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Mergers can fail when managers overlook the costs and operating issues associated with managing a larger, more complex organization.
From eNews, September 11, 2008
Mega-mergers like Delta and Northwest Airlines, Time Warner and AOL, Chrysler and Daimler, HP and Compaq, and Sprint and Nextel promise big benefits: increased cost savings and revenues, strengthened competitiveness, enhanced technological capacity, and expanded market share and global reach. However, the day-to-day experiences of many employees and managers often fall short of these expectations.
When mergers and acquisitions come up short or fail, managers usually blame it on a lack of synergy, clashing corporate cultures, or incomplete integration. However, there is another, often overlooked factor: "diseconomies of managing," also known as the costs and operating issues associated with managing a larger, more complex organization.
J. Myles Shaver, a strategic management and organization professor at the University of Minnesota's Carlson School of Management, explores this issue in a forthcoming research study, "Diseconomies of Managing in Acquisitions: Evidence from Civil Lawsuits," co authored by John Mezias of the University of Miami School of Business. (Organization Science has accepted their paper for publication.)
"When acquisitions under perform, researchers and managers rarely consider the fact that companies become disproportionately more difficult to manage as they grow in size," says Shaver. "An acquisition intensifies this effect, making the combined, larger organization more difficult to manage than the two, individual business operations. Something similar happens when a company is growing about 20 to 30 percent a year. Rapid growth typically goes hand in hand with the rapid hiring of new employees. As a result, it's hard to maintain the corporate culture and complexity increases rapidly."
Their research examines 576 U.S. firms in the manufacturing sector that were acquired in 1987, including private and public firms picked up by 370 domestic and 206 international organizations. They studied civil lawsuit judgments involving the acquired firms for five-year periods before and after acquisition because the lawsuit judgments capture substantial disputes related to imprudent action, negligence, or mismanagement of relationships, and can have a tangible economic impact on the firms.
The study concludes that acquired firms have more civil lawsuits brought to judgment during the five-year post-acquisition period versus the five-year pre-acquisition period; the larger the acquired company, the greater the increase in post-acquisition lawsuit judgments; and lawsuits do not increase when acquirers are foreign-held, in different industries, or larger in revenues.
"Our research shows that many of the difficulties associated with acquisitions are reflections of the complications that stem from increased firm size," says Shaver. "Typically, there are breakdowns in oversight because managers do not have the time to devote the attention needed to do the things they should be doing, or because important information becomes lost in the larger organization and does not reach the appropriate decision maker."
He adds, "Because diseconomies of managing are inherent in many situations, it is important that they be considered when assessing potential acquisitions."