Can You Buy a Business Relationship?

On The Importance of Customer and Supplier Relationships in Acquisitions

Heln Anderson Virpi Havila Asta Salmi

Mergers and acquisitions have become a popular strategy for gaining growth. Studies show, however, high failure rates for acquisitions. Earlier literature concentrates on the strategic or organizational fit between companies and integration processes and fails to recognize the companies external business relationships. An implicit assumption seems to be that through acquisition the market position of the target firm can be taken over. We argue that it is not always easy or even possible to take over a companys customer and supplier relationships. We elaborate on the various problems related to relationships that acquisitions may give rise to. Our conceptual
Address correspondence to Heln Anderson, Linkping University, Department of Management and Economics, SE-581 83 Linkping, Sweden. The authors appear in alphabetical order.

discussion is illustrated with a case study from the graphics industry. 2001 Elsevier Science Inc. All rights reserved.

INTRODUCTION Mergers and acquisitions (M&A) have been, and continue to be, a very popular strategic alternative for company growth and/or diversification. Motives prompting mergers include increase of market share, reduction or elimination of competition, quick and economical entry into a business, impulse purchase of a bargain-priced business, reduction of overdependence on geographical presence, acquisition of new technology, exploitation of multiple synergies, and a desire to grow rapidly [1].

Industrial Marketing Management 30, 575586 (2001) 2001 Elsevier Science Inc. All rights reserved. 655 Avenue of the Americas, New York, NY 10010

0019-8501/01/$see front matter PII S0019-8501(99)00123-6

Mergers and acquisitions continue to be a very popular strategic alternative . . . literature shows that most M&As fail.
The phenomenon of M&A has attracted strong academic interest too. Studies have emerged in the fields of financing, industrial economics, strategic management, and organization theory. On the one hand, the literature concentrates on comparing the acquiring and the target firms: the strategic and organizational fit and synergy between the two companies [2, 3]. On the other, analysis of processconcerning, for example, premerger negotiations, acquisition behavior, postmerger integration, and performancehas been prominent [1, 4, 5]. Earlier literature shows that expected gains from takeovers seldom materialize and that most M&As fail [2, 4, 6]. By failure, it is meant that the acquisition or merger does not improve the performance or does not measure up to managers evaluations. Several studies [1, 5, 7] also suggest that failures in the integration process are important reasons for M&A failure. The literature thus far has concentrated on the characteristics of the two merging companies and their integration. In our view, this focus fails to recognize the interdependence between a firm and its environment and is therefore too narrow. A large proportion of the M&A literature seems to be based on the assumption that managerial actions have a major influence on the success of the acquisition or merger (cf. [8]). The resource-dependence view, however, would argue that external factors greatly influence the success of any company operations [9]. In this article, we take the more contextual approach to acquisitions. We argue that another reason for failure may be lack of recognition of the context of the merging companies, that too much effort is concentrated on the mutual fit of the two merging companies. To provide new understanding of the phenomenon of M&A, we focus on the merging companies external business relationships. We propose that an acquisition influences and is influenced by not only the two merging companies, but also by their customer and supplier relationships. And that the way these relations are influenced may have a decisive effect on the outcome of the acquisition. Moreover, as Johanson and Mattsson [10] point out, . . . [T]he major aim of the acquisition may be to get control of the exchange relationships, to change their character, or to change the connections between exchange relationships. Control of exchange relationships through acquisitions is, however, never certain, since there are always two actors involved (p. 217). We therefore raise the question whether external relationships, with regard to their character of being continuously formed through interaction, can be taken over, i.e., bought, when buying a company. The purpose of this article is to discuss what type of effectintended and unexpectedacquisitions may have on the existing customer and supplier relationships of the merging companies. Our discussion is conceptual in character but is illustrated with a case study. The empirical data concern the graphics industry. We focus on one Swedish company in particular that has been involved in several M&As. We point out that external business relationships should be given explicit attention in both premerger and integration phases. In the literature, mergers and acquisitions often are discussed simultaneously and grouped under the heading

HELN ANDERSONS research interests lie in the area of industrial marketing, technological innovation, and market strategy. VIRPI HAVILAS dissertation dealt with changes in international business relationships, and her current interests are dynamics in business networks and termination of business relationships. ASTA SALMIS research is focused on business networks and their dynamics, emerging markets in Eastern Europe, strategies, and international business.

