling theory helps further our understanding of particular aspects of deal making such as target selection and deal structuring. While the literature has focused on the positive effects of signals on the feasibility and efficiency of acquisitions, there are still a few important gaps in our current understanding and applications of signaling theory in the M&A context. For example, signaling theory is traditionally developed as a ‘‘one-to-one or transaction specific communication’’ (Connelly, Certo, Ireland, & Reutzel, 2011, p. 44), yet this simplification may overlook the fact that signals are valuable to the focal acquirer as well as other prospective bidders. In addition, even though signals could confer benefits to acquirers as emphasized by previous research, the value of signals may not be persistent over time and it is likely that the effects of signals are contingent upon the informational environment as well as the heterogeneous interpretations of the recipients. It is also noteworthy that most of the literature using signaling theory considers the benefits of signals conveyed by target firms, yet little is known about the efficiency implications of acquirers’ signals in the M&A market. Given that these considerations present certain caveats for studies that incorporate signaling theory into M&A research as well as interesting research opportunities, below we elaborate on these research gaps in greater detail.

Signals and Contracting Problems While most signaling theory applications in M&A, including the studies discussed above, tend to emphasize the positive aspects of signaling in coping with adverse selection and enhancing the efficiency of M&A deals,

Insights of Signaling Theory for Acquisitions Research

181

signals can also have some negative consequences or drawbacks that are rarely appreciated. Here, as an illustration, we describe an interesting contracting problem that is more likely to crop up when signals exist on a target firm. To exploit the intrinsic value of target firms’ assets, acquirers need to expend a lot of time and effort in due diligence, negotiations, and postacquisition planning prior to the completion of acquisitions. Given the specificity of these activities, their costs would be largely sunk if the deal were not to be completed. Thus, acquirers stand to bear substantial costs that they could not recover, should the target decide to pursue better offers from other bidders. In particular, the risk of committing resources in due diligence to no avail is greater for a target that is attractive to other bidders based on the signals it sends. In other words, not only can signals reduce the problem of adverse selection for a specific acquirer, they can also offer the same benefit to other prospective bidders, thereby introducing negative effects for a buyer that already made deal-specific investments in a deal if the target either attempts to hold up the buyer and demand a higher sales price or if the target actually sells to another firm. In order to protect themselves from this predicament, acquirers may be able to negotiate termination payment provisions, which shift the costs of termination to sellers, if the latter decide to pursue other bidders or otherwise terminate the deal (e.g., Bates & Lemmon, 2003; Coates & Subramanian, 2000; Officer, 2003). For example, sellers may be forced to make lump-sum payments to buyers. Alternatively, lockup options may enable buyers to purchase the seller’s stock at a discounted price, gaining an equity position in the firm, if the previously agreed-upon transaction were to fall through. In sum, termination provisions could help reduce acquirers’ concerns of losing a deal and provide an incentive for them to bear the costs required to complete the deal. They also reflect the good faith of sellers to carry out the deal and not seek alternative bidders, or walk away at a later time. Given that acquirers face greater risks of losing deal-specific investments when targets have attractive signals, as we discussed earlier, termination provisions are all the more likely to surface in these scenarios than otherwise. Targets will agree to these termination provisions, thereby cutting off outside options they possess by virtue of their signals, when an acquirer offers a greater bid premium for the target in the first place. The logic above opens signaling theory to a new set of considerations, highlighting the dual role of signals during M&A deal making: while signals are beneficial for acquirers to mitigate their risk of adverse selection, they have similar consequences for other potential bidders and

182

CHENG-WEI WU ET AL.

can increase a target’s outside options. Thus, while existing research has emphasized the positive aspects of signals, taking a broader perspective on their properties reveals that they also introduce contracting problems in M&A markets. Signals can therefore have unexamined downsides and their value might also vary across investment contexts, as we discuss below.

Contingent Value of Signals Little is currently known about the contingent effects of signals based upon the characteristics of sellers or buyers. For instance, signals can be especially useful for investors and potential exchange partners when targets are young, as there is greater uncertainty about their quality (Stuart, Hoang, & Hybels, 1999). In contrast, the same signals (and associated costs) may not yield the same benefits when the firm is more established since the risk of adverse selection tends to diminish as a firm develops a track record. Research has likewise shown that the value of signals varies with respect to external market conditions (Gulati & Higgins, 2003). The notion that signaling theory lends itself to the study of contingent effects has been mentioned in recent work (e.g., Boyd, Haynes, Hitt, Bergh, & Kitchen, 2012), and more research needs to be devoted to the heterogeneity of signals’ benefits rather than looking only at mean effects. Another source of variance around the average value of signals in M&A may come from acquisitions involving the target’s rivals, since this sort of activity can produce information relevant to the identification and appraisal of targets. For example, in April 1998, Elan placed a $700 million bid to acquire Neurex, a privately held biotech company with cutting-edge technology in pain management and acute care. While interesting in its own right, that announcement also revealed opportunities that could help ‘‘investors start hunting for hidden values elsewhere in the industry’’ (Hall, 1998). Specifically, recent work in finance has explored what has been labeled the ‘‘acquisition probability hypothesis,’’ which proposes that M&A announcements involving a firm’s rivals convey information that can cause potential investors to update their perception of a market’s growth opportunities and discern other firms’ prospects. Since information so produced can also mitigate the acquirers’ risk of adverse selection, rivals’ M&A activity enhances the likelihood of a focal firm to be acquired (e.g., Eckbo, 1983; Fee & Thomas, 2004; Song & Walking, 2000). Given that information produced from M&As involving a firm’s rivals could

Insights of Signaling Theory for Acquisitions Research

183

potentially duplicate the effects of signals conveyed by the firm itself, the value of signals in facilitating M&A deals may weaken when buyers can leverage the informational environment to mitigate their concerns of adverse selection. Thus, rivals’ acquisition activity offers an alternative to signals as a vehicle to reduce adverse selection, making the value of signals contingent on the existence of such activity. By joining these two literatures, it is possible to consider how the impact of acquisitions of a firm’s rivals will likely have a greater (lesser) effect when signals on the firm are lacking (present), just as the research on the acquisition probability hypotheses has the potential to enrich signaling theory applications by contextualizing this theory.

Signals and Bidder Heterogeneity The impact of targets’ signals will not only vary across targets, as the foregoing discussion emphasizes, but also across bidders, yet previous research has not attended to this source of heterogeneity, or potential boundary condition on the effects of targets’ signals. While signals offer an effective way of reducing acquirers’ search problems and adverse selection risk, for signals to be useful, it is necessary that an acquirer would notice and act on them (e.g., Pollock & Gulati, 2007). However, because of bounded rationality, search costs, and internal organizational systems, firms can have limited attention to opportunities surrounding them (Ocasio, 1997; Simon, 1947). If firms have not developed information processing capabilities, they may be slow or even passive in their reactions to external stimuli such as signals, which could diminish their pursuit of new growth opportunities. Hence, the consideration of how signals are incorporated into acquirers’ M&A decision making offers an additional interesting way to examine the value of signals and the contingencies shaping their effects. To assess acquirers’ attention to and use of signals, an important consideration is the role of their experience in M&A markets. Experience in a particular business activity enables firms to direct attention to specific areas that allow them to acquire and assess external information more efficiently, which could enhance their abilities to recognize and exploit new growth opportunities (e.g., Bingham, Eisenhardt, & Fur, 2007; Starbuck & Milliken, 1988). Consistent with this reasoning, research has indicated that experience could help firms engage in efficient information search and scan for relevant signals, thereby enhancing firms’ abilities to decode signals and to make quick reactions (Heil & Robertson, 1991). Since bidders carrying

184

CHENG-WEI WU ET AL.

out acquisitions frequently tend to be more aware of the risks and costs associated with M&A transactions, acquisition experience could allow firms to extend their search scope for acquisition targets and to select targets with signals to facilitate the completion of acquisitions. Consequently, acquirers that differ in their experience in the M&A market may notice and act on signals differently, and targets with attractive signals could be more likely to be acquired by experienced bidders.

