Opening the black box of sociocultural integration in mergers and acquisitions: Is
shared identity the key to M&A success?
Master thesis
University of Groningen Faculty of Economics and Business
MSc BA Change Management
Loïs Veldscholten S2967626
l.a.veldscholten@student.rug.nl
Supervisor: M. Hanisch Co-assessor: dr. I. Maris-de Bresser
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Abstract
A substantive body of theory and research on the role of culture in mergers and acquisitions (M&As) suggests that social and cultural differences can create major obstacles to achieving integration benefits and improving financial performance. Drawing on social identity theory literature and research on M&As, we explore whether there is a relationship between shared organizational identity and M&A performance. We focus on the sociocultural dynamics in the integration process to get more insight into organizational-level conditions that create value in post-merger performance. We theorize that shared identity will positively influence M&A performance, as the sense of group belonging strengthens when merging firms share the same organizational identity. We argue that this effect will be strengthened by interorganizational trust and prior engagement between the merging firms. We empirically test this study across a sample of 211 M&A deals in the biopharmaceutical industry. The results show that we do not find evidence to support our hypotheses. We contribute to current literature by studying shared identity on the organizational level. This study also contributes to M&A literature by examining antecedents of M&A performance more closely through a focus on the sociocultural aspects of merging two firms. We conclude by giving suggestions for future research.
Keywords: Social identity theory, Organizational identity, Shared identity, M&A, M&A performance,
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Table of Contents
1. Introduction ... 4
2. Theoretical Background and Hypotheses ... 5
2.1 M&A Performance ... 5
2.2 Social identity theory ... 7
2.3 Social identity and the organization ... 8
2.4 Social identity and M&As ... 8
2.5 Shared identity and M&A performance ... 8
2.6 Interorganizational trust ... 9 2.7 Prior engagement ... 11
3. Methods ... 12
3.1Empirical setting ... 12 3.2 Data collection ... 13 3.3 Sample ... 14 3.4 Measures ... 14 3.4.1 Dependent variables ... 14 3.4.2 Independent variables ... 14 3.4.3 Moderators ... 15 3.4.4 Control variables ... 15 3.5 Plan of analysis ... 174. Results ... 18
4.1 Descriptive statistics ... 18 4.2 Correlations ... 18 4.3 Multicollinearity ... 21 4.4 Homoscedasticity ... 21 4.5 Regression results ... 21 4.6 Marginal effects ... 24 4.7 Alternative analysis ... 255. Discussion and Conclusion ... 26
5.1 Main findings ... 26
5.2 Theoretical implications ... 27
5.3 Managerial implications ... 28
5.4 Limitations and future research ... 28
6. References ... 30
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1. Introduction
Mergers and acquisitions (M&As) are a key strategic tool for many companies to achieve corporate growth, diversification, and economies of scale (Ellis, Reus, & Lamont, 2009). However, M&As often fail, which is why a growing body of research is studying the variables that affect the performance of M&As. Although scholars have been studying these variables for three decades, it remains unclear which organizational-level conditions create value in post-merger performance (King, Dalton, Daily, & Covin, 2004; Stahl et al., 2013). A growing field of research is directed at the cultural dynamics of M&As and the emotional and behavioural response of the employees involved (Cartwright & Schoenberg, 2006). One of these cultural dynamics can be found in the identity of the organizations, as the identity represents the beliefs, values and assumptions shared by members of an organization (Schein, 2010). In M&As, two groups of people merge and social identity theorists examine how these groups go from two separate identities into a common group with a new social identity (Hogg & Terry, 2000).
Scholars apply t
he perspective of social identity theory, where people classify themselves and others into various social categories, such as an organizational membership, to organizational socialization, role conflict, and intergroup relations (Ashforth & Mael, 1989). If people identify with a certain group, there are feelings of oneness with a group, which creates in-group favouritism and a sense of belonging. This contributes to trust and commitment and will make them support institutions that embody their identity (Ashforth & Mael, 1989; McLeod, 2008). For organizations, identification with the organization has a powerful impact on affect and behaviour, as it increases intragroup cohesion and cooperation and it enhances support and commitment to the organization (Turner, 1982). M&As pose a threat to identity because the targeting firm is perceived to be culturally different from the acquiring firm and vice versa (Björkman, Stahl & Vaara, 2007; Stahl & Voigt, 2008).Despite a great focus on the impacts of social identity theory, important empirical and theoretical gaps remain in the literature. Two of these gaps are particularly critical: first, although previous research did examine social identity theory in the M&A context, the direct relationship between shared identity and M&A performance is not addressed; and second, whereas most research has looked at employees’ individual levels of identification with pre-merger and/or post-merger organizations related to M&A success (e.g., Sung et al., 2017), the issue of organizational level identification has not been addressed (van Dick, Ciampa, & Liang, 2018).
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performance. We argue that social identity theory is a valid lens for this study because shared identification leads to improved integration and an inappropriate integration process can lead to bad M&A performance (Birkinshaw, Bresman, & Håkanson, 2000; Cartwright & Schoenberg, 2006). This mechanism is strengthened by two boundary conditions: one is interorganizational trust and the other is prior engagement. With these boundary conditions, we can uncover a part of integration that is now still seen as a black box (Steigenberger, 2017).
In this study, we use a dataset of 211 M&A deals in the biopharmaceutical industry, with deals made between 1994 and 2019. The regression results show that we do not find support for the expected positive association between shared identity and M&A performance. The moderators interorganizational trust and prior engagement do not show significant effects either. This means that although shared identity leads to improved integration, it does not directly impact M&A performance. A possible explanation could be that shared identity is only able to positively influence performance when it is aligned with other elements in the integration process. It might also mean that shared identity is temporal and should be measured over time, instead of only in the pre-merger phase, to get a better insight into how it impacts performance.