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. . . [R]eason for failure may be lack of recognition of the context of the merging companies . . . .
M&A. In this article, our focus is on acquisitions, even though similar argumentation would apply to mergers as well. The article is organized as follows. Section 2 offers a review of M&A literature. Section 3 discusses customer and supplier relationships as assets of a company, and section 4 elaborates on customer and supplier relationships in a wider context. Section 5 includes the method and the empirical base. There we also discuss the effects of acquisitions on our case companies existing customer and supplier relationships. Finally, section 6 gives conclusions and managerial implications. THE LITERATURE ON MERGERS AND ACQUISITIONS The main reason behind M&A activities is a belief in potential economic gains. In general (following the U.S. Federal Trade Commission classification), the following forms of merger activity can be distinguished: (1) horizontal, (2) vertical, (3) product extension, (4) market extension, and (5) conglomerate. The first four activities concern related businesses, whereas the fifth concerns unrelated businesses of financial character. So-called portfolio investments are concentrated on reducing risks and gaining financial synergies through the acquisition of another company (see e.g., [11]). In this article, we concentrate on the related merger activities where operative as well as managerial synergies with related business activities are the focus. Several studies show that diversification seems to be positively correlated to profitability [12, 13]. The early research in this area concentrates on empirical measurements comparing performance and degree of diversification within related industries. From such studies of economic performance, both the degree and number of related products within the companies [14] and the market structure factors emerge as explanatory factors [15]. A more recent observation is that the extent to which companies are integrated affects the merger process. In later studies of M&A, more and more of the interest has been directed toward the merger process as such and on firm level rather than on industry level. Jemison and Sitkin [16] and Datta [3] concentrate their analyses on the strategic and organizational fit between the (two) merging parties. These studies point out difficulties with the integration process. Shrivastava [1] separates three different types of integration. First, procedural integration involves combining systems and procedures of the merged companies at the operating, management control, and strategic levels. Second, physical integration of resources and assets involves the consolidation of product lines, production technologies, R&D projects, plant and equipment, and real estate assets. Finally, managerial and sociocultural integration is perhaps the most difficult postmerger integration problem. It involves a complex combination of issues related to the selection or transfer of managers, the changes in organizational structure, the development of a consistent corporate culture, and a frame of reference to guide strategic decision making, the gaining of commitment and motivation from personnel, and the establishment of new leadership. The complexity of merging two separate organizations is well described by Shrivastavas categorization. It takes into account the costs and efforts that administrative, technical, and organizational integration creates. In addition, managerial and sociocultural dimensions have given rise to many hindrancesthere is a perceived difference between belonging to the acquiring company and belonging to the acquired company. Shrivastavas key aspects of handling these problems are coordination, control, and conflict resolution by the merging parties. Human relations and management turnover issues during and after an acquisition also are emphasized in the lit577

