Hitt Et Al (1998) Successful and Unsuccessful Acquisitions

British Journal of Management, Vol. 9, 91-114 (1998)

Attributes of Successful and UnsuccessfulAcquisitions 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 ofBusiness, 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 evidencethat they often do not enhance the financial performance of acquiring firms and mayadversely affect innovation. However, some acquisitions are associated with bothincreases in financial performance and a strengthened commitment to R&D whileothers experience decreases in both. Multiple theories have been offered to explainacquisitions and their outcomes, but few have received strong empirical support.

This paper describes a multiple rater, multiple-case study of acquisitions that had highlyfavourable outcomes and others that experienced highly unfavourable outcomes. Alltwelve of the high performing acquisitions studied were found to exhibit the dualcharacteristics of firiendliness during acquisition negotiations and resource comple-mentarities between the two firms. Additionally, debt played an important role in thesuccess (low to moderate debt) or lack of success (high or extraordinary debt) in 21 ofthe 24 acquisitions studied. Inadequate target evaluation was a factor in 11 of the 12acquisitions with low performance. Importantly, the results of both sets of acquisitionssuggested that a configuration of attributes affected post-acquisition performance. Otherfindings both supported and contradicted commonly held beliefs about acquisitions, aswell as highlighted variables not typically associated with acquisition strategies. Thestudy provides directions for future theory development and empirical research onacquisitions.

Introduction

For many years, acquisitions have been a pop-ular strategy (Hoskisson and Hitt, 1994). Forsome firms, acquisitions have become a well-institutionalized phenomenon strongly influencingorganizational structures and behaviours (Hirsch,1986; Pablo, 1994). Clearly, some organizationsconsider acquisitions to be a superior method ofinvesting corporate resources (Bruton, Oviatt andWhite, 1994; Pablo, 1994).

' We thank our colleagues Jean Bartunek, Gibb Dyer,Sydney Finkelstein, Vance Fried, Graham Hubbard,Chet Miller and Hugh O'Neill for comments on earlierdrafts of this manuscript.

The amount of resources companies dedicatedto acquisitive growth increased steadily betweenthe middle of the 1960s and the end of the 1980s(Weston and Chung, 1990), but the rate of ac-quisitions slowed slightly during the early 1990s.Between 1990 and 1992, for example, approx-imately $222 billion was spent on acquisitions(Pablo, 1994). However, acquisition activity beganto increase in 1992 and 1993 with more dollarsinvested in acquisitions during 1994, 1995 and1996 than in any previous year. In 1996 over$1 trillion was spent on acquisitions globally with$660 billion in the USA (Lipin, 1997). Thus, theUSA was the most active followed by GreatBritain and Germany (Koretz, 1997). This level ofactivity suggests that the fifth merger wave of this

© 1998 British Academy of Management

92 M. Hitt, J. Harrison, R. D. Ireland and A. Best

century has begun and may be the greatest inhistory (Whitford, 1997).

In spite of their popularity as a growth strategy,acquisitions may not, on average, provide manyfinancial benefits for acquiring firms (Carper, 1990;Datta, Pinches and Narayanan, 1992; Jensen,1988; Loderer and Martin, 1992; Porter, 1987;Ravenscraft and Scherer, 1987). Equally disturb-ing, there is evidence that acquisition activity canlead to reductions in internally developed innova-tion (Hitt, Hoskisson, Ireland and Harrison, 1991a;Hitt, Hoskisson, Ireland and Harrison, 1991b;Hitt, Hoskisson, Johnson and Moesel, 1996).

The fact that acquisitive growth is a significantfirm strategy and many acquisitions are not suc-cessful suggests an inadequate theoretical andpractical understanding of this complex phenom-enon. Consequently, the purpose of this researchwas to examine thoroughly a set of acquisitionsthat produced successful outcomes compared toanother set that produced unsuccessful outcomes.The successful acquisitions defied the patternsdescribed and thus led to increased financialperformance and greater investment in R&D.The unsuccessful set produced poor financialperformance, coupled with reductions in R&Dinvestment. Each set of acquisitions can then beconsidered outliers. Our purpose was to identifycommon attributes of these acquisitions to ad-vance theoretical understanding of how to succeedand avoid failure using an acquisition strategy.

The analytical method used to make these com-parisons was a systematic, multiple rater, multiple-case analysis of acquisitions associated withpositive or negative changes in both financial per-formance and investments in R&D (as measuredby R&D intensity). Yin (1989) argued that casestudies are appropriate in answering 'why' ques-tions about contemporary events over which theinvestigator has little or no control. In this study,the main research question is why some acquisi-tions lead to increases in both financial perform-ance and R&D investments while others lead toreductions in both. Yin (1989) also suggested thatcase studies are appropriate for generating theo-retical propositions. The present study resulted inseveral testable research propositions.

Following is a summary outline of the basictheory and evidence regarding acquisition activit-ies. This theory and evidence provides a founda-tion for describing the study's research questionand interpreting the findings reported herein.

Prevalent theories of acquisitions

Resource-based view. A theoretical perspectivethat partially supports several major views onacquisitions is the resource-based view of the firm(Barney, 1991). Applied to acquisitions, this viewsuggests that resources may motivate and directacquisitive growth. First, firms with specific typesof resources may seek acquisitive growth. Forexample, firms with significant free cash flowsmay seek to invest them by acquiring businessesto derive greater returns. Investing free cashflows in this way, as opposed to holding them,may also demotivate future takeover attempts.Second, a firm may attempt to gain economiesof scope by acquiring a business in which it canapply its core competence (Peteraf, 1993). A firmmay also use an acquisition to buffer its core com-petence or to combine with resources from theacquired firm to make its core competence lessimitable (Harrison, Hitt, Hoskisson and Ireland,1991). In effect, the acquisition may create co-specialized assets (Teece, 1986). Applying theresource-based view to acquisitions is congruentwith Barney's (1988) arguments that sustainablecompetitive advantage may accrue from the real-ization of private synergy that cannot be easilyimitated.

Acquisition process. An alternative theoreticalapproach focuses on the acquisition process.Among the most recognized proponents of thisapproach are Haspeslagh and Jemison (1991a,1991b). Based on a set of case studies, they sug-gest how to best manage the acquisition processto create firm value. They argue that acquisitionscreate four managerial challenges:

1 ensuring consistency of the acquisition withthe firm's current strategic direction

2 following a quality pre-acquisition decision-making process (e.g. choosing the right busi-ness for acquisition)

3 effectively integrating the acquired firm intothe existing business

4 fostering learning from the acquisition (ac-quisition specific and more general learning)(Haspeslagh and Jemison, 1991b).

Perhaps, the attribute receiving the most atten-tion from other scholars has been the importanceof post-acquisition integration to create value.

Attributes of Successful and Unsuccessful Acquisitions of US Firms 93

Acquisition outcomes. Several theoretical per-spectives have been advanced to explain theperformance of acquisitions. The most commontheoretical rationales suggesting a potential posit-ive effect of acquisitions on firm performanceinclude the following:

1 the merged firm achieves greater marketpower through increased market share ormultipoint competition

2 the merged firm gains economies of scaleand/or scope by combining complementarycapabilities of the two firms, and

3 the merged firm can access capital at lowercosts (Weston, Chung and Hoag, 1990;Dranove and Shanley, 1995; Hitt, Ireland andHoskisson, 1997).

Other theories explain why acquisitions maynot achieve positive performance enhancingeffects. Barney (1988), for example, argued thatprivate (unknown to others) and uniquely valu-able (unavailable to potential competitors) synergyis a prerequisite for a successful acquisition. With-out such synergy, potential acquiring firms bidthe price for target firms to amounts equal to orgreater than their value. Alternatively, Roll (1986)suggested that managerial hubris explains whyacquiring firms sometimes make excessive bids.Paying high premiums reduces the likelihood thatacquiring firms' shareholders will benefit from anacquisition (Datta et al., 1992).

As an alternative to these theoretical perspect-ives, Jensen (1988) argued that acquisitive take-overs can produce higher firm performance whenmanagement teams of firms that are underper-forming their potential are replaced because theacquiring firm can more efficiently manage theacquired firm's assets. Because managementteams in the acquired firms are replaced, the ac-quisitions are almost always hostile (acquired firmmanagers fight the takeover). The active marketfor corporate control during the 1980s reflects theconviction that takeovers were often completedto eliminate managers' non-value maximizingbehaviours.

There have been other more focused theoreticalnotions regarding the ability of acquisitions tocreate firm value. Among those, Hitt, Hoskissonand Ireland (1990) argue that an active acquisi-tion strategy over time causes firms to shift fromthe use of strategic to financial controls. In turn.

heavy emphasis on financial controls reducesdivisional managers' commitment to innovation.Given the growing importance of innovation forcompetitiveness in global markets (Franko, 1989),reduction in innovation may harm firm perform-ance in a variety of industries.

Thus, several theories have been advanced toexplain acquisitions and their success or the lackthereof. Most are relatively narrow (e.g. focus onprocess or outcomes such as innovation) andwhile some are complementary, others are inde-pendent (i.e. focus on different and independentattributes such as managerial hubris and hostiletakeovers). Unfortunately, none of these theoriesis able to capture the essence of the complexphenomenon of acquisitions, because they areincomplete. Thus, we have an inadequate under-standing of acquisitions. This is clearly evident inthe examination of the empirical findings onacquisitions.

Empirical evidence regarding the acquisitivegrowth strategy

Shareholders in acquired firms typically derivesignificant value from acquisitions (Datta et al.,1992; Jensen, 1988). Some evidence shows thatacquired firm shareholders gain an average of20% between the announcement of a proposedacquisition and its completion (The Economist,September 10,1994, p. 87). However, the value ofacquisitions for acquiring firm shareholders is lessconclusive (Amihud, Dodd and Weinstein, 1986;Carper, 1990; Datta et al., 1992; Lubatkin, 1987;Lubatkin and O'Neill, 1987).

Some research (e.g. Franks, Harris and Titman,1991) suggests that there is no significant per-formance difference between acquiring firms andtheir counterparts that do not engage in acquisi-tions. However, other results do not support useof an acquisition strategy. Loderer and Martin(1992) reported that an investment in each acquir-ing firm on the date of 10 000 acquisitions thattook place between 1966 and 1986, and held for500 trading days, would have yielded an equallyweighted return of 21%. In comparison, a share inthe market portfolio would have yielded a returnof 36%, more than 50% higher. Even after con-trolUng for risk, Loderer and Martin found thatacquiring firms often underperform the market.

Other results suggest benefits for acquiring firmshareholders only in specific types of acquisitions.


For example, Hopkins (1987) found benefits foracquiring firm shareholders when there was strat-egic fit, or similar strategic characteristics be-tween the target and acquiring firms. Singh andMontgomery (1987) found such benefits in re-lated acquisitions. Kusewitt (1985) discoveredthat financial performance was higher whenmerged firms shared a common industry. Theseworks provide coarse-grained support for theresource-based view and the importance of syn-ergy advanced by Barney (1988). Furthermore,Harrison et al. (1991) found support for the im-portance of private synergy. Their findings sug-gested that when the acquiring and acquired firmsemphasized different but complementary resources(thereby producing less public similarities), themerged firm achieved higher performance.

Other evidence suggests that the market forcorporate control may not be efficient as assumed.In fact, Walsh and Kosnik (1993) found that thetop corporate raiders in the 1980s often targetedfirms outperforming their industries, firms thatcan be assumed to be managed effectively andefficiently. Additionally, Davis and Stout (1992)found that firms with a higher return on equity(ROE) were more likely to receive a tender offerthan those with a lower ROE. They concluded thatthese results did not provide clear support for anysingle account for why takeovers (acquisitions)occur.

