Academic Paper

M&As, industry structure and M&A performance

 Academic Paper
M&As, industry structure and M&A performance

Date: June 15, 2011

Name: Barbara Vroklage

Student number: 2104334
Email: [email protected]

Faculty: Faculty of Economics and Business Administration

Study: Premaster Business Administration
Specialization: Strategy and Organization

Supervisor: D. P. Kroon MSc

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 FOREWORD

A premaster (or bachelor) thesis is due at the end of the premaster year Business Administration.
Premaster and bachelor students need to show the Free University Amsterdam that they can
independently perform on a scientific level.

This thesis will look at the relation of M&As and M&A performance, and the mediating power of
industry structure.

I would like to thank Dr. David Kroon for his guidance and assistance. His expertise helped me to
write this thesis and expanding my knowledge.

Barbara Vroklage
Amsterdam, June 2011

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 TABLE OF CONTENTS

Table of contents…………………………………………………………………………………... 4

Chapter 1: Introduction…………………………………………………………………………... 6
1.1 Preface…………………………………………………………………………………. 6
1.2 Problem statement……………………………………………………………………... 7
1.3 Research questions…………………………………………………………………….. 7
1.4 Definitions…………………………………………………………………………....... 7
1.5 Relevance……………………………………………………………………………… 10
1.5.1 Academic relevance…………………………………………………………. 10
1.5.2 Practical relevance…………………………………………………………... 10
1.6 Structure of thesis……………………………………………………………………… 11

Chapter 2: M&A performance…………………………………………………………………… 12

2.1 Strategic perspective………………………………………………………………….... 13
2.1.1 Relatedness………………………………………………………………….. 13
2.1.2 Market power and purchasing power……………………………………….. 15
2.1.3 Forms of operational synergy……………………………………………….. 15
2.2 Organizational perspective……………………………………………………………...16
2.3 Human perspective……………………………………………………………………...17
2.4 Conclusion……………………………………………………………………………... 17

Chapter 3: M&As and industry structure……………………………………………………….. 19

3.1 Industry structure………………………………………………………………………. 19
3.1.1 Threat of entry…...………………………………………………………….. 19
3.1.2 Power of suppliers…..………………………………………………………. 20
3.1.3 Power of buyers……………………………………………………………... 21
3.1.4 Threat of substitutes………………………………………………………… 22
3.1.5 Rivalry among existing competitors………………………………………… 22
3.2 Conclusion……………………………………………………………………………... 24

Chapter 4: Industry structure and M&A performance………………………………………… 25

4.1 Industry effects………………………………………………………………………….25
4.2 Firm effects…………………………………………………………………………….. 26
4.3 Effects on firm performance…………………………………………………………… 27
4.3 Conclusion……………………………………………………………………………... 28

Chapter 5: M&As and M&A performance……………………………………………………… 30

5.1 Relatedness…………………………………………………………………………….. 31

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 5.1.1 Effects……………………………………………………………………….. 31
5.2 Conclusion……………………………………………………………………………... 32
Chapter 6: Conclusion and discussion…………………………………………………………… 33
6.1 Practical implications…………………………………………………………………... 34
6.2 Limitations……………………………………………………………………………... 34
6.3 Future research…………………………………………………………………………. 34

Appendices…………………………………………………………………………………………. 35

References………………………………………………………………………………………….. 40

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 1. INTRODUCTION

1.1 Preface
For a company there are several ways to grow. A few ways are: franchise, license, alliance,
diversification, merger and acquisition (Kiessling & Harvey, 2008; Chandler, 2009). External growth
can be important for the success and existence of the company (Kusewitt, 1985). External growth or
in order words ‘growth by merger’ is the opposite of growing organically through its own internal
development (Nutter, 1954). Nutter (1954: 451) defines growth by merger “as the accretion resulting
directly from all types of acquisitions of already existing firms”. Mergers and acquisitions (M&As)
are the instrument to realize management goals and objectives (Jarillo, 2003) and strategic goals
(Sawler, 2005). But what are the consequences of M&As?

M&As are among the most dramatic and visible manifestations of strategy at the corporate level
(Schweizer, 2005). Larsson and Finkelstein (1999) state that M&As are complex events in
organizational life. It is obvious that M&As have consequences (positive and/or negative) for the
company, the employees and the environment.

M&A activities have been studied by academics from several disciplines and through various
theoretical lenses (Schweizer, 2005). The results from M&As are often disappointing (Stadtler,
Schmitt, Klarner & Straub, 2010). According to Larsson and Finkelstein (1999) and Schweizer (2005)
this is due to the fact that M&As are generally not well understood in practice. To better understand it,
it is important to know the post-acquisition consequences. Many studies focus on the direct effects of
M&As on firm (or M&A) performance (Siegel & Simons, 2010; Walsh, 1989). This paper will not
focus on the direct effects of M&As on firm performance but on the mediating effect of industry
structure. The basis of this idea lies within industrial organization (Mauri & Michaels, 1998). Many
researches have studied the effects of industry structure on firm performance (for example Mauri &
Michaels, 1998; Mason, 1939; Bain, 1956; Hawawini, Subramanian & Verdin, 2003; Porter, 1991).
There are several schools within industrial organization. Mason (1939) and Bain (1956) developed the
traditional school of industrial organization, which is called the structure-conduct-performance
paradigm (SCP paradigm). The SCP theory implies that structure influences conduct and that conduct
influences performance.

This thesis will look at a variety studies to find the mediating power of industry structure and to
answer the corresponding problem statement.

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1.2 Problem statement
The preface above gives a short view of the theme of this thesis. This thesis will focus on M&As and
the direct effects on industry structure and indirect effects on M&A performance. As described above,
this thesis will investigate the mediating effect of industry structure.
The problem statement of this thesis is:

“What is the effect of mergers and acquisitions (M&As) on industry structure and through this on
M&A performance?”

The conceptual model or graphical representation is displayed below (figure 1). It illustrates the
problem statement.

Industry   M&A  
M&As   Structure   Performance  

FIGURE 1
Conceptual model

1.3 Research questions

The research questions are based on the problem statement. Four research questions are developed to
come to an answer to the problem statement. The four research questions are:

1. Which factors drive M&A performance?

2. What is the effect of M&As on industry structure?
3. What is the effect of industry structure on M&A performance?
4. What is the effect of M&As on M&A performance?

1.4 Definitions
This paragraph will give short definitions of the meanings of important variables for this thesis. This
will make it easier to read and understand this thesis. The definitions can also be used as clarification
during reading.

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Merger
Mergers combine the resources of two or more businesses into a single entity (Sawler, 2005). The
function is to realize strategic goals (Sawler, 2005). A merger can happen when two firms agree to go
forward as a single new company rather than remain separately owned and operated.
There are two kinds of mergers: merger through absorption and merger through consolidation. An
absorption is a combination of two or more companies into an existing company. Only one company
keeps its identity. A consolidation is a combination of two or more companies into a new company
(Schall & Haley, 1991). In this case a new entity is created.

Acquisition
An acquisition is also called a ‘takeover’ (Wright, Kroll, Lado & Ness, 2002). One company buys
another company to grow. The target company or bought company will experience an ownership
change. An acquisition is a combination of the assets of target and bidder firms (Shelton, 1988).
There are different types of acquisitions. The most common type is taken over a company by acquiring
shares of another company (Schall & Haley, 1991).

