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Abstract

Purpose The purpose of this paper is to build a model of mergers and acquisitions (M&A) performance drawing from the concept of organizational identity theory. The paper proposes that successful performance of an M&A is dependent upon two things, namely, the alignment of the organizational identities of the two merging firms and the method used to integrate them. Design/methodology/approach This is a conceptual paper based on current research and uses multiple real-world examples of M&A to elaborate the proposed model and highlight scholarly and practical implications. Findings The paper explains that the similarity of the identities of the merging organizations has a significant impact on the performance of the combined entity. Furthermore, the integration method used by the merged firms influences the success of the merged entity. The use of an identity approach helps unravel new variables impacting M&A performance. Research limitations/implications A limitation of the paper is that it does not address how, over time, identity management can overcome the resistance of two merging entities. In addition to testing the proposed relationships, further research can explore these identity dynamics in unraveling an M&A performance. Practical implications This paper highlights the importance of evaluating identity as an element of an M&A due diligence. Practitioners should be aware of the dangers of signaling one identity integration strategy but using contradictory actions in implementation. Social implications Given the importance of identity in a variety of organizational outcomes, the paper is timely in integrating the organizational identity (OI) concepts in understanding M&A performance issues. Originality/value Given the importance of identity in a variety of organizational outcomes, the paper is timely in integrating the OI concepts in understanding M&A performance issues.
Improving the M&A success rate: identity
may be the key
Mahendra Joshi, Carol Sanchez and Paul Mudde
Introduction
Every year companies spend over US$4tn on mergers and acquisitions (M&As) in spite
of the fact that between 70 and 90 per cent fail. Practitioners and scholars alike are
puzzled by these statistics and have tried to identify what causes M&A failures. Factors
such as inaccurate assessment of financial and operational synergies, lack of clarity in
the execution of the integration process, negotiation errors, lack of backup plans and
cultural issues are some of the reasons that may lead to this high rate of failure. But
analysts have examined some of these factors more than others, and a lack of promising
evidence suggests a need to explore different possible causes for M&A failure. While
many studies highlight the importance of financial, accounting and value-creating
synergies in post-acquisition performance, others note that more work is needed in
evaluating the role of behavioral factors such as understanding cultural and identity
changes in post-acquisition success.
Without ignoring financial and operational due diligence as an integral part of M&As, it is
also important to understand how merging different organizational identities of two
companies affects how the new entity performs. Many firms give only cursory attention to
integrating identities after a merger, such as creating a new logo or adopting a new name.
However, neither practitioners nor scholars have sufficiently considered the impact of
deeper identity issues, which connect people psychologically to their organization, on the
performance of the newly created, post-acquisition firm.
Motivated by this gap in literature and practice, we explore the concept of
organizational identity and propose how M&As will perform differently depending on
organizational identity dynamics. Organizational identity, from now on referred to as
identity, is the central, distinctive and relatively enduring characteristics of an
organization (Albert and Whetten, 1985). Identity refers to “who are we as a firm,”
probes organizational values and goals and provides organizational members with a
sense of stability. Identity may change during an M&A, as the organizations involved
undergo a rigorous transformation as they join together. Therefore, identity deserves
attention because it addresses gaps left unaddressed because of the focus on
financial and operational variables. The similarity or dissimilarity in the identities of two
firms the acquiring and the acquired is a key factor that will influence the profitability
and performance of the combined entity.
Consider, for instance, the challenges of integrating the identities of Verizon and AOL in
their recently proposed merger. Because value creation through synergies is a critical
post-acquisition goal, it is important that the merged entity completely integrates both
the firms’ cultures and identities (Bradt, 2015). This is no small task because the
identities of Verizon and AOL are quite different; Verizon is an engineering-based,
Mahendra Joshi is an
Associate Professor of
Management and
Academic Director of
Graduate Programs at
Seidman College of
Business, Grand Valley
State University, Grand
Rapids, Michigan, USA.
Carol Sanchez is a
Professor of Management
and Director of International
Business Programs at
Seidman College of
Business, Grand Valley
State University, Grand
Rapids, Michigan, USA.
Paul Mudde is an Associate
Professor of Management
at Seidman College of
Business, Grand Valley
State University, Grand
Rapids, Michigan, USA.
PAGE 50 jJOURNAL OF BUSINESS STRATEGY jVOL. 41 NO. 1 2020, pp. 50-57, ©Emerald Publishing Limited, ISSN 0275-6668 DOI 10.1108/JBS-08-2017-0115
telecom firm, while AOL is closer to the customer and tends to emphasize the creative
and the business-to-consumer sale. If an M&A architects forget to manage the way
these two identities are integrated, one result could be psychological and cognitive
disengagement by employees at best and open hostility toward the combined entity at
worst. In short, the manner in which the two firms integrate the two identities and
manage the new M&A identity depends on how skillfully the employees of the two firms
come together for behavioral integration.
