Manish Popli
Strategic Management Area, IIM Indore
Email: manishp@iimidr.ac.in; Phone: 0731-2439542
This study tries to look at the contextual factors which impact the post-acquisition performance of the firms. In particular, this study addresses the influence of a firm’s governance and management structure on long-term post-acquisition value creation in M&As, highlighting the importance of business groups (BGs) affiliation as a key resource. Historically, BGs have dominated the economies of emerging markets, such as India, South Korea, Taiwan, and various Latin American countries. Their effects on firm performance, innovation, and internationalization are well documented. In particular, scholars argue that BGs are critical for filling voids in the economic institutions of imperfect markets for labor, capital, technology, and so forth. More recent studies debate though whether institutional transitions in emerging economies have attenuated these affiliation advantages. We argue that even with such institutional developments, BG affiliation continues to confer advantages to affiliated firms, in the form of resources and superior capabilities in managing diversified organization. These advantages are particularly useful when affiliated firms engage in M&As, granting them unique competitive advantages over unaffiliated firms when they go to derive the benefits from their M&As.
What do we do?
This is the first study to look at the impact of BG affiliation on long-term performance impact of acquisitions done by affiliated firms. We test our hypotheses using data from firms in India. In contrast with the state- and bank-owned BGs in China and Japan, Indian BGs are independent of state intervention and solely responsible for their strategic choices. Therefore, the Indian context presents an ideal setting for analyzing how the extended resources of a firm’s network may benefit M& As. Product market reforms in India started in 1991; capital market reforms started taking place only in the early half of the last decade. These reforms have served as catalysts for domestic and cross-border acquisitions by Indian firms. Accordingly, we choose 2005–2013 as the time period for this study.
What do we find?
BG-affiliated firms possess several unique features, including vertical ties related to ownership control, horizontal ties derived from cross-holding and interlocking directors, and family and social ties. Thus, we find support for our arguments that the resources and capabilities of a BG constitute a differentiating factor for the long-term post-acquisition performance of affiliated firms, compared with standalone firms.
The success of an M& A deal stems from a firm’s prowess in managing both ex-ante and ex-post challenges in managing the deal. The ex-ante issues primarily include target screening and selection, due diligence, choice of equity ownership and premium, and payment mode. The substantial information asymmetry in M&As exasperates ex-ante target selection challenges. However, we argue that the social capital available through a BG can help overcome this problem, which is particularly prevalent in emerging markets. Furthermore, the multidomain network structure of BGs may enable affiliated firms to capitalize on new opportunities. With its pool of management expertise in the form of a group management cadre, the BG also provides managerial services, which can mitigate ex-ante target screening and selection, negotiation, and due diligence difficulties. Even the risk of overpayment decreases for BGs, because their centralized decision making encourages less biased due diligence for a target firm. Concentrated ownership in the hands of company directors reduces manager–owner agency conflict and improves post-acquisition performance. With regard to the ex-post challenges, we argue that BGs constitute repertoires of unique resources and capabilities. Following an M& A deal, such network resources can help the acquirer firm to exploit opportunities that might not be available to standalone firms. For these benefits, it is important to classify M& A deals as either related or unrelated and consider the affiliation advantages in each case. First, for related deals, value creation stems from the realization of cost and revenue synergies. Cost synergies materialize relatively easily; revenue synergies are more difficult and take longer. BG-affiliated firms can leverage the best operational practices across their network to leverage the quick benefits of cost reductions.
For revenue synergies, which normally require cross-selling, the firm needs the ability to create new growth opportunities by recombining resources from its own and the target firms For this purpose, access to group-wide talent and technology are instrumental for encouraging product or service innovation. Moreover, the reputational capital of the BG helps legitimize new innovations, reducing the risk associated with product or service innovations and thereby increasing the likelihood of revenue synergies. Additionally, the political capital of the group might prompt approval and support from government agencies, which is important for managing external dependencies and uncertainties. Second, for unrelated deals, the realization of managerial and financial synergies from diversification creates more value for the acquirer. Because a BG-affiliated firm has access to a diverse pool of managerial prowess, it likely can manage the unrelated businesses more effectively.
As a result for our empirical analysis, we found strong support that firms affiliated with business groups have superior long term post-acquisition performance, relative to unaffiliated firms.
Second, we try to seek answers that how inter- and intra-group variations should determine how firms derive the benefits of their group affiliation. To that end, we test and find support for our arguments whether the product scope of the BGs should affect the post-acquisition performance of its affiliated firms. Greater diversification provides BG firms more opportunities to access various resources which may enhance their post-acquisition performance. Compared with focused groups, diversified BGs possess a broader set of competencies, which can help them venture into segments that require different skills
Third, we try to find whether intra-group linkages matter for M&A performance. We propose that affiliated firms with strong vertical and horizontal linkages should encourage social relations throughout the group. These firms then may find it easier to access resources, knowledge, and information held by other affiliated firms. Accordingly, for affiliated firms, the strength of director interlocks should relate positively to long-term post-acquisition performance. Stronger connections lead to greater interactions, access to information, skill transfers, and novel syntheses of existing skills and experience. In our empirical analysis, we find evidence that amongst BG-affiliated firms, group-level interlocking ties relate positively to the long-term post-acquisition performance of its affiliated firms.
ORIGINAL ARTICLE: Popli, M., Ladkani, R. M., & Gaur, A. S. (2017). Business group affiliation and post-acquisition performance: An extended resource-based view. Journal of Business Research, 81, 21-30.