Acquisition waves

Acquisition activity is cyclical with volumes and numbers resulting in so-called merger waves; periods of increased M&A frequency that are triggered by economic, regulatory, and technological events (Alexandridis, Mavrovitis, & Travlos, 2012; Brueller, Ellis, Segev, & Carmeli, 2015; Harford, 2005; Park & Gould, 2017). Comparison of merger waves suggests that different waves display different motives (Ranft & Lord, 2002). For instance, the 1960s wave and 1980s wave mirror each other. The Williams Act of 1969 helped to end a 1960s merger wave by making diversifying acquisitions more difficult (Palmer & Barber, 2001), and surviving conglomerates were later driven to refocus during the 1980s, or this later wave was a reaction to excessive diversification from the 1960s (Markides, 1995). While merger waves are associated to economic booms, M&A waves consistently end with a stock market crash or regulatory change (Martynova & Renneboog, 2008; Park & Gould, 2017), see Table 2.1.

The impact of waves can be significant, as approximately half of all M&A activity in the U.S. during the 20th century took place during an acquisition wave precipitated by political and economic change (Stearns & Allan, 1996). Additionally, there is some evidence that early movers in acquisition waves outperform others (Haleblian, McNamara, Kolev, & Dykes, 2012), as later deals are riskier due to the exchange of assets at higher prices (Martynova & Renneboog, 2008). Ironically, later deals gain legitimacy and experience easier completion even though they end up displaying lower performance (Goranova, Priem, Ndofor, & Trahms, 2017). One possible explanation is that later acquisitions are driven by CEO envy of peers with higher compensation from performing acquisitions (Goel & Thakor, 2009).

Table 2.1 Summary of M&A waves

External drivers of M&A

While the underlying justification by managers for acquisitions is that they will improve performance, acquisitions often respond to external events, such as regulatory change. One illustration was the fall of the Berlin Wall and consecutive opening of prior closed Central European markets to deals (Meyer & Lieb-Dóczy, 2003). Also technology shifts trigger acquisitions as a means to access needed resources (Haleblian et al., 2009; Heeley et al., 2006). Deals can also be initiated externally as investment bankers are often hired by target firms to shop them to potential acquirers. Additionally, the best acquirers constantly scan their environment for suitable targets (Nadolska & Barkema, 2014), and they may be approached by targets (Secher & Horley, 2018). For example, in 2018, Groupon has approached several firms to acquire it (Bloomberg, 2018).

Internal drivers of resource flow

A firm’s history and attributes can predispose it toward internal or external growth, and experience is further reinforced by repetitive implementation (Hagedoorn & Duysters, 2002) and resource investments (Moatti, Ren, Anand, & Dussauge, 2015). Still, the underlying source of value behind acquisitions is when slack resources in one firm cover a deficiency in another firm (Myers & Majluf, 1984), but resource flows relate to how an acquisition is framed as either leveraging acquirer strengths or mitigating a weakness.

If an acquirer is attempting to leverage a strength, then resource out-flow or transfer to a target is likely, and this is consistent with an acquirer applying internal slack resources to new uses (Teece, 1986; Wernerfelt, 1988). Additionally, research finds acquisitions involve greater transfer of resources from an acquiring to a target firm (Capron, Mitchell, & Swami-nathan, 2001). For example, managerial resources are often transferred to a target firm (Ranft, Butler, & Sexton, 2011), and managerial and other resource transfer can be facilitated by status differences between an acquirer and a target (Junni, Sarala, Tarba, & Weber, 2015; Podolny, 1993). As a result, differences in size can combine complementary aspects of large and small firms (King, Covin, & Hegarty, 2003).

However, if an acquisition is motivated by an acquirer’s weakness, then resource transfer will require an inflow, such as acquisitions aiming to benefit from knowledge in a target firm (Zander & Zander, 2010). There are multiple challenges that increase the difficulty of resource transfer from a target to an acquirer. First, an acquisition often portrays an acquirer as the victor and a target as the vanquished. This can lead to an acquiring firm taking a “not invented here” perspective that limits transfer (Hayward, 2002). Second, if motivated from a weakness, many of an acquirer’s resources will be obsolete or redundant and complicate integration. For example, in high-technology acquisitions, R&D investment redundancy can be expected to lower performance (King et al., 2008), and an additional reason is that tacit, socially constructed knowledge may be easily destroyed (Ranft & Lord, 2002).

Financial motives

Financial motives involve a range of benefits available from combining two previously separate firms. For example, an acquirer can benefit from a target firm’s cash flows, illustrating the similarities between some acquisitions and other forms of investments. This requires searching for undervalued firms where future cash flows are not yet fully appreciated by the stock market. Other gains involve financial effects from creating a larger entity with the possibility of internal cross-financing. While some have argued this benefit was more important when financial markets were less developed to help explain earlier conglomerate merger waves (Hubbard & Palia, 1999), these benefits may in fact be more pervasive. For instance, traditional portfolio strategy suggests growth is typically costly and benefiting from financial support from already up and running business units offers benefits compared to external financing. Further, in certain industries, size matters and the ability to muster larger financial assets is crucial for winning larger contracts, including the banking, insurance, or construction industries.

