Academic journal article Journal of Managerial Issues

Serendipitous Value Creation in Mergers and Acquisitions of Entrepreneurially-Oriented Firms: The Moderating Role of Political Skill

Academic journal article Journal of Managerial Issues

Serendipitous Value Creation in Mergers and Acquisitions of Entrepreneurially-Oriented Firms: The Moderating Role of Political Skill

Article excerpt

Mergers and acquisitions (M&A) are an important growth strategy for organizations (Hitt et al., 2001). Recent data reveals that over $40 trillion in M&A activity took place between 2004-2013 (Institute of Mergers, Acquisitions, and Alliances, 2015). However, it is commonly reported that more than 60% of M&As fail to achieve the financial benefits expected (e.g., Marks and Mirvis, 2001), and often times acquisitions decrease firm value (King et al., 2004). There are many reasons cited for lack of M&A success, including problems integrating employees. Employees experience uncertainty surrounding acquisitions because they do not know what the merged organization will mean for their employment and income security. Post-acquisition uncertainty has been linked to job strain, increased employee absenteeism, turnover, and decreased job satisfaction (Martin and Butler, 2015). Of particular interest to the authors of this study is the prevention of voluntary turnover of key employees because problems experienced by employees have been recognized as a cause for between one-third and one-half of merger failures (Davy et al., 1988; Cartwright and Cooper, 1993). In fact, top executives at merged companies believe that problems related to ineffective employee integration are more likely to affect long-term success than financial issues (Davy et al., 1988).

Other reasons for lack of success in M&A have been attributed to top management team (TMT) turnover. In a meta-analysis, it was found that TMT turnover postacquisition led to a decrease in M&A performance (Butler et al., 2012). TMT retention has been shown to lead to higher M&A success (e.g., Cannella and Hambrick, 1993; Kiessling and Harvey, 2006). TMT retention is also important for retaining other key employees (Graebner, 2004; Kiessling and Harvey, 2006).

Retaining key employees in M&As involving entrepreneurially-oriented firms can be essential to success (Graebner, 2004). Employee retention is necessary to achieve the projected gains from the newly combined organization, where employee talent from both the acquiring and acquired firm is important. Also, the communication of clear goals by the acquired TMT to their remaining employees is necessary for M&A success (Graebner, 2004) because the loss of key employees has been cited as a reason for M&A failure (Buono and Bowditch, 1989). Retaining key employees who understand the organization's routines and which resources are key to organizational performance is important. This key employee group understands the ingredients and mechanisms of value creation, a process that involves combining organizational resources better than competitors while producing products or services that fulfill customer needs (Sirmon et al., 2007). When the organization is successful at value creation, a sustainable competitive advantage and above average returns may result. Importantly, after the merged organization successfully integrates, it is also possible to achieve serendipitous value creation, or value creation that is unplanned or even "lucky" because the firm did not anticipate that the combined resources (i.e., tangible and intangible resources--see Barney, 1991) of the merged organization could create value in such a manner. Serendipitous value creation in M&A results from "the windfalls that were not anticipated by the buyer prior to the deal" (Graebner, 2004: 752). Also, if the firm values its resources in a manner distinct from other firms, the unique combinations of resources that result could create market opportunities (Denrell et al., 2003).

Going beyond value creation, the authors explore the role of executive political skill. Prior research suggests that executive political skill, which is possessed in varying degrees by the firm's TMT, has the potential to provide a positive influence in the M&A process (Martin and Butler, 2015). For example, TMT members who possess high degrees of political skill are able to influence employees in a way that positively influences organizational objectives (Ferris, Davidson et al. …

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