Master Thesis

M.Sc. in Business Administration with a specialization in

“Strategy and Organization”

- M&A activity in SMEs -

The influence of economic crises on the motives of SMEs to engage in M&A
activity

Lenart Ahlhoff
2621328
Supervisor: E.A.H. Kleijn

Application: 15/12/2017

Submission: 30/06/2018
Preface
The copyright rests with the author. The author is solely responsible for the content of the
thesis, including mistakes. The M&O department cannot be held liable for the content of the
author’s thesis.
Abstract
Merger and acquisition (M&A) have been a subject of interest to the academic as well as the
public debate for over half a century. Various streams of literature can be identified within the
merger acquisition field. However, small and medium enterprises (SME) are mostly neglected
in the debate, even though they play an important role in economies worldwide. Especially, the
influence of economic crises on the motives of owners of SMEs to engage in M&A activity has
not been suitably identified. Therefore, qualitative research was conducted to study this
phenomenon. To do so, thirteen interviews were conducted in the timeframe of May and June
2018. The data was gathered in the Netherlands and Germany as both countries were impacted
by the last crisis (crisis of 2008/2009) and SMEs are prominent economic actors in these
countries. It was found that SMEs behave differently in the process of an M&A. Their actions
are less linear and structured when compared to larger companies. Additionally, the data points
towards an escalation of the motive to sell due to the age of the owner in an economic crisis.
Moreover, it can be concluded that in an economic crisis the desire for synergies and knowledge
acquisition is increased. However, the data suggests that often deals are not concluded as
owners of SMEs perceive the acquisition offers made in a crisis situation as insufficient. The
paper on hand implies for M&A professionals that each case in the SME market has to be
approached individually as a transaction process represents an emotional decision to the owner.
At the same time, it makes the need for structured information supply by the owners apparent.
Nevertheless, the research of the paper on hand needs to be tested in quantitative models to
allow a generalization.

Key words: Merger and acquisition, economic crisis, small and medium enterprises, motives,
environmental contingencies

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Table of contents
1. Introduction ............................................................................................................................ 1
2. Theoretical framework ........................................................................................................... 4
2.1 What are small and medium enterprises? ......................................................................... 4
2.2 Merger and acquisition ..................................................................................................... 5
2.3 Hostile and friendly takeovers .......................................................................................... 6
2.4 Motives for M&A activity ................................................................................................ 7
2.4.1 Cost saving motives (synergies and economies of scale and scope) ......................... 7
2.4.2 Managerial motives ................................................................................................... 8
2.4.3 Knowledge and technology acquisition .................................................................... 9
2.5 Environmental contingencies and risk of M&A............................................................... 9
2.5.1 Environmental factors, dynamic and static environments....................................... 10
2.5.2 Stakeholders in M&A .............................................................................................. 10
2.5.3 Risks of M&A ......................................................................................................... 11
3. Methods ................................................................................................................................ 13
3.1 Research design .............................................................................................................. 13
3.2 Research context............................................................................................................. 13
3.3 Data collection ................................................................................................................ 14
3.3.1 Sampling .................................................................................................................. 14
3.3.2 Sample ..................................................................................................................... 14
3.3.3 Interview design ...................................................................................................... 15
3.4 Data analysis................................................................................................................... 16
4. Findings ................................................................................................................................ 17
4.1 Non-linear M&A process in SMEs ................................................................................ 19
4.1.1 Information supply .................................................................................................. 19
4.1.2 Hesitance to sell....................................................................................................... 20
4.2 Age motive escalation .................................................................................................... 22
4.2.1 Outside pressure ...................................................................................................... 22
4.2.2 Inside pressure ......................................................................................................... 23
4.3 Desire for synergies and knowledge acquisition increased ............................................ 25
4.3.1 Cost saving synergies .............................................................................................. 25
4.3.2 New sources of income ........................................................................................... 26
4.4 Insufficient offers ........................................................................................................... 27
4.4.1 Lower valuation....................................................................................................... 27
4.4.2 Lower interest of competitors.................................................................................. 28
5. Discussion ............................................................................................................................ 30
5.1 Conclusion ...................................................................................................................... 30
5.2 Theoretical implication................................................................................................... 30

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 5.3 Practical implications ..................................................................................................... 32
5.4 Limitations and future research ...................................................................................... 33
5.4.1 Limitations............................................................................................................... 33
5.4.2 Future research ........................................................................................................ 33
Literature .................................................................................................................................. 35
Appendix .................................................................................................................................. 44
Appendix A – Data inquiry Zephyr ...................................................................................... 44
Appendix B – Interview inquiry E-Mail .............................................................................. 45
Appendix C – Interview protocol ......................................................................................... 46
Appendix D – Representative data for 1 st order themes ....................................................... 48

Table of contents – Figures and tables

Figure 1: M&A deals of SMEs during and after the financial crisis (Business Insider, 2018;
Zephyr, 2018) ______________________________________________________________ 3
Table 1: European Commission SME definition (European Commission, 2003) ___________ 5
Table 2: Overview of the interviewees __________________________________________ 15
Figure 2: Conceptualization of the data structure _________________________________ 17
Figure 3: Aggregate dimensions of the findings ___________________________________ 17
Figure 4: Data structure non-linear M&A process in SMEs _________________________ 19
Figure 5: Data structure escalation of age motive _________________________________ 22
Figure 6: Data structure desire for synergies and knowledge acquisition increased ______ 25
Figure 7: Data structure insufficient offers ______________________________________ 27
Table 3: Research question and propositions _____________________________________ 29
Figure 8: Escalation of the age motive __________________________________________ 31

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1. Introduction
“If you look at the M&A market and activity there is indeed differences in how SMEs are
influenced relative to large cap when it comes to M&A activity. And they are also influenced
by specific factors that really play out in the SME market more than in the large cap market.”
– Interviewee 7

Merger and acquisitions (M&A) have been a phenomenon of the business world since the
beginning of the 20th century (Martynova & Renneboog, 2005). Earlier in time M&A was
already a practice but the volume of the transactions was by far not comparable to the mergers
and acquisitions of the 20th century (Town, 1992). There are five merger waves that can be
identified in the 20th century (Auster & Sirower, 2002). Merger waves represent times in which
the M&A activity peaks. The first M&A wave of the 1900s is thought to be driven by the desire
to create monopolies in contrast to the second merger wave in the 1920s where legislative
influence resulted in an oligopoly creating M&A wave (Stiegler, 1950). Due to global political
issues (i.e. Great Depression, World War I and II) a low level in M&A was observable until the
1960s. During the third M&A wave in the 60s the motive was to pursue unrelated
diversification and the mitigation of risks (Shleifer & Vishny, 1991). The fourth wave occurred
in the 1980s. Here, the underlying mechanism was the reorganization of conglomerate
structures that were created in the previous M&A wave (Martynova & Renneboog, 2005). In
this period most transactions were hostile unlike the activity recorded in the 1960s (Shleifer &
Vishny, 1991). The last wave in M&A activity in the 20th century can be accounted for in the
1990s. During that time the hostility once again dropped (Holstrom & Kaplan, 2001). That
particular wave had a focus on consolidation and internationalization as markets become more
globalized and interconnected (Evenett, 2004).

M&A activity in the beginning of the 21st century further increased resulting in a total deal
value of 3.79 USD trillion in the year 2006 (Barkema & Schijven, 2008), compared to 1.02
USD trillion in 1999 (Martynova & Renneboog, 2006). However, the financial crisis of
2008/2009 brought a stop to the spiking activity. The number of M&A deals dropped drastically
by about 40% from 2007 to 2009 (Reddy, Nangia, & Agrawal, 2014).
Drawing on the numbers, M&A has become more relevant than ever. In the first quarter of 2018
an all-time record high in deal value volume with 1.2 USD trillion was recorded (Roumeliotis
& Barbaglia, 2018). Not only in the public discussion and in the business-world is M&A a topic
that is constantly discussed. For example, the recent takeover of Monsanto by Bayer has

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received a large amount of publicity. For much longer though, cases like that have found a
prominent place in the academic literature. As a result, multiple streams of the academic debate
can be allocated to M&A, such as firm characteristics and performance (Haleblian, Devers,
McNamara, Carpenter, & Davison, 2009). There is an ongoing debate whether M&A activity
is in fact value creating or value destroying, if it has a positive effect on only one of the partners
or has no monetary effect on the business at all (Agrawal, Jaffe, & Mandelker, 1992; Asquith,
1983; Bradley, Desai, & Kim, 1988; Chatterjee, 1992; Hansen & Lott, 1996; King, Dalton,
Daily, & Covin, 2004; Seth, Song, & Pettit, 2000).