When employees of two firms come together in a merger, both groups tend to experience
pre-merger anxiety and post-acquisition friction. If the merged entity fails to consider how to
reconcile the identity issue, perceptions of uncertainty and feelings of threat could hurt
employee work routines and jeopardize post-acquisition profitability and performance
(Drori et al.,2013). For this reason, good management of the integration of organizational
identities will reduce employee anxiety, improve the transition to the new entity and enhance
the overall success, including the profitability, of the new entity. Conversely, when
managers integrate identity poorly and employees perceive a threat to their pre-merger
identity, employees may engage in roles and behaviors that directly or indirectly impede the
new entity’s performance (Amiot et al., 2012). In short, the profitability and performance of
the post-acquisition firm will improve if managers align the identities of the merging firms
and how they integrate the two identities.
Previous work on post-acquisition performance
Analysts have examined many variables to determine which have the most effect on
post-acquisition performance, including whether the acquirer was a conglomerate or a
related firm, or whether the firm had prior acquisition experience, and if payment was in
cash or equity. Quite surprisingly, none demonstrates a consistent, significant impact on
post-acquisition performance. In fact, findings are often contradictory. For instance,
some unrelated diversified firms outperformed The Standard & Poor’s 500 (Campa and
Kedia, 2002), while other unrelated diversified firms triggered a “diversification discount”
that hurt performance (Berger and Ofek, 1995). Likewise, some related acquisitions show
a strong positive effect on performance because they share similar products and
markets, increase efficiency and reduce overlapping resources, while other related
acquisitions may become embedded liabilities if the firm experiences an exogenous
shock (Shaver, 2006), such as a shift in industry dynamics. In sum, after decades of
research, there are no definitive predictors of superior profitability and performance of
post-acquisition firms (King et al., 2004).
A case for examining identity as a predictor of mergers and acquisition
performance
Given the challenge of trying to predict superior post-M&A performance, we explore the
influence of identity, a non-financial factor. Amiot et al. (2012) found that similarities
between two organizations’ identities helped employees accept and internalize the
expectations of the combined entity. When employees believe that there is continuity
between the pre- and post-acquisition identities, they may be more likely to
demonstrate positive behaviors that are important to any organization’s success. But if
Many firms give only cursory attention to integrating
identities after a merger, such as creating a new logo or
adopting a new name.
VOL. 41 NO. 1 2020 jJOURNAL OF BUSINESS STRATEGY jPAGE 51
the M&A triggers changes that employees perceive as threats to their identity, this
could lead to negativity, increased stress, cognitive rigidity and threaten the chance of
superior post-acquisition performance.
Mergers and acquisitions and multiple identities
Assimilation, federation, metamorphosis and confederation are four methods that firms can
use to successfully integrate identities (Bouchikhi and Kimberly, 2012). In this paper, we
address two methods that are most relevant to M&A activity. The first is assimilation, which
happens when the identity of an acquired company dissolves into the identity of the parent
firm. The second is confederation, when the identities remain separate and do not meld, so
that coordination between them is limited to administrative activities with a minimal impact
on identity.
From an identity perspective, when are mergers and acquisitions likely to be
successful?
We suggest that the similarity or dissimilarity of the identities of the two firms and the
integration method assimilation or confederation used to manage the new M&A identity
will affect the profitability and the performance of the new entity. Later, we explain why this
is so, and add Figure 1 to illustrate.
Quadrant 1: similar identities and the use of assimilation will lead to positive
performance
The identities of two firms are similar when both organizations have comparable
prototypical characteristics, and the decision-makers categorize their firms in a similar
fashion (Anand et al.,2013). For instance, among Scottish knitwear firms, the owners
Figure 1 Managing Identity for M&A performance
PAGE 52 jJOURNAL OF BUSINESS STRATEGY jVOL. 41 NO. 1 2020
characterized other Scottish garment manufacturers’ identities as similar to their own,
referring to them as “premium quality, expensive garment manufacturers.” These same
firms ignored or dis-identified with overseas competitors who made mass-produced
items (Porac et al., 1989).
When a firm acquires a company with a similar identity, it expects there will be a greater
shared understanding among employees and other stakeholders about the goals and
expectations of the merged entity. This shared understanding among managers,
employees and other stakeholders will be stronger if the parent organization uses
assimilation as the integration mechanism. Assimilating similar identities reduces the
ambiguity that occurs during post-acquisition and sets the stage for a smooth transition
(Weber and Drori, 2011).