Hitt et al. (1991a, 1991b) found that acquisi-tions have a negative effect on both R&D inten-sity (a measure of R&D inputs) and patent intensity(a measure of R&D outputs). By affecting the'championing culture' that supports organiza-tional innovation (Burgelman, 1983), acquisitionsmay lower managers' incentives to develop newproduct and process ideas (Hitt et al., 1990). Morerecent research shows that firms active in the mar-ket for corporate control introduce fewer newproducts to the market regardless of their in-dustry than firms not active in the market forcorporate control (Hitt et al., 1996).

There has been little direct empirical evidenceregarding the popular theoretical notions posedby Roll (1986) and Haspeslagh and Jemison(1991a). Davis and Stout (1992) concluded thatcurrent organizational theories are not usefulin explaining acquisition behaviour and success.Given the variety of theories, none of which hasbeen found to dominate the explanation of ac-quisitions, and the conflicting evidence regarding

the success of the acquisitive growth strategy,more work is necessary to help understand thiscomplex phenomenon. While there has been asignificant amount of research on acquisition per-formance, little research has focused on helpingus better understand how acquisitions can besuccessful. This is surprising given that acquisi-tions represent a dominant strategic trend inindustry. Thus, using an inductive method, thepurpose of this research was to identify andunderstand conditions and attributes contributingto acquisition success and failure.

Methods

Assumptions associated with widely-acceptedtheory and measures can sometimes bufferresearchers from actual events and outcomes(Downey and Ireland, 1988). Traditionalhypothesis-testing research, by definition, placesboundaries (constraints) on what can be learnedfrom a project. Large sample hypothesis-testingresearch often makes only an incremental con-tribution to theory. That is because empiricalresearch must build on existing theory (to be pub-lishable) and because traditional methods oftenconstrain researchers to minor extensions to cur-rent understanding. Thus, a 'straightjacket' mind-set develops that produces only incrementalcontributions beyond current theory. Because ofthe need to develop a more complete theoreticalexplanation for acquisitions outcomes (due to theinadequacies of prior theory), we chose a moreinductive case-study method of analysis. An in-ductive method allows unknown attributes andgroupings to emerge and permits a better under-standing of complex phenomena (Sackmann, 1992;Van Maanen, 1979). There are several inductivemethods; we chose one which simultaneouslyallowed the development of considerable depthof information along with the use of a relativelylarge sample to enhance the generalizability ofthe findings. The purpose of this study was todevelop theory about successful and unsuccessfulacquisitions by analysing outliers ('best' and 'worst')drawn from a large sample of acquisitions.

The case-study method applied in this studyrepresented an empirical inquiry using multiplesources of evidence to investigate a phenomenon,within its real-life context, where the boundariesbetween phenomenon and context are not clearly


evident (Yin, 1981). In the case of acquisitions,these boundaries cannot be identified easily,due to the presence of at least two firms (bidderand target) from potentially different contextsand often many other firms or stakeholders (i.e.other bidders, competitors, unions and govern-ment agencies).

Another advantage of an intensive and sys-tematic case-research design is that it provides anin-depth longitudinal (seven years in this study)examination of each acquisition's evolution andan opportunity to identify patterns or 'bundles'of attributes (Larson, 1992). The principal ad-vantage associated with identification of multi-variable pattems is that some variables may beeffective predictors of performance only whencombined with others.

The case-study approach applied herein recog-nizes the importance of both theory and rivaltheory as a part of theory development (Yin, 1989).In other words, if successful acquisitions havecharacteristics not held by unsuccessful ones, andvice versa, case analysis may reveal why one set offactors leads to increased firm performance andanother set leads to reduced firm performancefollowing an acquisition. This study applied amultiple rater, multiple-case design based on thework of Eisenhardt (1989), Elsbach and Sutton(1992), and Yin (1989).

Sample

The sample was drawn from a collection ofacquisitions identified originally by Hitt and hiscolleagues (1991a), who used Standard andPoors' COMPUSTAT Research Files and Moody'sIndustrial Manual to select over 1000 acquisitionscompleted during the 1970s and 1980s. Of these,191 had complete data for industry-adjusted retumon assets (ROA) and industry-adjusted R&Dintensity for three years prior to (for both firms)and following (combined firm) the acquisition.ROA was calculated as net income after taxesdivided by total assets. Firm ROA was adjustedby subtracting average industry ROA. ROA iswidely used in strategic management research(Hoskisson and Hitt, 1990). R&D intensity

was calculated as R&D expenditures divided bytotal annual firm sales. R&D intensity was alsoadjusted by subtracting average industry R&Dintensity. R&D intensity has been used frequentlyto indicate a firm's commitment to innovativeactivity, which can have a substantial impact onfuture performance (Baysinger and Hoskisson,1989; Baysinger, Kosnik and Turk, 1991; Hittetal., 1991a, 1991b; Hoskisson and Johnson, 1992)and has been found to be positively related toinnovation output measures such as patents andnew products (Hitt et al., 1991a, Hitt et al., 1996).Consequently, these two variables served well ourinitial objective to identify for in-depth studythose companies with positive changes in finan-cial performance and an increased emphasison R&D and those with negative changes infinancial performance and a reduced emphasison R&D.

To control for the effects of major regulatorychanges and to increase generalizability to the pres-ent day, we eliminated from the sample acquisi-tions tiiat occurred during the 1970s (one-third ofthe initial sample). Also, to ensure that the targethad an adequate impact on the merged firm,we chose only those acquisitions in which the ac-quirer was not more than ten times larger than thetarget (approximately half of the initial sample).

From the final data set, we identified two setsof acquisitions, successful and unsuccessful. Thereis precedence for studying sets of successful andunsuccessful firms (cf. D'Aveni and MacMillan,1990). Successful acquisitions were defined asthose that showed increases in industry-adjustedperformance (ROA) and industry-adjusted R&Dintensity subsequent to the acquisition. There

^ A market measure of firm performance was con-sidered but rejected for several reasons. In particular, ifprivate synergy is truly possible, it may not be recognizedby the market because of information asymmetries. For

example, one of the successful acquisitions studiedwas SmithKline's acquisition of Beckman Instruments.Market analysts initially criticized the SmithKline actionbecause the intended synergy was not visible. However,SmithKline intended to change its core business andthe Beckman acquisition played a major role in makingthis change. SmithKline maintained secrecy about theintended change until well after the acquisition wascompleted. It also may have avoided rival bids by main-taining secrecy about its intended actions. Additionally,even where potential private synergy is identifiable byothers in the market, managers may not be able toachieve it after the two firms are integrated (Haspeslaghand Jemison, 1991a). As a result, we feel that account-ing measures may be superior to market measuresas indicators of performance for the purpose of thisresearch.


were only 12 pairs of firms exhibiting both ofthese characteristics (see Table 1). The second setconsisted of 12 acquisitions with the greatestreductions in industry-adjusted performance(ROA) and industry-adjusted R&D intensitysubsequent to the acquisition. As expected, therewere many acquisitions in the data set withnegative changes in both performance and R&Dintensity (Hitt et al., 1991a). However, to comparesuccess with failure, we identified the bottom12 pairs for which secondary information wasavailable (see Table 1).'

Thus, our final sample included 24 pairs of firmsor 48 firms in total, large for a case study. Thesuccessful set of firms experienced an averageincrease in ROA of 234% over a three-year periodfollowing completion of the acquisition. Altern-atively, the unsuccessful set of firms experienced areduction in ROA averaging 3525% (these per-centages are exacerbated by small pre-acquisitionnumbers). Average actual ROA for this set offirms was -0.104 with an average reduction fromthe pre-acquisition period of -0.213. Thus, manyof the firms involved in the unsuccessful acquisi-tions changed from a positive ROA to a signific-antly negative ROA.

Data collection

We used the ABI/INFORM database, the Busi-ness Periodicals Index, the Reader's Guide toPeriodicals, the Wall Street Journal Index, and theApplied Science and Technology Index to identifyall published materials on the 48 firms for therelevant seven-year time period (three years priorto the acquisition for both acquiring and targetfirms, the year of the acquisition and three yearsafter the acquisition year for the merged firm).There are precedents in the use of popular andbusiness press accounts for scholarly research(e.g. Chen and Meindl, 1991; House, Spangler andWoycke, 1991). We then collected data on thesefirms from these published materials. We alsoexamined annual reports for the merged firm forthe year of the acquisition (and sometimes beforeand thereafter, if needed) and cases in business textsthat discussed either or both companies, or theacquisition, during the relevant time period (a listof all sources used is available from the authors).

Data analysis

As noted previously, this study applied a multiple-case design that allowed a replication logic

' There have been Harvard cases written on CooperIndustries (Stuart and Collis, 1991b) and on com-petition in the pet food industry with special emphasison the Quaker Oats acquisition of Anderson Clayton(Stuart & Collis, 1991a). The Cooper Industries casepraises the firm's successful corporate strategy ofacquiring diversified firms. This is in contrast to ourcategorization of the Cooper Industries acquisition ofCrouse-Hinds in the unsuccessful group. Over time.Cooper Industries has experienced considerable successwith its acquisition strategy but encountered significantproblems with the specific acquisition of Crouse-Hinds.Crouse-Hinds represented a significant diversificationinto a new industry for Cooper. Crouse-Hinds was equalin size to Cooper industries and the firm had to take onsignificant debt to finance the acquisition. Wall Streetanalysts criticized the acquisition because of the un-related diversification and debt acquired. Using anevent study, we found a statistically significant negativeabnormal return from the acquisition suggesting themarket's displeasure with the move. We also found anegative market return for Cooper over a period ofthree years after the acquisition.

The Quaker Qats/Anderson Clayton case is morecomplicated. Some criticized Quaker for acquiringAnderson Clayton suggesting that its market sharedeclined thereafter. However, closer scrutiny suggests adifferent view. Ralston Purina, the pet food market

leader, attempted to acquire Anderson Clayton. If ithad been successful, it would have gained a dominantmarket share in the dog food market to complement itsstrong market share in the other pet food segments.Thus, Quaker Qats' acquisition of Anderson Claytonmay have been a defensive move to prevent a nearmonopoly by Ralston Purina in the pet food market.Undoubtedly, the acquisition sparked strategic responsesand intense competition from others in order to survive.Quaker Qats' overall share of the pet foods marketincreased from 5.9% in 1986 to 13.1% in 1987 withthe acquisition of Anderson Clayton. However, withthe substantive competition noted above, its pet foodmarket share was 10.9% in 1989 (interestingly, RalstonPurina's overall market share also declined during thistime). But, this does not tell the whole story. QuakerQats still maintained market shares of 52.9% and 80%in the moist dog food and soft-dry dog food segments,respectively, in 1989. These were acquired from Ander-son Clayton. Thus, the acquisition made Quaker Qats amajor competitor in the pet food industry. Further-more, we found a positive change in market returns forQuaker Qats over the three-year period following theacquisition.

We concluded that these facts supported our finalcategorization of the Cooper Industries/Crouse-Hindsand Quaker Qats/Anderson Clayton acquisitions intotheir respective groups for our study.


