When the target may know better: Effects of experience and information asymmetries on value from mergers and acquisitions

• Author: Xavier Martin,Youtha Cuypers,Ilya R. P. Cuypers
• Date: 01 March 2017
• DOI: http://doi.org/10.1002/smj.2502
• Published date: 01 March 2017

Strategic Management Journal

Strat. Mgmt. J.,38: 609–625 (2017)

Published online EarlyView 17 March 2016 in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2502

Received 14 June 2012;Final revisionreceived 28 December 2015

WHEN THE TARGET MAY KNOW BETTER: EFFECTS

OF EXPERIENCE AND INFORMATION ASYMMETRIES

ON VALUE FROM MERGERS AND ACQUISITIONS

ILYA R. P. CUYPERS,1YOUTHA CUYPERS,2andXAVIERMARTIN

3*

1Lee Kong Chian School of Business, Singapore Management University,

Singapore, Singapore

2Nova School of Business and Economics, Universidade Nova de Lisboa, Lisbon,

Portugal

3School of Economics and Management, Tilburg University, Tilburg,

The Netherlands

Research summary: Extending research on the effect of experience on acquisition outcomes, we

examine how the differential in previous M&A experience between the target and the acquirer

affects the value they, respectively, obtain when the acquirer takes over the target. Drawing on

literature about organizationallearning, negotiation, and information economics, we theorize that

the party with greater experience will be able to obtain more value. Furthermore, we theorize

that the effect of differential M&A experience on value obtained is contingent on the level of

information asymmetry the acquirer faces with respect to the target, specically as a function

of the target’s product-market scope and whether the deal is friendly. We test and nd support for

these predictions in a sample of 1,241 M&As over a 30-year period.

INTRODUCTION

Among the leading themes for research on merg-

ers and acquisitions (M&As) is whether the deals

Keywords: M&A performance; experience advantage;

acquisition target; bargaining; product-market scope

*Correspondence to: Xavier Martin, School of Economics and

Management, Department of Organization and Strategy, Tilburg

University, P.O. Box 90153, 5000 LE Tilburg, The Netherlands.

E-mail: x.martin@tilburguniversity.edu

create economic value. The role of prior experi-

ence and experiential learning has featured promi-

nently in this literature (for a review, see Barkema

and Schijven, 2008a), probing when and how prior

experience contributes to valuecreation or improves

acquisition performance. Although this has offered

us many valuable insights on what drives value

creation in M&As, less is known about how the

value created in an M&A deal is shared among the

acquirer and target.1As a result, we have limited

understanding of reasons why one party sometimes

1Throughout the article, we refer to value creation for parsimony,

but our arguments hold fully in cases of value destruction, that is,

if one or both parties lose market valueupon M&A announcement.

Managerial summary: Corporate strategy is about a rm’s scope and development decisions

and outcomes, but corporate strategizing is incomplete unless managers anticipate the moves of

other economic actors. We demonstrate the importance of these points when it comes to learning

to make acquisitions. Using an innovative research design and theory that enables comparison

between acquirer and target gains, we show that whatever their rm’s acquisition history and

capabilities, acquisitive managers should mind the negotiation and other pitfalls that arise when

target rms possess ample acquisition experience of their own. We also demonstrate that the effect

of experience advantage,whereby the more experienced party benets, depends on the target rm’s

scope and whether the deal is friendly— two dimensions that acquirers can and should take into

account. © 2016 The Authors. Strategic Management Journal published by John Wiley & Sons

Ltd.

© 2016 The Authors. Strategic Management Journal published by John Wiley & Sons Ltd.

This is an open access article under the terms of the Creative Commons Attribution License, which permits use,

distribution and reproduction in any medium, provided the original work is properly cited.

