Organizational Fit and Acquisition Performance: Effects of Post-Acquisition Integration

Author(s): Deepak K. Datta

Source: Strategic Management Journal , May, 1991, Vol. 12, No. 4 (May, 1991), pp. 281-
297
Published by: Wiley

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 Strategic Management Journal, Vol. 12, 281-297 (1991)

ORGANIZATIONAL FIT AND ACQUISITION

PERFORMANCE: EFFECTS OF POST-ACQUISITION
INTEGRATION
DEEPAK K. DATTA
School of Business, University of Kansas, Lawrence, Kansas, U.S.A.

Based on 173 acquisitions in the U.S. manufacturing industry, this study examines the
impact of organizational differences between acquiring and acquired firms on post-acquisition
performance. The findings indicate that differences in top management styles have a negative
impact on performance in acquisitions characterized by both high and low levels of post-
acquisition integration. However, no such relationship was observed between differences in
the reward and evaluation systems and post-acquisition performance in either the high or
low integration subgrouips. Implications of the findings, along with directions for future
research, have been discussed in the concluding section of this paper.

Mergers and acquisitions have been a fact of ably play a critical role in determining the
organizational life in the U.S., with corporations eventual performance of an acquisition.
investing billions of dollars each year in such Given the strategic and financial implications
ventures. In 1989 alone more than 3400 such of acquisitions, it is not surprising that the
transactions were completed, involving a total performance of acquisitions and the variation
value in excess of $230 billion (Mergers and therein has figured prominently in business
Acquisitions, 1990). Many senior executives also research. Prior research in strategic management
believe that the pace of merger and acquisition (e.g. Chatterjee, 1986; Lubatkin, 1987; Salter
activity is unlikely to slow down considerably in and Weinhold, 1979; Seth, 1990; Shelton, 1988;
the 1990s despite proposed anti-merger bills in Singh and Montgomery, 1987) has generally
Congress (Mergers and Acquisitions, 1987). The focused on the role of 'strategic fit' and synergistic
continuing popularity of mergers and acquisitions benefits as determinants of acquisition perform-
is probably a reflection of the widespread belief ance. On the other hand, issues of 'organizational
among managers that acquisitions provide a fit' have received considerably less attention-
quicker and seemingly easier route to achieving the existing literature is limited, fragmented and
growth and diversification objectives. Paradoxi- anecdotal (Buono and Bowditch, 1989; Davis,
cally, studies by Porter (1987) and Young (1981) 1968; Leighton and Tod, 1969; Marks, 1982;
suggest that acquisitions have a high failure Sales and Mirvis, 1984).
rate-nearly half of all acquisitions are rated as 'Organizational fit', which influences the ease
being unsatisfactory by managers of acquiring with which two organizations can be assimilated
firms. Additional support is available in a study after an acquisition, can be assessed along a
by Ravenscraft and Scherer (1989). They found number of dimensions. However, the two areas
that the profitability of target firms, on an often mentioned as being particularly important
average, actually declines after an acquisition, from the perspective of post-acquisition inte-
suggesting that implementation difficulties prob-gration are differences in 'management styles'

0143-2095/91/040281-17$08.50 Received 13 December 1989

( 1991 by John Wiley & Sons, Ltd. Final revision received 29 October 1990

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282 D. K. Datta

(Callahan, 1986; Davis, 1968; Diven, 1984; Seed, reviews of the literature). The contribution of
1974), and, in 'organizational systems', particu- this body of research has undoubtedly been
larly the 'reward and evaluation system' (Diven, significant; however, the studies have provided
1984; Ferracone, 1987; Hayes, 1979; Magnet, only limited insights into factors that influence
1984). This paper seeks to examine the relation- acquisition performance, or have explained why
ship between such differences and post-acquisition nearly half of all acquisitions fail to fulfill prior
performance, and also to identify whether the expectations. Generally speaking, studies here
relationship in each case depends on the extent have focused on the relationship between issues
of post-acquisition integration. related to the market for corporate control,
The paper is structured as follows: first, the especially its competitiveness (e.g. mode of
literature on acquisition performance and the payment, type of transaction, and number of
importance of organizational fit in terms of bidders) and shareholder gains. Issues of strategic
management styles and reward and evaluation organizational fit do not feature in these studies.
systems is discussed. Also presented in the Recent studies in strategic management have,
following section are the hypotheses tested in however, examined the performance implications
this study. Next, the research method used is of 'strategic fit' or relatedness. Basing their
described, including the selection of the sample, arguments on the diversification literature and
the operationalization of the variables, and the also on the literature in industrial organization,
data collection procedure. Third, the results of researchers such as Salter and Weinhold (1979)
the statistical analysis are presented and, follow- and Lubatkin (1983) have argued that related
ing that, in the concluding section, the findings acquisitions should exhibit superior performance.
and their implications have been discussed. Compared to unrelated acquisitions, related
acquisitions provide greater synergistic benefits
arising out of economies of scale and scope. In
REVIEW OF RELATED LITERATURE addition, possibilities of transferring core skills
AND RESEARCH HYPOTHESES across involved firms are also associated with
such acquisitions. Accordingly, empirical studies
The following paragraphs provide a brief overview by Chatterjee (1986), Lubatkin (1987), Seth
of the literature on acquisition performance, (1990), Shelton (1988), and Singh and Mont-
the importance and influence of organizational gomery (1987) have sought to test the hypothesis
differences (in terms of management styles and that 'strategic fit' is positively related to value
reward and evaluation systems), and the role of creation in acquisitions. Their findings, however,
post-acquisition integration in influencing the have not always been consistent with expec-
relationship between organizational fit and per- tations. Lubatkin (1987), for example, observed
formance. that, contrary to what he had hypothesized,
horizontal acquisitions did not outperform vertical
or conglomerate acquisitions. Similarly, Chat-
Acquisition performance
terjee's (1986) study indicates that gains to target
The topic of acquisition performance has been firm shareholders in unrelated acquisitions were
at the forefront of academic research in the areas significantly higher than those in related, non-
of financial economics, industrial organization, horizontal acquisitions. Also, in a more recent
and strategic management. A recent meta- study, Seth (1990) found that there were no
analytic review (Datta, Narayanan, and Pinches, significant differences in the overall value creation
1990) identified over 40 studies on acquisition (combined for the bidding and target firm)
performance using the event-study methodology, between related and unrelated acquisitions. On
with most studies originating in the area of the other hand, Singh and Montgomery's (1987)
financial economics. Most finance studies have research provides some support for the
examined performance from the perspective relatedness hypothesis. They found that while
of gains accruing to bidding and target firm gains to the acquiring firm shareholders in both
shareholders as a result of acquisition announce- related and unrelated acquisitions were not
ments (see Jarrell, Brickley, and Netter, 1988; significantly different from zero, those to the
Jensen and Ruback, 1983 for excellent narrative target firm shareholders were higher in related

