JEFFREY A.

KRUG

MAJOR WORK
MERGERS & ACQUISITIONS

VOLUME I: MERGERS & ACQUISITIONS

I. Definitions and Concepts

1. Reed, Stanley Foster, Alexandra Reed Lajoux, and H. Peter Nesvold,
The Art of M&A. New York, New York: McGraw-Hill, 2007, 4th Edition,
Chapter 1, Getting Started in Mergers and Acquisitions, pp. 1 8 (8
pages, one column, ISBN 0-07-140302-7).
2. Gaughan, Patrick A., Mergers, Acquisitions, and Corporate
Restructurings. Hoboken, New Jersey: John Wiley & Sons, Inc., 2007,
4th Edition, Chapter 1, Introduction, pp. 3 28 (26 pages, one column,
ISBN 978-0-471-70564-2).
3. Bruner, Robert F., Applied Mergers and Acquisitions. Hoboken, New
Jersey: John Wiley & Sons, Inc., 2004, 1st Edition, Chapter 3, Does
M&A Pay, pp. 30 67 (36 pages, one column, 0-471-39505-6)

II. Merger and Acquisition Motives

4. Baker, H. Kent, Thomas O. Miller, and Brian J. Ramsperger, A Typology
of Merger Motives, Akron Business and Law Review, Winter 1981, Vol.
12, No. 4, pp. 24 29 (6 pages, 2 columns). (University of Akron, Office
of the Dean, College of Business Administration, Akron, OH 44325,
U.S.A.).
5. Walter, Gordon A. and Jay B. Barney, Management Objectives in
Mergers and Acquisitions, Strategic Management Journal, January 1990,
Vol. 11, No. 1, pp. 79 86 (8 pages, two columns). (Wiley Periodicals
Inc., 111 River Street, Hoboken, New Jersey 07030, U.S.A.).
6. Mukherjee, Tarun K., Halil Kiymaz, and H. Kent Baker, Merger Motives
and Target Valuation: A Survey of Evidence from CFOs, Journal of
Applied Finance, Fall 2004, Vol. 14, No. 2, pp. 7 24 (18 pages, two
columns). (Financial Management Association, College of Business
Administration, University of South Florida, Tampa, FL 33620, U.S.A.).
7. Trautwein, Friedrich, Merger Motives and Merger Prescriptions,
Strategic Management Journal, May/June 1990, Vol. 11, No. 4, pp. 283
295 (13 pages, two columns). (Wiley Periodicals Inc., 111 River Street,
Hoboken, New Jersey 07030, U.S.A.).
III. Theoretical Determinants of Mergers & Acquisitions
8. Gort, Michael, An Economic Disturbance Theory of Mergers,
Quarterly Journal of Economics, November 1969, Vol. 83, No. 4, pp. 623
643 (19 pages, one column). (MIT Press Journals, 55 Hayward Street,
Cambridge, Massachusetts 02142, U.S.A.).
9. Chatterjee, Sayan, Types of Synergy and Economic Value: The Impact of
Acquisitions on Merging and Rival Firms, Strategic Management
Journal, March/April 1986, Vol. 7, No. 2, pp. 119 139 (21 pages, two
columns). (Wiley Periodicals Inc., 111 River Street, Hoboken, New
Jersey 07030, U.S.A.).
10. Shiller, Robert J., Fashions, Fads, and Bubbles in Financial Markets. In
Coffee, John C., Jr., Louis Lowenstein, and Susan Rose-Ackerman (eds.),
Knights, Raiders, and Targets: The Impact of the Hostile Takeover. New
York and Oxford: Oxford University Press, 1988, pp. 56 68 (13 pages,
two columns). (Oxford University Press, 200 Madison Avenue, New
York, New York 10016, U.S.A., ISBN 0-19-504405-3).
11. Jovanovic, Boyan and Peter L. Rousseau, The Q-Theory of Mergers,
The American Economic Review, May 2002, Vol. 92, No. 2, pp. 198 204
(7 pages, two columns). (American Economic Association, 2014
Broadway, Suite 305, Nashville, Tennessee 37203, U.S.A.).

IV. Hubris, Agency Costs, and The Market for Corporate Control
12. Roll, Richard, The Hubris Hypothesis of Corporate Takeovers, The
Journal of Business, April 1986, Vol. 59, No. 2, pp. 197 216 (20 pages,
one column). (University of Chicago, 5720 Woodlawn Avenue, Chicago,
Illinois 60637, U.S.A.).
13. Manne, Henry G.., Mergers and the Market for Corporate Control, The
Journal of Political Economy, April 1965, Vol. 73, No. 2, pp. 110 120
(11 pages, two columns). (University of Chicago, 5720 Woodlawn
Avenue, Chicago, Illinois 60637, U.S.A.).
14. Dodd, Peter, The Market for Corporate Control: A Review of the
Evidence, Midland Corporate Finance Journal, Summer 1983, Vol. 1,
No. 2, pp. 6 20 (15 pages, two columns). (Stern Stewart Putnam &
Macklis, Ltd., 520 Madison Avenue, New York, New York 10022,
U.S.A.).
15. Jensen, Michael C., Takeovers: Their Causes and Consequences,
Journal of Economic Perspectives, Winter 1988, Vol. 2, No. 1, pp. 21 48
(28 pages, one column). (American Economic Association, 2014
Broadway, Suite 305, Nashville, Tennessee 37203, U.S.A.).
16. Davis, Gerald F. and Suzanne K. Stout, Organization Theory and the
Market for Corporate Control: A Dynamic Analysis of the Characteristics
of Large Takeover Targets, 1980-1990, Administrative Science
Quarterly, December 1992, Vol. 37, No. 4, pp. 605 633 (29 pages, one
column). (Cornell University, Graduate School of Business and Public
 Administration, 20 Thornwood Drive, Suite 100, Ithaca, New York
14850-1265, U.S.A.).

V. Merger and Acquisition Waves

17. Golbe, Devra L. and Lawrence J. White, Catch a Wave: The Time Series
Behavior of Mergers, The Review of Economics and Statistics, August
1993, Vol. 75, No. 3, pp. 493 499 (7 pages, two columns). (MIT Press
Journals, 55 Hayward Street, Cambridge, Massachusetts 02142, U.S.A.).
18. Linn, Scott C. and Zhen Zhu, Aggregate Merger Activity: New Evidence
on the Wave Hypothesis, Southern Economic Journal, July 1997, Vol.
64, No. 1, pp. 130 146 (17 pages, one column). (Southern Economic
Association, The University of Tennessee at Chattanooga, 313 Fletcher
Hall, Dept. 6106, 615 McCallie Avenue, Chattanooga, Tennessee 37403-
2598, U.S.A.).
19. Harford, Jarrad, What Drives Merger Waves?, Journal of Financial
Economics, September 2005, Vol. 77, No. 3, pp. 529 560 (32 pages, one
column). (Elsevier Sequoia S.A., P.O. Avenue de la Gare 50, Lausanne 1,
CH-1001, Switzerland).

VOLUME II: THE MERGER & ACQUISITION PROCESS

I. Corporate Strategy and Mergers & Acquisitions

20. Salter, Malcolm S. and Wolf A. Weinhold, Diversification via
Acquisition: Creating Value, Harvard Business Review, July-August
1978, Vol. 56, No. 4, pp. 166 176 (11 pages, two columns). (Harvard
Business Review, 230 Western Avenue, Alston, Massachusetts 02134,
U.S.A.).
21. Bradley, James W. and Donald H. Korn, The Changing Role of
Acquisitions, The Journal of Business Strategy, Spring 1982, Vol. 2, No.
4, pp. 30 42 (13 pages, two columns). (Emerald Group Publishing,
Limited, 60/62 Toller Lane, Bradford, West Yorkshire BD8 9BY,
England).
22. Lamont, Bruce T. and Carl R. Anderson, Mode of Corporate
Diversification and Economic Performance, Academy of Management
Journal, December 1985, Vol. 28, No. 4, pp. 925 934 (9 pages, one
column). (Academy of Management, 235 Elm Road, Briarcliff Manor,
New York, 10510-8020, U.S.A.).
23. Porter, Michael E., From Competitive Advantage to Corporate Strategy,
Harvard Business Review, May/June 1987, Vol. 65, No. 3, pp. 43 59 (17
pages, two columns). (Harvard Business Review, 230 Western Avenue,
Alston, Massachusetts 02134, U.S.A.).
24. Krishnan, Ranjani A., Satish Joshi, and Hema Krishnan, The Influence
of Mergers on Firms Product-Mix Strategies, Strategic Management
 Journal, June 2004, Vol. 25, No. 6, pp. 587 611 (25 pages, two
columns). (Wiley Periodicals Inc., 111 River Street, Hoboken, New
Jersey 07030, U.S.A.).