Signals on the Buy Side The foregoing review of signaling theory in M&A studies has demonstrated how targets’ signals can help acquirers distinguish high-quality targets from lower-quality ones. However, little is known about whether or not signals conveyed by acquirers can have similar effects in facilitating M&A transactions. While the target is the object of the acquisition and therefore signals on its resources and prospects clearly are important, it might also be that signals on an acquirer can both directly and indirectly help to facilitate M&A deals. To begin with, research has indicated that a higher acquisition price is not the only factor that sellers consider when deciding whether to accept an offer (e.g., Graebner & Eisenhardt, 2004). Just as an acquirer may want to prioritize targets that present less valuation uncertainty, a target firm may go forward with a buyer that is more credible and trustworthy (e.g., Graebner, 2009; Graebner & Eisenhardt, 2004). This is particularly the case when the acquirer offers to pay in stock because the acquirer has private information on the value of its own resources and prospects. Moreover, buyers also need to convince external investors to finance their M&A transactions, and firms with signals are more likely to secure the financing for acquisitions on good terms, particularly when information asymmetries exist between the acquirer and its external investors in capital markets. Thus, signals of acquirers can indirectly help them engage in M&A deals. These situations are most likely to exist for younger firms with significant intangibles when they want to leverage such resources in new markets. This presents an interesting tradeoff for their M&A programs, particularly for newly public firms: On the one hand, firms with greater R&D intensity are better able to capture value from pursuing international acquisitions (e.g., Markides & Oyon, 1998; Merck & Yeung, 1992). However, such firms do not raise all the capital they need when going public and experience financial

Insights of Signaling Theory for Acquisitions Research

185

constraints (e.g., Chaddad & Reuer, 2009), making it more difficult to pursue acquisitions. To the extent that signals relax such constraints in financial markets and make capital available to the firm on more attractive terms, the firm will be in a better position to engage in acquisitions based upon the value creation potential of its R&D resources. Under such situations, an acquirer’s signals can be valuable to external capital providers as well as to a target which might be uncertain about the acquirer’s value or its ability to manage acquisitions. Indeed, in the presence of intangible assets, the association of an IPO acquirer with a prominent investment bank and venture capitalist has been reported to be directly linked with higher market reactions to acquisitions (e.g., Arikan & Capron, 2010). As such, in contrast to recent M&A literature emphasizing the role of target signals, there also exist interesting opportunities to investigate the efficiency implications of acquirers’ signals.

FUTURE RESEARCH DIRECTIONS In addition to the above gaps in our current knowledge about signaling theory, there are other broad and fruitful areas we believe deserve scholars’ attention in theory development and empirical examinations of signaling theory in M&A studies. Specifically, in what follows, we discuss the relation between signals and acquisition performance, the effectiveness of signals in the presence of alternative remedies to adverse selection, and new methodologies that could be used to test signaling theory. Our discussions here are not intended to be exhaustive, but to sketch out a few research opportunities that scholars could pursue to explore the broader potential of applying signaling theory in M&A research.

Signals and acquisition performance Acquisition performance is one of the most important issues studied in M&A research. Although M&A has been an important means by which firms expand their business scope, most research suggests that acquisitions, on average, fail to provide value to acquirers (e.g., King, Dalton, Daily, & Coven, 2004). Reasons for acquisition failures can range from imprudent target selection to ineffective post-acquisition management

186

CHENG-WEI WU ET AL.

(e.g., Haspeslagh & Jemison, 1991; Larsson & Finkelstein, 1999). Since these issues are connected with each other, one of the major challenges of conducting acquisitions appears to be how to get things right in the process of deal making. As asymmetric information surfaces during due diligence and negotiations, signals can yield benefits to buyers by mitigating their risk of adverse selection. However, even though signals are widely recognized as an important means in facilitating M&A transactions, little is known about whether buyers acquiring targets with signals can perform better than other buyers that select targets lacking signals. The possibility that signals can be employed to assess the potential synergistic gains and to facilitate the transfer of resources across firms seems to suggest signals allow buyers to realize more value from acquisitions. Yet the ultimate performance of acquisitions depends on the effectiveness of post-acquisition integration, which requires time to be observed. Consequently, to develop a deeper understanding of the effects of signals on the buyer’s acquisition performance, we encourage future research to conduct longitudinal analyses in examining whether signals can actually foster effective integration. It would be valuable to examine how signals affect multiple aspects of M&A performance, including the success of integration processes within different business functions.

Signals and Alternative Remedies Besides signals, there are a number of other ways for firms to reduce adverse selection risk. For example, buyers can transfer the risks associated with asymmetric information to a better-informed target by using stock as a currency for exchange (e.g., Fishman, 1989). Since in such circumstance the sellers’ gains from acquisitions are dependent upon the merged entity’s value, high-quality targets with private information about their future prospects are more likely to accept stock as a method of payment. In a similar spirit, contingent earn-outs allow buyers to make payments to the target contingent upon its ability to reach certain pre-specified performance goals (e.g., Datar, Frankel, & Wolfson, 2001). With such a deal structure, the buyer’s downside losses are limited, as no further payments are made to the target if the acquisition performance turns out to be poor, just as the target participates in upside gains. Another remedy to the adverse selection problem is for buyers to use another governance structure rather than carrying out acquisitions immediately. Specifically, firms can find alliances

Insights of Signaling Theory for Acquisitions Research

187

attractive to address exchange hazards involved in acquisitions, because more information on the value of the target firm would be available during the process of cooperation, and firms can limit sunk investments (e.g., Balakrishnan & Koza, 1993). Given that all of these remedies enable firms to cope with the risk of adverse selection, one interesting question worth further consideration is whether they substitute or complement the effect of signals in reducing the inefficiencies in M&A markets. For example, Reuer and Ragozzino (2012) suggest that firms are more likely to proceed with acquisitions, versus alliances, when the prospective targets are associated with valuable signals, implying that signals and governance structure choices may work as substitutes in addressing failures in M&A markets.

New Research Designs The vast majority of acquisition research has examined signaling effects in M&A markets by relying on secondary data. Considerable opportunities therefore exist for scholars to examine how signals are actually incorporated into M&A decision making via other research designs. For instance, experimental techniques are particularly valuable in investigating decision making during target selection. In addition, survey methods and qualitative research can help directly measure the information costs borne by firms and observe the underlying processes carried out by firms (e.g., due diligence, negotiations, and integration planning). More fine-grained, primary data could be useful to advance our understanding of the causal mechanisms discussed earlier. It would also be valuable to obtain information on the heterogeneity of buyers’ attention and reaction to signals as well as gather information on the value of outside options that signals provide to targets. Such information could provide important insights into the details of how managers select acquisition targets and how much value the parties attach to different signals they possess. Future research that goes beyond the effect of signals on target selection and valuation and examines the relationship between signals and the success of post-acquisition integration processes would also be valuable by adopting research methods providing primary data on post-merger management. Given the recent interest and progress in signaling theory in the M&A domain, we believe that research along the lines we have noted will be important in developing this perspective in the literature and, in so doing, enriching the set of theories used to explain the M&A phenomenon.

188

CHENG-WEI WU ET AL.

REFERENCES Agrawal, A., & Walking, R. A. (1994). Executive careers and compensation surrounding takeover bids. Journal of Finance, 49(3), 985–1014. Akerlof, G. A. (1970). The market for ‘‘lemons’’: Quality uncertainty and the market mechanism. Quarterly Journal of Economics, 84(3), 488–500. Amburgey, T. L., & Miner, A. S. (1992). Strategic momentum: The effects of repetitive, positional, and contextual momentum on merger activity. Strategic Management Journal, 13(5), 335–348. Arikan, A. M., & Capron, L. (2010). Do newly public acquirers benefit or suffer from their preIPO affiliations with underwriters and VCs? Strategic Management Journal, 31(12), 1257–1289. Balakrishnan, S., & Koza, M. P. (1993). Information asymmetry, adverse selection and joint-ventures: Theory and evidence. Journal of Economic Behavior & Organization, 20(1), 99–117. Bange, M. M., & Mazzeo, M. A. (2004). Board composition, board effectiveness, and the observed form of takeover bids. Review of Financial Studies, 17(4), 1185–1215. Bates, T. W., & Lemmon, M. L. (2003). Breaking up is hard to do? An analysis of termination fee provisions and merger outcomes. Journal of Financial Economics, 69(3), 469–504. Beckman, C. M., & Haunschild, P. R. (2002). Network learning: The effects of partners’ heterogeneity of experience on corporate acquisitions. Administrative Science Quarterly, 47(1), 92–124. Bingham, C. B., Eisenhardt, K. M., & Fur, N. R. (2007). What makes a process a capability? Heuristics, strategy, and effective capture of opportunities. Strategic Entrepreneurship Journal, 1(1-2), 27–47. Boyd, B. K., Haynes, K. T., Hitt, M. A., Bergh, D. D., & Kitchen, D. J. (2012). Contingency hypotheses in strategic management research use, disuse, or misuse? Journal of Management, 38(1), 278–313. Brau, J. C., & Fawcett, S. E. (2006). Initial public offerings: An analysis of theory and practice. Journal of Finance, 61(1), 399–436. Certo, S. T. (2003). Influencing initial public offering investors with prestige: Signaling with board structures. Academy of Management Review, 28(3), 432–446. Chaddad, F. R., & Reuer, J. J. (2009). Investment dynamics and financial constraints in IPO firms. Strategic Entrepreneurship Journal, 3(1), 29–45. Coates, J. C., IV., & Subramanian, G. (2000). A buy-side model of M&A lockups: Theory and evidence. Stanford Law Review, 53, 307–396. Cohen, B. D., & Dean, T. J. (2005). Information asymmetry and investor valuation of IPOs: Top management team legitimacy as a capital market signal. Strategic Management Journal, 26(7), 683–690. Comment, R., & Schwert, G. W. (1995). Poison or placebo? Evidence on the deterrence and wealth effects of modern antitakeover measures. Journal of Financial Economics, 39(1), 3–43. Connelly, B. L., Certo, S. T., Ireland, R. D., & Reutzel, C. R. (2011). Signaling theory: A review and assessment. Journal of Management, 37(1), 39–67. Datar, S., Frankel, R., & Wolfson, M. (2001). Earnouts: The effects of adverse selection and agency costs on acquisition techniques. Journal of Law, Economics, and Organization, 17(1), 201–238.