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 Organizational Fit and Acquisition Performance 283

acquisitions. Additional support has been pro- zational structures, or organizational cultures:
vided by Shelton (1988), whose study findings incompatibilities which may negate the potential
suggest that acquisitions which permit bidders benefits associated with an acquisition (Lubatkin,
access to new but related markets create the 1983; Marks, 1982). In the following paragraphs
most value for shareholders. we discuss the importance of organizational fit
The considerable diversity in the findings of as a determinant of post-acquisition performance,
the above studies provides strong support to and also present the hypotheses examined in this
Jemison and Sitkin's (1986) contention that study.
strategic fit, while important, is not a sufficient
condition for superior acquisition performance.
Organizational fit
In other words, while relatedness indicates that
potential synergistic benefits may be present, it
Differences in management styles
will result in superior acquisition performance
only if synergies can eventually be realized An important element of 'organizational fit' in
through effective post-acquisition integration. As acquisitions is the extent of compatibility in
discussed later, that might not be the case the styles of the acquiring and acquired firm
if organizational impediments thwart effective management. Management style has been
implementation. described as an element of the managerial or the
subjective culture of an organization (Bhagat and
McQuaid, 1982; Sathe, 1985). It has been
Post-acquisition integration
conceptualized in the organizations literature
The need for post-acquisition integration of (e.g. Covin and Slevin, 1988; Khandwalla, 1977;
operations in an acquisition is primarily bounded Miller, 1987) as comprising a number of factors,
by its objectives. An acquisition might form a including the management group's attitude
part of a strategy of related diversification and, towards risk, their decision-making approach, and
therefore, be expected to provide synergistic preferred control and communication patterns.
benefits. Such benefits could be in the form of Management styles are unique to organizations
operating efficiencies and economies of scale and may differ considerably across firms-for
requiring high levels of integration as might be example, management groups may have very
feasible in related acquisitions (Porter, 1985; different risk-taking propensities. It is, therefore,
Salter and Weinhold, 1979). Alternatively, an not unusual to find that policies and procedures
acquisition could be of an unrelated business, which seem to be reckless and extremely 'risky'
motivated by a desire to improve one's to one management group appear to another
price-earnings ratio or sales growth, and involve group to be justifiable approaches (Davis, 1968;
little or no integration or sharing of resources Freedman, 1985). Similarly, one management
(Shrivastava, 1986). group's tolerance for change may be much greater
The primary objective in post-acquisition inte- than another. Top management groups might
gration of operations is to make more effective also differ in their approach to decision-making.
use of existing capabilities. Merging firms can As pointed out by Mintzberg (1973), while some
reduce unit costs in production, inventory hold- management teams rely almost exclusively on
ing, marketing, advertising, and distribution common sense, gut feelings, and 'rules of thumb',
integrating similar departments and functions others emphasize formalized strategic planning
(Howell, 1970; Rappaport, 1987). However, while, systems, market research, and various manage-
in theory, integration should result in benefits, ment science techniques. In addition, differences
in reality the picture can be very different. can also exist in management groups' beliefs on
Impediments associated with the integration of the desired level of 'flexibility' (Burns and
operations can result in the acquiring firm being Stalker, 1961). For example, one group may
unable to manage the integration of the target believe in loose, informal controls and open
firm effectively (Haspeslagh and Jemison, 1987). channels of communication, while another might
This is especially true when organizational incom- stress greater operating control, highly structured
patibilities exist in areas such as management channels of communication, and adherence to
styles, reward and evaluation systems, organi- well-defined job descriptions. Similarly, there

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284 D. K. Datta

might be significant differences in terms of the post-acquisition management of the combined