II. Acquisition Planning and Analysis

25. Rappaport, Alfred, Strategic Analysis for More Profitable Acquisitions,
Harvard Business Review, July/August 1979, Vol. 57, No. 4, pp. 99 109
(11 pages, one column). (Harvard Business Review, 230 Western Avenue,
Alston, Massachusetts 02134, U.S.A.).
26. Bagchi, Prabir and Ramesh P. Rao, Decision Making in Mergers: An
Application of the Analytic Hierarchy Process, Managerial and
Decision Economics, March/April 1992, Vol. 13, No. 2, pp. 91 99 (9
pages, two columns). (Wiley Periodicals Inc., 111 River Street, Hoboken,
New Jersey 07030, U.S.A.).
27. Sirower, Mark L., Constructing a Synergistic Base for Premier Deals,
Mergers & Acquisitions, May/June 1998, Vol. 32, No. 6, pp. 42 49 (8
pages, two columns). (SourceMedia, 55 Broadway, 6th Floor, New York,
New York 10006, U.S.A.).
28. Dickerson, Andrew P., Heather D. Gibson, and Euclid Tsakalotos, Is
Attack the Best Form of Defence? A Competing Risks Analysis of
Acquisition Activity in the UK, Cambridge Journal of Economics, May
2003, Vol. 27, No. 3, pp. 337 357 (21 pages, one column). (Oxford
Publishing Limited, Great Clarendon Street, Oxford, OX2 6DP, England).
29. Arend, Richard J., Conditions for Asymmetric Information Solutions
when Alliances Provide Acquisition Options and Due Diligence, Journal
of Economics (Zeitschrift fr Nationalkonomie), July 2004, Vol. 82, No.
3, pp. 281 312 (32 pages, one column). (Springer Science & Business
Media, Van Godewijkstraat 30, Dordrecht, 3311 GX, The Netherlands).

III. Acquisition Decision Making

30. Duhaime, Irene M. and Charles R. Schwenk, Conjectures on Cognitive
Simplification in Acquisition and Divestment Decision Making,
Academy of Management Review, April 1985, Vol. 10, No. 2, pp. 287
295 (9 pages, two columns). (Academy of Management, 235 Elm Road,
Briarcliff Manor, New York 10510-8020, U.S.A.).
31. Jemison, David B. and Sim B. Sitkin, Corporate Acquisitions: A Process
Perspective, Academy of Management Review, January 1986, Vol. 11,
No. 1, pp. 145 163 (19 pages, two columns). (Academy of
Management, 235 Elm Road, Briarcliff Manor, New York 10510-8020,
U.S.A.).
32. Pablo, Amy L., Sim B. Sitkin, and David B. Jemison, Acquisition
Decision-Making Processes: The Central Role of Risk, Journal of
Management, 1996, Vol. 22, No. 5, pp. 723 746 (24 pages, one column).
(Elsevier Science Ltd., The Boulevard, Langford Lane, Kidlington,
 Oxford OX5 1GB, England).
33. Kirby, Susan L. and Mark A. Davis, A Study of Escalating Commitment
in PrincipalAgent Relationships: Effects of Monitoring and personal
Responsibility, Journal of Applied Psychology, April 1988, Vol. 83, No.
2, pp. 206 217 (12 pages, two columns). (American Psychological
Association, 720 First Street, N.E., Washington, DC 20002, U.S.A.).
34. Durand, Rodolphe, Predicting a Firms Forecasting Ability: The Roles of
Organizational Illusion of Control and Organizational Attention,
Strategic Management Journal, September 2003, Vol. 24, No. 9, pp. 821
838 (18 pages, two columns). (Wiley Periodicals Inc., 111 River Street,
Hoboken, New Jersey 07030, U.S.A.).

IV. Post-Merger Employee Effects

35. Nahavandi, Afsaneh and Ali R. Malekzadeh, Acculturation in Mergers
and Acquisitions, Academy of Management Review, January 1988, Vol.
13, No. 1, pp. 79 90 (12 pages, two columns). (Academy of
Management, 235 Elm Road, Briarcliff Manor, New York 10510-8020,
U.S.A.).
36. Cartwright, Sue and Cary L. Cooper, The Psychological Impact of
Merger and Acquisition on the Individual: A Study of Building Society
Managers, Human Relations, March 1993, Vol. 46, No. 3, pp. 327 347
(21 pages, one column). (Springer Science & Business Media, Van
Godewijkstraat 30, Dordrecht, 3311 GX, The Netherlands).
37. Newman, Jerry M. and Frank J. Krzystofiak, Changes in Employee
Attitudes After an Acquisition, Group & Organization Studies,
December 1993, Vol. 18, No. 4, pp. 390 410 (21 pages, one column).
(Sage Publications, Inc., 2455 Teller Road, Thousand Oaks, California
91320, U.S.A.).
38. Weber, Yaakov, Oded Shenkar, and Adi Raveh, National and Corporate
Cultural Fit in Mergers/Acquisitions: An Exploratory Study,
Management Science, August 1996, Vol. 42, No. 8, pp. 1215 1227 (13
pages, two columns). (Institute for Operations Research and the
Management Sciences, 901 Elkridge Landing Road, Suite 400,
Linthicum, MD 21090-2909, U.S.A.).
39. Weber, Roberto A. and Colin F. Camerer, Cultural Conflict and Merger
Failure: An Experimental Approach, Management Science, April 2003,
Vol. 49, No. 4, pp. 400 415 (16 pages, two columns). (Institute for
Operations Research and the Management Sciences, 901 Elkridge
Landing Road, Suite 400, Linthicum, MD 21090-2909, U.S.A.).
 VOLUME III: INTEGRATION, GOVERNANCE, & PERFORMANCE

I. Post-Merger Top Management Team Effects

40. Walsh, James P., Top Management Turnover Following Mergers and
Acquisitions, Strategic Management Journal, March/April 1988, Vol. 9,
No. 2, pp. 173 183 (11 pages, two columns). (Wiley Periodicals Inc.,
111 River Street, Hoboken, New Jersey 07030, U.S.A.).
41. Hambrick, Donald C. and Albert A. Cannella, Jr., Relative Standing: A
Framework for Understanding Departures of Acquired Executives,
Academy of Management Journal, August 1993, Vol. 36, No. 4, pp. 733
762 (30 pages, one column). (Academy of Management, 235 Elm Road,
Briarcliff Manor, New York, 10510-8020, U.S.A.).
42. Krishnan, Hema A., Alex Miller, and William Q. Judge, Diversification
and Top Management Team Complementarity: Is performance Improved
by Merging Similar or Dissimilar Teams?, Strategic Management
Journal, May 1997, Vol. 18, No. 5, pp. 361 374 (14 pages, 2 columns).
(Wiley Periodicals Inc., 111 River Street, Hoboken, New Jersey 07030,
U.S.A.).
43. Bergh, Donald D., Executive Retention and Acquisition Outcomes: A
Test of Opposing Views on the Influence of Organizational Tenure,
Journal of Management, 2001, Vol. 27, No. 5, pp. 603 622 (20 pages,
one column). (Elsevier Science Ltd., The Boulevard, Langford Lane,
Kidlington, Oxford OX5 1GB, England).
44. Krug, Jeffrey A., Executive Turnover in Acquired Firms: An Analysis of
Resource-Based Theory and the Upper Echelons Perspective, Journal of
Management and Governance, 2003, Vol. 7, No. 2, pp. 117 143 (27
pages, one column). (Springer Science & Business Media, Van
Godewijkstraat 30, Dordrecht, 3311 GX, The Netherlands).

