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Target Environment

Different environments place different demands on resource needs, so resources targeted through acquisition are those that are valuable in the environment where they will be used.22 An implication that a target firm's environment makes a difference is that not all targets will be equally attractive. Still, acquirers do not consistently consider the impact of a target firm's environment during target selection. For example, acquirers often discount the role of a target firm's environment in assessing the performance of a target firm's management.23

Industry environment relates to three factors: munificence, dynamism, and complexity. Munificence relates to the degree that the environment supports growth for firms within the industry.24 Growing industries are expected to positively impact firm performance, but this may simply be an enabling and not a direct cause of firm performance.25 Although high munificence will not guarantee a better target, target firms operating in environments with low munificence may focus internal resources on competitive defensive moves that offer less upside potential than resources developed by firms in munificent environments.26 Dynamism corresponds to the level of unpredictability within an industry and relates to the difficulty of discerning patterns from environmental change.27 Environmental uncertainty may lower the frequency of acquisitions by contributing to doubt about the value of other firm's resources. However, the advantage of speed, or quickly gaining resources in acquisitions, may make resources that are needed and owned by a target firm in a changing environment more attractive.28 For example, Walgreen paid more than twice the prior closing price for, but the acquisition enabled them to access vendor relationships and achieve a 50 percent increase in customers that would have required significant time to accomplish separately.29 Complexity relates to the number of organizations a firm contends with in an industry.30 Although complexity can arise from different sources, the factor salient in M&A relates to concentration, or the extent to which monopoly power exists within an industry.31 Monopoly power tends to increase with industry concentration and decrease with industry fragmentation. Fragmented industries are more complex as resources are widely distributed across multiple firms.32 Although the resources of firms in concentrated industries will likely generate interest from potential acquirers, it is less likely that these firms can be purchased without a paying high premium or other complications.33 Early acquirers when consolidation has begun in an industry are able to pick the better targets and leave behind a smaller and less competitive pool of firms.34 It is also possible that early acquirers are better-managed firms that are responding proactively to industry contraction by improving efficiency.35

Successful acquirers not only consider the target, but also its industry environment. Selecting targets early in the consolidation of a target's industry or around times of rapid change may provide more favorable starting points for performance. Targets in growing industries also provide a more forgiving environment for successful integration. The implication is that target selection needs to consider more than internal characteristics of potential target firms.

Friendly Fit

In a friendly acquisition, there is an increased chance that the combined firm will achieve easy and fast synergistic resource combinations that lead to higher performance. Challenges associated with hostile acquisitions include paying a higher premium to overcome resistance and greater difficulty in carrying out due diligence.36 However, the primary reason that hostile acquisitions are less desired is that they involve high management turnover that reduces the ability to integrate a target firm's resources.37 Managers represent a valuable resource in the combined firm, and successfully moving into new markets may depend on retaining target managers with relevant market knowledge. Although there may be positive elements of management turnover such as target firm managers becoming redundant in a combined firm or the elimination of managers who contributed to poor performance, the loss of knowledge often outweighs any benefits from target manager turnover.38

Although managers of firms in related industries can be expected to have common perceptions, there are no guarantees, and the question of whether to integrate management of the target must be addressed. Three methods are suggested for evaluating this issue. First, acquirers need to consider the ability of the acquirer and the target management to work together, something that will be easier in friendly deals. However, during negotiations, people are likely to put their best face forward. One option is to role play a target decision to assess compatibility, as improved fit will likely result when an acquirer finds that they would make a similar decision under similar circumstances.3 9 This concept corresponds to two of Cisco's rules for target selection, which require that a target have a similar vision and a compatible culture to help ensure that it has a complementary philosophy.40 The challenge of combining companies is likely to be proportional to any cultural gap and can be lessened by picking firms with similar cultures.

Second, successful acquirers are likely to include a termination fee to align interests when completing an announced acquisition. Including a termination fee provides some protection for the acquirer when facilitating integration planning by enabling the acquirer to reveal private information to a target firm.41 The buying and selling of a home offers an analogy in that when the buyer makes a security deposit the seller provides property disclosures. In the context of an acquisition, the target firm agrees to termination fees that serve as an enabler for the acquiring firm to disclose the strategy for combining the firms and the role of target firm employees following the acquisition.

Third, successful acquirers avoid targets with golden parachutes or comparable takeover defenses. If stock options vest when a takeover occurs, it makes integration more challenging because an acquirer needs time to transfer skills, something made difficult when key people in a target stand to benefit financially as a result of a takeover.42 Even if they stay, target employees who experience significant financial windfalls from an acquisition will likely focus more on their newfound wealth than the on interests of the continued success of a combined firm. As a result, successful acquisitions generally avoid conditions that hinder an alignment of interests and knowledge transfer.

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