Each phase of the M&A process has the potential to establish conditions for improving subsequent performance. However, there is no guarantee that they will; thus implementation may be unable to overcome errors committed earlier.10 The implication is that achieving better M&A performance requires considering integration issues early in the process, beginning with having a clear strategic rationale for the M&A. What provides a good rationale is not specifically developed here. However, any rationale for M&A needs to incorporate the importance of acting quickly. Speed is the primary advantage of M&A compared to internal development since its results can be seen faster, and the need for speed can counter the potential limitations of an acquisition. Explicit recognition that a high hurdle exists in reaching M&A goals also requires that managers develop a clear strategic rationale for an acquisition. This must aid target selection, and carry through the stages of integration planning and implementation.
Improving M&A integration begins with a focus on target selection and deal structuring in order to minimize challenges during implementation. Target selection involves management of the acquiring firm identifying a target firm and setting deal characteristics, such as an offer price. Most deal characteristics are fixed after negotiations are complete and a deal is announced, so poor selection only increases the challenges of implementation. For example, the premium paid for a target firm is negatively related to M&A performance and paying too high a premium can preclude improved performance.11 Still, there are a multitude of things that managers need to consider in selecting a target, and surprises from areas not considered will be inevitable. The focus here will be on a handful of observable attributes managers can influence in selecting a target and their expected impact on performance.
Acquisitions are a means of managing the resources available to firms, and improved M&A performance often depends on an interdependence between an acquirer's and a target firm's resources.12 Research suggests acquisitions that enable acquirer and target strengths and weaknesses to offset each other are most likely to create value.13 In the case of knowledge integration, positive outcomes can be expected for firms in related industries. For unrelated acquisitions, the negative impacts of dissimilarity increase as knowledge becomes more dissimilar.14
Acquisition strategies for resources either involve supplements, obtaining more of a resource, or complements, obtaining another resource that combines effectively with resources the acquirer already controls. 15 Although a strategy based on supplements results in adding to the resource base, a drawback of such a strategy is that resource redundancy following the combination of firms can lower performance.16 In contrast, a strategy that pursues complements focuses on combining different but mutually supportive resources and can create new value.17 For example, value can be added if an acquirer gains access to new customers and segments that complement existing product or service.18 Complements can also provide a valuable source of asymmetry that can allow an acquirer to gain access to target resources at a price below their value to the acquirer. Although complementary resources are difficult to value, acquirers may pay a lower price compared to the potential value of a resource combination because the value of a given target varies for different acquirers with dissimilar resource profiles.19
The value that can be obtained from a target firm varies by bidder. The offer price of different acquirers should reflect the anticipated value of each expected combination with a target. However, to be accepted, the price of a winning bid need only exceed that of competing bids. Therefore, the price paid will exceed the value that could be created in the second-best combination, an outcome that should remain true even if a bid is not contested. Any surplus value for an acquirer over the price paid can be translated into higher performance. In contested acquisitions, competitors may attempt to bid a target's price above an acquirer's value in an attempt to sabotage a successful combination. If bids remain rational, winning bids can create value from the difference between the value estimated for the next best combination and the estimated value of the combination for the acquirer. The value achieved could be even higher for resources that complement one another because they often generate unanticipated benefits, such as easier collaboration.20 This logic is consistent with early advice for acquisitions that suggested acquiring firms avoid unrelated acquisitions and select firms that complement them.21