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Article Excerpt
Acquisitions continue to be an important topic for management scholars and practitioners alike. Managers are actively involved in both sides of the acquisition equation (target and acquirer) from valuation (preacquisition) all the way through to integration (postacquisition). During this tumultuous period, it now appears that the top management team of a successful target firm is integral to postacquisition success. The authors examine the role that "imposed" changes placed on the newly acquired firm has on the retention of the top management team. The compulsory changes appear to be a key factor in the turnover of top management team members and thus diminish the value of the acquired firm. Furthermore, this study suggests that top management team turnover detrimentally affects postacquisition firm performance.
Keywords: top management team; acquisitions; performance
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The new global marketplace appears to be in a constant state of flux. Domestic markets' barriers to trade (e.g., tariffs, quotas, administrative "red tape") continue to fall, transportation and technological advances are improving the operating efficiency and effectiveness, and international trade blocks continue to form to accelerate trade. Indeed, organizations are now, more than ever, facing competitive pressures of the new, global marketplace. As a result of these changes in the global environment, organizations are experiencing dramatic shifts in the way they are organized and how they compete. Acquisition is one form of strategy that appears to be one of the most popular market entry approaches for American multinational corporations (Seth, Song, & Pettit, 2000). As the marketplace changes and speed becomes of the essence, the need for rapid renewal has played a significant role in driving organizations to acquire competences rather than to build them internally (Hamel, 2000).
Acquisitions are used to gain first-mover advantages so as to amass customers before rivals enter the market (Eisenmann, 2006) and to strategically enter networks of firms. Acquisitions also are a way to acquire new resources positively affecting investors' expectations (Morrow, Sirmon, Hitt, & Holcomb, 2007) and are undertaken to increase a firm's innovativeness (Vanhaverbeke, Duysters, & Noorderhaven, 2002). Yet after acquisition, performance of technical personnel may drop because of poor integration (Paruchuri, Nerkar, & Hambrick, 2006), but measures of postacquisition performance still are in question, and multiple metrics have been used by researchers (Schoenberg, 2006).
In 2005, global mergers and acquisitions transactions were reported as being worth $2.9 trillion, which was a 38% growth compared to 2004 ("Global M&A Volume," 2005). In the United States alone, $886.2 million worth of acquisitions occurred, 30% greater than in 2004. It would appear that organizational growth strategies will continue to utilize mergers and acquisitions as a viable means to compete in the 21st century. Some recent examples of large strategic acquisitions in 2005 include Computer Associates' purchase of Concord Communications for $330 million, Time Warner and Comcast's purchase of Adelphia Communications Corporation for $17.6 billion, Wachovia's acquisition of Palmer and Cay Insurance (revenues of $400 million), Proctor and Gamble's purchase of Gillette for $60.8 billion, and Omnivision's acquisition of CMD Optics for $30 million.
The resource-based view (RBV) of the firm suggests that because of the new global competition and the added dimension of speed needed to be competitive in the marketplace (Pearce, 2002), successful firms may be acquired for their rare, inimitable, and valuable resources (Barney, 1986). Successful firms' idiosyncratic resources attract other firms that cannot develop them quickly enough internally for acquisition. The top management team (TMT) of the target firm is viewed as critical to enhancing postacquisition performance of the acquired firm, as the TMT possesses knowledge critical to ongoing business operations, and its members' departure may heighten the level of disruption and uncertainty in the firm following the acquisition (Cannella & Hambrick, 1993; Hambrick & Cannella, 1993; Krishnan et al., 1997; Singh & Zollo, 1998). Change (e.g., in the composition or authority of the acquired firm's TMT) can have a negative impact on the performance of the firm once it is acquired. Research suggests that the loss of the TMT on acquired firms will negatively affect postacquisition performance of the acquired firm (Cannella & Hambrick, 1993). Therefore, because of the new global marketplace, where such dynamics as speed to the market and innovation are important, the RBV focuses on acquisitions as opportunities to acquire intercompany resources to augment compatible internal firm resources.
Our research is laid out in the following fashion: First we will discuss TMTs and their importance after acquisition from the resource-based theory perspective. Then, through theoretical development, we explore three key characteristics of the TMT identified by previous research and the impact of organizational change on (a) TMT networks, (b) TMT knowledge, and (c) TMT dynamic capabilities, and (d) we explore the relationships between TMT retention and performance and between organizational changes and performance.
TMTs and Their Importance After Acquisition: A Resource-Based Theory Perspective
The resource-based theory focuses on resource integration (Hennart & Reddy, 1997). The acquisition of resources is a strategic necessity, as valuable firm resources are scarce, imperfectly imitable, and lacking in direct substitutes (Barney, 1991; Peteraf, 1993). The resource-based theory also suggests that acquisitions can help firms maximize firm value through gaining access to other firms' valuable resources (Madhok, 1997; Ramanathan, Seth, & Thomas, 1997).
