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Merger Dynamics —
A System Dynamics Analysis of Post-Merger
Integration Processes
Switbert F.L. Miczka and Andreas GréBler
Mannheim University
Industrieseminar, Schloss
D-68131 Mannheim, Germany
Tel.: +49 621 181-1583
Fax: +49 621 181-1579
E-Mail: smiczka@is.bwl.uni-mannheim.de
agroe@is.bwl.uni-mannheim.de
Abstract
Mergers and acquisitions (M&As) have drawn the attention of researchers for several
decades now. Manifold viewpoints have been taken and numerous factors apparently
influencing the success of an M&A project have been identified, leading to an extensive,
yet extremely fragmented body of knowledge. Although the logical strive for integration
has been expressed by several authors, in most cases a focus on small sections of M&As
persists.
The aim of this study is to offer a different way of synthesis that allows testing
well-established theories of post-merger integration processes. With the help of a
literature-based system dynamics model and by analysing the simulation runs it
produces we are able to open up a new perspective on the organisational processes
which are dominant during post-merger integration. Particular emphasis is put on the
investigation of capability transfer, the change of corporate culture and the employees’
perception of the integration process.
Key words: mergers & acquisitions; post-merger integration; literature-based
modelling; capability transfer.
For the last 40 years mergers and acquisitions (M&A) have drawn the attention of
researchers mainly for two reasons: Firstly, the regular occurrence of this particular
strategic move has inspired detailed analyses. At the peak of the current M&A wave in
2000 the value of the worldwide M&A transactions amounted to about $ 3.5 trillion
(Grant, 2002), which is about 1.7 times the gross national product of Germany in the
same year (von Baratta, 2003). Even after a substantial decline due to the economic
downturn during the last three years the worldwide M&A activity remains at an
impressive level with transactions worth $ 1.38 trillion in 2003 (Stewart, 2004), which
is still more than in every single year before 1996 and approximately the value of all
deals closed during the 1980s (Grant, 2002). Several reports indicate that a revival of
the M&A market is approaching (Stewart, 2004; money.cnn.com, 2004; Kestel, 2003).
Secondly, the effects of externally achieved corporate growth seem to be worth a
closer look since M&As affect economies, industries, organizations, as well as
individuals substantially. On the one hand M&As alter markets, industries or even
whole economies: Those which get caught by a substantial M&A wave regularly end up
in a completely new configuration. The power relations between the competitive forces
inside the industry shift due to the higher level of concentration (Porter, 2001). On the
other hand M&A deals often trigger dramatic change in individual firms, affecting
organizational structures, individual job environments and life circumstances. Mergers
and acquisitions stand for thrills and threats, for corporate chances and individual
changes, gambling, growth and getting fired. Where managers assume their ultimate
challenge, lower-level employees often imagine their personal ruin, and therefore
research reveals not only growth and prosperity, but numerous pitfalls and risks
emerging from the combination of two formerly independent organizations. The weak
corporate performance of many companies after a merger or acquisition supports
scepticism towards the justification of such a risky strategic move (King et al., 2004),
and employee-oriented voices emphasize negative examples causing high individual
uncertainty and traumatic effects to organizational and personal identity (Cartwright &
Cooper, 1996).
Mergers and acquisitions appear to be “an important, if not dominant, strategy for
twenty-first century organizations” (Hitt, Harrison & Ireland, 2001, 4) since they
apparently offer opportunities of fast access to new resources, markets, and new
knowledge, and present a possibility of investing disposable financial resources in
promising industries and companies (Bower, 2001). The expected outcomes of M&A
deals seem to justify the apparently high risk, but which dynamics evolve from the
combination of two organizations and apparently lead to only little chances for a
successful combination several studies have reported? (Cartwright & Cooper, 1996)
The different backgrounds of researchers approaching M&A topics have opened up
various and sometimes contradicting perspectives (Haspeslagh and Jemison, 1991).
Manifold criteria for evaluation have been created and numerous factors apparently
influencing the success of an M&A project have been identified, leading to an extensive
body of knowledge which covers descriptions of practices, best policies, and of theories
on how these factors interact with each other. In combination with the researchers’
diverse backgrounds this has led to the obvious fragmentation of the M&A knowledge
base (Cooper, 2001). The more detailed research becomes, the less straightforward and
manageable becomes the body of knowledge, without any integrative efforts
(Schoemaker, 2001). Yet the endeavours have not been brought together and addressed
straightforwardly in a comprehensible and methodologically coherent research design.
The present study aims as a first step at a comprehensible integrative formulation of
people-oriented, cultural, and knowledge-focused issues of the post-merger integration
phase. Firm-external effects and a detailed financial analysis of the post-merger phase
will not be part of this analysis. Their omission is grounded in the assumption that those
elements are either not to be influenced extensively by the management team (in case of
the market), or are not the core elements of value creation in mergers and acquisitions:
Haspeslagh and Jemison (1991) argue that two classes of M&A exist, the “strategic”
ones that aim at the “creation of value” through the combination of two organizations,
and others that only “capture value” and consider M&A merely as an investment
without any ambition to coordinate operationally or strategically. Since the latter
consequently do not involve any significant management efforts after merging, they will
not be covered explicitly by this study.
The differentiation between the terms mergers and acquisitions is not made with the
widely applied reference to the legal characteristics of the deal (Gerpott, 1993). Rather,
the two terms are used to describe differences in the distribution of power between the
two formerly independent organizational entities A and B which are to be combined:
Merger shall describe a situation in which both partners are more or less equal in power,
whereas acquisition depicts a condition characterized by one dominant and one
subordinated unit.
Methodological approach
The present study tries to overcome at least some of the difficulties of the
fragmentation by integrating the current body of knowledge on post-merger integration
offered in the corresponding literature into a system dynamics (SD) model. Most SD
modelling guidelines, e.g. Sterman (2000), explain the building process of such models
as the explication of individual implicit models through interactive discussion in
workshops or through comparable techniques. The idea behind the literature-based
approach of the present study therefore shall be laid out briefly.
In general the aim of any research is the creation of a consistent and complete
knowledge base on a particular subject, interpreting Schoemaker (2001). The longing
for consistency finds expression, for example, in the referential system of quotations
scientific publications use to link specific ideas to each other (Stichweh, 1987), as well
as in the formulation of integrative efforts which attempt to build a framework
interconnecting the individual research results (Luhmann, 1994). The respective
building blocks of such a knowledge base are supposed to be retrieved with a certain
level of precision, which the methods of empirical research provide to an extent that has
been generally accepted as sufficient. Completeness is a formal aim, but basically
unattainable since the complexity of any research object that is of social nature
unavoidably leads to a fragmentation of the knowledge base. As already mentioned the
research on mergers and acquisitions is a formidable example.
The formulation of frameworks or meta-studies is frequently conducted in order to
check both consistency and completeness and to integrate several fragments.
Unfortunately many of these frameworks are oriented on the design of empirical studies
and thus simply formulate hypotheses about linkages on a meta level without
conducting own empirical testing or other ways to crosscheck findings
methodologically, for which Das and Teng (2000) give a formidable example. Albeit
many empirical studies include observations of variables over time, the condensation
into frameworks often results only in correlative hypothesis of the kind “A is positively
related to B”. The time dimension is excluded systematically, even though maybe
unconsciously. System dynamics yet aims at the formulation of a different class of
hypotheses, namely dynamic hypotheses which describe the researcher’s assumption
about a system’s behaviour over time caused by the interference with other elements
(Sterman, 2000, 94-102). The explicit formulation of perceived or previously proved
interrelations between variables in a formal model rather than in an alternative verbal
description leads to higher precision and may hint at uncertainties about the directness
of connections or reveal inconsistencies in theoretical constructions. Approaching
systems structure by modelling causal relationships instead of correlative ones increases
the meaningfulness of such models, since it forces the decent investigation in the nature
of and reason for the correlations revealed previously. Qualitatively researched
knowledge may be of great use in this regard (Sterman, 2000, 853-855; Milling, 1984).
Even though SD models are rarely accurate in the exact numerical values they
project, the precise mathematical formulation of causal relations supports the
clarification of the actual structure of the examined problem. A clear picture of the
problem’s structure improves the understanding of the observed phenomena (Forrester,
1987; Gr6Bler, 2000). In this regard, a numerically exact representation is only the
second step. As a first step, however, a conclusive causal structure must be identified
which represents the reality of the problem domain. In other words, structural validity is
assumed to be more important as behavioural validity (Barlas, 1996).
