In this paper we draw on work in behavioral learning theory and risk taking to examine whether firms desperate for growth overpay for acquisitions, and we develop a theory of desperation in the context of growth. We suggest two key drivers of such desperation: (1) when a firm's organic growth is low, paying handsomely for acquisitions may be one of the few options for growth, and (2) when a firm becomes dependent on acquisitions for continuing growth, it is vulnerable to overpaying for acquisitions. Although pressures to grow via acquisition can be intense, we also test whether the benefits of acquisition experience—from both acquirers and their advisors—help to prevent overpayment caused by desperation. We test these ideas in a sample of firms in the banking industry between 1994 and 2005. Consistent with this theory of desperation, our results showed that firms desperate for growth are more likely to pay high acquisition premiums. Our findings on the moderating role of acquisition experience showed that advisors' acquisition experience is more helpful than acquirers' own acquisition experience in preventing desperate acquirers from overpaying for a target.
Get full access to this article
View all access options for this article.
References
1.
AdnerR.LevinthalD.2001“Demand heterogeneity and technology evolution: Implications for product and process innovation.”Management Science, 47: 611–628.
2.
AikenL. S.WestS. G.1991Multiple Regression: Testing and Interpreting Interactions. Newbury Park, CA: Sage.
3.
AkaikeH.1974“A new look at the statistical model identification.”IEEE Transactions on Automatic Control, 19: 716–723.
4.
AllenL.JagtianiJ.PeristianiS.SaundersA.2004“The role of bank advisors in mergers and acquisitions.”Journal of Money, Credit and Banking, 36: 197–224.
5.
AmburgeyT. L.MinerA. S.1992“Strategic momentum: The effects of repetitive, positional, and contextual momentum on merger activity.”Strategic Management Journal, 13: 335–348.
6.
AnandJ.SinghH.1997“Asset redeployment, acquisitions and corporate strategy in declining industries.”Strategic Management Journal, 18: 99–118.
AudiaP. G.GreveH. R.2006“Less likely to fail: Low performance, firm size, and factory expansion in the shipbuilding industry.”Management Science, 52: 83–94.
9.
BarkemaH. G.SchijvenM.2008a“How do firms learn to make acquisitions? A review of past research and an agenda for the future.”Journal of Management, 34: 594–634.
10.
BarkemaH. G.SchijvenM.2008b“Toward unlocking the full potential of acquisitions: The role of organizational restructuring.”Academy of Management Journal, 51: 696–722.
11.
BaumJ. A. C.LiS. X.UsherJ. M.2000“Making the next move: How experiential and vicarious learning shape the locations of chains' acquisitions.”Administrative Science Quarterly, 45: 766–801.
12.
BeckmanC. M.HaunschildP. R.2002“Network learning: The effects of partners' heterogeneity of experience on corporate acquisitions.”Administrative Science Quarterly, 47: 92–124.
13.
BlinderA. S.MorganJ.2005“Are two heads better than one? Monetary policy by committee.”Journal of Money, Credit and Banking, 37: 789–811.
14.
BowersH. M.MillerR. E.1990“Choice of investment bankers and shareholders' wealth of firms involved in acquisitions.”Financial Management, 19(4): 34–44.
15.
BromileyP.1991“Testing a causal model of risk-taking and performance.”Academy of Management Journal, 34: 37–59.
16.
BurnhamK. P.AndersonD. R.1998Model Selection and Inference: A Practical Information Theoretic Approach. New York: Springer-Verlag.
17.
BurtR. S.2004“Structural holes and good ideas.”American Journal of Sociology, 110: 349–399.
18.
BurtR. S.2007“Secondhand brokerage: Evidence on the importance of local structure for managers, bankers, and analysts.”Academy of Management Journal, 50: 119–148.
19.
CannellaA. A.Jr.HambrickD. C.1993“Effects of executive departures on the performance of acquired firms.”Strategic Management Journal, 14: 137–152.
20.
CapronL.DussaugeP.MitchellW.1998“Resource redeployment following horizontal acquisitions in Europe and North America, 1988–1992.”Strategic Management Journal, 19: 631–661.
21.
CohenJ.CohenP.1983Applied Multiple Regression/Correlation Analysis for the Behavioral Sciences, 2d ed.Hillsdale, NJ: Lawrence Erlbaum Associates.
22.
DavisG. F.2009Managed by the Market: How Finance Re-Shaped America. New York: Oxford University Press.
23.
DavisG. F.2010“Not just a mortgage crisis: How finance maimed society.”Strategic Organization, 8: 75–82.
