Strategic Management Journal Strat. Mgmt. J., 30: 137–161 (2009) Published online 20 November 2008 in Wiley InterScience (www.interscience.wiley.com) DOI: 10.1002/smj.728 Received 15 June 2006; Final revision received 28 July 2008

THE EFFECTS OF PROCEDURAL AND INFORMATIONAL JUSTICE IN THE INTEGRATION OF RELATED ACQUISITIONS† KIMBERLY M. ELLIS,1 * TACO H. REUS,2 and BRUCE T. LAMONT3 1 Barry Kaye College of Business, Florida Atlantic University, Boca Raton, Florida, U.S.A. 2 Rotterdam School of Management, Erasmus University, Rotterdam, The Netherlands 3 The College of Business, Florida State University, Tallahassee, Florida, U.S.A.

This study explores the independent and interactive effects of procedural justice and informational justice on post-deal value creation in large, related acquisitions. Our results show that informational justice and procedural justice affect different components of value creation. Procedural justice is critical in realizing market position improvements following the integration process, while informational justice is essential in achieving market position gains during integration and financial return gains both during and post-integration. Indicating that the interrelationships between different justice dimensions may be more complex than previously thought, we find that procedural justice reduces the positive effects of informational justice on financial return during the integration process, while it magnifies the effects of informational justice on the combined firms’ market position during integration efforts. We explore the implications of these results for future research on the acquisition integration process and for practicing managers engaging in large, related acquisitions. Copyright  2008 John Wiley & Sons, Ltd.

INTRODUCTION Merger and acquisition (M&A) activity in 2006 reached $3.8 trillion, surpassing record levels set at the beginning of the twenty-first century (Berman, Keywords: related acquisitions; integration process; procedural and informational justice *Correspondence to: Kimberly M. Ellis, Barry Kaye College of Business, Florida Atlantic University, 777 Glades Road, Boca Raton, FL 33431, U.S.A. E-mail: [email protected] † This article was published online on 20 November 2008. Errors were subsequently identified and corrected by an erratum notice that was published online only on 8 December 2008; DOI:10.1002/smj.749. This printed version incorporates the amendment identified by the erratum notice.

Copyright  2008 John Wiley & Sons, Ltd.

2007). But, despite decades of research, the conditions under which M&As enhance or destroy firm value still remain unclear. In fact, a recent metaanalysis of studies examining post-acquisition value creation reveals that acquisitions in general, and the most commonly tested constructs in particular, have no significant value creation effects (King et al., 2004). Moreover, studies by leading consulting firms indicate that up to two-thirds of M&As fail to achieve anticipated cost savings, revenue growth, and other synergistic benefits necessary to increase shareholder wealth (Adolph et al., 2001; Cools et al., 2007; Henry, 2002; PricewaterhouseCoopers, 2000). These studies and others by M&A scholars provide consistent evidence

138

K. M. Ellis, T. H. Reus, and B. T. Lamont

that post-deal value creation hinges on the combined firm’s ability to blend operations of the two previously separate firms during the integration phase (Birkinshaw, Bresman, and H˚akanson, 2000; Haspeslagh and Jemison, 1991; Jemison and Sitkin, 1986; Larsson and Finkelstein, 1999; Schweiger, 2002). While recent studies have examined the effects of integration extent (Saxton and Dollinger, 2004; Schweizer, 2005; Zollo and Singh, 2004) and integration speed (Angwin, 2004; Homburg and Bucerius, 2006) on post-M&A outcomes, our understanding of various aspects of the integration process itself and their relationship to post-deal value creation remains limited. Building on the process perspective of acquisitions (Jemison and Sitkin, 1986), several empirical studies have examined effects of dimensions of the integration process. Evidence exists that communicating with the combined firm’s employees (Calori, Lubatkin, and Very, 1994; Napier, Simmons, and Stratton, 1989; Ranft and Lord, 2002; Schweiger and DeNisi, 1991) and allowing managers of the acquired firm to maintain some autonomy (Datta and Grant, 1990; Datta, Grant, and Rajagopalan, 1991; Ranft and Lord, 2002) are significant determinants of post-M&A outcomes. Collectively, these findings imply that managing the integration process in a way that fosters interaction with and involvement by members of both firms leads to improved performance after the deal. To date, however, no study has drawn together these disparate views of acquisition process management in a coherent theoretical framework to empirically assess post-acquisition value creation. Organizational justice theory offers a framework to address this gap in the literature, thereby improving our understanding of the relationship between M&A integration process management and post-deal value creation. Generally speaking, organizational justice refers to perceived fairness in a firm setting. Based on a recent metaanalysis, organizational justice literature examines four justice types—distributive justice, procedural justice, informational justice, and interpersonal justice (Colquitt et al., 2001). To focus our theorizing and because we are not concentrating on specific resource allocations resulting from the deal or how individual employees were treated following the deal, we do not consider distributive or interpersonal justice. Rather, justice, used in the context of our study, refers to activities initiated by an acquirer and aimed at the integration of Copyright  2008 John Wiley & Sons, Ltd.

