Targeted M&A Performance: Post-Acquisition Process and Organizational Integration

Corporations use mergers and acquisitions (M&A) as a tactic in implementing strategy, yet the rate of outcomes that meet targeted performance remains relatively low. Given the importance and frequency of M&A utilization in management strategy, it is critical that the success rate in achieving targeted perfomaance improve so that M&A are viable strategic options for industry. Although pre-acquisition factors and processes such as financial due diligence and strategic fit may improve the chance of success, significant evidence of correlation between these elements and targeted performance outcomes does not exist. Further, companies will continue to combine in’espective ofpre-acquisition coMitions and thus need assistance fi’om research in post-acquisition moderators of success. Much of the research of post-acquisition M&A has developed along disciplinary lines where the process of functional integration is studied separately from integration of people in the merged organization. This study examines the contribution of both the functional integration and human capital integration to the targeted post-acquisition performance outcome. A systematic review of research explores post-acquisition integration literature to identify moderators of achievement of targeted performance. The evidence collected supports the theory that successful post-acquisition integration of combined processes and organizational elements correlates to successful achievement of targeted acquisition perforrnance. Further, the research supports the theory that, although pre-acquisition factors influence integration, the post-acquisition process moderates achievement of the targeted performance outcome. The analysis also provides evidence regarding the importance of leadership, management of employee-level dynamics, as well as completion of organizational and process integration prior to realization of synergies and targeted post-acquisition performance. Thus, where many companies identify the end of the post-acquisition process as the point at which functions combine as targeted, research suggests that closure also needs to occur on the organizational integration side to optimize possible synergies and acquisition performance.Targeted M&A Performance: Post-Acquisition Process and Organizational Integration Sheila Dempsey Chickene A Thesis Submitted to the Graduate Faculty of University of Mm’yland University College in Partial Fulfillment of The Requirements for the Degree of Doctor of Management Advisory Committee: Dr. Thomas Mierzwa Dr. Denise Breckon March 2013 UMI Number: XXXXXXX Copyright 2013 by Chickene, Sheila Dempsey INFORMATION TO USERS The quality of this reproduction is dependent upon the quality of the copy submitted. Broken or indistinct print, colored or poor quality illustrations and photographs, print bleed-through, substandard margins, and improper alignment can adversely affect reproduction. In the unlikely event that the author did not send a complete manuscript and there are missing pages, these will be noted. Also, if unauthorized copyright material had to be removed, a note will indicate the deletion. UMI® UMI Microform XXXXXX Copyright 2013 by ProQuest, LLC All rights reserved. This microform edition is protected against unauthorized copying under Title 17, United States Code. ProQuest, LLC 789 East Eisenhower Parkway P.O. Box 1346 Ann Arbor, M148106-1346 University of Maryland University College Graduate School of Management & Technology DOCTOR OF MANAGEMENT DEGREE DISSERTATION APPROVAL FORM Candidate Sheila Dempsey Chickene has completed all the necessary dissertation requirements of University of Maryland University College’s Doctor of Management Program. APPROVED: Committee Chah’: Dr. Thomas J. Mierzwa March 2, 2013 Date: Committee Co-Chair: Dr. Denise A. Breckon March 2, 2013 Date: iii Abstract Corporations use mergers and acquisitions (M&A) as a tactic in implementing strategy, yet the rate of outcomes that meet targeted performance remains relatively low. Given the importance and frequency of M&A utilization in management strategy, it is critical that the success rate in achieving targeted perfomaance improve so that M&A are viable strategic options for industry. Although pre-acquisition factors and processes such as financial due diligence and strategic fit may improve the chance of success, significant evidence of correlation between these elements and targeted performance outcomes does not exist. Further, companies will continue to combine in’espective ofpre-acquisition coMitions and thus need assistance fi’om research in post-acquisition moderators of success. Much of the research of post-acquisition M&A has developed along disciplinary lines where the process of functional integration is studied separately from integration of people in the merged organization. This study examines the contribution of both the functional integration and human capital integration to the targeted post-acquisition performance outcome. A systematic review of research explores post-acquisition integration literature to identify moderators of achievement of targeted performance. The evidence collected supports the theory that successful post-acquisition integration of combined processes and organizational elements correlates to successful achievement of targeted acquisition perforrnance. Further, the research supports the