Another stream of the academic M&A literature scrutinizes the motives to engage in such
behavior. Motives are for example the creation of synergies, managerial motives and
knowledge and technology acquisition. In the whole literature on M&A one economic actor is
mostly neglected: small and medium-sized enterprises (SMEs in the following). Focus is
usually put on large (stock listed) companies, even though SMEs make up a large portion of
economies all over the world (Ayyagari, Beck, & Demirguc-Kunt, 2007). Nevertheless, they
are often solely considered as the target in an acquisition and only from time to time their
possible active role in an M&A is acknowledged. Especially the motives to engage in an M&A
are presumed to be the same as in large companies with the only difference that agency related
motives are not considered and the motive of succession can be added to the list of possible
motives (Weitzel & McCarthy, 2011). Furthermore, there is close to no previous academic
examinations of the motives of SMEs to engage in M&A in times of economic crises or how
such situations might be seen as influencing factors in the decision process. Besides the number
of M&A deals of large companies, M&A deals of SMEs dropped in the crisis of 2008/2009
(Zephyr, 2018). A clear difference in M&A numbers between the times of the financial crisis
and after the economic recovery is apparent. The difference is depicted below. The data of the
deal numbers was obtained from the M&A information platform Zephyr, while the historical
data of the Euro Stoxx 50 was gathered from Business Insider. The exact Zephyr inquiry can
be found in appendix A.

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Figure 1: M&A deals of SMEs during and after the financial crisis (Business Insider, 2018;
Zephyr, 2018)

The aforementioned circumstances lead to the following research question of the study on hand:

How do economic crises influence the motives of SMEs to engage in M&A activity?

To do so, the crisis of 2008/2009 was used as an exemplary economic crisis. A first
understanding will be developed to grasp what motives of SMEs exist to engage in M&A in
times of an economic crisis and how those might differ from the motives discussed in popular
academic M&A literature. Additionally, it will be assessed if SMEs behave differently in an
M&A situation compared to large companies. This research will help M&A professionals and
banks to gain a better understanding of the situation their clients might be in and hence lead to
a more adequate approach and possibly a higher likelihood of a successful M&A.

This paper will start out by giving a theoretical framework of the motives of SMEs to engage
in M&A, taking the economic situation into account. SMEs will be defined using the definition
of the European Union and the difference between a merger and an acquisition will be explained.
Afterward, it is presented what kinds of M&A exist, the motives to engage in such behavior
and environmental and economic forces discussed that might influence the decision to pursue
an M&A and the process itself. In the third chapter, the applied methodology will be presented.
It is discussed which research approach was chosen and what data was collected how.
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Furthermore, in this section, the type of data analysis is stated. The results of the data analysis
will be presented, and the findings will be explained. Ultimately, the limitations of this study
are described, recommendations are given and final remarks are made.

2. Theoretical framework
In order to suitably examine the research gap, a theoretical understanding needs to be developed.
First, SMEs are being defined as they are the economic actors in the focus of this study. Second,
the difference between a merger and an acquisition is stated, unrelated and related acquisitions
presented to the reader and a differentiation between vertical, horizontal and conglomerate
mergers made. After an understanding of M&A is developed, three major motives to engage in
M&A are explained. This will give a background why such behavior exists. Fourth, the business
environment of the companies and economic forces influencing the business are shown.
Afterward, the influences of an M&A decision on the stakeholders are given. Ultimately, the
risks of engaging in an M&A are highlighted. As a whole, the theoretical framework that is
being developed shows what SMEs and M&A are, how businesses are being influenced in their
M&A decision by the environment and how this in turn will affect the stakeholders. This will
give the ability to grasp the motives for an M&A by SMEs taking outside factors into account.

2.1 What are small and medium enterprises?

SMEs make up a large portion of the total economic value of most economies worldwide
(Ayyagari et al., 2007). Especially in Western Europe they have a historically large impact on
the economic well-being and are perceived as key drivers of innovation globally.
However, there is no clear definition of SMEs that is agreed upon in the academic literature nor
the business world (Abor & Quartey, 2010; Bacon & Hoque, 2005). Even the official definition
of SMEs by the World Bank and the European Union are not coherent (Berisha & Pula, 2015).
As the focus of the paper on hand will be on the European market and the collected data is from
sources in Europe, the definition of the European Union will be used in this study. The
definition of the European Commission (2003) distinguishes between micro, small and medium
sized companies. Micro companies have a staff headcount below 10 with a turnover lower than
2€ million or a balance sheet total lower than 2€ million. Small companies are restricted with a
headcount below 50 and a turnover or balance sheet total lower than 10€ million whereas
medium-sized companies have a staff headcount lower than 250 with a turnover lower than 50€
million or a balance sheet total lower than 43€ million.

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Table 1: European Commission SME definition (European Commission, 2003)

2.2 Merger and acquisition

In the business literature as well as in the academic discourse merger and acquisition are usually
considered jointly under the term M&A. Nevertheless, a differentiation has to be made even
though in both cases one or more companies change their business structure.

In acquisitions, an uneven distribution of power is observable where the buyer clearly has the
upper hand and will take over the control of the target company (Hagedoorn & Duysters, 2002).
The target generally does not have an assertive voice in the post-merger integration and future
decisions. Acquisitions are either related or unrelated. Related acquisition implies that the target
is in the same industry as the acquirer or at least shows potentials for economies of scale and
scope in the production (Singh & Montgomery, 1987). Unrelated acquisition follows the logic
to diversify the buyer’s portfolio (Nahavandi & Malekzadeh, 1988). The target offers a way to
enter a new market with less effort than setting up the business oneself. Yet, unrelated
acquisitions are said to be less beneficial than related ones in terms of performance (Hubbard
& Palia, 1999; Tuch & O`Sullivan, 2007). Furthermore, related acquisition is more likely to
generate benefits in corporate control due to the fact that a diversified portfolio needs to be
managed more intensively (Tuch & O`Sullivan, 2007).

In contrast to acquisitions are mergers in regard to power distribution, as the difference in power
is often only marginal. Here two or more firms form a new entity together. A dominant partner
might exist but the other(s) still has a voice in the decision-making process. Three types of
mergers can be identified: vertical, horizontal and conglomerate mergers (Chatterjee, 1986;
Lubatkin, 1983). In vertical mergers, the merging companies are active in the same industries
and their business operation is related in the way that “one can use the other’s products or
services as input for its own production or can supply output as the other’s input” (Fan & Goyal,
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2006, p. 879). A possible relationship between two firms in a vertical merger is a customer-
supplier relationship. Similar is the horizontal merger in which the merging firms are also active
in the same industry (Nagurney, 2009). The distinction is that the merging businesses have the
same stage of production of their products and can profit from a larger market power, synergies
and economies of scale and scope (Farrell & Shapiro, 2001). Different from vertical and
horizontal mergers are conglomerate mergers where the companies are active in nonrelated
industries (Tjemkes, 2017). Synergies and economies of scale and scope can rarely be achieved
besides financial synergies (Chatterjee, 1986). The driving idea of conglomerate mergers is
often the reduction of risk (Amihud & Lev, 1981) or managerial motives (Matsusaka, 1993).