When firm identities are similar, managers may tend to make quicker and more
effective decisions because they rely on their pre-acquisition understanding of the
stakeholders, competitors and the interdependencies among the various
constituencies. A similarity of identities gives managers similar frames of references,
communities of practices and information sources for decision-making, improving the
understanding and transfer of tacit knowledge between the firms and eventually
leading to better performance.
Using assimilation to integrate firms with similar identities leads to superior performance.
Similar identities are “easier to ‘link’ at the cognitive level” (Amiot et al., 2012, p. 445), and
they help people make better adjustments to new environments because they see
continuity between the identities. Despite the changes people experience, they see their “in
group” still exists (Amiot et al.,2012, p. 445), which helps employees better identify with the
new combined entity, making it easier for them to adjust to the new settings and move
forward. M&A performance will be positive when the two merging firms have similar
identities, and they use the assimilation method to integrate identities.
Quadrant 2: similar identities and the use of confederation will lead to negative
performance
When the identities of the two firms are similar, but they use a confederation, rather than an
assimilation method of integration, the performance of the post-merged firm is likely to
suffer. As mentioned before, a merger of two similar firms seeks capturing synergy as they
combine their resources. Examples of synergies include combined operations, the transfer
of capabilities in a functional area, the creation of umbrella brands and the ability to cross-
sell products (Shaver, 2006). Although there may be a desire to create synergies, using
confederation to integrate, the firm signals separation of the two organizations, despite their
similar identities, goals, values, products, and services. In this case, confederation is
unlikely to achieve strong synergies, resulting in performance that is more negative and a
more costly acquisition.
What is more, while similarity of identities may lead employees of the merged entity to
assume equal status, they may be in for a shock if the acquired firm exists as a separate
Perceptions of uncertainty and feelings of threat could hurt
employee work routines and jeopardize post-acquisition
profitability and performance.
VOL. 41 NO. 1 2020 jJOURNAL OF BUSINESS STRATEGY jPAGE 53
entity, as often happens with confederation. New employees may think they are
stepchildren of the acquirer, suspect there is a breach of the psychological contract and
experience low morale, employee unrest, high turnover and even sabotage because they
feel less central to the company than employees of the parent firm do. Therefore, the
performance of an M&A will likely be negative when the two merging firms have similar
identities but use the confederation method to integrate identities.
Quadrant 3: dissimilar identities and the use of assimilation will lead to negative
performance
When the identities of the two firms in an M&A are dissimilar and the mode of integration
is assimilation, the performance of the new firm is also likely to suffer because
complications, misunderstandings, conflicts and power issues tend to arise when firms
with dissimilar identities merge. If managers use assimilation to integrate two firms with
dissimilar identities, employees from the acquired firm usually abandon their previous
identities and accept the new identity of the parent organization. However, identities
are not easy to change and is particularly difficult if it threatens distinctiveness (Amiot
et al., 2012). This threat to the acquired firm’s distinctive identity increases stress,
induces rigidity and inhibits integration. Past evidence suggests that when threat levels
are high, employees often engage in counterproductive coping strategies, including
withdrawal and dis-identification with the new entity (Van Dick et al.,2005). Such
frustration and resistance does not help and may result in negative organizational
performance.
Quadrant 4: dissimilar identities and the use of confederation will lead to neutral
performance
Finally, when two firms with dissimilar identities integrate using the confederation
method, we predict no significant impact on organizational performance. Acquisitions
that keep the two entities separate from one another tend to occur mostly for financial
diversification reasons, and not to create operational synergies, knowledge transfers or
co-branding of products. Confederation, then, results in separate organizations and
allows the acquirer and target companies to operate as distinct business units within the
same corporate structure. This method intentionally limits cost reductions because the
objective is not to integrate operations, logistics or information systems. Confederation
also limits coordinated marketing and sales activities as cross-selling may be less
effective because of the lack of single organizational identity. In this case, post-
acquisition synergies are frequently limited to consolidated administrative functions at
the corporate level. Therefore, the performance of an M&A will be neutral when the two
merging firms have dissimilar identities and they use the confederation method to
integrate identities.
Implications and conclusion
Managing and integrating organizational identities, together with other factors, is key to
achieving a successful and profitable post-acquisition organization. Potential acquirers
should screen targets for identities that are similar to theirs, particularly along dimensions of
Assimilating similar identities reduces the ambiguity that
occurs during post-acquisition, and sets the stage for a
smooth transition.