theory that, although pre-acquisition factors influence integration, the post-acquisition process moderates achievement of the targeted performance outcome. The analysis also provides evidence regarding the importance of leadership, management of employee-level dynamics, as well as completion of organizational iv and process integration prior to realization of synergies and targeted post-acquisition performance. Thus, where many companies identify the end of the post-acquisition process as the point at which functions combine as targeted, research suggests that closure also needs to occur on the organizational integration side to optimize possible synergies and acquisition performance. Dedication V This dissertation is dedicated to family members who were instrumental in the completion of this body of work. First to my hnsband Paul, son Michael, and daughter Alexa, thank you for pushing me to get the work done when it would have been nmre fun to do other things. Thank you as well as for your unwavering belief in nay ability to complete the work needed for my doctorate and this dissertation. I look forward to our increased time together! To my Mom and Dad, Marie and Joe Dempsey, thank you for raising your 14 children to believe anything is possible and for cheering us on even when you may not have agreed with our choices. To my sister Karen Dempsey, who instigated this adventure, I look forward to celebrating your eventual Ph.D. completion. To Marianne and Joe Chickene, my second parents, thank you for your support and enconragement tlu’oughout. Lastly, to Lisa K Hill, my fi’iend since kindergarten thanks for jumping in as my surrogate at Michael’s graduation - it was inevitable that the two graduations would coincide. vi Ackno~vledgement I look fondly back on the learning gained through my doctoral experience and have many to acknowledge for their hand in the successful completion of both my coursework and this dissertation. First, thank you to Dr. Thomas Mierzwa and Dr. Denise Breckon for acting as advisor, coach, and editor throughout nay dissertation journey. Yore" guidance was a precious gift. In addition to my advisors, i ~vould also like to aclmowledge those in my cohol~t that journeyed along with me including Rajesh Radakrishnan, Amanda Lle~vellyn, Tammy Borkowski, Steve Gantz, Dainty Ebb, and Shaun Vaughns. There was definitely strength in numbers. I feel blessed to have been part of such a talented group of scholars. May your new knowledge serve you well! vii © Copyright by Sheila Dempsey Chickene 2013 Table of Contents viii Table of Contents ...............................................................................v..i.ii List of Tables ..............................................................................................x. i List of Figures ............................................................................................x..i Chapter 1 : Introduction ..........................................................................1. Background ....................................................................................... 1 Problem Statement ...........................................................................5 Research Questions .......................................................................7 Scope of Study ..................................................................................8 Significance of This Research ...........................................................10 Dissertation Chapters ............................................................................11 Chapter 2: Literature Review ................................................................1..2 Overview .........................................................................................1.2 . Pre-Acquisition Influences that Create Unique Acquisition Starting Points ....... 12 Perspectives in Post-Acquisition Integration ............................................... 16 Leadership and Communication in Process and Organizational Integration ........ 18 The Influence of Employee-Level Dynamics on Integration ..............................23 Development of a Combined Organizational Culture ....................................... 26 Management of Transition Process and Activities ...................................2..8 The Influence of Processes mad Organization in Post-Acquisition integration.. 32 Chapter 3: Conceptual Framework ........................................................3.5 Introduction ..............................................................................3..5 Conceptual Model Description ..............................................................36 Variables of the Analysis ................................................................ 38 Hypotheses ......................................................................................3.9 Summary of the Research Model ..................................................................44 ix Chapter 4: Research Method ..................................................................47 Introduction ..............................................................................4.7 Research Objectives ......................................................................4.7 Research Methodology ..................................................................47 Search Strategy ..........................................................................4.9 Data Collection Methods ............................................................... 