Table 1. Merged firms with increases and reduciions in industry-adjusted ROA and R&D intensity

Bidding firm

AlliedComputer AssociatesDairy MartFred MeyerGeneral DynamicsInstrument SystemsQuaker OatsRaytheonSmithKlineTextronUnilever PLCUSG Corp

Bidding firm

Ashland OilAvon ProductsChryslerCooper IndustriesCooper LaboratoriesCorvus SystemsDatapointEcolabHBOKleer Vu IndustriesKratosUS Steel

Merged firms with increases

Target firm

Signal CompaniesUCCELConna CorpGrand CentralCessna AircraftClopay CorpAnderson ClaytonBeech AircraftBeckman InstrumentsAvcoCheseborough PondsMasonite

Year of acquisition

198519871986198419861986198619801982198519871984

Related industries

Aerospace and automotiveInformation systemsConvenience storesRetail storesDefence/aviationIndustrial manufacturingConsumer productsAviation electronics/aviationPharmaceuticals/medical instrumentsAviation/defenceConsumer productsIndustrial manufacturing

Merged firms witli reductions

Target firm

US FilterMallinckrodtAmerican MotorsCrouse-HindsCavitronOnyx IMIInforexChemlawnAmherst AssociatesNestle-LemurKeuffel & EsserMarathon Oil

Year of acquisition

198119821987198119811985198019871985198419821982

Industries

Petroleum/pollution controlCosmetics and hospital supplies/chemicalsAutomobilesDiversified manufacturing/electrical productsHealth care products/Medical and dental equipmentInformation systemsInformation systemsInstitutional chemicals/residential chemicalsInformation systems/management consultingPlastics, cosmetics/toiletries, real estatePrecision instrumentationSteel/petroleum

(Eisenhardt, 1989). Data were evaluated for the12 cases in each of two sets, successful and un-successful. Within each set, the cases were exam-ined sequentially, similar to a series of experiments,with each case serving to confirm or disconfirminferences drawn from the others (Yin, 1989).This is an iterative approach, similar to that usedby Elsbach and Sutton (1992) (see also Boje,1991; Kahn, 1993 for iterative approaches).

Three raters (members of the research team)independently analysed each of the cases within aset. Each rater read and analysed a total of over4000 pages of information on firms in the sample.The analyses focused on company histories,rationales for the acquisition, pre- and post-acquisition activities, organizational character-istics, strategic focus, firm interrelationships,management attitudes and actions and the activit-ies of external stakeholders, such as competitorsor other bidders. A list of traits was identified dur-ing the first case analysis that reflected the influ-ence of those characteristics on the performance

of the merged firm. Each case was then evaluatedbased on the presence or absence of those traits.New traits were added as they were identifiedduring subsequent case analyses.

After completing their analyses, the raters com-pared and contrasted their case notes and conclu-sions. There was strong agreement in the raters'conclusions (initial agreement on approximately70-80% of the traits). However, where differencesoccurred, cases were re-examined and inferencestested. The final conclusions represented agree-ment among the three judges concerning the attri-butes of successful and unsuccessful acquisitions.To control for individual biases in the evaluationof information, each of the three raters evaluatedthe information independently. To include anattribute all three judges had to agree. Also atotal of four raters were used allowing one differ-ent rater on each of the two sets of acquisitions.This was designed to avoid conclusions on one setof data affecting the conclusions on the other one.The next section outlines these results.


Tabte 2. Attributes of successful acquisitions

Acquisitions Attributes

Complementarities Friendly Low to Change Emphasis on Focus on Careful Financialacquisitions moderate experience innovation core business selection slack

debt of targets

Quaker Oats/Anderson Clayton x x x x x x x x

Ratheon/Beech Aircraft x x x x x x x x

ComputerAssociates/UCCEL x x x x x x x

Allied/SignalCompanies x x x x x x

Unilever/Cheseborough-Ponds x x x x x x

Dairy Mart/C O N N A X X X X X

Fred Meyer/Grand Central x x x x x

General Dynamics/Cessna Aircraft x x x x x

SmithKline/BeckmanInstruments x x x x x

USG/Masonite x x x x x

Instrument Systems/Clopay X X X x

Textron/AVCO X X X X

Attributes of successful and unsuccessfulacquisitions

As shown in Tables 2 and 3, our in-depth caseanalyses identified eight attributes linked to the12 successful acquisitions and six attributes linkedto the 12 unsuccessful acquisitions studied. Below,we consider each of these attributes in more detail.

Attributes of successful acquisitions

Complementary assets and/or resources. An im-portant finding from the case analyses was that allacquired firms in the successful acquisition grouphad assets and/or resources that were comple-mentary to, at least, some of the acquiring firms'assets. For example, Quaker Oats acquiredAnderson Clayton for the expressed purpose of

gaining control of its Gaines pet food business. Inparticular, the Gaines pet food business had well-known established national brands such as GainesBurgers, Gravy Train, Top Choice, and CycleDog Foods. Integration of the Gaines pet foodbusiness with the pet foods division in QuakerQats doubled the size of that division, therebysignificantly increasing its market power (and atthe same time, reducing significant competition)and achieving operating synergies to enhancedivision profitability. In fact, its overall marketshare in the pet food business increased from5.9% to 13.1% for a positive 122% change withthe acquisition. The acquisition also prevented themarket leader, Ralston Purina, from dominatingthe market through its attempted purchase ofAnderson Clayton. Even after three years of re-taliatory responses from Ralston Purina and other

Attributes of Successful and Unsuccessful Acquisitions of US Firms

Tabte 3. Attributes of unsuccessfut acquisitions

99

Acquisitions Attributes

Large or Inadequate Ethical TMT and/or Multiple Diversificationextraordinary target concerns/ structure acquisitions/debt evaluation opportunism changes lack of control

Ashland Oil/US Filter x x x x x x

Avon Products/Mallinckrodt x x x x x x

Ecolab/Chemlawn x x x x x x

HBO/Amherst Associates x x x x x x

Chrysler/American Motors x x x x x

Datapoint/Inforex x x x x x

US Steel/Marathon Oil x x x x x

Cooper Laboratories/Cavitron x x x x

Corvus Systems/Onyx IMI x x x x

Kleer Vu Industries/Nestle-Lemur x x x x

Cooper Industries/Crouse-Hinds x x x

Kratos/Keuffel & Esser x x x

competitors (e.g. significant price reductions),Quaker Qats maintained market shares of over50% in the moist dog food market segment and80% of the soft-dry dog food market segment -both based largely on the acquisition of AndersonClayton.

Unilever, a large multinational firm head-quartered in Great Britain with significant sales inEuropean markets, was frustrated because ofproblems in introducing new products in a com-petitive European market. Thus, Unilever's ac-quisition of Cheseborough-Ponds provided accessto a large US market, because approximately 75%of Cheseborough-Ponds' sales were in the USA.Therefore, the acquisition of Cheseborough-Pondsprovided additional opportunities for both firmsto expand globally. The scale economies and thesuccessful skin product lines from Cheseborough-Ponds, such as Vaseline and Vaseline Intensive

Care, along with the new international marketsprovided for both firms, produced significantpositive synergy for the merged firm.

Interestingly, the SmithKline acquisition ofBeckman Instruments provided less obvious com-plementaries and positive synergy to the casualobserver. However, the strategic intent was tocombine the SmithKline strength in pharmaceut-icals and health care with Beckman Instruments'strength in diagnostic technology to enhance bio-medical research. Additionally, the cash gener-ated from SmithKline's pharmaceutical business,in particular its Tagamet anti-ulcer drug, could beused to finance Beckman's R&D. Both firms hada commitment to research in molecular biologyand biotechnology.

Thus, in summary, the acquired firm's com-plementary assets and/or resources provided tothe acquiring firm produced a high probability


of achieving positive synergy and a sustainablecompetitive advantage in the firms' markets.

Friendly acquisition. While the case analysesshowed that the market for corporate controlplayed an important role in many of the acquisi-tions, it did so in a way atypical of many acquisi-tions completed in the 1980s. That is, all 12 of thesuccessful acquisitions were friendly. In some cases,the acquiring firm represented a white knight tothe acquired firm. For example, Masonite was aprime takeover target of Pritzkers, Belzberg andthen General Felt, all of which Masonite fought.However, USG and Masonite had complement-ary products, markets and business philosophies.In fact, Masonite sought a white knight throughits financial adviser when faced with a takeoverattempt by General Felt. For Masonite, USG of-fered the opportunity to maintain some independ-ence while achieving synergies.

Another friendly acquisition involved the DairyMart acquisition of CONNA. In fact, CONNAwas pursued by Convenient Food Mart and choseto be acquired by Dairy Mart instead. Dairy Martwas a convenience store chain and CONNAowned 370 convenience stores. Therefore, thisrepresented a horizontal acquisition. The fact thatit was a friendly horizontal acquisition produced afaster and more effective integration of CONNAinto the Dairy Mart Corporation.

Low-to-moderate debt position. In 10 of the 12cases studied, the merged firm was able to main-tain, or achieve within a short period of time, alow-to-moderate debt position after the merger. Insome of the acquisitions, no debt was used. For ex-ample, the Raytheon acquisition of Beech Aircraftinvolved no cash outlays but rather an exchangeof stock between the two firms. Alternatively,Textron's $1.4 billion acquisition of AVCO wasfinanced largely by debt. In fact, Textron's debt-to-equity ratio was 16% prior to the acquisition,but 70% thereafter. However, Textron sold off busi-nesses, most from its own firm and a few of AVCO's,in order to reduce its debt-to-equity ratio of 40%.

An alternative approach was used by Unileverto purchase Cheseborough-Ponds. First, it partiallyfinanced the $3.1 billion acquisition with $1.5billion in cash. The rest was financed with debt,but shortly thereafter Unilever sold several ofthe Cheseborough-Ponds businesses to reduce itstotal debt load.

Maintaining a low-to-moderate debt positionproduces a lower cost of financing the acquisitionand a lower risk of future bankruptcy. Equallyimportant, it also avoids the trade-offs often asso-ciated with high debt (Baysinger and Hoskisson,1989; Hitt et al.., 1991a, 1991b; Hoskisson and Hitt,1994). Research has shown that, often, firms withhigh debt and high debt costs trade off long-terminvestments (e.g. in R&D and capital equipment).Such trade-offs can have significant negative ef-fects on a firm's strategic competitiveness (Hittet al., 1990; Hitt et al., 1991b; Hitt et al., 1997).

Change experience and flexibility skills. In two-thirds of the acquisitions, the acquiring firm orboth the acquiring and target firms had consid-erable experience in implementing change in theyears prior to the acquisition. As a result, thesefirms were more flexible, with developed ad-aptation skills. For example, those that had beenactive acquirers had more experience integratingdifferent corporate cultures. This experienceenabled them to achieve a dynamic equilibriummore quickly and smoothly in the integration ofthe two firms' assets and resources.

Allied was an active acquirer prior to its pur-chase of Signal companies. It purchased Bendix in1983 and Eustar in 1984. Bendix's aerospaceoperations became one of the most profitable ofAllied's major business groups. In 1984, Bendix, abusiness unit of Allied at the time, acquired KingRadio, a manufacturer of aircraft communication,navigation and flight control systems. Since 1979,Allied had completed nearly 40 acquisitions andincreased its size by 400%.

Signal also had acquisition experience. Forexample. Signal acquired Wheelabrator and soldits money-losing Mack Truck Division. It endedup with $500 million in cash, $8 billion in annualsales and a debt-to-equity ratio of only 25%.Therefore, it was a prime target and an excellentacquisition by Allied. However, Allied had to sellBendix's aerospace unit to receive the JusticeDepartment's approval to buy Signal. In addition.Allied sold off 28 unwanted units in 1985, mainlyunprofitable ones acquired in past deals, througha $3 billion spin-off. Therefore, these two firmshad considerable experience in acquisition andrestructuring.

Similarly, prior to the acquisition of AndersonClayton, Quaker Oats had used its significantcash flow from current businesses in worldwide


groceries and toys to make several large acquisi-tions, including those of Stokeley Van Camp andGolden Grains. Concomitantly, Anderson Clayton,which had been an active acquirer in prior years,was in the process of restructuring and divestingsome of its problem businesses. It sold the Amer-ican Founder's Life Insurance Company and itsBrazilian and Mexican businesses in 1985. Bymaking these sales, Anderson Clayton was able toeliminate its long-term debt in 1986, while settinga new record sales volume. In this case, both firmshad significant change experience and were quitesuccessful in their operations.