2.3 Hostile and friendly takeovers

Having identified different types of M&A, it is now presented how deals may be approached.
An acquisition of a publicly traded company can generally be either friendly or hostile.
However, this does not apply to SMEs as they are not publicly traded but it must be mentioned
for reasons of completeness. According to Martin and McConnell (1991, p. 683), a “takeover
is classified as hostile if the initial reaction by target management is to resist the tender offer.”
In a hostile takeover, the management of the target is not approached by the buyer with a tender
offer. Stockholders are given an offer directly or the stockholders are approached after the initial
negotiation with the management of the target fails (Morck, Shleifer, & Vishny, 1989, Schnitzer,
1996). In friendly takeovers the target and the buyer come to an agreement and shares are
bought at a negotiated price (Schwert, 2000).
Hostile acquisitions are often done as a means to discipline the current management of a
company which is perceived to be ineffective in maximizing the shareholder value (Morck et
al., 1989; Shivdasani, 1993). Following the acquisition, the acquiring firm often changes the
strategic orientation of the target to minimize existing inefficiencies (Martin & McConnell,
1991).

On the contrary friendly takeovers are usually driven by the prospect of synergies of the two
(or more) firms after the acquisition (Healy, Palepu, & Rubeck, 1997; Morck, Shleifer, &
Vishny, 1988). In most cases there are fewer bidders in a friendly takeover as the range of
companies that will experience synergies after the acquisition is smaller than the number of
companies that would potentially benefit from replacing the current management or changing
the strategic orientation (Bradley et al., 1988). Overall, the amount of friendly and hostile
takeovers is in aggregate distributed evenly (Martin & McConnell, 1991).

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2.4 Motives for M&A activity
The motivation for a firm to engage in M&A activity are manifold (Berkovitch & Narayanan,
1993; Haleblian et al., 2009; Mukherjee, Kiymaz, & Baker, 2004; Trautwein, 1990). They can
be seen as almost identical in SMEs and larger companies except for the absence of
entrenchment and empire building in SMEs (Weitzel & McCarthy, 2011). Additionally,
Arvanitis and Stucki (2015) state that agency related problems do usually not exist as often the
CEO is the largest shareholder. These motives will not be discussed as the focus is on M&A
activity in SMEs. In the following cost saving (synergies and economies of scale and scope),
managerial motives and knowledge and technology acquisition are discussed as the three large
motives.

2.4.1 Cost saving motives (synergies and economies of scale and scope)
The first large motive for M&A activity discussed is the goal to save costs. This might be the
most prominent motivation to engage in a merger and acquisition (Mukherjee et al., 2004).
According to Goold & Campbell (1998), firms often justify their acquisitions with the potential
of shared resources that are a result of the acquisition. They define synergies as “the ability of
two or more units or companies to generate greater value working together than they could
working apart” (Goold & Campbell, 1998, p. 133). Synergies can then be used to renew the
product portfolio of the merging firms (Hoberg & Phillips, 2010). An improved offering will
most likely result in higher market returns which will then maximize the shareholder profit. The
degree of synergy realization has been identified to be useful to measure the success of a merger
or acquisition. The higher the synergistic gains are, the higher the additional value that can be
achieved by combining two businesses (Larsson & Finkelstein, 1999). Another aspect that falls
under the cost savings motive is market power. An increase in size will result in a better
bargaining position towards suppliers (Chipty, 1995). Logically, the acquiring company can
save costs in the sourcing.
However, a difference needs to be made between mergers and acquisition. Mergers, rather than
the previously discussed acquisitions, are used for the cost saving motives of economies of
scale and scope such as the decision of a joint sourcing, marketing or production (Brouthers,
van Hastenburg, & van den Ven, 1998; Dranove & Shanley, 1995). Houston, James and
Ryngaert (2001) for example make it apparent that banks experience cost saving gains
especially, after a merger.
Nevertheless, it needs to be noted that even though there is clear evidence that synergies and
economies of scope and scale can be accomplished, the potentially saved costs are often

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overestimated pre-merger or pre-acquisition (Fiorentino & Garzella, 2015; Rhodes-Kropf,
Robinson, & Viswanathan, 2004) which is often related to managerial hubris that will be
discussed in the next section.

2.4.2 Managerial motives

Managerial motives are one of the reasons that have to be considered to understand why firms
engage in M&A activity. One of the largest managerial motives is the managerial hubris.
Possibly the first academic scholar to acknowledge managerial hubris was Roll in 1986. Roll
argues that “decision makers in acquiring firms pay too much for their targets on average” (Roll,
1986, p. 212). This can only be explained by hubris, meaning that CEOs over evaluate the
benefits they will be able to achieve by the acquisition.
Furthermore, managerial hubris can be used to explain overpayment in M&A as again the
managers over evaluates the benefits and at the same time the interest of the stockholders and
the management might not align (Black, 1989). However, Sanders (2001) asserts such behavior
to the fact that CEOs aim to increase their own earnings due to the positive effect that M&A
activity might have on their stock options, making it another managerial motive on its own.

Another aspect of the managerial hubris is the reliance on experience. Brouthers et al. (1998)
see one of the reasons why firms engage in merger activity and subsequently fail is the fact that
the management believes their experience to be more vast and dependable than it actually is.
Overconfidently managers recurrently misjudge the risks of engaging in an M&A and feel like
they can accomplish greater success than others (Doukas & Petmezas, 2007; Malmendier &
Tate, 2005). Hubristic managers are more likely to be active in M&A if the goal is to diversify
and no external financing is needed to complete the deal (Malmendier & Tate, 2008). The issue
of CEO overconfidence can be characterized as a global issue (Ferris, Jayaraman, & Sabherwal,
2013).

Also, narcissism has to be taken into consideration when discussing merger and acquisition
activity due to managerial motives. Chatterjee and Hambrick (2007) find that narcissistic CEOs
are more likely to choose bold action such as M&A which will result in big wins or big losses.
Another managerial motive that will lead to an engagement in M&A is the age of the owner
which can specifically be observed in SMEs (Yasumaru, 2009). With increasing age and no
succession, owners decide to sell their business to be able to enjoy their retirement. For SMEs,
the age (i.e. retirement) is one of the main reasons to engage in an M&A (Bruce & Picard, 2006).

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2.4.3 Knowledge and technology acquisition
Following the resource-based view, firms achieve a sustained competitive advantage due to
their respective unique resources and combination of the resources available to them (Barney,
1991). Two important resources that firms can leverage to achieve such a competitive
advantage are knowledge and technology.

According to Jones, Lanctot and Teegen (2001) SMEs are restricted in their access to resources
to be able to create a new technology. The development of the missing resources might be
impossible to achieve due to various reasons such as too time consuming or too expensive
(Granstrand, Bohlin, Oskarsson, & Sjöberg, 1992; Hagedoorn, 1993). Hence, firms turn to
external sourcing as a part of their technology strategy. Technological innovation will help the
acquiring firms to maintain their competitive position, enter new markets that could not be
suitably served before or even be in a technological leadership position to achieve a first-mover
advantage (Liebermann & Montgomery, 1998; Zahra, Sisodia, & Das, 1994). Especially
technology-driven startups, that often classify as SMEs, are increasingly the target group of
large multinational companies that seek innovation.

The acquisition of knowledge is mostly driven by the intention to develop new skills which will
lead the acquiring firm to competitive success (Inkpen, 1998). Furthermore, learning as a key
part of knowledge “allows a firm to generate new knowledge about markets, technologies,
processes, product and service concepts, and business models” (Tjemkes, Vos, & Burgers, 2017,
p. 155). Implementing the acquired knowledge plays a crucial factor in the usefulness of the
acquisition. Without an adequate integration the new knowledge cannot be used and will
subsequently be lost (Grant, 1999).

2.5 Environmental contingencies and risk of M&A

An aspect that has to be taken into consideration when examining M&A are the business
environment and the economic forces at work. This helps to further explain the situation of
engaging in M&A and what drives companies to do so besides the general motives presented
above. In the following environmental factors on the business in regard to the economic
situation will be illustrated. Then, the stakeholders of an M&A will be looked at and lastly, the
risk of M&A will be discussed. The environment and the stakeholders are interrelated, however
for the sake of this study a joint consideration is neglected.