Besides the effect from the mere formulation of a literature-based system dynamics
model, the possibility of simulating the model may allow further insights, mainly
regarding the refinement of the dynamic hypotheses and the identification of lacks and
inconsistencies in the current knowledge base. The dynamic hypothesis of a system
dynamics model can be checked at least for internal consistency with the assumed
interrelations between the model’s elements. In addition, simulating the model’s
behaviour might also reveal shortcomings in the underlying model structure. As a
consequence either the model structure has to be improved and adapted to the
knowledge base or a lack of insight in the body of knowledge has been detected.
Such a detected lack of knowledge may be got over, for instance, by borrowing from
closely related fields, in the present case especially from research on strategic alliances,
joint ventures or change management. The numerous similarities between post-merger
integration and other kinds of organizational change have already led to a high degree of
adoption of theoretical concepts, tools, and insights from such studies into the M&A
literature and practice (Galpin & Herndon, 2000). But for M&A “the complexities that
would accompany any other kind of change effort are all due, in this case, to the merger
of two companies, and the resulting organizational dynamics are intensified because
they have to be addressed not just in one organization but in two.” (Galpin & Herndon,
2000, 54) This high complexity increases the difficulty to obtain a complete and
consistent picture, not relieving that such a period of change is a difficult object to
analyze anyway. The usual comparatively static research methods focus on a specific
point in time or on discrete events analyzed sequentially and stringed to form a time
series (van den Bosch, 2001). Even though this repeated investigation offers hints at the
dynamics of the system, researchers frequently acknowledge that grasping dynamics
with conventional methods has been a problem in their studies (Bourantas & Nicandrou,
1998; Lane, Salk & Lyles, 2001). System dynamics thus offers a valuable method for
testing and maybe even increasing the consistency as well as the completeness of the
body of scientific knowledge on dynamic social phenomena. For this purpose the
exclusive recourse to literature is not only appropriate, but the logical basis.
The different purpose of the literature-based approach presented in this study
compared to the ‘managerial approach’ that SD guidelines frequently describe should be
obvious from these considerations: ‘Managerially built models’—i.e. those aiming at
the explication of implicit models—are supposed to support solving problems in the
specific situation of a particular company. The basis for these models is the subjective
expert knowledge of the interviewees. A rather explorative approach to a dynamic
problem is chosen. Insights from research are used as supplements, either directly or
because they actually form some of the perceptions the managers report on, new
knowledge is generated through an inductive approach. In contrast, the literature-based
model aims at the integration and testing of the already existing knowledge base. This
may lead to its further acceptance through the application of a different method of
investigation, or it may uncover shortcomings in the actual picture research draws on a
specific phenomenon. Additionally it can result in the deduction of new insights on the
causal relations in and the behaviour of the system under investigation.
Up to now the dynamics related to mergers and acquisitions have not been
researched extensively with system dynamics models. In fact, only three contributions
directly addressing the whole field could be identified in the last 15 years, namely
Lino’s (1988) model of the unsuccessful acquisition of the Zayre retail network by
Ames Department Stores Inc, Korten’s piece on the development of corporate value in
connection with mergers and acquisitions (Korten, 2000), and finally Kunc’s (2001)
study of the influence of M&A activity on an industry’s long-term performance.
Besides the small number of studies the mentioned also address only peripheral or very
specific questions of the M&A process. The basic questions which the enormous
number of non-SD-studies on M&A address have obviously never raised interest of the
system dynamics community despite the numerous hints on the importance of a
dynamic investigation of the several processes which are mainly of social nature—
usually a classical system dynamics domain.
The dynamics of post-merger integration
The model developed in the present study basically depicts the combination of two
organizations, A and B. Most phenomena influencing the post-merger processes take
place in both organizations, even though their intensity may differ. To depict situations
of an unequal distribution of power some variables are included that allow A to be
superior to B. For example, A can decide to what extent B gets the opportunity of
remaining autonomous and thus of protecting its own culture (Haspeslagh & Jemison,
1991). As a result both mergers and acquisitions in the terms of this study can be
simulated.
The model boundary follows the study’s focus on people- and knowledge-oriented
internal aspects of the post-merger phase as described further above. The model does
not contain variables that are relevant only at the pre-merger level or during the phase of
the closing of a deal. Furthermore, the focus on integration leads to the exclusion of all
variables that do not directly influence the company-internal processes in the post-
merger stage, e.g. political disputes, anti-trust examinations, competitor’s reactions, the
creation of monopolistic positions etc. Neither does it cover consequences of the
additional burden on the course of the daily business. The level of aggregation will be
kept comparably high, mainly as a consequence of the study’s limited space.
Nevertheless the relevant peculiarities of the post-merger phase depicted in literature
can be portrayed since the model building process reveals some overlaps and analogies
in the up to now discussed constructs and the apparently identified predictors of M&A
success. It turns out that the model’s dynamic behaviour is still endogenously generated,
what hints at the usefulness of the defined model boundary (Forrester, 1971).
Of particular importance for the understanding of the model is the organizational
level at which it is applied: For actual day-to-day integration matters—especially when
it comes to culture and the like—the examination has to be well-focused on the truly
merging organizational entities, which are mostly localized on the level of business
units or departments. The appropriate level of application to use the present model thus
has to be found by identifying the organizational level at which different populations of
a more or less homogeneous social structure can be found, if a detailed analysis is the
aim. Therefore the model is parameterized in a way that describes the situation in such a
sub-unit instead of those describing, for example, a whole multinational company.
Haspeslagh & Jemison (1991, 176) incorporate this idea in their distinction between
“acquirers”, i.e. the whole acquiring corporation, and “hosts”, the corporation’s subunit
that has to deal with the new partner (also Birkinshaw, Bresman & Haakanson, 2001).
This idea is valid for the acquisition of small organizations by large ones as well as for
the actually occurring integration tasks after a ‘mega-merger’. For the application of a
model representing the post-merger processes in an organisation this implies that it can
either show the processes only in a quite generalized way for large M&A deals, or it has
to be applied to every distinct organizational subunit that is combined with a counterpart
separately. Thus, a deal like the formation of DaimlerChrysler would result in a model
that includes the one designed and explained in this study many times if a detailed and
differentiated insight into the post-merger dynamics is desired. Otherwise, i.e. if the
whole deal is simulated in one model, only a general analysis can be achieved.
The complete model can be divided into four interweaved sub-models, each
addressing a particular aspect of the dynamics of post-merger integration: On the one
hand the transfer of capabilities from A to B and vice versa and the cultural dynamics
arising from an initial cultural difference are described, on the other hand the
employees’ perception of the way the integration is handled as well as the actual style
and impact of the M&A management team are addressed. For better understanding, the
sub-models are described separately one after the other and are considered in
combination in the end. Due to the limitations of this paper only the capability transfer
and the cultural dynamics can be explained in detail to point out the study’s approach,
whereas the other structures will only be touched on, even though they have been
developed with the same effort and rigour.
Capability Transfer
Haspeslagh and Jemison (1991; also Bresman, Birkinshaw & Nobel, 1999) conclude
from their studies that capability transfer is the value-creating characteristic of an M&A:
“Acquisitions create value when the competitive advantage of one firm is improved
through the transfer of strategic capabilities.” (Haspeslagh & Jemison, 1991, 28)
Furthermore they argue that this value creation takes place only in the post-merger
phase: “Yet no matter how attractive the opportunity, value is not created until after the
acquisition, when capabilities are transferred and people from both organizations
collaborate to create the expected benefits or to discover others.” (Haspeslagh &
Jemison, 1991, 11) This argumentation is supported by the basic assumptions of the
resource-based view (Wernerfelt, 1984; Penrose, 1959). It is argued that a company can
obtain a competitive advantage by accessing a set of resources or capabilities which are
valuable because they fulfil four criteria: They have to be rare, imperfectly imitable,
without strategically equivalent substitutes, and valuable when they are applied to the
market (Barney, 1991).' The aspect of imperfect imitability now is of particular
importance: Resources and capabilities can be inimitable because they are “dependent
upon unique historical conditions”, their link to the “sustained competitive advantage is
causally ambiguous”, or because they are “socially complex” (Barney, 1991, 101).
Inimitability causes a certain degree of imperfectness of the strategic factor markets on
which resources and capabilities are dealt (Dierickx & Cool, 1989): Causal ambiguity
prevents a clear identification of the desired resources or capabilities a company wants
to obtain, social complexity can make it impossible to transfer a particular resource or
capability from one company to another without destroying its vital embeddedness into
the current owner organization (Reed & DeFillippi, 1990; Barney, 1991; Kogut and
Zander 1992) If a desired capability or resource is even dependent on unique historical
conditions it is not tradable at all since it has to be built up over time like, for example,
customer relations (Dierickx & Cool, 1989). The logical result is that resources and
capabilities exist which either have to be developed internally, or can be bought not
exclusively but only as a part of the whole bundle of resources and capabilities which
includes the specifically desired ones. This is a merger or an acquisition.
