Cultural Con?ict and Merger Failure

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Cultural Conflict and Merger Failure: An Experimental Approach Department of Social and Decision Sciences, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213 Division of Humanities and Social Sciences 228-77, California Institute of Technology, Pasadena, California 91125 rweber@andrew.cmu.edu • camerer@hss.caltech.edu

Roberto A. Weber • Colin F. Camerer

W

e use laboratory experiments to explore merger failure due to conflicting organizational cultures. We introduce a laboratory paradigm for studying organizational culture that captures several key elements of the phenomenon. In our experiments, we allow subjects in “firms” to develop a culture, and then merge two firms. As expected, performance decreases following the merging of two laboratory firms. In addition, subjects overestimate the performance of the merged firm and attribute the decrease in performance to members of the other firm rather than to situational difficulties created by conflicting culture. (Experiments; Organizational Culture; Mergers)

Introduction

A majority of corporate mergers fail. Failure occurs, on average, in every sense: acquiring firm stock prices tend to slightly fall when mergers are announced; many acquired companies are later sold off; and profitability of the acquired firm is lower after the merger (relative to comparable nonmerged firms).1 Participants report a lot of conflict during the merger, resulting in high turnover (Buono et al. 1985, Walsh The most conclusive evidence of lower postmerger profitability comes from studies by Ravenscraft and Scherer (1987, 1989). They use Federal Trade Commission line-of-business data to compare companies’ lines of business after they were acquired with a proxy for what their performance would have been without the merger (using comparable control businesses). Operating income as a percentage of assets is lower by 0.03 for the merged target businesses. This is a substantial (and statistically significant) drop because their pretakeover operating income/asset ratio averaged 0.115. Also, McGuckin et al. (1995) provide support for the hypothesis that mergers and acquisitions fail on average, even though their overall interpretation is the opposite (but not clearly supported by their analysis). Specifically, they find that acquisitions decrease productivity and employment at the firm level (even though acquiring firms were highly productive before the acquisition) and this is similarly supported in their initial plant-level analysis. They manage to overturn the productivity result at the plant level only for a subset of plants (those belonging to larger firms). 1

1988).2 Participants express disappointment in the mergers’ results, and surprise at how disappointed they are. Curiously, widespread merger failure is at odds with the public and media perceptions that mergers are grand things that are almost sure to create enormous business synergies that are good for employees, stockholders, and consumers. Two examples may help illustrate our ideas about cultural conflict in mergers. In the period leading up to the Daimler-Chrysler merger, both firms were performing quite well (Chrysler was the most profitable American automaker), and there was widespread expectation that the merger would be successful (Cook 1998). People in both organizations expected that their “merger of equals” would allow each unit to benefit from the other’s strengths and capabilities. Stockholders in both companies overwhelmingly approved the merger and the stock prices and analyst predictions reflected this optimism. Performance after the merger, however, was entirely different, particularly at the Chrysler division. In the months 2 Walsh and Ellwood (1991) find that the high rate of turnover among management at acquired firms is not related to poor prior performance, indicating that the turnover is not due to the pruning of underperforming management at the acquired firm.

Management Science © 2003 INFORMS Vol. 49, No. 4, April 2003,...
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