Successful & Unsuccessful Acquisitions
British Journal of Management, Vol. 9, 91-114 (1998)
Attributes of Successful and Unsuccessful Acquisitions of US Firms^
Michael Hitt,* Jeffrey Harrison,^ R. Duane Ireland* arid Aleta Best§
*Lowry Mays College of Business Administration, Texas A&M University, College Station, TX 77843-4221, •College of Business Administration, University of Central Florida, Orlando, FL 32816, 'Hankamer School of Business, Baylor University, Waco, TX 76798-8004, and ^College of Business and Industry, University of Massachusetts Dartmouth, North Dartmouth, MA 02747, USA Acquisitive growth strategies continue to be popular, in spite of increasing evidence that they often do not enhance the financial performance of acquiring firms and may adversely affect innovation. However, some acquisitions are associated with both increases in financial performance and a strengthened commitment to R&D while others experience decreases in both. Multiple theories have been offered to explain acquisitions and their outcomes, but few have received strong empirical support. This paper describes a multiple rater, multiple-case study of acquisitions that had highly favourable outcomes and others that experienced highly unfavourable outcomes. All twelve of the high performing acquisitions studied were found to exhibit the dual characteristics offiriendlinessduring acquisition negotiations and resource complementarities between the two firms. Additionally, debt played an important role in the success (low to moderate debt) or lack of success (high or extraordinary debt) in 21 of the 24 acquisitions studied. Inadequate target evaluation was a factor in 11 of the 12 acquisitions with low performance. Importantly, the results of both sets of acquisitions suggested that a configuration of attributes affected post-acquisition performance. Other findings both supported and contradicted commonly held beliefs about acquisitions, as well as highlighted variables not typically associated with acquisition
Attributes of Successful and Unsuccessful Acquisitions of US Firms^
Michael Hitt,* Jeffrey Harrison,^ R. Duane Ireland* arid Aleta Best§
*Lowry Mays College of Business Administration, Texas A&M University, College Station, TX 77843-4221, •College of Business Administration, University of Central Florida, Orlando, FL 32816, 'Hankamer School of Business, Baylor University, Waco, TX 76798-8004, and ^College of Business and Industry, University of Massachusetts Dartmouth, North Dartmouth, MA 02747, USA Acquisitive growth strategies continue to be popular, in spite of increasing evidence that they often do not enhance the financial performance of acquiring firms and may adversely affect innovation. However, some acquisitions are associated with both increases in financial performance and a strengthened commitment to R&D while others experience decreases in both. Multiple theories have been offered to explain acquisitions and their outcomes, but few have received strong empirical support. This paper describes a multiple rater, multiple-case study of acquisitions that had highly favourable outcomes and others that experienced highly unfavourable outcomes. All twelve of the high performing acquisitions studied were found to exhibit the dual characteristics offiriendlinessduring acquisition negotiations and resource complementarities between the two firms. Additionally, debt played an important role in the success (low to moderate debt) or lack of success (high or extraordinary debt) in 21 of the 24 acquisitions studied. Inadequate target evaluation was a factor in 11 of the 12 acquisitions with low performance. Importantly, the results of both sets of acquisitions suggested that a configuration of attributes affected post-acquisition performance. Other findings both supported and contradicted commonly held beliefs about acquisitions, as well as highlighted variables not typically associated with acquisition