Financial synergy, or the hope that one plus one equals three, is a primary motive for acquisitions (Berkovitch & Narayanan, 1993; Sirower, 1997). This reflects that resources, such as cash, are flexible and, when part of resource orchestration between firms, can contribute to synergies (Bergh, 1998; Sirmon, Hitt, Ireland, & Gilbert, 2011). For example, acquisitions are one way that managers can employ excess cash (Jensen, 1986) to enable the realization of operational efficiencies (Dutz, 1989) and the combination of complementary resources (King et al., 2003; King et al., 2008). Financial motives are also interesting because they need to consider the degree of integration needed. Typically, financial gains require limited organizational integration (Haspeslagh & Jemison, 1991). For example, Berkshire Hathaway operates as a holding company of largely separate businesses.

Managerial motives

Even if acquisitions sometimes evolve out of incrementally strengthened inter-firm relations, it is generally assumed that CEO initiate acquisitions (Lehn & Zhao, 2006). For example, Mark Zuckerberg of Facebook takes an active role in its acquisitions by building relationships with potential target firm CEOs (Heath, 2017). The $19 billion acquisition of WhatsApp reportedly evolved over two years of interactions between Mark Zuckerberg and Jan Koum (Carlson, 2014). Relationships with a target firm’s management are also part of Cisco’s acquisition strategy (Mayer & Kenney, 2004). Further, support from top management can facilitate an acquisition under the right conditions. For example, Teva’s purchase of Hungarian firm Biogal was on hold for five years until Hungary’s government agreed to lay-offs (Brueller et al., 2016). However, acquisitions can also occur relatively quickly. For example, Barclays acquired Lehman Brothers, after it collapsed into bankruptcy in 2008, and John Varley (Barclay’s CEO at the time) attributed the deal to serendipity (Avery, 2013). Consistent with Barclay’s experience, the acquisition of bankrupt firms is also associated with higher acquisition performance (Jory & Madura, 2009).

However, managerial motives are also often associated with private interests of managers separate from or even contradicting the interests of shareholders. Change and acquisitions run the risk of heightening self-interest (Ullrich, Wieseke, & Van Dick, 2005). CEO specific motives for M&A include higher pay, greater discretion, and diversifying firm employment risk (Devers et al., 2013). For example, top manager salaries are tied to the size of firms and completing an acquisition offers the opportunity for higher managerial pay. Additionally, Hayward and Hambrick (1997) outline CEOs may be motivated to perform acquisitions simply to have their name in the news. This highlights that not all change is rational, as human traits impact decision-making (Graebner, Heimeriks, Huy, & Vaara, 2017).

Strategic motives

Acquisitions can be strategic tools, or they provide a means for increasing competitiveness at the corporate and business unit level. Organizational change is often associated with responding to either an opportunity or a threat (Gioia & Chittipeddi, 1991). Acquisitions can provide opportunities for accessing potential benefits, including denying competitors benefits, or avoid potential negative conditions. For example, M&A can reduce industry capacity, involve growth through geographic, product or market extensions, or target needed technology in ways that can benefit acquirers (Kim, Haleblain, & Finkelstein, 2011; Lin, 2014a). Still, acquisitions can also have unexpected effects, such as benefiting competitors (Clougherty & Duso, 2009). Framing a circumstance as either an opportunity or threat has also been found to influence resource transfer (Burg, Berends, & Raaij, 2014).

Firms seeking an opportunity will likely view an acquisition as an investment and provide additional resources to a target firm and its market so an acquirer can appropriate benefits (Burg et al., 2014). While resource flows from strategic combinations are possible both ways, initial resources (i.e., financial) flow to a target firm. Still, acquiring firm transfer of capabilities can be disruptive, and the stock market reacts negatively when an acquirer’s information technology (IT) capability exceeds a target firm’s (Tanriverdi & Uysal, 2015). Managers also value external resources more when they come from a prominent source or are scarce (Menon & Pfeffer, 2003), and this may be more likely if an acquiring firm sought a target in a growing market. For example, Walmart’s acquisition of Jet.com resulted in its placing Mark Lore, Jet.com’s founder, in charge of Walmart’s ecommerce operations (Nassauer, 2016). Still, a firm making an acquisition in response to a threat may confront risk aversion (Shimizu, 2007). The overall effect is that, when responding to a threat, firms limit knowledge sharing in an attempt to protect existing knowledge or firms tend to display threat rigidity (Burg et al., 2014; Chattopadhyay et al., 2001).