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2.5.1 Environmental factors, dynamic and static environments
Unexpected shocks such as an economic crisis create discontinuities and uncertainty in the
business environment (Sirmon, Hitt, & Ireland, 2007). Economic downturns are characterized
by a decreasing demand and an overall shortage of (monetary) resources. Therefore, the
profitability and growth of the firm are expected to decrease with an increasingly dynamic
situation (Baum & Wally, 2003). Firms are likely to sell parts of their business if the access to
the capital market is restricted to gain a certain financial well-being (Lang, Poulsen, & Stulz,
1995). At the same time, there is a higher need for information to properly assess a situation
(Smart & Vertinsky, 1984). Waschiczek (2008) reports that during and following the financial
crisis of 2008/2009 a ‘credit crunch’ was observable. Implying that banks were giving out fewer
loans which most likely resulted in the fact that externally financed M&A were even more
implausible. According to Duett, Oayyum and Welch (2010) a downturn in M&A activity
during and following the financial crisis 2008/2009 was observable. The uncertain overall
situation and restricted access to capital lead to a drop in the amount of M&As in comparison
to other means of collaboration (Folta, 1998).

Davis, Eisenhardt and Bingham (2009) argue that “highly dynamic environments require
flexibility” (p. 415). SMEs are seen to be better fit for dynamic environments and will adapt
more quickly to the newly imposed requirements of the surrounding (Carney, 2005; Jennings
& Beaver, 1997). Small and young firms are identified as being the initiators of discontinuous
innovation (Tushman & Anderson, 1986), making themselves independent from environmental
factors to a certain extent. For larger companies this represents the opportunity to acquire and
integrate such an innovative business to mitigate the crisis situation. But as discussed above,
the restrictions of the capital market and uncertainty in a crisis situation will make it less likely
that a business engages in an M&A activity than in a stable, static environment leading to an
overall reduced amount of M&As.

2.5.2 Stakeholders in M&A

Also to be taken into account when looking at M&A activity are the stakeholders of a business.
Aside from outside factors that influence the firm as discussed above, the business itself will
also influence groups and individuals by engaging in M&A. Below, the effects of the M&A on
the stakeholders (shareholders, banks, consumers, employees and management) are shortly
described.

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Following Friedman´s shareholder theory, the main objective of a business is to maximize the
value for the shareholders (Smith, 2003). Depending on the M&A, the shareholders might
experience a monetary increase or decrease. According to Haleblian et al. (2009), mixed results
are observable, and the main value increase can be attributed to the target. Despite this fact, the
attention is more on the shareholders of the target who will often receive a premium when
another firm is seeking to take over control.
Banks play a significant role in M&A activities since large amounts of capital are necessary to
complete a deal. If an external loan is not given by the banks an M&A would often not be
possible. Banks even influence the type of M&A that the buyer pursues (Hayward, 2003). It is
worth highlighting that the success of the financed M&A is in the bank interest. It not only
ensures the repayment of the loan but will also lead to potential future business opportunities.
Furthermore, the effect of an M&A on the consumers can be seen ambiguous. On the one hand,
consumers will profit from an increased innovation potential by the merged firms due to
knowledge pooling (Bena & Li, 2014) and a possible price decrease caused by synergies that
minimize the production costs (Davis & Wilson, 2008). On the other hand, it is possible that
consumers have to expect an increase in prices caused by greater market power and the
possibility to better coordinate the price level (Phillips & Zhdanov, 2012).
Additionally, the employees and management of the merging firms will be affected by this
action whereas the depth of change can vary from one M&A to another. An adaption to the
culture of the other firm has to be made and the former organizational identities have to be
adjusted to each other (Clark, Gioia, Ketchen, & Thomas, 2010). Besides the possible changes
in culture and identity changes in the working environment and tasks, lack of information and
lost talents have to be anticipated (Appelbaum, Gandell, Shapiro, Belisle, & Hoeven, 2000).
Despite the fact that M&A activity might have a positive effect on the compensation of the
management, it represents a large stress factor (Cartwright & Cooper, 1993) and hence a risk.

2.5.3 Risks of M&A

While M&A represents large opportunities to a business, the risks associated should not be
neglected. There are multiple problematic issues that may arise before, during and after the
M&A process. M&As represent periods of stress for the business, resulting in more than 70%
of all CEOs leaving the company within five years after the finalization of an M&A deal (Krug
& Aguilera, 2005). With a resigning CEO companies often lose an identification figure that
controls the operations of the business. Furthermore, M&As are not always value creating.
Haleblian et al. (2009) argue, that CEOs act on their own agenda neglecting the interests of the

11
shareholder and destroy value in their drive to maximize their own compensation. Additionally,
it has been observed that a long-term value increase for the acquiring firm is still questionable
(Cartwright & Schoenberg, 2006).

An obstacle that has to be carefully observed is a clash of culture of the merging organizations.
Cultural issues are one of the main reasons for the failures of merger and acquisitions (Kummer,
2009). If two very different cultures exist within the firms, an integration of the teams will be
more difficult and the potential for conflict is greatly increased (Cartwright & Cooper, 2012).
Also, related to the risk of integration failure is the risk of knowledge loss due to critical
personnel being disrupted by the M&A (Paruchuiri, Nekar, & Hambrick, 2006). Small,
innovative companies might lose their value to the buyer if key mechanisms are discontinued.
Nevertheless, M&A´s still are an attractive way for firms to save costs in the long term, acquire
knowledge and technology, or build a company empire.

Now an understanding of the academic literature covering SME, M&A, its motives,
stakeholders and risks was developed. It can be stated that each of the theoretical aspects has
been mostly thoroughly studied but not combined. To further investigate why SMEs engage in
M&A activity, taking the economic situation into consideration, new theory needs to be
developed. The antecedent literature hereby builds the basis for the examination on which a
new concept is being devised.

12
3. Methods

3.1 Research design

Since the goal of this paper is to explore the actions of SME owners and it is thought to find
patterns in the data to detect what reasons might exist a qualitative, explorative research
approach is used. Furthermore, a qualitative research model is used as it “consists of a set of
interpretive, material practices that make the world visible” (Denzin & Lincoln, 2011, p. 3).
Opposed to quantitative research, qualitative research is not conducted in a value free manner,
following the research philosophy of interpretivism, where data is subject to non-objective
interaction and a value-bound inquiry (Weber, 2004; Williams, 2000). The research of this
thesis can be categorized as inductive. In inductive research, it is sought to develop theory from
the data collected (Hodkinson, 2008) and it is closely connected to qualitative research
(Stenbacka, 2001). With the described bottom-up approach grounded theory is developed.
Grounded theory refers to “a general methodology for developing theory that is grounded in
data systematically gathered and analyzed” (Strauss & Corbin, 1994, p. 273). Grounded theory
can be used to discover intrapersonal relationship (Glaser & Strauss, 2017; Charmaz &
Belgrave, 2007). In this case, the individual motive to engage in an M&A represents the
intrapersonal relationship. Furthermore, grounded theory may help to prevent a practical but
non-fitting use of theories but leads to a sounds development of new theoretical concepts
(Glaser & Strauss, 2017).

3.2 Research context

The research context is given to establish a transferability. In addition, an overview of all
interviewees is given later on. The data collection for this research was conducted in Germany
and the Netherlands. In both countries, SMEs contribute a large percentage of the respective
national GDP. Ayyagari et al. (2007) found that in the Netherlands SMEs contributed on
average 50% and in Germany 42.5% to the GDP in 1990 to 1999. Also, the economies of both
countries were affected by the financial crisis 2008/2009 (Van der Heijden, Dol, & Oxley,
2011), which implies an effect on the SME sector. The data collection took place in the May
and June of 2018. All face to face data collection took place in Amsterdam. During the data
collection, a focus was put on the M&A behavior of SMEs in times of economic crisis.

13
3.3 Data collection

3.3.1 Sampling
To ensure that the data collection is informative enough to be able to find meaningful patterns
within the data, interviewees were selected on the basis of their current job or their past work
experience. An approach of purposive sampling was pursued as this helps to legitimize the
relevance of the data collected from each of the respective interviewees (Palinkas et al., 2015).
M&A professionals, private equity professionals and (former) owners were chosen and
approached on the professional social network LinkedIn or contact details were gathered from
the respective company website. The choice of M&A and private equity professionals as
interviewees helps to increase the scope of the data collection. While owners have vast
information and experience in their specific case, they do not have a broad overview and cannot
report on multiple cases. Additionally, M&A professionals are able to distinguish differences
between M&A in SMEs and large companies. To minimize the selection bias, potential
interviewees were approached individually based on their employment or experience. It was
chosen not to send general emails to companies. Selection bias refers to the dilemma that the
data selected does not suitably reflect the actual situation that is being examined (Collier, 1995).
To increase the credibility of the data a member check was conducted. Each of the interviewees
was sent a transcript of the interview and asked for feedback.