Insights of Signaling Theory for Acquisitions Research

189

Dierickx, I., & Koza, M. (1991). Information asymmetries: How not to ‘buy a lemon’ in negotiating mergers and acquisitions. European Management Journal, 9(3), 229–234. Eckbo, B. E. (1983). Horizontal mergers, collusion, and stockholder wealth. Journal of Financial Economics, 11(1), 241–273. Fee, C. E., & Thomas, S. (2004). Sources of gains in horizontal mergers: Evidence from customer, supplier, and rival firms. Journal of Financial Economics, 74(3), 423–460. Field, L. C., & Karpoff, J. M. (2002). Takeover defenses of IPO firms. Journal of Finance, 57(5), 1857–1889. Fishman, M. J. (1989). Preemptive bidding and the role of the medium of exchange in acquisitions. Journal of Finance, 44(1), 41–57. Graebner, M. E. (2004). Momentum and serendipity: How acquired leaders create value in the integration of technology firms. Strategic Management Journal, 25(8-9), 751–777. Graebner, M. E. (2009). Caveat Venditor: Trust asymmetries in acquisitions of entrepreneurial firms. Academy of Management Journal, 52(3), 435–472. Graebner, M. E., & Eisenhardt, K. M. (2004). The seller’s side of the story: Acquisition as courtship and governance as syndicate in entrepreneurial firms. Administrative Science Quarterly, 49(3), 366–403. Grote, M. H., & Umber, M. P. (2006). Home biased? A spatial analysis of the domestic merging behavior of US firms. Unpublished working paper. Gulati, R., & Higgins, M. C. (2003). Which ties matter when? The contingent effects of interorganizational partnerships on IPO success. Strategic Management Journal, 24(2), 127–144. Haleblian, J., Devers, C. E., McNamara, G., Carpenter, M. A., & Davison, R. B. (2009). Taking stock of what we know about mergers and acquisitions: A review and research agenda. Journal of Management, 35(3), 469–502. Haleblian, J. J., Kim, J. Y. J., & Rajagopolan, N. (2006). The influence of acquisition experience and performance on acquisition behavior: Evidence from the U.S. commercial banking industry. Academy of Management Journal, 49(2), 357–370. Hall, C. T. (1998). Ireland’s Elan Buys Neurex/Menlo Park biotech firm’s $700 million deal, San Francisco Chronicle: April 30: D-31. Haspeslagh, P., & Jemison, D. E. (1991). Managing Acquisitions: Creating Value for Corporate Renewal. New York: The Free Press. Haunschild, P. R. (1994). How much is that company worth? Interorganizational relationships, uncertainty, and acquisition premiums. Administrative Science Quarterly, 39(3), 391–411. Hayward, M. L. A., & Hambrick, D. C. (1997). Explaining the premiums paid for large acquisitions: Evidence of CEO hubris. Administrative Science Quarterly, 42(1), 103–127. Heil, O., & Robertson, T. S. (1991). Toward a theory of competitive market signaling: A research agenda. Strategic Management Journal, 12(6), 403–418. Jensen, M. C. (1986). Agency costs of free cash flow: Corporate finance and takeovers. American Economic Review, 76(2), 323–329. Jensen, M. C., & Ruback, R. S. (1983). The market for corporate control: The scientific evidence. Journal of Financial Economics, 11(1), 5–50. Kaufman, D. J. (1988). Factors affecting the magnitude of premiums paid to target-firm shareholders in corporate acquisitions. Financial Review, 23(4), 465–482. Kim, J. Y. J., Haleblian, J. J., & Finkelstein, S. (2011). When firms are desperate to grow via acquisition: The effect of growth patterns and acquisition experience on acquisition premiums. Administrative Science Quarterly, 56(1), 26–60.

190

CHENG-WEI WU ET AL.

King, D. R., Dalton, D. R., Daily, C. M., & Coven, J. G. (2004). Meta-analyses of postacquisition performance: Indications of unidentified moderators. Strategic Management Journal, 25(2), 187–200. King, D. R., Slotegraaf, R. J., & Kesner, I. (2008). Performance implications of firm resource interactions in the acquisition of R&D-intensive firms. Organization Science, 19(2), 327–340. Larsson, R., & Finkelstein, S. (1999). Integrating strategic, organizational, and human resource perspectives on mergers and acquisitions: A case survey of synergy realization. Organization Science, 10(1), 1–26. Makri, M., Hitt, M. A., & Lane, P. J. (2010). Complementary technologies, knowledge relatedness, and invention outcomes in high technology mergers and acquisitions. Strategic Management Journal, 31(6), 602–628. Markides, C., & Oyon, D. (1998). International acquisitions: Do they create value for shareholders? European Management Journal, 16(2), 125–135. Merck, R., & Yeung, B. (1992). Internalization: An event study test. Journal of International Economics, 33(1), 41–56. Milgrom, P., & Stokey, N. (1982). Information, trade and common knowledge. Journal of Economic Theory, 26(1), 17–27. Mitchell, W., & Shaver, J. M. (2003). Who buys what? How integration capability affects acquisition incidence and target choice. Strategic Organization, 1(2), 171–201. Nielsen, J. F., & Melicher, R. W. (1973). A financial analysis of acquisition and merger premiums. Journal of Financial and Quantitative Analysis, 8(2), 139–148. Ocasio, W. (1997). Towards an attention-based view of the firm. Strategic Management Journal, 18(S1), 187–206. Officer, M. S. (2003). Termination fees in mergers and acquisitions. Journal of Financial Economics, 69(3), 431–467. Pagano, M., Panetta, F., & Zingales, L. (1998). Why do companies go public? An empirical analysis. Journal of Finance, 53(1), 27–64. Pollock, T. G., & Gulati, R. (2007). Standing out from the crowd: The visibility-enhancing effects of IPO-related signals on alliance formation by entrepreneurial firms. Strategic Organization, 5(4), 339–372. Porrini, P. (2004). Can a previous alliance between an acquirer and a target affect acquisition performance? Journal of Management, 30(4), 545–562. Puranam, P., & Srikanth, K. (2007). What they know vs. what they do: How acquirers leverage technology acquisitions. Strategic Management Journal, 28(8), 805–825. Ragozzino, R., & Reuer, J. J. (2007). Initial public offerings and the acquisition of entrepreneurial firms. Strategic Organization, 5(2), 155–176. Ragozzino, R., & Reuer, J. J. (2011). Geographic distance and corporate acquisitions: Signals from IPO firms. Strategic Management Journal, 32(8), 876–894. Ravenscraft, D. J., & Scherer, F. M. (1987). Mergers, sell-offs, and economic efficiency. Washington, DC: Brookings Institution. Reuer, J. J., & Ragozzino, R. (2012). The choice between joint ventures and acquisitions: Insights from signaling theory. Organization Science, 23(4), 1175–1190. Reuer, J. J., Tong, T. W., & Wu, C. W. (2012). A signaling theory of acquisition premiums: Evidence from IPO targets. Academy of Management Journal, 55(3), 667–683. Roll, R. (1986). The hubris hypothesis of corporate takeovers. Journal of Business, 59(2), 197–216.

Insights of Signaling Theory for Acquisitions Research

191

Schweizer, L. (2005). Organizational integration of acquired biotechnology companies into pharmaceutical companies: The need for a hybrid approach. Academy of Management Journal, 48(6), 1051–1074. Simon, H. A. (1947). Administrative behavior. New York, NY: The Free Press. Song, M. H., & Walking, R. A. (1993). The impact of managerial ownership on acquisition attempts and target shareholder wealth. Journal of Financial and Quantitative Analysis, 28(4), 439–457. Song, M. H., & Walking, R. A. (2000). Abnormal returns to rivals of acquisition targets: A test of the ‘acquisition probability hypothesis’. Journal of Financial Economics, 55(2), 143–171. Spence, A. M. (1974). Market signaling: Informational transfer in hiring and related screening processes. Cambridge, MA: Harvard University Press. Starbuck, W. H., & Milliken, F. J. (1988). Executives’ perceptual filters: What they notice and how they make sense. In D. Hambrick (Ed.), The executive effect concepts and methods for studying top managers. Greenwich, CT: JAI Press. Stuart, T. E., Hoang, H., & Hybels, R. C. (1999). Interorganizational endorsements and the performance of entrepreneurial ventures. Administrative Science Quarterly, 44(2), 315–349. Varaiya, N. P. (1987). Determinants of premiums in acquisition transactions. Managerial and Decision Economics, 8(3), 175–184.

