Big news today on the mergers and acquisitions (M&A) front: Hudson’s Bay Co. announced it was acquiring the U.S. luxury retailer Saks for $2.9-billion. This got me thinking about how some companies, like Amazon, General Electric, and Proctor & Gamble, have great track records in M&As; they make very few missteps. Others — I’m looking at you, Yahoo — all too often bet big and fail to gain any advantage from their acquisitions. How will The Bay do?
There are plenty of explanations for success or failure in the M&A world, mostly relating to corporate fit and culture, the level of strategic insight, or market forces. Of late, though, some academics are looking at acquisitions from a learning perspective; they argue that prior experience is crucial in dealing with increasingly complex acquisitions. Following this school of thought are Anna Nadolska (Rotterdam School of Management) and Harry G. Barkema (London School of Economics), who developed a theory for how a firm’s top management team learns how to make future acquisitions based on its previous experiences, why the composition of the management team is crucial, and how this affects whether or not acquisitions are successful.
Nadolska and Barkema focus on the top management team because it is usually the team executives, with the CEO, that identify companies to target, set an acceptable price, and decide whether or not to proceed with an acquisition. They theorize that the best management teams for acquisitions should be as diverse as possible, with team members having varying length of service and educational backgrounds.
But it’s not only what individual team members bring to the table, they say; it’s also the interaction within the group. “We argue that diverse teams are more likely to share their experience with acquisitions, to have comprehensive debates about past acquisitions, and to get more information from outside the team to resolve debates,” they write in Strategic Management Journal. “They will, therefore, spend more time in deciding which insights, skills, and routines are worth transferring from one acquisition to the next and on developing acquisition processes and capabilities.”
Of course, executives on a polyglot management team will also tend to take longer to make decisions and, therefore, the researchers say, will acquire fewer companies in a typical year than management teams that are less diverse. The acquisitions they do make, though, should be more successful.
“The case for heterogeneous teams is getting stronger as the pace of change and the complexity of economic and social environments worldwide is increasing.”
Nadolska and Barkema tested their theory using data from more than 2,036 acquisitions by 25 Dutch companies between 1966 and 2006. Their data included how long executives had served on top management teams and the executives’ educational backgrounds.
After crunching the numbers, the researchers found that their theory held up. Heterogeneous top management teams learned more per acquisition and were less likely to transfer the wrong lessons and acquisition processes to later acquisitions, thereby increasing the rate of success.
As for homogeneous management teams, they did indeed acquire more companies than diverse management teams, and this ability to expand quickly, even with less learning and success, was advantageous when the speed of growth through acquisitions was the key strategy.
“What is important is that diverse teams are not always best,” Nadolska and Barkema conclude. “Competitive conditions within industries, as well as company strategy, matter. Still, we believe that the case for heterogeneous teams is getting stronger as the pace of change and the complexity of economic and social environments worldwide is increasing.”
Nadolska and Barkema, Good Learners: how top management teams affect the success and frequency of acquisitions; Strategic Management Journal (pending publication)