24.
DavisG. F.MizruchiM. S.1999“The money center cannot hold: Commercial banks in the U.S. system of corporate governance.”Administrative Science Quarterly, 44: 215–239.
25.
DenrellJ.2003“Vicarious learning, undersampling of failure, and the myths of management.”Organization Science, 14: 227–243.
26.
ElsbachK. D.KramerR. M.1996“Members' responses to organizational identity threats: Encountering and countering the Business Week rankings.”Administrative Science Quarterly, 41: 442–476.
27.
FestingerL.1954“A theory of social comparison processes.”Human Relations, 7: 117–140.
28.
FinkelsteinS.2003Why Smart Executives Fail: And What You Can Learn from Their Mistakes. New York: Penguin Putnam.
29.
FinkelsteinS.HaleblianJ.2002“Understanding acquisition performance: The role of transfer effects.”Organization Science, 13: 36–47.
GraebnerM. E.EisenhardtK. M.2004“The seller's side of the story: Acquisition as courtship and governance as syndicate in entrepreneurial firms.”Administrative Science Quarterly, 49: 366–403.
32.
GreenbergE.ParksR.1997“A predictive approach to model selection and multicollinearity.”Journal of Applied Econometrics, 12: 67–75.
33.
GreeneW. H.2003Econometric Analysis, 5th ed.Upper Saddle River, NJ: Prentice Hall.
GreveH. R.2003Organizational Learning from Performance Feedback. New York: Cambridge University Press.
36.
GreveH. R.2008“A behavioral theory of firm growth: Sequential attention to size and performance goals.”Academy of Management Journal, 51: 476–494.
37.
GulatiR.1995“Social structure and alliance formation patterns: A longitudinal analysis.”Administrative Science Quarterly, 40: 619–652.
38.
GulatiR.LavieD.SinghH.2009“The nature of partnering experience and the gains from alliances.”Strategic Management Journal, 30: 1213–1233.
39.
HaleblianJ.FinkelsteinS.1999“The influence of organizational acquisition experience on acquisition performance: A behavioral learning perspective.”Administrative Science Quarterly, 44: 29–56.
40.
HaleblianJ. J.KimJ.-Y. J.RajagopalanN.2006“The influence of acquisition experience and performance on acquisition behavior: Evidence from the U.S. commercial banking industry.”Academy of Management Journal, 49: 357–370.
41.
HambrickD. C.FinkelsteinS.1987“Managerial discretion: A bridge between polar views of organizational outcomes.” In CummingsL. L.StawB. M.(eds.), Research in Organizational Behavior, 9: 369–406. Greenwich, CT: JAI Press.
42.
HambrickD. C.FinkelsteinS.MooneyA. C.2005“Executive job demands: New insights for explaining strategic decisions and leader behaviors.”Academy of Management Review, 30: 472–491.
43.
HardingD.RovitS.2004“Building deals on bedrock.”Harvard Business Review, 82(9): 121–128.
44.
HaspeslaghP. C.JemisonD. B.1991Managing Acquisitions: Creating Value through Corporate Renewal. New York: Free Press.
45.
HaunschildP. R.1994“How much is that company worth?: Interorganizational relationships, uncertainty, and acquisition premiums.”Administrative Science Quarterly, 39: 391–411.
46.
HaunschildP. R.BeckmanC. M.1998“When do interlocks matter?: Alternate sources of information and interlock influence.”Administrative Science Quarterly, 43: 815–844.
47.
HaunschildP. R.MinerA. S.1997“Modes of interorganizational imitation: The effects of outcome salience and uncertainty.”Administrative Science Quarterly, 42: 472–500.
48.
HaywardM. L. A.2002“When do firms learn from their acquisition experience? Evidence from 1990–1995.”Strategic Management Journal, 23: 21–39.
49.
HaywardM. L. A.HambrickD. C.1997“Explaining the premiums paid for large acquisitions: Evidence of CEO hubris.”Administrative Science Quarterly, 42: 103–127.
50.
HeckmanJ. J.1979“Sample selection bias as a specification error.”Econometrica, 47: 153–161.
51.
HigginsM. J.RodriguezD.2006“The outsourcing of R&D through acquisitions in the pharmaceutical industry.”Journal of Financial Economics, 80: 351–383.
52.
HittM. A.HarrisonJ. S.IrelandR. D.2001Mergers and Acquisitions: A Guide to Creating Value for Stakeholders. New York: Oxford University Press.
53.
HogarthR. M.EinhornH. J.1992“Order effects in belief updating: The belief adjustment model.”Cognitive Psychology, 24: 1–55.