M&A Performance
M&A performance is a complex concept that can be approached in different ways (Zollo & Meier,
2008). Approaches vary along several dimensions, from subjective to objective measurement
methodologies, from short-term to long-term time horizon, from an organizational level of analysis to
a process or transaction level. Zollo and Meier (2008) distinguish three different levels: task level,
transaction level and firm level. Task performance or integration process performance is “the degree
of targeted level of integration between the two organizations that has been achieved across all of its
task dimensions in a satisfactory manner” (Zollo & Meier, 2008: 56). Transaction performance or
acquisition performance is “the amount of value, in cost efficiencies and revenue growth, generated
by the complete transaction process” (Zolla & Meier, 2008: 56). Firm performance is “the combined
entity, over and above the value generated by the transaction itself (Zollo & Meier, 2008: 58).

Three constructs are relevant to this thesis. These constructs are integration process performance,
overall acquisition performance and long-term process performance (employee retention). The
different constructs are part of the strategic management and organizational behaviour literature.
Chapter two distinguishes three perspectives to study M&As. The above-mentioned constructs
measure the strategic (overall acquisition performance), organization (integration process
performance) and human objectives (employee retention). Only integration process performance has
a short-term time horizon. The other two have a long-term time horizon.

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Zollo and Meier (2008) analysed 88 articles to get a sense of the scope of measures. This thesis will
use the items for measurement of Zollo and Meier (2008) because of the broad view on M&A
performance.
Integration process performance can be measured with four items:
- the alignment of the operations and systems along the two organizations (Datta, 1991);
- the integration of human resources;
- the impact on customers; and
- the transfer of capabilities across the organizational boundaries.

Overall acquisition performance can be measured with five items:

- standalone cost improvements in either of the two organizations and elimination of duplicated
costs across the two units;
- cross-selling products to customers of the respective units in both directions (Larsson &
Finkelstein, 1999);
- developing new customer relationships;
- creating new products in either unit’s business domains; and
- creating entirely new business.

Employee retention and customer retention are the measures of long-term process performance. This
thesis will only elaborate employee retention because customer retention is not relevant to HRM.
Employee retention can be measured with three items:
- the percentage of employees retained two years after the event;
- the percentage of key staff retained two years after the event; and
- the percentage of executives retained two years after the event.

All items are deducted with the degree to which they (employees, key staff or executives) were
targeted for retention at the outset of the event.
Integration process performance, overall acquisition performance and employee retention are
approximated with subjective measures. Biases cannot be excluded in subjective measures.
Researches have used objective measured to overcome this problem. Subjective measures can be
compared with objective measures because subjective measures have the advantage of being
correlated to a large number of objective measures (Dess & Robinson, 1984; Zollo & Meier, 2008).
Firm performance is approximated with objective measures and divided in accounting performance
(long-term), financial performance (long-term) and stock performance (short-term). Accounting
performance can be measured with the variation in both return on assets (ROA) and return on
invested capital (ROIC) within a five-year window. The long-term financial performance can be
measured with the monthly returns of the acquirer versus a group of companies of similar size. Stock

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performance or short-term abnormal returns can be computed with cumulative daily returns of the
acquiring company versus the market index within a one- and a three-day window (King et al., 2004;
Zollo & Meier, 2008).

This thesis will approach M&A performance in terms of overall acquisition performance, hence the
relation of industry structure and strategic management (further explained in chapter 2 en paragraph
2.4). M&A performance will be approached in terms of firm performance in case there are no or a
few studies that use overall acquisition measurements. Firm performance is also relevant because it
increases the reliability of the outcome of this thesis and because most studies have used firm
performance. This thesis will combine subjective and objective measurements.

1.5 Relevance
The academic and practical relevance will be discussed in this paragraph. The academic and practical
relevance are the motives for writing this thesis.

1.5.1 Academic relevance

Acquisitions became very popular during the 1970s, 1980s and 1990s (Harrison, Hitt, Hoskisson &
Ireland, 1991; Schweizer, 2005). As a result, many researchers have studied M&As. Unfortunately
existing empirical research has not identified antecedents that can be used to predict post-acquisition
performance (King, Dalton, Daily & Covin, 2004; Walsch, 1989).

There has been no research on the mediating power of industry structure between M&As and M&A
performance. Industry structure has been studied as the influencer of performance (Mason, 1939;
Bain, 1956; Hill & Deeds, 1996; McGahan & Porter, 1997) and as a reason for M&A (Walter &
Barney, 1990).

This thesis will try do identify the mediating power of industry structure. Maybe this will answer the
question why M&As failed in the past and thereby will increase the success of M&As.

1.5.2 Practical relevance

M&As are generally not well understood in practice (Schweizer, 2005), despite their popularity which
results in a high failure rate (Datta, 1991). Especially now the popularity of M&As is high. After the
economic crisis, M&As are a way to survive. An example is the merger of the Dutch public
broadcasters AVRO and TROS.

For a company it is important to know the effects of a merger or acquisition. What are the effects on
the performance of the company? Will it be a step forward or backwards?

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 !

This thesis will try to expand the understanding of M&As and therefore diminish the failure rate. It
will have a new look at M&As, M&A performance and industry structure.

1.6 Structure of thesis

The structure of the thesis is outlined in figure two. This thesis contains six chapters divided in three
main ‘blocks’ (introduction, theory and results, conclusion and discussion).

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FIGURE 2
Structure of thesis

Chapter one introduces and defines the thesis. Chapter two, three, four and five will answer the first
research questions. The theory and results can be found in those four chapters. The last chapter will
conclude and discuss the findings.

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 2. M&A PERFORMANCE

M&A performance is concretized in paragraph 1.4. This chapter will look at synergies and different
perspectives to answer the following research question.
Which factors drive M&A performance?

M&As have been studied through several theoretical lenses. Researches have applied strategic (Salter
& Weinhold, 1979; Walter & Barney, 1990; Lubatkin, 1987; Seth, 1990; etc.), economic, financial,
organizational (Pablo, 1994; Shrivastava, 1986; Datta, 1991), organizational behaviour (Straub, 2007)
and human resource management (HRM) perspectives to study M&As. The strategic, organizational,
and human are the most dominant perspectives and will be elaborated upon (see appendix I). There
are also studies that combine the different perspectives into an integrative model (Larsson &
Finkelstien, 1999; King et al., 2004; Siegel & Simons, 2010). Straub (2007) indicates that
performance is measured by means of three manifest indicators (synergy realization, relative
performance and absolute performance). Larsson and Finkelstein (1999) conceptualize M&A
performance in terms of synergy realization (see appendix II and III). Synergy can be best explained
as the concept that the sum of two merging firms is greater than their individual parts (2+2=5) (King
et al., 2004; Gaughan, 2007; Karenfort, 2011). Strategic potential of the combination, the degree of
organizational integration after the deal was completed, and the lack of employee resistance to the
integration of the joining firms are variables that are related to the extent to which M&As result in
synergistic benefits. These variables are reflected in strategic, organizational and HRM perspectives
(Larsson & Finkelstein, 1999). The sources of synergy in the firm contribute to the estimated total
realization of synergy (Stadtler et al., 2010). Synergy in the M&As can be divided in four categories:
operational synergies, collusive synergies, managerial synergies and financial synergies. Operational
synergies in production, marketing, R&D and administration are achieved through economies of
scale, vertical economies and economies of scope (Seth, 1990). M&As increase efficiency by creating
economies of scale (Walker, 2000). Operating synergies come in two forms: revenue enhancements
(income synergy) and cost reduction (cost synergy) (Gaugahn, 2007; Karenfort, 2011). Collusive
synergies are achieved through market and purchasing power. Managerial synergies come from
applying complementary competencies or replacing incompetent managers (Larsson & Finkelstein,
1999). Financial synergies are achieved through risk diversification and coinsurance. It refers to the
possibility that the cost of capital may be lowered by combining one or more firms (Gaughan, 2007).