a target in a fair manner. As such, we focus on the process by which decisions are made and the rationale provided for making such decisions during the integration process, which concern both procedural justice and informational justice. We define procedural justice as the extent to which the acquirer makes an effort to assure fairness of procedures and processes in decision making (Greenberg, 1987; Lind and Tyler, 1988; Thibaut and Walker, 1975). This justice type incorporates both the acquirer’s tendency of providing process control and giving voice to the acquired unit during the integration process. Moreover, we define informational justice as the extent to which the acquirer makes an effort to justify decisions and procedures (Bies and Shapiro, 1988; Greenberg, 1993). Hence, informational justice reflects the extent to which information is communicated across former firm boundaries and the soundness of explanations provided about the M&A decision-making process. Given the ambiguity often surrounding this major organizational change, managing the decision-making process in a way that enhances perceptions of fairness may serve to minimize employees’ apprehension, uncertainty, and resistance, thus reducing the level of disruption during integration efforts (Citera and Rentsch, 1993; Schweiger and DeNisi, 1991; Steensma and van Milligen, 2003). Because of high strategic stakes, massive restructuring efforts occurring in at least one and often both firms, and other complex management challenges, procedural and informational justice may be even more critical in large, related M&As involving similar-sized firms where one firm is no more than twice the size of the other prior to the deal (Meyer, 2001; Olie, 1994; Shrivastava, 1986). Not only does this special M&A type account for at least one-half and up to threefourths of all deals over the last decade (Cools et al., 2007; Mergerstat, 2006; PricewaterhouseCoopers, 2000), their phenomenological uniqueness also makes value creation determinants potentially different from other deal types (Carey, 2000; Marks, 2000). The heightened expectations of various stakeholders along with greater levels of anxiety and uncertainty typically generated by this special M&A type make it even more likely that attitudes about commitment and trust will influence the combined firm’s ability to implement successfully the changes needed to achieve deal benefits (Jemison and Sitkin, 1986; Lipponen, Olkkonen, and Moilanen, 2004; Marks and Mirvis, 1998; Strat. Mgmt. J., 30: 137–161 (2009) DOI: 10.1002/smj

Justice in the Integration of Related Acquisitions Shrivastava, 1986). As such, the opportunity exists to further extend justice theory into M&A research by investigating the effects of procedural and informational justice in this context. Several scholars have observed that incorporating justice theory into macro-level research improves our understanding of how firms implement large-scale organizational change efforts (Brockner, 2002; Konovsky, 2000; Korsgaard, Sapienza, and Schweiger, 2002). More recently, Luo (2005, 2007, 2008) has examined the independent and interactive effects of multiple justice types on outcomes in strategic alliances. While justice theory has been used in these macro-level contexts, few efforts have been made to integrate the organizational justice and M&A literatures. The limited studies that do have investigated employee reactions to allocation processes (Meyer, 2001), the use of different types of influence tactics (Steensma and van Milligen, 2003), employee post-deal identification with a common in-group and the organization as a whole (Lipponen et al., 2004), and effects of justice on the social integration process (Meyer and Altenborg, 2007). Yet, these studies do not consider direct effects of justice on firm-level performance associated with M&As. Addressing this gap in the literature, our study explores the research question: What independent and interactive effects do procedural justice and informational justice have on post-M&A value creation? In doing so, our study makes various contributions that enhance our understanding of M&A process management. First, after controlling for several factors identified in previous research as important drivers of post-M&A performance, we explore the unique contributions of procedural justice and informational justice on value creation. Guided by existing theory, we also identify how informational justice affects value creation during integration efforts, and procedural justice influences the enduring engagement of the target firm’s employees with the newly combined entity as reflected in post-integration value creation. Of more general significance, we extend justice theory by examining its applicability to this macro context where it is powerful enough to identify subtle, but important, distinctions between during and post-integration value creation effects of various M&A integration practices. And, by considering interactive effects of informational and procedural justice, a topic that until recently has Copyright  2008 John Wiley & Sons, Ltd.