The apparently different grounding of the argumentations to either resources or
capabilities, respectively, can be resolved by a clear definition of both terms: Resources
in this respect can be seen “stocks of available factors that are owned or controlled by
the firm. Resources are converted into final products or services by using a wide range
of other firm assets and bonding mechanisms [...], [and consist] of knowhow that can
be traded [...], financial or physical assets [...], human capital, etc. [...] Capabilities, in
contrast, refer to a firm’s capacity to deploy Resources, usually in combination, using
organizational processes, to effect a desired end. They are information-based, tangible
or intangible processes that are firm-specific and are developed over time through
complex interactions among the firm’s resources.” (Amit & Schoemaker, 1993, 35)
Therefore only the term ‘capability transfer’ is used in the further course of this study,
constituting the more comprehensive construct, since it includes the transfer of the
resources underlying the capability, but ‘resource transfer’ does not include the transfer
of capabilities.
Figure 1 shows the structure which represents the main elements of this process. The
structure is implemented twice in the model since two ways of capability transfer are
possible, from A to B as well as from B to A (Haspeslagh & Jemison, 1991). The
explanations always refer to the structure of the transfer from B to A, even though all
statements equally apply to the respective structure ‘A to B’. The icon in the lower right
indicates where the structure is situated in the entire model, the upper blue part is the
one covered by Figure 1, the lower is the corresponding structure of the transfer ‘A to
B’.
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Figure 1: The sub-model structure of the post-merger capability transfer
The input to the whole transfer process is the identified, apparently valuable
capabilities. A basic problem in this regard is the quantification of capabilities, as no
manageable, quantifiable definition could be identified in literature. Since an exact
prognosis of future numerical values is not the primary aim of SD, a quantification has
to be reasonable, but even a rough construct that allows to trace the variable’s behaviour
in connection to reality can be sufficient for a first model like the one presented here in
a particular research field (Milling, 1979). Therefore, as a first solution in the present
study we simply ask the question, “what do we want to learn to do from B?” The
answer to this question has to be broken down as far as possible to identify a single,
countable capability. For example, if the “capability of producing time-efficiently” is
supposed to be transferred, it can be broken down into the “capability of the effective
transportation of input factors”, an improved “management of order releases” leading to
smaller lot sizes, the “training of employees in new manufacturing techniques”, and so
forth. That means to learn time-efficient manufacturing implies to transfer at least three
distinct capabilities in this abbreviated illustration.
Only the identified capabilities can enter the transfer process and accumulate as
those desired capabilities to be transferred from B to A. The identification of
capabilities is considered to be a task completed in the pre-merger phase in this model
and thus an exogenous aspect. This stock is reduced through the transfer of capabilities
from B to A, influenced by the transfer time it takes and the so-called time factor. The
idea behind the latter is simple but of general importance to the model as it will also be
applied in other sub-models: In some cases the outflows from a particular stock are
related to the stock in the way “ rate =Stock/, ” with the time factor being
time factor
equal to one month. This formulation describes that theoretically the whole content of
the stock can flow out at once. It therefore represents a generally applicable
abbreviation of the term “rate = stock*average outflow rate” with “average outflow
rate = |amount in stock|”. Since most of the affected flows also contain a DELAY ora
similar function, only the specifications of these elements determine the actual speed of
the outflow, if no limitation is set by a different parameterisation of the time factor.
The second variable influencing the capability transfer is the necessary transfer
time. Grant (1996) defines organisational capabilities as accumulated individual
knowledge. Following Szulanski (2000) the transfer of knowledge does not happen
immediately but takes a considerable period of time. The phenomenon of a capability
transfer itself has not been defined clearly in literature, even though the basic idea has
been treated intensively. In what sense capability transfer is used actually is the basic
question for a thorough definition of the transfer time. For the present study capability
transfer shall be defined as the implementation of a capability formerly only available
in B into A’s value chain. This may happen by a transfer of capabilities in workshops or
through the exchange of documents, but also simply through an effective organizational
integration of, for example, B’s manufacturing units and their capabilities into A’s value
chain. The period of time that is necessary to do so is the transfer time, which mainly
depends on three factors: First of all the tacitness of B’s capabilities has an influence,
determining the difficulty of the transfer (Polanyi, 1966; Reed & DeFillippi, 1990): A
thoroughly codified procedure with clear routines and exactly defined resources to
deploy can be transferred basically by taking this procedural description to A. The more
tacit the capability is, the longer it takes to transfer it. Secondly, the transfer time
depends on how often A’s and B’s members interact with each other effectively
(Bresman, Birkinshaw & Nobel, 1999). And thirdly, A’s relative absorptive capacity
(Lane, Salk & Lyles, 2001) is essential. The latter describes how good A is in receiving
capabilities from B. In its original form the term absorptive capacity has been defined
as, “the ability of a firm to recognize the value of new, external information, assimilate
it and apply it to commercial ends” (Cohen & Levinthal, 1990, 128). Lane, Salk and
Lyles (2001) sharpened the concept in the context of international joint ventures—
which is transferable to the case of post-merger capability transfer—and offered the idea
of a relative absorptive capacity that includes only the first two aspects of the original
definition: ’Our results suggest that the first two components, the ability to understand
external knowledge and the ability to assimilate it, are interdependent yet distinct from
the third component, the ability to apply the knowledge.” (Lane, Salk & Lyles, 2001,
1156)" In addition, it is defined as a case specific (i.e., relative) rather than generally
valid variable that denotes that the two organizations “must have sufficiently similar
knowledge bases and norms in order for the ‘student’ [...] to understand the
“‘teacher’“(Lane, Salk & Lyles, 2001, 1140). The concept is incorporated into our model
as follows: A previously built up general absorptive capacity constitutes the basis. The
specific relative absorptive capacity concerning B’s knowledge then depends on the
cultural difference between both entities—taking up Lane et al.’s “similarity in norms”
and A’s familiarity with B’s business, measuring Lane et al.’s “similarity of the
knowledge base” (also Cohen & Levinthal, 1990, 129n)." Haspeslagh and Jemison
(1991, 111) explain this also directly in combination with the importance of the
tacitness of B’s resources: “If a firm’s strategic capabilities are embedded in the context
of its organization and culture, then transferring and applying them successfully require
an appreciation for the contexts from which they come and to which they will be
transferred.” Furthermore 4’s willingness to collaborate takes effect: Even though all
other aspects may induce a high relative absorptive capacity it may effectively be quite
low if the recipients of the new capabilities do not want to obtain them. A low
willingness results in less engagement to understand B’s capabilities, thus the relative
capacity to absorb those decreases (Minbaeva et al., 2002). All of these factors can
reduce the transfer time only up to certain point, since a reduction to zero seems not
reasonable. This generally necessary period of time is called the ideal transfer time and
is assumed to be three months, taking into account the definition of the transfer time
given above.
Besides the transfer of the desired capabilities two alternative outflows are possible.
On the one hand a correction of wrong perceptions may be necessary if some of the
desired capabilities turn out to be mirages which are expected to exist in B, but a closer
analysis of the insider information accessible after the deal reveals that they do not exist
in reality. This phenomenon is a direct result of bad due diligence in the pre-merger
phase. Furthermore, capabilities can get lost if key people leave the organization. The
more tacit the desired capabilities are, and the more dependent on some employee's
skills the organization is, i.e. the more tacit capabilities are located in a single person
(Reed & DeFillippi, 1990), the more dangerous is the exodus of those key people: “The
best capabilities are useless if they walk away from the purchase.” (Chaudhuri &
Tabrizi, 1999, 127)
After capabilities have been transferred, it again takes some time until they can fully
be deployed and can cause an increase in A’s performance. The application delay time
until the new capability shows some economical consequence depends on how strategic
the particular capability is: It is assumed that strategic capabilities generally come to
effect after 36 months, the period it takes, for example, to exploit a transferred patent or
to establish a new strategic market position based on the transferred capabilities. The
strategic relevance of the transferred capabilities to the transfer target determines how
long the application delay is in the particular case, considering how large the fraction of
strategic versus short-term effective capabilities is.” The capabilities’ (average)
strategic relevance also influences the performance effect generated through the
capability application: Highly strategic capabilities offer a better leverage and thus
cause a stronger economical effect. The absolute economical impact for A depends on a
single capability’s performance effect leveraged by its strategic relevance and on the
negative effect of ineffective interactions between A and B in the course of the transfer
process. These variables have been roughly estimated to obtain an insight into the
model’s behaviour. In addition, combination benefits that “do not involve formal
capability transfer” (Haspeslagh & Jemison, 1991, 29) like increased market power can
be fed into the model exogenously as a table function.