. . . to discuss what type of effectintended and unexpectedacquisitions may have on the existing customer and supplier relationships of the merging companies.
erature on M&A [5, 8, 17]. Comprehensive integration is required to transfer competence, and especially in the case of R&D transfer, intensive personal contacts and joint projects between the merging companies are needed. It has been recognized that to maintain the managerial and technical competence, the personnel of the acquired company should be retained. However, studies show that there is widespread top management transfer and turnover after mergers and acquisitions [5]. The focus in M&A research has developed to grasp the integration process, but we find that little attention is directed toward the context within which the merging companies operate. Moreover, the context is not regarded as having sociocultural dimensions such as relationships between firms. Hunt [4] postulates that different contexts suggest different acquisition processes (including targeting, negotiating, and postacquisition implementation) and discusses contextual variables, such as buyers strategy, industry, ownership, health of seller, compatibility of size, experience of buyer, and access to audit. Again, this approach essentially concentrates on the two companies alone. In M&A literature, customers and suppliers to the merging companies have been only mentioned in passing, e.g., they represent one group of relevant stakeholders who should be provided with general information about the likely impact of the merger [1]. In our view, this is not enough. For instance, the managerial turnover alone is likely to influence interaction in business relationships and in this way also affect relationships with customers and suppliers. Although a large proportion of M&A literature lies in the area of strategic management, it focuses on internal integration processes, and an implicit assumption seems to be that in buying a firm, its business relationships are also automatically acquired. We argue that a contextual view that recognizes firms as 578 being connected to each other through exchange business relationships can contribute to the strategic thinking concerning mergers and acquisitions (cf., [18, 19]). Such an argument leads us to regard business relationships as assets. BUSINESS RELATIONSHIPS AS ASSETS As interorganizational theory [9, 20] has developed, the focus in business studies has been extended from the perspective of the single firm to include the interaction between several firms. Relations between organizations have been studied to increase our understanding of a market form [21], of industry [22], of distribution systems [23], and of transactions in works inspired by Williamson [24]. Attention has been directed to a companys external relationships with, for example, customers and suppliers [2527]. Whereas traditional market models postulate that market transactions are isolated events taking place between sellers and buyers, there is an increasing amount of evidence pointing on long-term relationships between interdependent economic actors [2831]. The interorganizational perspective gives considerable attention to the time aspect; relationships are seen to be formed over time, and both history and future expectations of the involved parties are seen as affecting the relationship [26, 29, 32, 33]. Furthermore, because there are always two actors involved in a business relationship, it cannot be created by a unilateral decision. Thus, business relationships are rarely constructed, but rather, evolve over time. Through interaction, the involved actors have an impact on the character of the relationship, which means that over time it changes in content and strength ([29], p. 269). For example, two parties may adapt to each other

technically, logistically, administratively, or financially [31, 34]. Trust and commitment are two central features in relationships, which have been given attention in research [35, 36]. In addition, the fact that a business relationship always involves at least two individuals, one from each party, gives business relationships a social character. This has been denoted as social bonding between the actors [29]. It takes both time and resources to establish, maintain, and develop business relationships between firms. Relationship activities therefore can be seen as forming market investments: when a company commits resources in specific relationships, important market assets are formed for future use [37]. These relationships give the company access to resources of other business actors. Investments in relationships are cumulative, and interdependent: commitments made in one relationship influence the companys opportunities to enter into and act within other relationships. Only recently has it been acknowledged that these market-based assets must be cultivated and leveraged to increase shareholder value [38]. Of course, evaluation of market-based assets, such as customer relationships, channel relationships, and partner relationships, is difficult due to their largely intangible nature. This complexity should not, however, lead to ignoring these assets; after all, there is a growing recognition that today, a significant proportion of the market value of firms lies in intangible, offbalance sheet assets [4, 38]. The complication with these assets compared with traditional assets is their tacit and subjective nature. To sum up, to establish and develop a business relationship is a resource-intensive process. It is also a process in which the two involved parties invest in different ways. Therefore, established relationships form an important asset for any company, and as far as acquisitions are concerned, it becomes a central issue to what extent these market assets are transferable (cf. [37] p. 191). That is, the outcome of any acquisition depends on how well managers succeed in recognizing external relations and on whether established business relationships can be taken over. BUSINESS RELATIONSHIPS IN A WIDER CONTEXT The dyadic relationship joining two firms is always connected with other relationships to other parties [26, 29]. For instance, customers customers and suppliers