54.
HunterW. C.JagtianiJ.2003“An analysis of advisor choice, fees, and effort in mergers and acquisitions.”Review of Financial Economics, 12: 65–81.
55.
IngramP.BaumJ. A. C.1997“Chain affiliation and the failure of Manhattan hotels, 1898–1980.”Administrative Science Quarterly, 42: 68–102.
56.
JacqueminA. P.BerryC. H.1979“Entropy measure of diversification and corporate-growth.”Journal of Industrial Economics, 27: 359–369.
57.
JemisonD. B.SitkinS. B.1986“Corporate acquisitions: A process perspective.”Academy of Management Review, 11: 145–163.
58.
KahnemanD.TverskyA.1979“Prospect theory: Analysis of decision under risk.”Econometrica, 47: 263–291.
59.
KennedyP.2003A Guide to Econometrics, 5th ed.Malden, MA: Blackwell.
60.
KesnerI. F.ShapiroD. L.SharmaA.1994“Brokering mergers: An agency theory perspective on the role of representatives.”Academy of Management Journal, 37: 703–721.
61.
KimJ.-Y.FinkelsteinS.2009“The effects of strategic and market complementarity on acquisition performance: Evidence from the U.S. commercial banking industry, 1989–2001.”Strategic Management Journal, 30: 617–646.
62.
KimJ.-Y.KimJ.-Y. J.MinerA. S.2009“Organizational learning from extreme performance experience: The impact of success and recovery experience.”Organization Science, 20: 958–978.
63.
KingD. R.DaltonD. R.DailyC. M.CovinJ. G.2004“Meta-analyses of post-acquisition performance: Indications of unidentified moderators.”Strategic Management Journal, 25: 187–200.
64.
KolasinskiA. C.KothariS. P.2008“Investment banking and analyst objectivity: Evidence from analysts affiliated with mergers and acquisitions advisors.”Journal of Financial and Quantitative Analysis, 43: 817–842.
65.
KrishnanH. A.HittM. A.ParkD.2007“Acquisition premiums, subsequent workforce reductions and post-acquisition performance.”Journal of Management Studies, 44: 709–732.
66.
KrollM.WaltersB. A.WrightP.2008“Board vigilance, director experience, and corporate outcomes.”Strategic Management Journal, 29: 363–382.
67.
LaamanenT.2007“On the role of acquisition premium in acquisition research.”Strategic Management Journal, 28: 1359–1369.
68.
LantT. K.BaumJ. A. C.1995“Cognitive sources of socially constructed competitive groups: Examples from the Mahattan hotel industry.” In ScottW. R.ChristensenS.(eds.), The Institutional Construction of Organizations: International and Longitudinal Studies: 15–38. Thousand Oaks, CA: Sage.
69.
LarssonR.FinkelsteinS.1999“Integrating strategic, organizational, and human resource perspectives on mergers and acquisitions: A case survey of synergy realization.”Organization Science, 10: 1–26.
70.
LaurieD.DozY. L.SheerC.2006“Creating new growth platforms.”Harvard Business Review, 84(5): 80–90.
71.
LevinthalD. A.MarchJ. G.1993“The myopia of learning.”Strategic Management Journal, 14: 95–112.
72.
LevittB.MarchJ. G.1988“Organizational learning.”Annual Review of Sociology, 14: 319–340.
73.
MarchJ. G.ShapiraZ.1987“Managerial perspectives on risk and risk-taking.”Management Science, 33: 1404–1418.
74.
McDonaldM. L.WestphalJ. D.GraebnerM. E.2008“What do they know? The effects of outside director acquisition experience on firm acquisition performance.”Strategic Management Journal, 29: 1155–1177.
75.
MenonT.PfefferJ.2003“Valuing internal vs. external knowledge: Explaining the preference for outsiders.”Management Science, 49: 497–513.
76.
NalopB.2007“Rules to acquire by.”Harvard Business Review, 85(9): 129–139.
77.
NeumanE. J.DavisG. F.MizruchiM. S.2008“Industry consolidation and network evolution in US global banking, 1986–2004.” In BaumJ. A. C.RowleyT. J.(eds.), Advances in Strategic Management, 25: 211–245. Bingley, UK: Emerald Group.
78.
OcasioW.1995“The enactment of economic adversity: A reconciliation of theories of failure-induced change and threat-rigidity.” In CummingsL. L.StawB. M.(eds.), Research in Organizational Behavior, 17: 287–331. Greenwich, CT: JAI Press.