Both Computer Associates (acquired UCCEL)and Textron (acquired AVCO) were active in theacquisition market and highly experienced inmaking acquisitions and integrating them into thefirm. UCCEL was the largest independent com-petitor of Computer Associates and thus, repre-sented a horizontal acquisition. While Textron wasa conglomerate, approximately 50% of its busi-nesses were related to aerospace. Furthermore,the AVCO acquisition was related to some of itsbusinesses.

Therefore, where there was considerable experi-ence, particularly on the part of the acquiring firm,integration between the two firms was achievedmore rapidly and effectively. Furthermore, it waseasier for the acquiring firm to achieve synergybetween its assets and the assets and/or otherresources (e.g. intangible) of the acquired firm.

Emphasis on R&D and innovation. In contrastto current research suggesting that an activeacquisition strategy normally produced a lowermanagerial commitment to innovation (e.g. Hittet al., 1990; Hitt et al, 1991a), two-thirds of thesuccessful merged firms maintained an emphasison innovation, often through healthy investmentsin research and development. In fact, the acquir-ing firms frequently had strategic policies to main-tain an emphasis on research and developmentand innovation. For example. General Dynamicshad a heavy emphasis on research and develop-ment and was able to increase the investment inR&D in Cessna after the acquisition was consum-mated. In fact, the potential synergies between thetwo firms were based on the development of newtechnology to build new aircraft and other relatedaviation products.

Of course, the SmithKline acquisition ofBeckman Instruments had particular significance

because of both firms' commitment to research inmolecular biology and biotechnology. In earlieryears, SmithKline had been rather conservative inits R&D investments. However, after discoveringTagamet, it significantly increased its investmentin R&D, to include a new $20 million laboratoryfor molecular biology research. Computer Asso-ciates, while an active acquirer, also spent morethan the industry average on research and develop-ment in new software. Similarly, USG follows astrategy of internal development that is comple-mented by external acquisitions.

The emphasis on innovation and research anddevelopment is important to maintain a long-termcompetitive advantage in the firms' markets. Notall businesses were high technology and thereforedid not require significant investment in R&D;but innovation is typically considered importantin all industries to maintain market leadershipand a competitive advantage. For example, FredMeyer continued to invest in developing newstores and modernizing its existing stores. Themodernization of stores might be equated to pro-cess innovation in manufacturing firms. Therefore,these firms have been able to avoid the problemsdescribed by Hitt et al. (1990,1991a, 1996).

Focus on core business(es). At least seven ofthe acquiring firms were able to maintain afocus on their core business(es) and/or use theacquired firm resources to leverage the corebusiness(es). The use of acquired firm resourcesto leverage the acquiring firm's core businessfacilitates the achievement of positive synergy.Several of the firms bought active competitors orbusinesses in the same industry but operating indifferent geographical regions. For example. DairyMart's acquisition of CONNA was a horizontalacquisition that allowed a significant geographicexpansion of the markets in which Dairy Martoperated. Similarly, the Fred Meyer acquisition ofGrand Central offered it access to 31 stores infive different states, representing a 50% expan-sion in the number of its retail outlets. After theacquisition, Fred Meyer was the seventh largestdiscount merchandiser in the USA and was oper-ating in two new markets, Idaho and Utah.

The horizontal acquisition of UCCEL providedComputer Associates over 50% of the informa-tion security market. The acquisitions of BeechAircraft by Raytheon and Cessna Aircraft byGeneral Dynamics both showed a strong emphasis


on the core business of the acquiring firms. Inother cases, parts of the acquired firm were usedto leverage core businesses, such as Ouaker's PetFoods Division with the integration of Gaines PetFoods from Anderson Clayton. In fact, the acqui-sition provided Ouaker Oats new access to anddomination of specific dog food market segments.Furthermore, the $172 million of cash and market-able securities and other liquid resources in pen-sion assets provided considerable liquidity forOuaker Oats to invest in its core businesses.

In summary, the continued focus on the acquir-ing firm's core business(es) and/or use of acquiredfirm resources to leverage the core business(es)helps the firm to maintain its strengths and holdor gain a long-term competitive advantage.

Careful selection of acquisition targets. In somecases, it was clear that the acquiring firm had en-gaged in a careful and deliberate process of ana-lysing and selecting the target firm. Furthermore,the acquisition negotiations were sometimeslengthy but skilfully conducted. For example, theOuaker Oats acquisition of Anderson Claytonrequired almost one full year to complete. Gen-eral Dynamics entered into an agreement for ajoint technology programme with Cessna priorto the acquisition. The SmithKline acquisition ofBeckman Instruments entailed a careful analysisby SmithKline because Beckman represented itsintended core business (as opposed to its currentcore business). Analysts were initially scepticalabout this acquisition because they could notidentify the positive synergies between pharma-ceuticals and diagnostic equipment. However,the emphasis on biotechnology in BeckmanInstruments and the intent by SmithKline tomake that a core business offered an excellentcomplementarity.

Careful and deliberate selection of target firmsand conduct of negotiations allows the acquisitionof firms with the strongest complementarities andreduces the probability of paying a premium, acommon problem noted earlier.

Financial slack. The final characteristic identi-fied in several (five) of the successful acquisitionswas the existence of a significant amount of fin-ancial slack. This slack was commonly in the formof large amounts of available cash or a highlyfavourable debt position, which would allow theacquiring firm to assume significant amounts of

debt without incurring substantial problems.Of course, this attribute would make financing(either debt or equity) for the acquisition easierto obtain and less costly. If significant cash was onhand, less extemal financing would be necessaryand, if the firm had a favourable debt position,it would be much easier to obtain more debtfinancing, often at a lower interest rate.

An example of the value of financial slack isshown by the Unilever acquisition of Cheseborough-Ponds. Unilever had $1.5 billion in cash andobtained a bank credit line of up to $3 billion inorder to purchase Cheseborough-Ponds. Whilethe acquisition required $3.7 billion, and thus$2.2 biihon was financed with debt, Unileverreduced its debt thereafter by selling some ofCheseborough-Ponds' non-related businesses. An-other example is provided in the Allied acquisitionof Signal Companies. As noted earlier. SignalCompanies had significant cash on hand, particu-larly after its acquisition of Wheelabrator ($500million) and a low debt-to-equity ratio of 25%.Therefore, Signal had considerable slack whenacquired by Allied.

Potential outcomes of each of the significantattributes found in our study are highlighted inTable 4.

Attributes of unsuccessful acquisitions

Large or extraordinary debt. Most (11) of theunsuccessful acquisitions compiled large, and forsome, extraordinary debt. For example, Ecolab,in its purchase of Chemlawn, acquired an extra$500 000 in debt, an increase of 265% over itsprevious total debt. After the acquisition, Ecolabhad a 2.13 debt-to-equity ratio. Similarly, Kratoshad to borrow $49 million to finance its acquisi-tion of Keuffel & Esser, increasing its total debtto $72 million. The $49 million was borrowed at a17.75% interest rate (1% above the then-currentprime rate). As such, its annual interest paymentalone was greater than the combined annualnet income of the two companies. Eventually,Kratos had to delay installment payments on itsdebt because of inadequate cash flow.

Other examples include US Steel's $3 billion ofdebt used to finance its acquisition of MarathonOil. Afterwards, its total debt reached 52% ofcapitalization and its debt rating was loweredtwice by Standard and Poors within a nine-monthperiod. Similarly, Kleer-Vu's total debt-to-equity

Attributes of Successful and Unsuccessful Acquisitions of US Firms

Table 4. Effects of successful and unsuccessful acquisition attributes

103

Attribute

Successful acquisition attributes

Effect

1. Acquired firm has assets and/or resources that arecomplementary to the acquiring firm

2. Friendly acquisition3. Merged firm maintains low-to-moderate debt position

4. Experience with change and skills of flexibilityand adaptation

5. Sustained and consistent emphasis on R&Dand innovation

6. Focus on core business and use of acquired firmresources to leverage core business

7. Careful and deliberate selection of target firm andconduct of negotiations

8. Financial slack (cash and/or favourable debt position)

High probability of positive synergy and competitive advantage

Faster and more effective integration; possibly lower premiumsLower financing costs, lower risk (e.g. of bankruptcy andavoids tradeoffs associated with high debt)Faster and more effective integration; facilities achievementof synergyMaintain long-term competitive advantage in markets

Maintain strengths, and long-term competitive advantage;achievement of synergyAcquire firms with strongest complementarities and avoidoverpaymentFinancing (debt or equity) easier to obtain and less costly

Attribute

Unsuccessful acquisition attributes

Effect

1. Large or extraordinary debt

2. Inadequate target evaluation

3. Ethical concerns and/or opportunism

4. Changes in the top management team and/or structure

5. Multiple acquisitions and/or lack of control

6. Diversification

Higher financing costs, higher risk (e.g. bankruptcy) andprobability of having to make tradeoffs with long-terminvestmentsPay premium price, and may take on higher risks, along withadding a business that lacks potential to provide positive synergyInappropriate acquisition and/or negative effects on firmreputationLoss (or lack) of strategic leadership, chaotic conditionswithin the firmInability to focus managerial time and energy to select andnegotiate acquisition or achieve synergy, ineffective governanceLack of managerial knowledge of business, loss of strategiccontrol

ratio approached 2.0 after its acquisition ofNestle-Lemur. All four firms mentioned abovehad substantial net losses after their acquisitionswere completed, due at least in part to the sig-nificant debt costs. Even in those firms thatdid not experience net losses, debt costs producedsignificant reductions in net income and reducedtheir flexibility to make long-term investmentsand take advantage of acquired assets.

Inadequate target evaluation. Inadequate evalua-tion of the target firm by the acquiring firm wasidentified in most of the unsuccessful acquisitions.In some cases, the lack of evaluation could be at-tributed to managerial hubris, overconfidence intheir own abilities to effectively manage the assetspurchased (Roll, 1986). It is likely that this is thecase in Datapoint's purchase of Inforex. The yearbefore the acquisition, Inforex filed for Chapter

11 bankruptcy, because it could not meet its semi-annual debt payment. Not surprisingly, Datapointsuffered a huge reduction in net income (a decreaseof 95%) in the second year after purchasing In-forex. While the managers blamed the reductionon the recession, total revenues were higher thanin the previous year. Thus, the problem wasan inability to control costs.

Lee Iaccoca, Chrysler's CEO at the time,described the acquisition of AMC as similar 'toswallowing a whale'. American Motors was in thesame industry and Chrysler's managers shouldhave well understood its former competitor.Chrysler's overall productivity suffered afterthe acquisition and it encountered formidableproduction, labour and organizational problemswith AMC. Additionally, it had significant pro-duction overcapacity after the purchase. WhileChrysler tried to turn around the failing fortunes


of AMC's cars, it eventually ended the productionof many AMC product lines. Interestingly, AMC'sproblems were well known. It had a generallypoor image with customers (less than 1% shareof the US car market in 1986), outmoded andunprofitable manufacturing plants and negativeworking capital in 1986. Furthermore, Chrysleracquired AMC when the consumer market forautomobiles was soft, forcing it to close plants andlay off workers.'*

In other cases, there was lack of attentionto important details, possibly due to hubris orworse, incompetence. For example, Chemlawnwas loosely managed (lack of controls) and over-extended prior to the acquisition. Following theacquisition, Ecolab managers tried to rapidlyexpand Chemlawn's business but encounteredmanagement inefficiencies and low worker pro-ductivity in Chemlawn. As a result, many Chem-lawn managers were fired. Ecolab's CEO admittedthat it encountered more trouble with Chemlawnthan was expected.

