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Emerald Group Publishing Limited
Copyright © 2012, Emerald Group Publishing Limited
Advances in Mergers and Acquisitions
Article Type: Suggested reading From: Strategic Direction, Volume 28, Issue 2
Sydney Finkelstein and Cary L. Cooper,Emerald Group Publishing Limited, Bingley, UK, 2010, pp. 1395-1400, ISBN: 978-0-85724-465-9
Mergers and acquisitions (M&As) are one of the tools that companies may use to implement a strategy leading to the achievement of its financial and corporate objectives, versus a network strategy (Baggio and Cooper, 2010; Brás et al., 2010; Hsueh et al., 2010; Bendle and Patterson, 2010; Lee et al., 2010; Mariussen et al., 2010; McLeod et al., 2010; Pechlaner and Bachinger, 2010; Scott and Laws, 2010). When executed properly, mergers are one of the best ways to support business growth.
Finkelstein and Cooper have managed to compile a set of both theoretical and empirical original studies which show different advances relating to mergers and acquisitions. The book is divided into nine contributions. Each of the chapters takes on the challenge of understanding why the success rate of M&As is reduced.
In the first study “Mergers and acquisitions: a review of phases, motives, and success factors”, Calipha, Tarba, and Brock make an extensive review of the M&A literature with the purpose of understanding the relevant processes and synthesizing the research results for the benefit of managers and future research. They highlight the fragility of mergers and acquisitions. The authors focus on three basic aspects of mergers and acquisitions. The first aspect is analyzing our knowledge about M&A processes, such as due diligence and integration. The second refers to M&A motives such as new market entry, acquisition of scarce resources, and synergy realization, and so forth. The third one is M&A success factors. They focus on the key managerial and organizational factors that are generally associated with M&A success, such as the relative size of M&A partners, managerial involvement, culture, organizational structural issues, control systems, and analysis of future capital needs.
With this broad review as a backdrop, the next three chapters focus specifically on process issues, but in quite different ways. Tan and Ai examine the process Chinese companies go through in making acquisitions. This study entitled “China’s outward mergers and acquisitions in the twenty-first century: motivations, progress and the role of the Chinese government” look at both state-owned enterprises and private sector companies making deals to grow in other countries and regions of the world. These authors emphasize the crucial role the Chinese government plays in planning Chinese firms’ internationalization activities and the long-term implications on their competitiveness in the global market. In that way, this chapter not only provides new insights, but also suggests all sorts of interesting follow-up research questions. Future research, preferably based on empirical studies, should look at the issues arising from the management of M&A process, such as principal-agent conflict and post-M&A integration, which are still under little consideration.
In the chapter “Trust dynamics in acquisitions: the role of relationship history, inter-firm distance, and acquirer’s integration approach”, Stahl and Sitkin draw on the trust literature and research on socio-cultural integration in mergers and acquisitions to develop a model of the antecedents and consequences of trust dynamics in acquisitions. The model proposes that target firm members’ perceptions of the acquiring firm management’s trustworthiness are affected by the relationship history of the firms, the inter-firm distance, and the integration approach taken by the acquirer. The main focus of this chapter is on the motivational and behavioral reactions of acquired personnel. The proposed model points to the important role of the acquiring managers in building and restoring trust in acquisitions. The evidence suggests that trust plays a key role in the integration process.
Mergers and acquisitions are a very important growth alternative for most companies. For M&A deals to achieve long-term success, acquirers must identify the potential impediments that affect the process and address them one by one. In “Overcoming biases in M&A: a process perspective”, Garbuio, Lovallo, and Horn apply an excellent methodology to break down the M&A decision-making process into four key phases: the decision of whether to pursue an acquisition, preliminary due diligence, the bidding phase, and final due diligence. This technique helps identify, and address, inherent biases in how managers are going about these challenges. The authors draw on psychology to better understand how decision-makers go wrong, and present some corrective strategies that can help executives overcome the biases that affect each phase in the decision-making process. Finally, they discuss two biases, loss aversion and comparative ignorance, that motivate decision makers to actually forego acquisitions that could provide their firms with profitable growth opportunities. This chapter is a great example of how concepts from different disciplines can add value to our understanding of M&A success and failure, and provides a deep dive into one of the reasons Calipha, Tarba, and Brock identify for why deals go wrong.
A firm’s behavior is constrained by its access to resources owned or controlled by different constituencies in its environment. Mergers and acquisitions are one way to proactively manage these resource dependencies. In this context, another of the aspects examined in this book is resource dependence theory, one of the most well-known theories of acquisitions. Actually, the theory is considerably broader than M&A, but as it turns out this theory has been particularly good at predicting whether or not acquisitions are undertaken by firms. The idea is that companies that are dependent on others will seek to reduce their dependence by buying their way out of it (Alpkan et al., 2010; Altinay and Okumus, 2010; Comeche and Loras, 2010; Gómez et al., 2010; Lin et al., 2010; Ramírez et al., 2010; Sebora and Theerapatvong, 2010; Tihula and Huovinen, 2010; Wu et al., 2009). So a firm that depends on a supplier or buyer in the supply chain is more likely to buy a firm like that to reduce their dependence. Pfeffer published one of the first empirical articles on this subject in 1972, but with only an occasional follow-up, further exploration of resource dependence in the context of M&A seems overdue.
