Implications of Resource-based theory for research on mergers and acquisitions

1. Implications for research on mergers and acquisitions

This discussion has several important implications for research on merg- ers and acquisitions. First, the analysis suggests that much of the work on mergers and acquisitions has been conducted at too aggregate a level to inform managers of bidding firms when these strategies will generate superior returns for their shareholders (Halpern 1983). This is true even for research that has investigated the link between strategic relatedness in a merger or acquisition and returns to shareholders of bidding firms. Relatedness, per se, does not generate superior returns for bidding firms. Rather, synergistic cash flows stemming from relatedness will lead to supe- rior returns for shareholders of bidding firms when those cash flows are private and unique, inimitable and unique, or unexpected. These cash flows, in turn, will be generated by rare and private resources, or rare and costly to imitate resources and capabilities controlled by bidding firms that create economic value when combined with the resources and capabilities of target firms. Future research will need to partition related mergers and acquisitions into these much finer categories in order to study how strate- gic relatedness is translated into superior returns for the shareholders of bidding firms.

Second, the role of unexpected synergistic cash flows in generating supe- rior returns for bidding firm shareholders from mergers and acquisitions reemphasizes the role of luck in studying returns to the strategic actions of firms (Lippman and Rumelt 1982; Barney 1986a). While luck is a difficult variable to work with, especially in prescriptive models of competitive strategy, its continued emergence in analytical work suggests its impor- tance. Simply observing that an acquisition generated superior returns for the shareholders of a bidding firm does not imply that a uniquely valuable synergistic cash flow existed between this bidder and the acquired target. Nor do such returns necessarily imply that managers in this firm are skilled in discovering or exploiting relatedness between themselves and targets. Bidding firms can simply be lucky.

Finally, the impact that managerial actions in bidding and target firms can have on the distribution of the value created in a related acquisition deserves further attention. It has already been shown in the literature that target firms can obtain superior returns for their shareholders by increas- ing the number of well-informed bidders (Jensen and Ruback 1983; Turk 1987). This process can be short-circuited if managers in bidding firms are able to keep the existence of a uniquely valuable synergistic cash flow with targets private. How managers in bidding firms might be able to keep this information private (McKelvey 1982), and the implications of this private information for the regulation of securities markets (Bettis 1983), deserve ongoing attention.

2. Implications for practice

The arguments presented here also have important implications for man- agers seeking to implement merger and acquisition strategies. First, while the conditions under which these strategies will generate average and supe- rior returns have been emphasized, this analysis also suggests that mergers and acquisitions can lead to below average returns for the shareholders of successful bidding firms. This will occur when bidding firms overestimate the value of targets, and thus the price paid for a target will be greater than the economic value that a target brings to the bidding firm. Research by Salter and Weinhold (1979), and others, suggests that bidding firms typically overestimate the value of targets by underestimating the costs of exploiting synergies with targets. Even when markets for corporate control are imperfectly competitive, such miscalculations can generate economic losses for successful bidding firms. To avoid these miscalculations, bidding firms must become very skilled at understanding the nature of the strategic relatedness between themselves and target firms. With this understanding, bidding firms reduce the likelihood of overestimating the value of targets, and increase the likelihood of gaining at least competitive parity from mergers or acquisitions.

To move beyond competitive parity, the arguments presented here suggest that bidding firms must develop a second skill, over and above the ability to evaluate relatedness between themselves and targets. This second skill is the ability of a bidding firm to understand and value strategic relatedness between other bidding firms and targets. Firms can- not expect to obtain superior returns from acquiring targets when sev- eral other bidding firms all value these targets in the same way. In these kinds of markets for corporate control, perfect competition dynam- ics are likely to unfold, and the economic value of a target in creat- ing competitive advantages for a bidding firm is likely to be reflected in the price that a bidding firm must pay for a target. Thus, in order to obtain expected superior returns from acquisitions, firms must com- plete acquisitions only in imperfectly competitive markets for corporate control.

Distinguishing between perfectly competitive and imperfectly compet- itive markets depends on the ability of a firm to value the relatedness of other bidders with targets, and compare that value with their own relat- edness with a target. If other bidders value the target in the same way as a particular firm does, perfect competition dynamics are likely to unfold, and successful bidding firms can only expect zero economic profits. If other bidders value the target at a lower level than a particular bidder, then this peculiar bidding firm may earn superior returns from acquiring the target. To earn expected superior returns from acquisitions, it is not enough for managers to be good at spotting and valuing relatedness between their own firm and targets; they must also be good at spotting and valuing relatedness between other firms and targets.

Source: Barney Jay B., Clark Delwyn N. (2007), Resource-Based Theory: Creating and Sustaining Competitive Advantage, Oxford University Press; Illustrated edition.

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