610 I. R. P. Cuypers, Y. Cuypers, and X. Martin

gains more than the other party within a particu-

lar M&A deal, and which factors determine how

much of the total amount of value created in the deal

each party obtains. Indeed, the few studies that have

looked at acquirer versus target outcomes in M&A

deals (e.g., Seth, Song, and Pettit, 2000, 2002) have

highlighted that focusing solely on value creation

leads to an incomplete picture of how acquirers and

targets fare in M&As. Addressing this gap in the lit-

erature is critical to understanding under what con-

ditions acquirers and targets benet from M&As.

To address this issue, we draw on the litera-

tures on organizational learning from experience,

on bargaining, and on information economics. Our

premise is that a balanced understanding of value

obtained by acquirer and target alike requires exam-

ining not only the acquirer’s M&A experience, but

also comparing it with the target’s M&A experience

since the respective outcomes are the result of a bar-

gaining process in which both parties play an active

role. Our research question is: What is the effect

of differential M&A experience on the respective

amounts of value obtained by the acquirer and tar-

get, and what are contingencies for this effect?

Specically, we argue that the differential between

the acquirer and the target’s experience determines

which one will bargain better terms, and thereby,

obtain more value at the expense of the other party.

We then draw on the information economics litera-

ture to argue that the effect of differentialexperience

on the respective value each party obtains is con-

tingent on the information asymmetry the acquirer

faces with respect to the target. Weexamine our the-

oretical predictions using a sample of 1,241 M&As

that features detailed target as well as acquirer and

deal characteristics.

We aim to make several contributions to strat-

egy research at the union of the literature on

M&As, organizational learning, and information

economics. First, we contribute to the M&A liter-

ature by improving the understanding of the respec-

tive amounts of value obtained by the acquirer and

by the target, and how they compare. Carefully con-

trolling for how much value arises in total, we show

that differential experience inuences how much

value each party obtains from the deal. Furthermore,

contrary to much of the M&A literature that under-

standably focuses on acquirer characteristics, we

hone in on the active and important role of the target

(see also Graebner and Eisenhardt, 2004; Graebner,

2009) and explicate effects of target characteristics

and decisions.

Second, we contribute to research on organi-

zational learning by showing that value obtained

depends on both parties’ experience. Most prior

studies have only theoretically considered the

acquirer’s experience, and even the few studies that

considered both parties’ experience (e.g., Porrini,

2004) did so in isolation of each other without

theorizing about relative experience. Furthermore,

the organizational learning literature has mainly

provided insights on how experience helps the

development of an acquisition capability, which

helps to create value (Barkema and Schijven,

2008a); we complement this by highlighting that

experience also helps to capture value. We develop

this theory by also integrating arguments from

the literature on bargaining, from both organi-

zation behavioral (negotiation) and economic

(game theoretical and experimental) perspectives.

Both perspectives have identied experience as a

source of learning leading to improved bargaining

outcomes.

Third, whereas the application of information

economics to M&A strategy has largely focused

on the effect of information asymmetry on how

M&A deals are structured (e.g., Balakrishnan and

Koza, 1993; Cuypers, Ertug, and Hennart, 2015;

Dow, Cuypers, and Ertug, 2016), we show that

information factors are also important contingen-

cies that affect performance as evidenced here by

the respective value obtained upon deal announce-

ment. Thus, we extend the information economics

perspective, which is of growing importance for

strategy research (e.g., Ragozzino and Reuer, 2011;

Reuer et al., 2013).

Altogether, our contributions are phenomenolog-

ical in addressing the respective value accruing to

acquirers versus targets and in further evidencing

the role of targets, but also more broadly theoretical

in integrating the literatures on experiential learn-

ing, bargaining, and information economics in an

original way that yields a contingency model of how

differential experience and information asymmetry

jointly affect a strategic outcome.

THEORY

Since an acquisition is a transaction between the

owners and managers of the acquirer rm (in

short, the acquirer) and those of the target rm

(in short, the target), the total value that is created

(or destroyed) through an acquisition has to be

© 2016 The Authors. Strategic Management Journalpublished by John Wiley & Sons Ltd. Strat. Mgmt. J.,38: 609–625 (2017)

DOI: 10.1002/smj