“Mergers and acquisitions as a response to intra-industry dependence” extends resource dependency arguments in an intra-industry context as opposed to the way inter-industry setting is typically modelled. Schildt, Laamanen, and Keil find that mergers and acquisitions among pharmaceutical firms tend to take place among firms with technological and competitive interdependencies, an important result in this field. This is a thorough study that rules out alternative explanations, and will be seen as an important new insight in the literature. This study can be replicated in other industry contexts.
The other chapter in this volume that takes up resource dependence does so in a different way. In “Political connections and family business diversification”, Chung and Ding examine the impact of formal and informal political connections on the scope of family business diversification. They focus on family business groups because of their unique access to family ties or family social capital to achieve business objectives. Their analysis reports that the informal political connections possessed by the parent generation owners of family business groups are better predictors of family business diversification than the informal political connections established by the children generation owners. This result complements the resource dependence theory by suggesting that durable and non-transferable political connections possessed by family leaders have a unique effect in the corporate decision to diversify.
The studies that appear in the next two chapters take up a more traditional strategic management perspective on mergers and acquisitions. Schoenberg and Bowman, in “Value creation in corporate acquisitions: linking value creation logic, organisational capabilities and implementation processes”, develop a typology of acquisition value creation logics derived from the dynamic capability literature and explore the organizational capabilities and implementation processes required for the effective delivery of three value creation cases: governance-based, cost-based, and knowledge-based. These authors further develop a contingence approach where effective corporate acquirers make a conscious choice as to their predominant value creation logic based on a consideration of their organizational capabilities, which in turn defines the characteristics of appropriate target companies and the necessary implementation actions required to realize value post-acquisition. The interdependence between value creation strategy and appropriate implementation processes suggests that future studies which investigate the role of individual implementation variables also need to take account of the value creation logic of the acquisitions studied.
In the other contribution, “Beyond knowledge bases: towards a better understanding of the effects of M&A on technological performance”, the authors look at the impact of M&As on technological performance. M&A represent an investment planned to create economic value, mainly through the development of synergies. Valentini and Dawson argue that, when it provides additional technological resources, M&As promote the creation of more value in the innovation process. On the other hand, when it allows the redeployment of complementary assets, M&As enable more value to be captured from the innovations, and hence foster firms’ incentives in the innovation process (Abreu et al., 2010; Baregheh et al., 2009; Bonet et al., 2010; Chamberlin et al., 2010; Howcroft et al., 2010; Huang et al., 2010; Koelling et al., 2010; Mariotti and Piscitello, 2010; Martinez-Gomez et al., 2010; Meliá et al., 2010; Zhang and Duan, 2010). The results of the empirical analysis show that when target firms display a knowledge base that is neither too close nor too distant from that of the acquiring firm, post-acquisition technological performance is enhanced. Several limitations of this study warrant attention. First, the authors only examine one industry and they observe technological performance for a post-acquisition period of only two years. Moreover, M&A success should be considered both as a function of the potential benefits stemming from the combination of the involved firms as well as of organizational integration, which translates potential fit into real synergies.
The last chapter in this book, “Allure and danger of the boutiques: the influence of the specialization of investment bank on the acquirer’s performance”, focuses on the role of acquisition advisors. Sleptsov, through an empirical study, examines whether acquirers are better off with boutique or bulge-bracket advisors. The study points out that acquirer’s experience is the principal aspect in this decision. Less experienced acquirers can benefit more from selecting a boutique advisor because its deeper involvement in the decision-making process during the development of the acquisition proposal and more focused and selective information gathering can help minimize the negative consequences of the cognitive overload that the inexperienced acquiring managers might otherwise experience. At the same time, the more experienced acquirers with presumably better developed decision-making routines should be better off selecting a bulge-bracket bank as their advisor – in order to enhance its ability to collect all pertinent information related to the planned acquisition.
The nine contributions in Volume 9 of Advances in Mergers and Acquisitions continue to follow the hallmark of the series – innovative work by scholars around the world on essential questions concerning mergers and acquisitions. We can conclude that this book will be very well received by researches interested in taking a deeper look at the current trends in mergers and acquisitions. In the business world, merger and acquisition activity is driven by powerful forces of change. Thus, understanding the influence of these forces is essential to anticipate opportunities and changes in future processes. It is clear that Finkelstein and Cooper have been successful in reaching the objectives they set for themselves in writing this book.
Reviewed by Carlos Lassala Navarré, University of Valencia, Valencia, Spain.
This review was originally published in Management Decision, Vol. 49 No. 8, 2010.
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