3.3.2 Sample
The gender among the interviewees was unequally distributed, only two out of the thirteen
interviewees were female. Also, there was a variance in their profession. Five interviewees are
M&A professionals, one is employed at a private equity firm, one is an asset manager, five are
former SME owners and one is an individual that still owns an SME but considered to sell in
the past. An overview of age, gender, profession and country of (former) occupation of the
interviewees can be found below in the table.

14
Table 2: Overview of the interviewees
Interviewee Profession Country of (former) occupation Age Gender
Interviewee 1 M&A professional The Netherlands 29 M
Interviewee 2 M&A professional The Netherlands 28 M
Interviewee 3 M&A professional The Netherlands 28 M
Interviewee 4 M&A professional Germany 41 M
Interviewee 5 M&A professional Germany 38 M
Interviewee 6 Private Equity professional The Netherlands 30 M
Interviewee 7 Asset manager The Netherlands 37 M
Interviewee 8 SME owner Germany 70 M
Interviewee 9 Former SME owner Germany 60 F
Interviewee 10 Former SME owner Germany 63 F
Interviewee 11 Former SME owner Germany 74 M
Interviewee 12 Former SME owner Germany 48 M
Interviewee 13 Former SME owner Germany 58 M

3.3.3 Interview design

The interviews were conducted in a semi-structured manner. Besides the existing list of
questions, additional questions were developed spontaneously depending on the responses of
the interviewee. The existing list of questions was derived from the theoretical framework of
this study and aimed to cover the points discussed. The choice to conduct semi-structured
interviews was made as this gives the chance to elaborate on topics that were not previously
discussed in the literature review and were not in the focus of the interview but might still be
relevant and will help to subsequently answer the research question (Gioia, Corley, & Hamilton,
2012). Furthermore, semi-structured interviews qualify as an appropriate type of data collection
of an exploratory study (Saunders, Lewis & Thornhill, 2012).

Out of the thirteen interviews, nine were conducted by phone and the remaining four were
conducted face to face. A small distinction between phone interviews and face to face
interviews needs to be made. Face to face interviews are more conclusive as emotions and
reactions of the interviewees can be interpreted and may be used to guide the interview
procedure. Additionally, it is argued that nonverbal data is lost if phone interviews are
conducted (Novick, 2008). Nevertheless, phone interviews are a valid means to collect

15
qualitative data. They seem not to result in much of a difference information-quality wise
(Sturges & Hanrahan, 2004) and might help to uncover sensitive information that individuals
are not comfortable to share in a personal meeting (Saunders et al., 2012). Previous to the
interviews, the interviewees received information about the general topic that was to be
discussed, the information that the interviews will be used for a master thesis and that it will be
ensured that all information will be treated confidentially (see appendix B). During the
interview, a list of questions acted as the research guide, providing structure. The research
question was not revealed during the interview (see appendix C). All interviews were recorded
with the consent of the interviewees and transcribed afterward. The transcripts of the interviews
can be found in appendix E.

3.4 Data analysis

The transcripts of the interviews were used to conduct a data analyses. For the data analyses,
an open coding approach was pursued, looking at the data without presumptions. Within the
open coding approach, it is intended to detect patterns in the data (Gioia et al. 2012). The coding
process was conducted with the computer program Atlas.ti. In the first step of the coding
process, the transcripts were read, and quotes were attributed with 1st order concepts, following
the logic of in vivo coding (Strauss & Corbin, 1998). Second, the vast number of 1 st order
concepts were then used to develop 2 nd order themes that group the most prominent 1 st order
concepts. Ultimately, the second order themes were used in combination with the first order
concepts to examine their relationship among each other and on that basis, aggregate
dimensions were developed (Ritchie, Lewis, Nicholls, & Ormston, 2003). An exemplary data
structure is presented in figure 2 below to make the process more comprehensible. A code-
recode procedure was conducted. After the first coding, the data was coded again after a
timeframe of 5 days and the results were compared to improve the dependability.

16
Figure 2: Conceptualization of the data structure

4. Findings
The figure below depicts the four aggregate dimensions that emerged after the careful analysis
of the data with their second order themes. At the beginning of each section (4.1 – 4.4), the
aggregate dimensions are shown with the corresponding first order concepts and second order
themes that led to the respective aggregate dimension. The aggregate dimensions found are the
non-linear M&A process in SMEs, age motive escalation, desire for synergies and knowledge
acquisition increased and insufficient offers. Additionally, tables are supplied in appendix D to
give supporting data to the first order concepts chosen in order to show their relatedness to the
data collected.

Figure 3: Aggregate dimensions of the findings

17
First, the differences between SMEs and larger companies in an M&A setting will be elaborated.
This will make it easier to understand the findings regarding the influence of times of economic
hardships on the motives of SMEs to engage in M&A. It was found that in comparison to larger
companies the M&A process in SMEs can be understood as a non-linear act. As a second step,
it is explained how the managerial motive to sell a company due to age-related issues is
escalated in times of economic hardship. Further, the data suggests that the desire to engage in
an M&A process to reach synergies and acquire technology is increased in times of economic
crisis. The findings will close with the presentation of the problem of insufficient offers that
owners are facing in times of economic hardship which subsequently lead to the decision not
to engage in M&A activity.

18
4.1 Non-linear M&A process in SMEs
The data suggests that in comparison to the M&A process in larger companies, M&A in SMEs
is less linear and not as goal driven. This especially seems to be influenced by the information
supply and hesitance to sell by the owners. The data structure for this finding can be seen below.
The second order themes and first order concepts are discussed in the following.

Figure 4: Data structure non-linear M&A process in SMEs

4.1.1 Information supply

Most interviewees saw a clear difference between SMEs and larger companies in the
organization of the company which has also an influence on the M&A process. The
organization includes for example the division of tasks and hierarchy of the business. The
information supply to advance and conclude an M&A deal is often more problematic in an SME
compared to a larger company. This mostly stems from the fact that SMEs are less organized
and business controlling is inadequate.

4.1.1.1 Less organized

It was found that SMEs are often reliant on one person or a group of persons that lead the
business in contrast to larger companies where a clear structure and hierarchy is recognizable.

19
Interviewee 6 described that “if you go to the higher mid-market and also to the larger
companies, mostly there's a good management team, second tier management team, there's a
CFO, there's a CEO and there's more structure in place“. Due to the lower level of organization
of the SME it is often more difficult to obtain information needed. More involvement is asked
of M&A professionals to be able to advance the M&A process. SMEs seem to be unprepared
for the M&A process and lack a clear division of labor and definition of roles which makes it
harder for the involved parties to obtain information and develop a clear, structured process.

4.1.1.2 Inadequate business controlling

Another concept that was found is the inadequate business controlling that seems to be apparent
in SMEs. Especially financial information is hard to obtain for the personnel that is in charge
of closing the M&A deal and financials might not be very precise which hinders the progress.
Numbers have to be checked and can sometimes not be incorporated without care. It was said
that “you have to be there and collect the things yourself. That is one thing and the other is that
SMEs also need a little more convincing so that some things are disclosed” (Interviewee 4).
SMEs are warier about what information they give out in case the M&A process fails at a certain
point whereas large (stock) listed companies in most cases are required by law to disclose their
financials which significantly increases the flow of financial information.

4.1.2 Hesitance to sell

The second theme, which can later be agglomerated in non-linear M&A process in SMEs, is
the hesitance to sell. The data suggests that owners of SMEs behave differently in the M&A
process with regard to the emotions at play. Before and during the M&A, SME owners seem to
be in an emotional conflict.