139

received limited attention in the broader procedural justice literature (Colquitt et al., 2001; Luo, 2007), we provide evidence for how different types of organizational justice are interrelated in affecting firm-level outcomes.

THEORY DEVELOPMENT Justice research has argued and demonstrated that variations in the fairness of processes and procedures affect the attitudes and behaviors of those impacted by such practices (Leventhal, 1980; Thibaut and Walker, 1975). Doing legal research on dispute-resolution processes, Thibaut and Walker (1975) introduced the role of procedural justice as the amount of process control provided to people affected by the procedures and their outcomes. While the concept of procedural justice originates from legal research, it has become one of the most researched topics in organizational psychology and human resource management (Colquitt et al., 2001; Cropanzano and Greenberg, 1997), and is receiving increased attention among strategy researchers (e.g., Luo, 2007; Kim and Mauborgne, 1998). Justice theory has been applied to large-scale change (Daly and Geyer, 1994), layoff decisions (Brockner and Greenberg, 1990), global strategy making (Kim and Mauborgne, 1991; Korsgaard et al., 2002), new product development (Li, Bingham, and Umphress, 2007), and management of international joint ventures (Johnson, Korsgaard, and Sapienza, 2002; Luo, 2005, 2008). This line of research builds on the idea that procedural justice not only affects employee outcome satisfaction, but also higher-order attitudes of trust (Folger and Konovsky, 1989) and commitment (Brockner et al., 1987). These higher-order attitudes can be critical for the success of implementing strategies that require the mobilization of workforces (Daly and Geyer, 1994; Kim and Mauborgne, 1991). Several views explain why fairness of processes and procedures has such powerful effects on individuals. Thibaut and Walker (1975) emphasize that procedural justice matters because process control functions as a guard to people’s self-interest. By controlling the process (e.g., by having a voice), people can protect their interests. The group-value view of procedural justice argues that such fairness of processes matters because people want to be treated with respect and dignity and as valued members of enduring groups (Lind and Strat. Mgmt. J., 30: 137–161 (2009) DOI: 10.1002/smj

140

K. M. Ellis, T. H. Reus, and B. T. Lamont

Tyler, 1988). From this view, procedural justice confirms members’ standing in groups and organizations and helps to build solidarity. In a strategic decision-making context, Kim and Mauborgne (1998) stress how procedural justice fosters intellectual and emotional recognition. They argue that fair processes provide a sense of respect for intellectual value and emotional well-being of organization members, which make them more willing to take on new challenges and cooperate with others in ways that enhance firm-level value creation. As research on justice developed, it has become clear that fair process entails not only providing process control, but also providing information to justify the processes (Bies and Shapiro, 1988). As such, informational justice focuses on the extent to which explanations are provided to people that convey information about why procedures were used or why certain decisions were made (Colquitt et al., 2001; Greenberg, 1993). Informational justice, in particular, changes the reaction and receptivity of employees to procedures because information and explanations help those affected to understand the underlying rationale for the procedures (Greenberg, 1993). Procedural justice and informational justice seem particularly important during M&A integration because large-scale changes place concerns for self-interest and inclusion in high relief (Brockner and Wiesenfeld, 1996). Both justice concepts have received some empirical support in prior M&A literature. A few studies have emphasized autonomy provision to the target firm (Datta and Grant, 1990; Datta et al., 1991), which can be linked to procedural justice. Other studies have highlighted the importance of communications with acquired organization members in order to manage the integration process effectively (Calori et al., 1994; Napier et al., 1989; Schweiger and DeNisi, 1991), which can be linked to informational justice. However, several descriptive studies imply that effective management of the M&A integration process entails more than communication and providing autonomy to the target firm (Haspeslagh and Jemison, 1991; Hitt, Harrison, and Ireland, 2001; Marks and Mirvis, 1998). Also, empirical research suggests interrelationships among various factors influencing the M&A integration process (Larsson and Finkelstein, 1999; Ranft and Lord, 2002). For example, Ranft and Lord (2002) observe the critical role of both communications between the firms and the need for autonomy in the target firm, Copyright  2008 John Wiley & Sons, Ltd.

