Advances in Mergers and Acquisitions

Cary L. Cooper, Sydney Finkelstein, Cary L. Cooper, Sydney Finkelstein

• Publisher: Emerald Publishing Limited
• Year: 2019
• ISBN:
  9781789736014
• Topic: Business
• Subtopic: Business generale
• Index: Business

Advances in Mergers and Acquisitions stands out from the competition due to its focus on three key characteristics: studies from scholars in different countries, with different research questions, relying on different theoretical perspectives. Such a broad and inclusive approach to mergers and acquisitions is not easily replicated in academic journals, with much narrower mandates and metrics. The chapters published in this volume provide cutting edge ideas by leading scholars, and help to inform mergers and acquisitions research around the world.
Volume 18 of this annual series explores a range of issues that include: why the success rate of M&As is still limited; how Boards influence M&A activity; what the role of M&A advisors is; the role of diversity in the context of M&As; stakeholder relationships in the context of M&As; why research has not focussed on family businesses in the M&A field as much as it should; making M&As less risky as a strategic investment; merging cities; pre-merger and acquisition strategies and finally, how 'value' has been used or not used in M&As.

CHAPTER 1

A RESEARCH AGENDA TO INCREASE MERGER AND ACQUISITION SUCCESS

Mitchell Lee Marks

ABSTRACT

Scholars have been conducting serious research on the human, organizational, and cultural aspects of mergers and acquisitions (M&A) for 30 years. Yet, over this period, there have only been modest improvements in the M&A success rate. In this chapter, the author examines corporate combinations, describes how human factors contribute to their failure or success, and identifies key research questions whose answers can help to improve the M&A success rate in both financial and human terms. The author proposes research questions for the key phases of a deal, including buying a company and putting companies together. And, reflecting an emerging trend among some frequent acquirers to build an internal competence in M&A execution, the author also proposes research questions for how to accelerate the process of learning from past combinations to better manage future ones.

Keywords: Merger; acquisition; integration; culture clash; transition teams; cross-border

INTRODUCTION

Many motives prompt executives to acquire or merge with another organization.¹ In some cases, a combination helps a firm move quickly into a new market or product space or pursue a strategy that would otherwise be too costly, risky, or technologically advanced to achieve on its own. Other times, deals are opportunistic, such as when a troubled competitor seeks a savior or when a bidding war ensues after a firm is “put into play.” Still other times, acquisitions or mergers can be defensive moves to protect market share in a declining or consolidating industry. The overarching reason for combining with another organization is that the union will enable a firm to attain strategic goals more quickly and inexpensively than acting on its own (Haspeslagh & Jamison, 1991).

Despite their popularity, most mergers and acquisitions (M&A) are financial failures and produce undesirable consequences for the people and companies involved. While target-firm shareholders generally enjoy positive short-term returns, investors in bidding firms frequently experience share price underperformance in the months following acquisition, with negligible long-term gains (Agrawal & Jaffe, 2000). In addition, M&A can exact a heavy toll on employees (DeMeuse & Marks, 2003; Mische, 2001). A longitudinal study of 10,000 US employees representing 4,000 organizations found those from organizations that had been engaged in M&A reported significantly less favorable results than those who had not been involved. This held true for every industry group and every facet of working life measured (Wiley & Moechnig, 2005).

Many factors account for the dismal M&A track record, including paying the wrong price, buying the wrong company, or making the deal at the wrong time. My own 30-year research program with Philip H. Mirvis finds that the processes used to put companies together are integral to a deal’s success versus failure (Marks & Mirvis, 2010). This encompasses the formation and operations of the buying team (Mirvis & Marks, 1992), how the firms are integrated (Marks & Mirvis, 2000), and learning from current deals to better manage future ones (Marks & Mirvis, 2001). In the rest of this chapter, I suggest research opportunities to assess and understand processes in each of these three phases of a deal.

BUYING A COMPANY

Buying a company encompasses strategizing, scouting, assessing and selecting a partner, deal making, and preparing for the eventual combination. The typical approach involves a “tunnel vision” on the financial aspects of the deal. Buyers concentrate on what a target is worth, what price premium, if any, to pay, and how to structure the transaction. The successful approach, by comparison, also emphasizes finance but adds careful attention to how a combination advances the business strategy of a firm, due diligence on behavioral and culture factors that might complicate the combination, and a clear picture of how the firms will be integrated.

Research Questions on Buying a Business

A review of relevant literature as well as practical experience suggests some key areas for future M&A research on the workings of buy teams.