References: Amihud, Y, P. Dodd and M. Weinstein (1986). 'Conglomerate Mergers, Managerial Motives and Stockholder Wealth ', Journal of Banking and Finance. 10, pp. 401-410. Barney, J. B. (1988). 'Returns to Bidding Firms in Mergers and Acquisitions: Reconsidering the Relatedness Hypothesis ', Strategic Management Journal, 9 (Special Issue), pp. 71-78. Barney, J. B. (1991). 'Firm Resources and Sustained Competitive Advantage '.Journal of Management. 17, pp. 99-120. Baysinger, B. and R. E. Hoskisson (1989). 'Diversification Strategy and R&D Intensity in Multiproduct Firms '. Academy of Management Journal. 32, pp. 310-332. Baysinger, B., R. D. Kosnik and T. A. TUrk (1991). 'Effects of Board and Ownership Structure on Corporate R&D Strategy ', Academy of Management Journal. 34, pp. 205-214. Boje, D. M. (1991). 'The Story Telling Organization: A Study of Story Performance in an Office-supply Firm ', Administrative Science Quarterly. 36, pp. 106-126. Bruton, G. D., B. M. Oviatt and M. A. White (1994). 'Performance of Acquisitions of Distressed Firms ', Academy of Management Journal. 37, pp. 972-989. Burgelman, R. A. (1983). 'A Process Model of Internal Corporate Venturing in the Diversified Major Firm '. Administrative Science Quarterly. 28, pp. 223-245. Attributes of Successful and Unsuccessful Acquisitions of US Firms 113 Hermann, E. S. and L. Lowenstein (1988). 'The Efficiency Carper, W. B. (1990). 'Corporate Acquisitions and ShareEffects of Hostile Takeovers '. In: J. C. Coffee, L. Lowenstein holder Wealth: A Review and Explanatory Analysis ', and S. Rose-Ackerman (eds). Knights, Raiders, and Targets, Journal of Management, 16, pp. 807-823. pp. 211-240. Oxford University Press, New York. Chatterjee, S. (1986). 'Type of Synergy and Economic Value: Hirsch, P. M. (1986). 'From Ambushes to Golden Parachutes: The Impact of Acquisitions on Merging and Rival Firms ', Corporate Takeovers as an Instance of Cultural Framing Strategic Management Journal, 7, pp. 119-139. and Institutional Integration ', American Journal of Sociology, Chen, C. C. and J. R. Meindl (1991). 'The Construction 91, pp. 800-837. of Leadership Images in the Popular Press: The Case of Hitt, M. A. and R. D. Ireland (1985). 'Corporate Distinctive Donald Burr and People Express ', Administrative Science Competence, Strategy, Industry and Performance ', Strategic Quarterly. 36, pp. 521-551. Management Journal, 6, pp. 273-293. Datta, D. K. (1991). 'Organizational Fit and Acquisition Hitt, M. A. and R. D. Ireland (1986). 'Relationships among Performance: Effects of Post-acquisition Integration ', Corporate Level Distinctive Competencies, Diversification Strategic Management Journal, 12, pp. 281-297. Strategy, Corporate Structure and Performance ', Journal of Datta, D. K., G. E. Pinches and V. K. Narayanan (1992). Management Studies, 23, pp. 401-416. 'Factors Influencing Wealth Creation from Mergers and Acquisitions: A Meta-analysis ', Strategic Management Hitt, M. A. and D. Smart (1994). 'Debt: A Disciplining Force for Managers or a Debilitating Force for Organizations? ', Journal, 13, pp. 67-84. Journal of Management Inquiry, 3, pp. 144—152. D 'Aveni, R. A. (1994). Hypercompetition. The Free Press, Hitt, M. A., R. E. Hoskisson and R. D. Ireland (1990). New York. 'Mergers and Acquisitions and Managerial Commitment D 'Aveni, R. A. and I. C. MacMillan (1990). 'Crisis and the to Innovation in M-Form Firms ', Strategic Management Content of Managerial Communications: A Study of the Journal, 11 (Special Issue), pp. 29-47. Focus of Attention of Top Managers in Surviving and Failing Firms ', Administrative Science Quarterly, 35, pp. 634-657. Hitt, M. A., R. E. Hoskisson, R. D. Ireland and J. S. Harrison (1991a). 'Effects of Acquisitions on R&D Inputs and OutDavis, G. F. and S. K. Stout (1992). 'Organization Theory and puts ', Academy of Management Journal, 34, pp. 693-706. the Market for Corporate Control: A Dynamic Analysis of Hitt, M. A., R. E. Hoskisson, R. D. Ireland and J. S. Harrison the Characteristics of Large Takeover Targets, 1980-1990 ', (1991b). 'Are Acquisitions a Poison Pill for Innovation? ', Administrative Science Quarterly, 37, pp. 605-633. Academy of Management Executive, 5(4), pp. 22-34. Downey, H. K. and R. D. Ireland (1988). 