79.
OcasioW.1997“Towards an attention-based view of the firm.”Strategic Management Journal, 18: 187–206.
80.
PabloA. L.SitkinS. B.JemisonD. B.1996“Acquisition decision-making processes: The central role of risk.”Journal of Management, 22: 723–746.
81.
PalmerD.MaherM. W.2010“The mortgage meltdown as normal accidental wrongdoing.”Strategic Organization, 8: 83–91.
82.
PenroseE. T.1959The Theory of the Growth of the Firm. Cambridge, MA: Basil Blackwell.
83.
PoracJ. F.WadeJ. B.PollockT. G.1999“Industry categories and the politics of the comparable firm in CEO compensation.”Administrative Science Quarterly, 44: 112–144.
84.
PowellW. W.KoputK. W.Smith-DoerrL.1996“Interorganizational collaboration and the locus of innovation: Networks of learning in biotechnology.”Administrative Science Quarterly, 35: 128–152.
85.
RafteryA. E.1995“Bayesian model selection in social research.”Sociological Methodology, 25: 111–163.
RentschJ. R.HeffnerT. S.DuffyL. T.1994“What you know is what you get from experience: Team experience related to teamwork schemas.”Group and Organization Management, 19: 450–474.
88.
RollR.1986“The hubris hypothesis of corporate takeovers.”Journal of Business, 59: 197–216.
89.
SaulS.PollackA.2008“Big pharmaceutical companies hunger for biotech drugs.”New York Times, August 1: C5.
90.
SchwarzG. E.1978“Estimating the dimension of a model.”Annals of Statistics, 6: 461–464.
91.
SchweizerL.2005“Organizational integration of acquired biotechnology companies into pharmaceutical companies: The need for a hybrid approach.”Academy of Management Journal, 48: 1051–1074.
92.
SirowerM.1997The Synergy Trap: How Companies Lose the Acquisition Game. New York: Free Press.
93.
SitkinS. B.PabloA. L.1992“Reconceptualizating the determinants of risk behavior.”Academy of Management Review, 17: 9–38.
94.
SluskyA.CavesR. E.1991“Synergy, agency, and the determinants of premia paid in mergers.”Journal of Industrial Economics, 39: 277–296.
95.
StawB. M.SandelandsL. E.DuttonJ. E.1981“Threat-rigidity effects in organizational behavior: A multilevel analysis.”Administrative Science Quarterly, 26: 501–524.
96.
SteinerD. D.RainJ. S.1989“Immediate and delayed primacy and recency effects in performance.”Journal of Applied Psychology, 74: 136–142.
97.
SzulanskiG.1996“Exploring internal stickiness: Impediments to the transfer of best practice within the firm.”Strategic Management Journal, 17: 27–43.
98.
TosiH. L.WernerS.KatzJ. P.Gomez-MejiaL. R.2000“How much does performance matter? A meta-analysis of CEO pay studies.”Journal of Management, 26: 301–339.
99.
VaraiyaN.KerinR. A.WeeksD.1987“The relationship between growth, profitability, and firm value.”Strategic Management Journal, 8: 487–497.
100.
VaraiyaN. P.FerrisK. R.1987“Overpaying in corporate takeovers: The winner's curse.”Financial Analysts Journal, 43: 64–70.
101.
VermeulenF.BarkemaH.2001“Learning through acquisitions.”Academy of Management Journal, 44: 457–476.
102.
von HippelE.1994“Sticky information and the locus of problem-solving: Implication for innovation.”Management Science, 40: 429–439.
103.
WarnerJ. B.WattsR. L.WruckK. H.1988“Stock prices and top management changes.”Journal of Financial Economics, 20: 461–492.
104.
WernerfeltB.1984“A resource-based view of the firm.”Strategic Management Journal, 5: 171–180.
105.
WestphalJ. D.SeidelM. D. L.StewartK. J.2001“Second-order imitation: Uncovering latent effects of board network ties.”Administrative Science Quarterly, 46: 717–747.
106.
WisemanR. M.BromileyP.1996“Toward a model of risk in declining organizations: An empirical examination of risk, performance and decline.”Organization Science, 7: 524–543.
107.
WrightP.KrollM.KrugJ. A.PettusM.2007“Influences of top management team incentives on firm risk taking.”Strategic Management Journal, 28: 81–89.
108.
ZolloM.SinghH.2004“Deliberate learning in corporate acquisitions: Post-acquisition strategies and integration capability in U.S. bank mergers.”Strategic Management Journal, 25: 1233–1256.