4.1.2.1 Emotional attachment to the name

From the data collected one might assume that owners of SMEs are attached to the name of the
company and are in fear of losing the name. This is especially applicable for owners of family
businesses. The name represents the entrepreneurial success of the family and is not easily given
up on. Furthermore, it stands for the history of the company and is something that the respective
family can identify with. When asked if owners of family businesses are more hesitant to sell
due to their name interviewee 5 responded: “In Germany, yes. […] Even more extreme than
Germany is Italy where this family tradition is extremely strong, one fights to the last not to
sell”. This quote underlines the existing bond between owners and the family business and its

20
name. Even an economically challenging situation is sometimes not sufficient to enforce an
M&A.

4.1.2.2 Emotional attachment to employees

Another difference that became apparent is the emotional attachment to the employees that
influences the M&A process in SMEs. The relationship in SMEs is different than in larger
companies where a certain anonymity for the employees within the company will remain. A
close connection between the employees and the owners seems to exist. Furthermore, the owner
often knows the employees personally. This is reflected in the M&A process in the manner that
when a company is to be sold the owner attaches great importance on the fact that his or her
employees are not fired or at least treated fair. One former owner explained that “We also didn't
want to make a sale to someone who cuts many jobs, so that the former employees change sides
of the street when they see us“ (Interviewee 9).

4.1.2.3 Sympathy for the buyer needed

The last concept that can be grouped under the hesitance to sell is the needed sympathy for
the buyer. For a former owner “it was extremely important that out of the people that asked
me at some point “tell me…”, I found someone whom I firstly found personally sympathetic,
of whom I was convinced that he had the highest degree of personal integrity” (Interviewee
11). This is closely connected to the emotional attachment to the name and the employees. If
sympathy is not given, the owner of an SME is likely to be hesitant to sell the business. All
(former) business owners stated that this is an important factor in the search of a buyer and
was also confirmed by almost all other interviewees.

21
4.2 Age motive escalation
From the data collected it can be said that the motive of SME owners to sell his or her company
due to their age is escalated in times of an economic crisis. The owner that already felt like it is
time to retire is further pushed towards a sale to escape the difficult situation and have a carefree
retirement. The antecedents of this are shown and explained below.

Figure 5: Data structure escalation of age motive

4.2.1 Outside pressure

Owners seem to be influenced in times of crisis from the inside of the company and the outside.
By the outside, factors and stakeholders are meant that are connected to the business while the
inside is the business itself. The data points towards the bank, decreasing prices and the loss of
customers in a situation of economic crisis to pressure owners to sell, subsequently escalating
the age motive.

4.2.1.1 Bank
In an economic crisis financial resources are scarce. During the financial crisis of 2008/2009 a
credit crunch was reported, implying that the general availability of loans greatly decreased.
This results in the fact that businesses are unlikely to receive a loan in such economic
circumstances. One interviewee 9 reported that this might lead to a problematic situation for a

22
business, as necessary investments cannot be made, hence exacerbating the already bad
performance. Besides the lower availability of debt financing, banks will try to minimize their
risks in a time of economic distress. This also includes that if “you cannot pay back your loans,
so then you automatically become a distressed company and they [the bank] will force you to
sell it” (Interviewee 1). Of course, this represents the extreme, however it shows the increased
pressure to opt for the possibility to sell the business.

4.2.1.2 Decreasing price

In times of economic hardship, the performance of a business will most likely decrease except
for when it is active in a crisis stable market or can be identified as a profiteer (e.g. repossession).
A decrease in performance will also impact the realized price for the business if sold. When
affected by an economic crisis, the firm value will also steadily decrease. Interviewee 3 further
remarked that “you don't want to be last one [to sell]”. In addition to the market situation that
negatively influences the value, is that a potential buyer will lose “appetite” if other businesses
were already acquired in earlier stages of the crisis. These circumstances create a pressure on
owners of (small and medium-sized) businesses to sell their company for a decent price.

4.2.1.3 Lower income

The spiraling economy in a crisis will also negatively impact the company in the sales volume.
As the overall willingness to pay is decreased, fewer customers will consume the products of
the business. Interviewee 8 stated that during the financial crisis of 2008/2009 the main
customer in their B2B relationship went bankrupt bringing the business in a distressed situation.
Interviewee 5 gives the whole picture of the situation: “after the fall of Lehmann there was an
absolute shock in the markets and this meant an absolute investment stop, an order-stop for all
companies. Accordingly, horrendous declines in sales and this led to many bankruptcies.” As
described, reduced sales may in extreme cases lead to bankruptcies. At the least they will inflict
a lower performance which might cause the decision of the owner to exit before the situation
exacerbates.

4.2.2 Inside pressure

Opposed to the outside pressure, inside pressure originates from the inner circle of a business.
Owners of SMEs are often the sole shareholder or share their possession of the company only
with a small number of individuals. These circumstances result in a strong pressure on the
owner to sell since in most cases an emotional attachment to the respective group exists.

23
4.2.2.1 Shareholders
„When the economy goes bad the shareholders have a say and depending on who gets payed
back at one point, the shareholders might say: "ok, lets sell the company. Then at least we get
something instead of just filing for bankruptcy”” (interviewee 1). This quote vividly describes
the situation that seems to occur in a crisis. Instead of waiting for the company to go bankrupt
a number of shareholders pressures the other shareholders to sell the company to “get the last
bit”. In comparison to a larger company, the shareholders of smaller companies often hold a
large share and have a voice in the decision-making process. Especially passive shareholders
are inclined to push a sale as interviewee 3 mentioned during the interview.

4.2.2.2 Family
The first order concept family refers, on the one hand, to a missing succession within the family
business that might lead to the fact that a family business owner might decide to exit when a
situation of economic hardship arises to have the possibility to enjoy his or her retirement. On
the other hand, it refers to the pressure that is put on him or her by the family members who
push the owner in a situation of emotional stress. Interviewee 1 said a reason to decide for an
exit in a crisis situation might in reality be “his wife who says: "come on, lets enjoy our life"”.
A case like this can only be seen in family owned SMEs, influences of the family on the decision
maker have far reaching consequences.

24
4.3 Desire for synergies and knowledge acquisition increased
If during an economic crisis a company’s business model is no longer successful, the business
will try to cut down on costs while searching for new sources of income. Synergies promise
quick results in the cost savings while, for example, new knowledge can enable a company to
develop new products. The data suggests that a desire for synergies and acquisition increases
in times of an economic crisis, but no M&A action will follow for the reasons discussed in the
next section.

Figure 6: Data structure desire for synergies and knowledge acquisition increased

4.3.1 Cost saving synergies

To limit the damaging economic effect of a crisis on a business, owners will pursue a strategy
of cost savings. As the income is low and also only very little financing is available, decision
makers will try to limit the expenditures to have some liquidity left.

4.3.1.1 Economies of scale

Economies of scale were discussed earlier as one of the main reasons why companies engage
in M&A. During a crisis situation the business can save costs due to economies of scale. With,
for example, a combined production of two companies the costs per unit will decrease and a
higher margin will be reached. In a crisis situation, the increased margin can be of great

25
importance. The statement of interviewee 2 supports this: “sometimes it's better to combine
with another company. You can then save your company because of the synergies”.

4.3.1.2 Buyer power

Another way to save costs quickly is the synergy of having a higher negotiation power in the
bargaining process with the suppliers. If a business offers a product that needs to be
manufactured, it can source the raw materials for a lower price. It was stated in the interviews
collected by one of the former owners that after the acquisition “He [the new owner] also
brought the purchasing department together, which naturally led to an improvement in
purchasing conditions” (interviewee 9).

4.3.2 New sources of income

Besides saving costs, the owner of a business is likely to seek out the development of new
sources of income to overcome the problematic economic situation or at least mitigate its effects.

4.3.2.1 Independence of crisis

During an economic crisis “there are still companies showing good performance and at that
time this is probably because of a specific segment” (interviewee 2). This will motivate the
business to develop the same product or at least have a shift in this product direction to be able
to gain an independence from the crisis and not be stuck in the situation with the majority of
the market. An M&A can enable this shift.

4.3.2.2 Knowledge combination

The potential to combine knowledge through an M&A seems to be a valid motive from the data
obtained. The advantage is that “with the new shareholder you can gain a lot of information
and potential that you did not have before” (interviewee 3). New knowledge will boost product
development and processes within the business can be streamlined. Owners can achieve a
performance increasing diversification, hence mitigating the effects of an economic downturn.