Studies have used different variables to measure M&A performance, which depends on the
perspective (mentioned above). Larsson and Finkelstein (1999) define M&A performance as the
actual net benefits created by the interaction of two firms involved in a merger or acquisition. For

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example, Healy, Palepu and Ruback (1992) used cash flow returns on assets to measure the
improvements.

2.1 Strategic perspective

The strategic perspective identifies variables that are related to performance. Kusewitt (1985)
examined seven factors of acquisition strategy and their relation to financial performance of the firm:
relative size of acquiree to acquirer, acquisition rate, industry commonality between acquirer and
acquiree, acquisition timing relative to the market cycle, type of consideration used in payment,
acquiree profitability just prior to acquisition and price paid. These variables have been used and
adjusted over time. For example King et al. contradict the findings of Kusewitt (1985) and Datta et al.
(1992) that type of consideration has an influence on post-acquisition performance. A more recent set
of variables will be further used. Straub (2007) and Stadler et al. (2010) comprise six measured
variables that are positively related to M&A performance:
- market similarity;
- market complementarity;
- production operation similarity;
- production operation complementarity;
- market power; and
- purchasing power.

Three other variables will be added since they relate (in some way) to performance or the above-
mentioned variables. The extra added variables are: difference in size (or relative size), method of
payment and price paid.

2.1.1 Relatedness
The first four variables can be defined as the ‘relatedness of two firms’ and results in operational
synergies (Stadtler, 2010). The more related firms are, the greater their synergy potential (Pablo &
Javidan, 2004). Performance is the value created as a result from the strategic fit (Kusewitt, 1985;
Lubatkin, 1987; Salter & Weinhold, 1979). Relatedness is defined in terms of resource or product-
market similarity (King et al., 2004).

There are many studies about the relatedness of firms. Studies have emphasized the importance of
related firms and others the importance of unrelated firms (Datta, Narayanan & Pinches, 1992;
Shelton, 1988; Singh & Montgomery, 1987; Morck, Shleifer & Vishny, 1990; Lubatkin, 1987; Seth,
1990). Strategic differences are frequently regarded as less valuable than similarities or even as
dysfunctional elements (Stadtler et al., 2010). The traditional conceptualizations of relatedness focus

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on the similarity and do not capture the complementary synergy sources that may by present
throughout the value chain (Larsson and Finkelstein, 1999). Unrelated firms or conglomerate firms
(King et al., 2004) share complementary resources but are companies in different geographic markets
or companies whose products do not directly compete with those of the acquiring firm (King et al.,
2004; Walker, 2000). A few examples of complementarities are market access, different products and
know-how. These complementarities can lead to a successful M&A. Consequently, performance or
synergies can be achieved through both ‘economies of sameness’ (from accumulating similar
operations) and ‘economies of fitness (from joining different, but complementary, businesses)
(Stadtler et al., 2010; Larsson & Finkelstein, 1999).
The strategic potential of the combination is important for the integration process. The better the fit,
the more successful the integration (organizational perspective). The combination fit of Larsson and
Finkelstein (1999) is not solely based on the relatedness of both firms. Larsson and Finkelstein (1999)
state that it is not always important to be the same in order to have a good fit. Complementarities are
also a key to success (Kim & Finkelstein, 2009). Larsson and Finkelstein (1999) therefore
conceptualize the combination potential of M&As in terms of both the strategic similarity and the
strategic complementarity of operations of the joining firms.

Datta (1991) states that a strategic fit, while important, is not a sufficient condition for superior
acquisition performance. Datta (1991) investigates the organizational fit of two firms. Organizational
fit is divided in two areas: management styles and organizational systems. Management styles and
organizational systems have to be the same in order to obtain fit. Differences in styles are huge
impediments for the success of the merger or acquisition. The differences in systems have less impact
because systems are more easily and quickly reconciled following an acquisition (Datta, 1991).
Lubatkin (1987), Seth (1990), and Larsson and Finkelstein (1999) have another view on this topic.
They do not favour related firms. Research showed that similarity of management styles had little
effect on organizational integration.

Datta (1991), Rumelt (1974), and Singh and Montgomery (1987) all point out the importance of
similarity while Lubatkin (1987), King et al. (2004), Seth (1990), and Larsson and Finkelstein (1999)
also see the benefits of unrelated firms (conglomerate firms) or complementarities. Kuswitt (1985)
and Rumelt (1974) look at the relatedness of acquired firms. Relatedness of markets (for example)
leads to increase of performance. This is much wider and less specific then for example Larsson and
Finkelstein (1999).
Larsson and Finkelstein (1999: 5) show that “traditional conceptualizations of relatedness between
joining firms focus on the similarity of their operations (e.g. Shelton, 1988; Singh & Montgomery,
1987), with strategic differences often viewed as less valuable than similarities or even as
dysfunctional”.

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A factor that relates to the above-mentioned variables is difference in size between acquiring and
acquired company, also defined as relative size. It is an important consideration in explaining synergy
realization (Larsson & Finkelstein, 1999; Finkelstein & Cooper, 2010). Difference in size can have
negative consequences for the M&A (Kusewitt, 1985). It can reflect lack of empathy and
misunderstanding between organizations (Finkelstein & Cooper, 2010).

2.1.2 Market power and purchasing power

The last two variables are market power and purchasing power. Collusive synergy represents the class
of scarce resources leading to market power (Stadtler, 2010; Chatterjee, 1986). Collusive synergies
can only be achieved through horizontal mergers (Chatterjee, 1986). Market power is a wealth-
increasing motivation for M&As; M&As can enhance the firm’s market power (Walker, 2000).
Galbraith and Stiles (1984) identify dual conditions for market power: the essentiality of the product,
service, or market that a firm provides to others within its chain of production and the exclusivity by
which the firm provides this product, service or market.

There are several ways to obtain purchasing power or buying power (Bhattacharyya & Nain, 2011). A
way to obtain this kind of power is by obtaining quantity discounts from suppliers. Another way is to
increase profit margins by squeezing suppliers. These actions promote greater efficiency on the part
of suppliers. Purchasing power can also be obtained by sinking costs. This will increase the profit
margins.

Method of payment or type of consideration used in payment (cash or securities) is not a variable
determining purchasing power but in some way it relates to it since a firm has the power to pay for an
acquisition. Therefore it is worth mentioning it. King et al. (2004) and Datta et al. (1992) have
contradictory findings concerning method of payment. Datta et al. (1992) and Kusewitt (1985) point
out that the method of payment impacts post-acquisition performance. King et al. (2004) evidences
say that the method of payment does not impact post-acquisition performance, while using a larger
sample and more than one post-acquisition event window.

The variable ‘price paid’ needs to be mentioned for the same reason as the ‘method of payment’ is.
Kusewitt (1985) has found no relation between price paid and the performance but it is a success
criterion (Finkelstein & Cooper, 2010).