Cultural dynamics
The second major process which gets a lot of attention in literature is the issue of
cultural changes in the post-merger phase. At day zero suddenly two organizations have
to collaborate that have each developed an identity and an unique culture; i.e. “a
complex set of values, beliefs, assumptions, and symbols that define the way in which a
firm conducts business” (Barney, 1986, 657), over many years. How the differences
between the two cultures can influence other integration processes, how diversity can be
overcome and what actually happens when two cultures are confronted with each other
has been described from many perspectives, not only for M&As but also for other types
of inter-organizational relationships. The structure modelling the cultural dynamics is
shown in Figure 2.
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Figure 2: The sub-model describing the cultural dynamics
Again, a major difficulty in this regard is the quantitative capturing of the qualitative
variables describing corporate culture. For the present study an adjusted version of the
continuum of organizational cultures developed by Cartwright and Cooper represents
the underlying construct (Cartwright & Cooper, 1996). The continuum is changed in
that regard that it is interpreted as an interval scale, assigning each of the cultural
archetypes defined a value between | and 6 (compare Figure 3). The assumption that an
ordinal scale can be used as an interval scale is made aware of and despite the problems
it may bring along concerning
empirical validity. For the present
investigation it offers a first tool
1 2 3 4 5 6 for assessment which can be
F + + + + 1 communicated easily and may
serve as a starting point for
power power role role task/ person/ 4 : ali i
autocratic patriarchial closed open achievement suppot|_ practical investigation if the
model is supposed to be applied
to a real life case. Cartwright and
Cooper mention that “it is not so
much the distance between the two parties that [is] important, but the direction in which
the other culture has to move.” (Cartwright & Cooper, 1996, 81n) They ground this
statement in the existence of two underlying factors which evaluate the cultural change
as good or bad, namely the attractiveness of the partner’s culture and the value of
preserving the own culture. Since these two factors are modelled separately the mere
numerical value of the cultural distance is at first used as an input in this context. The
two evaluating elements will be explained in detail further below in this section.
Figure 3: Adapted interval scale for the assessment of
cultural differences
Thus the initial cultural difference between two organizations can range from 0 to 5.
A decrease in cultural difference can only happen if at least one of the two cultures
undergoes a change process and an acculturation takes place.
Acculturation in turn takes place only if there is interaction between both entities.
Through interaction the employees get to know new ways of doing things and maybe
prefer those. As a result the organizations’ values, opinions and procedures adapt to
each other. From the relative size of the two partners and the number of interactions the
impact of the interactions on the cultural change can be calculated: The larger the other
partner, the lower the possibility to preserve one’s own culture at a given level of
interaction. The current specification assumes that for a change of one point on the
cultural differences scale 200,000 interactions are necessary if both companies are of
equal size, and if A does not make use of its dominance: If a situation with an uneven
distribution of power is examined, the stronger partner A can choose to what extent it
exerts pressure on B to change its culture. Haspeslagh and Jemison (1991) describe this
as the autonomy the acquirer A grants the acquired B, motivated by the insight that
there may be the (true or illusionary) need to preserve B’s culture to secure its valuable,
i.e. tacit, capabilities. In a similar argumentation Nahavandi and Malekzadeh (1988)
argue that A might value cultural diversity in the combined organization and thus does
not enforce the adaptation of its culture through B. Both rationales are covered in the
model by the exogenous variable autonomy granted to B, portraying A’s cultural policy
during the integration phase. The terminology implies that the autonomy granted to B
should be connected to the possibility to preserve own culture for B instead of directly
relating it to the change in B’s culture.
In addition to the autonomy granted to B Nahavandi and Malekzadeh (1988)
conceptualize acculturation as depending on three further aspects: The attractiveness of
interaction, the value of the own culture and the relatedness of A’s and B’s businesses.
The influence of the former two is comprehensible: To what extent the interaction with
the counterpart appears to be attractive, i.e. how eager the employees are to interact
with the new partner and as a result, how open they are for new ‘ways to do things’
influences the pace of cultural change obviously. Opposing this factor the value of
preserving one’s own culture can slow down the acculturation. Nahavandi and
Malekzadeh (1988) see these two factors only as influencing the acculturation of an
acquired organization to its acquirer. Apparently they assume that the acquirer is
culturally stable and immune against any cultural influences, which is analogue to
Berry’s (1983) original description of different types of acculturation. Obviously this is
not compatible with the basic conception of the present study. As a consequence the
variables will not only be included for B, but also for A to allow cultural change in both
entities. In the model both variables are fed in as relative values ranging from 0 (no
attractiveness or no value of own culture, respectively) to 1 (high attractiveness or high
value of own culture).
The fourth factor which is supposed to have an influence on the acculturation
following Nahavandi and Malekzadeh (1988), the relatedness of the two organizations,
is not considered explicitly in the model. The authors state that, “if the merger is with a
firm in a related business, the acquirer is more likely to impose some of its culture and
practices in an attempt to achieve operating synergies” (Nahavandi & Malekzadeh,
1988, 84). This statement seems to point at a connection between A’s familiarity with
B’s business and the change in B’s culture, but it is problematic for two reasons: Firstly,
from the formulation it is apparent that this idea implies a quite low value A assigns to
cultural diversity, which has already been considered in the autonomy granted to B. “Is
more likely” secondly implies that acquirers have a choice which cultural policy to
impose on B. Therefore it seems reasonable to omit a fixed connection between
familiarity and the autonomy granted to B and to consider this idea to be regarded
sufficiently in A’s (exogenous) specification which degree of autonomy to grant to B.
It may be raised the objection that the structure of this sub-model allows only
acculturation, but not an increase in cultural difference. Referring to the model’s
boundary this limitation can be explained easily: How shall cultural difference increase
if the only alternative given is the culture of the counterpart, but there is no external
point of reference? A cultural crisis may lead to a hardening of the two positions
opposing each other; Berry names this phenomenon “rejection” (Berry, 1983, p. 69; also
Nahavandi & Malekzadeh, 1988, 83). But an increase in cultural difference seems not
logically justifiable inside the model boundary.
Employees and their perception of the integration process
After two major areas of change have been discussed in detail, the following two
sections briefly cover the two remaining parts of the merger dynamics model, namely
the employees’ perception of the deal and the pursued approach to managing the
integration boundary between A and B. Several groups of people participating in the
post-merger integration processes have to be distinguished and put into relation to each
other briefly. Employees in A and in B, respectively, describe the total workforce of the
two organizations. Key people are part of each of these two groups, but are those
employees that own a considerably high amount of valuable skills. In contrast to the key
people the rest of the employees are
considered replaceable easily. The
top management and the M&A team
raragavent
(denoted as the M&A management
capacity) are people who are not
erpioyses A ernioyees B dynamics, but have already only a
combined organization ‘A+B’ in
reyreoes |
Xe structure and perception of the post-
merger action exogenous to the
organization A they define the
policies influencing the dynamics of the model like time and amount of layoffs and the
team
influenced br the ost-merger
> y P 8
mind. This makes their internal
Figure 4: Participants in the post-merger process model. As agents of the dominant
like. Figure 4 exhibits the relationships between the different groups.
Comparable to the structure of the capability transfer also this sub-model is included
twice in the complete model. The explanation given here for the situation of A’s
employees similarly apply to the conditions in B. Figure 5 gives an overview.
The key variable in this part of the model and maybe most obvious consequence an
M&A results in for the employees is the sudden uncertainty the announcement of the
deal raises. “Acquisitions threaten, reduce, or destroy important elements of economical
or psychic value such as job security, promotion, career opportunities, status and pride
of association.” (Haspeslagh & Jemison, 1991, 132) Cartwright and Cooper explain this
by “the termination of the existing psychological contract between the individual and
his or her organization [and consider it] the beginning of a period of self-appraisal and
critical risk analysis.” (Cartwright & Cooper, 1996, 116) Thus after the announcement
of the deal the employees in both organizations try to anticipate how many people
actually might get fired—the level of anticipated layoffs—taking into account the
operational overlap of A and B as well as A’s reputation for being radical in
rationalisation following an M&A. The operational overlap is defined as the total
number of positions which exist twice after the deal. A’s reputation for M&A handling
describes the assumed or from previous M&As estimated percentage of overlap that
will be cut by A. This source of uncertainty can be reduced by management through
statements about its actual policy concerning the overlap problem: It can either issue job
guarantees or announce explicitly which persons will be fired (Schweiger and DeNisi,
1991) Only if the sum of the announced layoffs and the job guarantees is equal to the
number of employees the job situation exerts no further influence on the overall
uncertainty. In addition the effect on top-down communication on the employees’
uncertainty is taken into account addressing not job perspectives but every other issue
of the deal, its motivation, its current progress and success, visions, market reactions,
and so forth (Schweiger & DeNisi, 1991). Exceeding the expectations leads in general
to a positive perception of the M&A and its integration process as a consequence of the
perceived sincerity, care, and fairness.