This paper makes some important contributions. Firstly, it contributes to social identity theory by examining shared identity on the organizational level and by linking identity to M&As, particularly, M&A performance. Secondly, it contributes to existing M&A literature, by examining antecedents of M&A performance more closely through a focus on the sociocultural aspects of merging two firms. Even though we did not find support for our hypotheses, the outcomes of this study give managers insight in the importance of the integration process in order for an M&A to be successful. Managers should consider the interdependencies in the integration process and they should align these elements accordingly. Furthermore, this study can serve as a starting point for future research to study shared identity in the M&A context. Therefore, this study provides useful suggestions for future research.
2. Theoretical Background and Hypotheses
2.1 M&A Performance
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experience long-run benefits (Cartwright & Schoenberg, 2006). Research also shows that the abnormal returns accrued to acquiring firms in the years following an acquisition are negative or close to zero (Agrawal & Jaffe, 2000). Importantly, these studies show that there is a wide variation in acquisition performance at firm level. Therefore, the desire to understand the antecedents of performance lies at the heart of much M&A research.
Because of the high failure rates, the complex phenomenon that M&As represent has attracted interest from several disciplines over the past decades. Within strategic management, corporate finance and organizational behaviour literature we can see that their focus lies on the issues of strategic fit, organizational fit and the acquisition process itself (Cartwright & Schoenberg, 2006). These various disciplines investigated the influence of these issues on the performance of M&As. Strategic management literature focused on the strategic fit by looking at the link between performance and the strategic attributes of the combining firms, particularly the extent to which the business of the target company should be related to that of the acquirer (Cartwright & Schoenberg, 2006). Strategic management research provided detailed insights into value-creation mechanisms within acquisitions based on resource sharing and knowledge transfer (Ahuja & Katila, 2001). Besides the ‘goodness of strategic fit’ influencing M&A performance, the wider integration process should be taken into account. Literature about the acquisition process shows that inappropriate decision-making, negotiation and integration processes can lead to bad performance (Cartwright & Schoenberg, 2006). Moreover, it tells us that the speed of integration, communication and whether organizations learn from their prior acquisition experiences, play a big role in the acquisition process (King et al., 2004). However, M&A underperformance cannot be explained by the ‘goodness of strategic fit’ and the acquisition process alone, as cultural fit also plays a role in it.
A growing field of research is directed at the cultural dynamics of M&As and the emotional and behavioural response of the employees involved. This literature originates from the psychology, organizational behaviour and human-resource management disciplines. It tries to explain the performance of M&As by looking at the impact of the event itself, of the uncertainty that it brings and of the process of integration on individual members of the organizations (Cartwright & Schoenberg, 2006). This literature focusses on the relationship between culture and performance and shows that a poor cultural fit is one of the most cited reasons for low success rates of M&As (Bauer & Matzler, 2014; Nguyen & Kleiner, 2003). This enormous impact originates from the influence of organizational culture on nearly all organizational practices, leadership styles, directives and administration processes (Chatterjee, Lubatkin, Schweiger, & Weber, 1992). While cultural fit has been acknowledged to be an important factor in M&A performance, the concept was not always clearly defined.
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differences in national culture better predict stress, negative attitudes towards the merger and actual cooperation than differences in corporate culture do. Their findings also suggest, however, that both national and corporate cultures are essential inputs that determine merger processes and outcomes. More recent work found that differences in national culture appear to have a less negative impact on performance than cultural differences on an organizational level (Hajro, 2015; Stahl & Voigt, 2008; Teerikangas & Very, 2006). Therefore, we focus on the organizational dimension of culture, defined as the beliefs, values and assumptions shared by members of an organization (Schein, 2010).
Looking at the organizational dimension of culture, cultural differences in M&A situations arise through employee groups that assert the distinctiveness of their social identities (Gertsen & Søderberg, 1998). This can be explained by the fact that employees might face difficulty in adopting a new corporate identity, which is why M&As can lead to undesirable psychological consequences such as lower identification with, and support for, the newly merged organization (Bartels, Douwes, De Jong, & Pruyn, 2006; Giessner, Ullrich, & van Dick, 2011). Moreover, M&As pose a potential threat to workers’ social needs, as well as their need for security, and to the values that they relied on (Bartels et al., 2006; Cartwright & Schoenberg, 2006). This might not only reduce employees’ well-being and the quality of social relationships at work, it might even ultimately jeopardize the strategic and financial goals of M&As (Giessner et al., 2011). On the contrary, empirical studies have shown that stronger organizational identification leads to higher job satisfaction, higher in-role and extra-role behaviour and weakened intentions to leave the company (Riketta & van Dick, 2005). Given the links to employee well-being and performance of mergers, the study of organizational identification has become a cornerstone for understanding the organizational effectiveness. For this reason, identification is a useful concept in diagnosing organizational problems such as those that often arise during M&As. Social identity theory helps us to understand what happens in this identification process.
2.2 Social identity theory
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2.3 Social identity and the organization
Ashforth and Mael (1989) were the first to systematically introduce social identity theory to organizational psychology. They argued that organizational identification is a specific form of social identification. As organizations can be seen as social groups from a social psychological perspective, they reformulated the concept of identification as ‘perceived oneness with a group’. Accordingly, an organization is said to have an identity when its members share an equal understanding of the character or essence of this organization. The identity may be reflected in shared values and beliefs, a mission, the structures and processes, the organizational climate, etcetera. Ashforth and Mael (1989) also argued that the more one identifies with the group, the more likely one is to act in accordance with the group’s beliefs, norms, values and to act in ‘group-typical’ ways, which affects both the satisfaction of the individual and the effectiveness of the organization (Ashforth & Mael, 1989).
Even though identification with a group may lead to individuals acting in group-typical ways, this does not automatically mean that individuals always act in accordance with the social identity of that group membership (van Knippenberg, 2000). The influence of identification is contingent on social identity being salient. That is, even if an individual identifies with a group, they might not be aware of this group membership, for group membership only affects attitude and behaviour to the extent that the individual is ‘made aware’ of the membership in the group (van Knippenberg, 2000). Contextual factors affect salience, so any ‘event’ that speaks to a group membership can make social identity based in that group membership salient. The prospect of a merger or an acquisition is an example of such an event and may make this organizational identity salient (van Knippenberg, 2000).