2.1.3 Forms of operational synergy

Finally the two forms of operational synergy will be discussed (cost synergy and income synergy).
Karenfort (2011: 20) states that cost synergies constitute operational reductions in cost, which are
derived from the sharing of value chain activities. There are three mechanisms that result in cost

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synergy. These mechanisms are economies of scale, learning and economies of scope. Income
synergy is possible through value chain linkage. There are two ways to achieve income synergy:
differentiation and economies of scope. The degree of diversification is often referred to as
relatedness (Karenfort, 2011). Strategic fit links to the strategic issue ‘diversification’ (Finkelstein &
Cooper, 2010). Diversification is discussed in paragraph 3.1.2.

2.2 Organizational perspective

The organizational perspective involves organizational integration as a measure for M&A
performance. Integration is the degree of interaction and coordination between the two firms involved
in a merger or acquisition (Larsson & Finkelstein, 1999). The primary objective in post-acquisition
integration of operations is to make more effective use of existing capabilities (Datta, 1991).
Integration is influenced by management styles, cross border combinations, and relative size. Datta
(1991) adds three other factors to the influencers of integration, namely reward and evaluation
systems, organizational structures, and organizational cultures. King et al. (2004) addresses another
factor that influences the integration process. This factor is the acquisition experience. King et al.
(2004) findings conclude that prior acquisition experience no relationship has with M&A performance
but is linked with management experience. Hitt, Harrison and Ireland (2001: 55) caution that ‘the
importance of the link between managerial experience and M&A success should not be
underestimated’ and cumulate research findings on acquisition experience. Haleblian and Finkelstein
(1999) findings contradict the findings of King et al. (2004). They found evidence for both positive
and negative effects of acquisition experience on acquisition performance. When a firm’s current
acquisition was dissimilar to its prior acquisitions, acquisition experience had a negative influence on
acquisition performance. When a firm’s current acquisition was similar to its prior acquisitions,
acquisition experience has a positive influence on acquisition performance. They benefit from past
acquisition knowledge (Haleblian & Finkelstein, 1999).

The combination fit of Larsson and Finkelstein (1999) is strongly related with the organizational
integration (see appendix II and III). The extent of synergy realization depends on how the new
organization is managed after the M&A deal is closed (Larsson, & Finkelstein 1999; Datta, 1991).
Poor integration is the cause of acquisition failure (Pablo, 1994; Shrivastava, 1986).

Pablo (1994) identifies three types of intergration:

- procedural integration;
- physical integration; and
- managerial and sociocultural integration.

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Procedural integration involves combining systems and procedures of the merged companies. The
objective is to homogenize and standardize work procedures. The results of a procedural integration
are improved productivity and reduced costs or processing information.
Physical integration involves the strengthening of product lines, product technologies, R&D projects,
plant and equipment, and real estate assets.
Managerial and sociocultural integration is the most complex and least common form of integration.
Pablo (1994: 70) identifies managerial and sociocultural integration as “the involvement of a complex
combination of issues related to the selection or transfer of managers, the change in organizational
structure, the development of a consistent corporate culture, and a frame of reference to guide
strategic decision making, the gaining of commitment of motivation from personnel, and the
establishment of new leadership”. Blake and Mouton (1985) have specifically studied the integration
of the human side of the merger. This is part of the sociocultural integration.

Shrivastava (1986) identifies three types of characteristics in order to determine the level of
integration in an acquisition. These characteristics are: task characteristics, cultural characteristics,
and political characteristics. The integration level determines performance.

2.3 Human perspective

The HRM literature has emphasized the psychological issues (Astrachan, 1990; Marks, 1982), the
importance of effective communication (Sinetar, 1981; Schweiger & DeNisi, 1991), and how M&As
affect careers. Previous research has generally shown that acquired company employees react
unfavourably to M&As (Larsson & Finkelstein, 1999; Blake & Mouton, 1985; Sinetar, 1981;
Schweiger & DeNisi, 1991).

Appendix II shows that employee resistance is part of the HRM perspective. This much-investigated
part is of great importance for the M&A performance. Also there is no direct, large-scale empirical
evidence on the effects of M&As on individual workers (Siegel & Simons, 2010). The success of
M&As are dependable on the resistance of employees and yet there is little information available.
Sinestar (1981) and Schweiger and DeNisi (1991) state that communication is the key to prevent a
negative reaction of the employees. Managers need to take way the uncertainty by communication.
Siegel and Simons (2010) argue the fit or match between plants and firms and their owners. A good
match will be achieved when a worker is employed in the right role at the right firm.

2.4 Conclusion
There are many factors within the different perspectives and synergies that drive M&A performance.
Each perspective has factors that relate to performance. This thesis focuses on industry structure as a
mediator. A perspective needs to be chosen for the continuation of this thesis. The strategic

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perspective fits best with industry structure and the aim of this thesis because strategy is the
mechanism to align firms with their environment. Industry structure concerns the environment of a
firm and belongs to strategy management. Dess et al. (1990) state that the relationship among
strategy, environment and structure can be successfully explored through the conduct of strategic
management research. Hence, this thesis will look at the effects of M&As from a strategic
perspective.

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 3. M&AS AND INDUSTRY STRUCTURE

M&As and their effects are studied by many researches. There are few studies on the effects of
M&As on industry structure. This chapter will look at aspects of industry structure and the effects of
M&As and will try to answer the following research question:
What is the effect of M&As on industry structure?

3.1 Industry structure

Industry structure is easily linked to Porter (1991). Industry structure resides in the five basic forces of
competing (Stahl & Grigsby, 1997; Porter, 1991; Porter, 2008), see appendix IV:
-­‐ the threat of new entrants;
-­‐ the bargaining power of suppliers;
-­‐ the bargaining power of buyers;
-­‐ the threat of substitute products or services; and
-­‐ the intensity of rivalry among existing competitors.

Porter’s (1991) framework for diagnosing industry structure is built around five competitive forces.
These forces erode long-term industry average profitability. The ultimate function of the five forces
model is to explain the sustainability of profits against bargaining and direct and indirect competition.
The rivalry among existing competitors defines an industry’s structure and shapes the nature of
competitive interaction within an industry (Porter, 2008). How do M&As affect these forces? Each of
the five forces is affected by a series of drivers (see appendix V). These drivers make it possible to
ascertain whether the M&A effects on the health of industry competition are positive, negative or
neutral (Porter, 2002).

3.1.1 Threat of entry

The threat of entry in an industry depends on the height of the entry barriers and the expected reaction
of the incumbents. Entry barriers are advantages that existing competitors have relative to new
entrants (Porter, 2008; Chatterjee, 1990). They are resources that the incumbents posses but that an
entrant has to obtain at a cost. Entry barriers or industry boundaries are important because it
influences industry concentration, the role of substitutes and many other factors (Sampler, 1998).
Porter distinguishes seven major sources:
1. supply-side economies of scale;
2. demand-side benefits of scale;
3. customer switching costs;
4. capital requirements;
5. incumbency advantages independent of size;

Premaster thesis BA 19  
 6. unequal access to distribution channels; and
7. restrictive government policy.

M&As are ways to enter an industry (Chatterjee, 1990). New entrants will acquire an established firm
in the aimed industry (Grant, 2010). In this way the apparent entry barriers have no use. This is
sometimes known as the ‘trojan horse route’. The acquiring firm ‘gets around’ the entry barriers.
Concentrated markets and high stock prices favour acquisitive entry. M&As overcome high entry
barriers (Chatterjee, 1990) by paying a price. M&As increase the threat of new entrants, which is
negative for the incumbents.