II. Merger Integration

45. Schweiger, David M. and Angelo S. DeNisi, Communication With
Employees Following a Merger: A Longitudinal Field Experiment,
Academy of Management Journal, March 1991, Vol. 34, No. 1, pp. 110
135 (26 pages, one column). (Academy of Management, 235 Elm Road,
Briarcliff Manor, New York, 10510-8020, U.S.A.).
46. Pablo, Amy L., Determinants of Acquisition Integration Level: A
Decision-Making Perspective, Academy of Management Journal, August
1994,Vol. 37, No. 4, pp. 803 836 (34 pages, one column). (Academy of
Management, 235 Elm Road, Briarcliff Manor, New York, 10510-8020,
U.S.A.).
47. Homburg, Christian and Matthias Bucerius, Is Speed of Integration
Really a Success Factor of Mergers and Acquisitions? An Analysis of the
Role of Internal and External Relatedness, Strategic Management
Journal, April 2006, Vol. 27, No. 4, pp. 347 367 (21 pages, two
 columns). (Wiley Periodicals Inc., 111 River Street, Hoboken, New
Jersey 07030, U.S.A.).
48. Shaver, J. Myles, A Paradox of Synergy: Contagion and Capacity Effects
in Mergers and Acquisitions, Academy of Management Review, October
2006, Vol. 31, No. 4, pp. 962 976 (15 pages, two columns). (Academy
of Management, 235 Elm Road, Briarcliff Manor, New York, 10510-
8020, U.S.A.).

III. Determinants of Merger Performance

49. Kusewitt, John B., Jr., An Exploratory Study of Strategic Acquisition
Factors Relating to Performance, Strategic Management Journal, April-
June 1985, Vol. 6, No. 2, pp. 151 169 (19 pages, two columns). (Wiley
Periodicals Inc., 111 River Street, Hoboken, New Jersey 07030, U.S.A.).
50. Harrison, Jeffrey S., Michael A. Hitt, Robert E. Hoskisson, and R. Duane
Ireland, Synergies and Post-Acquisition Performance: Differences versus
Similarities in Resource Allocations, Journal of Management, March
1991, Vol. 17, No. 1, pp. 173 190 (18 pages, one column). (Elsevier
Science Ltd., The Boulevard, Langford Lane, Kidlington, Oxford OX5
1GB, England).
51. Finkelstein, Sydney and Jerayr Haleblian, Understanding Acquisition
Performance: The Role of Transfer Effects, Organization Science,
January/February 2002, Vol. 13, No. 1, pp. 36 47 (12 pages, one
column). (Institute for Operations Research and the Management
Sciences, 901 Elkridge Landing Road, Suite 400, Linthicum, Maryland
21090-2909, U.S.A.).
52. Eschen, Erik and Rudi KF Bresser, Closing Resource Gaps: Toward a
Resource-Based Theory of Advantageous Mergers and Acquisitions,
European Management Review, Winter 2005, Vol. 2, No. 3, pp. 167 178
(12 pages, two columns). (Palgrave Macmillan Limited, Brunel Road,
Houndmills, Basingstoke, RG21 6XS, United Kingdom).
53. Schoenberg, Richard, Measuring the Performance of Corporate
Acquisitions: An Empirical Comparison of Alternative Metrics, British
Journal of Management, December 2006, Vol. 17, No. 4, pp. 361 370
(10 pages, two columns). (Blackwell Publishing Ltd., 9600 Garsington
Road, Oxford, OX4 2DQ, United Kingdom).

IV. Best Practices

54. Krug, Jeffrey A., Why Do They Keep Leaving?, Harvard Business
Review, February 2003, Vol. 81, No. 2, pp. 14 15 (two pages, two
columns). (Harvard Business Review, 230 Western Avenue, Alston,
Massachusetts 02134, U.S.A.).
55. Fubini, David, Colin Price, and Maurizio Zollo, Mergers: Leadership,
Performance and Corporate Health. Houndmills, Basingstoke,
Hampshire and New York, NY: Palgrave MacMillan, 2007, Chapter 2,
 Creating the New Company at the Top, pp. 15 30 (16 pages, one
column).
56. Ashkenas, Ronald N. and Suzanne C. Francis, Integration Managers:
Special Leaders for Special Times, Harvard Business Review,
November/December 2000, Vol. 78, No. 6, pp. 108 116 (9 pages, two
columns). (Harvard Business Review, 230 Western Avenue, Alston,
Massachusetts 02134, U.S.A.).
57. Chanmugam, Ravi, Walt Shill, David Mann, Kristen Ficery, and Bill
Pursche, The Intelligent Clean Room: Ensuring Value Capture in
Mergers and Acquisitions, The Journal of Business Strategy, 2005, Vol.
26, No. 3, pp. 43 49 (7 pages, one column). (Emerald Group
Publishing, Limited, 60/62 Toller Lane, Bradford, West Yorkshire BD8
9BY, England).
58. Hunter, William C. and Julapa Jagtiani, An Analysis of Advisor Choice,
Fees, and Effort in Mergers and Acquisitions, Review of Financial
Economics, 2003, Vol. 12, No. 1, pp. 65 81 (17 pages, one column).
(Elsevier Science Ltd., The Boulevard, Langford Lane, Kidlington,
Oxford OX5 1GB, England).
 Editors Introduction

Mergers & Acquisitions

Jeffrey A. Krug

The objective of this three-volume Major Work is to critically examine research on the soft side
of M&As. The broad field of M&As can be divided into quantitative (hard side) versus
qualitative (soft side) issues. Accounting and finance researchers focus primarily on hard issues
such as the measurement of stock and accounting performance, merger valuation, and securities
law. Strategy and organizational researchers focus on qualitative issues such as the analysis of
acquisition candidates, merger negotiations, decision-making processes, and post-merger
integration. Like other strategic issues, the identification of potential synergies from a merger, the
most effective way to negotiate a transaction, and the best approach for integrating a merger, are
subject to the personal viewpoints and skills of those making decisions. As a result, there
continues to be an active and on-going debate about how to most effectively analyze and integrate
a merger, despite a growing and rich literature on M&A best practices.

Merger and Acquisition Trends

Mergers and acquisitions (M&As) continue to play an important role in shaping business activities
worldwide. According to Thompson Financial, M&A deals reached a record $4.4 trillion
worldwide in 2007, up almost 20 percent from $3.8 trillion in 2006. Acquisitions by U.S. and
European firms each account for about 40 percent of the worldwide M&A market, which
continues to be driven by consolidation in financial services, telecommunications, utilities, and
natural resources. Cross-border transactions account for more than 45 percent of all M&As. The
growing importance of regional economic groups such as the European Union, NAFTA, and
Mercosur has been an important driver of M&A deals as firms continue to standardize products
and services, and to consolidate manufacturing and services, in order to build global and regional
scale and scope efficiencies (Rugman and Verbeke, 2004). M&A activity has also grown steadily
in Japan and the rapidly growing markets of China, India, Mexico, and Brazil. These account for
the balance of deals outside the United States and Europe. A large share of M&A activity in
emerging markets is being driven by large multinational firms that view M&As as an effective
strategy for gaining entry.
Through the 1960s, U.S. firms accounted for the greatest share of M&As worldwide. By
the 1970s, however, European firms had developed significant multinational capabilities that
enabled them to compete more directly with U.S. firms. This led to a significant increase in
M&As by Europeans firms, especially in the U.S. market. Through the early 1980s, Japanese
firms competed in foreign markets primarily through exports. By the early 1980s, however,
foreign governments had imposed a variety of restrictions on Japanese imports in an attempt to
protect domestic firms from Japanese imported goods in the automobile, motorcycle, steel,
semiconductor, and textile industries, among others. Japanese firms responded to these
restrictions by shifting production to the United States, Canada, Europe, and Latin America.
Instead of repatriating profits from foreign-based investments, many Japanese firms reinvested
earnings by acquiring local firms. Thus, by 2000, Japanese, U.S., and European firms had
developed significant multinational capabilities and were all actively engaged in M&As as a
means of establishing and strengthening their competitive positions worldwide. The dramatic rise
in cross-border acquisitions during the 1980s and 1990s subjected many firms in a variety of
countries to intensive foreign competition for the first time. Many firms responded by closing
inefficient plants, consolidating value chain activities, and eliminating redundant layers of
management. Since the early 2000s, firms in China (e.g., Lenova), Mexico (e.g., Vitro), Brazil
(e.g., Embraer), and other emerging markets have developed transnational capabilities that are
enabling them to make M&As both domestically and abroad. In sum, trends in globalization,
technology, and competition continue to drive M&As globally. It appears as though these trends
will continue in the foreseeable future.