another critical aspect of management style, i.e. entity. Consequently, the potential for conflict
'participation', or the extent to which they due to differences in styles is likely to be the
encourage subordinate 'participation' in decision- highest in acquisitions followed by considerable
making (Vroom and Yetton, 1973). operational integration (Marks, 1982), given that
The influence of management styles on organi- such acquisitions invariably involve much higher
zational performance has been examined in recent levels of managerial interaction. Also, the cooper-
strategic management literature (Covin and Sle- ation required to manage the integration process
vin, 1988; Kerr, 1982; Leontiades, 1982; Miller, might be very difficult to obtain if major
1987). An acquisition has the effect of bringing differences in management styles exist. Not only
together the management groups of two organiza- are conflicts likely to be more and, therefore, to
tions, with styles which might be similar, or be less likely to be resolved, it also becomes
alternatively, very different. Significant differ- more difficult to coordinate and control the
ences can contribute to, what Buono, Bowditch, integration of post-acquisition operations. As
and Lewis (1985) call, 'cultural ambiguity', a argued by Davis (1968: 93), 'the likelihood of
situation characterized by uncertainties concern- conflict because of differences in managerial
ing whose style or culture will dominate. Gener- business styles becomes greater in proportion to
ally, the acquiring firm management end up the extent that the operations of the two
imposing their own style on the management at companies are expected to reinforce one another.'
the acquired firm and, as Hirsch and Andrews Since integration of operations makes the
(1983) note, this can result in a loss of identity coexistence of two different styles virtually
among acquired firm management. This outcome infeasible, it inevitably raises the issue of whose
is one of increased anxiety, distrust, and conflict, style will dominate (generally it is the style of the
culminating in a 'merger standstill,' with declining acquiring firm that prevails). Ensuing conflicts, in
productivity and poor post-acquisition perform- turn, tend to reduce the probability that the two
ance (Ivancevich, Schweiger, and Power, 1987). management groups will effectively work together
In summary, one can argue that while compati- towards achieving the goals of the acquisition.
bility in management styles facilitates post- On the other hand, as argued by Hayes (1979),
acquisition assimilation, major differences in organizations with very different management
management styles and philosophies can prove styles can work effectively together after an
to be serious impediments to the achievement of acquisition if the interaction is limited, as in
acquisition success (Davis, 1968). As hypothe- situations of low post-acquisition integration.
sized by Buono and Bowditch (1989: 134), The above arguments lead to the following
differences in management styles may be a major hypotheses:
reason why mergers and acquisitions often fail
Hypothesis 2: In acquisitions characterized by
to achieve the level of performance predicted by
high post-acquisition integration, there will be
precombination feasibility studies. Additional
a negative relationship between differences
support is available in the form of case studies
in management styles and post-acquisition
(Callahan, 1986; Lipton, 1982; Rappaport, 1982),
performance.
which suggest that differences in management
thinking and values are important contributors Hypothesis 3: In acquisitions characterized by
to post-acquisition problems. Thus: low post-acquisition integration, differences in
management styles will not be related to post-
Hypothesis 1: There will be a negative relation- acquisition performance.
ship between differences in the management
styles of the acquiring and acquired firms and
Differences in reward and evaluation systems
post-acquisition performance.
The reward and evaluation system is widely
The extent to which differences in management regarded as one of the most important com-
styles impact acquisition performance is likely to ponents of the organizational form (Galbraith,
vary depending on the level of interaction 1977; Kerr, 1982; Murthy and Salter, 1973;
required among the two management groups in Napier and Smith, 1987). Such systems (which

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 Organizational Fit and Acquisition Performance 285

define the terms of exchange between individuals firms. Thus, managers accustomed to highly
and the organization) do vary significantly across leveraged performance bonus (common in many
organizations, based on factors such as market entrepreneurial companies) might find it difficult
or industry characteristics and the strategy that to adjust to a more bureauratic mode, if required,
the firm chooses to adopt (Balkin and Gomez- after an acquisition and vice-versa (Hayes,
Mejia, 1990; Govindarajan and Fisher, 1990; 1979). As Ferracone (1987) observes, even in
Kerr, 1985; Lorsch and Allen, 1973; Pitts, 1974; acquisitions where marked differences in reward
Salter, 1973). For example, Lorsch and Allen and evaluation systems are not always there,
(1973) found significant differences in the criteria there are often enough dissimilarities to generate
used to evaluate managerial performance across considerable conflicts.
samples of vertically integrated and conglomerate With reward and evaluation systems rep-
organizations. Diversified conglomerates in their resenting an important vehicle in reinforcing
study placed more emphasis on the 'end-result' organizational culture (Kerr and Slocum, 1987),
criteria in rewarding managers while integrated changes made to the existing system (or the
firms typically used a combination of end and imposition of a new system) after an acquisition
intermediate results. Pitts (1974) had found are likely to elicit strong reactions. Even specu-
variations in the reward and evaluation systems lations on how the system may be altered are
between firms which were acquisitive diversifiers sufficient to cause significant anxieties and
and those which diversified through internal conflicts, and to lead to unsatisfactory post-
expansion. Similarly, Kerr's (1985) data suggest acquisition performance. The issue of dysfunc-
that the process by which a firm's diversification tional imposition of the acquiring firm's systems
strategy had been achieved has a major influence on the acquired firm and its implication for
on the design of the reward system. acquisition performance has also been addressed
In addition, the literature on strategy by Jemison and Sitkin (1986). According to them,
implementation suggests that implementation such imposition can be viewed as the outcome of
effectiveness and, hence, performance is signifi- two forces, namely, defensiveness and arrogance.
cantly influenced by the choice of control systems. The former stems from unfamiliarity with the
For example, recent research by Govindarajan acquired firm's procedures while the latter is
and Gupta (1985) highlights the importance of a generally the outcome of an erroneous belief
fit between strategy and control systems in among acquiring firm management that their
achieving superior performance. Given that a systems (including reward and evaluation
critical component of control systems is the systems) are superior to those in the acquired
reward and evaluation system, one can reasonably entity and should, therefore, be adopted uni-
expect that the choice of the reward system formly after the acquisition. The outcome can
during the assimilation process is an important be detrimental-while a system might have been
determinant of post-acquisition performance. appropriate and successful in the acquiring firm,
Certainly, similarities in reward and evaluation it may not be so for the acquired entity. These
systems allow for easier integration of systems; arguments lead to the next hypothesis:
significant differences between the acquiring and
acquired firms, on the other hand, can be an Hypothesis 4: There will be a negative relation-
important impediment to acquisition implemen- ship between differences in the reward and
tation (Diven, 1984). evaluation systems of the acquiring and acquired
Differences in reward and evaluations systems firms and post-acquisition performance.
exist along a number of factors. These include
factors related to the evaluation criteria, such as Again, the impact of differences in reward and
the time period over which the process is focused, evaluation systems on performance is likely to
indices used to measure performance, and the be more pronounced if post-acquisition plans
type of performance indicator used in the require substantial integration of operations. In
evaluation process. In addition to the evaluation such cases, retention of major differences in
criteria, the form and administration of compen- reward systems in the post-acquisition phase can
sation can be important. The system of bonuses create a major morale problem among managers
and incentives may differ significantly across with a perceived inferior system. It then becomes