M&As can also raise barriers to entry, which lowers the threat of entry. Horizontal mergers increase
concentration and thus market power. This raises the barrier to entry and prices (Wignaraja, 2005).
Raising the barriers is an indirect consequence of M&As. M&As can also be used to specifically raise
barriers (direct consequence). This action is called strategic entry deterrence, which comes from the
industrial organization (IO) literature (see for more information paragraph 4.1). The aim is to raise
barriers and thereby prevent potential competitors from entering an industry (Wignaraja, 2005). This
can be done by limit pricing.

3.1.2 Power of suppliers

A powerful supplier is negative for a firm because they can charge high prices and squeeze
profitability (Porter, 2008). Some factors that determine the strength of suppliers are: high costs of
switching to other suppliers for the buyers, non-availability of substitutes and concentration on a few
suppliers (Ray, 2010). M&As can influence the power of suppliers. Suppliers have to deal with one
large company instead of two separate smaller firms (Sankaran & Vishwanath, 2008). The
consolidated firm offers better bargaining vis-à-vis the suppliers due to size effects. The buyer power
of the merging firm increases (Shahrur, 2005). The power of suppliers diminishes.

Ahern (2010) argues that the bargaining power of a target is inversely related to its most fundamental
dependency on an acquirer: its product market interactions. He combines dependency with bargaining
power. Ahern (2010) proposes that a target that is more dependent upon an acquirer (in this case
supplier) has less bargaining power in a diversifying merger, and hence will capture less of the gains.
The low bargaining power results in more power of suppliers.
The power of suppliers changes in case of a vertical M&A (Sankaran & Vishwanath, 2008). The
consolidated firm will seek materials further up the value chain. They will have to deal with new
(other) suppliers or other materials at the same supplier. Another way to make a shift of supplier(s) is
by diversification. Below you will find a short elaboration of diversification since it is importance for
this thesis.

Premaster thesis BA 20  
Sampler (1998: 351) argues that “what drives the profitability of the diversification is the degree of
relatedness in terms of products and markets of a firm's various businesses”. Diversification is either
understood using the characteristics of the firm’s dominant industry or by looking separately at each
industry environment of the firm’s business units (Farjoun, 1994). Palepu (1985) and Rumelt have
studied the relation between diversification and performance. These were industrial organization
studies (for further information on industrial organization, see chapter 4). The results of this stream of
research showed that diversification is not always beneficial (Sampler, 1998; Palepu, 1985). They also
showed that firms diversified into related businesses were more profitable than other diversified firms
(Amit & Livnat, 1988; Palepu, 1985; Markides, 1995). The so-called related diversifiers (or related
diversification) are companies that expand their operations beyond current markets and products, but
still operate within existing capabilities or within the existing value network. They expand their
existing product line or markets. The opposite of related diversification is unrelated diversification
(Morck et al., 1990). This is the case when a business adds new, or unrelated, product lines or
markets. The new business does not fit with the existing business. Amit and Livnot (1988: 163) state
that “low return- low risk firms are usually unrelated diversifiers, with relatively lower market risks
and lower market-to-book ratios”.
M&As are used as a method of diversification, focusing on both motives for different types of
combinations (Larsson & Finkelstein, 1999). Mergers are a way to expand current markets (Walter &
Barney, 1990). Walter and Barney (1990: 83) summarize their findings about the relation between
M&As and diversification as follows: “diversification is a consequence of the strategic imperatives of
utilizing financial strengths instead of a hedging ‘strategy’ per se”. Their view supports the view of
Rumelt (1974). Expanding current markets is the dominant motive in mergers and acquisitions
(Walter & Barney, 1990).

3.1.3 Power of buyers

Powerful buyers have the ability to force prices down, demand better quality or more service and play
industry participants off against one another (Porter, 2008). Concentrated and price sensitive buyers
have more power. The consolidation of two firms increases bargaining power, which can lead to an
oligopoly and monopolistic situation (high industry concentration) (Sankaran & Vishwanath, 2008).
In case of an oligopoly or monopoly buyers have low power, which is positive for a firm. Companies
have the ability to set their own prices and are not influenced by market forces or intensive
competition.

The increased bargaining power of M&As can also lead to insufficient investments of suppliers. This
is negative for buyers. So are scale-decreasing mergers (Shahrur, 2005), which is the opposite of
scale-increasing mergers. Scale-increasing mergers (economies of scale) result in higher output levels
and lower output prices, which benefits byers. Byers can also benefit from M&As when lowered input

Premaster thesis BA 21  
prices are passed on to them, due to increased buyer power vis-à-vis the supplier (Shahrur, 2005; Fee
& Thomas, 2004).

3.1.4 Threat of substitutes

DePamphilis (2010) states that threat of substitutes is determined by five factors. These factors are
relative price, relative performance of competing products, perceived quality and the willingness of
the customer to switch products.
M&As have the ability to lower input prices due to increased bargaining power, cost-efficient
production and/or investment policy. This can result in lower output prices, which changes the threat
of substitutes. Scale-increasing mergers can also cause lower output prices (economies of scale). The
threat of substitutes diminishes because price is not a motive to choose a substitutive product. A
consolidated company can also increase quality but keep the output price unchanged. This is possible
through increased bargaining power vis-à-vis the supplier.
Substitutes can benefit from M&As when they are scale decreasing or even fail. Output prices will
stay unchanged or increase and investments will be insufficient. The negative M&A developments
will lead to a bad competitive position.

3.1.5 Rivalry among existing competitors

Rivalry among existing competitors can take many forms, including price discounting, new product
introductions, advertising campaigns and service improvements. The extent of rivalry depends on the
intensity with which competitors compete and on the basis on which they compete (Porter, 2008). The
basis on which firms compete refers to the dimension on which competition takes place. This has a
major influence on profitability (Porter, 2008). There are two types of rivalry: competition based on
imitation/price discounting and competition based on strategic positioning (Porter, 2002) (see
appendix VI).

The concentration of firms or industry concentration can examine the nature of competition within an
industry (Sampler, 1998). In Porter’s view, firm profitability is a function of the nature of
competition, as defined by industry structure and firm strategy (Hill & Deeds, 1996).
The nature of rivalry in an industry is altered by mergers and acquisitions that introduce new
capabilities and ways of competing (Porter, 2008). In some industries, companies turn to mergers and
consolidation not to improve cost and quality but to attempt to stop intense competition. The aim is a
high concentration. Walker (2000) points out that it is difficult for an acquiring firm to gain a
competitive advantage over rival firms. His study found no evidence that the stocks of acquiring firms
outperform those of matching firms.

Premaster thesis BA 22  
Shahrur (2005: 85) shows that “rival firms will benefit from a horizontal takeover since the increased
buyer power will lead to more intense competition in an imperfectly competitive supplier industry”.
Suppliers need to be concentrated in order to have a positive effect for rival firms. Researches add
another gaining factor for rivals, the M&A announcement. Rivals experience abnormal returns at
M&A announcements (Sharur, 2005; Fee & Thomas, 2004; Song & Walkling, 2000). This applies for
gaining rivals (positive-information-signaling). They experience significantly positive abnormal
returns for a year after the announcement.

M&As can also be negative for rival firms. Chatterjee (1986) points out that a merged firm can lower
its prices due to cost-efficient production and/or investment policy. Cost-efficient will also reduce the
demand for factor inputs (raw materials) and thus increasing factor prices. Rivals will face lower final
prices and higher costs of raw material (Chatterjee, 1986). This also called as the product/factor price
effect. The rival firms will lose market value as a consequence to the product/factor price effect.