2.4 Social identity and M&As
A special case of group structure is the merging of two organizations or the acquisition of one organization by another (Hogg & Terry, 2000). Mergers and acquisitions pose problems of intragroup relations for organizations because the post-merger entity embraces pre-merger intergroup relations between the merging partners. This in-group bias and ‘us-versus-them’ thinking are greatest when there is a perceived external threat such as in M&As and when the out-group is perceived to be culturally different from the in-group (Björkman et al., 2007; Stahl & Voigt, 2008). These relations are often competitive, and negative responses and feelings towards the employees of the other organization may then jeopardize the success of the merger (Hogg & Terry, 2000). On the contrary, social identity theory can restore some coherence to organizational identification and it can suggest fruitful applications to organizational behaviour (Ashforth & Mael, 1989), which is why we test this theory in the context of M&As.
2.5 Shared identity and M&A performance
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with their organization versus the sharedness of an organizational identity within the newly formed organization (van Dick et al., 2018). This study focuses on the latter, where shared identity can be seen as the employees’ shared belonging to the post-merger organization. Sharing an organization identity with others represents team effort as what ‘we’ are doing, it is not about ‘you’ as a personal individual but ‘you’ as a member of the organization with responsibilities to the organization. This creates a sense of in-group favouritism which increases intra group cooperation and cohesion (Ashforth & Mael, 1989; Billig & Tajfel, 1973). This intra group cooperation and cohesion are important aspects of the integration process.
Research on post-acquisition integration builds on the premise that ‘all value creation takes place after the acquisition’ (Haspeslagh & Jemison, 1991). Post-merger integration - the ease with which two distinct organizations become one - is an important determinant for merger success (Bereskin, Byun, Officer, & Oh, 2018). Some researchers made the distinction between task integration, which is measured in terms of transfers of capabilities and resource sharing, and human integration, which involves developing a sense of shared identity and positive attitudes towards the new organization (e.g., Birkinshaw et al., 2000). These two integration processes can be understood separately. Stahl and Voigt (2008) built on the work of Birkinshaw et al. (2000) and proposed that integration is an interactive process requiring sociocultural and task integration efforts. They did not claim that one is more important than the other.
We focus on the aspect of sociocultural integration that seems most relevant to performance, namely the emergence of a shared identity. The formation of interpersonal relationships during the sociocultural integration process influences the levels of cooperation, resistance, perceived stress and the turnover rate (Hajro, 2015). In M&As, when members disidentify with their pre-merger organization and gain psychological entry to the newly formed organization, shared identity will become salient. In turn, a shared identity between the two merging organizations creates a sense of belonging, and the in-group favouritism that emerges advances the integration of the two firms. Moreover, as high levels of employees’ social identification with an organization’s identity results in higher performance (Haslam & Ellemers, 2005), one might likewise expect a salient shared identity between two merging firms to result in a better M&A performance. Therefore, we hypothesize:
Hypothesis 1. Shared identity is positively associated with M&A performance.
2.6 Interorganizational trust
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different ways that trust might transmit these benefits. The dominant perspective is that trust results in direct main effects on a variety of outcomes. Dirks and Ferrin (2001) studied the alternative perspective where trust facilitates or hinders the effects of other determinants of attitudinal, perceptual, behavioural and performance outcomes. In their model, trust acts as a moderator, suggesting that trust provides the conditions under which certain outcomes such as cooperation and higher performance, are likely to occur.
Where interpersonal trust dominated organizational trust literature, more recently attention shifted towards trust at the organizational level (Searle & Dietz, 2012). Trust at the interorganizational level can be described as trust in the impersonal structures, processes, and routines that regulate the relationship between the organizations (Stahl et al., 2013). It refers to the faith in the organization’s leadership and the belief that its goals are attainable (Vanhala, Heilmann, & Salminen, 2016). This faith is a critical element of trust, especially under high uncertainty. Research shows that trust goes beyond knowing, prediction and expectations (Simmel, 1990), so besides trust involving knowledge, it involves more: a belief that something is true when clear evidence is illusive (Pratt, Lepisto & Dane, 2019). This dual nature of trust, namely that it combines good reasons with faith, is especially relevant in situations of uncertainty, such as when two firms merge.
A large body of research on interorganizational trust has shown that trust is of critical importance to the formation and implementation of cooperative alliances between firms, such as joint ventures, R&D collaborations, and marketing partnerships (Das & Teng, 1998; Ring & Van de Ven, 1992; Zaheer, McEvily, & Perrone, 1998). In the context of M&As, the turbulence following the announcement of a merger or an acquisition creates a breeding ground for distrust because the situation is unpredictable, easy to misinterpret, and people feel vulnerable (Stahl & Sitkin, 2010). The period following the takeover announcement is thus one of intense vulnerability and risk assessment in which trust on the interorganizational level is essential, for interorganizational trust can enhance the members’ willingness to accept change and it can improve both organizations’ ability to adapt to complexity and change (Stahl, Larsson, Kremershof, & Sitkin, 2011).
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closely the aspects of the sociocultural integration process, such as shared identity and trust, and how they are related to the performance of M&As (Stahl et al., 2011).
Where prior work focused on the direct relationship between trust and M&A performance, we instead focus on the moderating effect of interorganizational trust. Interorganizational trust emphasizes expectations of reliability, fairness, and goodwill of the other firm (Krishnan, Martin, & Noorderhaven, 2006). Moreover, increased collaboration and decreased potential for conflict occurs between trusting firms and behavioural uncertainty will be reduced (Parola, 2015; Zaheer et al., 1998). Hence, interorganizational trust promotes a context in which both firms act in “good faith” (Parola, 2015; Pratt et al., 2019). We expect this context of good faith to provide the right conditions under which a sense of belonging, created through shared identity, will be fostered. Accordingly, as trust is said to nourish a sense of belonging and a sense of attachment to members of the same social group, we expect that interorganizational trust provides the right context in which the effect of shared identity will strengthen. Therefore, we hypothesize:
Hypothesis 2. Interorganizational trust positively moderates the relationship between shared identity and M&A performance.
