Acquisition Motives and the Distribution of Acquisition Performance

• Date: 01 December 2017
• DOI: http://doi.org/10.1002/smj.2686
• Author: Maryjane R. Rabier
• Published date: 01 December 2017

Strategic Management Journal

Strat. Mgmt. J.,38: 2666–2681 (2017)

Published online EarlyView 7 September 2017 in WileyOnline Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2686

Received 5 April 2015;Final revision received22 May 2017

Acquisition Motives and the Distribution

of Acquisition Performance

Maryjane R. Rabier*

Desautels Faculty of Management, McGill University, Montreal, Quebec, Canada

Research summary: I examine how acquisition motives relate to the distribution of

post-acquisition performance. I argue that acquisitions motivated by operating synergieshave the

potential to experience greatergains than acquisitions driven by nancial synergies but are harder

to value and implement, making them more uncertain. Using SEC lings, conference calls and

press releases to capture acquisition motives, I nd that acquirers pursuing operating synergies

are more likely to experiencehighly positive and highly negative long-term returns than acquirers

pursuing nancial synergies. I also nd that acquisition experience and geographic proximity to

targets soften acquirers’ extreme downside outcomes in operating synergy acquisitions. My the-

ory and results suggest that approaches that emphasize average outcomes for acquirers and use

industry classications to capture acquisition motives may be incomplete.

Managerial summary: Managers engage in acquisitions for various reasons. In this study,I nd

that reasons related to operating synergies (e.g., revenue growth through new product offerings

or cost savings through economies of scale) are more likely to result in extreme high and low

performance outcomes for the acquiring rm compared to reasons related to nancial synergies

(e.g., diversication of cash ow streams). In addition, I nd that the acquirer’s prior acquisition

experience and the geographic proximity between the target and acquirer help soften the extreme

low performance outcomes related to operating synergies. Copyright © 2017 John Wiley & Sons,

Ltd.

Linking acquisition motives to acquisition perfor-

mance is a long-standing issue in strategy research

(King, Dalton, Daily, & Covin, 2004; Seth, 1990b;

Walter & Barney, 1990). Prior research empha-

sizes the distinction between acquisition motives

related to operating synergies (i.e., gains achieved

through the combination of the acquirer’s and

target’s resources, such as revenue growth through

new product offerings or cost savings through

economies of scale) and acquisition motives related

to nancial synergies (i.e., gains achieved through

Keywords: acquisitions; operating synergies; nancial

synergies; public disclosures

*Correspondence to: Maryjane R. Rabier, Desautels Faculty

of Management, McGill University, 1001 Sherbrooke St W,

Montreal, Quebec H3A 1G5, Canada. E-mail: maryjane.rabier@

mcgill.ca

Copyright © 2017 John Wiley & Sons, Ltd.

the combination of the acquirer’s and target’s

nancial structure, including tax savings, lower cost

of capital, diversication of cash ow streams, and

extraction of gains from well-managed but under-

valued targets) and nds mixed results. Some stud-

ies nd that operating synergy acquisitions expe-

rience higher performance (Capron, Dussauge, &

Mitchell, 1998; Rumelt, 1974, 1982), focusing their

explanations on the ability of operating synergies

to produce unique combinations of resources and

capabilities. Other scholars nd that nancial syn-

ergy acquisitions experience higher performance

(Chatterjee, 1986; Ravenscraft & Scherer, 1987),

emphasizing that operating synergies may be harder

to value and to implement than nancial synergies.

In this paper, I help resolve these conicting

ndings by taking two novel and important steps.

First, I develop new data that use acquirers’ publicly

Motives and Distribution of Performance 2667

available conference call transcripts, press releases,

and Securities and Exchange Commission (SEC)

lings (Boone & Mulherin, 2007; Frankel, John-

son, & Skinner, 1999) to directly capture man-

agers’ ex ante acquisition motives for a large

sample of transactions. Scholars note that extant

approaches to capturing acquisition motivations are

either very coarse-grained (e.g., industry overlap

between acquirer and target) or difcult to repli-

cate (e.g., surveys that measure managers’ ex post

recollection of an acquisition’s motivation), cre-

ating issues that may lead to conicting ndings

(Andrade, Mitchell, & Stafford, 2001; Castañer &

Karim, 2013).