PAGE 54 jJOURNAL OF BUSINESS STRATEGY jVOL. 41 NO. 1 2020
strategic goals, values, product branding and reputation for quality. When the identities of
acquirers and acquired firms are similar, acquirers achieve improved post-acquisition
profitability when they use assimilation to integrate the identities of the combining
companies. Acquirers should avoid making acquisitions with dissimilar identities, but given
market pressure for growth and competitive threats, some acquirers will inevitably find that
a target’s identity aligns poorly with theirs. When M&A players have dissimilar identities, the
future organization could deliver performance that is more negative if managers use
assimilation to integrate the acquired firm into the parent firm. This is because firms that
have dissimilar identities are not likely to have or be able to execute any expected synergies
in spite of trying to assimilate.
Much depends on how identities integrate, or do not, during the execution of the M&A.
Employees of acquired firms experience challenges and adjustments to their practices
during an acquisition, and most of the time, their identities are strongly rooted in their
original firms. However, as the idea of the new post-acquisition entity solidifies, their
cognitive adjustment to losing the prior identity and accepting that of the new entity may
differ in each of the four scenarios we discussed. For some employees, losing their previous
identity could trigger trying to hold onto it so much that they refuse to accept the new firm
and dis-identify with it. The firm’s performance could suffer severely if employees manifest
such disregard for the new firm in their daily work.
Managers who are responsible for integrating two firms following an M&A must realize
that there is no one-size-fits-all approach. Identity differences, and handling them without
care, could jeopardize successful integration and hurt future performance as much as
financial and operational problems might (Anand et al., 2013). For example, Lenovo’s
recent acquisition of the Motorola’s cell phone handset business faced several
integration problems, while Lenovo’s acquisition of IBM’s personal computers business
over a decade ago was a remarkable example of successful integration (Bajarin, 2015).
In the earlier acquisition, much of Lenovo’s identity resembled and overlapped with IBM’s
personal computers (PC) unit, and they used assimilation to integrate the two
businesses. The businesses shared a common brand, their management teams worked
closely to support the design and development of generations of ThinkPads and they
coordinated the supply and distribution chain with vendors and customers. Identity
similarities contributed to shared culture, values and strategic vision. Lenovo retained
IBM’s PC brand, its product development and sales teams and continued strong
relationships with US-based corporate customers.
In comparison, Lenovo’ acquisition of Motorola’s handset business highlights the
dangers of signaling one identity integration strategy but implementing another in
practice. First, Lenovo and Motorola’s identities were dissimilar. Although Lenovo’s PC
business was global, China was the primary market for its cell phone business, and
Chinese executives managed it. Motorola’s cell phones matched its identity as a
premium market player in its home, US market, while Lenovo’s cell phones occupied a
position in the mass market, with low pricing and standard features (Chu and Osawa,
2017). Given these dissimilarities, Lenovo first proposed a confederation approach to
Acquirers should look for targets with similar identities and
then manage identity integration using assimilation to
emphasize these similarities.
VOL. 41 NO. 1 2020 jJOURNAL OF BUSINESS STRATEGY jPAGE 55
integrating the two firms, choosing to retain Motorola’s branding, logo, personnel and
leadership team. CEO Yang instructed his management team to use a “hands-off”
approach and give Motorola’s leadership the autonomy to make product and marketing
decisions. This might have been successful, but Lenovo quickly abandoned
confederation and changed Motorola’s product lineup, design language and price
points. It then named Chen Xudong, a longtime Lenovo PC executive with little
background in smartphones outside of China, as head of the combined entity’s global
phone business (Chu and Osawa, 2017). The results were poor performance; sales sank
for both Lenovo and Motorola brands. Lenovo’s smartphone market share in China
plummeted to under 2 per cent, down from about 12 per cent three years earlier, and it
laid off thousands of employees, mostly at Motorola. The benefits of confederation
evaporated as Lenovo became entrenched in Motorola’s operations.
As this example suggests, identity is as critical to value creation and superior performance
in M&As as are financial and operational factors. Acquirers should look for targets with
similar identities and then manage identity integration using assimilation to emphasize these
similarities. On the other hand, forced assimilation when firms have different identities may
interfere with attempts to generate synergies. A confederation approach may mitigate some
post-acquisition problems, but managers must remember that maintaining independent
identities will probably limit synergies between the two firms. As in the case of
LenovoMotorola, if synergies between firms do not occur as a result of confederation, firms
may be tempted to try to assimilate the firms, which if done for the wrong reasons may
exacerbate the issues of dissimilar identities and harm chances for long-term profitability
and performance.