when managing resource transfers in M&As of relatively large targets. Thus, a framework examining multiple attributes of the integration process is warranted.

HYPOTHESES Previous research provides preliminary indications that managing the integration process in a fair manner should have positive effects on employees’ attitudes about organizational commitment and trust. These attitudes, in turn, influence the target firm members’ disposition to changes necessitated by the integration of two previously separate firms (Lipponen et al., 2004; Meyer, 2001). Such relationships then affect value creation outcomes following the acquisition. The theory underlying the development of our hypotheses is shown in Figure 1. Much of the theoretical exposition that follows rests on the implied distinctions between procedural justice and informational justice. Justice during the integration process Creative problem solving and initiatives from key employees will be needed to effectively deal with the many unexpected challenges likely to emerge in the process of integrating two large, related firms (Shrivastava, 1986). High levels of employee involvement and strong relational ties will be required in the combined firm to foster knowledge sharing and cooperation, thereby fully capturing any enduring synergies enabled by the deal (Johnson et al., 2002; Ranft and Lord, 2002). Moreover, organization members need to be committed to changes resulting from the acquisition (Haspeslagh and Jemison, 1991). Establishing commitment among organization members requires that they have a chance to influence and participate in making decisions about the course of actions. That is, to become committed, key employees would like to do more than simply comply with requests for change, and instead actively participate in shaping various aspects of the integration process (Jemison and Sitkin, 1986). As mentioned above, procedural justice refers to the extent to which the acquirer makes an effort to assure fairness of procedures and processes in decision making in the form of allowing involvement in decision making or providing for an ability to control procedures (Thibaut and Walker, Strat. Mgmt. J., 30: 137–161 (2009) DOI: 10.1002/smj

Justice in the Integration of Related Acquisitions Combined firm value creation

Justice in M&A integration

Procedural justice

H1

H3

Informational justice

141

Value creation during integration

H2 Value creation post-integration H4

Figure 1.

Research model Procedural justice, informational justice, and value creation in related acquisitions

1975). The extent to which organization members can influence the processes and procedures that affect them is critical for collaborative problem solving (Li et al., 2007) and building commitment (Colquitt et al., 2001; Kim and Mauborgne, 1998). Given consistent evidence of its positive effects on identification, commitment, satisfaction, and similar attitudes (Konovsky, 2000; Korsgaard, Schweiger, and Sapienza, 1995; Lipponen et al., 2004), we posit that it will be critical to allow target firm managers to have some process control and voice in the decision-making process. Providing involvement in the process should not be mistaken by a false sense of control (Marks, 2000). The popular press provides plenteous rich reports that indicate employees can be suspicious about decision makers’ words. For example, the extensively documented merger of Daimler and Chrysler was announced as a merger of equals, implying that key employees from both companies would have a clear voice in the integration process and be equally involved in every aspect of the deal (Zaheer, Schomaker, and Genc, 2003). However, it soon became quite obvious that structural components to assure such sharing of control were not in place. This was bluntly expressed in the words of one reporter when he asked: ‘How do you pronounce the name of the German-American car company?’ and answered ‘It’s ‘Daimler’; the ‘Chrysler’ is silent’ (Economist, 2000: 76). If actions do not correspond with decision makers’ words, employees will likely accuse management Copyright  2008 John Wiley & Sons, Ltd.

