Improving the odds of acquisition success

Acquisitions are a popular corporate growth strategy; however, performance outcomes often fail to meet executives’ expectations. Why do acquisitions often yield disappointing results? To provide an answer to this burning question, a study published by Mira Bilgili at Kansas State University in the Journal of Management finds that a variety of factors affect post-acquisition performance.

Acquisition experience of the acquiring firms, acquiring-firm-to-target-firm size ratio, target firm pre-acquisition performance, and target firm managerial autonomy in the post-acquisition stage are among the factors that have been frequently linked to post-acquisition performance. These firm and deal characteristics represent conditions that can create perceptions of low relative standing among target firm executives in relation to acquiring firm executives. Acquirers with greater acquisition experience are likely to have gained the necessary knowledge and skills to complete the post-acquisition integration process and run the target firm without the help of its executive team. Similarly, when acquiring-firm-to-target-firm size ratio is high, acquirers are likely to possess the resources necessary and to feel confident in their ability to successfully manage the target firm’s operations, diminishing the relative standing of target firm management in the process. Target firm’s executives may also be granted lower levels of discretion and control if their firm has had poor pre-acquisition performance. In fact, a belief that the acquiring firm’s management is better suited to lead the target firm than its current leadership is often a key motivation behind acquisitions of underperforming firms. Finally, executives’ relative standing is likely to be diminished when acquiring firms impose their own strategy, systems, and procedures on target firms following acquisition completion, stripping target firms’ executives of their autonomy, control, and discretion in decision making. Professor Bilgili examined whether diminished relative standing results in higher levels of executive turnover post-acquisition and how turnover, in turn, affects post-acquisition performance.

114 previous studies that have reported strength of association among firm and deal characteristics, executive turnover, and post-acquisition performance were collected, coded, and analyzed. It was found that relative standing helps explain high levels of executive turnover following acquisitions, which in turn results in lower post-acquisition performance. Target firm executives are presumed to have valuable knowledge about their firm, its industry, and competitors. When their power and status are diminished post-acquisition, they are likely to voluntarily leave or be replaced. Executive turnover may not only strip the firm of valuable human and social capital, but also add to the already significant levels of post-acquisition uncertainty and distress among firm stakeholders, including employees, customers, and investors and impede acquiring firms’ successful reorganization and integration efforts.

In contrast, CEO turnover was found to have a positive effect on post-acquisition firm performance. The authors infer that while replacing the CEO may signal change and give way to new ideas about the strategic direction of the firm, letting go of a large proportion of the top management team may be too significant of a disruption. Overall, executive turnover was found to be among the strongest predictors of post-acquisition performance. This provides evidence that leaders do matter, and that retaining target firm executives is a necessary condition for acquisition success.

Finally, the results of the study show nuanced findings concerning the relationship between integration between acquired and target firms and post-acquisition performance. While greater integration across strategy, systems, and procedures between the two firms helps create synergies and eliminate redundancies, which yield higher levels of post-acquisition performance; integration can also result in decreased autonomy of target firm executives and ultimately, lead to high levels of turnover among these executives. Therefore, the findings suggest that the presumed benefits of integration begin to dissipate when higher levels of integration results in loss of valuable target firm human capital.

Based on these findings, managers should increase their focus on the following activities:

• Engage in integration planning and explore optimal integration levels in order to avoid the negative consequences of diminished executive relative standing. This should involve tailoring the integration process to bolster the specific sources of value and synergies that motivated the acquisition, which may necessitate integration only of select functions and systems or strategically pacing more expansive organizational changes.

• Carefully evaluate acquired firm executives’ role in the organization and whether complementarities exist between their skills and those of the acquiring firm executives. Such evaluations should be aimed at determining the effect of retaining acquired firm executives post-acquisition.

• If retention of acquired firm executives is determined to be a priority, offering appropriate incentives and post-acquisition autonomy can decrease the likelihood of voluntary exit of key executives. Key executives may also be tasked with leading integration efforts and/or spearheading the change process from within along with acquiring firm leadership. Establishing cross-functional teams comprised of acquired and acquiring firm executives would be an appropriate method of providing acquired firm executives with a voice in and ownership of the transition process and ultimately increasing their motivation and well-being.