A Clinical Exploration of Value Creation and Destruction in Acquisitions: Organizational Design, Incentives, and Internal Capital Markets

This paper presents clinically-based studies of two acquisitions that received very different stock market reactions at announcements one positive and one negative. Despite the differing market reactions, we find that, ultimately, neither acquisition created value overall. In exploring the reasons for the acquisition outcomes, we rely primarily on interviews with managers and on internally generated performance data. We compare the results of these analyses to those from analyses of post-acquisition operating and stock price performance traditionally applied to large samples. We draw two primary conclusions. (1) Our findings highlight the difficulty of implementing a successful acquisition strategy and of running an effective internal capital market. Post-acquisition difficulties resulted because: (a) managers of the acquiring company did not deeply understand the target company at the time of the acquisition; (b) the acquirer imposed an inappropriate organizational design on the target as part of the post-acquisition integration process; and (c) inappropriate management incentives existed at both the top management and division level. (2) Measures of operating performance used in large sample studies are weakly correlated with actual post-acquisition operating performance. * University of Chicago and NBER, University of Chicago, and Harvard University, respectively. We especially thank Shel Erikson, Thomas Hix, William Berger, Michael Grimes and Joseph Chamberlain of Cooper Cameron, John Deakins of Cameron Iron Works, and James Ringler and Larry Skatoff of Premark for talking with us and making this study possible. We thank Steven Hoffman, Sherry Roper, and Bradley Thompson for excellent research assistance. Comments from Larry Berlin, Derrick Deakins, Marc Knez, Toby Stuart, G. William Schwert, Rene Stulz, and seminar participants at the National Bureau of Economic Research and University of Chicago were very helpful. This research has been supported by the Sloan Foundation through a grant to the National Bureau of Economic Research, and by a Merrill Lynch grant to Mitchell to study mergers and acquisitions. Address correspondence to Graduate School of Business, University of Chicago, 1101 East 58th Street, Chicago, IL 60637.