suppliers may have a decisive impact on the business relationship. In this way, companies become connected, both directly and indirectly, to other companies and form networks of business relationships. Owing to the connectedness of business relationships, changes in the focal relationship affect not only the two parties directly doing business with each other, but also other connected parties. Anderson, Hkansson, and Johanson [26] refer to these effects and distinguish between primary and secondary functions of relationships (p. 3). By primary functions they mean the positive and negative effects on the two partner firms of their interaction in a focal dyadic relationship. The secondary functions, in turn, concern a focal business relationships effects on the connected parties. Connectedness of relationships means that there are always several parties who have made investments on the basis of the focal business relationship. A change in the focal business relationship therefore also may affect other, directly or indirectly, connected parties. Moreover, their reaction, in turn, is bound to affect the focal relationship. Thus, changes initiated in the interaction between any two parties are likely to cause multiple actions and counteractions in its context. An acquisition, for example, always affects the relationship between the two (or several) companies involved. In addition, changes are not necessarily confined to the relationship between the merging parties but may spread into connected relations and become more extensive network effects (cf. [39]). Earlier research on mergers and acquisitions has ignored the connectedness of business relationships; i.e., research has concentrated on the primary functions of relationships and neglected the secondary. Given the connectedness of business relationships, this seems to leave untouched several important factors affecting the outcomes of acquisitions. Acknowledgement of connectedness and external relations offers then important managerial implications of acquisitions as well. To capture the connectedness of a dyadic relationship, Anderson, Hkansson, and Johanson [26] propose two concepts: anticipated constructive and anticipated deleterious effects on network identity of a firm. Similarly, acquisitions have both positive and negative anticipated effects. Here, we aim at focusing on the strategic dimension of acquisitions, and we propose that acquisitions have both planned and intended and unexpected effects on external relations. The intended effects come from regarding relationships as any asset possible to take over. The unexpected effects are those that occur because the relationship also has an intangible interactive dimension, 579

which is most often, neglected prior to an acquisition. And that one reason thereof can be found in the character of the relationships: their continual development depends upon how the parties act and react within them. Our discussion will concentrate on the intended and unexpected effects of acquisitions on the companies customer and supplier relationships. ACQUISITIONS IN THE GRAPHICS INDUSTRY: THE CASE OF ALPHA, A SWEDISH COMPANY Method The empirical data presented in this article originates from an ongoing larger research project that analyzes dynamics within business networks.1 A longitudinal approach was needed to study the complexity of effects of acquisitions on companies customer and supplier relationships and the possible outcomes of this over time, and accordingly the approach we have chosen is a case study [40, 41]. For the sake of confidentiality at this stage of the study process, we will refer to the focus companies as Alpha, Beta, Theta (in Sweden), and Gamma (in Finland). We have collected data through in total 15 managerial interviews with 10 different managers representing both general management and separate fields of operations in these companies (see Table 1). In addition, three personal interviews were conducted in three connected companies. Thus, our analysis is based on different viewpoints: we have learned from the perceptions of several companies, of several business areas, and also of several individuals. Our research group includes Finnish and Swedish researchers so we have been able to interview each respondent in his/her native language. The interview data were complemented with archival material such as annual reports from the companies and newspaper articles. Description GRAPHICS INDUSTRY WHERE ALPHA OPEROur empirical data originate in the graphics industry, which represents both the traditional manufacturThe project Dynamics in Business Networks is a cooperation project between four researchers representing four different business schools/ universities in two Nordic countries. The aim of the research project is to develop better conceptual tools for analyzing change and dynamicsi.e., forces creating changein business networks. For the project, empirical data from the Nordic graphics industry has been collected, including written material (statistics, annual reports, journal articles, books) and interviews with managers and experts within the field.
1

THE ATES.

ing industry with old and proud traditions and handcrafts and an emerging modern mass communication industry. Few changes took place within the industry during its first 500 years, i.e., since Johannes Gutenberg invented book printing by movable type. It was during the 1970s that great changes within the industry started to occur: first, the changeover from lead-setting to photo-setting meant a change in the type of competence needed within companies operating in the graphics industry [42]. Due to technological changes and new media developments during the 1980s and the 1990s, this industry has gone, and is still going, through revolutionary changes. In recent years, for example, digital data transfer has dramatically changed the industrys structure. Another reason for changes in the industry structure in some of the Nordic countries was the recession in the beginning of the 1990s, which, among other things, led to overcapacity in and several bankruptcies among the printing companies [43]. A current phenomenon within this industry, which reflects the companies will to survive and seek new roles and positions in the industry, is mergers and acquisitions. The financial manager at Alpha in November 1997 expressed their reason for an acquisition as follows: You must be big if you are going to survive. ALPHA AS A TARGET FOR ACQUISITIONS IN 1973, IN 1992 AND IN 1995. Alpha has been involved in several acquisitions between 1973 and 1998. It is a Swedish company and was founded in 1839. Since the end of the 19th century, Alpha has operated under a well-known name in Sweden. In 1973, it was acquired by another Swedish company (referred to in this article as the Conglomerate) and became one of this companys divisions. At that time, Alpha had approximately 450 employees. Later on, the Conglomerate decided to concentrate on its core business, and accordingly, Alpha along with other businesses was sold in January 1992. Already during the late 1980s and in the beginning of the 1990s, Alpha had lost market shares and in 1992 was not as prosperous as it had been during most of its 150-year existence. One reason for the loss of market share was that it had, due to technological progress, become cheaper for customers to buy the fairly standardized product abroad that in turn meant that the customers now had more suppliers to choose from. The loss of customers resulted in financial crisis during autumn 1991. Not even a layoff of 66 employees helped to improve Alphas situation, and the company was sold at a nominal price of one Swedish crown. The next owner, who already operated within the graphics industry in Sweden, immediately laid off more