The rate of innovation can reshape rivalry. However, innovation is not enough to make an industry
structurally attractive (Porter, 2008). M&As do affect the innovation rate and innovation affects
rivalry. This indirect relation M&As and industry structure through innovation makes it important
enough to mention.
There are only a few studies that examine the effect of M&A on innovation performance (or R&D).
Man and Duysters (2003) summarize results of different studies.
-­‐ Ahuja and Katila (2001) find that large company should focus their M&A activity on small
targets if they would like to increase their innovative performance;
-­‐ Chakrabarti, Hauschildt and Süverkrüp (1994) find that innovative performance diminishes
when a large company takes over a small one and that M&As between companies of equal
size perform better;
-­‐ Hagedoorn and Duysters (2002) also find that M&As between companies of similar size
perform better.

These results show that firm size is an important variable. A balance of size and relatedness of
acquisitions is favored (Ahuja & Katila, 2001). Hitt, Hoskisson, Ireland and Harrison (1991) confirms
the strong relationship between firm size and R&D.

Ahuja and Katila (2001) view an acquisition as the union of two knowledge bases. They look at the
effects of the relative and absolute size of the acquired knowledge base. They do not find impact of
non-technological acquisitions on subsequent innovation output (Ahuja & Katila, 2001; Man &
Duysters, 2003). They do find a positive and negative impact on innovation within technological
acquisitions. Absolute size of the acquired knowledge base has a positive impact on innovation

Premaster thesis BA 23  
output, while relative size of the acquired knowledge bases has a negative impact on innovation
output (Ahuja & Katila, 2001). It reduces innovation output.
Hitt et al. (1991) investigate the effects of M&As on R&D input and R&D output. They found that a
“negative relationship exists between a firm’s acquisitions and its relative R&D intensity, measured as
R&D investment divided by sales and adjusted for average industry R&D intensity” (Hitt et al., 1991:
695). So M&As have a negative effect on R&D input. Acquisitions also negatively affect patent
intensity (R&D output) primarily to the extent that they increase diversification (Hitt et al., 1991).

3.2 Conclusion
M&As affect industry structure. M&As overcome entry barriers and have the ability to raise entry
barriers. The fist effect is negative for incumbents and the second for possible new entrants. The
power of supplier diminishes due to size effects. The consolidated firm offers better bargaining vis-à-
vis the suppliers. This and cost-efficient production and/or investment policy can result in lower input
prices. The increased bargaining power of the consolidated firm can lead to an oligopoly and
monopolistic situation. The power of buyers diminishes in this situation. Buyers can benefit from
M&As when the lowered input prices are past on to them. This and improve of quality are negative
for substitutes and rival firms. M&As have the ability to stop intense competition. Rivals can benefit
from M&As when more competition among suppliers is caused.

Premaster thesis BA 24  
 4. INDUSTRY STRUCTURE AND M&A PERFORMANCE

Many have studied industry structure (for example Porter, Rumelt and Schmalensee) and the effects
that drive firm performance. This chapter will look at different studies and theories to answer the
following research question:
What is the effect of industry structure on M&A performance?

There are two schools within strategic management, which have a significant influence (Mauri &
Michaels, 1998). The resource-based view argues that firm heterogeneity is significant and persistent,
whereas industrial organization suggests that industry effects dominate over time (Mauri & Michaels,
1998). Researches have tried to find an answer for the question, is firm performance driven by
industry or firm effects (Hawawini et al., 2003)?

4.1 Industry effects

The discipline industrial organization focuses on an industry-based explanation (Powell, 1996). There
are several schools within industrial organization (IO). All schools assume that firms within an
industry are homogeneous (Mauri & Michaels, 1998). The traditional school is the Structure-Conduct-
Performance model or paradigm. Mason (1939) and Bain (1956) developed the Structure-Conduct-
Performance (SCP) model. This model is the foundation of the five forces model of Porter
(Houthoofd, 1996). Appendix VII shows the relations of structure, conduct and performance. The
structural characteristics determine conduct (or behavior of the firm) and conduct determines
performance. The SCP model proposes the existence of a relationship between structure and
profitability (Hawawini et al., 2003). Firm performance depends on its conduct in matters such as
pricing policy, R&D, and investment policy. Firm conduct (in other words strategy), in turn, depends
on industry structure, which includes concentration level, barriers to entry and degree of product
differentiation (Spanos et al., 2004). Companies in the same industry are confronted with the same
structural characteristics and therefore behave identical (conduct). Industry structural factors constrain
firm conduct. This is the reason why conduct is not a determent of performance (Houthoofd, 1996).
The industry structure in which a firm operates is the main driver of performance variations
(Hawawini et al., 2003). The market (or industry) structure is exogenous and stable (Mauri &
Michaels, 1998). The SCP model says that exogenous industry effects such as barriers to entry and
concentration are the dominant influences on performance (Ruefli & Wiggins, 2003).
The two others schools (Schumpeterian and Chicago) view market structure differently than the
traditional school (Hill & Deeds, 1996). The Schumpeterian and Chicago school view market
structure as dynamic and constantly evolving (Mauri & Michaels, 1998). These schools are also called
the behavioristic SCP-paradigm (Houthoofd, 1996).

Premaster thesis BA 25  
Porter has presented a framework for diagnosing industry structure, built around five competitive
forces that erode long-term industry average profitability (Porter, 1991). In the research growing out
of the industrial organization tradition, industry structure is a central determinant of firm performance
(McGahan & Porter, 1997).

Porter's well known five forces model is based on two arguments: (1) industry structure determines
the nature of competition in an industry, and (2) the nature of competition is a major determinant of
firm profitability (Hill & Deeds, 1996). Appendix VIII shows Porter’s view; firm profitability is a
function of the nature of competition, as defined by industry structure (Hill & Deeds, 1996).

Porter adds another factor to his model (appendix VIII). He argues that through choice of strategy a
firm can shape industry structure, and hence the nature of competition to its advantage (Hill & Deeds,
1996). Industry structure is partly influenced by external factors and partly influenced by firm actions
(Porter, 1991). Porter (1991) recognizes the role of firm’s conduct in influencing performance. A
strategic choice is the product of an understanding of industry structure (Spanos et al., 2004). Firms
are able to influence industry structure and therefore firm performance. This study confirms the
importance of industry factors on firm profitability (McNamara, Aime, & Vaaler 2005) and confirms
that there is a relation between industry structure and firm performance.

Industry structure constrains the behavior of its component firms (conduct), which in turn leads to
industry-specific performance differentials between firms (Hawawini et al., 2003). In other words,
“shared industry characteristics such as market structure and imitation of strategies lead to
convergence of core strategies and performance among firms in the same industry and differences
across industries” (Mauri & Michaels, 1998: 213).

4.2 Firm effects

In the 1980s there were major shifts in the strategic management field (Hawawini et al., 2003). This
school or line is called the resource-based view. It argues that firm performance is most influenced by
unique organizational processes and industry structure is less important (McGahan & Porter, 1997). It
suggests that firm-specific attributes drive both strategies and performance outcomes (Mauri &
Michaels, 1998).
Rumelt (1991) is the most influential scholar (McGahan & Porter, 1997) in this school. Rumelt’s
research is based on Schmalensee’s (1985) research work. Schmalensee provided the first research
that investigated industry and firm effects. The differences between studies are displayed in appendix
IX.

Premaster thesis BA 26  
This research question focuses on industry effects. Firm effects are mentioned to provide an overall
picture. The following text will therefore elaborate on the industry effect within this school.