Characteristics and Drivers of M&A Activity

Different periods of M&A activity have demonstrated different characteristics and been driven by
different factors. For example, the merger wave of the 1980s was characterized by the heavy use
of debt, with many bidding firms making acquisitions by borrowing rather than by paying in cash
or issuing new stock. According to Mitchell and Mulherin (1996), one-half of all major U.S. firms
received takeover bids during this period. Hostile acquisitions characterized many deals, which
were driven by industry deregulation, growing institutional investments, an increase in under-
utilized assets, and excess capacity utilization. These effects were largely the result of more
intense foreign competition (Holmstrom and Kaplan, 2001). Japanese and European competition
forced many U.S. firms to undertake restructuring programs that reduced excess capacity,
eliminated unrelated businesses, and led to greater specialization (Shleifer and Vishny, 1990).
Leveraged buyouts were an important mechanism for aligning shareholder and manager interests
during this period. Managers with equity stakes had greater incentives to work harder to pay off
debt, higher debt imposed greater financial discipline on firms, and individual shareholders and
institutional investors became more involved in the monitoring and governance of the firms they
acquired.
During the 1990s, highly leveraged and hostile acquisitions became less common. In the
U.S. market, increases in equity-based executive compensation such as stock option programs,
which rewarded executives for increases in the firms stock price, produced greater alignment
between executive and shareholder interests. In addition, shareholders and boards of directors
became more active monitoring firm activities. As a result, tender offers and hostile takeovers
became less important governance mechanisms. Moreover, institutional investors increased their
share of the U.S. stock market from 30 to more than 50 percent between 1980 and 1996 (Gompers
and Metrick, 2001). The movement toward the greater involvement of institutional shareholders
was more in line with the structure of European and Japan equity markets, which are largely
dominated by institutional investors that more closely monitor firm activities. In turn, European
and Japanese equity markets have adopted stock option programs for executives and boards of
directors similar to those in U.S. firms and made it easier for firms to repurchase their own shares.
In addition, hostile takeovers have become more common in European markets as a governance
mechanism (Aguilera and Jackson, 2003). In sum, worldwide equity markets are structurally
moving closer in that they are adopting governance mechanisms that produce greater alignment
between executive actions and shareholder interests and are more effective in motivating the
restructuring of firms in ways that improve efficiencies.

Merger and Acquisitions as Strategy

Firms use a variety of strategies to grow over time. They develop and introduce products
internally (Burgelman, 1983), form joint ventures (Harrigan, 1988), enter strategic alliances
(Parkhe, 1993), and engage in mergers and acquisitions (Lubatkin, 1987). Firms may prefer to
develop products internally (i.e., greenfield investments) in fast-growing markets when entry
barriers are low and markets can absorb additional capacity (Yip, 1982). Direct entry is more
attractive for larger firms because they have greater resources that enable them to overcome entry
barriers. Firms with strong competitive positions based on intangible assets and capabilities may
also be able to leverage capabilities through startups (Brouthers and Brouthers, 2000). This is
especially important for firms that operate in highly specialized niches, which reduce the firms
ability to respond quickly to changing market conditions.
In contrast, firms may engage in joint ventures as a means of organizational learning,
sharing costs, and gaining market entry (Hennart and Reddy, 1997). In instances where firms
share complementary resources, firms are more likely to engage in alliances rather than
acquisitions (Wang and Zajac, 2007). Joint ventures and strategic alliances, however, are often
difficult to implement. In particular, partners may resist sharing proprietary resources and secrets
out of fear that the other may appropriate them. In many cases, joint ventures are terminated when
a partner concludes that on-going costs of the relationship outweigh benefits.
In more than two-thirds of the cases, firms choose to expand using mergers and
acquisitions. The popularity of M&As is a result of numerous factors. Developing new products
is risky. It takes an average of eight years to bring a successful product to market (Biggadike,
1979). In contrast, acquisitions enable firms to acquire successful, ongoing businesses that have
already established strong competitive positions. Therefore, acquisitions are often viewed as less
risky than startup investments and give the firm greater control over proprietary resources than
either joint ventures or alliances. By acquiring firms with established market positions, bidding
firms can add to their existing market share and bypass the long process of developing new
products and markets internally. In addition, firms may find it difficult to enter industries with
high entry barriers. For example, existing firms may have strong competitive positions that they
are willing to defend against new entrants. They may possess absolute cost advantages that are
difficult for new entrants to overcome. Moreover, entry may be deterred because of high capital
costs and strong economies of scale effects (Bain, 1956). Acquisitions are often the most effective
means of circumventing these structural barriers. Moreover, acquisitions can be an effective
strategy for establishing competitive positions in highly competitive or mature industries without
adding to existing industry capacity. In sum, mergers and acquisitions are effective strategies for
quickly adding to the firms asset base and market share, reducing the risk of new production
introductions, and overcoming entry barriers (Kochhar and Hitt, 1998).
 Merger and Acquisition Objectives

It is not surprising, then, that most executives cite more rapid growth as a primary objective of
mergers and acquisitions, regardless of the mergers potential for creating synergies or improving
efficiencies (Baker, Miller, and Ramsperger, 1981). Executives and M&A specialists, however, do
cite different sets of objectives for different types of mergers. For example, firms sometimes
integrate backward by acquiring suppliers as a means of reducing supplier power, minimizing
resource dependencies, or reducing transaction costs (Williamson, 1975). Likewise, firms
sometimes acquire distributors and wholesalers, in order to improve quality control, increase
speed of delivery, or minimize possible appropriation of valuable resources by outside parties.
Conglomerate acquisitions, in which firms acquire other firms that operate in unrelated areas, may
be used for entering new businesses and organizational learning. In addition, conglomerate
acquisitions may be undertaken by firms as a means of utilizing excess cash flows, though
evidence suggests that these types of acquisitions do not always perform well (Lewellen, 1971).
These various objectives are to a large extent driven by non-synergistic motives or a desire to
manage interdependencies in the firms industry. The general public, however, may be more
familiar with the concepts of synergy and efficiency as the primary objectives of M&As. For
example, firms use horizontal acquisitions as a means of expanding product lines, extending
products into new markets, and strengthening market position (Halpern, 1973). Horizontal
acquisitions are often designed to achieve multiple efficiency goals such as collusive, operational,
and financial synergies. In addition, they may enable the firm to increase market power while
achieving greater economic efficiencies at the same time (Walter and Barney, 1990). Last,
acquisitions are a common strategy for diversifying into related products and markets using the
firms existing resources and capabilities (Rumelt, 1974).

Do Mergers and Acquisitions Create Value?

When executives are asked to rate the transactions in which they are personally involved, most
respond that their deals create value and that their firms strategic goals are achieved. In contrast,
a majority of executives tend to respond that only 20 to 30 percent of all M&As in general either
create value for acquiring firms or achieve the firms strategic objectives roughly the same
portion of M&As that executives report do not create value when they are personally involved!
The evidence, however, suggests that, despite their popularity, about one-half of M&As fail to live
up to expectations. In a meta-analysis of 93 empirical studies of M&A performance, King,
Dalton, Daily, and Covin (2004) concluded that stock values for both acquiring and target firms
generally increase significantly on the day of the acquisition announcement. This suggests that
shareholders expect long-term synergy gains from mergers. Despite anticipated gains at the time
of the announcement, market returns to the acquiring firm after the acquisition, as well as
accounting performance such as return-on-assets, return-on-equity, and return-on-sales, are
generally a zero-sum gain. About half of all M&As create value; the other half do not. Mergers,
on average, fail to realize potential gains that are thought to exist at the time of the announcement.
 The Consequences of Merger Failure

If firms continue to use M&As as their primary long-term growth strategy, why do so many
M&As fail? Alternatively, if so many M&As fail, why do executives continue to believe that
M&As are the best strategy for growing their firms over the long-term? Failed acquisition
strategies have numerous potential negative outcomes for the organization. Bruner (2005)
outlined six possible outcomes: (1) the destruction of market value that is reflected in sub-par
stock price performance after the merger, (2) financial instability that is reflected in poor debt
ratings and a greater probability of default, (3) impaired strategic position such as the loss of
market share, termination of products, abandonment of geographic markets, and loss of research
and development (R&D) programs, (4) organizational weakness that results from the loss of talent
and executive leadership, reduction in the effectiveness of business processes, and culture clashes
that alienate target employees and damage positive attributes of the target companys culture, (5)
damaged reputation that results from changes in name recognition, reputation, sentiment of
analysts, and press coverage, and (6) violation of ethical norms and laws that potentially lead to
criminal and civil litigation or bankruptcy.
In a survey of several hundred executives involved in an acquisition, Krug and Nigh
(2001) reported that one-third of target company executives are terminated following an
acquisition. Another one-third are alienated to the point that they choose to leave voluntarily.
Executives reported three primary reasons for leaving: (1) acquiring company top management
lacked leadership and direction, (2) acquiring company managers were dishonest or lacked morale
authority, and (3) employees were treated poorly. These results indicate that about two-thirds of
target company executives who leave shortly after an acquisition do so because they are either
terminated or depart because they feel the merger results in negative personal and professional
outcomes for themselves and their families. Bergh (2001) reported that up to 50 percent of target
companies are ultimately divested because of problems incurred during the integration process.
Thus, many acquiring companies appear to have great difficulties finding the right target,
negotiating the right price, and finding ways of integrating the merger in ways that benefit the two
organizations.