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TABLE 1 Personal Interviews Company Alpha (in Sweden) Beta (in Sweden) Gamma (in Finland) Theta (in Sweden) Interviewed Persons CEO1, CEO2, financial manager, sales manager, controller, purchaser CEO CEO, production manager CEO Interview Months May 1997 (2 interviews), November 1997, February 1998, March 1998, April 1998, June 1998, December 1998 October 1998 February 1998, June 1998, February 1999 April 1998, September 1998, February 1998

people, and the number of employees was now down to approximately 200. However, the new owner did not manage to run Alpha more than half a year: in November 1992 Alpha went into bankruptcy. The day after the bankruptcy, it already had a new owner. The selling price this time was 50,000 Swedish crowns. This owner, who had been a successful sportsman and was a well-known person, had been involved in one bankruptcy in the past. He ran the business two days before he filed a bankruptcy petition. After some weeks, he started to operate Alpha again, now with approximately 140 employees. Some suppliers, who did not trust this new owner, reacted immediately by increasing their prices and by refusing to give any credit to Alpha. Alpha also lost those customers who refused to do business with the new owner; in addition, Alpha was forced to lower its prices to some other customers. As a result, at the end of 1994, Alpha was again close to a bankruptcy. In 1995, Alpha was sold again to a holding company. At that time, it had 135 employees and sales of 110 million Swedish crowns. The holding company already owned a small company, which operated in the same industry as Alpha. The owners of the holding company intended to further develop their business within the graphics industry, and accordingly, in January 1998, the holding company acquired one of Alphas competitors. In the following discussion, this company will be called Beta. ALPHAS ACQUISITION OF DELTA IN THE BEGINNING OF 1990S. In the beginning of 1990s, Alpha acquired a small company, Delta, located in another town. The reason for this acquisition was that Alpha wanted to increase its production facilities regarding the last step in its production process. Most of Alphas competitors (such as Beta) do not have this last step in-house; instead, they buy it from companies specializing in this type of production. Only few larger companies within this field in Sweden have the type of complete production process, which Alpha now gained. A complete production process

includes three different steps, which usually are taken care of by small, often family-owned, companies. After the acquisition several of Deltas former customers started to buy from other companies. The reason given was that they did not feel confident that Alpha-Delta would give the same priority to their orders as Delta had done previously. ALPHA AND BETA AS MEMBERS OF A GROUP FROM 1 JANUARY 1998. Beta is a Swedish company and is located approximately 200 kilometers from Alpha. The products Alpha and Beta offer are direct substitutes for each other. However, because Alpha and Beta have different local markets, they are not competitors with regard to the local customers. The companies aimed at maintaining existing exchange relationships with local customers and at continuing to deal with them in the same manner. The parties were not allowed to enter into each others territory. This indicates that the management regarded the existing exchange relationships to be important, and that the local customers were not to become influenced by the merger. Typical within this industry is that there are several companies operating in the same town/area, which means that the local customers to Alpha and Beta had several alternative suppliers. Alpha and Beta were regarded as competitors for some nonlocal customers, meaning that some of their salesmen visited the same customers. Because the two companies offered a similar product, the main way to compete had been to offer a lower price. The future sales activities were to be coordinated so that only one salesman would visit each nonlocal customer. From the perspective of the nonlocal customers and their possibility to choose between different suppliers, this coordination is a change for the worse. One of the customers was very clear about this: If you want to know my honest opinion, I dont like it. Within the graphics industry, as in many others, the customers are demanding quicker deliveries, and the time from order to delivery is becoming shorter. Thus, this has become a means to compete within the industry. An ac581

