One of the problems faced by organizations interdependent with other organizations is that the exchanges required for maintaining operations are uncertain and potentially unstable. Coping with organizational environments requires stabilizing them somehow or, as Thompson (1967) has suggested, reducing the uncertainty confronting the organization. When the conditions of the environment are mediated by social actors, as is increasingly the case for modem organizations, uncertainty derives not only from the vagaries of nature hut from the ahtions taken by others. In such cases, the uncertainty resulting from the unpredictable actions of others is reduced by coordinating these actors. Observations of most environments suggest that they tend, over time, to move from instability to stability because the various participants develop stable interaction patterns.
One way of achieving increased stability and predictability in organization- environment relationships is through growth (Katz and Kahn, 1966), and one form of growth is through merger, which involves the acquisition of another firm or organization. Merger typically involves a restructuring of organizational dependence. There are three general types of merger between organizations, involving vertical integration, horizontal expansion, and diversification or conglomeration: Each merger has the effect of managing interdependence, though each is focused on a different form of interdependence and operates differ-, ently. Companies may merge vertically, forward or backward, in the production process in an attempt to deal with symbiotic interdependence, or the “mutual dependence between unlike organisms” (Hawley, 1950:36). Steel companies may merge with producers of coal, and oil companies may acquire systems for petroleum distribu- tion. Paper companies may buy lumber firms while textile firms purchase fabric stores. The second form of merger is horizontal expansion, in which organizations acquire their competitors to reduce com- mensalistic interdependence—the interdependence which derives from the competitive relationship of outcomes obtained by two or more parties. The structure of an industry becomes increasingly concen- trated as horizontal mergers reduce competitive interdependence. Mergers among similar organizations not only reduce competitive interdependence by absorbing competition, such mergers also increase the power of the resulting larger organization in its symbiotic relation- ships as well. The third form of merging involves diversification, in which an organization acquires another organization which is neither in the same busmess nor in a direct exchange relationship with it. A firm dependent on a single, critical exchange can reduce its dependence on any single exchange through diversification by engaging in activities in a variety of different domains.
Nelson (1959) noted that mergers followed the economic cycle, occurring more frequently when stock prices were high and interest rates low, or when the costs of merger were reduced. Nelson further noted that there had been three major merger movements, the first accomplishing the consolidation of competitors, the second achieving vertical integration, and the third involving an expansion and diversification into other sectors of the economy.
We argue that merger is a mechanism used by organizations to restructure their environmental interdependence in order to stabilize critical exchanges. It is possible to analyze the extent to which actual mergers are consistent with this argument. There are alternative theories of merger, including those that hypothesize that mergers are undertaken to increase profits or to achieve economies of scale. While these arguments are not necessarily incompatible with our interdependence management hypothesis, the available data do not support these other two interpretations of merger activity.
Source: Pfeffer Jeffrey, Salancik Gerald (2003), The External Control of Organizations: A Resource Dependence Perspective, Stanford Business Books; 1st edition