MIXED METHODS: A RELEVANT RESEARCH DESIGN TO INVESTIGATE MERGERS AND ACQUISITIONS Audrey Rouzies ABSTRACT For several years, scholars studying mergers and acquisitions (M&A) regret their incapacity to fully capture and understand this complex phenomenon. Several authors have called for multidisciplinary approaches to improve our research. We believe that, instead of focusing on theories and multidisciplinarity, a complementary line of attack could be to put into question the methods used to study M&As. The purpose of this chapter is to show how mixed methods research can be a relevant design to open the black box of M&A and improve our understanding of M&A integration processes. Indeed, a key feature of mixed methods research is its methodological pluralism or eclecticism, which frequently results in superior research compared to mono-method research. In this chapter, we first define mixed methods research; we then review the literature on M&A using mixed methods and finally show the

Advances in Mergers and Acquisitions, Volume 12, 193–211 Copyright r 2013 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1479-361X/doi:10.1108/S1479-361X(2013)0000012011

193

194

AUDREY ROUZIES

pros and cons of this research design to advance our understanding of M&A. Keywords: Mergers and acquisitions; mixed methods; research design; qualitative methods; quantitative methods

INTRODUCTION For more than 20 years, there has been a growing body of research on the factors that influence the success of mergers and acquisitions (hereafter M&A). However, our understanding of M&A is still limited (King, Dalton, Daily, & Covin, 2004). In the M&A literature, since the mid-1990s, there has been a regular call for multidisciplinary approaches that would help opening the black box of M&A integration processes (Larsson & Finkelstein, 1999; Pablo, 1994), but we believe that even though multiple theoretical approaches are necessary to understand M&A, researchers who regret the gaps and paradoxes in the literature could reflect on the methodological design they rely on to analyze M&A. Putting into question the methods used to gather information and to build inferences could be a way to improve the quality of research on M&A. In their research note, Meglio and Risberg (2010) argue that M&A research methods have become standardized and that if scholars want to advance their understanding of M&A, they must rethink how they produce knowledge in M&A field in terms of research design and sources of data (Meglio & Risberg, 2010). In this chapter, we develop Meglio and Risberg’s position and aim to demonstrate that mixed methods can make a contribution toward understanding M&A integration processes and their relationship with performance. Indeed, M&As are multifaceted and complex phenomena (Larsson & Finkelstein, 1999) and M&A researchers need to find ways to approach this complexity in their research design. To date, we observe that M&A scholars rely on either quantitative or qualitative designs (Cartwright, Teerikangas, Rouzies, & Wilson-Evered, 2012). Although well-developed in other research fields, mixed methods remain rare in M&A studies. Qualitative methods are often criticized for being anecdotal and difficult to generalize, while quantitative methods are criticized for their lack of depth and understanding (Jick, 1979). Dynamic relationships in strategy can be captured in the statistically significant findings of large sample studies, but

A Relevant Research Design to Investigate Mergers and Acquisitions

195

these studies lose (in their error term) unexplained variances that could offer richer characterizations of business strategies (Harrigan, 1983). Several authors have proposed mixed methods to overcome the limitations of using these methods individually (Creswell, 1994; Hurmerinta-Peltoma¨ki & Nummela, 2006; Jick, 1979; Parkhe, 1993; Tashakkori & Teddlie, 2003). We believe that the development of mixed methods on M&A research is a path to gain a multidimensional picture of such a complex phenomenon. In the remainder of the chapter, we first define mixed methods, we then review mixed methods in M&A research; in the third section, we present our own research using mixed methods and finally we discuss the pros and cons of this design.

DEFINING MIXED METHODS ‘‘A research methodology is a broad approach to scientific inquiry specifying how research questions should be asked and answered. This includes worldview considerations, general preferences for designs, sampling logic, data collection and analytical strategies, guidelines for making inferences, and the criteria for assessing and improving quality’’ (Teddlie & Tashakkori, 2009, p. 21). Mixed methods research combines qualitative and quantitative data collection and data analysis within a single study (Johnson & Onwuegbuzie, 2004; Tashakkori & Teddlie, 2003). Mixed methods research is a type of research in which a researcher or a team of researchers combine elements of qualitative and quantitative approaches (e.g., use of qualitative and quantitative viewpoints, data collection, analysis, and inference techniques) for the purpose of breadth of understanding or corroboration (Johnson, Onwuegbuzie, & Turner, 2007, p. 123). In social sciences, mixed methods research has emerged as an alternative to the dichotomy of qualitative and quantitative traditions (Teddlie & Tashakkori, 2009, p. 4). Mixed method design has long been adopted in educational research and sociology for instance. In 1983, Harrigan underlined that strategy research needs sophisticated research methodologies because it deals with complex topic and that hybrid methodology is needed (Harrigan, 1983, p. 398). More recently, researchers from disciplines in management have presented the benefits of mixed methods: in international business (Hurmerinta-Peltoma¨ki & Nummela, 2006), in entrepreneurship (Hohenthal, 2006), and in marketing (Koller, 2008). In the literature, different labels are used to name the same research design combining qualitative and quantitative methods: multimethod/multitrait

196

AUDREY ROUZIES

(Campbell & Fiske, 1959), convergent validation or triangulation (Jick, 1979; Kavanagh & Ashkanasy, 2006; Webb et al., 1966), hybrid methodology (Angwin & Meadows, 2009; Harrigan, 1983), multimethod (Bresman, Birkinshaw, & Nobel, 1999; Buono et al., 1985), between-methods triangulation (Brannen & Peterson, 2009), and mixed methods (Raukko, 2009). Several classifications of mixed methods designs have been proposed (Creswell, 1999; Creswell et al., 2003; Greene, Caracelli, & Graham, 1989; Morse, 2003; Patton, 1990). All the authors agree on two important dimensions to classify mixed methods research: (1) the sequence of implementation and (2) the priority of methods. Mixed methods designs can indeed be sequential or simultaneous. In a sequential design, the researcher collects data in different phases (for instance in-depth interviews followed by survey questionnaires). In a simultaneous design, the researcher collects qualitative and quantitative data at the same time. Concerning priority, a researcher can give equal priority to both quantitative and qualitative research, or emphasize more on one type of data over the other. Mixed methods designs are indeed divided into equivalent status designs (the researcher uses equally the quantitative and the qualitative data) and dominant-less dominant studies (the researcher conducts the study within a dominant method with a small component of the other method).1 Mixed methods are more complex to implement than single methods. However, they can be chosen if they are a relevant design to answer the research question (Creswell, 2003). Indeed, the starting point of any study should always be the research question (Bryman, 1992). Post-merger or acquisition phase is a complex period where many sociocultural dynamics interplay (culture, identity, power, conflicts, etc.). Karl Weick (1979, p. 189) underlines that if a narrow methodological approach were to be applied in a complex context, only a small slice of the reality would be revealed. Consequently, mixed methods are a way to grasp the complexity of postmerger or acquisition integration process.

MIXED METHODS IN M&A RESEARCH It has been acknowledged in previous studies that a vast majority of M&A research utilize mainly quantitative designs focusing on large publicly traded US firms and using secondary data available from databases (Haleblian, Devers, McNamara, Carpenter, & Davison, 2009, p. 40). Indeed authors often use databases to run statistical analysis (event studies, regressions analysis, and structural equation model) to understand the impact of

A Relevant Research Design to Investigate Mergers and Acquisitions

197

different variables on M&A performance. Such methods have provided scholars with valuable insights into the antecedents and consequences of M&A, but they have limited abilities to get ‘‘inside’’ the phenomenon (Haleblian et al., 2009, p. 40). Although significant papers using qualitative research designs can be found in the M&A literature, most of them are dealing with ‘‘the human side’’ of the integration focusing for instance on culture (Schweiger & Goulet, 2005), identity (Vaara, Tienari, & Sa¨ntti, 2003), or trust (Graebner, 2009). Mixed methods designs are still rather rare in the M&A literature. In a recent research on co-authorship practices in the field of M&A research, Mirc, Rouzies, Teerikangas, and Tarba (2010) have analyzed all the articles published in 19 top-tier academic journals in management.2 In order to cover the broad range of disciplines within management, they selected top-tier journals in finance, strategy, marketing, human resource management organizational behavior, and organizational psychology. They created a dataset made of 442 articles dealing with M&A. We have updated this dataset to include articles from 2009 to 2012. Consequently, we now have nearly 50 years of M&A research combined in a dataset. On total, we have recorded 518 articles published between 1963 and 2012 in those journals. For each journal, articles were classified into four categories: quantitative, qualitative, mixed methods, and theoretical. In this chapter, to analyze methodological choices, we excluded theoretical papers to focus on the remaining 450 empirical papers. Among those 450 empirical articles, 79.8% were quantitative (359 articles), 17.3% were qualitative (78 articles), and only 2.2% were mixed method (13 articles) (Table 1). We carefully read the method section of the 13 articles initially classified as mixed method to check whether the authors were really combining qualitative and quantitative data. We first excluded three articles for two reasons: (1) the authors collected both type of data but finally presented

Table 1.