cepted delivery time of six weeks some years ago was down to two weeks in 1998. Through the acquisition of Beta, Alpha and Beta were able to use the each others free production capacity. In this way they expected to get new customers and also to sell more to the old ones in the future. Alpha also expected to get new customers through Beta because Alphas production process is complete compared with Betas, which is missing the last step. Beta, as most of the other companies within the field, had been buying this function from specialized companies, which usually are local small companies. After the acquisition, Beta was going to use Alpha for this last step, which means that Beta now also could market itself as a company with a complete production process. This soon proved to be very important for Alpha and its survival as a company. Both Alpha and Beta have production where specific types of input material are needed. Both companies usually buy their supplies through industrial distributors, which are few in Sweden. One important reason for the acquisition of Beta was that as a larger company, they hoped to create a better bargaining position vis--vis suppliers in negotiations concerning the price of supplies. ALPHA AND THE LOSS OF AN IMPORTANT CUSTOMER DUE TO AN ACQUISITION IN 1998. During the planning of the division of the work between Alpha and Beta, Alpha was informed that one of its main customers, Theta, had been sold to a Finnish company, Gamma. According to Gammas CEO, Alpha had sustained losses during the 1990s and was expected to go bankrupt soon again. Therefore, Gamma planned to stop buying from Alpha and move the product into its own in-house production. As a result of higher production volumes, Gamma expected to get better prices from its suppliers. This very soon proved to be right regarding some suppliers. Theta had been buying approximately 95% of one product group of Alpha and had accounted for one third (approximately 30 million Swedish crowns) of Alphas turnover. For Alpha, the loss of Theta as a customer meant that it now was forced to concentrate on other types of products because the equipment needed to produce the specific product for Theta had been owned by Theta. Directly after Gammas acquisition of Theta, the production equipment was moved to Gamma in Finland. This, in turn, meant that Alpha needed to shrink its premises and dismiss a number of personnel. In September 1998, Alpha had 80 employees left. One reason for Alphas survival, despite a loss of one third of its sales overnight, was that Beta had started to use Alpha for 582

the last step in the production process. In this way, Alpha got new customers who to some extent could compensate for the one they had lost. Discussion: Effects of Acquisitions on Alphas Customer and Supplier Relationships In our elaboration on the effects of the acquisitions on Alphas customer and supplier relationships, we shall investigate more specifically how they may influence the acquisition and its outcomes. We limit our discussion to the immediate customer and supplier relations of the merging companies, although clearly, in any business market, various connections prevail. For example, such parties as suppliers of suppliers, customers of customers, governmental organizations, and financial intermediaries cause further complications. Our discussion focuses on the following acquisitions where Alpha has been in one way or another involved: Alphas acquisition of Delta in early 1990s, the acquisition of Alpha in November 1992, the acquisition of its competitor, Beta, in January 1998, and the acquisition of its customer, Theta, in February 1998. When planning an acquisition there are relationship effects that managers expect to occur; we call these intended effects. There also may be effects of an acquisition on customer and supplier relationships, which are not planned (unexpected effects). For a manager, the latter are clearly more critical as far as an acquisition outcome is concerned. INTENDED EFFECTS ON RELATIONSHIPS TO CUSTOMERS AND SUPPLIERS: ACQUISITIONS IN JANUARY 1998 AND FEBRUARY 1998. The acquisition in January 1998 meant that the former competitors, Alpha and Beta, were owned by the same holding company. This did not influence Alphas and Betas business relationships with local customers; the two were 200 kilometers apart. Traditionally in this industry, it has been important to have the supplier located in the neighborhood. Here, the intended effects on customer relationships were that the relationships with local customers would not be influenced. The fact that Alpha and Beta now belong to the same group means that they use each others free production capacity. In this way Alpha and Beta are able to compete by way of shortening the time between order and delivery, which has a positive and intended effect on both old and new customer relationships. Another intended effect (which has been put into practice) is that Alpha has obtained new customers through Beta who now uses