What Explains the Tendency to Overpay in M&As?

What, then, separates successful from unsuccessful acquiring firms? Porter (1987) suggested that
all strategies ultimately falter if: (1) the firm overpays for the target company, offsetting any value
that may have been created through the transaction, (2) the firm buys a company in an unprofitable
industry, which minimizes the profit potential of the transaction, or (3) the firm fails to
successfully integrate the target company after the merger, preventing any value transfer between
the two firms.
Why do firms overpay? Finance theory suggests that financial synergies are impossible
to achieve when capital markets are efficient, since shareholders will bid up the price of the target
company until all potential benefits of the acquisition are offset by the purchase price. If we
assume that capital markets are, indeed, efficient, then the fact that so many M&As fail suggests
that at least some bidding firms may be overpaying for the companies they acquire. One possible
explanation is that managers acquire other companies as a means of empire-building increasing
the assets and employees under their control to increase their personal wealth, power, and potential
for advancement (Berle and Means, 1933). Jensen (1986) proposed that managers are unlikely to
distribute the firms excess cash flows to shareholders in the form of dividends because doing so
would signal to shareholders that they are unable to find projects that deliver greater returns than
shareholders could earn on their own by investing in diversified stock portfolios. Managers are
more likely to use excess cash flows to invest in acquisitions to increase the span of their own
control, even though such investments may be risky or deliver sub-par returns. The news media
have promoted this view of management, especially in light of recent corporate scandals (e.g.,
Enron and Tyco). It is noteworthy that executives never list the advancement of personal goals on
surveys of merger motivations. A second explanation is that capital markets are, indeed, efficient
and stock prices do incorporate all publicly available information. Managers may, however, have
unique skill sets or unique information about how value can be created by merging two
companies. This would explain why bidding firms may be willing to pay in excess of the efficient
market price.
An underlying assumption of much of the literature in finance, economics, and strategic
management is that executives are rational decision-makers. A variety of scholars, however, have
suggested that decision-makers are often anything but rational they have limited information
processing capabilities and use cognitive simplifying practices to analyze complex problems
(Duhaime and Schwenk, 1985). A basic premise of the process perspective is that decision makers
have difficulty processing all the variables and data necessary for analyzing a complex problem
(Simon, 1957). In order to deal with this complexity, they simplify the decision-making process
by outsourcing activities to outside analysts, not analyzing data fully, and moving forward despite
mounting evidence that the acquisition is ill-advised. Poor planning, political pressures, escalating
commitment to the acquisition, and a failure to fully analyze costs and benefits lead to poor
decisions and decisions to pay too much (Jemison and Sitkin, 1986). The process perspective also
considers the likelihood that decision makers make errors because they overestimate their own
expertise. In developing hubris theory, Roll (1986) referred to this tendency as managerial over-
optimism or the winners curse. Based on past successes, executives become over confident and
bid more for the target than rational bidders under similar circumstances. Shiller (1981) argued
that excessive enthusiasm to acquire speculative investments may not only be an outcome of
unsound judgment but represent a tendency of some investors to be influenced by faddish
behavior in financial markets. Capital market prices are influenced by changing fashions or fads.
Thus, psychological effects may offer important insights into why executives make poor decisions
and why they may overpay in acquisitions.

Post-Merger Integration

In addition to paying too much, mergers also fail because of poor execution. Acquirers must
consider a variety of issues, such as how much to integrate, the speed of integration, and the
consequences of over- and under-integration. Value creation is created when integration redeploys
assets to more efficient uses, transfers knowledge and resources between merging firms, and
aligns the functional activities of the target with the acquirer (Capron, 1999). As a result,
integration normally leads to the imposition of acquiring firm systems and controls on the target
firm, increased coordination of value chain activities between the two firms, and greater firm
interdependence (Borys and Jemison, 1989). The level of integration varies from acquisition to
acquisition and is often viewed as a choice along a continuum that ranges from autonomy to
absorption (Schweiger and Walsh, 1990). A low level of integration may simply be designed to
leverage parent company resources to support the target firm, which requires some standardization
in management systems. A higher level of integration may entail the combination, sharing, and
coordination of value chain activities. The highest level of integration leads to extensive resource
sharing and the target companys adoption of parent company culture, strategy, organizational
structure, and planning, control, information, financial, and other systems. Integration design is
also influenced by acquisition characteristics (Pablo, 1994). For example, a high level of
integration is necessary when value creation is achieved through strategic resource sharing and the
exchange of critical skills. A low level of integration, however, is often desired when the parent
company wishes to preserve unique characteristics of the target companys culture, in order to take
advantage of unique capabilities in the target firm. Greater cultural differences between the two
firms may also cause the acquirer to integrate more carefully to avoid culture clashes and
minimize conflict (Nahavandi and Malekzadeh, 1988). In sum, the level and style of integration
depends heavily on the source of value creation and motivations of the acquirer.

Best Practices in Mergers and Acquisitions

Given the complexities of integrating target companies, wide variations in characteristics from one
deal to another, and high failure rate of existing deals, how can executives maximize their chances
of success? Recent literature has pointed to several best practices: (1) creation of an effective
top management team, (2) management of employee relationships, (3) development of effective
integration mechanisms, and (4) effective use of resources and capabilities. Post-merger
performance is significantly lower when key target company executives depart shortly after the
acquisition (Cannella and Hambrick, 1993). The loss of more senior executives has greater
performance consequences because it deprives the newly merged company of critical firm-specific
knowledge and industry expertise, and may disrupt long-established stakeholder relationships
(Bergh, 2001). Therefore, long-term performance is enhanced when acquiring companies make
quick decisions about who stays and who remains, get the right executives into the right positions,
and develop cohesiveness and buy-in within the new top management team (Fubini, Price, and
Zollo, 2006). In creating effective top management teams, open communications and constructive
debate are important mechanisms for stimulating thinking and creating an atmosphere that
promotes a feeling among all executives that they are an integral part of the new team. Teams are
also more effective when they have complementary skills, differences in top management team
styles are minimized, and the parent gives target company executives autonomy and job status
(Datta, 1991; Hambrick and Cannella, 1993; Krishnan, Miller, and Judge, 1997). In addition to
top management team issues, acquirers need to effectively manage relationships with target
company employees. Acquisitions create uncertainty and stress, lower employee commitment to
the organization, increase employee intent to turnover, and lower employee productivity
(Schweiger and DeNisi, 1991). Communicating with employees about the objectives of the
merger and their future role in the new company is an important mechanism for minimizing
negative employee reactions to the merger. The retention of key target executives may play an
important role in managing employee relations, since they create an important buffer between
employees and the new parent company.
Key executives who take a personal interest in making an acquisition work or have unique
skills managing acquisitions are often a key to successfully integrating a target company.
However, the unique skills and capabilities of individual executives are lost if the executive leaves
the firm or is not intimately involved in the integration process. Acquiring companies that succeed
the most are those that codify their knowledge about M&As in analytical tools that can be
disseminated to a wide range of players throughout the organization. They document their
knowledge in manuals on due diligence, systems conversion, integration, and systems training. In
addition, they develop quantitative models on financial analysis, net present value analysis,
staffing, product mapping, and project management that can be used to effectively analyze
acquisition candidates, identify sources of value creation, and execute the acquisition (Zollo and
Singh, 2004). Integration managers can play an important role during integration by helping to
establish goals, facilitating communications, and dealing with interpersonal conflicts.
Integration, however, sometimes produces unexpected problems. In general, integration
increases firm interdependence. As a result, negative shocks to one firm are likely to negatively
affect the other. Moreover, merger synergies are often produced by combining units in order to
eliminate excess capacity. The elimination of capacity, however, makes firms less flexible in
responding to positive shocks such as unexpected increases in product demand. Shaver (2006)
referred to these problems as contagion and capacity effects and concluded that even well-
integrated mergers that lead to initial performance gains can create structural characteristics that
inhibit the firms ability to perform at high levels in the future. Another issue is speed of
integration. Practitioners often emphasize that successful acquirers implement change quickly
generally during the first 100 days after the merger. Integrating the target company quickly can be
beneficial, since it minimizes uncertainty and stress among executives and employees. Intelligent
clean rooms, which bring in outside analysts to perform critical analyses and develop
implementation plans before the deal is closed, is an important mechanism for speeding up the
integration process. Speed, however, can be both an advantage and disadvantage, depending on
characteristics of the firms. When an acquirer purchases a firm that operates in a different market
segment (i.e., low external relatedness), speed of integration is beneficial (Homburg and Bucerius
(2006). In contrast, integrating a merger quickly can be detrimental to performance when external
relatedness is high (i.e., firms operate in the same market segments). Integrating firms in the same
market segments may include reduction of brands, combination of sales forces, consolidation of
distribution channels, and relocation of customer service branches, among other factors. In these
instances, integration can cause uncertainty among customer groups. Integration, therefore, needs
to be undertaken more methodically and carefully in these types of mergers.
Last, firms need to consider the degree of relatedness between the two merging firms as a
source of value creation. Kusewitt (1985) found that industry commonality, in which the bidding
firm acquires a target company that operates in the same industry, is an important determinant of
performance. In general, however, researchers have found conflicting results, indicating that
greater degrees of strategic relatedness may or may not lead to superior performance (Singh and
Montgomery, 1987). Relatedness may be a desirable but insufficient condition for creating value
in the absence of effective integration (Capron and Pistre, 2002). Integration, in contrast, is a
critical determinant of acquisition success, regardless of the degree to which potential synergies
exist. Rather than focusing on industry segments, performance effects may be greater when firms
focus on leveraging complementary resources and capabilities. The potential for performance
gains is greatest when firms with large differences in capital, administrative, interest, and R&D
intensity are merged, since they provide the greatest potential for benefits from resource
complementarity (Harrison, Hitt, Hoskisson, and Ireland, 1991).