Second, I integrate and unify the theoretical argu-

ments of prior authors by moving my theoretical

and empirical focus from average to distributional

outcomes. Specically, I argue that operating syn-

ergy acquisitions have more extreme upside, but

also more extreme downside, as compared to nan-

cial synergy acquisitions. Operating synergies may

have the potential to deliver resource and capabil-

ity combinations that are more unique than nan-

cial synergies, but operating synergies are also more

difcult to value and implement than nancial syn-

ergies. These competing pressures make operat-

ing synergy acquisitions much more uncertain than

nancial synergy acquisitions. Therefore, the dis-

tribution of acquirer gains from operating synergy

acquisitions is likely to have a longer positive tail

and a longer negative tail than the distribution of

acquirer gains from nancial synergy acquisitions.

Thus, the misclassication of motives for evena few

transactions might drive many of the differences in

average performance observed in prior studies.

I develop a large sample of 1,222 acquisition

transactions, covering 55 two-digit Standard Indus-

trial Classication (SIC) industries. Examining

managers’ public statements and regulatory lings,

I classify managers’ motives for the transaction

(e.g., economies of scale, development of new

products, increase in geographic scope, diversica-

tion of cash ows, etc.) into operating and nancial

synergies, using guidance from the prior literature.

Using quantile regression, I nd that acquirers

that pursue operating synergies experience more

negative buy-and-hold returns at the 10th percentile

and more positive buy-and-hold returns at the

90th percentile, relative to acquirers that pursue

nancial synergies. While the data contain multiple

motivations for acquisitions, disaggregated anal-

yses show that the operating synergy results are

driven primarily by motives relating to economies

of scale and innovation, while the nancial synergy

results are driven primarily by motives relating to

diversication of cash ows.

To better understand howacquiring rms’ ability

to execute the valuation and implementation pro-

cess of the acquisition drive the results, I also exam-

ine whether a prior alliance tie, geographic proxim-

ity between the rms, and acquirer prior acquisition

experience moderate these ndings. I nd that these

sources of information and inter-rm coordination

provide some cushion against the extreme downside

outcomes of operating synergy acquisitions, but do

not contribute much to the extreme upside outcomes

of operating synergy acquisitions. For robustness,

I also consider an alternative measure of downside

value destruction, post-acquisition goodwill impair-

ments. Consistent with the buy-and-hold results, I

nd that operating synergy acquisitions are more

likely to result in impairments.

This paper contributes to the existing literature

in three major ways. First, the paper is the rst to

move beyond averageoutcomes for acquirers and to

examine the full distribution of post-acquisition out-

comes. Capron and Pistre (2002: 781) foreshadow

the importance of this kind of theoretical devel-

opment when they state that “most of the studies

[in mergers and acquisitions] show that, on aver-

age, acquirer shareholders about break even, [but]

very few emphasize that this mean hides a large

variance in acquirer gains,” and I respond to their

call. My core nding that operating synergy acqui-

sitions tend to have the highest upside and the

lowest downside may help explain the appeal of

these challenging transactions: while operating syn-

ergies present numerous valuation and implementa-

tion challenges (Capron, Mitchell, & Swaminathan,

2001; Ellis, Reus, & Lamont, 2009; Shayne Gary,

2005; Jemison & Sitkin, 1986; Larsson & Finkel-

stein, 1999; Puranam & Srikanth, 2007), they also

provide an alluring upside via their potential to cre-

ate unique resources and capabilities.

Second, the paper sheds insight on the mecha-

nism through which the acquirer’s prior experience

and geographical proximity contributes to better

acquisition performance, extending prior work in

this area (A. Chakrabarti & Mitchell, 2013, 2015;

Kaul & Wu, 2015; Shaver, Mitchell, & Yeung,

1997). Specically, I nd that prior experience and

geographic proximity helps acquiring rms avoid

costly mistakes, yet does very little in helping

them achieve extreme gains. This suggests that

Copyright © 2017 John Wiley & Sons, Ltd. Strat. Mgmt. J.,38: 2666–2681 (2017)

DOI: 10.1002/smj