CORPORATE ACQUISITION DECISIONS UNDER DIFFERENT STRATEGIC MOTIVATIONS

Abstract

Acquisition is one of key corporate strategic decisions for firms’ growth and competitive advantage. Firms: (1) diversify through acquisition to balance cash flows and spread the business risks; and (2) eliminate their competitors through acquisition by acquiring new technology, new operating capabilities, process innovations, specialized managerial expertise, and market position. Thus, firms acquire either unrelated or related business based on their strategic motivations, such as diversifying their business lines or improving market power in the same business line. These different motivations may be related to their assessment of market growth, firms’ competitive position, and top management’s compensation. Thus, it is hypothesized that firms’ acquisition decisions may be related to their industry growth potential, post-acquisition firm growth, market share change, and CEO’s compensation composition between cash and equity. In addition, for the two alternative acquisition accounting methods allowed until recently, a test is made if the type of acquisition is related to the choice of accounting methods. This study classifies firms’ acquisitions as related or unrelated, based on the standard industrial classification (SIC) codes for both acquiring and target firms. The empirical tests are, first, based on all the acquisition cases regardless of the firm membership, and then, deal with the firms acquiring only related businesses or unrelated businesses exclusively.

The type of acquisitions was more likely related to industry growth opportunities, indicating that the unrelated acquisition cases are more likely to be followed by higher industry growth rate than the related acquisition cases. While there were a substantially larger number of acquisition cases using the purchase method, the related acquisition cases used the pooling-of-interest method more frequently than in the unrelated acquisition cases. The firm-level analysis shows that the type of acquisition decisions was still related to acquiring firms’ industry growth rate. However, the post-acquisition performance measures, using firm’s growth and change in market share, could support prior studies in that the exclusive-related acquisitions helped firms grow more and get more market share than the exclusive-unrelated acquisitions. CEO’s compensation composition ratio was not related to the types of acquisition.

Citation

Chung, K.-H. (2004), "CORPORATE ACQUISITION DECISIONS UNDER DIFFERENT STRATEGIC MOTIVATIONS", Advances in Management Accounting (Advances in Management Accounting, Vol. 12), Emerald Group Publishing Limited, Bingley, pp. 265-286. https://doi.org/10.1016/S1474-7871(04)12012-1