Structure of Three-volume Collection on Mergers & Acquisitions

In selecting readings for this major work, I included articles and book chapters from a wide range
of journals and authors from around the world. The three-volume collection includes readings
from 32 academic and practitioner journals and four books written by 100 different authors. No
author contributed more than two readings to the collection. I attempted to minimize the number
of articles from the most widely read journals, e.g. Strategic Management Journal, Harvard
Business Review, Academy of Management Journal, and Academy of Management Review. I
assumed that libraries and researchers were most likely to subscribe to these journals and that
including important pieces from less widely distributed journals and less well-known authors
would make the greatest contribution. All authors and journals were well known in their home
countries but not always well known outside. The level of academic rigor of these readings,
however, equaled that of contributions by more well-known authors in the best-known outlets.
Thus, the collection presents an extensive and comprehensive overview of the field.

Volume I: Mergers & Acquisitions

Volume I begins by examining concepts, trends, motivations, and theoretical explanations for
M&As. Section I (Definitions and Concepts) includes chapters from three leading practitioner
books. Reed, Lajoux, and Nesvold (Chapter 1) introduce basic concepts in the field from their
book The Art of M&A. It is noteworthy that, Reed was the original publisher of Mergers &
Acquisitions journal, which has since become the leading practitioner journal in the field. In
Chapter 2, Gaughan discusses recent merger trends, patterns of M&A activity around the world
(e.g., in the United States, Europe, Japan, and China), and the characteristics and motivations of a
variety of different merger types from his book entitled Mergers, Acquisitions, and Corporate
Restructurings. In Chapter 3, Robert Bruner, Dean of the Darden Graduate School of Business at
the University of Virginia, presents a comprehensive review of studies on merger valuation and
discusses the primary drivers of profitability in M&A from his book Applied Mergers &
Acquisitions.
Section II (Mergers and Acquisition Motives) examines the motivations of M&As. For
example, Baker, Miller, and Ramsperger (Chapter 4) surveyed chief financial officers (CFOs) to
develop a typology of 15 merger motives in different types of mergers. CFOs rated more rapid
growth as the most important objective in all merger types. Otherwise, different merger types
were characterized by different sets of motivations. Walter and Barney (Chapter 5) developed
taxonomy of 20 management goals based on field interviews with M&A practitioners. Cluster
analysis revealed five different motivational groups: (1) to obtain and exploit economies and
scope, (2) to deal with critical and ongoing interdependencies with other firms, (3) to expand
product lines and markets, (4) to enter new businesses, and (5) to utilize financial capabilities.
These groups were related to different types of mergers. Vertical mergers, for example, were most
frequently motivated by a desire to minimize industry interdependencies. Conglomerate mergers
were related to entry into new businesses and utilizing financial capabilities. Concentric mergers
were associated with market expansion. Horizontal mergers were driven by multiple motivations,
especially to achieve collusive, operational, and financial synergies. In Chapter 6, Mukherjee,
Kiymaz, and Baker contrasted the motivations between mergers and divestitures. A survey of
chief financial officers revealed that the primary motivation for mergers was to achieve operating
synergies. In contrast, the primary motivation for divestiture was to increase focus. Executives
also believed that M&As were justified as a means of diversifying corporate portfolios to reduce
losses during economic downturns.
Trautwein (Chapter 7) ties the literature on merger motivations together by relating seven
theories of merger motives to prescriptions for merger strategies. Executives often use efficiency
arguments to justify acquisitions. He found that the efficiency and monopoly theories of mergers
have received little empirical support. In contrast, three theories have received strong support in
practice: (1) valuation theory, which suggests that managers often have better information about
the targets value than the stock market, (2) empire-building theory, which suggests that managers
acquire other companies as a means of maximizing their self-interest, and (3) process theory,
which suggests that managers possess limited information processing capabilities that may lead to
inaccurate valuations. Trautwein suggests that a focus on efficiency motives to justify mergers
may provide an inaccurate guide for undertaking mergers. Instead, research should be redirected
to explanations that build on decision processes, conflicting goals, and ambiguous private
information.
Section III (Theoretical Determinants of Mergers and Acquisitions) addresses the empirical
and theoretical reasons why mergers take place and where value is created. In Chapter 8, Gort
accepts that mergers may be motivated by monopoly power, economies of scale, and other gains.
These motivations, however, are not sufficient for explaining fluctuations in merger rates. He
proposes an economic disturbance theory of merger frequencies that suggests that mergers occur
when economic disturbances make variables more difficult to predict. Greater economic
uncertainty creates discrepancies in merger valuations. These differences lead to more
concentrated merger frequencies in industries subjected to greater economic disturbances. In
Chapter 9, Chatterjee focuses on value creation as an outcome of firm resources such as cost of
capital-related resources, which lead to financial synergies; cost of production resources, which
lead to operational synergies; and, price-related resources, which are related to collusive synergies.
Collusive synergies create the greatest value by increasing the firms market power. Further,
financial synergies that lead to lower cost-of-capital are associated with greater value creation than
operational synergies that lead to production and/or administrative efficiencies.
In Chapter 10, Shiller argues against the notion of market efficiency and suggests that market
prices are heavily influenced by changing fashions or fads. The lumpiness of media attention
contributes to randomness in trader behavior. He suggests that alternate explanations for merger
activity based in part on psychological research would contribute to our understanding of merger
activity beyond market efficiency arguments. Jovanovic and Rousseau (Chapter 11) use the Q-
theory of mergers to explain why firms engage in acquisitions. The Q-theory suggests that a
firms rate of investment will rise with its Q (the ratio of market value to the replacement cost of
capital). They develop a model that views mergers as a channel through which capital flows to
better projects and better management. Their model, therefore, views M&As as used-capital-
market transactions with high-Q firms buying low-Q firms.
Section IV (Hubris, Agency Costs, and the Market for Corporate Control) include five
articles that have shaped our theoretical understanding of the decision-making behavior of
managers. In Chapter 12, Roll introduces his hubris hypothesis. He suggests that takeover gains
reported in the academic literature may be largely overstated and that part of the significant
increase in the price of target company stock shortly after an acquisition announcement may
represent a simple transfer of wealth from the bidding firm. Decision makers are not always
rational when making decisions under uncertainty and will continue to bid on projects despite past
errors or evidence that they are over-bidding. Therefore, the increase in the targets market value
after an acquisition announcement may largely be offset by a decline in the market value of the
bidder. In Chapter 13, Manne introduces the concept of the market for corporate control. When
firms are poorly managed, the market price of the firm will decline. This makes the firm attractive
to outside bidders, who benefit by acquiring the firm, replacing the firms managers with their
own, improving efficiencies, and increasing the value of the firm. Mergers, therefore, constitute
an efficient mechanism for correcting instances of low firm valuation resulting from management
inefficiencies.
In Chapter 14, Dodd discusses the general success of the public corporation as a means of
organizing productive assets efficiently. He acknowledges that critics view acquisitions as an
empire-building strategy for executives who sacrifice shareholder interests to increase the assets
under their control. Acquisitions, however, provide an important channel through which corporate
assets can be moved from inefficient to more efficient uses. Further, the threat of takeover can be
an effective mechanism for minimizing the self-interested actions of incompetent managers.
When boards fail to replace poor management, the market for corporate control is a discipline of
last resort. Jensen (Chapter 15) presents a comprehensive summary of the literature on acquisition
value creation and concludes that the market for corporate control has benefited shareholders,
society, and the corporate form. While managers may oppose acquisitions because their positions
are threatened, M&As lead to asset restructuring that improves overall economic efficiency.
Overall, he views markets as efficient mechanisms for breaking organizational inertia and
replacing management in inefficiently run organizations.
Davis and Stout (Chapter 16) contrast the validity of organizational theory versus agency
theory in explaining where value in acquisitions occurs. On the one hand, organizational theory
views managers as pursuing activities that promote their individual interests and the survival of
the corporation, even when doing so decreases shareholder value. On the other hand, agency
theory views acquisitions as a way of monitoring management behavior. In cases where managers
fail to take actions that maximize the value of the firm, outside firms can bid for control of the
firm to improve performance. Data analysis revealed that greater organizational slack, age, and
having a chief executive officer with a financial background increased the risk of takeover. They
conclude by arguing that agency theory provides a more accurate theoretical lens for
understanding merger activity.
 Section V (Merger and Acquisition Waves) includes three articles that test whether merger
activity occurs in waves. In Chapter 17, Golbe and White provide an early empirical test of the
wave hypothesis by fitting a model based on sine waves to an aggregate merger series. Their
findings confirm the wave hypothesis that mergers move in cycles with discernable peaks and
troughs. These results are consistent with a later study by Linn and Zhu (Chapter 18), who find
that aggregate merger activity follows a stationary regime switching process. Merger activity
tends to appear in waves that are characterized by a multiplicity of stationary processes occurring
over time. In Chapter 19, Harford examines the root of merger waves. He finds that merger
waves result when an industry is subjected by economic, regulatory, or technological shocks that
motivate a large-scale restructuring of industry assets, but only when there is sufficient capital
liquidity. Merger waves are most likely to occur when industry shocks are accompanied by high
capital liquidity, low financing constraints, and high asset values.