An extreme case of inadequate analysis of thetarget firm and inattention to detail occurredin the Corvus acquisition of Onyx IMI. Corvusbought Onyx in 1985 despite the fact that Onyxlost its major contract with IBM the year beforeand continued to experience technical problemswith its disk drives. Corvus experienced a signific-ant loss in sales and net losses after the purchaseof Onyx. As a result, it sold the Onyx micro-computer line, inventory, trade name and relatedtechnology for $2 million only seven months afteracquiring it for $47 million.

" Long after the event, some analysts have argued thatChrysler's acquisition of AMC was only for the purposeof obtaining the popular Jeep division. However, thefacts belie such a conclusion. For example, if true, it isunclear why Chrysler did not immediately sell off (orclose) all of the other assets (similar to Quaker Oats'actions with Anderson Clayton assets). Rather, Chryslerexecutives tried to operate many of the AMC plantsand market several of AMC's other product lines.Alternatively, Chrysler could have sought to purchaseonly the Jeep division. Given the financial straits ofAMC and its owner Renault, at the time, such a pur-chase probably could have been negotiated. Further-more, there was no suggestion in any of the publishedaccounts before or after the acquisition that Chryslerwas focusing on the Jeep division's assets. While theperformance of the Jeep product line has since been apositive outcome, the data do not support a conclusionthat the Jeep division was the only or even the primarytarget in Chrysler's acquisition of AMC.

Ethical concerns/opportunism. In 10 of the 12acquisitions studied, ethical concerns and/or op-portunism were observed. Sometimes, these ethicalconcerns or opportunistic behaviour related directlyto the acquisition and thus may have had effectson its outcome. In other cases, the concerns and/opportunism were observed in one or more of thefirms involved in the acquisition, but were not re-lated directly to acquisition activities. Such behavi-our may affect the reputation of the firms involvedand thus could have, at least, an indirect effect onthe success or failure of the acquisition. Also, thehigh reported rate of unethical practices in theset of unsuccessful acquisitions may suggest thatother corrupt practices went unreported but stillhad a negative impact on performance.

Prior to and shortly after the HBO acquisitionof Amherst Associates, a number of opportunisticactions were taken by HBO managers. For ex-ample, in an attempt to avoid a hostile takeover,HBO managers began to implement a plan torecapitalize, but encountered resistance from alawsuit filed by stockholders. Thereafter, HBOmanagers adopted a poison pill to discourage hos-tile takeovers. HBO managers also sold a portionof the firm's contracts for immediate revenue andprofits in order to maintain projected growthrates. Finally, immediately before an announceddownturn in earnings, the HBO chairman sold500 000 shares of stock back to the firm at $23 pershare, close to the highest historical price of thefirm's stock.

An example of opportunism related moredirectly to the acquisition occurred in the caseof the Corvus Systems acquisition of Onyx. Thebuyout was initiated by Carl Berg, who was thechairman of and a major stockholder in OnyxIMI. He also served as a director of and held amajor ownership position in Corvus Systems.Onyx's sales revenue fell by 32% in the yearimmediately preceding the acquisition. Further-more, Corvus sold Onyx's microcomputer prod-uct line at a tremendous loss only seven monthsafter buying the firm. After major sales reductionsin the year following the acquisition, majordisputes arose between top executives in CorvusSystems and Mr Berg.

Another apparent ethical concern was observedin Cooper Laboratories' acquisition of Cavitron.In 1979, Cavitron fought Cooper's attempt to takeover the firm. At that time, an agreement wasreached between Cavitron and Cooper executives


that Cooper would not purchase more than 20.5%of Cavitron stock. However, Cooper reneged onits original agreement and in 1980, Cooper ownedapproximately 33% of Cavitron stock.

In other examples, the opportunism/ethicallyquestionable behaviours may not have beeninvolved directly in the acquisition. For example,Datapoint directors, officers and auditors werenamed in a lawsuit that claimed they violatedFederal Securities and other laws when officersand directors sold their stock-holdings prior tothe release of negative news about the company(which would negatively affect the stock price).Also, to ensure achievement of sales targets,marketing executives shipped false orders torecord revenue in a specific quarter and show thegrowth in earnings and revenues continued asprojected by top management. In September1982, shareholders filed a lawsuit claiming thatcompany officers had misrepresented the firm asa profitable, growing company and that theseindiscretions, when reported, caused the stockprice to fall precipitously. Furthermore, Inforex,the firm acquired by Datapoint, was investigatedby the Securities and Exchange Commission (SEC)regarding potential concerns about reporting pro-cedures, record-keeping actions, internal controlsand payments to foreign governments.

Other actions suggesting ethical concerns wereevident in Ashland Oil Company in which man-agers made illegal contributions to the US Presid-ential Campaign, were accused of illegal bidrigging for government contracts, and paid bribesto obtain oil from the Middle East. Likewise, USSteel was cited by the SEC because it failed tomake adequate disclosure to investors of the costsdealing with federal, state and local environ-mental regulations. This citation suggested thatthe firm may have failed to disclose up to $2 bil-lion of such costs. In addition, the US JusticeDepartment sued US Steel for violating federalair pollution regulations. The firm US Steel bought,Marathon Oil, was indicted for fraudulentlyobtaining oil and gas leases and was charged bythe Energy Department with deliberately over-charging customers.

Top management team and/or structure changes.In nine of the acquisitions studied, major changesin the top management team and/or the structureof the firm occurred. For example, Corvus Sys-tems had three different CEOs in the three years

following its acquisition of Onyx IMI. The presid-ent of Kleer-Vu resigned the year after the firmacquired Nestle-Lemur. In the year followingHBO's acquisition of Amherst Associates, itsCEO, who had been on the job less than one year,was replaced. Similarly, the president of Kratosresigned two years after the purchase of Keuffel& Esser. In addition, Datapoint fired five execut-ives from marketing and operations when thefalse shipments were discovered shortly after theInforex acquisition. Thus, little continuity ofleadership existed in these firms.

Achieving effective integration of newly-merged firms requires strong leadership andoversight. The loss of key top executives shortlyafter completing an acquisition may interrupt suchleadership and control. It also likely indicatesconflict in the governance of the firm.

Other firms made major changes in theirstructures. Chrysler, for example, implemented aholding company structure overseeing four auto-nomous divisions in 1985, two years prior to itsacquisition of American Motors. This structurewas designed to facilitate the implementation ofits acquisition and diversification strategy. How-ever, three years after the acquisition of AMC,Chrysler restructured the firm, abandoning theholding company structure, declaring it a mistake.In addition, Datapoint restructured into an M-form structure organized around functions duringthe same year it bought Inforex. Alternatively,Ashland Oil reorganized into a holding companystructure shortly after its purchase of US Filter.

Multiple acquisition/lack of control. HBO boughtMediflex Systems Corporation and three otherfirms shortly after acquiring Amherst Associates.Likewise, Ashland Oil bought a stake in NLTCorporation and Integran, a life insurance com-pany, in close proximity to the time period inwhich it acquired US Filter. Shortly beforeChrysler acquired AMC it acquired Gulf StreamAerospace Corporation and Electro Space Sys-tems, Inc. Both Cooper Industries and CooperLaboratories were active acquirers before andafter their acquisitions included in this study.Mallinckrodt was an active acquirer before andafter it was bought by Avon. Within a short timeafter it was acquired by Avon, Mallinckrodtbought a speciality chemicals company. Makingmultiple acquisitions within a short time perioddoes not allow top management of the acquiring


firm to focus its energies on the necessary evalua-tions of and negotiations with any one target firm,nor on the activities required to effectively inte-grate the acquired firm into the acquiring firm.For example. Cooper Industries acknowledgedproblems in integrating recent acquisitions,with particular emphasis on Crouse-Hinds, andsuspended its acquisition programme for a periodof time in hopes of improving the integration(Stuart and Collis, 1991b).

Lack of control is evidenced in the case ofDatapoint. In the year following its acquisition ofInforex, its net profits fell from almost $49 millionto less than $3 million. While the firm claimedthat the drop in earnings was due to a recession,as noted earlier, total revenues were higherthan the previous year. Therefore, costs had to beeven higher, evidencing control problems afterthe acquisition.

Diversification. Finally, six out of the 12 unsuc-cessful acquisitions studied entailed some form ofdiversification. In some cases, the firm acquiredwas unrelated to the acquiring firm's core busi-ness, such as in the US Steel acquisition of Mara-thon Oil. Similarly, there was little relatednessbetween the core business of HBO and Amherstand Associates, a health care consulting firm, andbetween the core business of Ashland Oil andUS Filter, a manufacturer of pollution controlequipment.

Cooper Industries operates more as a conglo-merate firm buying and selling unrelated busi-nesses. Thus, its purchase of Crouse Hinds, adiversified manufacturer of electrical products,fitted its overall portfolio, because it providednew products and markets to Cooper Industries.Alternatively, the Ecolab purchase of Chemlawnwas related. However, the goal of the acquisitionwas to provide diversification for Ecolab intoresidential services, because it only served insti-tutional customers prior to this acquisition. Thus,while loosely related to Ecolab, the acquisition ofChemlawn represented a diversification move.Similarly, Avon's acquisition of Mallinckrodt wasa partially related move, but Mallinckrodt was ahospital supply and chemical company, and thusits main businesses were only related to otherbusinesses Avon bought within the health carefield. As such, Mallinckrodt represented one pieceof a broader diversification strategy on Avon'spart.

While Chrysler's acquisition of AMC was ahorizontal move, its other acquisitions in a similartime period represented implementation of adiversification strategy. Therefore, in these sixcases, all acquisitions were a part of the firms'overall diversification strategy.

Potential outcomes of each of the significant attri-butes found in our study are highlighted in Table 4.

Discussion

The results of this study suggest that no one theory(offered previously) can explain fully the successof acquisitions or the lack thereof. The pheno-menon is more complex than past theoreticalreasoning suggests. For example, no less thanthree primary attributes were found important ineach case in the set of less successful acquisitions.No less than four attributes for the set of suc-cessful acquisitions were found for any particularacquisition. As a result, the research suggests thatpattems or configurations of attributes/variablesmay help explain the degree of success of acquisi-tions (Meyer, Tsui and Hinings, 1993). Belowwe discuss some of the major findings and theirsupport or lack of support for prior theoreticalarguments regarding acquisitions.

Relatedness/resource complementarities

One of the most studied topics in strategic man-agement has been the importance of relatedness(of products/markets) for firm performance. Whilethere have been compelling arguments for theimportance of product/market relatedness amonga firm's business, the research has been inconclus-ive (i.e. Hoskisson and Hitt, 1990). While the resultsof our research provide some support for the per-formance effects of relatedness/resource comple-mentarities, they also provide information that mayhelp understand the previous conflicting findings.

All of the acquisitions in the successful grouphad assets and/or resources that were comple-mentary to the acquiring firm and most wereconsistent with its strategic focus. Significantlyrelated acquisitions can make it easier for themerged firms to identify complementarities andexploit positive synergy. Even conglomeratefirms (highly unrelated businesses) were able tomake successful acquisitions, as long as the targetfirm was related to some of the acquiring firm's


businesses. The key to success appears to be theability to identify complementarities and take spe-cific actions to achieve positive synergy (noticeablyabsent in the unsuccessful acquisitions). Thus, re-source complementarities are of greater import-ance than the product/market relatedness of aspecific acquisition. These results provide supportfor the resource-based view of the firm. In par-ticular, the findings of the importance of resourcecomplementarities and focus on a core businesssuggest that the successful firms were able toachieve economies of scale, economies of scopeand/or market power.