4.3.2.3 Risk mitigation

As already stated, in an economic crisis not only the business itself but also its customers and
the whole business surrounding will be affected. When asked if diversification was considered
when the financial crisis 2008/2009 deeply impacted the business of one of the interviewees,
the owner remarked: “That was precisely the idea of diversifying in this direction, so as not to

26
be dependent on one thing. We drew our conclusions from this [bankruptcy of the largest
customer]” (interviewee 8). Even in a crisis situation not all sectors are equally impacted. A
diversification mitigates the risk of a business.

4.4 Insufficient offers

Overarching above the motives to engage in an M&A is the decision whether to engage or not.
In times of crisis, an owner might decide to sell his or her business but the data suggests besides
the limited interest of buyers, owners ultimately refrain from selling the business due to
insufficient offers they receive. They value their business higher than the offer and will not
close the deal.

Figure 7: Data structure insufficient offers

4.4.1 Lower valuation

Business that are to be sold are valued on basis of their earnings (often EBITDA) and future
sales predictions. Depending on the current situation and the future outlook companies are
either priced higher or lower. In times of an economic hardship or crisis both factors are likely
to be negatively influenced resulting in a low valuation compared to the post crisis.

27
4.4.1.1 Lower performance
A number of financial figures can be used to measure performance. Under the most prominent
are the earnings before interests, taxes, depreciation and amortization (EBITDA) and return on
equity (ROE). With a lower sales volume that is closely connected to economic crises both
financial indicators will be negatively influenced, showing that the performance decreased. In
the financial crisis of 2008/2009 “horrendous declines in sales” (Interviewee 5) occurred.
Hence, performance of most businesses dropped which will subsequently lead to a lower
valuation of the business.

4.4.1.2 Lower sales forecast

The second factor influencing the valuation of a company is the sales forecast. It is used to
indicate the value of the company in the future which is a crucial element. A company that is
in a good current position but has a low forecast is often not very attractive for buyers. In the
situation of a crisis the forecast for almost the whole economy is low. Interviewee 1 described
that in a crisis the “numbers are a bit red which if you forecast it you would need a very good
business plan or business story for it to get the value that it might deserve or the value that it
might have within good time”. However, it was described in the interviews that some industries
might even experience a good forecast in times of economic distress. For example, business
involving car spare parts were in a good position as the demand their products experienced a
boost. Nevertheless, it seems evident from the data that this is only an exemption.

4.4.2 Lower interest of competitors

Influencing the insufficient offers is the low interest of competitors to engage in an M&A to
acquire the business. Antecedents of the low interest are the current situation of potential
buyers, the decrease amount of debt financing and the uncertainty of the market.

4.4.2.1 Current situation of potential buyers

From the data it may be concluded that it is very likely that a potential buyer of a business is
also negatively affected by an economic downturn. It can be said that “when you look at selling
your company to a competitor in bad economic times, the competitor has a hard time as well
and has to put a lot of time and energy into managing the company and then acquiring another
company is quite a big deal” (Interviewee 3). In times of an economic crisis, the potential buyer
is too absorbed with the own business and tries to maneuver it through the difficult situation
that resources will be focused on meeting that goal. Engaging in an acquisition or merger on
the sell side is not the top priority for most businesses.

28
4.4.2.2 Less debt financing available
As already described, a credit crunch can be observed in an economic crisis. This issue was
discussed on multiple occasions by the interviewees. A credit crunch implies that debt
financing becomes more difficult as less capital is available. To finance an M&A, debt
financing is often needed as the sums to take over another business are often high and the
equity capital is usually too low to finance it without involving other parties. Interviewee 2
described this dilemma: “if you need to attract like new investors or new equity to do the
acquisition, then it is already difficult because the times are hard. So, there is less money in
the market.”

4.4.2.3 Uncertainty
The last factor that seems to lead to a low interest to engage in an M&A by the competitors is
the uncertainty of the market. It is unknown how the situation will evolve. The resources needed
to engage in an M&A can be very valuable in the future and only a small number of businesses
will be willing to take the risk. Solid future market predictions cannot be made, hence the added
value of an M&A might be questionable. To describe the situation interviewee 4 pointed out:
“Everyone is keen to keep money in the dry in times of crisis, because there is uncertainty,
because you don't know how long the crisis will last and how much more money is needed to
overcome it.”

From the data gathered the propositions below in table 3 can be developed. They will be further
elaborated on in the theoretical implications.

Table 3: Research question and propositions

RQ How do economic crises influence the motives of SMEs to engage in M&A
activity?
Proposition 1 The model of the escalation of the age motive in times of an economic
crisis is proposed.
Proposition 2 It is proposed that particularly the motives to engage in an M&A to save
costs and obtain new knowledge or technology are largely restricted by
the lower availability of capital in times of an economic crisis.
Proposition 3 It is proposed that the emotional attachment to the company and some
stakeholders is a crucial factor that influences the motives of an SME
owner to engage in an M&A.

29
5. Discussion

5.1 Conclusion
This study used qualitative data to examine how economic crises influence the motives of SMEs
to engage in M&A activity. The data suggests that the motive to sell a company due to the age
of the owner is escalated. Pressure to engage in an M&A comes from the inside of the business
and the surrounding of the owner (shareholder, family) as well as from the outside (banks,
decreasing price, lower income). Additionally, it was found that business owners desire to
engage in an M&A to achieve synergies or to acquire new knowledge. Synergies and new
knowledge are seen as means to mitigate the effect of the economic downturn and stabilize
performance. However, it was found that it seems that ultimately no action is taken as only little
debt financing is available and uncertainty about the future economic situation exists. Another
contribution is the examination of why business owners refrain from selling their company in
times of an economic crisis. The data illustrates that owners may choose not to sell their
business due to insufficient offers they receive as they feel their business is worth more than
what is offered. The antecedents of the insufficient offers are the lower valuation of the
respective business due to a drop in sales, a low sales forecast and the lacking interest to acquire
of competitors. In a crisis situation, potential buyers seem not to focus on a possible M&A.
Also, the differences between an M&A of an SME and a large company was addressed. From
the data collected it may be concluded that the M&A process of SMEs is non-linear when
compared to larger businesses. The information supply of the involved parties seems to be
lacking since the businesses are often less organized and the business controlling tends to be
inadequate. Further, the decision to engage in an M&A is influenced by emotional factors. The
owners have a deep connection to the name and the employees of the company and usually,
sympathy for the acquirer is a must.

5.2 Theoretical implication

By combining and analyzing the data collected in the course of this study with regard to the age
motive and the motivation to engage in an M&A due to the age of the owner, previously
described by Bruce and Picard (2006) and Yasumaru (2009), it seems that business owners are
being pressured into engaging in M&A activity. Concluding the process that became apparent
in the data led to the first proposition:

30
Proposition 1: The model of the escalation of the age motive in times of an economic crisis is
proposed.

Figure 8: Escalation of the age motive

On the Y-axis of the model is the motivation to sell due to age, while on the X-axis is the
progression of the crisis. The modeled curve shows how the motivation to sell due to age
decreases and increases over the time of the crisis. In 1, the beginning of the crisis, the
motivation of the owner to engage in M&A due to reasons of age will decrease as the price he
or she will obtain when selling the company is lower. After the initial price drop, as the crisis
progresses, pressure from the outside and within the business will be put on the owner to sell
the company (2). The exact antecedents of the pressure are described in the previous section.
With the application of the pressure the motivation to exit of the owner due to her or his age
increases above the pre-crisis level, marked with 3 on the graph. After a while the motivation
peaks. At the peak, the pressure (4) and with it the motivation to sell is countered by the
potential obtained price which further declines as the economic crisis progresses. The
motivation to sell will constantly decrease until it drops below the pre-crisis motivation to exit
(5).

Previous literature describes the occurrence of a credit crunch in an economic crisis

(Waschiczeck, 2008). This will affect the whole M&A activity and a lower number of deals
may be observed (Duett et al., 2010; Folta, 1998). When investigating how the motives to

31
engage in M&A are affected by a crisis situation, it became apparent that cost saving and the
acquisition of new knowledge and technology are in theory very popular but can rarely be
observed to happen in times of an economic crisis. Therefore, the following is proposed:

Proposition 2: It is proposed that particularly the motives to engage in an M&A to save costs
and obtain new knowledge or technology are largely restricted by the lower availability of
capital in times of an economic crisis.

