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.