of what Leventhal (1980) has called ‘quasi-fair’ behavior because employees are likely to see through manipulative attempts to be fair (Folger and Skarlicki, 1999). Truly providing process control, though it may be limited, in what alternatives are pursued by the combined firm can enhance commitment to various decisions considered necessary to create value following the acquisition (Camerman, Cropanzano, and Vandenberghe, 2007; Daly and Geyer, 1994). This, in turn, increases the likelihood that target firm managers will be involved in actively motivating their employees to perform jobs at or above pre-deal levels and eliciting their overall support of the combined firm. Moreover, allowing involvement of target firm managers in the decisionmaking process should engender them to play a critical role in maintaining relationships with key external stakeholders such as customers and suppliers, identifying opportunities to achieve costand revenue-based synergies, determining ways to leverage complementary resources and abilities, and supporting other organizational initiatives required for the combined firm’s long-term success. Given the magnitude of anticipated changes following large, related acquisitions, the support and commitment of members of the target firm to the newly combined firm seems vital. As such, incorporating procedural justice in the integration process by providing process control to target firm managers should have positive effects on outcomes during the acquisition integration process. Strat. Mgmt. J., 30: 137–161 (2009) DOI: 10.1002/smj

142

K. M. Ellis, T. H. Reus, and B. T. Lamont

Hypothesis 1: During the integration process, procedural justice is positively related to value creation. Informational justice refers to the extent to which organizational leaders share information openly with organization members in order to provide a sense of justification for the procedures that are followed (Bies and Shapiro, 1988; Greenberg, 1993). It is called informational justice because the justification requires a provision of adequate information and explanations by decision makers, for example by offering a detailed account of final decisions made. Because of efforts to explain changes, informational justice is related to establishing trust (Colquitt et al., 2001), which is important for the development of receptivity to change among key employees following an acquisition. In large, related M&As of similar-sized firms, newly combined firms must often decide how to restructure operations so as to eliminate redundancies and achieve economies of scale. This typically requires firms to engage in cost-cutting activities such as employee terminations, facility closings, and product offering reductions. While these activities are often necessary to realize cost efficiency benefits, they are also the source of stress and uncertainty among employees of both firms. During the integration process, akin to any major organizational change, employees are likely to experience considerable uncertainty—organization members are unsure about their futures, concerned that their jobs might be on the line, doubtful about what the changes involve, and uncertain as to how changes will affect them personally (Buono and Bowditch, 1989). Change may often be accompanied by exaggerated perceptions of conspiracy among organization members because of a belief of being purposefully kept in the dark (Folger and Skarlicki, 1999). In such a situation, there is a particular need for information in order for organization members to understand the underlying rationale for changes necessitated by the deal. Without clear explanation and clarity of expectations, rumors about the process are likely to run high. Insufficient and mixed signals from the combined firm’s top management team spark feelings of doubt and cynicism (Marks, 2000). Fair procedures require an answer to why significant changes related to the acquisition are good for the newly combined firm. When organization members clearly understand required changes— Copyright  2008 John Wiley & Sons, Ltd.

why changes are occurring and how they will be affected—they are more likely to trust senior management and be more open to impending changes (Jemison and Sitkin, 1986; Marks and Mirvis, 1998). For this reason, Schweiger and DeNisi (1991) explain the importance of providing adequate information through a ‘realistic merger preview’ for target firm members. Others have also stressed the importance of feedback to enhance receptivity, or reduce resistance, to change (Bastien, 1987; Gutknecht and Keys, 1993; Haspeslagh and Jemison, 1991; Larsson and Finkelstein, 1999). Thus, from an informational justice perspective, revealing specific details about critical decisions is likely to reduce the negative influence of individual emotions and attitudes such as anger and dissatisfaction, as well as to constrain rumors and other self-constructed explanations that spread rapidly throughout organizations following a deal (Citera and Rentsch, 1993; Greenwood, Hinings, and Brown, 1994; Steensma and van Milligen, 2003). Moreover, informational justice can be extremely important in not only helping those parties affected by the M&A understand the rationale driving the deal itself, but also establishing trust and credibility among employees of both firms (Napier et al., 1989). As a result, employees will be more likely to accept the realities of integration decisions, and adapt more quickly to required changes in the combined firm, which, in turn, should lead to less disruption (Marks, 2000). Because informational justice affects employees’ openness to changes (Citera and Rentsch, 1993), we posit that it will influence value creation during the acquisition integration process. If explanations or clarification of objectives are lacking, significant disruption and value deterioration is likely to occur almost immediately. And, any attempt to disclose reasons for changes after they are in full swing or near completion would likely be met with skepticism, distrust, and less-thancomplete endorsement by concerned managers and employees (Meyer, 2001), and the resultant value created by the combined firm during the initial stages of the integration effort is likely to suffer.

