CEOs face complex situational demands at each phase of the merger process. We offer an institutional perspective on how pre-merger and post-merger objectives and demands translate into CEO leadership role requirements. By illustrating how these role requirements are well-served by CEO neo-charismatic leadership, we answer why the rise of CEO neo-charismatic leadership is relevant to the merger context. Our model contributes to the institutional understanding of the merger process and its demands, and specifies forms of executive leadership needed for mergers to be successful.
Neo-charismatic leadership, institutional theory, mergers, acquisitions
What predicts merger and acquisition (M&A) success remains unexplained by research (Hitt, Harrison, Ireland, & Best, 1998). The following factors have been previously explored: human resource issues (Napier, 1989), integration activities (Zollo & Singh, 2004), organizational learning (Vermeulen & Barkema, 2001), cultural fit (Weber & Camerer, 2003), and others. We might expect leadership to be cited among these major factors. After all, studies in finance and strategic management credit leadership as the determinant of M&A performance (Fulmer & Gilkey, 1988; Haspeslagh & Jemison, 1991; Schweiger, Ivancevich, & Power, 1987). Indeed, given an important role of organizational change in mergers, studies of M&As were encouraged in terms of neo-charismatic leadership (Bass, 1990). Bass's (1990) optimism was well justified: Neo-charismatic theories proved to be credible executive "road maps" to leading macro- and micro-level change processes. As witnessed by a considerable and growing body of work that applies neo-charismatic theories to the study of mergers, Bass's call is enjoying productive scholarly response (Nemanich & Keller, 2007; Nemanich & Vera, 2009; Waldman & Javidan, 2009).
This emergent body of work advances the knowledge about the role of neo-charismatic leadership in M&As. Many leadership aspects of the M&A phenomenon are yet to be clarified. Despite the tapestry of ideas and thoughts, existing efforts still do not offer a comprehensive answer to the important question: Why should neo-charismatic leadership emerge in the M&A context? What exactly is it about the M&A process itself that makes the assumptions of emergence and performance of neo-charismatic leadership plausible? So far these questions have been left unexplored. Proliferation of research on CEOs and their leadership as a mechanism to realize the merger opportunities have not offered much guidance in understanding the linkages between the merger process, CEO leadership, and the merger performance. Exactly when and how merger performance might be best understood in terms of CEO leadership?
With neo-charismatic leadership (Bass, 1985; Podsakoff, MacKenzie, Moorman, & Fetter, 1990) and the process-based view of acquisitions (Haspeslagh & Jemison, 199 I) as our foundation, we envision success in premerger preparation and postmerger integration as demanding different aspects of CEO neo-charismatic leadership. Our model examines how situational demands translate into specific leadership role requirements. It suggests what a CEO is supposed to do to ensure merger success. Finally, we envision that the premerger demands, leadership role requirements, and neo-charismatic behaviors are representative of what is expected from both the acquirer's CEO and the target's CEO. Naturally, our rationalization of the neocharismatic leadership at the postmerger applies to the CEO of the unified firm alone.
CEO Leadership and the Fate of Mergers: An Illustration
M&As have been one of the more notable strategies for corporate growth in recent decades. In the first half of 2004, the total value of M&As reached $394.2 billion (Grone, 2004). In 2005, worldwide M&A volume surged to more than $2.3 trillion, indicating a new wave of strategic deal making (Berman & Singer, 2005). These numbers indicate the scope of M&As in past years. Perhaps the most curious aspect of M&As is that they continue to be a dominant strategy for corporate renewal and expansion despite the high failure rate (King, Dalton, Daily, & Covin, 2004). This is intriguing as M&As are reported to have a low success rate in value creation (Lubatkin, 1987). Their failure rate is about equal to the success rate (Young, 1981). Some studies show that failures outnumber successes (Ellis & Pekar, 1978).
Various factors account for the merger success. One factor analyzed at length is organizational culture (Buono, Bowditch, & Lewis, 1985; Nahavandi & Malekzadeh, 1988; Weber & Camerer, 2003). Likewise, CEO leadership is consistently cited among these factors. Studies in finance and strategic management have long credited executive leadership as the determinant of M&A performance (Fulmer & Gilkey, 1988; Haspeslagh & Jemison, 1991; Schweiger et al., 1987). Recent analyses provide further evidence for CEO leadership as affecting merger outcomes (Nemanich & Keller, 2007; Nemanich & Vera, 2009).