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286 D. K. Datta

necessary to address and resolve existing differ- Acquisitions. All partial acquisitions, and also
ences and bring about uniformity in the reward acquisitions by firms who were themselves
and evaluation structure, even if it means acquired by 1986, were subsequently excluded
significant additional expenditure. Therefore, one from the sample. Moreover, to allow for a
can hypothesize that, in acquisitions involving minimum assimilation period of 2 years the
high levels of integration, differences in the sample was restricted only to those acquisitions
reward and evaluation systems of the acquiring which were completed by March 1984. This
and acquired firms will have a significant negative screening procedure resulted in a starting sample
impact on post-acquisition performance. On the of 703 acquisitions.
other hand, if the acquired firm is kept as an The initial mailing of the questionnaires in
autonomous entity and its operations are not May 1986, a follow-up letter, and a second
integrated with the acquiring firm after the mailing of questionnaires in July resulted in a
acquisition, it might even be feasible to let the total of 191 responses. Of the 191 acquisitions,
two organizations retain their own systems. 42 were completed in 1980, 39 in 1981, 38 in
Ferracone (1987) provides an example of such 1982, 50 in 1983, and 22 in 1984. The 191 returns
an acquisition-one involving a large industrial represent a response rate of 27 percent, which
firm that acquired a leading financial services can be considered satisfactory taking into con-
organization. The acquiring firm management sideration the fact that the performance of
saw the acquired business remaining distinct acquisitions is generally viewed by most compa-
and autonomous, and were able to adopt a nies as an extremely sensitive topic. However,
compensation system for the acquired firm which complete data on all the variables in this study
was very different from their own. Thus, in were available in 173 of the 191 acquisitions.
cases where post-acquisition integration is low, Potential respondents in the survey were
differences will probably not have a major impact senior executives in acquiring firms-they were
on acquisition performance. Given the above identified by comparing the most recent list of
arguments, the next set of hypotheses examined senior executives in the acquiring firm with that
in this study was as follows: in the year of the acquisition (using Moody's
Industrial Manuals). This procedure enabled us
Hypothesis 5: Differences in the reward and to ensure that the executive to whom the
evaluation systems across the acquiring and questionnaire was mailed was with the acquiring
acquired firms will be negatively related to firm at the time of the acquisition and would,
post-acquisition performance in acquisitions therefore, be knowledgeable about the acqui-
characterized by high levels of post-acquisition sition. In a few cases the executive to whom the
integration. questionnaire was sent forwarded it to another
person in the organization who, he felt, was more
Hypothesis 6: Differences in the reward and knowledgeable about the particular acquisition.
evaluation systems across the acquiring and Also, to minimize 'survivor bias', respondents
acquired firms will not be related to post- were specifically requested to complete the
acquisition performance in acquisitions charac- questionnaire even if the acquired firm had been
terized by low levels of post-acquisition inte- subsequently divested (as long as it had been
gration. with the acquiring firm for a period of at least
2 years). In all, of the 191 responses received,
52 were to questionnaires which had been sent
METHODOLOGY to the CEO of the acquiring firm, in 66 cases it
was to the President and in 59 cases to a Senior
Sample
or Executive Vice-President of the firm. The rest
The study's sample consists of acquisitions valued (14) were received from Vice-Presidents. Of
at $1 million or more in the U.S. manufacturing those who did not participate, 120 (17.5 percent
and mining sectors during the period January of the sample) provided their reasons for not
1980-March 1984. The starting point was a list doing so, citinig reasons such as 'time pressures',
of all acquisitions featured in the acquisition 'company policy against participating in surveys',
rosters in the quarterly issues of Mergers and and, quite frequently, 'data confidentiality.'

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 Organizational Fit and Acquisition Performance 287

Measures Post-acquisition integration

The extent to which the operations of the

acquiring and acquired firms were integrated was
Differences in management style
measured along various manufacturing/R&D and
marketing activities (see Appendix). Principal-
Differences in management style were measured
component analysis identified two factors-with
using an adapted version of instrument developed
items on manufacturing integration loading on
by Khandwalla (1977). The scale comprised 17
one and those used to measure marketing
items for measuring differences in the risk-taking
integration loading on the other. The Cronbach-
propensity of the management groups, extent
ot values were 0.91 and 0.90 for the scales
of participation encouraged in decision-making,
measuring post-acquisition integration along
approach to decision-making, and emphasis
manufacturing and marketing activities respect-
placed on formality (see Appendix for question-
ively. Here again, respondents were asked to
naire items). Respondents were asked to indicate
indicate the extent of post-acquisition integration
the extent of perceived differences in management
or consolidation of operations along each item
styles between the acquiring and acquired firm
of the scale (1 = very low integration to 5 = very
management along each of these items using a
high integration) and the individual scores were
five-point Likert-type scale (1 = very similar,
then used to calculate a composite index of
5 = very different). The Cronbach-ot value for
the extent of post-acquisition integration of
the scale was 0.92, providing strong evidence of
manufacturing and marketing functions. These
the reliability of the scale and high inter-item
two composite scores were then used to categorize
correlation. Principal-components factor analysis
the acquisition in the sample into two subgroups:
with varimax rotation on the items extracted a
a 'high integration' subgroup which consisted of
single factor. An aggregate measure of 'differ-
acquisitions where the composite integration
ences in management style' was calculated by
scores along both the manufacturing and market-
averaging the scores on all the items in the
ing dimensions were greater than 3.0 (midpoint
questionnaire (Koberg, 1987). In a separate
value in the scale) and a 'low integration'
question, respondents had also been asked to
subgroup composed of acquisitions where both
provide their perception of the aggregate or
scores were less than 3.0. Seventy-one acquisitions
'overall' difference in the management styles
were in the high integration category while
between their and the acquired firm. This
63 were characterized by low levels of post-
measure was highly correlated with the calculated
acquisition integration. However, because of
composite score (r = 0.82, p<0.001), indicating
incomplete data the sample sizes in our analysis
response consistency.
were 69 and 61 respectively.