Schmalensee’s (1985) data implied that firm effects do not exist (see appendix IX) thus his findings
support the traditional school of industrial organization (Schmalensee, 1985; Powell, 1996).
Schmalensee’s results showed that industry membership/effects accounted for 19,6 percent of
observed variance in business unit returns (Schmalensee, 1985; Powell, 1996; Hawawini et al., 2003;
McGrahan & Porter, 1997). Market share accounted for a negligible amount, which was selected as a
variable for firm effects.

Membership of an industry is the determent of strategy and performance. This is sustained through
entry barriers (Mauri & Michaels, 1998). Mauri and Michaels (1998) added some findings to this.
Their findings suggest that firms competing in the same industry tend to develop homogeneous
competitive strategies for investing in technology and marketing resources.

Rumelt tried to clarify the large degree of error Schmalensee made (Rumelt, 1991; Hawawini et al.,
2003). Rumelt did find evidence of both industry and firm-specific effects (Rumelt, 1991; Mauri, &
Michaels, 1998). He reported that industry effects account for 9 to 16 percent of variation and
business-unit effects explain 44 to 46 percent of variation (McGrahan & Porter, 1997; Hawawini et
al., 2003; Rumelt, 1991). Stable business-unit effects are six times more important than stable
industry effects (Rumelt, 1991; Powell, 1996). Business-units within an industry differ more than
industries differ from each other (Rumelt, 1991; Powell, 1996). Rumelt could not identify the true
strength of industry effects. He did show that companies are not homogeneous but “extremely
heterogenous” (Rumelt, 1991).

4.3 Effects on firm performance

Paragraph 4.1 and 4.2 discus the firm and industry effects but do not address the effects of industry
structure on M&A performance. This thesis looks at M&A performance in terms of firm performance.
Firm performance concerns the profitability of the firm (see paragraph 1.4). Siegel and Simons (2010)
use profit and market share as the indictors of performance. Most studies use ROA as the measure
(accounting measure) for firm performance (Ruefli & Wiggins, 2003). Hawawini et al. (2003)
employed both economic measures and ROA and found no difference in their results across these
measures (Ruefli & Wiggins, 2003). The economic measures were used as an alternative to the
accounting-based ROA. The economic measures are economic profit per dollar of capital employed
ant total market value per dollar of capital employed.

Premaster thesis BA 27  
Recent resource-based view studies have found that approximately 10 percent of the variance in firm
performance is attributable to industry effects (McNamara et al., 2005; Short et al., 2007) and thereby
recognizing the importance of industry membership for firm performance (Short et al., 2007). Which
helps to shape firm performance. A change of the industry structure will have direct consequences for
the performance of the firm. Unfortunately these studies do not further break down the independent
variables. The mentioned studies merely address the existence and variance of industry effects on firm
performance (Pock, 2006).

Spanos et al. (2004) differs from all the other studies. They use several dimensions of industry
structure to determine firm performance: industry concentration, industry entry barriers and industry
growth. Firm profitability is measured with the price-cost margin (PCM). The PCM “represents the
proportional difference between output price per unit and the marginal cost of producing an additional
unit” (Spanos et al., 2004: 149). IO and strategic management research have addressed the dominant
role of these industry structural factors in determining profitability (Bain, 1956; Mason, 1939).
Research within the traditional SCP framework assumed that industry structure, in the form of
industry concentration and entry barriers (i.e., industry advertising, cost efficiency, cost efficiency,
capital and technology) are key determinants of profitability. These industry characteristics serve to
insulate some firms from excessive competition, which results in higher than normal profitability.
Concentration allows high prices and high profitability (monopoly pricing) through the increase of
cooperative behavior. Higher concentration gives firms a greater degree of control in managing price
through collusion, and hence profits (Bain, 1951). Entry barriers are important because new entrants
are attracted by high prices (Scherer & Ross, 1990; Spanos et al., 2004), which can enhance
competition. As mentioned before, there are several ways to constitute barriers. High entry barriers
protect and increase high prices and high profitability of the incumbents. The last industry structural
factor is growth. The relationship between growth and profitability can be positive or negative, but
studies found significant evidence that they are positive associated (Hay & Morris, 1991; Spanos et
al., 2004).
Spanos et al. (2004) results show a positive influence of industry structure on firm performance.
Spanos et al. (2004) only found a positive impact of entry barriers on firm performance, despite the
other studies. They found no significant effects of industry concentration and growth. A remark must
be made considering the study of Spanos et al. (2004). The study only concerns Greece, which could
implicate that the outcomes for other countries might be different.

4.4 Conclusion
Studies point out that industry structure affects firm performance. A large stream of studies (resource-
based view) addresses the importance of industry effects. They mention the variance of industry
effects on firm performance. This does not say how the industry effects affect firm performance. The

Premaster thesis BA 28  
answer to this question lies in the IO and strategic management research. These studies break down
industry structure in terms of industry concentration, entry barriers and growth. A high concentration,
in combination with entry barriers and growth, allow high prices and high profitability. The
characteristics strengthen in this case the competitive position of a firm, which results in an
improvement of the firm performance. Conversely, firms within an unconcentraded industry, no entry
barriers and no growth will likely behave competitive, driving down profitability.

Premaster thesis BA 29  
 5. M&AS AND M&A PERFORMANCE

This chapter will look for a direct relation between M&As and M&A performance. The last research
question is:
What is the effect of M&As on M&A performance?

Chapter two discusses the different factors that drive M&A performance. M&As affect these factors
and the factors affect M&A performance. This is not a direct relation between M&As and M&A
performance. Other studies need to be discussed in order to answer the research question.
Many studies use accounting measurements to address the impact of M&As on M&A performance.
Accounting measurements are part of firm performance (see paragraph 1.4). M&A performance will
be used in terms of firm performance and acquisition performance.

Siegel and Simons (2010) look at the productivity of a plant to identity the possible influence of
M&As on firm performance. They found evidence that plants experience an improvement in relative
performance after sale. This could be addressed as a direct relation of M&As on firm performance.
Siegel and Simons (2010) use profit and market share as indicators of performance. The first indicator
is affected by M&A, but evidence shows that market share is not. Market share experiences no change
after an M&A. Also, the increase in plant productivity does not improve profit due to the costs of an
M&A. Thus, M&As do not appear to improve firm performance.

King et al. (2004: 192) conclude that “M&A activity does not create superior post-acquisition
performance for acquiring firms”. King et al. (2004) does not solely look at firm performance but use
multiple measures. They researched four variables that impact post-acquisition performance. The
findings result that post-acquisition performance is moderated by unspecified variables. The results of
Siegel and Simons (2010) are consistent with the results of King et al. (2004), M&As do not improve
firm performance. The abnormal returns for acquiring firms are zero or negative. Moeller et al. (2005)
confirms the view that M&As do not improve performance. Moeller et al. (2005) reveal that
shareholders in the acquiring firms endure losses.

The above-mentioned studies conclude that M&As do not improve performance, but there is a direct
relation. Most studies examine the resources or factors that lead to performance, for example based on
the resource-based theory (Crook et al., 2008; Newbert 2008). Studies have used moderators to
indicate the effects of M&As on firm performance (King et al., 2004; Datta et al., 1992; etc.).

Paragraph 2.1 discusses combination potential. Combination potential of M&As is usually

conceptualized in terms of their degree of relatedness (Larsson & Finkelstein, 1999; Datta, 1991;

Premaster thesis BA 30  
Kusewitt, 1985; Singh & Montgomery, 1987), the relatedness between joining firms. Relatedness is
an important factor that drives performance. The next paragraphs will elaborate this subject.