Hypothesis 2: During the integration process, informational justice is positively related to value creation. Strat. Mgmt. J., 30: 137–161 (2009) DOI: 10.1002/smj

Justice in the Integration of Related Acquisitions Justice theorists suggest not only that individual mechanisms of fairness matter, but that also they are mutual reinforcing (e.g., Luo, 2007; McFarlin and Sweeney, 1992). Informational justice helps involved parties develop, understand, and abide by procedures better, and as such intensifies the effect of procedural justice on performance (Korsgaard et al., 1995). Within the context of alliances, Luo (2007) argues that when there is a better social environment among boundary spanners of partnering firms they are likely to improve effects of procedural justice on alliance performance. Similarly, justice during the acquisition integration process implies not only that target employees are able to voice their views to the combined firm’s top managers, but also that key decision makers of the combined firm convey information to employees (D’Aprix, 1996). Thus, during the integration process, the two dimensions—procedural justice and informational justice—are likely to be mutually reinforcing principles of fairness (Kim and Mauborgne, 1998). To have one type of justice and not the other could be detrimental to the combined firm’s ability to implement changes required for value creation during the integration process. For example, to provide informational justice, but little to no procedural justice may result in the feeling among organization members of the target firm that impending changes are being forced on them. Organization members, then, would receive sufficient information but no voice to influence the integration process. Moreover, inconsistencies on the part of the combined firm’s management team between procedures used in decision making and explanations provided about decisions during initial stages of the integration process will be cause for target organization members to suspect unfair processes in general (Bies and Shapiro, 1988). This, in turn, will likely make it more difficult to build trust and garner support during the integration process, thereby hindering the realization of synergistic benefits stemming from the deal. When procedural justice is accompanied by lack of informational justice, organization members may become resentful toward decision makers. Without explanations about decisions and clarity of expectations, organization members will be unable to determine the value of their voice. In such a context, process control will likely be viewed as an example of quasi-fair behavior (Leventhal, 1980). When organization members are kept in the dark about important factors that affect them, they Copyright  2008 John Wiley & Sons, Ltd.

143

will be unclear what processes and procedures to control, and whether such process control has an effect, even if they are given a voice to refute certain actions. In contrast, when both justice dimensions of the integration process are in place, this will likely have a strong influence on trust and commitment. A social environment where information is shared and interactions are improved not only enhances the extent to which organization members understand procedures, but also helps facilitate their ability to develop procedures, which is conducive for the effect of procedural justice on group performance (Korsgaard et al., 1995), and interorganizational performance (Luo, 2007). Moreover, Ranft and Lord (2002) observed that, in acquisitions where target firm managers were involved in the decision-making process, sharing information was critical not only to building trust, but also to transferring and integrating technological capabilities. This further suggests that the concurrent existence of procedural justice and informational justice creates a favorable environment within the combined firm which facilitates valuecreating actions beyond any independent effects from each justice dimension alone. Hypothesis 3: During the integration process, procedural justice and informational justice have a positive interaction effect on value creation. Procedural justice post-integration While we posit that informational justice and procedural justice are both important determinants of post-deal value creation, the effects of individual justice dimensions may vary over the course of the integration process. More specifically, it is likely that procedural justice has a more enduring effect after the M&A integration process is completed. Informational justice may become less important once the integration is completed, since organization members will increasingly be clear about the justification for the acquisition and the change process. More and more information will be made public. Consequently, employees will be able to assess much more about why the deal was made and how it is being implemented. Even if the initial rationalization does not seem right to them personally, the justification of certain decisions will become clear as employees receive Strat. Mgmt. J., 30: 137–161 (2009) DOI: 10.1002/smj

