Hitt Et Al (1998) Successful and Unsuccessful Acquisitions

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

Attributes of Successful and Unsuccessful Acquisitions 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 of Business, 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 evidence that they often do not enhance the financial performance of acquiring firms and may adversely affect innovation. However, some acquisitions are associated with both increases in financial performance and a strengthened commitment to R&D while others experience decreases in both. Multiple theories have been offered to explain acquisitions and their outcomes, but few have received strong empirical support. This paper describes a multiple rater, multiple-case study of acquisitions that had highly favourable outcomes and others that experienced highly unfavourable outcomes. All twelve of the high performing acquisitions studied were found to exhibit the dual characteristics offiriendlinessduring acquisition negotiations and resource complementarities between the two firms. Additionally, debt played an important role in the success (low to moderate debt) or lack of success (high or extraordinary debt) in 21 of the 24 acquisitions studied. Inadequate target evaluation was a factor in 11 of the 12 acquisitions with low performance. Importantly, the results of both sets of acquisitions suggested that a configuration of attributes affected post-acquisition performance. Other findings both supported and contradicted commonly held beliefs about acquisitions, as well as highlighted variables not typically associated with acquisition strategies. The study provides directions for future theory development and empirical research on acquisitions.

IntroductionFor many years, acquisitions have been a popular strategy (Hoskisson and Hitt, 1994). For some firms, acquisitions have become a wellinstitutionalized phenomenon strongly influencing organizational structures and behaviours (Hirsch, 1986; Pablo, 1994). Clearly, some organizations consider acquisitions to be a superior method of investing corporate resources (Bruton, Oviatt and White, 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 earlier drafts of this manuscript. 1998 British Academy of Management

The amount of resources companies dedicated to acquisitive growth increased steadily between the middle of the 1960s and the end of the 1980s (Weston and Chung, 1990), but the rate of acquisitions slowed slightly during the early 1990s. Between 1990 and 1992, for example, approximately $222 billion was spent on acquisitions (Pablo, 1994). However, acquisition activity began to increase in 1992 and 1993 with more dollars invested in acquisitions during 1994, 1995 and 1996 than in any previous year. In 1996 over $1 trillion was spent on acquisitions globally with $660 billion in the USA (Lipin, 1997). Thus, the USA was the most active followed by Great Britain and Germany (Koretz, 1997). This level of activity suggests that the fifth merger wave of this

92 century has begun and may be the greatest in history (Whitford, 1997). In spite of their popularity as a growth strategy, acquisitions may not, on average, provide many financial benefits for acquiring firms (Carper, 1990; Datta, Pinches and Narayanan, 1992; Jensen, 1988; Loderer and Martin, 1992; Porter, 1987; Ravenscraft and Scherer, 1987). Equally disturbing, there is evidence that acquisition activity can lead to reductions in internally developed innovation (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 significant firm strategy and many acquisitions are not successful suggests an inadequate theoretical and practical understanding of this complex phenomenon. Consequently, the purpose of this research was to examine thoroughly a set of acquisitions that produced successful outcomes compared to another set that produced unsuccessful outcomes. The successful acquisitions defied the patterns described and thus led to increased financial performance and greater investment in R&D. The unsuccessful set produced poor financial performance, coupled with reductions in R&D investment. Each set of acquisitions can then be considered outliers. Our purpose was to identify common attributes of these acquisitions to advance theoretical understanding of how to succeed and avoid failure using an acquisition strategy. The analytical method used to make these comparisons was a systematic, multiple rater, multiplecase analysis of acquisitions associated with positive or negative changes in both financial performance and investments in R&D (as measured by R&D intensity). Yin (1989) argued that case studies are appropriate in answering 'why' questions about contemporary events over which the investigator has little or no control. In this study, the main research question is why some acquisitions lead to increases in both financial performance and R&D investments while others lead to reductions in both. Yin (1989) also suggested that case studies are appropriate for generating theoretical propositions. The present study resulted in several testable research propositions. Following is a summary outline of the basic theory and evidence regarding acquisition activities. This theory and evidence provides a foundation for describing the study's research question and interpreting the findings reported herein.

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

Prevalent theories of acquisitions Resource-based view. A theoretical perspective that partially supports several major views on acquisitions is the resource-based view of the firm (Barney, 1991). Applied to acquisitions, this view suggests that resources may motivate and direct acquisitive growth. First, firms with specific types of resources may seek acquisitive growth. For example, firms with significant free cash flows may seek to invest them by acquiring businesses to derive greater returns. Investing free cash flows in this way, as opposed to holding them, may also demotivate future takeover attempts. Second, a firm may attempt to gain economies of scope by acquiring a business in which it can apply its core competence (Peteraf, 1993). A firm may also use an acquisition to buffer its core competence or to combine with resources from the acquired firm to make its core competence less imitable (Harrison, Hitt, Hoskisson and Ireland, 1991). In effect, the acquisition may create cospecialized assets (Teece, 1986). Applying the resource-based view to acquisitions is congruent with Barney's (1988) arguments that sustainable competitive advantage may accrue from the realization of private synergy that cannot be easily imitated. Acquisition process. An alternative theoretical approach focuses on the acquisition process. Among the most recognized proponents of this approach are Haspeslagh and Jemison (1991a, 1991b). Based on a set of case studies, they suggest how to best manage the acquisition process to create firm value. They argue that acquisitions create four managerial challenges: 1 ensuring consistency of the acquisition with the firm's current strategic direction 2 following a quality pre-acquisition decisionmaking process (e.g. choosing the right business for acquisition) 3 effectively integrating the acquired firm into the existing business 4 fostering learning from the acquisition (acquisition specific and more general learning) (Haspeslagh and Jemison, 1991b). Perhaps, the attribute receiving the most attention from other scholars has been the importance of post-acquisition integration to create value.

Attributes of Successful and Unsuccessful Acquisitions of US Firms Acquisition outcomes. Several theoretical perspectives have been advanced to explain the performance of acquisitions. The most common theoretical rationales suggesting a potential positive effect of acquisitions on firm performance include the following: 1 the merged firm achieves greater market power through increased market share or multipoint competition 2 the merged firm gains economies of scale and/or scope by combining complementary capabilities of the two firms, and 3 the merged firm can access capital at lower costs (Weston, Chung and Hoag, 1990; Dranove and Shanley, 1995; Hitt, Ireland and Hoskisson, 1997). Other theories explain why acquisitions may not achieve positive performance enhancing effects. Barney (1988), for example, argued that private (unknown to others) and uniquely valuable (unavailable to potential competitors) synergy is a prerequisite for a successful acquisition. Without such synergy, potential acquiring firms bid the price for target firms to amounts equal to or greater than their value. Alternatively, Roll (1986) suggested that managerial hubris explains why acquiring firms sometimes make excessive bids. Paying high premiums reduces the likelihood that acquiring firms' shareholders will benefit from an acquisition (Datta et al., 1992). As an alternative to these theoretical perspectives, Jensen (1988) argued that acquisitive takeovers can produce higher firm performance when management teams of firms that are underperforming their potential are replaced because the acquiring firm can more efficiently manage the acquired firm's assets. Because management teams in the acquired firms are replaced, the acquisitions are almost always hostile (ac