Stakeholder Conflict in Mergers and Acquisitions and the Importance of Post-Merger Integration

Abstract

This doctoral thesis consists of three papers. The first paper theoretically reapplies Hirshleifer's (1991) paradox of power to stakeholder conflicts as a primary source of synergy impairment in mergers and acquisitions (M&A). It further extends the theoretical framework through focus on post-merger integration (PMI) as a mitigating factor in post-M&A value-decreasing combats. It outlines that mergers aiming for synergy can cause conflictual instead of cooperative actions within primary stakeholder groups due to violation of their interests. If acquirer management fails to counteract with high-quality PMI measures, the transaction will destroy stakeholder wealth due to deterioration of synergy. A stakeholder-oriented PMI is worth conducting up to the point where the net merger synergy still exceeds unresolved synergy impairment plus the direct cost of PMI. Applying the Cournot-Nash solution concept, the theory confirms that synergy potential grows with increasing target size. This means that so-called “merger of equals” have the highest synergy expectation and at the same time the lowest risk of synergy impairment due to missing incentives for the target stakeholders to oppose an acquisition. Nevertheless minor relative deal size encourages stakeholder conflict due to beneficial wealth transfers in favor of the target firm, provided that the conflict does not escalate. The second paper analyzes 1,035 effective US mergers and acquisitions in the period 2005-2014. It finds a significant negative long-run financial and operating performance measured by buy-and-hold abnormal returns and abnormal operating cash flow returns. On average, US acquirers achieve a -8.2% stock price underperformance and a decline in pre-tax operating cash flow returns of -3.1% in the subsequent 36 months. The paper confirms that cash-financed transactions and the takeover of private targets positively impact M&A profitability. Controlling for certain firm and deal characteristics, further determinants are identified and tested which firstly, negatively influence synergy realization in general, and secondly, encourage post-merger stakeholder conflicts that reinforce synergy impairment, or even lead to dis-synergy. Based on robust results of multivariate regression analyses on acquirer performance, this paper concludes that the main post-merger value-influencing factors are integration capacity, complementarity of economic environment, and decisiveness of stakeholder conflict. This ultimately justifies the theoretical foundation of the existence of post-merger stakeholder conflicts and the need for a well-managed PMI as a mitigating mechanism to improve M&A performance. The third paper empirically examines the post-merger stakeholder conflict hypothesis in M&A by applying a sample of 425 effective US transactions from 2005-2014. The theory claims that potential violations of primary stakeholder interests cause non-cooperative stakeholder actions and an impairment of merger synergy. A stakeholder-oriented post-merger integration (PMI) may serve as a value enhancing mechanism to mitigate the negative impact on long-term merger outcomes. The theory is tested by showing that a high-quality PMI with focus on the four dimensions of management attention, stakeholder information, integration support, and risk awareness (all measured by textual analysis of annual reports and publicly available information), on average results in a 22% higher acquirer stock return and an increase in operating performance of 4% over a three-year period compared to a portfolio of reference firms matched by size and book-to-market ratio. This paper also finds, as a result of high-quality integration, that improved employee productivity and customer demand positively influence long-run M&A performance. Finally, it is shown that acquirer synergy expectation, pre-deal M&A activity, growth prospects, as well as deal size drive PMI quality.