'Strategic Objectives Hitt, M. A., R. E. Hoskisson, R. A. Johnson and D. D. in Policy Research: An Essay on the Dangers of not Moesel (1996). 'The Market for Corporate Control and Acknowledging Purposeful Behavior '. In: R. Lamb and Firm Innovation ', Academy of Management Journal, 39, P. Shrivastava (eds). Advances in strategic management, pp. 1084-1119. pp. 263-275. JAI Press, New York. Hitt, M. A., R. D. Ireland and R. E. Hoskisson (1997). StraDranove, D. and M. Shanley (1995). 'Cost Reductions or tegic Management: Competitiveness and Globalization. West Reputation Enhancement as Motives for Mergers: The Publishing Company, St. Paul, MN. Logic of Multi-hospital Systems ', Strategic Management Hopkins, H. D. (1987). 'Long-term Acquisition Strategies in Journal, 16, pp. 55-74. the U.S. Economy ', Journal of Management, 31, pp. 557-572. Eisenhardt, K. (1989). 'Building Theories from Case Hoskisson, R. E. and M. A. Hitt (1990). 'Antecedents and Study Research ', Academy of Management Review. 14, Performance Outcomes of Diversification: A Review and pp. 532-550. Critique of Theoretical Perspectives ', Journal of ManageElsbach, K. D. and R. 1. Sutton (1992). 'Acquiring Organment. 16, pp. 461-509. izational Legitimacy through Illegitimate Actions: A MarHoskisson, R. E. and M. A. Hitt (1994). Downscoping: How riage of Institutional and Impression Management Theories ', to Tame the Diversified Firm. Oxford University Press, Academy of Management Journal, 35, pp. 699-738. New York. Franko, L. G. (1989). 'Global Corporate Competition: Who 's Hoskisson, R. E. and R. A. Johnson (1992). 'Corporate ReWinning, Who 's losing, and the R&D Factor as One Reason structuring and Strategic Change: The Effect on DiversificaWhy ', Strategic Management Journal, 10, pp. 449-474. tion Strategy and R&D Intensity ', Strategic Management Franks, I, R. Harris and S. Titman (1991). 'The Postmerger Journal. 13, pp. 625-634. Share-price Performance of Acquiring Firms ', Journal of Financial Economics. 29, pp. 81-96. House, R. J., W. D. Spangler and J. Woycke (1991). 'Personality and Charisma in the U.S. Presidency: A PsychoHarrison, J. S., H. M. O 'Neill and R. E. Hoskisson (1991). Acquisition Strategy in Hostile Takeovers: Target and Bidding logical Theory of Leader Effectiveness ', Administrative Science Quarterly. 36. pp. 364-396. Firm Performance. Paper presented at the annual meeting Jemison, D. B. and S. B. Sitkin (1986). 'Corporate Acquisiof the Strategic Management Society, Toronto. tions: A Process Perspective ', Academy of Management Harrison J. S., M. A. Hitt, R. E. Hoskisson and R. D. Ireland Review. 11, pp. 145-163. (1991). 'Synergies and Post Acquisition Performance: Jensen. M. C. (1986). 'Agency Costs of Free Cash Flow, Differences Versus Similarities in Resource Allocations ', Corporate Finance and Takeovers ', American Economic Journal of Management, 17, pp. 173-190. Review. 76, pp. 323-329. Haspeslagh, P. and D. B. Jemison (1991a). Managing Jensen, M. C. (1988). 'Takeovers: Their Causes and ConAcquisitions. The Free Press, New York. sequences ', Journal of Economic Perspectives. 2, pp. 21-48. Haspeslagh. P and D. B. Jemison (1991b). 'The Challenge of Jensen, M. C. (1989). 'Eclipse of the Public Corporation ', Renewal Through Acquisitions ', Planning Review, March/ Harvard Business Review, 67(5), pp. 61-74. April, pp. 27-32. 114 M. Hitt, J. Harrison, R. D. Ireland and A. Best Jensen, M. C and R. S. Ruback (1983). 'The Market for Ravenscraft, D. J. and R. M. Scherer (1987). Mergers, Sell-offs Corporate Control: The Scientific Evidence ', Journal of and Economic Efficiency. Brookings Institute, Washington Financial Economics. 2, pp. 5-50. DC. Kahn, W. A. (1993). 'Caring for the Caregivers: Patterns of Roll, R. (1986). 'The Hubris Hypothesis of Corporate TakeOrganizational Caregiving ', Administrative Science Quarterly, overs ', Journal of Business, 59, pp. 197-216. 38, pp. 539-563. Sackmann, S. A. (1992). 'Culture and Subcultures: An AnaKoretz, G. (1997). 