While some of the unsuccessful acquisitionswere also closely related to the acquiring firms,there was not a consistent pattern of related-ness in this group. Six of the 12 acquisitions in-volved significant diversification. However, evenin the cases involving acquisition of related firms,the acquiring firm was unable to achieve or developpositive synergy between the two firms' assets/resources. Therefore, product/market relatednessalone did not distinguish clearly between the suc-cessful and unsuccessful acquisitions in this study.

As a whole, this research suggests that totaldiversification of the firm is less important thanthe resource complementarity between the twomerging firms. Relatedness of products/marketsdoes not necessarily imply that the two firms havecomplementary resources. For example, resourcesdo not have to be similar to be complementary.Harrison et al. (1991) found that firms with differ-ent, but complementary resources, were better ableto achieve synergy than those with similar resources.TTiis may help explain why researchers have beenunable to find consistent support for the related-ness hypothesis in past research (e.g. Chatterjee,1986; Lubatkin, 1987; Seth, 1990; Wansley, Lane andYang, 1983). Furthermore, this past research isdominated by large sample studies where the re-searchers determined potential resource comple-mentarities a priori or used product relatedness asa proxy for resource complementarity. Moreover,because it is difficult to measure intangible resources,most of these studies focused on only tangible re-sources. Our research suggests the importance ofresource complementarities for successful acqui-sitions, leading to the following proposition:

Proposition 1. Resource complementarity, incombination with other attributes, contributesto acquisition success.

Debt position. Acquisitions are often associatedwith increasing levels of debt, especially in theshort term (Hitt et al, 1991b). Debt was the mostconsistent determinant of whether an aquisitionwould be successful or not. Ten of the 12 suc-cessful acquisitions were associated with low-to-moderate debt, while large or extraordinary debtwas linked to 11 of the unsuccessful acquisitions.

Debt servicing costs can reduce earnings anddivert financial resources from innovative activ-ities (Hitt et ai, 1990). The increased financial riskassociated with debt may also make managersmore risk averse and less willing to invest inR&D due to its uncertain payoff (Baysinger andHoskisson, 1989; Smith and Warner, 1979). Highor extraordinary debt increases the risk of bank-ruptcy (Hitt and Smart, 1994). While debt can bea positive force in the development of the firm(Modigliani and Miller, 1958), low-to-moderatedebt allows managers more strategic flexibility -flexibility that is necessary to operate effectivelyin a dynamic and hyper-competitive environment(D'Aveni, 1994). Thus, the results suggest thatfirms should be careful in the amount of debtused to finance an acquisition.

Our findings concerning debt are in contrast tothe arguments by Jensen (;i986, 1989) that debtmay be necessary as a disciplinary force for man-agers. Also, we observed some forms of man-agerial opportunism in firms with high debt loadssuggesting that debt may not always prevent suchopportunitism. Some arguments (e.g. Jensen,1986,1988) seem to ignore (or attempt to explainaway) the trade-off costs required with the use ofhigh leverage. Based on the results of this study,the second proposition is as follows:

Proposition 2. Low-to-moderate debt levels(combined with other attributes) increasethe likelihood that financial performance andinnovative activity will increase subsequentto an acquisition, while high debt levels (com-bined with other attributes) lead to reduc-tions in financial performance and innovativeactivity.

Experience with change. Large-scale changeswere discovered in both sets of acquisitions.However, the nature of change was substantiallydifferent between the groups. Eight of our 12high-performing acquisitions involved at least onecompany, and often both firms, that had recent

108

experience with significant corporate changes,most often due to other acquisitions.

Companies that have recent experience withacquisitions are already in a fluid state and there-fore more easily adaptable to the changes requiredby the new acquisition. Lewin (1936) suggestedthat behavioural changes are facilitated by aprocess of 'unfreezing', 'change', and 'refreezing'.At the organizational level, unfreezing involvesovercoming structural inertia that results fromforces favouring the status quo. These forces caninclude existing systems, structures, processes,culture, sunk costs and internal politics, factorsthat provide stability in organizations. However,if an organization has completed an acquisitionrecently or been involved in some other form ofrestructuring, its systems, structures, processes,culture, sunk costs and internal politics should bein a fluid state. Thus, the organization is likely tobe unfrozen or flexible.

Because an acquisition requires substantialchange in both firms (Jemison and Sitkin, 1986),flexibility should facilitate post-acquisition inte-gration. At a minimum, acquisitions requirechanges to information systems, compensationsystems, planning systems, control systems andreporting structures. Organizations that haveexperience with these types of changes are in abetter position to create a smooth transitionleading to greater synergy.

Additionally, firms with prior acquisition ex-perience have a better understanding of the targetselection process, are more knowledgeable regard-ing negotiations and can better integrate acquiredfirms into their operations. Experience in thechange process allows them to anticipate andprevent or overcome resistance to change fromtarget-firm managers (and perhaps their ownmiddle and lower-level managers and profes-sionals). It may even be possible for organizationsto develop distinctive competencies in their abili-ties to select, purchase and integrate other com-panies (Haspeslagh and Jemison, 1991a; Hitt andIreland, 1985,1986).

The key for change experience to contributeto more effective acquisitions is organizationallearning. In other words, firms that have signi-ficant experience with large-scale change mustlearn from that change and apply that learn-ing to the process of selecting and/or integratingthe acquisition after it is completed as recom-mended by Haspeslagh and Jemison (1991a).

M Hitt, J. Harrison, R. D. Ireland and A. Best

Pennings, Barkema and Douma (1994) arguethat, in general, acquisitions compared to internalventures (innovation) often prevent a firm fromdeveloping proprietary skills to endow it with acompetitive advantage. While learning from ac-quisitions may be difficult and may require con-certed effort, our results show that some firmsovercome this barrier and learn from their exper-ience thereby facilitating better management offuture acquisitions.

Alternatively, Kusewitt (1985) observed anegative relationship between the number ofacquisitions in which an acquiring firm hadrecently engaged and its financial performance.He attributed this effect to 'corporate indigestionstemming from acquisition fever' (p. 159). Theeffects described by Kusewitt are consistent withour findings in the unsuccessful set of acquisi-tions. Nine of the 12 acquisitions were associatedwith multiple acquisitions by one or both firms. Infact, several of the acquisitions in this group werecarried out simultaneously or within a year ofanother major aquisition. The result was chaos, asopposed to systematic implementation. We attri-bute these differences to organizational learning.The successful acquiring firms learned from theirprevious acquisitions and applied the enhancedknowledge to make an effective new acquisition(e.g. special actions to identify and achieve posit-ive synergy). Seven of the nine acquisitions in thischaotic sub-group were also subjected to majorchanges in structure or the top management teamduring the same time period, contributing to theloss of control. Datta (1991) discovered that dif-ferences in top management styles between ac-quiring and target firms had a negative effect onperformance. Top management team transitionsare likely to exacerbate this effect.

As a result, we can see that experience withchange is positive, as long as the organizationlearns from past change activities and controls theprocesses associated with the acquisition. How-ever, too much change, too fast, can cause theacquiring firm to lose control of these processes.The following proposition summarizes thesearguments:

Proposition 3. Recent experience with acqui-sitions or other large-scale changes by one orboth acquisition partners (in combination withother attributes) can increase the likelihood ofacquisition success, if effective organizational


leaming is achieved. Without such learning,chaotic conditions limit control over imple-mentation processes, leading to poor financialperformance and a reduction in innovativeactivity.

Acquisition selection and negotiation processes.Five of the acquisitions in the successful groupwere completed only after the target was chosencarefully. However, nearly all (11) of the unsuc-cessful acquisitions were associated with inad-equate target evaluation and planning for theacquisition.

In the unsuccessful group, inadequate evalua-tion and planning occurred for a variety ofreasons, including overconfidence in the ability tomanage purchased assets effectively (managerialhubris), ignoring obvious problems in the targetfirm. Thus, the results provide support for Roll's(1986) hypothesis that ineffectiveness in someacquisitions is due to the hubris of acquiring firmmanagers. Often, the acquiring firm paid sub-stantial premiums for the acquired firm. All of theproblems were related to a lack of thorough ana-lysis of the target firm and the processes neededto acquire and integrate it into the new parent.The white knights in the unsuccessful sample, inparticular, seemed determined to make the ac-quisitions despite having to pay extremely highpremiums and other obvious barriers. Also, manyof the unsuccessful acquisitions were completedin a short period of time, disallowing appropriateanalysis and negotiations. These results providestrong support for Haspeslagh and Jemison's(1991a) suggestion of the importance of a qualitypre-acquisition decision process. Consequently,the following proposition is offered:

Proposition 4. Deliberate and systematicacquisition planning processes (in combinationwith other attributes) can facilitate the pur-chase of an acceptable target with terms thatwill not adversely affect and may even con-tribute to high financial performance andincreased innovation.

Configurations of attributes

Perhaps the most important finding from thisstudy is that no single attribute alone couldexplain the acquisitions success or lack thereof.This becomes even more important because many

of these attributes represented different theo-retical explanations for the success or failure of anacquisitive strategy.

Attribute configurations for successful acquisi-tions. Six attributes were the most significant insuccessful acquisitions: resource complement-arities, friendliness of the process, low-to-moderate debt, change experience, emphasis oninnovation and focus on core business. All of thesuccessful acquisitions were associated with bothresource complementarities and friendly negotia-tions. Most of the acquisitions exhibited thecombination of low-to-moderate debt and changeexperience as well. Those acquisitions withoutthe latter two attributes exhibited a combinationof a focus on core business and an emphasis oninnovation. Thus, all of the acquisitions in thesuccessful group exhibited some combination offour of the aforementioned six attributes.

A friendly negotiation process should facilitatethe integration between the two firms after theacquisition is completed; Haspeslagh and Jemison(1991a) have argued the importance of the integ-ration process to the success of acquisitions.Alternatively, the fact that none of the acquisi-tions in the successful set entailed a hostile pro-cess provides little support for the market forcorporate control arguments popularized byJensen (1988) and others. Friendliness betweenthe two firms may facilitate the creation and ex-ploitation of synergy, when resource complement-arities exist. Unfriendly negotiations can lead tohigher premiums, which reduce future financialreturns. In addition, friendliness during thenegotiation process can increase the probabilitythat the cultures and systems of the merging firmswill be successfully combined, thus increasing thelikelihood that synergies will be realized (Harrison,O'Neill and Hoskisson, 1991). If a target firm'smanagers are opposed to the acquisition, theyare not likely to be cooperative during post-acquisition integration.

The emphasis on the innovation attribute sup-ports arguments by Hitt et al. (1990) and Franko(1989) suggesting the importance of innovationfor strategic competitiveness and firm perform-ance. Our results also suggest that firms canremain innovative even though they follow anacquisition strategy, in contrast to the argumentsof Hitt et al (1990) and Hitt et al. (1991b). Earlier,we suggested the importance of focusing on a

no M. Hitt, J. Harrison, R. D. Ireland and A. Best

firm's core business, which supports much of therecent literature in strategy suggesting that topexecutives can more effectively manage firms thatremain focused and do not overdiversify (e.g.Hoskisson and Hitt, 1994).

Thus, our research suggests that successfulacquisitions usually entail resource complemen-tarities and a friendly, non-hostile process. In ad-dition, they usually exhibit other attributes suchas low-to-moderate debt and change experienceor focus on core business and an emphasis oninnovation. Many of the acquisitions exhibitedconfigurations of more than four attributes. Thus,the results lead to the following proposition:

Proposition 5. Optimal synergy is createdand highest performance is achieved when ac-quisitions entail resource complementarities,friendly, non-hostile negotiations and a com-bination of low-to-moderate debt and changeexperience or focus on core business and anemphasis on innovation.