2.7 Prior engagement
Studies in the acquisition literature have focused on the role of experience, namely the direct effect of acquirers’ acquisition experience on acquisition performance. They focused on the impact of knowledge codification, experience trajectories and integration strategies on the performance of corporate acquisitions (Porrini, 2004; Singh & Zollo, 1998). These studies have shown mixed results. Some of them found a positive relation between acquirers’ acquisition experience and performance (Fowler & Schmidt, 1989), whereas others did not find a significant association (Haleblian & Finkelstein, 1999; Singh & Zollo, 1998). A few of these studies found that some acquirers misappropriated knowledge from a past experience to a new experience. Hence, researchers also examined the effects of other types of experience on acquisitions, such as the effect of an acquirer’s alliance experience with the target (Porrini, 2004).
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relational connections, there is a greater understanding of each other’s needs and capabilities (Goerzen, 2007).
Research shows that a repeated partnership between an acquiring and targeting firm creates a shared connection (Teerikangas, 2012). The relational connection that emerges from these shared experiences increases the feeling of unity (Buvik & Rolfsen, 2015). Moreover, a prior experience between the acquiring and targeting firm can build mutual trust between the partners, which facilitates the integration process (Zaheer, Hernandez, & Banerjee, 2010). Consequently, this trust strengthens a sense of belonging among the members (Finkelstein, Choi, & Tran, 1998). From a social identity perspective, this all contributes to in-group favouritism and the sense of group belonging and helps in knowing how to interact with each other in the integration process. Thus, an acquiring and targeting firm with a prior engagement are familiar with each other and they have this relational connection in which trust has been built. We expect this to strengthen the sense of belonging. Therefore, we argue for a moderating effect of prior engagement instead of the direct effect of prior ties on performance studied by earlier, mostly alliance, research. Hence, we hypothesize:
Hypothesis 3. Prior engagement positively moderates the relationship between shared identity and M&A performance.
The proposed hypotheses of this study are displayed in the conceptual model in figure 1.
Figure 1. Conceptual model
3. Methods
3.1 Empirical setting
We test our hypotheses using a dataset of mergers and acquisitions in the biopharmaceutical industry. The biopharmaceutical industry uses biological discoveries and inventions to develop drugs (Shakeri & Radfar, 2017). This industry includes both biotechnology and pharmaceutical firms. The
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biopharmaceutical industry was chosen as M&A deals are deeply embedded in this industry’s culture (Antony & Ferreira, 2019). Both mega-deals and bolt-on acquisitions are a key component in the biopharmaceutical industry and are crucial for achieving growth and competitive advantage. Moreover, M&A activity has steadily increased in this industry since the 1980s. This emergence can be explained by the fact that when a firm’s blockbuster drug loses its patent protection, the firm needs to find other high-volume, high-margin drugs to supply its marketing mechanisms. If it has no compounds within its development pipeline that can suitably utilize these mechanisms, the firm purchases another pharmaceutical company that owns patents for major compounds that can utilize its regulatory and marketing capacities (Richman, Mitchell, Vidal, & Schulman, 2016). Thus, large pharmaceutical companies must acquire other companies with profitable discoveries when these acquirers are not producing valuable discoveries themselves. Besides, consolidation, and megadeals in particular, provide drug companies with the level of income necessary to fund R&D and new drug development. Consequently, there were more M&A deals in this industry than in any other industry (Alvaro, Branch, & Challener, 2020). M&As allowed many pharmaceutical companies to make considerable cost savings. However, organizational and cultural barriers may emerge after the deal has been completed and issues of organizational and cultural fit may have an effect on M&A performance (James, 2002), which makes this industry an appealing setting for testing our hypotheses.
3.2 Data collection
For this study, we used a database of M&A deal contracts in the biopharmaceutical industry. These were 1503 contracts of M&As announced between 1994 and 2019. The contracts were provided by the Faculty of Economics and Business of the University of Groningen. With eight master students we created an extensive data set with M&A information. The contracts were used as a base for the data set, other sources were used to complete all the information. Amongst others, the data set contains information on deal and firm characteristics, financial information, CEO information and text documents of annual reports and press releases. We collected this information for both the targets and the acquirers. For the acquirer, we collected data for the years 1-3 prior to the deal, the year of the deal itself, and for the years 1-3 after the deal. For the target, we collected data of the years 1-3 prior to the deal.
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from their website and we collected corporate communications which were used for computer aided textual analysis (CATA).
3.3 Sample
We downloaded the final data set as an excel spreadsheet and then imported it into StataSE16. Some deals needed to be dropped because they were duplicates and some had to be removed due to missing values for one of the variables. Hence, the final sample reduced significantly in size. It resulted in a final sample of 211 observations. Appendix A gives an overview of the variables and its missing values. It shows that we lose the majority of the observations due to missing values for our dependent variables ROA (41.74%) and Tobin’s Q (64.07%) and independent variable Shared identity (46.55%).
To eliminate outliers in the data, we winsorized the ROA and the Tobin’s Q values at the 5% level.
3.4 Measures
3.4.1 Dependent variables
M&A performance is a multifaceted construct and after decades of research a debate remains across and within several disciplines on how to measure M&A performance (Zollo & Meier, 2008). Consistent with other studies measuring M&A performance on the firm level, we choose to use the two dependent variables Return on Assets (ROA) and Tobin’s Q to measure financial M&A Performance (Zollo & Meier, 2008). The ROA defines the accounting-based performance and the Tobin’s Q defines the marked-based value and both are commonly adopted in prior literature. We measure both dependent variables through a cross-sectional comparison of the variables before and after the merger. These long-term accounting measures are common in strategic management and organization studies journals (Zollo & Meier, 2008).
ROA. To measure the dependent variable ROA, for each year we calculate net income / total assets (USD) of the acquirer for that year (Jewell & Mankin, 2011). To get the final ROA, we subtract the average ROA of the three years prior to the deal from the average ROA of the three years after the deal.