LKUP performance
performance A ——— orieation of
performance -_— a employees in A
perception delay time ——tm perceived ert se
Rana performance ori
pet oy
remembrance <Time>
top-down
~<employees in A> communication
oe Fo ina =
in A [seas a ‘puarantees A. communication
l a rea sceniiay WA
{ é
ae anticipated
obec oa — tof me nA PR
loss of key A A _______ change inansicpated
= ak ‘operative
peopl in A memes overlap
cal A's reputation for
een | aA hie
\ _-byoffdebay time
alternative job offers ‘announcement A change in <loss of key
for key people employees in A. people in A>
INT employees
aa
Figure 5: Sub-model of the employees’ perception of the post-merger dynamics
The resulting degree of uncertainty influences the employees’ willingness to
collaborate with their new colleagues and to support the M&A project actively
(Cartwright & Cooper, 1996). Several other variables affect the enthusiasm as well:
First of all the total change the own organizational culture has undergone, assessed with
the value of preserving it. Large changes in a strongly favoured corporate culture will
reduce the willingness to collaborate significantly, since the deal is perceived as
destructive and hence unfavourable (Haspeslagh & Jemison, 1991). Furthermore the
number of announced layoffs in the own organization in relation to the number of
employees decreases the motivation for collaborative behaviour (Marks & Mirvis, 1992)
Besides these ‘soft’ factors also the motivation resulting from monetary incentives is
incorporated (Frey, 2000; Haspeslagh & Jemison, 1991). In addition a large M&A team
and an impressive budget for integration-related expenses arouse the employees’
perception to participate in something important, Haspeslagh and Jemison call this
“creating the right atmosphere” (Haspeslagh & Jemison, 1991, Kay & Shelton, 2000).
Managing the boundary between A and B
The fourth and last sub-model (see Figure 6) covers the boundary between A and B,
i.e. the elements which actually interconnect the two organizations and where therefore
exchange and confrontation can occur and take effect. The concept of a “boundary” or
“interface” between the two organizations which has to be managed is based on
Haspeslagh’s and Jemison’s (1991) work. They suggest that one of the major tasks of
the integration managers is to guarantee that each substantial interaction a member of
the one organization initiates has to target the right person in the other organization. An
active management of the boundary thus reduces the amount of inefficient, time-
consuming and therefore expensive interactions. In addition the further characteristics
of the managerial approach to post-merger integration are covered.
capabilites to B>
working capacity
\Y
eed fo strategie
INI M&A budget
/
time of change in
M&A capacity
inerependence
‘mgt capacity
INI
‘ar time for change ie
Bers vii reitive to B's st. MBA bulget
‘apabilties mae
concn, 7 tuciness of BS | a en tne fr change in
cabanas Ae capabilites change ia MEA, M&A bulget
. MHRA bal bualget
strategic relevance relative to
‘of cansferred
change rate for M&A
~ M&A budget
M&A ment M&A resources“
capacity
~ emphyees
leverage | standard stage
etme L aoe
(g colborte A { "Terao Clas
seaman BER anane —* came ‘
Va Ou
( | conta ye
sim a ae
collaborate in B Bo
J\ cm |
a accent
wilingness intractions
Figure 6: Sub-model of the boundary between A and B
A key variable the previous explanations have already involved frequently is the
number of interactions, a factor influencing several aspects of the integration process
and important in all sub-models. In fact, Haspeslagh and Jemison (1991, 121) say that
“interactions between the two firms are at the heart of the integration process.”
Interactions are acts of exchanging knowledge between employees in A and B during
the actual integration process. They can take place via telephone, e-mail, fax, in meeting
or by other means of impersonal or personal interaction.
From A’s perspective as the organization in control the integration task has to be
assessed in terms of the size of B. There the M&A budget is measured in relation to B’s
last turnover and is set exogenously by the top management in advance. In contrast to a
comparison of the number of employees this conceptualisation bears the basic economic
distinction between capital-intensive and labour-intensive production in mind: A
relation to the number of employees would understate the task to integrate a capital-
intensive business, whereas the turnover as reference value allows an evaluation of the
integration task regardless of this criterion. To integrate a capital-intensive company
with few employees that generates the same turnover as a compared labour-intensive
firm is thus assumed to be comparable regarding the costs of integration due to the
higher costs associated with the employees’ standard of living and working, the
technical integration, and so forth.
The M&A budget constitutes in combination with the available M&A management
capacity, i.e. the size of the M&A team, the overall M&A resources that have been
dedicated to the integration task. This conceptualizes the idea of ‘organizational slack
resources’ as “that cushion of actual or potential resources which allows an organization
to adapt successfully to internal pressures for adjustment or to external pressures for
change in policy, as well as to initiate changes in strategy with respect to the external
environment.” (Bourgeois, 1981, 30; also Cyert & March, 1963) The motivational as
well as the process-related importance of the availability of slack resources for
successful post-merger integration has been acknowledged by several authors
(Sharfman et al., 1988; Haspeslagh & Jemison, 1991) Both the M&A budget and the
M&A management capacity can be adjusted exogenously through the corresponding
change rates as a reflection of the ‘slack policy’ over time.
The available M&A management capacity furthermore influences the quality of the
boundary management and the time it takes to set up a working interface structure, the
so-called stage setting time (Haspeslagh & Jemison, 1991). In the present model it is
assumed that an ideal and at least necessary stage setting time of three months can be
achieved with a management team with a size representing 5% of A’s and B’s combined
workforce. A higher ratio of M&A team size to workforce results in an even faster
establishment of the boundary management. As a result the effectiveness of interaction
is positively influenced by an efficient boundary management. Unfortunately even a
perfectly managed boundary cannot prevent ineffective interactions since also the
cultural difference between A and B takes effect on the effectiveness of interactions.
The merger dynamics model
After all four sub-models and their deduction from the existing knowledge base have
been explained, these structures are to be combined to form the integrative model of the
post-merger dynamics that is the aim of the study. Due to its size the structure is only
shown as a rough sketch in Figure 7, illustrating how the sub-models are arranged.
if
Figure 7: The structure of the merger dynamics model, combining all four sub-models
From these graphics the importance and key position of the number of interactions
and the willingness to collaborate in A as well as in B become apparent. Each of these
elements directly combines effects from three sub-models and influences the same
structures in turn. The integrated model illustrates what is meant by the statement that
some of the relations proposed in literature are modelled as direct influences of one
element on another, whereas other relations are incorporated only as indirect ones. For
example, Szulanski (2000) only suggests that both, the source’s as well as the
recipient’s motivation is important for a successful transfer of knowledge. The
comparison with other studies reveals that the causal structure that underlies the transfer
obviously is more complicated: Szulanski (2000) only proposes that the respective
willingness to collaborate of both groups affects to what extent they interact with each
other and thus generate a possibility to transfer capabilities. Minbaeva et al. (2002)
additionally assume that the recipient’s willingness to collaborate exerts an influence on
his ability to absorb new capabilities. The necessity to define causal relationships in a
formal model therefore has induced a more precise formulation of the antecedents of the
capability transfer: both ability and opportunity are necessary, but each of them depends
at least to some extent on the same motivational basis.