144

K. M. Ellis, T. H. Reus, and B. T. Lamont

and assess more information (Kernan and Hanges, 2002). Moreover, people tend to be more affected by the information that they receive first than by subsequently received information (Van den Bos, Vermunt, and Wilke, 1997). Consequently, while informational justice may have an important role during the integration, this role will likely not sustain post-integration. In contrast, procedural justice is likely to serve value creation in the long run. The ability to voice opinions, participate in decision making, or challenge decisions made by others is likely to foster greater intellectual recognition (Kim and Mauborgne, 1998). In addition, providing process control to members of the acquired management will trigger an environment where more strategic viewpoints are considered and scrutinized (Kim and Mauborgne, 1995). Such increased expression of opportunities will likely help the acquirer to avoid falling back to what worked in the past, and instead foster the search and identification of synergy possibilities long after the integration process is completed. Moreover, procedural justice during integration effort will likely not only lead to engagement of organization members in the change process, but also to the development of plans which drive the future success of the newly combined firm as a whole. Hypothesis 4: Post-integration, procedural justice is positively related to value creation.

RESEARCH METHODS The Mergerstat database served as the primary means of identifying acquisitions for inclusion in this research project. Because aspects of the integration process vary by acquisition type and size of the firms involved (Haspeslagh and Jemison, 1991; Jemison and Sitkin, 1986; Shrivastava, 1986), our study examines M&A process management within a specific context: large, related deals involving similar-sized firms. This specific M&A type is selected for several reasons. As mentioned earlier, this M&A type accounts for a substantial percentage of the total dollar value of deals completed in the last decade (Mergerstat, 2006). Also, because of the enormous strategic stakes, complex management challenges, and critical need for success in this specific M&A type, effects of justice during Copyright  2008 John Wiley & Sons, Ltd.

the integration process are intensified (Olie, 1994; Shrivastava, 1986). Our focus on this specific M&A type required us to establish certain criteria. We looked to previous studies to identify sample screens. Following this review, the criteria we used included (1) large transactions, as reflected by a minimum deal value of $100 million (Hayward and Hambrick, 1997; Sirower, 1997); (2) related acquisitions, as measured by firms operating in the same two-digit primary Standard Industrial Classification (SIC) code (Chatterjee et al., 1992; Lubatkin, 1987) or firms having at least one four-digit SIC code match among the top six lines of businesses that they were operating in at the time of the deal (Haleblian and Finkelstein, 1999); and (3) similar size as indicated by a relative assets or sales ratio between 0.5 to 2.0 (Ravenscraft and Scherer, 1987). Also, the hypotheses required that we empirically investigate the effects of justice at two distinct periods—during the first year of integration efforts and one year after the completion of integration efforts. M&As included in our sample had a completion date within a four-year period between January 1995 and December 1998. This time frame allowed us to test hypothesized effects at two time periods while minimizing the potential of retrospection bias by asking respondents about details surrounding more recent organizational events (Huber and Powell, 1985). Based on these criteria, the initial sample consisted of 360 deals. After making adjustments for multiple acquisitions by an acquiring firm during the sample period, subsequent acquisitions of firms that had previously been acquiring firms, substantial divestures of acquired firm assets, and spin-offs of combined assets into a separate entity, the resulting sample consisted of 305 transactions. Data collection process The data collection strategy relied on primary and secondary sources of information. We gathered secondary data for management retention, acquisition experience, and prior performance from archival sources such as Standard & Poors’ Compustat, companies’ 10-K and other filings with the U.S. Securities Exchange Commission, and the Securities Data Corporation (SDC) Platinum database. To gather critical primary data directly from firms, we developed a survey instrument that Strat. Mgmt. J., 30: 137–161 (2009) DOI: 10.1002/smj