'Dealmakers Go on a Global Tear ', lysis of Organizational Knowledge ', Administrative Science Business Week, February 17, p. 25. Quarterly, 37, pp. 140-161. Kusewitt, J. B. (1985). 'An Exploratory Study of the Strategic Seth, A. (1990). 'Value Creation in Acquisitions: A ReAcquisition Factors Relating to Performance ', Strategic examination of Performance Issues ', Strategic Management Management Journal, 6, pp. 151-169. Journal, 11, pp. 99-115. Larson, A. (1992). 'Network Dyads in Entrepreneurial Settings: Singh, H. and C. A. Montgomery (1987). 'Corporate AcquisiA Study of the Governance of Exchange Relationships ', tion Strategies and Economic Performance ', Strategic Administrative Science Quarterly, 37, pp. 76-104. Management Journal, 8, pp. 377-386. Larsson, R. (1993). 'Case Survey Methodology: Quantitative Smith, C. L. and J. B. Warner (1979). 'Bankruptcy, Secured Analysis of Pattems Across Case Studies ', Academy of Debt, and Optimal Capital Structure: A Comment ', Journal Management Journal, 36, pp. 1515-1546. of Finance, 34, pp. 347-351. Lewin, K. (1936). Principles of Topological Psychology. Stuart, T. and D. Collis (1991a). Cat Fight in the Pet Food McGraw-Hill, New York. Industry (A, B, C, D). Harvard Business School, Boston, MA. Lipin, S. (1997). 'Corporations ' Dreams Converge on One Stuart, T. and D. Collis (1991b). Cooper Industries ' corporate Idea: Its Time to do a Deal ', Wall Street Journal, February strategy. Harvard Business School, Boston, MA. 26, Al, A12. Teece, D. (1986). 'Profiting from Technological Innovation: Loderer, C. and K. Martin (1992). 'Postacquisition Performance Implications for Integration, Collaboration, Licensing and of Acquiring Firms ', Financial Management, 21(3), pp. 69-77. Public Policy ', Research Policy, 15, pp. 285-305. Lubatkin, M. (1987). 'Merger Strategies and Stockholder The Economist (1994). 'The trouble with mergers '. September Value ', Strategic Management Journal. 8, pp. 39-53. 10, pp. 13-14. Lubatkin, M. and H. M. O 'Neill (1987). 'Merger Strategies Van Maanen, J. (1979). 'Reclaiming Qualitative Methods for and Capital Market Risk ', Academy of Management Journal, Organizational Research ', Administrative Science Quarterly, 30, pp. 665-684. 24, pp. 520-526. Meyer, A. D., A. S. Tsui and C R. Hinings (1993). 'ConfigWalsh, J. P. and R. D. Kosnik (1993). 'Corporate Raiders urational Approaches to Organizational Analysis ', Academy and their Disciplinary Role in the Market for Corporate of Management Journal. 36, pp. 1175-1196. Control ', Academy of Management Journal, 36, pp. 671-700. Modigliani, F. and M. H. Miller (1958). 'The Costs of Capital, Wansley, J. W, W. R. Lane and H. C. Yang (1983). 'Abnormal Corporation Finance, and the Theory of Investment ', Returns to Acquired Firms by Type of Acquisition and American Economic Review, 48, pp. 261-297. Method of Payment ', Financial Management, 12(3), Pablo, A. L. (1994). 'Determinants of Acquisition Integration pp. 16-22. Level: A Decision-making Perspective ', Academy of ManWeston, J. F. and K. S. Chung (1990). 'Takeovers and Coragement Journal, 37, pp. 803-836. porate Restructuring: An Overview ', Business Economics. Pastin, M. (1986). The Hard Problems of Management: 25(2), pp. 6-11. Gaining the Ethics Edge. Jossey-Bass, San Francisco. Weston, J. F., K. Chung and S. Hoag (1990). Mergers, RestrucPennings, J. M., H. Barkema and S. Douma (1994). 'Organturing and Corporate Control. Prentice-Hall, Englewood izational Learning and Diversification ', Academy of Cliffs. NJ. Management Journal, 37, pp. 608-640. Whitford, D. (1997). 'Sale of the Century ', Fortune. February Peteraf, M. A. (1993). 'The Cornerstones of Competitive 17, pp. 92-100. Advantage: A Resource-based View ', Strategic Management Yin, R. K. (1981). 'The Case Study Crisis: Some Answers ', Journal, 14, pp. 179-191. Administrative Science Quarterly. 26, pp. 58-65. Porter, M. E. (1987). 'From Competitive Advantage to CorYin, R. K. (1989). Case Study Research: Design and Methods. porate Strategy ', Harvard Business Review, 65(3), pp. 43-59. Sage Publications, Beverly Hills, CA.