Two major feedback loops across the sub-models’ boundaries can be identified from
complete model structure: Firstly, the “motivated by success”-loop (Figure 8),
describing that positive results from the integration-driven capability transfer motivate
the employees and thus foster further collaboration. During the post-merger integration
process this effect can mainly be enforced by reducing the cultural difference, but with
respect to the second important feedback loop this should be aimed at only after
thorough consideration.
capability
identification in B
perceived
performance vahed change in
penance A's culture
application of new
vi capabilies in A
laborate iB
a certainty in A
willingness to
collaborate in A
loss of key
people in B +
relative absorptive
4
4)
ccutwal difference
+ bss of B's
© capabilites
tacitness of B's
capabilites
. travel distance
number of
effectiveness of interactions
interactions
Figure 8: The “motivated by success”-loop
This second loop shown in Figure 9 is the “change culture only if change is
favoured” loop, describing that cultural change can become an important motivator, but
can also slow down the integration and the value-creating capability transfer if it is
enforced, but not favoured by the employees.
value of preserving
‘valued change in heal pecs
‘A's culture
.
top-down in A expected level
punication> — of communication
assumed 4)
layoffs in A chateiaaty cultural
Henne nN difference
culture
aa
4, ee
Ps
willingness t6 i
collaborate in A attractiveness of —
interaction for A
5 ssl to preserve
loss of key ep caituie Toe A
people in A
interactions
Figure 9: The "change culture only if change is favoured"-loop
The influence of the cultural difference on the capability transfer process now
becomes apparent: On the one hand its negative effect on the relative absorptive
capacity of the recipient and on the transfer time lets management favour a fast cultural
integration (cf. Birkinshaw et al., 2001). On the other hand the employees’ negative
evaluation of cultural change might lead to an even worse situation for quick and
successful capability transfer. This shows how important an assessment of the cultural
differences in the pre-merger phase is and to that it should be a major basis for the
development of a post-merger integration strategy.
Due to the constraints of this study it is refrained from a detailed analysis of all
implications from the combination of the sub-models, with the exception of two
noteworthy details: The first concerns the announcement of layoffs: From the
connection of the capability transfer structure and the employees’ perception an
important implication for the number of the announce layoffs has to be noticed: The
loss of key people directly results in the loss of capabilities—that is the reason to denote
them as ‘key people’. Yet they are still a part of the stock of employees of the respective
organization. Thus if the number of announced layoffs exceeds the difference of
employees minus key people, management actively reduces the stock of desired
capabilities and also the basis for value creation. In contrast this is not the case if the
people are fired after all capabilities have been transferred. Therefore the layout policy
has to be thought through decently: A “suck them out and fire them” policy might be a
good approach to mergers and acquisitions, saving the high salaries of valuable
employees after the original targets regarding capability transfer have been achieved.
But, of course, thorough reflection leads to the insight that the innovation potential of
these employees might be valuable as well—later on, beyond the boundary of this
model, i.e. after the integration has been completed.
Secondly the modelling of the financial aspects has to be regarded in detail: Between
the M&A budget and the performance figures for A and B no connection has been
modelled even though it may be argued that the money spent to facilitate the post-
merger processes has a significant impact on the performance as success criterion of the
deal. This omission is intended for two reasons: First of all the performance is used as
the calculation basis for the effect of performance related incentive structures. Yet the
corresponding literature postulates that the basis for such incentives has to be closely
tied only to the achievement of particular targets set for integration phase (Frey, 2000).
Since the M&A budget is fixed externally it is therefore not supposed to influence the
motivation of the employees. Furthermore, the chosen specification allows a more
detailed analysis of the value the post-merger phase produces: It is (theoretically)
possible to calculate the net present value of an M&A deal in dependence on the chosen
integration approach. This simply requires to offset the time series of the payoffs
generated from the transfer and application of new capabilities against the time series
of the M&A budget and discount the results to TIME=0. The only additional
information needed is B’s last absolute turnover before the deal. As the present value
analysis can be conducted in greater detail if both time series are available separately an
incorporation of the M&A budget into the performance figure is not preferable from this
point of view either.
After these observations on the effect of the combination have been explained
theoretically, the actual behaviour of the complete “merger dynamics” model shall be
analysed. The parameterisation is comparable to the sub-models. As a brief storyline the
scenario represented in the baserun can be described as the integration of the
organization B with 100 employees into the ten times larger A. A is modelled as an
organization that sticks to its traditions. Towards B it is not particularly interested in
terms of culture but wants to obtain 750 comparatively tacit capabilities which are to be
exploited. In turn B shall get 2000 mostly codified capabilities injected to increase its
operational efficiency. B is interested in these capabilities but also attracted by its new
partner’s culture since the own traditions are disliked in the company. The combination
with A is considered a chance for cultural change. As a consequence of its particular
20
interest in an efficient capability transfer A provides sufficient resources to foster the
integration process. The comprehensible behaviour of the sub-models shown above is
partly based on the fact that each model was kept isolated from the dynamics other parts
generate. Consequently the behaviour of the integrated model is supposed to be a bit
more difficult to grasp and harder to trace to its roots.
capability transfer from A to B capability transfer from B to A
me a 800
=F ~ AE
0 10 20 30° 40 50 60 70 80 90 100 0 10 20 30 40 50 60 70 80 90 100
Time (Month) Time (Month)
“desired capabilities A>B" : baserun +—+—+— Capabilities “desired capabilities B>A" : baserun +—+—+— Capabi
“transferred capabilities A>B" : baserun —2—= Capabilities “transferred capabilities B>A" : baserun —2—= Capabi
applied capabil :baserun —+—s——s Capabilities applied capabilities in A: baserun —>—=—s—= Capabi
Figure 10: Capability transfer between A and B in the complete model
Figure 10 shows how the stocks of the two capability transfer processes change over
time. This is quite similar to the behaviour of the respective sub-model. Interesting is
the fact that the transfer and the application of almost 2,000 capabilities from A to B is
achieved in about half the time it takes to complete the opposite process for only about
600 capabilities. Clearly one reason is the higher tacitness of the capabilities to be
transferred from B to A (0.7 versus only 0.2 for A’s valuable capabilities).
perception of the integration process in A perception of the integration process in B
0.8 Dmni 0.8 Dmnl
1.5M_ €/Month 1.5M_ Month
a]
0.4 0.4
745,000 €/Month la j ya] 745,000 Month $e
0 Dmnl 0 Dmal
-10,000 €/Month 10,000 €Month
0” 45 30 45 60 75 90 0 1% 30 45 60 75 90
Time (Month) Time (Month)
willingness to collaborate in A: baserun —+—+—+—Dmnl willingness to collaborate in B : baserun —+—+—+- Dmnl
uncertainty in A: baserun ——2—2—2—2—2 2 Dmnl uncertainty in B : baserun. ——2—2—2—2—2 —2_Dmnl
perceived performance A: baserun 2222 €/Month perceived performance B: baserun —2——2—3 3 €/Month
Figure 11: Perception of the integration phase in A and B
In addition A’s relative absorptive capacity is smaller than B’s from TIME =
3.96875 onwards, with the gap growing, grounded in the significantly lower degree of
the willingness to collaborate in A, what is connected to the employees’ perception of
the deal and the post-merger integration process, portrayed in Figure 11. Note the
different scale for the total change in A’s culture (0 to 0.006) and in B’s culture (0 to 4).
The scale from 0 to 0.8 refers to the willingness to collaborate in each graph.
21
Noteworthy are in this regard the transmission of the steps in the uncertainty graphs into
the behaviour of the willingness variables. The large step in the beginning is caused by
the publication of the pursued employment policy, i.e. the announcement of layoffs and
the issue job guarantees. The second step in period 5 is due to an enlargement of the
M&A team from 5 to 20 people, leading to a consecutive increase in top-down
communication. In the following periods the development of the willingness to
collaborate in both organizations is dominated by a different factor, namely the
performance orientation of the workforces: A policy of increasing monetary motivation
of the employees is equally implemented in the two table functions LKUP performance
orientation for A and B.
In the early phase of the post-merger integration the performance generated by the
transferred and applied capabilities takes no effect on the employees’ willingness to
collaborate. But from period 7 onwards the management relates wages increasingly to
the performance. The effect is different in both organizations: In B the induced
performance orientation directly results in an increase in motivation (compare
Figure 11b), whereas A’s employees become slightly demotivated in the beginning, i.e.
until period 20. The reason is apparent from Figure 10: The transfer of the capabilities
from B to A and their application takes more time, and A is until period 12 in a ‘worse-
before-better dip’ of the performance figure, which is caused by the primarily very
ineffective interactions that directly cause transfer related costs. In addition to that the
reduction of the M&A budget from period 12 onwards slows down the increase in
willingness to collaborate in A, both illustrated in Figure 11a. The importance of the
right timing of a performance oriented motivation strategy becomes clear from this
example.