Relative size
Differences in reward and evaluation systems
Various authors (e.g. Kitching, 1967; Kusewitt,
This was measured using a scale identified by 1985) have hypothesized that size differences
Kerr (1982) (see Appendix). Respondents were between the acquiring and acquired firm influ-
asked to indicate the extent of perceived differ- ence acquisition performance. Kusewitt (1985),
ences on a Likert-type five-point scale (1 = very for example, found a negative relationship
similar, 5 = very different). The Cronbach-oL between relative size (ratio of the acquired
value for the scale was 0.90. Moreover, principal- firm to the acquired firm) and acquisition
components factor analysis indicated that all the performance. Kitching (1967), on the other hand,
eight items measuring differences in reward and found that acquisitions where the acquired firms'
evaluation systems loaded on a single factor. sales were less than 2 percent of the acquiring
Again, a composite measure of the difference firm had high failure rates. Given its potential
was calculated for each acquisition in the sample impact, relative size was used as a control variable
by taking the mean of the item scores, and these in this study. It was operationalized as the ratio
too correlated highly (r = 0.78, p<0.001) with of the sales of the acquired firm to that of the
the overall measures provided by the respondents. acquiring firm (in the year before the acquisition).

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288 D. K. Datta

Acquisition performance To validate the perceptual performance meas-

ure used in this study, an ex-post analysis of
Acquisition performance was measured by asking
archival data was done using a randomly selected
the respondents for their assessments of the
subsample of 75 acquisitions. Using Predicasts
extent to which the acquisition was able to
F&S Index, the Wall Street Journal index and
achieve prior expectations in terms of its impact
the ABI Inform data base accounts pertaining to
on the performance of the acquiring firm. It
these acquisitions were identified in the business
was measured along five performance criteria,
press. However, in 57 of the 75 acquisitions the
namely: ROI, EPS, stock price, cash flow, and
extent of available information on post-acquisition
sales growth, all of which have been widely used
performance from secondary sources was very
in prior research (e.g. Burgman, 1983; Souder
limited and, hence, did not provide an opportunity
and Chakrabarti, 1984). Respondents were asked
for any meaningful evaluation. In the remaining
to (1) rate the performance of the acquisition
18 acquisitions, data from articles, news items,
along each criterion using a five-point Likert-
information in annual reports etc., on each
type scale, and (2) assign weights to each criterion
acquisition were then carefully examined by an
according to its perceived importance. The
independent and informed evaluator to assess
importance scores were used to weight the
the level of post-acquisition success using multiple
'performance scores' so that a weighted average
criteria, i.e. post-acquisition sales growth, post-
'acquisition performance' index could be estab-
acquisition profitability of the acquired division
lished for each acquisition. Also, in a separate
(where the information was available), cash flow
question, each respondent was asked to provide
changes, importance given to the acquired entity
his opinion of the 'overall' performance of the
by the acquiring firm after the acquisition, and
acquisition in question. When compared, the
the opinions expressed by executives and industry
two scores were highly correlated (r = 0.89,
analysts. His evaluations of the post-acquisition
p<0.001), suggesting consistency of response.
performance of the 18 acquisitions on a 1-5 scale
Perceptual measures were used in this study
(with '1' being 'very unsuccessful' and '5' being
because of the difficulties and problems associated
'very successful') were then correlated with the
with the use of 'objective' measures in measuring
composite measures of 'acquisition performance'
post-acquisition performance (Burgman, 1983;
calculated based on questionnaire data. The zero-
Kitching, 1967; Porter, 1987). Accounting meas-
order correlation coefficient of 0.77 (p<0.001)
ures are typically available in aggregate form
between the two sets of scores indicates that the
(i.e. for the entire corporation) and isolating the
questionnaire responses were reasonably valid
performance of the acquisition after controlling
measures of post-acquisition performance.
for the performance of other units and the impact
of other events is difficult, if not impossible.
Second, shareholder abnormal gains as a result
Non-response bias
of an announcement or consummation (used
in event studies) do not measure acquisition Given that the response rate was only 27 percent,
performance as an outcome but merely reflect we checked for possible non-response bias using
the security markets' 'a priori' expectations two tests. First, the respondents and non-
(Montgomery and Wilson, 1986). Therefore, they respondents were compared along the dimension
are unlikely to be appropriate measures of post- of average size (measured in terms of sales
acquisition performance. In summary, neither revenue) for both the acquiring and acquired
accounting nor market measures (abnormal gains) firms. The calculated t-statistic values of 0.403
can be used as valid measures of post-acquisition and 0.103 for the acquiring and the acquired firm
performance. A reasonable alternative is the respectively (see Table 1) were statistically
use of considered management judgement, an insignificant, which suggests that there were no
approach which is likely to provide a picture of significant differences between the responding
performance which is much closer to reality. This and the non-responding groups. Second, given
follows the guidelines of Dess and Robinson obvious difficulties in comparing the respondent
(1984) who advocate the use of subjective and non-respondent samples across the research
measures when approprate objective measures variables (differences in management styles,
are not available (as is the case in this study). differences in reward and evaluation systems and

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 Organizational Fit and Acquisition Performance 289

Table 1. Comparison of respondents and non-respon- respondents, given that they would have fallen
dents (in terms of $million sales revenue) into that category had a second set of question-
naires not been mailed. Again, as Table 2
Respondents Non- illustrates, there were no significant differences
respondents between the two groups, providing further
evidence of the representativeness of the sample.
Mean S. D. Mean S. D. t

Acquiring
ANALYSIS AND RESULTS
firms 1551.4 3665.4 1644.7 2252.0 0.403
Acquired
firms 158.2 809.9 150.6 736.6 0.103 Table 3 provides the means and standard
deviations of the study variables and also the
correlation coefficients between them in the high
S.D. = Standard deviation.
and low integration subgroups. Hypotheses 1 and
4 were first tested on the entire sample using the
acquisition performance), we compared the 'late' following regression model:
and 'early' respondents along these variables.
The assumption behind this test for non-response PERFORM = (x + o1(RSIZE)
bias (suggested by Oppenheim, 1966) is that the
+ oL2(DIFSTY)
'late' respondents (those responses received after
the second mailing) are very similar to non- + t3(DIFREW)+ El (1)

Table 2. Comparison of early and late respondents

High Integration Low Integration

Early Late t Early Late t

Variablea (n=43) (n=28) value (n=37) (n=26) value

1. Differences in management styles 3.113 3.203 0.655 3.381 3.373 0.046

2. Differences in reward and
evaluation systems 3.197 2.900 1.536 3.340 3.119 0.917
3. Acquisition performance 3.093 3.264 0.781 2.925 3.075 0.042

'Variables measured using five-point Likert-type scales.