Volume II: The Merger and Acquisition Process

Section I (Corporate Strategy and M&A) includes five articles that discuss the essence of
corporate strategy portfolio management and how mergers and acquisitions contribute to value
creation in the diversified firm. Salter and Weinhold (Chapter 20) discuss common
misperceptions about how diversified firms can create value through M&As and focus on how
firms can leverage resources and competencies to create superior value. The acquirer plays an
important role in leading this process. In Chapter 21, Bradley and Korn discuss why firms have
increasingly shifted to diversification strategies based on acquisition versus internal development
as their primary method of growth. They then build a financial framework that examines the costs
and benefits of acquisitions, problems with valuation, and competitive positioning.
Lamont and Anderson (Chapter 22) examine the degree to which firms mix diversification
strategies (i.e., acquisition versus internal development) and analyze the performance implications
of firms using different strategy mixes. They find that one-third of firms enter new businesses
using mixed approaches. Further, the performance of mixed diversifiers is not significantly
different from firms that use a single strategy to achieve diversification goals. Thus, firms may
use different combinations to achieve diversification and performance objectives and different
approaches may be appropriate in different environments. Porter (Chapter 23) finds that more
than half of acquisitions are later divested and discusses three essential tests that must be met to
create value. First, the attractiveness test requires that firms enter industries with profitable
structures. Second, the cost-of-entry test requires that bidding firms do not overpay for targets.
Third, the better-off test requires that the acquisition results in transfer value between the acquirer
to target firms. In Chapter 24, Krishnan, Joshi, and Krishnan examine whether multi-product
firms use mergers as a strategic tool for reconfiguring their product mix toward high-profit
products. In an analysis of hospital mergers, they find that firms both increase their market share
and shift their product mix to high-profit services when they are located in more highly
competitive markets. However, firms do not, as hypothesized, either reduce their market share or
shift their product mix away from low-profit services. Thus, mergers may relax institutional and
organizational constraints on resource redeployment toward more profitable product areas, but
they dont appear to relax the constraints on reducing the firms presence in less profitable product
areas.
 Section 2 (Acquisition Planning and Processes) addresses how firms value potential
investments. Rappaport (Chapter 25) presents a framework based on discounted cash flow
analysis to estimate the value of potential investments. He shows how cash flow projections, cost-
of-capital, discount rates, and the building of alternative purchase price scenarios can be used to
produce accurate analyses. Bagchi and Rao (Chapter 26) use the Analytic Hierarchy Process
(AHP) methodology to demonstrate how bidding firms can rank a set of acquisition candidates.
Complex problems can be structured into a hierarchy for analyzing and ranking alternatives on the
basis of multiple objectives and from multiple perspectives. In Chapter 27, Sirower presents a
framework that includes four cornerstones strategic vision, operating strategy, systems
integration, and power and culture for achieving competitive advantage through acquisition.
Each is a necessary but insufficient step in creating value.
In Chapter 28, Dickerson, Gibson, and Tsakalotos take a different view of acquisitions by
examining whether M&As can be used as a strategy for reducing a firms chance of takeover.
Using a sample of manufacturing firms from the U.K., they find that larger corporate size reduces
takeover risk. Larger companies have greater internal cash flows that can be used to make
acquisitions. Companies that make acquisitions reduce their risk of takeover by around one-third.
Therefore, acquisitions are an effective form of defense against takeover. Arend (Chapter 29)
introduces a model that examines how joint ventures and alliances can be used to test potential
relationships before a merger decision is made. If value creation appears to be minimal, a firm can
withdraw from the relationship, avoiding the costs it would have incurred had it entered a merger
agreement and later dissolved the merger.
Section III (Acquisition Decision Making) focuses on decision-making processes. Duhaime
and Schwenk (Chapter 30) argue that decision makers use cognitive simplifying processes to deal
with the complexity of ill-structured problems. They identify four simplification biases that may
lead to errors in decision making. Reasoning by analogy suggests that decision makers define
problems using simple analogies that may lead to an overly simplistic perception of the problem.
Illusion of control suggests that managers may overestimate the extent to which they control the
outcome. Escalating commitment suggests that managers develop a commitment to a project that
leads them to follow through despite mounting evidence that the acquisition should not be made.
Last, single outcome calculation suggests that managers view the solution to a failing acquisition
as a simple divest or not-divest decision rather than considering other possible solutions. In
Chapter 31, Jemison and Sitkin add to this perspective by discussing how acquisition outcomes are
affected by problems present in the acquisition process. Acquisitions can be conceptualized as a
series of decision processes that influence decision makers at different stages as the acquisition
unfolds. Four decision-making impediments inhibit effective decision making during this process.
For example, activity segmentation refers to the practice of assigning analysis responsibilities to
different outside consultants. This helps executives manage the complexity of the acquisition
process. However, it also leads to different perspectives that are difficult to integrate. Second,
managers have a tendency to develop a desire to complete the process quickly (escalating
momentum). This may lead to premature solutions that lower chances of success. Third,
ambiguity during the negotiation process is critical for effective negotiations. This ambiguity,
however, is often carried into the post-merger integration process, which increases conflict
(expectational ambiguity). Last, the misapplication of acquiring company systems in the acquired
company can increase defensiveness and resistance in the acquired company and jeopardize the
integration process (management system misapplication).
Pablo, Sitkin, and Jemison (Chapter 32) build on Jemison and Sitkins work by suggesting
that risk (i.e., decision-maker risk perceptions and propensities) should be considered in academic
tests of decision processes. They discuss how the process perspective on acquisitions is
grounded in theory and can be used to improve the explanatory and predictive power of
acquisition outcomes. In Chapter 33, Kirby and Davis perform a laboratory experiment to test the
concept of escalating commitment. Regardless of the level of risk of investment alternatives,
participants showed tendencies to escalate their commitment to an investment over time.
Increased monitoring, however, deterred participants from pursuing risky projects and minimized
their escalating commitment to a project. Durand (Chapter 34) proposes and tests a model that
identifies differences in forecasting ability across firms. In an analysis of French firms, he finds
that three factors increase forecasting biases: (1) changes in a firms production over time, (2)
high relative investments in dynamic resources such as R&D, and (3) a firms elevated perceptions
of its strengths relative to competitors. Thus, organizational illusion of control causes firms to
overvalue the firms resources.
Section IV (Post-Merger Employee Effects) discusses the effects of acquisitions on
employees. In Chapter 35, Nahavandi and Malekzadeh develop a model that focuses on the
concept of acculturation. They suggest that firms can improve chances of success by agreeing on
the mode of acculturation before integration. A close fit between strategy and culture or
congruence between firms regarding the preferred mode of acculturation increases
implementation success. In a study of middle managers involved in the merger of two firms in
the U.K., Cartwright and Cooper (Chapter 36) find that measures of mental health declined in the
two firms after the announcement despite a high level of cultural compatibility. The cultures of
the two firms were successfully merged. However, managers of both firms experienced
significant stress after the merger. Newman and Krzystofiak (Chapter 37) measure attitudes in a
sample of bank employees and find that job satisfaction and organizational commitment decline
significantly following an acquisition. Thus, uncertainty appears to be an important determinant
of stress over and above the merger event itself.
Weber (Yaakov), Shenkar, and Raveh (Chapter 38) add to the existing research on cultural
effects in M&As by distinguishing between national and corporate culture. They find that cross-
national cultural differences lead to significantly higher levels of stress and negative feelings about
the merger. Moreover, differences in corporate culture lower the commitment and cooperation of
the target companys top management team in purely domestic mergers. Their findings
demonstrate that differences in both national and corporate culture can negatively affect attitudes
and decrease integration success. In Chapter 39, Weber (Roberto) and Camerer conduct laboratory
experiments to test the effect of organizational culture differences on merger success. They find
that cultural differences are associated with lower levels of merger performance. Study subjects
were inclined to overestimate performance of the merger and blamed declines in performance on
the other firm rather than on cultural differences between the two firms.

