Analogical Reasoning from Source to Target Acquisitions

This study draws upon organizational learning in the management domain and analogical reasoning in the psychology arena to examine the antecedents of acquisition success in a study of 655 firms from 54 industries that conducted 2622 acquisitions from 1991 through 2005. Where previous work in this domain focused on cumulative abnormal returns (CAR) as the measure of performance and ordinary least squares as the method of analysis, this work extends the literature by introducing Tobin's Q-ratio as the measure of performance and autoregressive, integrated, moving average (ARIMA) model with transfer functions as the methodological approach. Earlier research on the influence of prior experience on focal acquisition performance has yielded interesting insights despite variation in findings. However, CAR is a short-term measure that is dependent upon stockholder reaction and does not fully anticipate the long-term fitness of the acquisition event. Ex ante, this study expected to result in a meta-narrative applicable to all merger and acquisition activity that could guide management of an acquisition program through the identification of the antecedent conditions of success. Prior research suggests that the Q measure is more relevant to managerial understanding and strategic orientation than insights gained from investor opinion as measured from cumulative abnormal returns. This study's findings suggest that acquisition experience, timing, antecedent performance, and, interaction between experience, timing and performance are all related to focal acquisition results. Further, when ARIMA is used to analyze the data and Q is the dependent variable, additional details and richer insights about the influence of the independent measures are gained. These findings justify the additional effort and time necessary for managers to use Tobin's Q. Additionally, while CAR does provide a particular set of actionable information, Tobin's Q-ratio provides a more robust long-term indicator of acquisition performance especially where analogical reasoning is the process through which learning is demonstrated