Distribution of Methods in Articles on M&A Published from 1963 to 2012.

Type of Paper

Number of Papers

Percentage

Quantitative Qualitative Mixed methods

359 78 13

79.8 17.3 2.8

Total

450

100

198

AUDREY ROUZIES

only quantitative results (Puranam, Singh, & Zollo, 2006; Shanley & Correa, 1992) and (2) the authors collected both type of data but did not discussed the reasons why they chose this research method (Graves, 1981). Bresman, Birkinshaw, and Nobel’s article (2010) was also excluded from the analysis as it was a re-edition of Bresman, Birkinshaw, and Nobel (1999). So, nine articles met the mixed methods definition and were kept for the content analysis. Below, we present these nine articles underlining the type of data combination chosen by the authors and the author’s rationale for using mixed methods. Buono, Bowditch, and Lewis (1985) adopt the perspective of organizational culture to analyze a merger between two mutual saving banks. To build up their case study, they rely on interviews, survey questionnaires, observation data, and archival data. The authors develop a ‘‘multimethod approach employed in a longitudinal framework to gather data about the two pre-merger banks, the merger process itself and the post-merger experience’’ (Buono et al., 1985, p. 483). They point out that the combined material ‘‘provides a clear picture of the objective and subjective organizational culture and organizational climate profiles (y) in the merger’’ (Buono, et al., 1985, p. 484). Morosini, Shane, and Singh (1998) study the effect of national culture distance on cross-border acquisition performance. To do so, they collect questionnaires from 52 companies and run 16 interviews in 4 firms of their sample. The authors indicate that interviews were used ‘‘to provide a richer understanding of the mechanisms by which national cultural distance enhanced post-acquisition performance and to confirm the survey results’’ (Morosini et al., 1998, p. 147). Bresman, Birkinshaw, and Nobel (1999) studied knowledge transfer in international acquisitions. They first collected questionnaire data from 42 cases of international acquisitions involving knowledge transfer that they used to test hypotheses about international transfer in acquisitions derived from the literature. Then, they undertook a qualitative phase with 19 interviews leading to detailed case studies of three international acquisitions. For both type of data, they collected information at two point of time to examine the patterns of knowledge transfer over time. The authors justify the use of ‘‘multimethod’’ saying that ‘‘it was clear than one method alone could not satisfactorily answer the questions we were interested in.’’ They point out that ‘‘by using (y) questionnaire measures as well as qualitative evaluations we sought to ‘triangulate’ on the phenomenon, and indeed this did yield some interesting results’’ (Bresman, Birkinshaw, & Nobel, 1999).

A Relevant Research Design to Investigate Mergers and Acquisitions

199

Birkinshaw, Bresman, and Hakanson (2000) analyze the integration process of three foreign acquisitions made by Swedish companies. To study the dynamics of task integration and human integration in R&D operations, they combine three types of data (questionnaires to a sample of R&D employees on both sides, semi-structured interviews with key persons at the acquirer and the acquired company, and archival data) in two phases. The authors indicate that ‘‘the mix of qualitative and quantitative data allowed us to get rich insights into the integration process as it unfolded as well as some relatively objective measures of the changes that had occurred over the four years between phases of data collection’’ (Birkinshaw et al., 2000, p. 402). Faulkner, Pitkethly, and Child (2002) investigate human resource management practices adopted by American, Japanese, German, and French companies in the UK companies that they have acquired. The ‘‘research project (y) was carried out both by means of the survey instrument (201 questionnaires), the results from which were subsequently analyzed statistically, and also by means of in-depth interviews (40 interviews). The results of both forms of research were broadly consistent with each other’’ (Faulkner et al, 2002, p. 110). The authors cite quotations from interviews to illustrate statistical results. They emphasize that ‘‘the aim of the in-depth interviews is to achieve an element of triangulation in tandem with the statistically analyzed questionnaire’’ (Faulkner et al., 2002, p. 112). Dackert, Jackson, Brenner, and Johansson (2003) analyze employees’ expectations of the merger of the head offices of two public service organizations. They developed and used a two-stage methodology (Creswell, 1994), combining the repertory grid method with a survey questionnaire based on the elicited constructs. They present the advantages and disadvantages of this approach following Creswell (1994).3 Haleblian, Kim, and Rajagopalan (2006) analyze the combined effect of these two sources of learning: prior acquisition experience and recent acquisition performance. The authors acknowledge that ‘‘The empirical models built on these large-scale archival data could provide systematic evidence on the hypothesized causal relationships as well as findings with greater generalizability, but we discerned that they might not be able to fully capture the fine-grained, intermediate processes that contribute to the relationships and other context-specific boundary conditions’’ (Haleblian, Kim, & Rajagopalan, 2006, p. 361). The authors sent questionnaires to a sample of banking industry acquisitions and conducted a series of exploratory semi-structured interviews with bank managers, executives, and bank industry experts. The authors underline that ‘‘because our study was

200

AUDREY ROUZIES

deductive, these qualitative insights were not used to develop theories. Rather, we used these insights to (1) close potential gaps between our theories and empirical models, (2) check the validity of assumptions embedded in our empirical models, (3) incorporate industry-specific boundary conditions or shared assumptions into our study, and (4) help interpret our findings’’ (Haleblian, Kim, & Rajagopalan, 2006, p. 361). Brannen and Peterson (2009), in an in-depth study of individual-level outcomes, analyze cross-cultural work alienation as a phenomenon that can limit the overall success of post-merger integration. They conducted a fiveyear ethnography. During this period, they observed, on a 10 hours per week basis, formal meetings, quality control group discussions, and collective bargaining sessions. They also conducted in-depth interviews. After five years of ethnographic observation, a questionnaire was administered to triangulate with the ethnography results. In their article, Brannen and Peterson (2009, p. 476) present the principles of within-method triangulation for validation: (1) the use of multiple data collection methods for primary and secondary data; (2) the documentation of different perspectives by conducting formal and informal interviews with key informants from differing functional, hierarchical, departmental, and national groups; and (3) the repetition of data collection over time using each method. The authors indicate that ‘‘The multi-method research approach thus indicates several advantages of combining ethnographic with quantitative methods, especially when researching complex cultural phenomena’’ (Brannen & Peterson, 2009, p. 483). The authors find partial contradictions in the findings of the ethnography and the findings of the questionnaire which led them to re-examine the data: ‘‘the contradictions between the findings generated by the two methods were catalysts for the reexamination and reanalysis of both data sets, out of which came new insights into both analyses and a more accurate understanding of the postmerger dynamics’’ (Brannen & Peterson, 2009, p. 483). Heimeriks, Schijven, and Gates (2012) analyze underlying mechanisms of deliberate learning the context of post-acquisition integration. The study is based on a two-pronged research design (Heimeriks et al., 2012, p. 712). They first followed an abductive approach to propose hypotheses, thanks to a combination of established arguments from prior research and in-depth qualitative interviews. Then, they tested their hypotheses, thanks to quantitative data collected via a questionnaire. The authors indicate that they ‘‘combine (1) fine-grained survey data with (2) in-depth qualitative study of integration practices in pursuit of richer insights than either of these two methodologies could yield independently’’ (Heimeriks et al., 2012, p. 712).

