Looking into the ‘black box’ – unlocking the effect of integration on acquisition performance

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Abstract

Extending research on the performance of Mergers and Acquisitions (M&As), this paper seeks to explain how the post-acquisition integration phase affects acquisition performance. Despite extensive research efforts, there remains a scant understanding of how acquisition implementation, particularly in the post-acquisition integration phase, impacts the performance of M&As. Based on an extensive study of eight acquisitions, in this paper, a grounded model detailing the mechanisms by which the post-acquisition integration phase affects acquisition performance is developed. The model posits that integration-related factors do not bear directly upon acquisition performance. Instead, their effect is mediated by functional organizations in both firms. When focusing into these functional mediating dynamics, we observe that integration-related processual, behavioral and cultural factors affect the identified functional mediators in different ways. Going forward, we echo calls for integrated perspectives to the study of M&A and M&A performance in particular.

Introduction

Mergers and acquisitions (M&A) are a favored means of corporate growth and renewal in an increasingly competitive global arena (Faulkner, Teerikangas, & Joseph, 2012). Despite their managerial appeal, research observes that securing success in M&A transactions is a complex undertaking (Gomes et al., 2013, Hitt et al., 2012, Larsson and Finkelstein, 1999). Studies on the performance of M&As consistently show that, contrary to expectations, M&As do not necessarily improve the financial performance of the buying firm (King et al., 2004, Papadakis and Thanos, 2010, Schoenberg, 2006, Zollo and Meier, 2008).

The downside of the majority of these studies is that they measure the financial performance of M&As mostly in a short timeframe ranging from a few days to a one-to-three year period around the M&A (see Meglio and Risberg, 2011, Thanos and Papadakis, 2012a for comprehensive reviews) where the integration process is still ongoing (Ranft & Lord, 2002). In contrast, the handful of studies taking a longer perspective (e.g., Laamanen and Keil, 2008, Quah and Young, 2005) suggest that the performance impact of M&As on buying firms would tend to be negative in the first post-deal years, moving at best toward the positive in the longer-term (Quah & Young, 2005). In other words, M&As would seem to be so complex to integrate operationally, organizationally and socio-culturally that it takes buying firms on average five to ten years, until they are possibly able to report positive performance figures. These findings point to the inherent managerial complexity in making M&As succeed.

Despite a wealth of interest in the study of acquisition performance (Zollo & Meier, 2008), the critical question of “how does the management of the post-acquisition integration process impact the performance of mergers and acquisitions” remains largely unanswered (Ahammad and Glaister, 2011, Gomes et al., 2013, Haleblian et al., 2009, King et al., 2004). In other words, there is scant understanding of the processual and managerial antecedents behind M&A performance (Ellis et al., 2009, Gomes et al., 2011, Zhang et al., 2015). In light of the fact that the post-acquisition integration phase is repeatedly mentioned as a key factor explaining M&A failures (Angwin and Urs, 2014, Duncan and Mtar, 2006, Heimeriks et al., 2012, Larsson and Finkelstein, 1999, Weber et al., 2011), this can be considered a serious research gap (Angwin & Meadows, 2015). Haleblian et al. (2009) comprehensive review of 300 published papers in top-tier journals echoes this point: “We encourage research that explores the processes that foster effective integration” (p. 409). Other prominent M&A scholars have raised concerns as to the lack of appreciation of the factors impacting the performance and outcomes of M&A (Hoskisson and Hitt, 1993, Hitt et al., 1998, King et al., 2004). In their extensive meta-analytical study of research on M&A performance, King et al. (2004) identified no significant M&A performance antecedents, concluding that “additional, unknown variables may impact M&A performance”, and subsequently calling for more theory-building research on M&As, using novel methods.

In this paper, an effort is made to address this theoretically and practically important gap. The research question guiding our work is: “How does the post-deal integration phase affect acquisition performance?” Our research approach deviates from the bulk of prior research on M&A performance, predominantly based on quantitative archival US data (Andonova, Rodriguez, & Sanchez, 2013) or surveys using perceptual top manager data (Meglio & Risberg, 2010). Our research approach aligns with the recommendations to explore the qualitative dynamics in M&A (Cartwright et al., 2012, Meglio and Risberg, 2010) and M&A performance in particular (Meglio & Risberg, 2011) in order to “get inside the M&A phenomenon” (Haleblian et al., 2009, p. 492). In this paper, we report the findings of a large-scale interview-based study using grounded theory methods. Inductive approaches are particularly suited to the study of complex social processes unfolding over time (Eisenhardt, 1989, Glaser and Strauss, 1967), and thus can be considered adequate to appreciating the performance dynamics inherent in post-acquisition integration. Our focus was on acquisitions pursued using a growth-oriented business strategy and integrated adopting a symbiotic strategy (Haspeslagh & Jemison, 1991).

Based on the study of eight acquisitions made by four Finnish multinationals and 166 one-to-one interviews with top and middle managers from both buying and target firms, in this paper, a grounded model of the mechanisms through which the post-acquisition integration phase comes to affect acquisition performance is developed. This is the main theoretical contribution of the paper. In so doing, the paper provides an important step toward opening the ‘black box’ of post-acquisition integration and its impact on acquisition performance. Importantly, we find that integration-related processual, behavioral and cultural factors do not bear directly upon acquisition performance. Instead, their effect is mediated by functional organizations, i.e. the sales, research, manufacturing, IT, finance and HR functions. This leads us to argue that positing an unequivocal causal link from one element in the post-acquisition phase to a particular acquisition performance metric needs to be treated with caution. Instead, echoing recent calls (Angwin and Vaara, 2005, Bauer and Matzler, 2014, Gomes et al., 2013), we call for integrated perspectives to M&A performance.

Section snippets

The study of M&A performance

One of the most popular in the M&A literature concerns the success, i.e. performance, of M&As. Numerous papers have been published on this topic (Haleblian et al., 2009, Meglio and Risberg, 2011). Thanos and Papadakis (2012a) reviewed 13 US and European management journals 1980–2010, identifying 137 papers using M&A performance as their dependent variable. In another review covering the period 1970–2006 only in the top management and finance journals, Zollo and Meier (2008) identified 88 papers

Research method and setting

The findings presented in this paper draw from a research project spanning several years, in which post-acquisition integration dynamics were under study. Given the recognized need for more theory-building on M&A (Greenwood et al., 1994, Haleblian et al., 2009, Larsson and Finkelstein, 1999, Schweiger and Goulet, 2000) coupled with the need to further our appreciation of the integration related antecedents of M&A performance, the grounded theory method (Glaser, 1978, Glaser, 1992, Glaser, 1998,

Toward unlocking the effects of integration on acquisition performance

Based on the analysis of the studied eight acquisitions, we observed that integration-related processual, behavioral and cultural antecedents affect acquisition performance. Surprisingly, though, this effect is indirect, as we found it to be mediated by functional organizations. In the next sections, we proceed to outlining our grounded model on how the post-acquisition integration phase affects acquisition performance. We first detail the three elements of the developed model, and then move

Discussion

In light of calls to further our appreciation of M&A performance dynamics, in this paper we focused on integration-related antecedents of acquisition performance. In so doing, we follow recent calls for the need to explore the ways in which acquisition implementation dynamics, particularly as regards the post-acquisition integration phase, come to affect M&A performance (Cording et al., 2008, Gomes et al., 2013, Haleblian et al., 2009). In this paper, a grounded model outlining how the

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