Tobin’s Q. We measure the Tobin’s Q for each year by calculating the acquirers’ liabilities + (stock price x shares) / total assets (USD) of that year (Chung & Pruitt, 1994). To get the final Tobin’s Q, we subtract the average Tobin’s Q of the three years prior to the deal from the average Tobin’s Q of the three years after the deal.
3.4.2 Independent variables
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target and the acquirer six months prior to the deal by using the archive.org website. We make textual analyses of the similarity of the mission statement of the target and the mission statement of the acquirer. The mission statement of an organization is known to reflect an organization’s values, identity and philosophy (Babnik, Breznik, Dermol, & Širca, 2014). As the mission statement represents an organization’s identity, high similarity implies presence of a shared identity between the target and acquiring firm. In this study, we use a dictionary (see Appendix B) developed by Hanisch, Haeussler, Graf-Vlachy, Konig and Cho (2018) to perform the textual analysis of the mission statements. This results in a cosine similarity measure, which indicates the similarity between the two “about us” sections and thus shows whether the target and acquirer have a shared identity.
3.4.3 Moderators
Interorganizational trust. We use the M&A contracts to measure the moderator interorganizational trust. A context-sensitive manual coding procedure is used to identify the number of “good faith” clauses mentioned in the contract (Hanisch et al., 2018). In addition to the role of good faith in contractual relations, good faith is said to provide the basis for trust, because contracting parties do not contract with those they do not trust, so they will rely on the good faith of the other party (Burton, 1980). Since there is variation in the length of the M&A contracts, we divide the frequency of good faith clauses by the number of words in the contract.
Prior engagement. We use the BioScience Advisors database to check for prior engagements between the target and acquiring firm. Prior engagement represents relationships in which the firms reached a formal agreement to exchange or commit resources (Zaheer et al., 2010). These agreements included amongst others alliances, joint ventures, license agreements, equity, co-developments and research.
3.4.4 Control variables
Financial performance might be influenced by a wide range of other variables. That is why we added control variables that might simultaneously influence the dependent variables as well as the independent variable. The control variables we added are on the deal level and on the firm level and are a selection of possibilities that might drive our results. There are more variables that could possibly drive our results, however, we cannot control for everything, therefore we base the choice of our control variables on those that have been used by previous research or are expected to influence the results.
Deal level
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problems which in turn influence performance (Uddin & Boateng, 2009). We use the natural logarithm of deal value to indicate the size of the deal.
Hostile takeover. The nature of the deal, friendly or hostile, may influence the performance. Hostile takeovers may poorly influence future financial performance, as target management may refuse to re-deploy assets into the best use after the deal (Franks & Mayer, 1996). We measure this variable by creating a binary variable in which 0 = friendly and 1 = hostile.
Merger / Acquisition. Our sample includes multiple types of deals: acquisition, merger, majority stock purchase, minority stock purchase, equity investment, stock for stock merger, reverse merger and all stock transaction. Each type of deal might have different implications. However, the majority of the deals in our sample are mergers and acquisitions. Hence, we break down deal types by creating dummies for mergers and for acquisitions.
Firm level
Previous M&A experience acquirer. Performance is said to increase as the number of prior acquisitions increase (Fowler & Schmidt, 1989). Organizations with prior acquisition experience may become more adept at necessary structural change and may thereby avoid administrative problems that would negatively impact performance (Lubatkin, 1983). Prior research also shows that management needs experience in order to produce successful acquisitions (Paine & Power, 1984). Therefore, we include the number of times the acquirer engaged in a merger or acquisition before the current deal, dating back to deals in 1994. We count the occurrence of the acquiring firm in the original data set (Zollo & Singh, 2004).
Previous M&A experience target. As well as previous experience of the acquiring firm, the target firm may have experience in acquiring another firm as well. We measure the variable in the same way, by including the number of times the target engaged in a merger or acquisition before the current deal, dating back to deals in 1994. We count the occurrence of the target firm in the original data set (Zollo & Singh, 2004).
Cross border. Research shows that cross-border mergers and acquisitions cause lower improvements in performance compared to domestic deals. Cross-border acquisitions are associated with amongst others more information asymmetries, agency problems, managerialism and cultural differences, which can all negatively impact financial performance (Moeller & Schlingemann, 2005). We use the headquarter locations to create a dummy variable in which 0 = domestic and 1 = cross border.
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Leverage. Financial leverage affects financial performance. During downturns, highly leveraged firms tend to lose market share and experience low profits (González, 2013). We measure leverage by the acquirer’s liabilities prior to the deal / its total assets prior to the deal (Sauerwald, Lin, & Peng, 2016).
Financial crisis. The financial crisis in 2007 - 2008 affected the performance of M&As formed in 2008 - 2009 (Nicholson & Salaber, 2014). Therefore, we control for the effects of the financial crisis as an exogenous shock by creating a dummy variable (Rajan & Zingales, 1998). The current COVID-19 pandemic can be seen as an exogenous shock as well, however, we do not take this shock into account as our sample only consists of deals announced in 2019 or earlier. Future research should take the effect of this pandemic into consideration.
ROA before the deal. To account for the influence of previous financial performance of the acquirer, we control for the ROA before the deal by taking the average ROA of the three years prior to the deal (Teerikangas & Very, 2006). We only use this control variable in the regressions with the dependent variable ROA.
Tobin’s Q before the deal. We control for the Tobin’s Q before the deal by taking the average Tobin’s Q of the acquirer in the three years prior to the deal. We only use this control variable in the regressions with the dependent variable Tobin’s Q.
3.5 Plan of analysis
We make use of the statistical software Stata, version 16.0, to analyse our data (StataCorp, 2019). Since the dependent variables ROA and Tobin’s Q are both continuous, we test all hypotheses through an Ordinary Least Squares (OLS) regression (Hutcheson, 2011). To check whether we are allowed to perform an OLS regression, we test the assumptions for doing an OLS regression and they allow for the use of the OLS regression.
