Acquisition Performance: Experience or Competence?

1. Acquisition Performance:Experience or Competence? Steven E. Phelan Tomas Mantecon University of Nevada Las Vegas

2. Background • Phelan • Research Questions • Entrepreneurial competence • Alliances • Acquisitions • Methods • Agent-based models • Experimental game theory • Event studies

3. Central Questions in Strategy • Do some firms perform better than others? • Do some firms (consistently) create more shareholder value than others? • Sustainable competitive advantage – the holy grail • There is a deeply held belief (bias?) that this is true • Why do some firms perform better than others? • Most research focuses on this question • Can I make this specific firm perform better than others? • Little on this

4. Acquisition Research in Strategy • Same questions • Do some firms perform consistently better on acquisitions than others? • Why is this the case? • What should a specific firm do to increase its acquisition performance? • General perception that… • …acquirers (bidders) lose value in acquisitions and that the targets capture most of the value created

5. The Resource-Based View of Strategy • A General Theory for Why Firm A Outperforms Firm B • Firm A possesses a value-creating resource (asset) that Firm B does not, or • Firm A uses a resource in a way Firm B does not (it possesses a competence or capability that Firm B finds difficult to imitate) • If Firm A can acquire its resources for a lower cost than Firm B (due to information asymmetry or luck) than they will also have a competitive advantage

6. Resource-Based View of Acquisitions • Firm can acquire valuable resources through acquisitions • Emphasis on creating a synergy between old and new resources (1+1=3) • Porter has two tests: • Is firm better off? • Is additional value being created in the merger? • Cost of entry • Is the acquisition premium you are paying less than the value created (and preferably much less) • Links to the synergy trap or winner’s curse

7. Recent theory • Hitt, Hoskisson, and Ireland • Firms may develop a competency in identifying, negotiating, and/or integrating acquisitions that can lead to a competitive advantage • Classic examples: Cisco, GE – who make dozens of acquisitions each year • Not much empirical evidence for an acquisition competence • Those with an acquisition competence should have a higher performance

8. The Role of Experience • Simple enough • The more acquisitions you do the better you should get at acquisitions • Easy to study • Simply count how many acquisitions a firm makes and see if performance increases with experience

9. Measuring performance • Market efficiency • If you believe that markets are reasonably efficient then the deviation in a firm’s stock price following the acquisition announcement will reflect the market’s judgment on the wisdom of the acquisition (after adjusting for normal daily market movements) • Window • We use a 3-day day window that includes movements one day before and after the announcement.

10. Previous Studies • Kusewitt (1985) • Returns decline if firms do more than one acquisition per year • 138 companies, 3500 events, 1967-76 • Fowler (1989), Bruton (1994) • Small positive relationship between experience and performance • Only 41 and 52 events respectively • Lahey and Conn (1990) • No difference in performance between firms making single or multiple acquisitions in a six year window • 91 events over $10m

11. Previous Studies • Haleblian & Finkelstein (1999) • Reported U-shaped relationship between experience and performance using 449 events >$10m • Convoluted logic to explain effect • Hayward (2002) • 535 acquisitions by 100 firms • No relationship between experience and performance • Time between acquisitions was significant • Inverted U-shape • Zollo & Reuer (2003) • 51 banks, 577 events • No relationship between experience and performance

12. Meta-Analysis • King et al (2004) meta analysis • Compared 7 studies, 1300 events • Different performance measures ranging from days to months to years • No relationship between experience and any performance measure • We hypothesize no relationship between experience and performance for our sample

13. Competence • So what is making GE and Cisco so good at acquisition if not experience? • Perhaps raw experience is not a good proxy for competence • Chambliss (1999) found that Olympics swimmers were qualitatively different from amateurs not just quantitatively different (they have differential technique) • “superlative performance is really a confluence of dozens of small skills and activities, each one learned or stumbled upon”

14. Differential Learning • There may also be an interaction between experience and competence • competent companies may learn faster (perhaps masking an experience main effect) • Hypotheses: • Qualitative competence will be associated with performance • There will be an interaction between competence and experience

15. Sample • All reported acquisitions in SDC database between 1991 and 2002 • Dropped firms without CRSP data • Dropped recaps, spinoffs, LBOs, contaminated events (i.e. earnings announcement at same time) • Dropped outliers (|CAR|>0.5) – only 50 cases • Final sample 10,574 events • 5734 private targets • 1465 public targets • 3375 subsidiary targets

16. Design • Sample was divided into 2 time periods • 1991-1996 & 1997-2002(although other divisions were tested) • We operationalized ‘competence’ as the average (mean or median) performance in the first six years • Two measures CAR and residual CAR • Considered 1, 3, 5 qualifying events

17. Results • Controls: • Event year, relative acquisition size, acquirer performance, contested bids, business similarity, method of payment, use of advisor • Raw correlations • Positive correlation between competence and performance, • Negative correlation between experience and performance

18. Results

19. Results by Target Status

20. Discussion • Experience has no relationship with performance • Confirms meta-study • We also found no U-shaped relationship on normalized data • Artifact of extreme measures? • Past performance predicts future performance • Arguably an unobserved competence

21. Discussion • Competence relationship: • Strongly significant for private firms • Marginally significant for subsidiaries • Not significant for public acquisitions • Suggests an informational component • Private market is less competitive than public market • Perhaps, competent firms have lower search costs • No interaction between experience and competence • Competent firms did not leverage experience better

22. Extension I. Firm Effects N=2224

23. Extension II. Cross Border Acquisitions R2=0.035 N=4682

24. Extension III. Recursive Partitioning Analysis R2=.198