A Clinical Exploration of Value Creation and Destruction in Acquisitions: Organization Design, Incentives, and Internal Capital Markets
Steven N. Kaplan
University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)
Mark L. Mitchell
Karen Hopper Wruck
Ohio State University - Fisher College of Business, Department of Finance
Center for Research in Security Prices (CRSP) Working Paper No. 450
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.
Number of Pages in PDF File: 55
JEL Classification: L1, L10, L21, L22, G31, G34working papers series
Date posted: August 11, 1997
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