A Relevant Research Design to Investigate Mergers and Acquisitions

201

Among the nine articles presented above, it is interesting to note that none of the authors uses the wording ‘‘mixed methods’’ to describe their research design. We can wonder why. We believe that even if mixed methods research is a paradigm whose time has come (Johnson & Onwuegbuzies, 2004), it is still rather unknown in organization and management research. Most of the articles analyzed here use mixed methods in an instrumental role: the use of qualitative methods facilitates the quantitative part of the study or vice versa (Bryman, 1992). Indeed, scholars applying mixed methods use only triangulation, which is a very limited portion of the full potential of this methodology. In fact, we observe that M&A scholars underline two main arguments to justify their research methodology: mixing qualitative and quantitative data allow (1) a richer understanding of the phenomenon studied (Birkinshaw et al., 2000; Buono et al., 1985; Heimeriks et al., 2012; Morosini et al., 1998) and/or (2) a triangulation of data (Brannen & Peterson, 2009; Faulkner et al., 2002). Although triangulation is an important reason to combine qualitative and quantitative methods, we believe that M&A scholars can exploit the full potential of mixed methods if they go beyond mere triangulation. In their review of 57 mixed methods studies, Greene, Caracelli, and Graham (1989) advanced five purposes for combining methods in a single study: triangulation, complementarity, development, initiation, and expansion. Triangulation refers to the classic sense of the word; the intent is to seek convergence of results or corroboration concerning the same phenomena. Complementarity is used to assess the different levels of a phenomenon. Greene et al (1989) characterized complementarity with the analogy of peeling the layers of an onion. Complementarity measures different facets of a phenomenon to enrich its understanding. Development refers to studies where the first method (being either quantitative or qualitative) is used to ‘‘help inform the development of the second method’’ (Greene et al., 1989, p. 260). For instance, a first series of qualitative interviews will help to refine the wording of the questionnaire used in a second phase of data collection. Even though fresh insights are more likely to emerge than be planned (Rocco, Bliss, Gallagher, & Pe´rez-Prado, 2003), initiation studies use the intentional analysis of inconsistent qualitative and quantitative findings to add depth and breadth to inquiry results and interpretations (Rocco et al., 2003, p. 23). Initiation studies seek paradoxes and fresh perspectives on a phenomenon. Finally, M&A scholars could use expansion mixed method to extend the breadth and the scope of the study (Greene et al., 1989, p. 260). We believe that M&A research could strongly beneficiate from the exploitation of the full potential of mixed methods. For instance, initiation

202

AUDREY ROUZIES

studies could raise paradoxes and fresh analysis to thwart US hegemonized M&A research (Meglio & Risberg, 2010). Meglio and Risberg (2010, p. 88) denounce the fact the ‘‘M&A field has become marred by a set of bureaucratic techniques (that everybody must use) that trivialize research with a concern for minor problems with little organizational relevance.’’ Meglio and Risberg (2010) discuss the need for alternative methods for data collection to broaden our understanding of the dynamics and the complexity of M&As; they underline the role of mixed methods in this issue. Another limit in the nine M&A researches presented above is their lack of integration between qualitative and quantitative. The authors tend to present quantitative and qualitative results in two separate sections which reflect the lack of combination between the two types of data. According to Creswell (1994), in mixed methods, authors have three main options to combine data: two-phase design, dominant-less dominant design, or mixedmethodology design. In the two-phase design, the qualitative and the quantitative phase are conducted separately. The advantage of this approach is that the two paradigms associated which each type of data are clearly separate which means that it is easier for the author to present and justify the assumptions behind each paradigm. The disadvantage of this approach lies in the lack of connection between methods that the reader may perceive. Dackert et al. (2003) is a good example of two-phase design in the M&A literature. In the dominant-less dominant design, the reader presents the study within a single dominant paradigm with one small component of the overall study drawn from the alternative paradigm (Creswell, 1994, p. 177). Most of the M&A researches using mixed method follow this approach. Finally, the mixed-methodology design represents the highest degree of mixing data and paradigms. The researcher combines aspects of the qualitative and quantitative paradigm at all or many methodological steps in the design (Creswell, 1994, p. 178). As the strength of mixed methods lies on the integration of various methods throughout the whole research process rather than their mere sequential combination, mixedmethodology design is the most advanced approach. Fully integrated mixed methods designs are still scarce in the literature; for good examples, see Schulenberg (2007) and Woolley (2009). To conclude, we note that the added value of mixed methods has been quite modest in M&A literature; this observation corresponds to Hurmerinta-Peltoma¨ki and Nummela’s (2006) conclusion on their research on mixed methods contribution in International business field. So, there is room for improvement. M&A research will surely benefit from the exploitation of the full potential of mixed methods intents; in other words, M&A scholars

A Relevant Research Design to Investigate Mergers and Acquisitions

203

should try to develop complementarity, initiation, and expansion design. Moreover, M&A research would benefit from fully integrated design developing further approaches in which mixed methods may enable us to understand the complexity and the dynamics of M&As (Meglio & Risberg, 2010; Cartwright et al., 2012) and to explore social and cultural tensions, ambiguities, and ambivalences; indeed contradictory aspects of social reality are exiting from a variety of perspectives (Green & Preston, 2005, p. 168). Finally, it is noteworthy to mention that authors using mixed methods approach also combine this approach with longitudinal data collection (Birkinshaw et al., 2000; Buono et al., 1985). In M&A research, longitudinal data collection allows scholars to gain access to the dynamics of the postmerger integration process. As proposed by Hurmerinta-Peltoma¨ki and Nummela (2006), there is more value added when mixed methods are combined with longitudinal research design. Indeed, combining a mixed method design with a longitudinal data collection could be a good way to analyze complex, multifaceted, and dynamic phenomenon such as M&As. Indeed, integration of qualitative and quantitative data might be in the form of comparing, contrasting, and building on or embedding one type of conclusion with the other (Creswell & Tashakori, 2007, p. 108). M&A scholars interested in mixed methods should read Teddlie and Tashakkori (2009) or Creswell and Plano Clark (2007) to discover the numerous ways to fully exploit mixed methods and to go beyond mere triangulation.

PROS AND CONS OF MIXED METHODS IN M&A RESEARCH In this section, we present the potential advantages and drawbacks of mixed methods for M&A studies borrowing the results from other research fields. Mixed methods give M&A scholars more accurate and powerful tools to understand the complexity of organizational (macro) and individual (micro) dynamics observed in a post-merger integration process, but researchers must be aware of some limitations. Clarify, complement, or explore alternative explanations for relationships. As already underlined, mixed methods provide a route toward a richer understanding of the studied phenomenon. By combining qualitative and quantitative methods, M&A researchers can enhance the knowledge output of their study. The qualitative study may clarify and complement the results of a quantitative analysis. The combination of methods can also raise some alternative explanations for the relationships analyzed. May (2007, p. 297)

204

AUDREY ROUZIES

concludes that ‘‘mixing methods can at best provide the key to innovative ways of understanding a phenomenon by offering new ways of ‘‘connecting the dots’’ and creating something above and beyond the two separate datasets.’’ In other words, mixing methods can offer potential for exploring new dimensions and for asking new questions (Hammond, 2005). Mixing qualitative and quantitative data is a way to build stronger inferences when the results of both types of analyses that investigate the importance of various factors suggest similar findings. Mixed methods allow the opportunity for divergent views to be voiced and then served as the catalyst for a more balanced evaluation (Teddlie & Tashakkori, 2009, p. 13). Consequently, mixed methods could be a relevant research design to avoid methodological conformity (Meglio & Risberg, 2010), to diversify the research questions and address different issues than the one chosen by the ‘‘main stream’’ M&A literature. New methodological approaches are as useful as new theoretical lenses to understand sociocultural dynamics in M&A. Access to practitioners. We believe that the use of mixed methods enhances the managerial relevance of the research. Indeed, purely quantitative methods often simplify the M&A context up to a set of variables analyzed with secondary data. On the other end, purely qualitative data may appear to practitioners as a subjective analysis of narratives. We have observed that mixed methods are more accessible and well accepted by practitioners. Indeed, managers often tell us that they really perceive the added value of this research design. To quote one of the managers with whom we worked: ‘‘This methodology is more convincing for me and my team than purely qualitative ones because I feel like I can rely on quantitative results and interpret them with the interviews that you’ve done. I like it.’’ As managerial relevance and impact are important in research, we believe that it is interesting to use methods that make sense for practitioners because they are the one opening companies’ doors to let us run our researches. In a recent paper, Aguinis, Sua´rez-Gonza´lez, Lannelongue, and Joo (2012) propose to revisit scholarly impact taking into account not only the number of citations (internal impact) but also scholarly impact on stakeholders outside the academy (external impact) measured by the number of Google pages. A recent research Molina-Azorin (2012) has analyzed articles published in the Strategic Management Journal from 1980 to 2006 and shown that mixed methods articles tend to have a higher number of citations than the group of mono-method studies. Future researches could evaluate whether mixed methods studies are more cited both inside and outside academy.