52 Research Constraints and Limitations ...................:. ............................ 54 Threats to Validity ........................................................................ 55 Subject Matter Expert (SME) Review .................................................57 Chapter 5: Analysis of Findings ............................................................ 58 Introduction ...............................................................................5.8 Systematic Literature Search Results ................................................. 58 Characteristics of Excluded Studies ................................................... 59 Characteristics of Included Studies .................................................... 62 Synthesis of Included Studies .......................................................... 63 Pre-Acquisition Factors & a Well-Executed Post-Acquisition ................... 67 Externally Focused Pre-Acquisition Factors ............................... 68 Internally Focused Pre-Acquisltion Factors ................................ 71 Externally & Internally Focused Pre-Acquisition Factors ............... 74 Leadership and Communication ...................................................... 77 Employees and Organizational Cultm’e ..............................................81 Orgaaaizational and Process integration .............................................. 84 X Limitations ................................................................................88 Problem Definition ........................................................... 89 Literature Search .............................................................. 89 Gathering Infol~nation fi’om Included Studies ........................... 90 Methods within Individual Studies. ........................................ 91 Integration of Evidence from Individual Studies ........................... 91 Intel~retation of Evidence ................................................... 92 Presentation of Results ........................................................ 92 Conclusion ...................................................................................... 93 Chapter 6: Implications for Management ..................................................... 100 Introduction ..............................................................................100 Implications for Management Theory ................................................. 100 Implications for Management Practice ................................................ 101 Future Trends in M&A .................................................................1.03 Recommendations for Future Research ............................................... 105 References ....................................................................................................109 Appendices ...................................................................................................124 Appendix A: Matrix of Merger and Acquisition Types ........................... 124 Appendix B: Selection Criteria ....................................................... 125 Appendix C: Assesslnent Criteria Tool (ACT) ......................................126 Appendix D: Search Strings ............................................................127 Appendix E: Results of Systematic Literature Search ............................. 128 Appendix F: Sources of Literature ................................................... 129 Appendix G: SME Response Folan ................................................... 130 List of Tables xi Table 1 : Table 2: Table 3: Table 4: Table 5: Table 6: Table 7: Table 8: Table 9: Table 10: Table 11: Table 12: Summary of Propositions Derived from Literature Review ................ Summary of Propositions, Variables, and Hypotheses ........................ Summary of Sem’ch Themes ....................................................... Search String Strategy Summary .................................................... Excluded Studies ..................................................................... Included Study Summaries ......................................................... Externally Focused Pre-Acquisition Factor Studies and Findings ..... Internally Focused Pre-Acquisition Factor Studies and Findings ...... Externally & Internally Focused Pre-Acquisition Factor Studies and Findings ....................................................................... Leadership and Communication Studies & Findings .......................... Employee-Level Dynamics & Organizational Culture Studies and Findings ......................................................................... Organizational & Process Integration Studies and Findings ................. 34 45 51 52 61 64 71 73 76 81 84 88 Figure 1 : Fignre 2: Figure 3: List of Figures Conceptual Model of Post-Acquisition integration for Targeted M&A Performance .......................................................................................... Research Model and Hypotheses .................................................... Evidence Based Model and Hypotheses .................................. 