This research makes apparent that SMEs behave differently with regard to M&A as opposed to
larger companies. In an SME, the process is often less structured and overall a non-linear
process. Additionally, the emotions of the owner play a large role. In contrast, the M&A in
large companies can be seen as an unemotional process since the management team or board
of directors rarely represents the only shareholders and they cannot as deeply identify with the
business. The emotions at play can influence the judgment of the owner.

Proposition 3: It is proposed that the emotional attachment to the company and some
stakeholders is a crucial factor that influences the motives of an SME owner to engage in an
M&A.

5.3 Practical implications

The research of this thesis underlines the importance for M&A professionals and banks to
approach each owner that decides to engage in an M&A individually and not with a generic
one size fits all approach. A better understanding is created of the situation owners are in, during
an economic crisis. Understanding the owners position enables M&A professionals and bankers
to suitably approach them and increases the likelihood of a successful transaction. Furthermore,
the findings imply that M&A professionals should be aware that compared to an M&A of a
large (stock listed) company, it represents a very emotional decision for SME owners. This
might lead to hesitance to take action and conclude the sales process. Additionally, it shows
that professionals active in the M&A sector should be prepared to conduct an in-depth data
collection within the SME since the structure and processes are often not in place to supply all
necessary and suitable information up front.

Moreover, owners can learn from this research. Owners are made aware that the information
they present to the respective parties might not be suitable to conclude the M&A process and
that a revision of the information prepared is needed. Further, from the model of the escalating

32
age motive, it can be derived that an owner should pay close attention to the pressure applied
to them to engage in an M&A. The influences might lead to a not carefully thought out decision
to sell the company. It might be more beneficial to try to survive the crisis and proceed with an
exit afterward.

5.4 Limitations and future research

5.4.1 Limitations
Limitations of this research can be linked to the chosen research design. Qualitative research is
limited in representability and generalizability can only be considered carefully (Denzin &
Lincoln, 2011). Also, the amount of thirteen interviewees might not be enough to thoroughly
study the phenomena observed and different patterns in the data might have emerged with a
larger sample size. Additionally, the geological scope of the data collection limits this research
as data was collected only in the West European countries Germany and the Netherlands.
Owners from different regions of the world with a different cultural background might behave
differently. However, it was tried to overcome this dilemma by focusing on conducting
interviews with M&A professionals. Due to their professions, they receive a good overview
over M&A activity of SME owners and can report on multiple cases and not on just the
individual one. Furthermore, it needs to be kept in mind that only individuals that responded
positively to the interview inquiry could be interviewed. Especially owners that had to sell their
company and perceive this as a failure might not be open to sharing their insights, hence
rejecting the inquiry. Also, only the economic crisis of 2008/2009 was taken into consideration.
Other economic crisis might reveal a different behavior.

5.4.2 Future research

This study’s main focus was on how economic crises influence the motives of SME owners to
engage in M&A. The model of the escalation of the age motive was proposed. This model
should be tested in a longitudinal study. As of now, the model can be constructed from the data
gathered, however only a quantitative confirmation bears the possibility of generalizability.
Hereby the dependent variable could be defined and measured as the motivation to sell the
respective business. As for the independent variable, the obtained sales price could be used.
Moderating variables in this model could be the different outside and inside pressures described
earlier in the study.

33
Additionally, further research should concentrate on how the lower availability of debt
financing in times of economic crisis (credit crunch) affects SMEs in their M&A behavior.
Especially, how the capital restrictions influence the motives to reach synergies and acquire
new knowledge and technology should be investigated and a comparison to a stable economy
made. The research of Folta (1998) and Duett et al. (2010) may provide a fundament for future
advances as they examine the influences of times of economic distress on M&A activity. Until
now there has been some research in this direction but again the focus was on larger companies
and not on the SME sector.

34
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Appendix
Appendix A – Data inquiry Zephyr

Data on M&A activity of SMEs in the timeframes of 01.07.2008 to 31.12.2009 and 01.07.2015
to 31.12.2016 in the countries Germany and the Netherlands was collected from the M&A
database Zephyr. The timeframe was chosen to gain an overview of the differences in numbers
of M&A deals in times of a good economic situation and during the financial crisis. To collect
the data of the numbers of M&A deals, besides of the mentioned timeframes the following
search queries were used:

-Country: Germany, Netherlands (Acquiror OR Target OR Vendor)

-Company type: Individuals/Families (Acquiror OR Target OR Vendor)
-Company type: Company (Acquiror)
-Current deal status: Completed
-Listed/Unlisted/Delisted companies: unlisted target
-Deal type: Acquisition, Merger

Furthermore, the deals had to be completed-confirmed or completed-assumed in the respective

timeframe. The database Zephyr reveals that in the first timeframe chosen (bad economic
situation) 245 deals were completed in comparison in the timeframe of economic well-being
532 deals were completed. This represents a difference of 287 deals (117%).

44
Appendix B – Interview inquiry E-Mail

Dear X,

I am currently studying the business master „Strategy and Organization“ at the VU Amsterdam
and am in the process of writing my master thesis about M&A motives in SMEs. Due to your
job I believe that you would have valuable input for me. So, I would be very happy if you would
be open to be interviewed by me regarding said topic. All data collected will be treated
confidentially and only I will work with non-anonymized transcripts. I will be more than happy
to provide you with an overview of my findings or the whole document if requested.

Please let me know if you are open to participate and if so, when it would suit you best.

Thank you very much in advance! I look forward to your answer.

Best regards,

Lenart Ahlhoff

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Appendix C – Interview protocol

My name is Lenart Ahlhoff and I am a student of the master program business administration,
with the specialization strategy and organization at the Vrije Universiteit in Amsterdam. For
my graduation thesis I do research regarding merger and acquisition activity in SMEs, taking
the current economic situation in consideration. For this I would like to take an interview with
you. The length of the interview will be about 45-60 minutes. For this interview I would like to
make a sound recording and, on that basis, reports will be made of the interviews. Your data
will be treated confidentially, and your privacy will remain guaranteed at all times. If there are
any questions that you do not want to answer, you can indicate this, you have the right not to
answer these questions or even completely refrain from your participation in this research. I
really appreciate that you want to participate, and I would like to thank you in advance.

Question - Interviews

Introduction
1) Could you please tell me something about yourself. What you do in your job?
2) How long have you been active in your job?

Intro – motives
3) What is your experience with M&A?
4) Do you have experience regarding M&A in SMEs?
5) Where do you see the biggest difference between an M&A of an SMEs and a large company?
6) How do SMEs and large companies differ in risk taking in regard to M&A?
7) How important do you value the personal relationship to the buyer of the SME?

Motives
8) What motives of SME owners to engage in M&A activity are known to you?
9) What is the reason for these motives?
10) Why would an SME sell in times of economic hardship?
11) Why would an SME not sell in times of economic hardship?
12) Is it maybe more that uncertainty is a larger factor for the reason of the lower number of
M&A is a bad economic situation than really the situation itself?
13) Do you think a family owned business is more hesitant to sell as it’s the family name that
gets lost?
14) Why would an SME engage in M&A in times of prosperity or why not?
15) Is the consolidation of a sector an important factor in the decision to sell or buy?
16) What would be a reason from the outside for SMEs to sell your company?
17) What are usually the biggest stakeholder that are affected by an M&A decision?
18) Would you say that the motive of managerial hubris is applicable to SMEs?
19) Would you say that the motive of empire building is applicable to SMEs?
20) Would it make sense to you to merge or acquire with a different firm in times of economic
hardship with the goal to cut costs and have an ultimately higher chance of survival?

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Asymmetric investing
21) Would it not be beneficial to engage in an M&A in times of economic hardship as firms
tend to be valued lower and the multiples are not that high?
22) Wouldn’t it make sense to buy in hard economic times to acquire something that is unrelated
to the current economic situation?

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Appendix D – Representative data for 1st order themes

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