A Relevant Research Design to Investigate Mergers and Acquisitions

205

Even though mixed methods seem to be relevant for the analysis of M&A, they may not be a suitable strategy for all research questions and various constraints may prevent their effective use. An epistemological debate. We observed a long-standing epistemological debate over whether it is coherent to combine qualitative and quantitative methods in a study (Bryman, 1988; Hammersley, 1992). Researchers against mixing methods argue that qualitative and quantitative methods are based on different epistemological and ontological assumptions that prevent their combination in a significant way. Researchers in favor of combining methods rely on a pragmatic paradigm: the selection of a method ought to depend on the purposes and circumstances of the research, rather than being derived from epistemological and philosophical assumptions. Teddlie and Tashakkori (2009, p. 16) underline that this paradigms debate has been resolved for many researchers currently working in social and behavioral sciences notably in educational research, where mixed methods are a longstanding practice. Nevertheless, in other disciplines, such as management, there is a vestige of the debate. M&A scholars starting a research project with a combination of both types of methods should justify their position in this debate and explicitly state their epistemological position. Teddlie and Tashakkori (2009) encourage dialogue between the three communities (qualitative, quantitative, and mixed methods). In M&A field of research, the dialogue between qualitative researchers and quantitative researchers could be a way to improve our contribution to the understanding of this complex social phenomenon that is M&A. A time-consuming design. Mixed methods are a resource-demanding research design. For instance, Faulkner et al (2002, p. 112) who gathered 201 questionnaires and 40 interviews note that ‘‘resources did not permit more extensive interviewing.’’ Because they are complex, mixed methods researches require time and resources. It takes time to collect the data (especially qualitative data) and resources to administrate the data (printing cost for the questionnaires, transcription of qualitative data). Researchers have two options to cope with the time and resource requirement. They can decide to develop a dominant-less dominant design where they give unequal importance to the two types of data. In this case, time and resources will be, in priority, allocated to one type of data. The second option is to choose a two-phases design where the researcher implements only one phase of data collection at a time, making the data collection less costly and more feasible at each time (even though the entire process remains costly in terms of resources and time).

206

AUDREY ROUZIES

Need for competences. Because of their backgrounds, tastes, or experiences, researchers are usually specialized in doing one kind of research, be it qualitative or quantitative. Graduate and doctoral training usually prepares researchers to use one method or another but not to combine methods effectively (Jick, 1979). In a recent article in the field of educational research, Earley (2007) proposes a syllabus for a mixed methods course. The author notes that even though educational researchers were engaged in a dialogue about the advantages, the disadvantages, and the very definition of mixed methods, they were not officially trained in the mixed methods research process and they have to create these courses without the benefit of prior coursework to guide them (Earley, 2007, p. 146). The author regrets the lack of resources to teach mixed methods research and underlines the fact that mixed methods courses for PhD students are still underdeveloped. This lack of training is all the more regrettable that M&A scholars willing to undertake research with a mixed design should make sure that they have the necessary competences in both qualitative and quantitative methods. We encourage M&A researchers to set up teams consisting of researchers with experience in quantitative designs and others skilled in qualitative designs; thus, collaboration could be a way to develop efficient results using mixed methods. Difficulty to publish. Whatever the discipline, researchers using mixed methods report difficulties to publish because this research design is a relatively new approach. Indeed, journals tend to specialize by methodology thus encouraging purity of method (Jick, 1979). In some case, journal editors may be interested in mixed methods designs, but because reviewers are usually specialized on one type of methods, it could be difficult to get an appropriate review and to have the reviewing process moving forward. It is probable that many doctoral dissertations rely on a combination of qualitative and quantitative data, but when packaged into articles for publication, these researches tend to highlight only the quantitative methods (Jick, 1979, p. 605). This situation is exactly what happened in our case: our doctoral research combined qualitative and quantitative data, but the first article published from this dissertation was a purely quantitative one because the journal asked us to limit the size of the paper (Rouzies, 2011). Hurmerinta-Peltoma¨ki and Nummela (2006) found another reason to explain mixed methods papers’ rarity in management research. They state that ‘‘it could be argued that the current urge to publish had led to a situation in which researchers are encouraged to report the various phases of their research projects separately, as this maximizes the number of publications.’’

A Relevant Research Design to Investigate Mergers and Acquisitions

207

Moreover, some journals have specific guidelines for how to structure the paper. Using mixed methods demands longer methodology sections. Researchers have to describe the qualitative methodology, the quantitative methodology, and the mixing of the methods. It can be difficult to do so within the space limitations of an academic journal. Indeed, the ‘‘biggest challenge is describing the complexity of mixed methods studies within the page limits of most journals’’ (Creswell & Plano Clark, 2007, p. 178). Another option to get mixed methods articles published is to explicitly target methods-based journals such as Journal of Mixed Methods, Quality and Quantity, or International Journal of Social Research Methodology. However, this publishing strategy has a drawback: even though they are high-quality contributions, articles published in methods-based journals may be less read and consequently less cited by M&A scholars than papers published in regular management journals.

CONCLUSION The starting point of this chapter was the enduring difficulty for M&A scholars to approach this phenomenon and to propose fine-grained analyses. In the literature, multidisciplinary studies are presented as a way to grasp the complexity of M&A (Larsson & Finkelstein, 1999; Pablo, 1994). In this chapter, instead of focusing on theoretical approaches that could improve our understanding of M&A, we underline the role of methods as a way to advance our knowledge on dynamics at play in M&A integration processes. We conclude that mixed methods are a relevant research design to study dynamics in M&A. Indeed, because M&As are a multifaceted phenomenon, they require a variety of approaches in order to be studied in a way that conveys their complex nature. Moreover, mixed methods allow researchers to gain a holistic understanding of M&As. In this conclusion, we want to emphasize that mixed methods are not panacea in M&A research. Indeed, the research question must guide the methodology chosen. For testing narrow and well-defined research questions, the study will be better served by using quantitative methods for instance. In their recent contribution, Mirc et al. (2010) observe a lack of interdisciplinary cooperation among scholars in their study of M&A. They state that M&A scholars, when involved in M&A publication activity, can be seen as isolationists rather than active cooperators or networkers. In other words, there is a lack of dialogue between M&A scholars as far as theoretical approaches are concerned. This chapter aims at initiating

208

AUDREY ROUZIES

dialogue between qualitative and quantitative M&A scholars who could form teams to study M&A integration processes following a mixed methods design to enhance the organizational relevance of their contributions. To conclude, we cite this rather old but still relevant quotation from Philips (1971): ‘‘We simply cannot afford to continue to engage in the same kind of sterile, unproductive and unimaginative investigation which have long characterized most research in management’’ (Philips, 1971, p. 175).

NOTES 1. See Morse (2003) for a detailed presentation of mixed methods designs. 2. This study analyzes articles published between 1963 and 2009 in Academy of Management Journal, Academy of Management Review, Administrative Science Quarterly, British Journal of Management, Human Relations, Human Resource Management, International Journal of Human Resource Management, Journal of Finance, Journal of International Business Studies, Journal of Management, Journal of Management Studies, Journal of Marketing, Journal of Marketing Research, Journal of Occupational and Organizational Psychology, Journal of Organizational Behaviour, Journal of World Business, Organization Science, Organization Studies, Strategic Management Journal. 3. Creswell’s arguments about the two-stage method will be developed later in this chapter.

REFERENCES Aguinis, H., Sua´rez-Gonza´lez, I, Lannelongue, G., & Joo, H. (2012). Scholarly impact revisited. Academy of Management Perspectives, 26, 2, 105–132. Angwin, D. N., & Meadows, M. (2009). The choice of insider or outsider top executives in acquired companies. Long Range Planning, 42, 359–389. Birkinshaw, J., Bresman, H., & Hakanson, L. (2000). Managing the post-acquisition integration process: How the human integration and task integration processes interact to foster value creation. Journal of Management studies, 37(3), 395–425. Brannen, M. Y., & Peterson, M. F. (2009). Merging without alienating: interventions promoting cross-cultural organizational integration and their limitations. Journal of International Business Studies, 40(3), 468–489. Bresman, H., Birkinshaw, J., & Nobel, R. (1999). International knowledge transfer in acquisitions. Journal of International Business Studies, 30(3), 439–462. Bresman, H., Birkinshaw, J., & Nobel, R. (2010). International knowledge transfer in acquisitions. Journal of International Business Studies, 41, 5–20. Bryman, A. (1988). Quantity and quality in social research. London: Routledge. Bryman, A. (1992). Quantitative and qualitative research: Further reflections on their integration. In J. Brannen (Ed.), Mixing methods: qualitative and quantitative research (pp. 57–78). Aldershot, UK: Ashgate.