Attribute configurations in unsuccessful acquisi-tions. The dominant attributes of the unsuccess-ful acquisitions included large or extraordinarydebt, inadequate target evaluation, ethical concerns/opportunism and top management team and/orstructure changes. In fact, 11 of the 12 acquisitionsin this set entailed combinations of at least threeof these four attributes. Clearly, where man-agerial hubris produces inadequate evaluation ofpotential acquisition targets, executives are likelyto believe that they can successfully manage theirfirms in spite of high debt levels and the asso-ciated servicing costs. Furthermore, those whoexhibit managerial arrogance are also more likelyto engage in opportunistic or unethical behaviour.Such individuals may believe they can conceal be-haviours that are inconsistent with societal values,laws or regulations. Alternatively, they may un-derestimate the potential severity of negativeconsequences resulting from such behaviours.

Organizations with poor social performanceare often involved in court battles which can drainresources and divert funds from productive uses(e.g. R&D, capital equipment). Furthermore,executives may be involved personally in the legalproceedings, thus turning their attention fromimportant activities such as successful integrationof an acquisition. In some of the cases studied,executives had to spend inordinate amounts of

time dealing with court battles and/or problemscreated by inappropriate behaviour of other man-agers. Thus, such problems can produce lowerperformance of the combined firm.

Nine of the ten unsuccessful acquisitions thatexperienced top management team change and/or major structural changes also exhibited poorsocial performance. In some instances, top man-agement team changes could be linked to un-ethical actions. In these instances, top executiveswere forced out for, among other reasons, theirinvolvement in questionable activities. Top man-agers (especially the CEO) are a major source ofthe organization's ethical values. When top man-agers are replaced, subordinates experience con-fusion conceming the ground rules of acceptablebehaviour (Pastin, 1986). At these times, organ-izations are particularly susceptible to ethicalproblems. Dramatic changes to organizationalstructure are likely to result in the same type ofconfusion, because they entail revisions in report-ing relationships and lines of authority andsupervision.

Consequently, it is not surprising that changesin the top management team or major changes tostructure are associated with unethical actions,especially when combined with an acquisition,another source disruption. These arguments leadto the following proposition:

Proposition 6. Configurations of large orextraordinary debt, inadequate target evalua-tion, ethical concerns/opportunism and topmanagement team and/or structure changes arelikely to lead to poorer financial performanceand less innovative activity after the acquisitionis completed.

Limitations

While the approach used has a number of ad-vantages, it also has some limitations. The use ofsecondary data collected and reported by others(e.g. journalists) opens the data to potential biasesbecause they are based on the perceptions andinterpretations of people over whom the re-searchers have no control. This limitation ispartially offset because many different sourceswere used, allowing the researchers to triangulateinformation. Additionally, the approach used hasthe potential for injecting researcher bias becausethe researchers gather, analyse and interpret the


data with the case method. However, as describedearlier, care was taken to limit researcher bias.

Certainly, other measures of acquisition success(or the lack thereof) could have been used. Nocombination of measures can fully capture such acomplex phenomenon. Furthermore, R&D in-vestments (one of the variables used as a successcriterion) have a long-term effect, and will havean ex post effect on ex ante ROA. Of course, ROAmay also have an effect on ex post R&D. Mostvariables related to success, however, are likely tobe reciprocally interdependent. These two vari-ables were chosen over other possible successcriteria (e.g. liquidity, productivity measures)because of their prominence in recent empiricalresearch on acquisitions.

Additionally, the focus on outliers could limitgeneralizability. Using outhers helps ensure thatthe attributes discovered differentiate successfuland unsuccessful acquisitions. However, furtherresearch will be needed to discover if the attri-butes of outliers generalize to the larger universeof acquisitions.

Finally, while debt effects are considered largelyas exogenous in this research, they also areendogenous. The level of debt is considered asan outcome variable (which contributes to firmperformance - high debt costs reduce R&Dinvestments and ROA) but it also affects slackresources. The case research design does notallow disentangling the variables such as debt thatcan be both endogenous and exogenous.

Implications and conclusions

While there are potential limitations of themethod used in this study, its richness and depthprovide many benefits that we believe outweighits limitations. As such, this study has implicationsfor theory development in the strategic manage-ment field. First, it represents a non-conventionaltechnique for developing strategic managementtheory. Case studies have long been a part ofmanagement research. However, case researchhas typically involved either one or a very smallnumber of cases (Larsson, 1993) and a single re-searcher using a rather informal method. The mul-tiple case, multiple rater, systematic case methodused here has the potential to facilitate the de-velopment of new theory in the strategic man-agement field. Additionally, the use of an outherapproach facilitated our ability to differentiate

the attributes of successful and less successfulacquisitions. As such, this approach holds promiseto facilitate understanding of complex pheno-mena not well explained using averages acrosslarge samples.

Second, some of the widely referenced theoriesconcerning acquisitions were confirmed. Forexample, resource complementarities, combinedwith a friendly courtship, were found in the highperforming acquisitions. However, the inability ofrelatedness, alone, to explain performance providesfurther understanding of why the relatednesshypothesis has not received consistent support.Clear resource complementarities must exist andbe exploited. In some cases, resource complemen-tarities cannot be identified by product related-ness (used in much previous research), as in theSmithKline acquisition of Beckman Instruments.

In addition to the support for a resource-basedview of acquisitions, the work of Haspeslagh andJemison (1991a, 1991b) received considerable sup-port from this study. Three of their four originalrecommendations (they referred to them as man-agerial challenges) regarding acquisitions receivedsupport from this study Haspeslagh and Jemisonemphasize the importance of the acquisitionprocess in acquisition success. The recommenda-tions receiving support included following aquality pre-acquisition decision-making process,effectively integrating the acquired firm intothe existing business and fostering learningfrom the acquisition. Thus, our research sug-gests that the acquisition process does, indeed,have an important effect on post-acquisition firmperformance.

This study also provided strong evidence con-cerning the important role of debt in acquisitions.Basically, our findings suggest that debt's dis-ciplinary properties were unnecessary in thesefirms to achieve strong performance and highvalue thereby raising questions about the signific-ance of Jensen's (1989) arguments on the need fordebt to provide high value to shareholders. It isalso of interest that managerial opportunism wasevidenced in some firms with high debt, therebyquestioning debt's disciplinary properties.

The fact that no hostile acquisitions were foundamong our sample of successful acquisitions is atodds with the arguments for the efficiency of themarket for corporate control and its disciplinaryrole. In the 1980s, it was argued that hostiletakeover bids represented the natural forces in


the market for corporate control to acquire under-valued assets (because of ineffective managementteams' and firms' inefficiencies) (i.e. Hermannand Lowenstein, 1988; Jensen and Ruback, 1983;Jensen, 1986).

These results are partially supported by Walshand Kosnik (1993) who showed that the disciplin-ary effect of the market for corporate control mayexist only among target firms and competitorsthat had sustained histories of poor performance.In fact, Walsh and Kosnik (1993) found thatalmost 50% of the cases involving the most activehostile takeover artists in the 1980s were focusedon target firms performing above their industry'saverage. Furthermore, the problems in attempt-ing to achieve integration of the two firms afteran unfriendly takeover are obviously more sig-nificant than suggested previously.

The findings by Davis and Stout (1992) mayrequire some reinterpretation based on the re-sults of our study. They found that firms with highdebt were not attractive takeover candidates butthose with low debt were more likely to experi-ence hostile takeover attempts because of poormanagement. Our research suggests a differentinterpretation. Firms with high slack and low debtare likely to be more attractive acquisition targetsthan those with high debt because of the debtservicing costs and the ability to obtain more cap-ital to finance the acquisition. Furthermore, ourresults suggest that firms with low debt likely hadeffective management and firms with high debtoften had ineffective management.

An interesting finding of this study was thateven highly diversified firms were able to completesuccessful acquisitions under certain conditions.Also, successful and unsuccessful acquisitions donot appear confined to certain industries. In bothcases, past research could be interpreted to sug-gest otherwise. Therefore, this study has partiallyconfirmed some prior research regarding the im-portance of relatedness and friendliness. However,in other cases, the results question commonlyaccepted theoretical notions.

Several variables identified in this study areworthy of further investigation, including experi-ence with change, emphasis on innovation, theexistence or absence of slack, managerial hubris,ethical concerns and changes in the top manage-ment team. However, it may be that the config-uration of attributes is more important than anyone of the factors considered separately (Meyer

et al., 1993). In fact, our research strongly sup-ports the notion that success or the lack thereof inacquisitions is likely the result of a configurationof variables rather than any one variable's inde-pendent effects. Thus, a more complex view ofacquisitions may be necessary to accurately testand understand their success in future research.

Thus, our study has confirmed some importantprior theoretical arguments and provided evidenceof the potential inaccuracy of other theoreticalarguments regarding acquisitions. As a result, thisresearch provides a basis for future empiricalwork on acquisitions. We encourage further em-pirical work using large samples to examine thepropositions stated herein. Our research suggeststhe importance of examining multiple variablesand their potential interaction to explain post-acquisition performance. Furthermore, some ofthe variables identified in our study may requireintensive field research (e.g. learning from changeexperiences, inadequate target evaluations, em-phasis on innovation and possibly managerialopportunism). As a result, to understand the com-plex phenomenon of acquisitions in future em-pirical work may require both quantitative andqualitative approaches and be longitudinal innature. Thus, our research suggests the need forcomplex and challenging research designs to cap-ture a more complete understanding of acquisitions.

References

Amihud, Y, P. Dodd and M. Weinstein (1986). 'ConglomerateMergers, Managerial Motives and Stockholder Wealth',Journal of Banking and Finance. 10, pp. 401-410.

Barney, J. B. (1988). 'Returns to Bidding Firms in Mergers andAcquisitions: Reconsidering the Relatedness Hypothesis',Strategic Management Journal, 9 (Special Issue), pp. 71-78.

Barney, J. B. (1991). 'Firm Resources and Sustained Com-petitive Advantage'.Journal of Management. 17, pp. 99-120.

Baysinger, B. and R. E. Hoskisson (1989). 'DiversificationStrategy 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 ofBoard and Ownership Structure on Corporate R&D Strat-egy', Academy of Management Journal. 34, pp. 205-214.

Boje, D. M. (1991). 'The Story Telling Organization: A Studyof Story Performance in an Office-supply Firm', Admin-istrative Science Quarterly. 36, pp. 106-126.

Bruton, G. D., B. M. Oviatt and M. A. White (1994). 'Per-formance of Acquisitions of Distressed Firms', Academy ofManagement Journal. 37, pp. 972-989.

Burgelman, R. A. (1983). 'A Process Model of InternalCorporate Venturing in the Diversified Major Firm'.Administrative Science Quarterly. 28, pp. 223-245.


Carper, W. B. (1990). 'Corporate Acquisitions and Share-holder Wealth: A Review and Explanatory Analysis',Journal of Management, 16, pp. 807-823.

Chatterjee, S. (1986). 'Type of Synergy and Economic Value:The Impact of Acquisitions on Merging and Rival Firms',Strategic Management Journal, 7, pp. 119-139.

Chen, C. C. and J. R. Meindl (1991). 'The Constructionof Leadership Images in the Popular Press: The Case ofDonald Burr and People Express', Administrative ScienceQuarterly. 36, pp. 521-551.

Datta, D. K. (1991). 'Organizational Fit and AcquisitionPerformance: Effects of Post-acquisition Integration',Strategic Management Journal, 12, pp. 281-297.

Datta, D. K., G. E. Pinches and V. K. Narayanan (1992).'Factors Influencing Wealth Creation from Mergersand Acquisitions: A Meta-analysis', Strategic ManagementJournal, 13, pp. 67-84.

D'Aveni, R. A. (1994). Hypercompetition. The Free Press,New York.

D'Aveni, R. A. and I. C. MacMillan (1990). 'Crisis and theContent of Managerial Communications: A Study of theFocus of Attention of Top Managers in Surviving and Fail-ing Firms', Administrative Science Quarterly, 35, pp. 634-657.

