Merger & Acquisition by Family Firms: The Effect of Distance

Abstract

This paper looks at the merger and acquisition (M&A) behavior of family firms, in particular their spatial strategy. Existing research on M&A by family firms have looked at the performance implications of M&A by family firms (Basu, Dimitrova, & Paeglis, 2009; Bauguess & Stegemoller, 2008) and found that family firms prefer generic expansion compared to growth through M&A (Caprio, Croci, & Del Giudice, 2011; Shim & Okamuro, 2011). However this literature has overlooked the spatial dimension of M&A strategies. Firms have to seek information and choose among geographically distributed alternatives (Dicken, 1971). Previous studies have pointed out that, the difficulty of search increases with distance (Chakrabarti & Mitchell, 2014). However what is less well known is the impact of geographical distance on search for specific ownership categories like family firms. There is also limited understanding of the factors that exacerbate or ease the impact of geographic distance for family businesses when they seek new resources. This lack of understanding of the spatial strategy adopted by family businesses in acquisitions is because “there are few empirical articles on M&As [mergers and acquisitions] involving family firms” (Mickelson & Worley, 2003: 252) in the first place. In order to address this gap in the literature we evaluate the impact of distance on the likelihood of family firms undertaking M&A, in an emerging market context. We argue that the difficulty of search increases with distance, particularly for family businesses, but the impact of geographic distance decreases for these firms with the availability of critical resources.

Using insights from behavioral agency theory (Gomez-Mejia, Cruz, Berrone, & De Castro, 2011; Gómez-mejía, Haynes, Núñez-nickel, Jacobson, & Moyano-Fuentes, 2007; Wiseman & Gomez-mejia, 1998) and the resource based view (RBV) (Barney, 1991, 1996; Wernerfelt, 1984, 1995) we model the impact of geographic distance on the probability of acquisition by a family firm among a range of potential targets. We propose that family firms are cautious and conservative and consequently find it harder to acquire distant targets compared to non-family firms. However the availability of the right resources enhances the ability of these firms to acquire over greater distances. We examine 924 domestic acquisitions announced between 1991 and 2015 by 405 Indian chemical manufacturing firms. Our results suggest that family firms are less likely to undertake M&A over longer distances. However family firms are able to overcome the distance barrier in M&A, if a) They have prior M&A experience; b) The target is urban; and c) It is a first generation family firm.

This paper contributes to existing literature in several ways. It contributes to the growing literature on family firm heterogeneity and its impact on strategy (Chang & Hong, 2000; George & Kabir, 2012; Silva, Majluf, & Paredes, 2006). This study also contributes to the literature on M&A by family firms (Basu et al., 2009; Bauguess & Stegemoller, 2008; Caprio et al., 2011; Shim & Okamuro, 2011) by providing a nuanced understanding of the mechanisms influencing family firms to opt for distant M&As. Our results also add to a fragmented body of research (Chakrabarti & Mitchell, 2014), that acquiring firms face constraints that limit their ability to systematically consider a spatially unbounded set of potential target firms. Finally this paper adds to the growing literature based on emerging economy firms by providing a better understanding of these firms.