Volume III: Merger Integration, Governance, and Performance

Volume III focuses on post-merger integration mechanisms and the role that top management
teams and boards of directors play in initiating, integrating, and improving corporate performance
using merger and acquisition strategies. Section I (Post-Merger Top Management Team Effects)
examines the effect of acquisitions on top management teams. In the first study to examine this
topic, Walsh (Chapter 40) documents higher executive turnover rates in target companies. The
most significant turnover occurs in the first year after the acquisition and more senior executives
leave more quickly. Hambrick and Cannella (Chapter 41) use the concept of relative standing to
explain why executive turnover is so high after an acquisition. They find that executives are more
likely to leave when their status falls, especially relative to colleagues, after the acquisition and
when they experience a loss in autonomy. Krishnan, Miller, and Judge (Chapter 42) measure
performance effects and find that higher turnover among target company executives is associated
with lower post-merger performance. They also find that turnover is lower when the merger
combines top management teams with complementary skills (i.e., functional backgrounds). The
more complementary the merging top management teams and lower the target company
executive turnover the higher the post-merger performance of the target firm. Bergh (Chapter
43) uses the resource-based view of the firm to show that target companies are less likely to be
divested several years later when they retain executives with the longest tenure. He argues that
longer-term executives have a more intimate understanding of the acquired company and such
knowledge is invaluable to integration efforts. Krug (Chapter 44) finds that acquisitions create
longer-term instability in acquired firms that can last up to nine years following the acquisition.
Turnover is not, however, significantly different in cross-border versus purely domestic mergers.
Section 2 (Merger Integration) focuses on how firms improve integration processes.
Schweiger and DeNisi (Chapter 45) introduce a realistic merger preview in a firm that recently
announced a merger. One plant was given the preview and the other was not. Stress, uncertainty,
job dissatisfaction, and other dysfunctional outcomes increased in both plants following the
merger announcement but returned to normal levels in the plant that was given the merger
preview. Thus, communication programs that inform employees of merger events appear to be an
effective means of minimizing negative behavior effects from a merger announcement. Pablo
(Chapter 46) studied integration processes in acquiring firms and found that level of integration is
associated with strategic task needs (positive), organizational task needs (negative), the acquirers
degree of multiculturism (negative), compatibility of acquisition visions (negative), and power
differential between the two firms (negative). Integration design decisions are, therefore,
influenced by a variety of task-related, cultural, and political characteristics.
Homburg and Bucerius (Chapter 47) find that speed of integration is beneficial in some
mergers but harmful in others. Speed is most beneficial when external relatedness is low but
internal relatedness is high. In contrast, speed is detrimental in mergers characterized by high
external and low internal relatedness. Their findings suggest that managers should consider inter-
firm relatedness issues in determining how fast to proceed with integration efforts. In Chapter 48,
Shaver discusses how interdependence resulting from integration can lead to adverse effects in the
distribution of outcomes across businesses. Contagion effects, for example, occur when
environmental shocks and competitive pressures experienced by individual units also affect other
units within the integration firm. Capacity effects may occur when slack resources are eliminated
to increase capacity utilization. The resulting capacity constraint may have the unwanted effect of
preventing businesses from realizing positive gains from shocks in the business environment.
Thus, even well-integrated mergers can unwittingly destroy value.
Section XII (Determinants of Merger Performance) discusses characteristics of a merger
that are associated with higher post-merger performance. Kusewitt (Chapter 49) finds that
industry commonality and higher pre-merger performance of the target is associated with higher
post-merger performance. In contrast, performance is lower when firms purchase larger targets,
are active acquirers, acquire firms in periods of market highs, and pay for acquisitions in cash. In
Chapter 50, Harrison, Hitt, and Ireland take a different approach by comparing acquisitions on the
basis of resources rather than industry relatedness. They find that merger performance is highest
when there are differences in capital, administrative, interest, and R&D intensities between firms.
These results support the notion that greater value is created when there are opportunities for
unique and complementary resource flows between merging firms.
In Chapter 51, Finkelstein and Haleblian use the theory of transfer effects to examine
determinants of acquisition success. Acquisition performance is higher when firms operate in
similar industries (positive transfer effect). A second acquisition, however, tends to perform more
poorly, especially when it is made in a different industry (negative transfer effect). Acquirers tend
to apply practices to subsequent acquisitions that they learn from past acquisitions rather than
adapting practices to the unique requirements of the individual acquisition. In Chapter 52, Eschen
and Bresser use resource-based theory to develop a two-step model that identifies conditions under
which resource-driven mergers produce superior results. They propose that M&As are appropriate
for resolving resource deficiencies when target resources have high strategic value, are distinct
from the acquirers existing resource base, and market and technological uncertainties are
moderate or low. Schoenberg (Chapter 53) compares alternative measures of acquisition
performance in a sample of cross-border acquisitions. He finds no significant correlations
between performance data other than a positive association between managers and expert
informants subjective assessments. Stock market movements are not correlated with executives
assessments of merger performance. He suggests that information asymmetry may exist between
investors and company management, especially regarding aspects of merger integration.
The final section of this major work, Section IV (Best Practices), includes five articles
that offer insight into new findings and practices in the field. In Chapter 54, Krug discusses recent
research showing that M&As destroy leadership stability in target companies and argue that
restoring leadership continuity and developing an effective top management team are important
determinants of acquisition success. In Chapter 55, Fubini, Price, and Zollo discuss the critical
role of the CEO and senior management team in effecting integration. Five important challenges
include: (1) creating an effective top management team, (2) developing an inspiring corporate
story to support the communication effort, (3) building a strong performance culture, (4)
championing external stakeholder interests, and (5) balancing speed of integration with time for
reflection and absorption of integration-specific learning. In Chapter 56, Ashkenas and Francis
discuss the role of the integration manager, who bridges the gap between the due-diligence team,
which disbands after the deal is closed, and the new management team, which will eventually run
the new firm. In Chapter 57, Chanmugam, Shill, Mann, Ficery, and Pursche describe the
intelligent clean room concept. Immediately following a merger announcement, a third party is
brought in to conduct analysis and planning before the merger is formally approved. This allows
the two firms to continue operating as competitors until final approval is reached. At the same
time, detailed financial models, valuations, estimates of synergy, and development of an
integration plan can be produced. This enables the two firms to hit the ground running on the day
following approval. In the final paper, Hunter and Jagtiani (Chapter 58) investigate the role of
financial advisors and find that using a top-tier advisor increases both the probability of closing
the deal and of closing the deal more quickly. The use of top-tier advisors, however, is also
associated with lower gains to the acquirer, an indication that top-tier advisors may motivate
acquirers to offer larger premiums for the target.

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