Roberto A. Weber • Colin F. Camerer
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)
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,...