The real sources of a firm's success are the organization's specific or idiosyncratic resources (Conner, 1991). Empirical studies, demonstrating that firm-specific factors are more important than environmental or industry structure characteristics in explaining a firm's superior performance, have lent further credence to the early conceptual work on resource-based theory (Rumelt, 1991). As these valuable resources are firm specific and can be causally ambiguous, other firms may make acquisition offers to combine these resources for strategic reasons. Also, there is a difference between assets and capabilities, as assets are related to "having," whereas capabilities are related to "doing," making them more invisible. A target firm may wish to be acquired because it has the assets but not the capabilities, which could be supplied by an acquiring firm. For example, a small research and development biotech firm that develops a new drug has the asset but not the capability to distribute. Therefore, the small firm seeks a large firm to acquire it, and the large firm wishes to acquire the strategic asset, as it has the capability to market and distribute.
It appears that the key postulate of the RBV is that differences in resources are causally related to differences in product or service attributes and, thus, to competitive advantage and differences in performance (Conner, 1991). A characteristic that may make firm resources less imitable is their social complexity. The interpersonal relations within a management team and a firm's reputation among suppliers or customers are examples of socially complex firm resources that are difficult to replicate and imitate. Resources such as assets and capabilities have to be developed by the TMT, which chooses paths or flows (investments) over a period of time. This inimitable resource developed and maintained by the TMT as well as its interpersonal relationships (i.e., professional and personal networks), professional and personal knowledge (i.e., codified and tacit knowledge), and ability to develop unique configurations of resources and to adjust them relative to changes in the marketplace (i.e., dynamic capabilities) are integral to determining the value to a firm of the TMT. This line of reasoning would contend that during the acquisition of a firm, the retention of the TMT would be instrumental from an RBV perspective.
Unfortunately, managers of the acquiring firm often undertake management of the acquired firm rather than use the target firm's capabilities (Walsh, 1988). The acquiring firm managers will often make organizational changes, such as forcing the acquired firms' managers to use the acquiring firms' managerial tools and then controlling the implementation of these tools (Capron, Dussauge, & Mitchell, 1998). Both formal and informal organizational changes occur after acquisition, and both are intertwined, such as changes in organizational culture and structure that have a pervasive effect on managers' attitudes, managerial styles, decision making, and organizational success (Shrivastava, 1986; Krug & Hegarty, 1997). These organizational changes often create uncertainty in TMTs regarding their future role in the organization, which leads to TMT members having increased stress, lower job satisfaction, and increased intent to leave (Schweiger & DeNisi, 1991). Furthermore, the acquisition changes will affect target firms' executives' dispositional characteristics that they use to interpret problems, develop opinions, and solve problems (Finkelstein & Hambrick, 1996).
Organizations, in a broader sense, have developed certain rules and processes that determine who holds the power and how it is executed based on social values developed by agreements among the participants, which may change after acquisition of the firm (Cyert & March, 1963; Pfeffer, 1981; Salancik & Pfeffer, 1977). An example of an unsuccessful organizational change can be illustrated in the following America Online (AOL)-Time Warner scenario. AOL's Robert Pittman took over Time Warner, then argued that the online upstart and venerable media conglomerate could win more advertising dollars by working together, thus changing the organization. His strategy might have made sense, but he set overly ambitious growth targets and derided seasoned Time Warner executives who pointed out that the package deals involved giving advertisers discounts that were too deep ("Arrogance and Refusal," 2002). Mr. Pittman's organizational change failed because of corporate infighting and power struggles among advertisers in this strategy of cross-media deals. Mr. Pittman eventually quit after his growth targets were scrapped and investor credibility was at an all-time low.
We have identified three major theoretical streams of management literature in regard to organizational change and the TMT capabilities and success of a firm: (a) networks, (b) knowledge, and (c) dynamic capabilities. These relationships are explored in regard to organizational changes and postacquisition performance of the acquired firm.
Hypothesis Development
TMT network. TMTs develop and maintain networks of relationships between firms. In settings where relationships are key to success, established TMT networks are invaluable assets. What makes a network of firm relationships (nonhierarchical, long-term commitments) so important is the quality of relationships and shared values, multiple roles and responsibilities, mutuality, and affiliation sentiments. Therefore, what differentiates the network-oriented organization are its density, multiplexity, reciprocity of ties, and a shared value system defining membership roles and responsibilities. The conclusion that many researchers have come to is that interpersonal networks add value (Achrol, 1997). The TMT's network of external and internal relationships in which a successful firm is embedded can represent a significant contribution to continued firm success.
Indeed, the ambiguous,...
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