Acquiring businesses is a complicated process in which acquiring companies often attempt to ease the transition by retaining at least one director at the target company’s board level. New research from the University of Notre Dame questions the wisdom of that decision.
Often, poor post-acquisition results are attributed to the idea that the employees of the target company never feel entirely comfortable with the new employer, or that the acquirer does not fully understand the target and struggles to achieve synergies. It therefore goes without saying that retaining a director of the target company would promote better post-acquisition performance. Primarily, it signals to employees that their previous leadership is valued and that a director at the target company might have a unique idea to help smooth the transition.
However, the opposite is true, according to “Retain the problems or the solutions? The post-acquisition performance implications of director retention”, to appear in the Strategic Management Journal by John Busenbark, assistant professor of management at the Mendoza College of Business at Notre Dame.
The team – including Robert Campbell from the University of Nebraska-Lincoln, Scott Graffin from the University of Georgia, and Steven Boivie from Texas A&M University – looked at how companies performed after acquiring a target company, by empirically studying a factor that impacts the creation of post-acquisition value for the acquirer’s shareholders. Specifically, they looked at director retention, which occurs when the acquiring company brings at least one director from the target company onto its own board.
“Across multiple periods of post-acquisition performance, statistical techniques, and different samples of acquisitions, we consistently find that director retention tends to undermine post-acquisition performance compared to companies that did not retain a director” , said Busenbark, who specializes in business. governance and research methods.
The team empirically analyzed more than 550 acquisitions that took place between 2004 and 2014 in which the acquiring company assumed a wholly controlled stake in the target company. They then investigated the composition of boards of directors before and after the acquisitions to determine whether directors of the target had been retained by the board of directors of the acquiring company.
They analyzed the relationships between a director’s retention and investors’ appropriation of long-term value – a variable that captures shareholder value – for one, two, three and five years after acquisition.
“In additional analyses, we also provide preliminary insight into factors that may ameliorate or suppress this relationship, which we hope opens the door to future research to better understand why this negative relationship exists.” Busenbark said.
The research offers at least two crucial contributions to leadership in acquiring organizations. First, they encourage senior executives to think about why they might want to retain a target director. In further in-depth analyses, they found that acquirer managers are generally hesitant to retain a director, but might do so either because it is part of the acquisition negotiation process or because it might facilitate inherent machinations. to the process. Either way, the research suggests that managers might want to approach director retention with concern.
Second, the study launches a broader exploration of why director retention might hurt post-acquisition performance.
“While this component is exploratory in our study,” Busenbark said, “we tentatively find that director retention might say more about the relatively stronger power of the target firm than about the desires of the acquirer. , acquisition leaders may not be shy about onboarding a new director, so we hope our research encourages them to see target demands like this through a more critical lens.
Contact: John Busenbark, 574-631-1735, jbusenba@nd.edu