Past events and developments in the area of M&As illustrate well the evidently important role of CEO leadership in M&As. In-depth studies of individual merger cases present rich accounts of CEO leadership as real-life examples of how leadership by merger "captains" might decide the fate of a given deal. Consider the iconic case of the 1998 Daimler-Chrysler merger--a landmark deal in the industrial merger history. The joint name of the new company conveyed a strong message about the deal as the "merger of equals," but the resignation of a few Chrysler executives by the end of the merger year caught media attention. By March 1999, reports that many Chrysler mid-level managers and engineers had departed became public.
The rapid exodus from Chrysler made many wonder if the merger was "equal" after all. The controversy over the merger arrangement quickly fueled negative industry, consumer, and market reactions. In the following months, Daimler-Chrysler CEO Jurgen Schrempp confirmed that Daimler-Benz had deceived Chrysler and its shareholders by misrepresenting the true intentions with regard to the merger of Chrysler as a merger of equals (Burt & Lambert, 2000). News that Daimler's CEO had single-handedly orchestrated the distortion of the truth about the merger plans catalyzed many postmerger problems. Certainly not all of these difficulties should be blamed on Schrempp alone. Yet the unethical approach to merger leadership might have galvanized the difficulties to shape the merger's subsequent failure.
Another example conveys CEO leadership as a primary factor of merger success. A 2001 announcement of the Wachovia and First Union merger was consistent with the later integration approach developed by Wachovia's CEO L. M. "Bud" Baker and First Union's CEO Ken Thompson (Baldwin & Swinson, 2003a). The merger-of-equals vision had shaped the ways of integrating two banks. Baker and Thompson's "roundtable" approach to decision making was adopted by their senior management teams. The egalitarian view of the merger cascaded down to lower organizational levels. It created a positive atmosphere of openness and cooperation among the members of the business, staff function, and information technology (IT) operation units of the due diligence team.
The Wachovia merger differs from the Daimler-Chrysler merger in many ways. Yet in both cases, CEOs operated within the same objective context of a merger situation. Despite the similarity of contexts, these CEOs differed in the way they planned and led their mergers, which might explain the discrepancies in merger success. These and similar M&A cases make us wonder how such discrepancies arise and what could be learned to ensure merger success.
One possibility is that executives might rely on differing interpretations of the objective situational demands arising within the institutional context of mergers. Furthermore, acting within objectively the same context, executives might differ in their understanding of the leadership role requirements to effectively respond to merger demands. In sum, variations in interpreting merger demands and leadership role requirements might explain variations in CEO behavior.
It is clear that both the objective merger context and the interpretations of the context by executives might shape CEO leadership. One might also wonder if variations in leader behavior are due to a lack of some shared understanding of the institutional aspects of the merger and its objective demands. Perhaps by focusing on the objective side of the merger process one might start unveiling some institutional standards for merger leadership. Making such knowledge available to merger practitioners might be a feasible way of reducing discrepancies in their views of the merger demands and leadership role requirements, but also variations in merger performance.
It is important to briefly describe what constitutes a typical merger process.
The M&A Process, Problems, and Demands
The acquisition process begins with the emergence of the acquisition idea and the evaluation and selection of the target. The acquisition committee supervises the due diligence process, negotiates the price, manages the preannouncement, and carries out merger planning. Once the merger is announced, the integration starts with progress assessed and corrected at various points after the announcement. The integration ends once the assessment and correction requirements have been satisfied. In reality, however, the integration does not always follow the preplanned deadlines. Instead, it remains an ongoing issue with a flexible time frame.
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Various authors view the structure of the M&A process differently. Previous models had encompassed anywhere between a three-stage (Pablo, Sitkin, & Jemison, 1996) and a seven-stage (Vester, 2002) approach. To pursue a more parsimonious presentation of CEO leadership in mergers, in this...