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4. Results
4.1 Descriptive statistics
The table in Appendix C presents descriptive statistics for all variables. The mean values, the standard deviations and the minimum and maximum values of the variables are shown. The descriptive statistics indicate that the dependent variable ROA has a mean of -0.004, meaning that the ROA after the deal is slightly lower than the ROA prior to the deal. The dependent variable Tobin’s Q has a mean of -2.004, meaning that the market value of the firms is lower after the deal than prior to the deal. The standard deviation of the Tobin’s Q (6.696) is higher than the standard deviation of ROA (0.216), which means there is more fluctuation in market-based performance than in accounting-based performance. The table also shows that the independent variable Shared identity has a mean of 0.285 (SD = 0.144), which indicates that on average the target and acquiring firm are for 28.5% similar in their identity. The values for Interorganizational trust are very low, as the number of words in the contracts is very high. Later, we standardize this variable to get a better scale. The mean of the moderator Prior engagement shows that on average the target and acquirer had 0.142 prior engagements, with the maximum being 3.
The descriptive statistics of the control variables show that only 1.4% of the deals in our sample are Hostile. Furthermore, 94% of the deals are either a Merger (11.4%) or an Acquisition (82.5%). Acquirers have more previous M&A experience, namely an average of 1.943 previous deals, than Targets, which experience on average 0.327 earlier deals. A Cross border mean of 0.313 indicates that 31.3% of the deals are cross-border deals and 68.7% are domestic deals. Lastly, the table shows us that 10.4% of the financial results in our sample fall in the Financial crisis years 2008-2009.
In the correlation matrix and the regression models we make use of standardized values for all the variables except for the dependent variables and the binary variables. We standardize them because we use various scales and through standardization we can compare them better.
4.2 Correlations
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20 Correlation matrix Variables (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (16) (17) (1) ROA 1.00 (2) Tobin’s Q -0.37 *** 1.00 (3) Shared identity -0.15 ** 0.04 1.00 (4) Trust -0.17 ** 0.08 0.27 *** 1.00 (5) Prior engagement -0.04 0.11 * 0.09 0.03 1.00 (6) Deal size -0.18 ** 0.21 *** 0.30 *** 0.37 *** 0.14 ** 1.00 (7) Hostile -0.01 0.00 0.09 0.02 0.05 0.18 ** 1.00 (8) Acquisition -0.07 -0.01 0.19 *** -0.00 -0.15 ** 0.04 0.06 1.00 (9) Merger -0.05 -0.04 -0.13 * 0.06 0.15 ** -0.01 -0.04 -0.78 *** 1.00
(10) Previous exp Acq -0.11
* 0.15 ** 0.08 0.08 0.04 0.31 *** -0.03 0.11 * -0.08 1.00
(11) Previous exp Tar -0.06 0.09 0.22
*** 0.21 *** 0.07 0.30 *** 0.13 * 0.03 0.03 0.17 ** 1.00 (12) Cross border 0.07 0.02 -0.00 0.03 0.12 * 0.03 0.09 0.04 -0.02 0.09 0.13 * 1.00 (13) Firm size -0.28 *** 0.33 *** 0.29 *** 0.36 *** 0.27 *** 0.69 *** 0.14 ** 0.09 -0.04 0.45 *** 0.25 *** 0.14 ** 1.00 (14) Leverage 0.03 -0.19 *** 0.04 0.14 ** 0.03 0.11 * 0.02 0.06 -0.11 0.04 0.07 0.09 0.14 ** 1.00 (15) Financial crisis -0.07 -0.04 0.07 0.11 * -0.00 0.06 -0.04 0.12 * -0.12 * 0.10 -0.05 -0.06 0.14 ** 0.09 1.00
(16) ROA before deal -0.64
*** 0.48 *** 0.19 *** 0.31 *** 0.14 ** 0.39 *** 0.05 0.12 * -0.03 0.25 *** 0.12 * 0.04 0.59 *** -0.12 * 0.12 * 1.00
(17) Tobin’s Q before deal 0.31
*** -0.82 *** -0.08 -0.08 -0.09 -0.19 *** -0.02 -0.00 0.05 -0.15 ** -0.08 0.02 -0.37 *** 0.22 *** 0.04 -0.42 *** 1.00 *** p<0.01, ** p<0.05, * p<0.1
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4.3 Multicollinearity
The correlations show some high values which might imply multicollinearity. To rule out multicollinearity issues, we do a variance inflation factor (VIF) test. Appendix D shows the results of the VIF test for ROA and for Tobin’s Q. The VIF value should be < 10 (Craney & Surles, 2002). With a maximum VIF value of 3.193 for the dependent variable ROA and a maximum VIF value of 2.927 for the dependent variable Tobin’s Q, it is safe to say that there are no multicollinearity issues and we can continue with the regressions.
4.4 Homoscedasticity
We also test the assumption for homoscedasticity by carrying out a Breusch-Pagan test. Appendix E shows the results of the tests for both dependent variables. For both dependent variables, the tests show a p-value of 0.000, which is smaller than a p-value of 0.05, so we can reject the null hypothesis and there is significant evidence for heteroscedasticity. Therefore, we use the robust standard errors to obtain unbiased standard errors in the regression analyses.
4.5 Regression results
We conduct an Ordinary Least Squares regression (OLS) to test our hypotheses. The results of the regression are presented in table 2. Model 1, 2 and 3 show the effects of the variables on the ROA and Model 4, 5 and 6 present the effects of the variables on the Tobin’s Q.
Model 1 shows the effect of the control variables on the dependent variable ROA, which represents M&A Performance. The R2 of this model is 0.46, meaning that 46% of the dependent variable can be explained by the control variables.
In Model 2 we add our independent variable Shared identity and our moderators Interorganizational trust and Prior engagement. However, we do not find a significant effect for Shared identity (p = 0.374) which means that we cannot find support for hypothesis 1. We do not look at the effect of the moderators in this model, as we create an interaction term to look at the effect of the moderators in Model 3.