M&A Motives

To what extent are M&A “buy” decisions motivated by strategic intent (e.g., market power, efficiency, asset redeployment, and market discipline) versus manager’s self-interest (e.g., hubris, empire building, survival, and personal financial gains)? This question applies to the overall make-versus-buy decision, the selection of a partner, and the price paid. Obviously, corporate pronouncements and executive talking points express the business case behind any deal. Yet a blue-ribbon panel of financial experts concluded that chief executive officer (CEO) ego was the primary force driving M&A in the United States (Boucher, 1980). Another study found that the bigger the ego of the acquiring company’s CEO the higher the premium a company is likely to pay for a target (Sirower, 1997).

If the true motives behind a combination have more to do with “nonstrategic” forces – say, the desire to run the largest company in an industry or fear of being swallowed up by competitors – then value creation is unlikely because there are few benefits to be leveraged by joining forces. To get at these factors, researchers might look into the pattern of purchases by regular acquirers and to what extent it builds out a clear and coherent business strategy. Those with a clinical mindset might, as Harry Levinson (1976) has done, explore the mindsets of buying CEOs and how their ambitions and fears factor into their M&A proclivities. They might also investigate instructions given to buy teams, pressures on them to do a particular deal, and considerations given to alternative courses of action.

Research question 1a. To what extent do strategic versus non-strategic motives drive M&A buy teams and what is the relationship between those motives and the price paid, partner selected, and synergies achieved by a deal?

Behavioral and Cultural Due Diligence

When due diligence focuses exclusively on the financial makeup of potential M&A partners, analysts overestimate revenue gains and cost savings and underestimate the resource requirements and headaches involved in integrating businesses (Lodorfos & Boateng, 2006). Adding in behavioral due diligence – the process of investigating a potential partner’s talent, organizational makeup and culture – enables a buyer to understand if the values of the potential partners are compatible, if the bench strength exists to replace managers who might depart, if all parties are on the same wavelength regarding synergies and what it takes to combine, and if there is enough trust and chemistry to propel the combined operation into becoming more than the sum of its parts (Carlton & Linebury, 2004; Gebhardt, 2003). Behavioral due diligence pays off: one study found that successful acquirers were 40% more likely to conduct thorough human and cultural due diligence than unsuccessful buyers (Anslinger & Copeland, 1996).

Research question 1b. How do buy teams consider behavioral versus financial due diligence in their analysis and to what extent does behavioral due diligence yield better M&A decisions?

Buy Team Make Up

Most members of traditional due diligence teams come from financial positions or backgrounds. They bring a financial mind-set to the study of a partner, and their judgments about synergies are informed by financial models and ratios. They do not necessarily bring an experienced eye to assessing a partner’s “fit” in areas of engineering, manufacturing, or marketing. As a result, there is a tendency for “hard” criteria to drive out “soft” matters: if the numbers look good, any doubts about organizational or cultural differences tend to be scoffed at and dismissed.

Mirvis and I have argued that the traditional membership of due diligence teams (e.g., financial analysts and strategists) be augmented by people from technical, operational, and HR functions. More research is needed to understand how this diversity in interests and expertise influences M&A analysis and team dynamics.

Research question 1c. To what extent does functional and operational diversity in due diligence team membership contribute to better M&A decision making?

Buy Team Decision Making

M&A underperformance is sometimes attributed to the “rush to close” the deal at the expense of attending to factors that could help or hurt its eventual success (Ashkenas & Francis, 2000). Why would companies buy something when their buy team has not thoroughly “looked under the hood?” Several scholars have documented how decision making traps – anchoring in initial perceptions, escalating commitments, and cognitive overload – can lead buyers to follow faulty assumptions and multiple misjudgments (Duhaime & Schwenk, 1985). Thus Mirvis and I have also proposed that buy teams be schooled in decision-making biases and apply decision-making tools and interventions to their deliberations. What are needed are studies of how these practices, studied in the lab, can operate in the field.

Research question 1d. What decision tools and interventions improve an M&A buy team’s analyses and decisions?

Combination Forms

Organizations can link together in many forms of legal combinations, ranging from a relatively informal network to outright absorption of one entity by another. The forms of combination vary by the depth of commitment and level of investment between the organizations joining forces. A strategic alliance is a cooperative effort by two or more entities in pursuit of their own strategic objectives. A joint venture (JV) goes further, by establishing a complete and separate formal organization with its own structure, governance, workforce, procedures, policies, and culture – while the predecessor companies still exist. A merger usually involves the full combination of two previously separate organizations into a third (new) entity. An acquisition typically is the purchase of one organization for incorporation into the parent firm.

Important differences distinguish these forms. As financial investment and risk increase, so does the control held by the lead company. Along this same line, the impact on the target company or lesser partner grows, as do the requirements for integration. If, for whatever reason, a combination does not live up to expectations (or if the needs of either party change), then the formal bonds of a merger or acquisition are much more difficult to undo than are the relatively time-bound and looser ties of an alliance or JV.

Research question 1e. To what way does the form of a combination influence its eventual strate...