. . . most important to recognize that business relationships can develop in an unforeseen way with unexpected effects on other relationships
the part of Alphas production process that Beta was missing. Besides the local customers, Alpha and Beta have earlier competed for some nonlocal customers. The two companies have been coordinating their sales forces so that only one seller will visit each nonlocal customer. This is one of the intended effects on the relations with nonlocal customers. It may lead to higher prices for these customers due to the fact that there is one less competitor. On the supplier side, the intention is to be able to negotiate better prices due to increased size. Whether this will occur or not is still to be seen. While not directly involved in the acquisition, which took place in February 1998, Alpha, as one of the main suppliers to the target firm Theta, felt its effects. The Finnish company who acquired Theta had the intention to terminate Alphas and Thetas relationship. This has occurred, and Theta now is buying a large part of its supplies from its mother company in Finland. Because some production equipment was removed from Alpha, it also was forced to end production of one product group. Consequently, it was not able to search for new customers and establish new relationships with them, at least not immediately. Without doubt, it was Gammas intention to decrease risk of competition and to make it more difficult to establish competing relations on the Swedish market. UNEXPECTED EFFECTS ON RELATIONSHIPS TO CUSTOMERS AND SUPPLIERS: ACQUISITIONS OF EARLY 1990S, NOVEMBER 1992, AND FEBRUARY 1998. The reason for Alphas acquisition of Delta in the early 1990s was to add one finalizing stage to the production process. After the acquisition several of Deltas former customers started to buy from other companies. Although customers in principle were offered better service by ensuring that all steps of production were made in-house, they were not confident that Alpha-Delta would be committed to them anymore. Of course, this loss of customers as a result of the acquisition was not expected. For the acquisition in November 1992, the fact that Alpha was acquired by a person with a bad reputation in this industry had effects on Alphas customer and supplier relationships. Some of the customers refused to continue to deal with Alpha, and some suppliers demanded immediate payments. This can be seen as an unexpected (and negative) effect of the acquisition on customer and supplier relationships. It shows that the persons representing a company and their reputation also may play a decisive role in external business relationships. For Alpha, the Finnish acquisition of Theta in February 1998 meant a sudden and unexpected loss of an important customer. Alpha lost one third of its turnover and was forced to lay off personnel and sell machines. This can be seen as an connected effect of the acquisition on a supplier relationship. However, contrary to Gammas expectations, Alpha has not gone bankrupt but thus far has succeeded in reorganizing its operations. To summarize, our analysis shows that: (a) customer and supplier relationships do interfere with how the process of an acquisition will develop, (b) some of the effects can be intended and calculated, and (c) some effects may be unexpected because managers underestimate or even neglect to regard the connected parties. Thus, we can discuss intended and unexpected effects on companies customer and supplier relationships. DISCUSSION AND CONCLUSIONS Theoretical Implications The literature concerning mergers and acquisitions thus far has concentrated on the merging companies. 583