The remaining dynamics of this exemplary case are to a large extent similar to those
already described for the sub-models. The cultural change processes are almost
identical, again only B undergoes a significant change, the total change in A’s culture
sums up to only 0.0041 points (compare Figure 12b). The major difference of the
isolated baserun_culture portrayed in Figure 12b is the speed of acculturation, caused by
the number of interactions which heavily increases to a maximum of 1,240 interactions
per months in this simulation of the complete model. In combination with the reduction
of B’s workforce these interactions lead to an about four times smaller possibility for B
to preserve its previous culture, whereas A's possibility to do so is between 2.5 and four
times higher. The post-merger literature assumes that cultural integration processes take
about three to five years (Birkinshaw, Bresman & Haakanson, 2001; Cartwright &
Cooper, 1996). In the simulation the cultural difference decreases from the initial 3
points to 0.0605 in the first 36 months and to 0.0016 until month 60, thus it is obviously
able to generate the cultural dynamics with a reasonable time horizon.
the boundary between Aand 8 cultural change
2,000 Ineractionsonth a2
‘8 mal
24 People
“2 People
InteractionssMonth
Dnt
8 People
eT)
“Time (Month) °
nr ae a ee
InteractionsMonth “Tine (Mont)
umber of interaction
tttectiveness of inter
mnt eutural baserun mat
‘Omnl total change in A's culture baserun
People _totalchenge in B's culture: baserun
Figure 12: Behaviour of the elements of the boundary between A and B and cultural
dynamics in the complete merger dynamics model
22
As Figure 13 shows also the changes in the workforce are almost predictable and
comparable to the picture the sub-model offers. The in general comparatively low
willingness to collaborate in both organisations leads to a steady outflow of key people,
reinforced by the constant amount
ies asp sorttorse of alternative job offers. In addition
‘fo Poole NOT B is affected by some /ayoffs. The
1a Beene only noteworthy difference is the
a Baap slight slowdown of the key people’s
an voluntary fluctuation due to the
"38 People increase in both __ entities’
people Het | willingness to collaborate.
o 1 20 30408060 70 80-90 100
Time (Month)
The results of the baserun show
that the model can somehow offer a
consistent multidimensional picture
of the dynamics of post-merger
Figure 13: Changes in the workforce in A and B integration processes. Since the
quality of these results and
therefore the model’s ability to project an M&A’s trajectory in a reliable manner is not
obvious from this single run, several tests of the model structure and its behaviour are
carried out in the following.
‘announced layotts in A: baserun
‘announced layotts in B : baserun
jople
Structural tests of the merger dynamics model
The baserun presented in the previous chapter describes an example of a possible
post-merger scenario, the chosen parameters represent a consistent storyline, yet the
model’s ability to generate an appealing output says only little about its overall quality.
A validation or verification of models is generally impossible as Sterman (2000, 846—
850) explains. Since all models are only simplified representations of real systems their
omissions make them refutable and argumentatively vulnerable, and thus each model
can be proven wrong, or falsified in Popper’s sense. Nonetheless it is possible to build
confidence in a model by explaining to what extent and with which limitations it can
generate valuable insights with some correspondence to reality. Several procedures are
explained in the SD literature to evaluate the structure and behaviour of system
dynamics models through thorough and multifaceted testing. Due to the limited scope of
this study only the structural assessment can be conducted formally.
Forrester and Senge (1980) name five ways to test the structure of a system
dynamics model, namely the assessment of the structure and the parameters, tests of the
model’s dimensional consistency, of its reaction to extreme conditions, and of the
adequacy of its boundary. The assessment of the model structure and of its boundary’s
adequacy can hardly be accomplished in this study in greater detail: On the one hand the
iterative modelling process which underlies the presented structure has lead to an
alignment with the current literature on the covered phenomena from the authors’ point
of view. Therefore the subjective evaluation of structure and boundary will lead to no
further valuable evaluation. The second possibility of an assessment of structure and
boundary, a confrontation with experts in the field of post-merger integration, is an
interesting and valuable possibility to build confidence in the model, but it clearly goes
beyond the scope of this study. Therefore from the present point of view the model can
23
only be regarded as sufficiently precisely related to reality. One remark appears to be
necessary anyway: The model does not include elements named ‘prior acquisition
experience’ or ‘prior experience with the other company’, even though these factor’s
influences on M&A success are a regularly discussed issue in the corresponding
literature (Haspeslagh & Jemison, 1991; Beckman & Haunschild, 2002; also
Gammelgaard, 2002). A decent analysis of an organization’s M&A experience reveals
that this construct merely is an aggregation of several aspects the model actually takes
into account: Experience with M&A in general or with a single organization in
particular, no matter if it has been good or bad, influences the organization’s willingness
to accept or even strive for the confrontation with a different culture (Carr, 1999). It
may increase the ability to identify desirable capabilities in the pre-merger phase and
thus reduce the correction of wrong perceptions. In addition a high general absorptive
capacity may also be the result of substantial experience in the transfer of capabilities in
the course of M&As, alliances or joint ventures. And finally the choice of successful
policies for the allocation of M&A resources, a motivating design of monetary
incentives or the grant of autonomy to the weaker partner may mark the M&A-
experienced organization. In fact, “may” is the important statement in these examples.
The dissolution of ‘prior acquisition experience’ into several dimensions which can
influence an M&A’s outcome represents one result this study generates from its
literature-based analysis. It offers an explanation why previous research differs in the
assessment of the relevance of acquisition experience: Experience is no separate factor,
but a combination of several independent characteristics of an organization.
The next proposed test addresses the conceptual and numerical equivalence of the
model’s parameters. In this regard especially those variables have to be examined
thoroughly which are used to describe intangible elements. The complications which
arise in the modelling of such essentially non-quantifiable variables have been treated
repeatedly in the SD literature (e.g. Warren, 2002). Nevertheless a representation of
social or socio-technical systems inevitably includes this kind of elements. The way
chosen to implement intangible variables in the merger dynamics model as relative
values ranging from 0 to | is related to the scaling methods the social sciences use to
measure social constructs like trust, morale, and the like. This linkage offers the
theoretical opportunity for empirical testing and provides a certain level of equivalence
of the numerical dimension to the ‘real world’, even though no direct units of
measurement can be defined. Furthermore the measurement of abstract constructs like
capabilities can be seen critically. Since in these cases a definition of the construct is
suggested with the intention to offer a criterion for quantification also for these cases a
sufficient degree of analogy and measurability can be assumed, aware that a brief
definition of abstract constructs always is preliminary.
Next, in direct relation to the parameter assessment, the dimensional consistency of
the variables is addressed (Forrester & Senge, 1980; also Sterman, 2000), since two
small targets for criticism might be seen here: The units check in Vensim reports four
issues of concern, none of them is an actual error, all four are warnings about the use of
dimensioned inputs for table functions. Since the definition of a relation between two
variables with different dimensions has been intended in all four cases, e.g. to model an
input changing over time like in the table functions representing the policy for monetary
incentives, these warnings can be disregarded. The two actually problematic elements
are the time factor and the working capacity leverage. Both have been modelled with a
24
clear intention, the latter is not explicitly covered in this piece. Nevertheless the fact that
both are set to a value of one may raise suspicion about their character and may imply
that they are merely scaling factors. This has to be denied. For both factors reasonable
scenarios can be depicted which cause a parameterisation different to one. That both are
set to one is basically done to clarify the traces of distant impacts on the respective
variables these two factors influence as well, without adding another disturbing
manipulation.
Finally Forrester and Senge (1980) see a model’s behaviour under extreme
conditions as a source of additional confidence. The merger dynamics model has been
tested with the identified capabilities for both capability transfer structures as well as
the cultural difference set to zero. In both cases the affected stock-flow structures do not
show any questionable or surprising behaviour, but stay at zero during the whole
simulation. The initial values of the two numbers of employees cannot be set to zero for
technical reasons since both are repeatedly used in the denominator of fractions.
Furthermore the baserun has been adjusted by feeding 1,000,000 identified capabilities
into both capability transfer structures. Due to the problems in the exact quantification
this extreme value has also been considered important. The behaviour of the key
variables of the run ‘one million capabilities’ is shown in Figure 14.