Model 3 shows that we create an interaction term for our moderators, Shared identity x Interorganizational trust and Shared identity x Prior engagement, in order to look at the effect of the moderators. This causes our R-squared to slightly increase from 0.46 to 0.47, so we slightly improve the explanatory power of our model. Nonetheless, we do not find a significant effect for our moderator Interorganizational trust (p = 0.209), and neither for our moderator Prior engagement (p = 0.261). Hence, we can reject hypothesis 2 and hypothesis 3.
Model 4 shows the effect of the control variables on the dependent variable Tobin’s Q, which represents M&A performance.
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0.322), so we can again reject hypothesis 1. Furthermore, we find a positive significant effect for Prior engagement on Tobin’s Q (p = 0.018), which means that a prior engagement has a direct effect on performance as it increases the Tobin’s Q. This is an interesting result as we expected a moderating effect and not a direct effect.
Just as in Model 3, Model 6 shows the interaction effects of our moderators Shared identity x Interorganizational trust and Shared identity x Prior engagement, but now for Tobin’s Q. We do not find a significant moderating effect for Interorganizational trust (p = 0.751) and neither for Prior engagement (p = 0.968), which means we do not find support for hypothesis 2 and hypothesis 3 and we can reject them.
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OLS Regression Results
Model 1 Model 2 Model 3 Model 4 Model 5 Model 6
VARIABLES ROA ROA ROA Tobin’s Q Tobin’s Q Tobin’s Q
Independent variable Shared Identity -0.02 -0.01 -0.30 -0.31 (0.02) (0.01) (0.30) (0.28) Moderators Interorganizational Trust 0.01 0.01 0.03 0.04 (0.01) (0.01) (0.23) (0.23) Prior engagement 0.01 0.00 0.24* 0.24* (0.01) (0.01) (0.10) (0.12)
Shared identity x Trust 0.03 -0.11
(0.02) (0.33)
Shared identity x Prior engagement 0.01 0.01
(0.01) (0.13) Control variables Deal size 0.00 0.00 0.00 0.50 0.56 0.55 (0.01) (0.01) (0.01) (0.56) (0.59) (0.60) Hostile -0.02 -0.01 -0.02 -1.44 -1.43 -1.37 (0.03) (0.03) (0.03) (1.23) (1.11) (1.09) Acquisition -0.07 -0.06 -0.06 -0.63 -0.39 -0.44 (0.06) (0.06) (0.05) (0.44) (0.44) (0.47) Merger -0.12+ -0.12+ -0.12+ -0.63 -0.65 -0.71 (0.06) (0.06) (0.06) (0.97) (0.95) (0.91)
Previous M&A experience acquirer -0.00 -0.00 -0.01 0.06 0.05 0.07
(0.01) (0.01) (0.01) (0.15) (0.15) (0.16)
Previous M&A experience target -0.00 -0.00 -0.00 0.06 0.10 0.11
(0.01) (0.01) (0.01) (0.12) (0.12) (0.12) Cross border 0.04 0.04 0.03 0.44 0.36 0.37 (0.02) (0.02) (0.02) (0.73) (0.71) (0.72) Firm size 0.04+ 0.04+ 0.04* -0.13 -0.17 -0.18 (0.02) (0.02) (0.02) (0.48) (0.48) (0.50) Leverage -0.02+ -0.02+ -0.02+ -0.15 -0.16 -0.15 (0.01) (0.01) (0.01) (0.32) (0.33) (0.33) Financial crisis -0.00 -0.00 0.00 -0.23 -0.20 -0.22 (0.03) (0.03) (0.03) (0.39) (0.38) (0.39)
ROA before the deal -0.16** -0.16** -0.16**
(0.05) (0.05) (0.05)
Tobin’s Q before the deal -5.42*** -5.41*** -5.41***
(1.07) (1.07) (1.08)
R-squared 0.46 0.46 0.47 0.68 0.69 0.69
AIC -153.9 -149.9 -150.9 1181 1186 1189
BIC -113.7 -99.67 -93.92 1221 1236 1246
Log-likelihood 88.95 89.97 92.45 -578.6 -577.8 -577.7
Robust standard errors in parentheses *** p<0.001, ** p<0.01, * p<0.05, + p<0.1
Notes: n = 211
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4.6 Marginal effects
The regression output shows that the results are not on average significant, however, at certain points they might be significant, for example at extreme high or extreme low values. Therefore, we first plot the marginal effect of the independent variable Shared identity across all the values it has. We do this for ROA and Tobin’s Q. Appendix F shows the results and we see that for none of the values the results are significant. We also plot margins effects of the interaction terms so we can visualize the effects of the moderators. The margins plots are shown in the four graphs in figure 2.
The two graphs on the left present the moderating effects for ROA and the two graphs on the right the moderating effects for Tobin's Q. The independent variable Shared identity is shown on the x-axis with its standardized values (min = -2, max = 3). ‘Low trust’ represents the lowest value for Interorganizational trust (-2.34), by taking the minimum value. This is a negative number since the moderators were standardized. ‘High trust’ represents the maximum value for Interorganizational trust (2.77). ‘Low prior engagement’ indicates that there is no Prior engagement (-0.30), we took the minimum value of the standardized values. ‘High prior engagement’ represents the maximum value for Prior engagement (6.12).
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Figure 2. Graphs margins plots
4.7 Alternative analysis
Since a lot of observations were dropped through the dependent variable Tobin’s Q (see table missing values Appendix A), we perform an alternative regression analysis in which we only take ROA as a dependent variable. The results of these regressions are shown in Model 7, 8 and 9 in Appendix G. Our sample increased from 211 to 307 observations and we find an R-squared of 0.42 for all three models, which is slightly lower than in our original regression Model 1, 2 and 3 (R2 = 0.46).
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that the control variable ROA before the deal again has a strong significant effect (p = 0.000). The control variables Firm size (p = 0.001) and Leverage (p = 0.004) show a significant effect too.