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Keywords:
Integration,
Mergers and acquisitions,
Organizational identity,
Identity assimilation,
Identity similarity,
M&A performance
PAGE 56 jJOURNAL OF BUSINESS STRATEGY jVOL. 41 NO. 1 2020
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Further reading
Sirower, M.L. (1997), “Culture vulture”, CFO, Vol. 13 No. 8, p. 10.
Corresponding author
Mahendra Joshi can be contacted at: joshim@gvsu.edu
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... Internal and external stakeholders are key actors in the merger legitimation process (Meglio, 2019) as they have to make sense of the merger during this stage and refer to legitimation actions individually and collectively (Terry and O'Brien, 2001;Willem and Coopman, 2016). The postmerger integration period is crucial as a new organization struggles to find the right balance between different processes, norms, and cultures (Galpin and Herndon, 2008;Joshi et al., 2018). ...
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Purpose The objective of the study is to explore legitimation dynamics in a public–private integration process and to gain insights on the specific role of CSR in triggering public–private logics. Design/methodology/approach Corporate social responsibility (CSR) is part of firms' strategy in gaining legitimacy from their stakeholders in a merger context. However, little is known about the role of CSR in triggering diverse dynamics from public or private logics during post-merger integration. This study aims at exploring the specific role of CSR in triggering such diverse logics. A qualitative research design based on a single case study of a public–private merger of two French listed companies in the urban planning sector was opted for. The analysis was pursued in real time from the signing of the agreement and then over two years. Findings The results show that public–private legitimation is a process that proceeds in stages. The authors emphasize the key factors that characterize it: align on external concerns: reflecting societal and institutional pressures (public legitimation); readapt to make sense internally in relation to the merger through managerial innovation (private legitimation) and CSR as a form of corporate self-storying: combining the social and societal aspects of CSR within the organization (hybrid legitimation). Three major actions were identified in activating a CSR legitimation strategy: identifying and responding to local needs; building a unified brand, culture, and employee commitment to the organization; and creating sustainable programs. Research limitations/implications The first major contribution is linked to triggers influencing legitimation dynamics and in particular the role of CSR operating as a legitimation strategy in the merger integration process. A second theoretical contribution is linked to the evolutionary nature of the post-merger integration process. The processual study shows how stakeholder legitimacy demands can escalate and change over time. Practical implications First, three major actions were identified as key steps in activating a CSR legitimation strategy (identifying and responding to local needs; building a unified brand, culture, and employee commitment to the organization; and creating sustainable programs). These missions can be understood as key steps for managers in implementing CSR within an organization in a post-merger integration context. Second, this study increases our comprehension of legitimation as a dynamic micro-process. The different stages described in the study can be considered by the managers involved in the merger process as learning experiences to understand the complex phenomenon that is the integration process. Originality/value This study enriches the legitimacy-as-process perspective in providing insights on the specific role of CSR in triggering public–private logics.
... Mergers and acquisitions (M&As) are one of the most popular forms of corporate expansion in the twenty-first century. Despite the empirical evidence suggesting that M&As seldom create value for the buying firms' (Joshi, Sanchez, & Mudde, 2018;King, Dalton, Daily, & Covin, 2004), M&As remain popular. Academic research is yet to explain the driving force resulting in firms choosing M&As in spite of poor performance record. ...
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... The post-merger integration period is crucial as a new organization struggles to find the right balance between different processes, norms and cultures (Galpin & Herndon, 2008;Joshi, Sanchez, & Mudde, 2018). Stakeholders have to make sense of the merger during this stage and refer to legitimation actions individually and collectively (Willem & Coopman, 2016). ...
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Legitimation during post‐merger integration is a challenging nonlinear process influenced by the key public, private, and hybrid dynamics. In contrast to the planned characterization of merger integration, legitimation is a nonlinear process. Legitimacy is crucial to organizational change, especially in the context of a merger; managers need to understand the oscillating dynamics from public and private logics during the integration period. The legitimation process during a merger comprises three key processes: public, private, and hybrid. These are tools for managers involved in a public–private integration.
... However, literatures show that plenty of M&As are failure cases which cannot meet the expectations of acquirers (Zhou, Xie and Wang, 2016;Bhaumik, Owolabi and Pal, 2018). Within these literatures, frequent explanations for these failure M&As focus mainly on social and human factors (Vaara, 2002;Colman and Lunnan, 2011;Joshi, Sanchez and Mudde, 2018). Indeed, M&As underperformance are frequently attributed to employees' low PMI because of dramatic organizational changes (Gleibs, Mummendey and Noack, 2008). ...
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