5.1 Relatedness
There are two types of M&As: related M&As and unrelated M&As (Datta et al., 1992; Shelton, 1988;
Singh & Montgomery, 1987; Morck et al., 1990; Lubatkin, 1987; Seth, 1990). Lubatkin (1987), Seth
(1990), Singh and Montgomery (1987) and Salter and Weinhold (1987) measure performance of a
related M&A based on three sources: economies of scales, economies of scope, and market power
(Datta et al., 1992). Unrelated M&As or conglomerate M&As involve unrelated companies,
companies in different geographic market, or companies whose products do not directly compete with
those of the acquiring firm (King et al., 2004).

Larsson and Finkelstein (1999), Salter and Weinhold (1987) and Shelton (1988) not solely focus on
the relatedness between joining firms. Larsson and Finkelstein (1999) distinguish strategic similarity
and strategic complementarity (see also paragraph 2.1). Salter and Weinhold (1987) and Shelton
(1988) researched the differences between a related-complementary fit and related-supplementary fit
(see appendix X). A related-complementary fit is a horizontal integration and a related-supplementary
fit is a vertical integration.

5.1.1 Effects
Rumelt (1974) found significant differences between the performance of related firms and unrelated
firms, favoring the former (Seth, 1990). Singh and Montgomery (1987) point out the gains (or effects)
of related and unrelated M&As on performance. Specialized resources in related acquisitions may
result in increased efficiencies in technological or market activities, or increased market-specific
market power. The results from Lubatkin (1987) showed that M&As are a way to permanent gains in
common stock value for both acquiring an acquired firms ‘stockholders.

Unrelated acquisitions have more general gains. The effects of an unrelated acquisition are: reduced
financing costs, increased administrative efficiencies, or superior human capital not specific to
products or business (Singh & Montgomery, 1987). Increase in market power is also a possible effect
for unrelated acquisitions but it arises from increases in the absolute size and breadth of the firm.
Unrelated acquisitions “may increase the opportunities for predatory pricing and reciprocal buying,
and reduce intra-industry rivalry through the presence of several large firms facing each other in many
markets” (Singh & Montgomery, 1987: 380). Specific gains are not expected to be present in
unrelated acquisitions.
Unrelated or conglomerate acquisitions also have a negative impact. Datta et al. (1992) results showed
that conglomerate acquisitions have a negative impact on the wealth of the bidding firm shareholders.

Premaster thesis BA 31  
The above-mentioned information raises the next question: Which form of M&A (related or
unrelated) has the most positive effects on M&A performance? Rumelt (1974) and Singh and
Montgomery (1987) share the same vision. Both studies favor related acquisitions. Singh and
Montgomery (1987) arguments are that related acquisitions have higher returns than acquired firms in
unrelated acquisitions. Shelton (1988) joints the preference for related M&As. Acquisitions that
permit expansion into new markets (related-supplementary) or within the same business (identical)
create the most value (Shelton, 1988) (see appendix X).

Lubatkin (1987), Seth (1990) and Larsson and Finkelstein (1999) do not favor one form of M&A.
Lubatkin’s (1987) results did not show that some product and market relatedness is necessarily better
than none and Seth (1990) results showed that both unrelated and related acquisition strategies create
significant synergies. Larsson and Finkelstein (1999) emphasize the power of combination, a mix of
similarity and complementarity. Their view has also been used for paragraph 2.1.

5.3 Conclusion
Many studies have assigned moderators that affect the relation of M&As and M&A performance.
This chapter discussed a many examined moderator: relatedness. This does not answer the research
question. Is there a direct relationship between M&A and M&A performance without being
moderated or mediated? Siegel found a (partial) direct relation between M&A and M&A
performance, but it was negative. M&As do not improve firm performance. Other influential studies
have addressed moderators, specified or not. Concluding, there is no direct relation between M&A
and M&A performance without being moderated or mediated.

Premaster thesis BA 32  
 6. CONCLUSION AND DISCUSSION

This chapter will conclude the findings and results of the previous chapters. It will answer the
problem statement and discuss the results. The last two paragraphs will address the practical
implications, limitations of this thesis and future research.

The problem statement of this thesis is:

“What is the effect of mergers and acquisitions (M&As) on industry structure and through this on
M&A performance?”

Chapter three showed that M&As influence industry structure. In short: they overcome and raise
barriers, power of suppliers and buyers diminishes due to improved bargaining power and the threat
of substitutes and rival firms decreases. The consolidation of two firms increases bargaining power,
which can lead to an oligopoly and monopolistic situation (high industry concentration). Byers and
rivals can also benefit from M&As. Buyers benefit when for example the lowered input prices are
past on to them and rivals benefit when more competition among suppliers is caused. This answers
the first part of the problem statement.

Chapter four answers the second part of the problem statement. Studies have addressed the existence
of industry effects on firm performance, but this does not fully answer the second part of the problem
statement. The answer lies in the IO and strategic management field. Industry structure in the form of
industry concentration, entry barriers and growth are key determinants of profitability. Industry
concentration refers to the number of major competitors in a given industry (rivalry). The effects on
M&A performance are positive in case of high concentration, entry barriers and growth. This will
result in high prices and high profitability. The effects on M&A performance are negative in case of
an unconcentrated industry, no entry barriers and no growth. Firms within the industry will behave
competitively, which drives down the profitability.

The problem statement is answered but chapter five needs to strengthen this. There cannot be a direct
relation between M&A and M&A performance if industry structure is a mediator. Otherwise it would
be a moderator. Findings in chapter five conclude that there is no direct relation between M&A and
M&A performance. This relation is moderated or mediated, depending on the variable.

In conclusion, industry structure is a mediator. M&As affect industry structure and industry structure
affects M&A performance.

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6.1 Practical implications
The provided information is most valuable for the management of a firm. It will help to make a
decision whether or not to merge with another firm or to take over another firm (acquisition). It helps
them to think a view steps forward. Firms can see the consequences of M&As, which can influence
their goals. This thesis contributes to a better understanding of M&As (referring to paragraph 1.5.2).

6.2 Limitations
There are two limitations concerning this thesis. First of all, the information of how industry structure
affects performance is not linked to M&As. This limits the findings and the ability to answer the
problem statement. The second limitation concerns the sources. This thesis is solely based on
literature. Quantitative research would have completed the findings and conclusion.

6.3 Future research

The limitations of this thesis offer opportunities for future research. This thesis can be elaborated with
quantitative research, which will increase the reliability of the conclusion. Secondly, the theory can be
expanded with extra background material about industry structure, M&As and M&A performance.
This would also improve the reliability of this thesis.

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 APPENDICES

Strategic  

Human  

Organizational  

APPENDIX I
Synergy model

APPENDIX II
Integrative Model (Larsson & Finkelstein, 1999)

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 APPENDIX III
Model of M&A Performance (Larsson & Finkelstein, 1999)

APPENDIX IV
Five Forces (Porter, 1991)

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 APPENDIX V
Merger effects on the health of industry competition (Porter, 2002)

APPENDIX VI
Basis of rivalry (Porter, 2002)

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 Structure  

Conduct  

Performance  

APPENDIX VII
SCP model

APPENDIX VIII
Porter’s model

APPENDIX IX
Comparison Schmalensee, Rumelt and McGrahan and Porter (Hawawini et al., 2003)

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 APPENDIX X
Acquisition classification system (Shelton, 1988)

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