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

55 Pages Posted: 11 Aug 1997  

Steven N. Kaplan

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Mark L. Mitchell

AQR Capital Management, LLC; CNH Partners

Karen H. Wruck

Ohio State University - Fisher College of Business, Department of Finance

Date Written: July 1997

Abstract

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.

JEL Classification: L1, L10, L21, L22, G31, G34

Suggested Citation

Kaplan, Steven N. and Mitchell, Mark L. and Wruck, Karen H., A Clinical Exploration of Value Creation and Destruction in Acquisitions: Organization Design, Incentives, and Internal Capital Markets (July 1997). Center for Research in Security Prices (CRSP) Working Paper No. 450. Available at SSRN: https://ssrn.com/abstract=10995 or http://dx.doi.org/10.2139/ssrn.10995

Steven Neil Kaplan (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-4513 (Phone)
773-702-0458 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Mark L. Mitchell

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

CNH Partners ( email )

Two Greenwich Plaza
1st Floor
Greenwich, CT 06830
United States
(203) 742-3001 (Phone)

Karen H. Wruck

Ohio State University - Fisher College of Business, Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-688-5443 (Phone)
614-292-2418 (Fax)

HOME PAGE: http://www.cob.ohio-state.edu/~kwruck

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