37 46 94 POST-M&A INTEGRATION AND PERFORMANCE 1 Background Chapter 1: Introduction and Research Problem Mergers and acquisitions (M&A) are primary tactics in the arena of corporate strategy for growth and sustainability. Thomson Financial figures show that an estimated 10,000 US mergers and acquisitions occun’ed in 2006 (Marks & Vansteenkiste, 2008). Cartwright and Schoenberg (2006) put the global rate at about 30,000 acquisitions in 2004. In spite of its use as a tactic in corporate growth, estimates of success rates continue to be no higher than about 25- 34% (Deutsch & West, 2010). Some of the highest success rates are estimated at 50% (Cartwright & Schoenberg, 2006). Further, Marks and Mirvis (1992) claim 33% of M&A result in resale within five years of acquisition. As such, Haspeslagh and Jemison (1987), refer to M&A as a risky vehicle for strategic renewal while Pablo and Javidan (2002) categorize the M&A record of accomplishment as mediocre. Moreover, research indicates that despite decades of study of factors such as acquisition relatedness, prior acquisition experience, and organizational complementarity, antecedents for achievement of targeted financial outcomes remain tmknown (Hitt, Harrison, Ireland, & Best, 1998; King, Dalton, Daily, & Covin, 2004). Hitt et al. (1998) state, "the fact that acquisitive growth is a significant firm strategy and many acquisitions are not successful suggests an inadequate theoretical and practical understanding of this complex phenomenon" (p. 92). Many disciplines are attempting to understand how acquisition integration processes can improve the probability of success (Cartwright & Schoenberg, 2006). Research identifies four primary schools of thought that attempt to explain these phenomena including financial, strategic management, process, and organizational perspectives (Birkinshaw, Bresman, & HSkanson, 2000; Cartwright & POST-M&A INTEGRATION AND PERFORMANCE 2 Schoenberg, 2006; Chatteljee, Lubatldn, Schweiger, & Weber, 1992; Creasy, Stull, & Peck, 2009; Harrison, Hitt, Hoskisson, & Ireland, 199t; and Homburg & Bucerius, 2006). Haspeslagh and Jemison (1987) identify two phases of the M&A process - the activities that occur before the signing of the agreement and the integration phase that occurs thereafter. The financial and strategic management schools of thought tend to research the former whereas the majority of the process and organizational studies align with the latter (Birkinshaw et al., 2000). The focus of the financial perspective is primarily on wealth creation that results fi’om efficiencies or synergies in acquisitions (Birkinsha~v et al., 2000; Cartwright & Schoenberg, 2006; and Harrison et al., 1991). The strategic management perspective focuses on the compatibility or strategic fit of the merging organizations prior to acquisition (Birkinsha~v et al., 2000; Cartwright & Schoenberg, 2006). Through the 1980’s, the majority of research in M&A focused on the financial and strategic fit of the acquiring and acquired firms (Barkema & Schijven, 2008; Nahavandi & Malekzadeh, 1988). Despite the volume of research in the pre-acquisition arena, Harvey and Lusch (1995) describe the lack of a comprehensive due diligence model as "disquieting" (p. 5) and call for expanded resem’ch in this area. A decade later King et al. (2004) provide meta-analytic evidence of a lack of economic or strategic antecedents of acquisition financial performance. The authors determined that financial and strategic management factors were not capable of explaining the success or failure and recommended searching for additional antecedents of success. Although research continues in the pre-acquisition phase, Barkema and Schijven (2008) note a recent shift in research to the post-acquisition process with potential to enhance or even predict the realization of intended acquisition synergies. Given that poor fiscal and strategic due diligence is not a sufficient explanation for all failures; research needs to look beyond the pre-acquisition phase of M&A and investigate the post-acquisition phase. POST-M&A INTEGRATION AND PERFORMANCE 3 In the process and organizational perspectives, the focus is primarily on post-acquisition management, with evidence that the due diligence phase also benefits from understanding both process and organizational integration during post-acquisition. The process perspective investigates the role that an integration strategy and subsequent actions have on the outcome while an organizational perspective focuses on employee and cultural dynamics of the integration process (Cartwright and Schoenberg, 2006). Jemison and Sitkin (1986) define the process perspective as "the acquisition process itselt" (p. 145) and focus on activities that occur tbxoughout the acquisition. Birldnshaw et al. (2000) define the process perspective as task integration in the post-acquisition phase of M&A. If due diligence in the areas of financial and strategic compatibility are insufficient predictors of success, then study of post-acquisition and these latter areas of process and organizational integration may provide sought after answers. Cartwright and Schoenberg (2006) comment that research and insight have tended to develop along disciplinary lines rather than in a holistic or multi-disciplinary approach. Cartwright and Cooper (1995) recommend a multi-disciplinary approach to allow for a "collective rather than fragmented contribution to our understanding of the phenomena" (p. 41). In their study of successful and unsuccessful acquisitions, Hittet al. (1998) concur with Cartwright and Cooper in concluding that no one single theory fully explained the success or failure of acquisitions. Whereas fi