Table 3. Correlations, means, and standard deviation of study variables

High Integration (n=69) Low Integration (n=61)

Variable-, Mean S. D. 1 2 3 4 Mean S. D. 1 2 3 4

1. Differences in
management styles" 3.152 0.706 - 3.377 0.681 - - -
2. Differences in reward
and evaluation
systems!' 3.086 0.876 0.27 - 3.274 0.956 .50 - -- -
3. Acquisition
performance,' 3.184 0.883 -0.40 -0.22 - - 3.010 1.150 -0.32 -0.21 -
4. Relative size 0.129 0.242 -0.11 -0.10 -0.08 - 0.168 0.233 -0.08 -0.20 0.05

'Measured using five-point Likert-type scales.

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290 D. K. Datta

Table 4. Relationships between organizational differences and acquisition performance

No. Regression Coefficients

of Adj
Subgroup cases RSIZE DIFSTY DIFREW RI2 R2 F

All acquisitions 173 -0.532 -0.527*bR -0.123 0.177 0.162 12.154***

(-1.780) (-4.467) (-1.378)

High post-acquisition integration 69 -0.471 -0.477** -0.130 0.191 0.154 5.129**

(-1.147) (-3.281) (-1.110)

Low post-acquisition integration 61 0.049 -0.499" -0.074 0.109 0.062 2.321

(0.077) (-2.028) (-0.413)

***p < 0.001; **p < 0.01; *p < 0.05.

Figures in parentheses represent t-statistics.

where across all acquisitions. However, no significant

relationship was observed between differences in
PERFORM = acquisition performance reward and evaluation systems and performance
RSIZE = relative size (ac3 = -0.123, p = 0.17).' Also, as hypothesized,
DIFSTY = differences in management styles a strong negative relationship was found between
differences in management style and acquisition
DIFREW = differences in reward and
performance in the subgroup with high post-
evaluation systems
acquisition integration (2 = -0.477, p<0.01)
after controlling for relative size. However,
In order to test Hypotheses 2, 3, 5 and 6 we
contrary to expectations, a significant negative
estimated the above equation separately for the
relationship was also observed in the low inte-
high and low integration subgroups.
gration subgroup (2 = -0.499, p<0.05), sug-
gesting that differences in management style can
PERFORM = N + PI (RSIZE) be an important factor in influencing acquisition
+ 32(DIFSTY) performance even in acquisitions characterized
by low levels of post-acquisition integration.
+ 34(DIFREW)
Contrary to what had been hypothesized (H5),
+ E2-high integration (2) no significant negative relationship was observed
between differences in the reward and evaluation
systems and acquisition performance in the high
PERFORM = y( +, (RSIZE)
integration sample (W3 = -0.130, p = 0.27). The
+ Y2(DIFSTY) direction of the regression coefficient was negative
and suggestive of a possible negative impact of
+ Y3(DIFREW)
such differences on acquisition performance, but
+ E3-low integration (3) in the absence of significant results definite
conclusions cannot obviously be drawn. Hypo-
Results of the regression analyses are presented thesis 6 was supported in that no significant
in Table 4. The regression coefficient associated relationship was observed between differences in
with the DIFSTY variable in the full model was
negative and significant (OX2 = -0.527, p<0.001), ' Berry and Feldman (1985) suggest computing R2 (the
providing statistical support for Hypothesis 1. In proportion of variance in an independent variable explained
other words, differences in top management style by other independent variables) as a measure of the effects
of multicollinearity. Multicollinearity is a serious problem if
and post-acquisition performance are negatively
the value is close to 1.0-for none of the variables in the
related after controlling for relative size and three regression models estimated in this study was the value
differences in reward and evaluation system more than 0.28.

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 Organizational Fit and Acquisition Performance 291

the reward and evaluation systems and acquisition The findings of this study suggest that compati-
performance in the low integration subgroup bility of management styles is important to
(03 = -0.074, p = 0.68). superior performance in acquisitions charac-
In addition to the above, the study tested for terized by both high and low levels of post-
the equality of coefficients in the regression acquisition integration of operations. The findings
models for high integration and low integration therefore support the observations in case studies
subgroups using the Chow test (Chow, 1960). which indicate that acquisitions of firms with a
The low F-statistic value of 0.59 indicates that different management style can result in conflicts,
the two models (high and low integration) are difficulties in achieving operational synergies,
not statistically different, and suggests that the market share shrinkages and poor performance.
extent of post-acquisition integration does not These findings were not surprising given that
significantly influence the relationships between most acquisitions are accompanied by significant
organizational fit and acquisition performance changes in a relatively compressed period of
(as had been hypothesized). Additional tests time-changes which almost inevitably result in
of the potential moderating effects of post- enhanced complexity and uncertainty. These
acquisition integration were undertaken using the problems are further aggravated by differences
procedures suggested by Arnold (1982). First, in managerial styles and ongoing tensions con-
differences in the 'strength' of the relationship cerning which style will dominate. One can
(measured by correlation coefficients) between reasonably expect the level of apprehension to
differences in management style and acquisition be much higher among acquired firm manage-
performance across high and low integration ment, who often react defensively by clinging to
subgroups, were examined. A similar test was their own beliefs and approaches in an effort to
done for the relationship between differences in reduce uncertainty and preserve their identity.
reward and evaluation systems and performance. The outcome is likely to be one of conflicts and
In either case no statistically significant differ- confrontations contributing to poor acquisition
ences in the value of the correlation coefficients performance.
across the two subgroups were identified. Second, An interesting finding of this study is that
t-tests used to examine whether post-acquisition differences in management styles have a negative
integration moderates the 'form' of the relation- impact on acquisition performance even in
ship also did not produce significant results, acquisitions characterized by low post-acquisition
providing further evidence that post-acquisition integration. It was, however, not totally unexpec-
integration does not moderate the relationship ted, suggesting that, while in theory one can
between organizational fit and performance. visualize keeping the management groups
Moreover, given that a single measure of post- separate-thereby allowing each to maintain its
acquisition integration cannot be obtained (the style-in practice it is often not the case.
scale consists of two dimensions), moderated Necessary post-acquisition administrative interac-
regression analysis (MRA), the alternative pro- tions in such acquisitions mean that the acquiring
cedure suggested by Arnold (1982) and Stone firm management often end up imposing their
and Hollenbeck (1984) to test for moderating own style on the acquired firm. The likelihood
effects, could not be used in this study. is higher when the acquiring firm management
believe that they can enhance target firm effective-
ness by imposing their style, systems, and culture
DISCUSSION on the acquired firm. In other words, low post-
acquisition integration does not necessarily mean
This study examined the impact of two key true autonomy. Even in acquisitions followed by
factors pertaining to 'organizational fit', namely low integration of operations the acquired firm
differences in management styles and reward and is often subjected to very close control and
evaluation systems on acquisition performance. scrutiny. It can take the form of increased
A negative relationship was hypothesized for reporting, frequent visits by acquiring firm
both in acquisitions with high levels of post- management, and fundamental changes being
acquisition integration. In acquisitions with low required of the acquired firm in their management
integration no such relationship was expected. priorities. Also, the studies of Lorsch and