Davis, G. F. and S. K. Stout (1992). 'Organization Theory andthe Market for Corporate Control: A Dynamic Analysis ofthe Characteristics of Large Takeover Targets, 1980-1990',Administrative Science Quarterly, 37, pp. 605-633.

Downey, H. K. and R. D. Ireland (1988). 'Strategic Objectivesin Policy Research: An Essay on the Dangers of notAcknowledging Purposeful Behavior'. In: R. Lamb andP. Shrivastava (eds). Advances in strategic management,pp. 263-275. JAI Press, New York.

Dranove, D. and M. Shanley (1995). 'Cost Reductions orReputation Enhancement as Motives for Mergers: TheLogic of Multi-hospital Systems', Strategic ManagementJournal, 16, pp. 55-74.

Eisenhardt, K. (1989). 'Building Theories from CaseStudy Research', Academy of Management Review. 14,pp. 532-550.

Elsbach, K. D. and R. 1. Sutton (1992). 'Acquiring Organ-izational Legitimacy through Illegitimate Actions: A Mar-riage of Institutional and Impression Management Theories',Academy of Management Journal, 35, pp. 699-738.

Franko, L. G. (1989). 'Global Corporate Competition: Who'sWinning, Who's losing, and the R&D Factor as One ReasonWhy', Strategic Management Journal, 10, pp. 449-474.

Franks, I, R. Harris and S. Titman (1991). 'The PostmergerShare-price Performance of Acquiring Firms', Journal ofFinancial Economics. 29, pp. 81-96.

Harrison, J. S., H. M. O'Neill and R. E. Hoskisson (1991).Acquisition Strategy in Hostile Takeovers: Target and BiddingFirm Performance. Paper presented at the annual meetingof the Strategic Management Society, Toronto.

Harrison J. S., M. A. Hitt, R. E. Hoskisson and R. D. Ireland(1991). 'Synergies and Post Acquisition Performance:Differences Versus Similarities in Resource Allocations',Journal of Management, 17, pp. 173-190.

Haspeslagh, P. and D. B. Jemison (1991a). ManagingAcquisitions. The Free Press, New York.

Haspeslagh. P and D. B. Jemison (1991b). 'The Challenge ofRenewal Through Acquisitions', Planning Review, March/April, pp. 27-32.

Hermann, E. S. and L. Lowenstein (1988). 'The EfficiencyEffects of Hostile Takeovers'. In: J. C. Coffee, L. Lowensteinand S. Rose-Ackerman (eds). Knights, Raiders, and Targets,pp. 211-240. Oxford University Press, New York.

Hirsch, P. M. (1986). 'From Ambushes to Golden Parachutes:Corporate Takeovers as an Instance of Cultural Framingand Institutional Integration', American Journal of Sociology,91, pp. 800-837.

Hitt, M. A. and R. D. Ireland (1985). 'Corporate DistinctiveCompetence, Strategy, Industry and Performance', StrategicManagement Journal, 6, pp. 273-293.

Hitt, M. A. and R. D. Ireland (1986). 'Relationships amongCorporate Level Distinctive Competencies, DiversificationStrategy, Corporate Structure and Performance', Journal ofManagement Studies, 23, pp. 401-416.

Hitt, M. A. and D. Smart (1994). 'Debt: A Disciplining Forcefor Managers or a Debilitating Force for Organizations?',Journal of Management Inquiry, 3, pp. 144—152.

Hitt, M. A., R. E. Hoskisson and R. D. Ireland (1990).'Mergers and Acquisitions and Managerial Commitmentto Innovation in M-Form Firms', Strategic ManagementJournal, 11 (Special Issue), pp. 29-47.

Hitt, M. A., R. E. Hoskisson, R. D. Ireland and J. S. Harrison(1991a). 'Effects of Acquisitions on R&D Inputs and Out-puts', Academy of Management Journal, 34, pp. 693-706.

Hitt, M. A., R. E. Hoskisson, R. D. Ireland and J. S. Harrison(1991b). 'Are Acquisitions a Poison Pill for Innovation?',Academy of Management Executive, 5(4), pp. 22-34.

Hitt, M. A., R. E. Hoskisson, R. A. Johnson and D. D.Moesel (1996). 'The Market for Corporate Control andFirm Innovation', Academy of Management Journal, 39,pp. 1084-1119.

Hitt, M. A., R. D. Ireland and R. E. Hoskisson (1997). Stra-tegic Management: Competitiveness and Globalization. WestPublishing Company, St. Paul, MN.

Hopkins, H. D. (1987). 'Long-term Acquisition Strategies inthe U.S. Economy', Journal of Management, 31, pp. 557-572.

Hoskisson, R. E. and M. A. Hitt (1990). 'Antecedents andPerformance Outcomes of Diversification: A Review andCritique of Theoretical Perspectives', Journal of Manage-ment. 16, pp. 461-509.

Hoskisson, R. E. and M. A. Hitt (1994). Downscoping: Howto Tame the Diversified Firm. Oxford University Press,New York.

Hoskisson, R. E. and R. A. Johnson (1992). 'Corporate Re-structuring and Strategic Change: The Effect on Diversifica-tion Strategy and R&D Intensity', Strategic ManagementJournal. 13, pp. 625-634.

House, R. J., W. D. Spangler and J. Woycke (1991). 'Per-sonality and Charisma in the U.S. Presidency: A Psycho-logical Theory of Leader Effectiveness', AdministrativeScience Quarterly. 36. pp. 364-396.

Jemison, D. B. and S. B. Sitkin (1986). 'Corporate Acquisi-tions: A Process Perspective', Academy of ManagementReview. 11, pp. 145-163.

Jensen. M. C. (1986). 'Agency Costs of Free Cash Flow,Corporate Finance and Takeovers', American EconomicReview. 76, pp. 323-329.

Jensen, M. C. (1988). 'Takeovers: Their Causes and Con-sequences', Journal of Economic Perspectives. 2, pp. 21-48.

Jensen, M. C. (1989). 'Eclipse of the Public Corporation',Harvard Business Review, 67(5), pp. 61-74.


Jensen, M. C and R. S. Ruback (1983). 'The Market forCorporate Control: The Scientific Evidence', Journal ofFinancial Economics. 2, pp. 5-50.

Kahn, W. A. (1993). 'Caring for the Caregivers: Patterns ofOrganizational Caregiving', Administrative Science Quarterly,38, pp. 539-563.

Koretz, G. (1997). 'Dealmakers Go on a Global Tear',Business Week, February 17, p. 25.

Kusewitt, J. B. (1985). 'An Exploratory Study of the StrategicAcquisition Factors Relating to Performance', StrategicManagement Journal, 6, pp. 151-169.

Larson, A. (1992). 'Network Dyads in Entrepreneurial Settings:A Study of the Governance of Exchange Relationships',Administrative Science Quarterly, 37, pp. 76-104.

Larsson, R. (1993). 'Case Survey Methodology: QuantitativeAnalysis of Pattems Across Case Studies', Academy ofManagement Journal, 36, pp. 1515-1546.

Lewin, K. (1936). Principles of Topological Psychology.McGraw-Hill, New York.

Lipin, S. (1997). 'Corporations' Dreams Converge on OneIdea: Its Time to do a Deal', Wall Street Journal, February26, Al, A12.

Loderer, C. and K. Martin (1992). 'Postacquisition Performanceof Acquiring Firms', Financial Management, 21(3), pp. 69-77.

Lubatkin, M. (1987). 'Merger Strategies and StockholderValue', Strategic Management Journal. 8, pp. 39-53.

Lubatkin, M. and H. M. O'Neill (1987). 'Merger Strategiesand Capital Market Risk', Academy of Management Journal,30, pp. 665-684.

Meyer, A. D., A. S. Tsui and C R. Hinings (1993). 'Config-urational Approaches to Organizational Analysis', Academyof Management Journal. 36, pp. 1175-1196.

Modigliani, F. and M. H. Miller (1958). 'The Costs of Capital,Corporation Finance, and the Theory of Investment',American Economic Review, 48, pp. 261-297.

Pablo, A. L. (1994). 'Determinants of Acquisition IntegrationLevel: A Decision-making Perspective', Academy of Man-agement Journal, 37, pp. 803-836.

Pastin, M. (1986). The Hard Problems of Management:Gaining the Ethics Edge. Jossey-Bass, San Francisco.

Pennings, J. M., H. Barkema and S. Douma (1994). 'Organ-izational Learning and Diversification', Academy ofManagement Journal, 37, pp. 608-640.

Peteraf, M. A. (1993). 'The Cornerstones of CompetitiveAdvantage: A Resource-based View', Strategic ManagementJournal, 14, pp. 179-191.

Porter, M. E. (1987). 'From Competitive Advantage to Cor-porate Strategy', Harvard Business Review, 65(3), pp. 43-59.

Ravenscraft, D. J. and R. M. Scherer (1987). Mergers, Sell-offsand Economic Efficiency. Brookings Institute, WashingtonDC.

Roll, R. (1986). 'The Hubris Hypothesis of Corporate Take-overs', Journal of Business, 59, pp. 197-216.

Sackmann, S. A. (1992). 'Culture and Subcultures: An Ana-lysis of Organizational Knowledge', Administrative ScienceQuarterly, 37, pp. 140-161.

Seth, A. (1990). 'Value Creation in Acquisitions: A Re-examination of Performance Issues', Strategic ManagementJournal, 11, pp. 99-115.

Singh, H. and C. A. Montgomery (1987). 'Corporate Acquisi-tion Strategies and Economic Performance', StrategicManagement Journal, 8, pp. 377-386.

Smith, C. L. and J. B. Warner (1979). 'Bankruptcy, SecuredDebt, and Optimal Capital Structure: A Comment', Journalof Finance, 34, pp. 347-351.

Stuart, T. and D. Collis (1991a). Cat Fight in the Pet FoodIndustry (A, B, C, D). Harvard Business School, Boston, MA.

Stuart, T. and D. Collis (1991b). Cooper Industries' corporatestrategy. Harvard Business School, Boston, MA.

Teece, D. (1986). 'Profiting from Technological Innovation:Implications for Integration, Collaboration, Licensing andPublic Policy', Research Policy, 15, pp. 285-305.

The Economist (1994). 'The trouble with mergers'. September10, pp. 13-14.

Van Maanen, J. (1979). 'Reclaiming Qualitative Methods forOrganizational Research', Administrative Science Quarterly,24, pp. 520-526.

Walsh, J. P. and R. D. Kosnik (1993). 'Corporate Raidersand their Disciplinary Role in the Market for CorporateControl', Academy of Management Journal, 36, pp. 671-700.

Wansley, J. W, W. R. Lane and H. C. Yang (1983). 'AbnormalReturns to Acquired Firms by Type of Acquisition andMethod of Payment', Financial Management, 12(3),pp. 16-22.

Weston, J. F. and K. S. Chung (1990). 'Takeovers and Cor-porate Restructuring: An Overview', Business Economics.25(2), pp. 6-11.

Weston, J. F., K. Chung and S. Hoag (1990). Mergers, Restruc-turing and Corporate Control. Prentice-Hall, EnglewoodCliffs. NJ.

Whitford, D. (1997). 'Sale of the Century', Fortune. February17, pp. 92-100.

Yin, R. K. (1981). 'The Case Study Crisis: Some Answers',Administrative Science Quarterly. 26, pp. 58-65.

Yin, R. K. (1989). Case Study Research: Design and Methods.Sage Publications, Beverly Hills, CA.

Hitt Et Al (1998) Successful and Unsuccessful Acquisitions

Documents

Transcript of Hitt Et Al (1998) Successful and Unsuccessful Acquisitions