A Relevant Research Design to Investigate Mergers and Acquisitions

209

Buono, A. F., Bowditch, J. L., & Lewis, J. W. (1985). When cultures collide: The anatomy of a merger. Human Relations, 38(5), 477–500. Campbell, D. T., & Fiske, D. W. (1959). Convergent and discriminant validation by the multitrait-multimethods matrix. Psychology Bulletin, 56, 81–105. Cartwright, S., Teerikangas, S., Rouzies, A., & Wilson-Evered, E. (2012). Methods in M&A – A look at the past and the future to forge a path forward. Scandinavian Journal of Management, 28(2), 95–106. Creswell, J. W. (1994). Research design: Qualitative and quantitative approaches. Thousand Oaks, CA: Sage. Creswell, J. W. (1999). Mixed method research: Introduction and application. In T. Cijek (Ed.), Handbook of educational policy (pp. 455–472). San Diego, CA: Academic Press. Creswell, J. W. (2003). Research design: Qualitative, quantitative and mixed methods approaches (2nd ed.). Thousand Oaks, CA: Sage. Creswell, J. W., Plano Clark, V. L., Gutmann, M., & Hanson, W. (2003). Advanced mixed methods research designs. In A. Tashakkori & C. Teddlie (Eds.), Handbook of mixed methods in social and behavioral research (pp. 209–240). Thousand Oaks, CA: Sage. Creswell, J. W., & Plano Clark, V. (2007). Designing and conducting mixed methods research. Thousand Oaks, CA: Sage. Creswell, J. W., & Tashakori, A. (2007). Developing publishable mixed methods manuscripts. Journal of Mixed Methods Research, 1, 107–111. Dackert, I., Jackson, P. R, Brenner, S-O., & Johansson, C. R. (2003). Eliciting and analyzing employees’ expectations of a merger. Human Relations, 56(6), 705–725. Earley, M. A. (2007). Developing a syllabus for a mixed-methods research course. International Journal of Social Research Methodology, 10(2), 145–162. Faulkner, D., Pitkethly, R., & Child, J. (2002). International mergers and acquisitions in the UK 1985–1994: A comparison of national HRM practices. International Journal of Human Resource Management, 13(1), 106–122. Graebner, M. E. (2009). Caveat Venditor: Trust asymmetries in acquisitions of entrepreneurial firms. Academy of Management Journal, 52(3), 435–472. Graves, D. (1981). Individual’s reactions to a merger of two small firms of brokers in the re-insurance industry: A total population survey. Journal of Management Studies, 18(1), 89–113. Green, A., & Preston, J. (2005). Editorial: Speaking in tongues-diversity in mixed methods research. International Journal of Social Research Methodology, 8(3), 167–171. Greene, J. C., Caracelli, V. J., & Graham, W. F. (1989). Toward a conceptual framework for mixed-methods evaluation designs. Educational Evaluation and Policy Analysis, 11(3), 255–274. Hammond, C. (2005). The wider benefits of adult learning: An illustration of the advantages of multi-method research. International Journal of Social Research Methodology, 8, 239–255. Hammersley, M. (1992). Deconstructing the qualitative–quantitative divide. In J. Brannen (Ed.), Mixing methods: qualitative and quantitative research (pp. 39–56). Aldershot, UK: Ashgate. Harrigan, K. R. (1983). Research methodologies for contingency approaches to business strategy. Academy of Management Review, 8(3), 398–405. Haleblian, J., Kim, Ji-Yub, & Rajagopalan, N. (2006). The influence of acquisition experience and performance on acquisition behaviour: Evidence from the US commercial banking industry. Academy of Management Journal, 49(2), 357–370.

210

AUDREY ROUZIES

Haleblian, J., Devers, C. E., McNamara, G., Carpenter, M., & Davison, R. B. (2009). Taking stock of what we know about mergers and acquisitions: A review and research agenda. Journal of Management, 35(3), 469–502. Heimeriks, K. H., Schijven, M., & Gates, S. (2012). Manifestations of higher-order routines: The underlying mechanism of deliberate learning in the context of post-acquisition integration. Academy of Management Journal, 55(3), 703–726. Hohenthal, J. (2006). Integrating qualitative and quantitative methods in research on international entrepreneurship. Journal of International Entrepreneurship, 4, 175–190. Hurmerinta-Peltoma¨ki, L., & Nummela, N. (2006). Mixed methods in international business research: A value added perspective. Management International Review, 46(4), 1–21. Jick, T. J. (1979). Mixing qualitative and quantitative methods: triangulation in action. In J van Maanen (Ed.), Qualitative methodology (pp. 135–148). London: Sage. Johnson, R. B., Onwuegbuzie, A. J., & Turner, L. (2007). Toward a definition of mixed methods research. Journal of Mixed Methods Research, 1, 112–133. Johnson, R. B., & Onwuegbuzie, A. J. (2004). Mixed methods research: a paradigm whose time has come. Educational Researcher, 33(7), 14–26. Kavanagh, M., & Ashkanasy, N. (2006). The impact of leadership and change management strategy on organizational culture and individual acceptance of change during a merger. British Journal of Management, 17, 83–105. King, D., Dalton, D., Daily, C., & Covin, J. (2004). Meta-analyses of post-acquisition performance: Indications of unidentified moderators. Strategic Management Journal, 25, 187–200. Koller, M. (2008). A future research agenda for mixed-method-design in business research. International Journal of Business Research, 8(4), 50–60. Larsson, R., & Finkelstein, S. (1999). Integrating strategic, organizational and human resources perspectives on mergers and acquisitions: a case survey of synergy realization. Organization Science, 10, 1. May, V. (2007). Use of mixed methods in a study of residence and contact disputes between divorced and separated parents. Int. J. Social Research Methodology, 10(4), 295–306. Meglio, O., & Risberg, A. (2010). Mergers and acquisitions – Time for a methodological rejuvenation of the field? Scandinavian Journal of Management, 26, 87–95. Mirc, N., Rouzies, A., Teerikangas, S., & Tarba, S. (2010). The M&A community: Myth or reality? A social network analysis of co-authorship practices in the field of M&A research. Paper presented at the annual conference of European Academy of Management (EURAM), Rome. Molina-Azorin, J. F. (2012). Mixed methods research in strategic management: Impact and applications. Organizational Research Methods, 15(1), 33–56. Morosini, P., Shane, S., & Singh, H. (1998). National cultural distance and cross-border acquisition performance. Journal of International Business Studies, 29(1), 137–158. Morse, J. (2003). Principles of mixed methods and multimethod research design. In A. Tashakkori & C. Teddlie (Eds.), Handbook of mixed methods in social and behavioral research (pp. 189–208). Thousand Oaks, CA: Sage. Pablo, A. (1994). Determinants of acquisition integration level: a decision making perspective. Academy of Management Journal, 37(4), 803–836. Parkhe, A. (1993). ‘‘Messy’’ research, methodological predispositions, and theory development in international joint ventures. Academy of Management Review, 18(2), 227–268.

A Relevant Research Design to Investigate Mergers and Acquisitions

211

Patton, M. Q. (1990). Qualitative evaluation and research methods. Newbury Park, CA: Sage Publications. Philips, D. L. (1971). Knowledge from what? Theories and methods in social science research. Chicago, IL: Rand McNally. Puranam, P., Singh, H., & Zollo, M. (2006). Organizing for innovation: Managing the coordination-autonomy dilemma in technology acquisitions. Academy of Management Journal, 49(2), 263–280. Raukko, M. (2009). Organizational commitment during organizational changes. A longitudinal case study on acquired key employees. Baltic Journal of Management, 4(3), 331–352. Rocco, T. S., Bliss, L. A., Gallagher, S., & Pe´rez-Prado, A. (2003). Taking the next step: Mixed methods research in organizational systems. Information Technology, Learning and Performance Journal, 21(1), 19–29. Rouzies, A. (2011). Antecedents of employees’ identification with a merger. A three-stage empirical study. International Studies of Management and Organization, 41(3), 25–41. Schulenberg, J. L. (2007). Analysing police decision-making: Assessing the application of a mixed-methods/mixed-model research design. International Journal of Social Research Methodology, 10(2), 99–119. Schweiger, D. M., & Goulet, F. K. (2005). Facilitating acquisition integration through deeplevel cultural learning interventions: A longitudinal field experiment. Organization Studies, 26(10), 1477–1499. Shanley, M. T., & Correa, M. E. (1992). Agreement between top management teams and expectations for post-acquisition performance. Strategic Management Journal, 13(4), 245–266. Tashakkori, A., & Teddlie, C. (Eds.). (2003). Handbook of mixed-methods in social & behavioral research. Thousand Oaks, CA: Sage. Teddlie, C., & Tashakkori, A. (2009). Foundations of mixed methods research. Integrating quantitative and qualitative approaches in the social and behavioral sciences. Thousand Oaks, CA: Sage. Vaara, E., Tienari, J., & Sa¨ntti, R. (2003). The international match: Metaphors as vehicles of social identity-building in cross-border mergers. Human Relations, 56(4), 419–452. Webb, E. J., Campbell, D. T., Schwartz, R. D., & Sechrest, L. (1966). Unobtrusive measures: Non-reactive research in the social sciences. Chicago, IL: Rand McNally. Weick, K. (1979). The social psychology of organizing (2nd ed.). Reading, MA: Addison Wesley. Woolley, C. M. (2009). Meeting the mixed methods challenge of integration in a sociological study of structure and agency. Journal of Mixed Methods Research, 3(1), 7–25.