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292 D. K. Datta

Allen (1973) and Hoskisson and Hitt (1988) on challenges in the integration phase.
diversified firms suggest that financial control is In interpreting the results of this study however,
important in the successful management of an one needs to take into account its limitations.
acquired firm in unrelated acquisitions charac- First, this study was limited to the examination of
terized by low integration. To the extent that just two of the factors representing 'organizational
differences in management styles prevent agree- fit', with 'relative size' as a control variable.
ments on attendant financial targets, goals, and Obviously there are other factors (not included
investment criteria, the task of management in this study) which potentially influence post-
control becomes more difficult in such acqui- acquisition performance. To the extent that future
sitions. In addition, 'arrogance' on the part of studies use a more comprehensive and fully
the acquiring firm, and a belief that its own style specified model, they will not only explain a
and practices are superior, can lead to the greater percentage of the variability but also be
imposition of its style and systems on the acquired able to identify possible confounding effects.
entity even if the actual integration of operations Second, the data pertaining to a particular
undertaken is low (Jemison and Sitkin, 1986). acquisition in this study were collected from a
The result may be high post-acquisition turnover single respondent in the acquiring firm. The
among key acquired firm executives. While not decision to use a single respondent was partly
explored in this study, the loss of valuable based on the opinions of executives who partici-
expertise through the departure of key executives pated in the pretest. They strongly felt that
can be an important factor affecting performance use of multiple respondents would significantly
in such acquisitions (Walsh, 1988). increase their reluctance to participate in the
The study findings suggest that differences in study and consequently would have a very
reward and evaluation systems do not have the negative effect on the response rate. Taking into
same kind of negative impact on acquisition consideration their views, the fact that response
performance as differences in management styles rate on a sensitive topic such as mergers and
in acquisitions characterized by either high acquisitions is likely to be low, and the very low
or low post-acquisition integration. A possible response rate in a previous questionnaire-based
reason may be that differences in reward and study by Burgman (1983), we chose to use a
evaluation systems are more easily and quickly single respondent. Certainly, a future study which
reconciled following an acquisition than differ- uses multiple respondents can generate greater
ences in management styles. Consequently, such confidence in the results. Third, the study relies
differences may not have a major long-term upon self-report measures. While reliability and
impact on acquisition performance as do problems validity tests undertaken provide grounds for
arising from incompatible management styles confidence in the measures, future studies which
(which are deep-rooted, and therefore much use multiple data sources and more objective
more difficult to overcome). Also indicated by measures will yield stronger results. Finally, the
the data is the relationship between differences research does not address the level within the
in management style and in reward and evaluation acquiring firm at which the acquired firm is
systems, especially in acquisitions characterized managed. A more in-depth future study of a
by high post-acquisition integration. While man- limited number of acquisitions, preferably one
agement style and reward systems are two where the researcher is provided 'inside access,'
different components of the organizational form, can better address this issue and its implications
it must be remembered that reward systems are from the viewpoint of the relationships examined
often employed to reinforce values, beliefs, and in the paper.
practices in an organization (Kerr and Slocum,
1987). The relationship between the two, there-
Implications for managers
fore, does not come as a major surprise. As
observed by Cummings (1984), reward systems The findings of this study have important
in an organization with a high risk-taking implications from the perspective of executives
management style are likely to be different from associated with mergers and acquisitions. In
one with a risk-averse culture, and a merger of addressing the issue of high failure rate among
two such organizations can pose significant mergers and acquisitions, a number of authors

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 Organizational Fit and Acquisition Performance 293