5. Discussion and Conclusion
5.1 Main findings
The purpose of this study was to provide more insight into the role of social identity theory in M&As. More specifically, we examined the effect of shared identity between the merging organizations on the financial performance of M&As, represented as accounting performance and market value. Previous research focused on identity on the individual level, whereas we lifted it to the organizational level. Prior research also focused on the effect of sociocultural integration on M&A performance (Stahl & Voigt, 2008), but the direct relationship between shared identity and M&A performance was not studied before. Hence, we studied this relation as it could give insights into application of social identity in M&As. Thereby, we aimed at contributing to the search for an explanation why still a lot of M&As fail (Christensen et al., 2011). We found conceptual ground for two potential moderators too, so we hypothesized a moderating effect of interorganizational trust and prior engagement between the two merging firms, for these variables could strengthen the sense of belonging and sense of trust being important elements in the integration process of M&As.
With a data set of 211 M&A deals in the biopharmaceutical industry, we conducted Ordinary Least Squares regressions to test the hypotheses of this study. We found no significant effects between our independent variable and dependent variables and no significant moderating effects either. Additional analyses did also not help in explaining these relations. In conclusion, we can say that we did not find support for our hypotheses. We did however find significant effects for some control variables. The ROA of the acquirer before the deal negatively influences the dependent variable ROA. Whether the deal is a merger rather than an acquisition shows a marginal significant effect in that it negatively affects ROA. Further, firm size showed a positive, and leverage a negative marginal significant effect on ROA. Just as the ROA of the acquirer before the deal, the Tobin’s Q of the acquirer before the deal also shows a negative significant effect on the Tobin’s Q. Lastly, we found a direct effect of our moderator prior engagement on the Tobin’s Q.
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example, if speed of integration is high, employees of both firms might not have the time needed to create this feeling of trust and sense of group-belonging as when integration speed is moderate or low and then shared identity might not be reflected in performance. This could be a reason why even though shared identity is salient, its effect does not directly impact M&A performance.
Another possible reason for an insignificant effect could be that shared identity is an ongoing process and it should be measured over time, so it should still be measured in the integration phase. Some recent studies show that shared identity can change over time, as such firms in the pre-merger phase can have separate identities and shared identity might emerge in the post-merger phase (Clark, Gioia, Ketchen Jr, & Thomas, 2010; Łupina-Wegener, Schneider & van Dick, 2015). We measured the identity of the merging firms six months prior to the merger, whereas measuring shared identity over time could lead to different results regarding its impact on M&A performance.
5.2 Theoretical implications
In this study we opened the black box of integration and found that shared identity is not the key to M&A performance. We do however contribute to existing literature with this study in multiple ways. Firstly, we contribute to social identity theory literature by studying the direct relationship between shared identity and M&A performance. Social identity has been studied before in the context of M&As, but mostly its impact on social integration was studied (e.g., Björkman et al., 2007) and not its direct impact on performance. Secondly, we contribute to social identity theory literature by studying social identity on the firm level. Where social identity theory is originally an individual level theory and has mostly been studied at the individual level (e.g., Sung et al., 2017), we now lift it to the organizational level as organizations can be seen as social groups (Ashforth & Mael, 1989). Thirdly, we contribute to social identity theory by studying shared identity by means of a quantitative approach. Prior research mostly studied shared identity in qualitative research but asked for a more systematic consideration of shared identity in quantitative research (van Dick et al., 2018). We also contribute to social identity literature since we studied factors that might strengthen its effect of sense of belonging and in-group favouritism. These factors, interorganizational trust and prior engagement, have not been studied before in this way, as they were mostly studied as variables having a direct impact on performance.
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trust in the processes between both companies to strengthen the sense of group belonging. Lastly, we advance M&A literature by studying the moderating effect of a prior engagement between the targeting and acquiring firm. Where this variable was mainly studied in alliance literature, we now applied it to the context of M&As. We did not find significant results for the expected moderation but, surprisingly, we did find a positive direct impact of prior engagement on M&A performance. This is in line with what Porrini (2004) found, namely that prior alliances between the two merging firms positively influence acquisition performance. It is also in line with previous research that found a relation between prior ties and M&A performance (Hoang & Rothaermel, 2005; Gulati et al., 2009).
5.3 Managerial implications
In addition to a theoretical contribution, this study also has implications for managers and directors dealing with M&As, especially in the integration process. Very often, the soft aspects of M&As are ignored which could lead to failure of an M&A. Although we do not find significant results, managers should be careful with sociocultural integration, in that they should not underestimate possible social identity issues. Sharing an identity creates a sense of belonging, in-group favouritism and it enhances trust, which is desirable for the success of an M&A. Conflicts in the integration phase should hereby be avoided at all times, since these can have detrimental effects on M&A success. Moreover, even though shared identity is salient, it might mean that its effects only lead to positive outcomes when other factors regarding integration, such as the speed of integration and the integration approach, are picked wisely. Managers should therefore consider the interdependencies in this phase and should align all these elements accordingly.
Furthermore, managers should be aware that shared identity development could proceed in stages and evolve through intra- and intergroup dynamics over time. Where shared identity is not present in the pre-merger phase, it could be that it develops in the post-merger phase (Łupina-Wegener et al., 2015). Therefore, management should set guidelines and values so that the organizational identities can become, or will stay, coherent. This study also shows that merging firms which had a prior engagement with one another positively influence the performance of M&As, which tells managers that it could help to merge with a firm the organization has worked with before. Also, performance of the acquirer before the deal influences the performance of the M&A. Management could use this information in the evaluation process for target selection and in the development of the integration strategy.
5.4 Limitations and future research
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according to that shared identity. Moreover, we only measured shared identity before the deal without measuring it over time. Therefore, we cannot say anything about the shared identity during and post-merger, while this might be interesting to know as it could give more insight into what happens in the integration process. Instead of solely measuring pre-merger shared identity, future research should further investigate the temporal dimensions of shared identity, for example by measuring shared identity over time. Furthermore, we do not know whether there was continuity of identity. Research indicates that post-merger organizational identification is higher when employees perceive continuity with their pre-merger identities (Graebner, Heimeriks, Huy, & Vaara, 2017). From this view, besides comparing the identity of the targeting and the acquiring firm on their similarity, future research could compare the identity of the target and the identity of the acquirer before the deal to that of the merged firm.
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6.
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