The basic pattern of the capability transfer is comparable to the one seen in the
baserun (compare Figure 10), it only occurs at a different level. Thus the model seems
to be stable in this regard. Also the cultural dynamics react neutrally to the extreme
input. Interesting is the fact that it does not take significantly longer to transfer and
apply one million capabilities each way than to do so with 2,000 and 750, respectively,
even though the number of interactions hits its capacity restriction of 32,000
interactions per month, resulting from 100 employees in B and a mean interaction time
of 1/320 months. The reason for this phenomenon can be found in the extremely high
willingness to collaborate which develops in both organizations as soon as a significant
number of capabilities is applied. It is in turn caused by the strong effect of the
performance generated from the applied applications: Due to the larger total number of
capabilities the performance is raised to a different dimension—the performance of the
baserun model is not even at noise level for this extreme example. Consequently two
observations can be stated as a result of this particular simulation: Firstly, the model is
apparently stable regarding the number of capabilities fed in. This weakens the
difficulties of the quantification of capabilities addressed above. Secondly, the
performance orientation of the employees has to be defined thoroughly. If the
corresponding table function or the performance effect of a single capability are ill-
dimensioned and not harmonized with each other regarding their dimensions the model
overstates the employees’ reaction to the application of the transferred capabilities. This
seems to be realistic to some extent: In both runs both the LKUP performance
orientation of employees tables for A and B are calibrated to induce an increase in the
corresponding willingness to collaborate of up to 0.24 if the performance increases by
€1m. But in the baserun only total effects of €l1m for B and €1.6875m for A are
assumed. Therefore the policy rewards the completion of these processes with
incentives leading to a plus of 0.24 and 0.405 in the willingness to collaborate,
respectively. This is a reasonable level, comparable to the incentive packages in a
medium sized company. But to offer the same incentives—worth 0.24 per €1m for a
25
process with a projected effect of €4.5bn (A) and €1bn (B) as for the ‘one million
capabilities’ case—is obviously not realistic.
capability transfer and application ‘motivation and interactions
2M Capabilities 40,000 interact'month
2,000 Capabilities 400, Dmnt
1M Capabilities
20,000 interact’/month
1,000 Capabilities 200
Dnt
© Capabilities 0 interact month
© Capabilities 0 Dmni
15 30 45 60 75 90 015 30 45 60 75 90
Time (Month) Time (Month)
applied capabilities in A: one million cap. ———+~ Capat ‘lo interactions: one million cap —t——+—— interact'/month
applied capabilities in B: one million cap —2——2 Gapal ‘lo interactions: baserun. 222 interact'imonth
applied capabilities in A: baserun —?——2—— Capabilities _ willingness to coll’ A: one million cap, ———?——3—_ Dn
applied capabilities in B : baserun ++ Capabilities _ willingness to coll’ B: one million cap ++ Dmnl
performance cultural change
248 32 ?
188 24 f
428) 1.6
600M
08 \
10,000
0 10 20 30 40 50 60 70 80 90 100 0
Time (Month) o 10 20°30 40 50 60 70 80 90 100
Time (Month)
performance A: one million capabilities +——+—— €/Month
performance B : one million capabilities. —2——2— €/Month cultural difference : one million capabilities +++ Dmnl
performance A: baserun ——3——s—3—s—_ €/Month total change in A's culture : one million capabilities. —2 Dmnt
performance B: baserun +s 4s €Month total change in B's culture : one million capabilities. -— Dmnl
Figure 14: Model behaviour with one million capabilities to be transferred each
The stability of the model is a major criterion of its usability. The basic ability of the
model to generate a behaviour which is comparable with the literature has been
demonstrated during the presentation of the simulation results above. Thus the merger
dynamics model can be considered to offer some reasonable insights into the dynamics
of post-merger integration processes, both on a structural as well as on a behavioural
level.
Insights into merger dynamics
The aim of this study has been an integrative description of the dynamics of the
post-merger integration phase. The application of a literature-based system dynamics
model as means of investigation differs from both the methods usually used in the
management sciences to examine such phenomena, as well as from the generally
described procedures to build a system dynamics model. As a consequence the
generated insights are of different nature as well.
The description in a system dynamics model which integrates the different facets of
the post-merger capability transfer processes and the social interactions connected to
them generates new ideas about the structure underlying the observable phenomena.
The construction of a formal model has fostered a more precise characterization of
widely used and discussed terms like ‘capability transfer’. Its definition as the process
of the effective integration of one organization’s capabilities into the value chain of its
26
partner offers a clear criterion for empirical analyses. The clarity of this definition is a
direct effect of explicit modelling.
The inconsistent findings of previous studies on particular M&A success factors can
be explained at least partly by the hypothesis that most of those proposed predictors are
not one-dimensional factors but obviously cover several variables influencing the
outcome of an integration process in one notion. The “prior acquisition experience”
often discussed (King et al., 2004) is only one example which can clearly be
disaggregated into several, independent factors. Similarly the question to what extent
the relatedness of the two merging companies’ businesses influences the outcome of an
acquisition is approached from a different perspective. The comparatively little
importance of this element for the capability transfer process presents a possible
explanation for the contradictory results of studies on M&A success also for this
construct.
Even though these clarifications are merely outcomes of the modelling process of
the stock-flow structure and thus might have resulted from any model of this kind, the
specific literature-based approach of the study gives these insights a different character
and foundation. As explained above, a test of the consistency and completeness of the
literature base on post-merger integration is one of the purposes of this model. The
building process reveals that in spite of the vast number of publications a conclusive
portray of the problems of post-merger integration is not available from the current
knowledge base. Related research on the inter-organizational relationships in strategic
alliances and joint ventures, as well as on change management offers complementing
ideas and concepts. Nevertheless their transferability is always limited due to the
differences in the dimensions of the integration task on the one hand and the
hierarchical character of an M&A on the other hand. The hypotheses about causal
relationships expressed in the model structure offer a starting point for further research
on the specificities of post-merger situations in comparison to other forms of
organizational change and of inter-organizational relationships.
Apart from these theory-related outcomes concerning the structure of the research
problem some practical benefits result from the present study. First of all a
comprehensible visualisation of the complex interdependencies between different
aspects of post-merger management is achieved. The stock-flow diagram allows a better
communication and understanding of the mutual influences of corporate culture,
capability transfer and value creation, the employees’ perception of the integration
process, and the managerial policies. In addition the simulation results stimulate a
dynamic perception of the causalities and effects of post-merger changes. Even though a
numerically precise projection of the model is not achieved (and not aimed for), a
general representation of possible post-merger trajectories can be obtained. The positive
effects of both the visualisation of the complex network of interrelations as well as the
possibility to simulate and thus ‘experience’ the interaction between the model’s
elements foster the learning about dynamic phenomena.
Several starting points for further research arise from this study. The empirical
identification of reference modes for the stocks in the system are the maybe most
obviously desired supplement, but at the same time also the most difficult task. But the
implications from the integration of the different research areas provide several
interesting issues which are more feasible. A test of the proposed structure causing an
27
organization’s absorptive capacity, for example, is considered a valuable contribution
fostering the consistency of the knowledge base. The empirical determination of precise
parameters or at least dimensional relations of parameters to each other would increase
the model’s ability to generate reliable results. With such data, for example, an
expansion of the model is imaginable which exploits the generated time series of the
performance figures and provides the possibility to compare different scenarios on the
basis of a fictitious net present value of the post-merger integration process—the ideal
basis for every investment decision. Since the model allows an exclusive evaluation of
the integration, a more detailed ex ante projection of a deal’s potential for value creation
may be possible. This criterion would then pave the way for a consideration of the pre-
merger decision and evaluation processes, which includes the identification process of
the desired capabilities, among others.
Studies of post-merger dynamics with literature-based system dynamics models
advance the generation of theoretical insights concerning the quality of the existing
knowledge base as well as the learning processes about the complex social interferences
during this phase of value creation. Neither the topic nor the applied method lack the
potential for future investigations if only the various linking points for research and
application are used thoroughly.
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* Barney (1991:101) explicitly includes both resources and capabilities into his considerations although
he only uses the term “resources” in his further explanations.
" The structure modelled in the present study focuses the aspect of assimilation and thus understands the
ability to understand external knowledge only in this context.
™ This may also be seen as a representation of the concepts researchers address as the ‘relatedness of A’s
and B’s business’. Relatedness between A’s and B’s activities is one of the classic criteria that has been
researched as a determinant for M&A success. Its correlation with M&A success yet is controversial
(Haspeslagh & Jemison, 1991). Its influence on the relative absorptive capacity might explain its partial
relevance for success without giving it high priority.
’ The link between a capability’s strategic value and its tacitness as it has been explained further above is
actually unimportant for the purpose of this study. The question whether a capability has been imitated
by competitors in the mean time or not lies outside the boundary of the model since it does not
influence the performance level caused by the mere post-merger integration. Thus a direct connection
between tacitness and strategic relevance has not been included. If desired, it may be preliminarily
accounted for the (external) imitation through a decrease of the strategic relevance over time, reflecting
the anticipated threat. The omission of the link actually offers the additional possibility to portray the
transfer of explicit (codified) capabilities which are of high strategic interest, e.g. patents.
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