(e.g. Achtmeyer and Daniell, 1988; Rappaport, management groups, and facilitating conditions
1979) have suggested that the probabilities of in which each group can better understand the
success can be significantly improved through others' perspective.
systematic planning. Our results imply that such
planning, in order to be meaningful, should
necessarily include a careful assessment of existing RESEARCH IMPLICATIONS AND
organizational differences, particularly differ- DIRECTIONS FOR FUTURE RESEARCH
ences in management styles. Unfortunately, in
practice, such analysis is either overlooked From the viewpoint of academic researchers, the
or given secondary importance. The escalating findings highlight the importance of taking a
momentum and the underlying desire to complete broader perspective in their study of acquisition
transactions quickly often leads to incomplete performance. There is a definite need to go
analysis and premature 'solutions' (Jemison and beyond issues of relatedness and synergistic
Sitkin, 1986), with organizational considerations benefits, recognizing that the expansion of 'two
often playing a very limited role in merger and plus two equals five' does not happen automati-
acquisition decisions (Hirsch, 1987; Robino and cally. With the findings of the body of research
DeMeuse, 1985; Schweiger and Ivancevich, 1985). linking 'strategic fit' and performance being
This is especially surprising when one considers largely inconclusive, future research should also
that in a recent survey of 101 CEOs and senior focus on issues related to post-acquisition
managers of large companies, by the management implementation. Shrivastava (1986) identifies
consulting firm of Egon Zehnder International, three types of post-acquisition integration-
the most commonly cited causes for acquisition procedural, physical and managerial/sociocultur-
failure were people and organizational problems al. While procedural integration involves the
(Mergers and Acquisitions, 1987). combination of systems procedures, and rules,
Another factor contributing to inadequate physical integration entails the consolidation of
analysis might be the over-reliance on the services assets and equipment. Managerial and sociocultur-
of investment bankers, who typically choose to al integration, on the other hand, relates to
de-emphasize questions and issues related to cultural integration, integration of management
organizational fit. As Haspeslagh and Jemison styles, and changes in organization structure. The
(1987) suggest, it is not because investment findings of this study indicate that one aspect of
bankers believe that qualitative organizational managerial integration, namely differences in
issues are any less important, but often because management styles, has an important impact on
recommendations based on quantitative data are post-acquisition performance while impediments
easier to defend, if legally challenged. Moreover, to procedural integration in the form of differ-
issues related to management styles and values are ences in reward systems do not play an important
highly sensitive and controversial. The tendency, role. Future research needs to identify impedi-
therefore, is to avoid them as much as possible ments associated with other aspects of the three
during the pre-acquisition and negotiation phases. types of integration towards assessing their impact
However, the findings of this study highlight the on acquisition performance.
importance of including an analysis of key A very important area for future research
organizational dimensions as an integral part of relates to the management of acquisitions. As
any acquisition analysis. First, it will help emphasized by Haspeslagh and Jemison (1987),
managers gain a more realistic picture of syner- the probability of value creation in mergers and
gistic benefits and, thereby, the true value of the acquisitions stems not from relatedness but
acquisition. Second, considering the likely impact primarily on how the interdependencies that
of organizational factors will prompt early think- contribute to the benefits are managed. While
ing on how the acquisition can be best managed, the results indicate that high differences in
once it is completed. For example, in acquisitions management style are generally associated with
with differences in management styles, significant poor performance, not all acquisitions with high
mental readjustments required for effective inte- differences in management styles in this study
gration suggest the need for an atmosphere of exhibited poor performance. Why did some
open communications and mutual respect among acquisitions with high differences in management

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294 D. K. Datta

styles perform better than others? An interesting APPENDIX: QUESTIONNAIRE ITEMS

area for future research, therefore, relates to the
Differences in management style
process of implementation, and on how the
process can be best managed, particularly in
cases where organizational incompatibility poses 1. Approach to management problems
additional challenges. Another important area (proactive vs. reactive and cautious).
for future research is the role and importance 2. Degree of emphasis on R&D and inno-
of organizational mechanisms in successfully vation.
managing the interdependencies that promote 3. Degree of reliance on external borrowings
resource/skill-sharing. For example, research that or stock issues vs. funds generated from
explores the importance of task forces in operations to finance growth.
mediating problems and conflicts that emerge 4. Riskiness of the investments pursued.
out of differences in terms of management styles, 5. Usage of sophisticated analytical tech-
cultures, and systems should provide interesting niques in decision-making.
insights. Such questions which involve contingent 6. Importance accorded to the long-term
relationships can probably be appropriately exam- planning of investments and their financ-
ined using medium-grained methodologies (e.g. ing.
cluster analysis or Q-type factor analysis) sug- 7. Reliance on personal experience and
gested by Harrigan (1983). By combining the judgement rather than on experts.
generalizability of coarse-grained methodologies 8. Orientation in decision-making (long-term
(cross-sectional analysis using large data bases) vs. immediate future).
with the detail of fine-grained methodologies 9. Extent to which the communication chan-
(individual case studies) they provide a useful nels are structured and access to important
middle ground for examining contingent relation- financial information restricted.
ships. 10. Emphasis on adapting freely to changing
In summary, although researchers such as circumstances without too much concern
Buono and Bowditch (1989), Jemison and Sitkin for past practice.
(1986), Hunt (1990), and Marks (1982) emphasize 11. Usage of sophisticated control and infor-
the importance of the implementation, such issues mation system for tight formal control.
have played a very limited role in the empirical 12. Getting personnel to follow formally estab-
research on mergers and acquisitions. While lished procedures.
research attention has primarily been on the 13. Getting line and staff personnel to adhere
potential benefits in such transactions, the high closely to formal job descriptions.
failure rate among acquisitions is a testimony to 14. Participation sought by top management
the fact that anticipated benefits (or synergies) in decision-making relating to product- or
are not easily realized. There is, therefore, a service-related decisions.
compelling case to extend research on the 15. Extent of participation in decision making
performance of acquisitions to an examination among top management relating to capital
of the impact of key organizational and behavioral budgeting decisions.
issues. Hirsch, Friedman, and Koza (1990) have 16. Extent of participation in decision-making
emphasized the importance of looking at both in decisions related to long-term strategic
the formulation and implementation sides of growth and diversification.
strategic decisions-and that certainly applies to 17. Strongly individualistic decision-making by
research on mergers and acquisitions. The paucity formally responsible executive vs. group-
of existing research on acquisition implementation oriented consensus decision-making.
provides excellent opportunities for meaningful
future research in the area of strategic manage-
ment. It is hoped that this study represents an
Differences in reward and evaluation system
important step in that direction, prompting
further research which will provide a better
Differences in the evaluation criteria
understanding of the myriad factors that influence
post-acquisition performance. 1. Time period over which the reward and

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 Organizational Fit and Acquisition Performance 295

evaluation process focused (short-run vs. to thank John H. Grant, V.K. Narayanan, and
long-run performance). N. Rajagopalan for their helpful comments on
2. Type of performance indicator used in earlier drafts of this paper, and Shraboni Datta
the evaluation process (end result vs. for research assistance. This paper has also
intermediate performance). benefitted significantly from the comments and
3. Nature of indices used to measure perform- suggestions provided by two anonymous
ance (objective indices vs. judgmental reviewers.
input of superiors).
4. Performance measures based on divisional
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