. . . [T]he potential positive economic gains depend upon the willingness to develop and exploit the existing customer and supplier relationships.
More specifically, the focus is on the reasons why companies merge or acquire other companies, on how and to what degree the companies are integrated, and on what kind of effects an acquisition has on these companies, for example, regarding their performance, location, production, and personnel. The effects on the involved companies customers and suppliers have been largely ignored in the M&A literature. We have shown that, mergers and acquisitions have important implications, either positive or negative, for the merged companies customer and supplier relationships. We argue that this aspect should be given explicit attention in studies of M&A. An acquisition, for example, may strengthen and develop the customer and supplier relationships. The other extreme is that these relationships can deteriorate or even be terminated. It is perhaps most important to recognize that business relationships can develop in an unforeseen way with unexpected effects on other connected relationships. In accordance with the business relationship view, it is meaningless and conceptually impossible to disconnect the organization from its context [44]. Having observed that mergers and acquisitions occur in the context of business relationship, we propose that it is relevant to ask the question: Can a business relationship be bought? Our view of this question revolves around the understanding of relationships as assets. Acquisition of a company involves both tangible and intangible assets. For the former, property rights can be assigned and transferred. For the latter, in turn, it is tricky to assign property rights. External relations with customers and suppliers belong to this category. Owing to their interactive and intangible nature, control of relationships by only one party is impossible, although the relationships are crucial for the success of the acquisition. It is central to acknowledge that the potential positive economic gains depend upon the willingness and ability of actors to develop further and to exploit the existing customer and supplier relationships. An attempt by one party to acquire a relationship is not a sufficient move to secure such gains. Clearly, as illustrated in our case study, effects of M&A vary in accordance with the connectedness that prevails between the companies before the merger. In the case of a related merger, the customer and supplier relations of the two companies are more likely to be influenced than in the case of an unrelated mergeri.e., the networks of the companies are more overlapping (cf. [45]). Our empirical cases concern related M&A, and we have shown that connected companies reacted in various waysboth in anticipated and unexpected waysto the acquisitions. Although our analysis has not addressed the issue of connectedness in detail, there appears to be much more to do along these lines in future studies. The disregard for customer and supplier relationships has led us to be critical toward the field of studies of M&A. Our critique also is directed towards the field of business relationships. Mergers and acquisitions, together with their effects on business relationships, clearly fall into the area of interest for studies on interaction between companies (see e.g., p. 217 in [10]). The main concern within these studies is developments that occur between the two parties in a business relationship or at the level of the entire network of companies. Takeovers from the viewpoint of the involved companies (as investigated in studies of M&A) have not yet been focussed on explicitly. M&A, including issues such as getting control of other firms resources (relationships), should belong to the agenda of network researchers.

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Managerial Implications We argue that one has to involve the companies customer and supplier relationships both within the premerger phase, where strategic evaluations and considerations are made, and the integration phase of the merger. Moreover, their intangible nature should be understood. Explicit studies of the effects of M&A on customer and supplier relationships can provide better tools for companies when seeking and choosing target companies. It is important to have the right evaluation criteria and measures for finding a good partner. It is essential to evaluate the business relationships the potential partner has, to find out with whom the potential partner interacts regarding, e.g., product development, and to evaluate these relationships both as investments and as potentials. By investments, we mean that the firm has to think of what the alternative cost would be to develop such a business relationship from scratch. With such a procedure, the relationships will be given a value in the same manner as brand name and goodwill are given a price in an acquisition. Simultaneously, the company should be sensitive to the reactions of other actors. Our study shows that customers may be less convinced about the commitment or reputation of the acquirer, for example, than expected. To conclude, business relations represent a value, which can be exploited by both parties, but their value also depends on the actions of both parties. Therefore, managers should be interested in what happens to these assets in connection with acquisitions. It is also important to recognize when and how the integration of the companies influences suppliers and customers. Establishing relationships with suppliers and customers is a time-consuming process where specific individuals often are involved. Although it is not easy to control the relationship, one way of nurturing relationships is to identify the key persons at both ends of the relationship. Moreover, one has to actively involve both parties involved in the process; it does not seem to be enough to merely inform business partners about the potential effects of the merger or acquisition; rather, the new situation should be tackled jointly. Recognizing the interactive and subjective nature of customer and supplier relationships means that they have to be handled actively also during the integration phase of the acquisition. Our focus has been on the acquiring company, but we are certain that these considerations apply to the acquired company as well. Resorting to relationship analysis and management can be a powerful tool for enhancing coop-

eration and integration between the merging companies. Alternatively, relationship effects may be used as an argument while negotiating potential mergers and acquisitions. It is not an easy task for a manager to evaluate and handle such intangible assets as business relationships. But we are confident that when managers realize the need for relationship strategies and relationship management, they are able to tackle these issues. For instance, an understanding of the problems and their appropriate handling in the postmerger integration process between the merging companies is applicable to a wider context of connected relations as well. Thus, coming back to the high failure rate of mergers and acquisitions, we suggest that managers can better ensure a successful outcome of acquisitions by giving explicit attention not only to the target firm but also to its relations to suppliers and customers. But business relationships become future potentials only if they are recognized and managed in a similar way as other parts of the company during the integration phase. And, the potential can become realized only from interacting with willing actors at the other end of the relationship. ACKNOWLEDGMENT
The authors acknowledge the financial support of the International Graduate School of Management and Industrial Engineering at Linkping University, Tore Browaldhs Stifelse, the Academy of Finland and Finnish Cultural Foundation.

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