Justice in the Integration of Related Acquisitions included items to assess procedural justice, informational justice, changes in multiple indicators of the combined firm’s post-acquisition value creation at two points in time (during the integration and after completion of the integration process), and issues of strategic and organizational fit. The survey instrument was pretested in two ways. First, feedback was solicited from faculty members and doctoral students at a major southeastern U.S. university who were experienced with research designs utilizing surveys. Several of these colleagues were involved in research projects related to knowledge transfer during acquisitions, and thus had considerable knowledge about existing M&A literature. In addition, several top managers who had been involved in large, related acquisitions of similar-sized firms reviewed the instrument and provided suggestions in terms of additional questions or constructs that were important to the overall success of the acquisition integration process. These informants also estimated the time it took them to complete the survey instrument. This process resulted in changes that were included in the final survey instrument. Similar to other acquisition studies, we utilized a single respondent considered to be a key informant (e.g., Capron, 1999; Capron, Dussauge, and Mitchell, 1998; Datta, 1991). Several efforts were made to identify the top manager in the combined firm most knowledgeable about each of the 305 acquisitions in our sample. First, we reviewed press releases about the focal acquisition to identify the CEO and other top-level managers involved in the acquisition decision-making process. Then we reviewed the list of the combined firm’s top management team available in 10-K reports and Hoover’s Company Reports to determine if the CEO and other executives were still with the company at the time of data collection. Moreover, this allowed us to verify official titles as well as obtain phone numbers of potential key informants. We made phone calls to the selected key informant to confirm their involvement in the integration process of the focal deal and their willingness to participate in our study. Lastly, we included a statement in the cover letter requesting that the respondent forward the survey to another organization member, if he deemed that individual more knowledgeable about the integration process related to the focal deal. Moreover, since the acquiring firm is more likely to initiate the actions that relate to justice principles, we focused Copyright  2008 John Wiley & Sons, Ltd.

145

on top managers from the acquiring firm. Also, consistent with the view of other M&A scholars, we considered acquirer managers most knowledgeable about the intentions of the acquiring firm and thus able to provide credible assessments of justice principles and other aspects of the integration process. Given that we focused our sample selection on large acquisitions of at least $100 million, we assume that these acquisitions are clearly discernable strategic events, and that the significance of the event, both to the key respondents personally and their firms, functions as an important recollection aid of the factors related to the acquisition integration process, making recall biases less likely (Finkelstein and Haleblian, 2002). Surveys, administered via fax, were received from 107 key informants. This represented a 35 percent response rate that was considered high given the time demands placed on top managers and the sensitive nature of our research topic. There were no statistically significant differences between respondents and nonrespondents in terms of the sample criteria used (transaction value and relative size ratios). Almost 90% of the respondents were identifiable members of the combined firm’s top management team holding positions such as chief executive officers, presidents, chief financial officers, controllers, and senior vice presidents of Acquisitions, Corporate/Business Development, Legal, or other functional areas. Moreover, 85 percent of the respondents were employees of the acquiring firm prior to the focal transaction. After removing observations that had missing responses, the sample was reduced to 100. In six cases, total revenue was not available for both firms for each of the three years prior to the acquisition, so models predicting changes in market position one year after the acquisition itself included 94 observations. Moreover, since some firms that engaged in acquisitions during the later stages of the four-year time period were still integrating the previously separate firms, the models predicting changes in financial return and market position one year after completing the integration process were based on 67 and 62 observations, respectively. While the final sample size was smaller than initially desired, it is still large enough to perform subsequent analyses and provide a conservative test of hypothesized effects. Moreover, the generally supportive results offer some indication that the sample size was adequate. Strat. Mgmt. J., 30: 137–161 (2009) DOI: 10.1002/smj

146

K. M. Ellis, T. H. Reus, and B. T. Lamont

The potential for common method bias existed because the same survey instrument was used to gather data on post-acquisition value creation, procedural justice, informational justice, and issues of fit. We engaged in several actions to minimize issues associated with common method bias. First, we assured each key informant that survey responses were strictly confidential and identities would not be published or released to anyone. In addition, we separated scale items into three different sections. Moreover, the items related to justice and those related to value creation appeared on different pages of the survey. Also, there were several items that separated the focal items. Finally, we used Harmon’s one-factor test to assess the presence of common method bias. Results of the global factor analysis along with the scree plot indicated nine interpretable factors (four for value creation, three for issues of fit, one for procedural justice, and one for informational justice) that combined explained 83 percent of the total variance with the highest single factor loading explaining less than 21 percent of the variance (Kent and Moss, 1994; Podsakoff and Organ, 1986). Furthermore, as we discuss below, perceptual measures correlated strongly with archival measures of sales growth, stock price, and profitability. Thus, common method bias does not appear to be a serious problem, adding credence to the validity of our study results. The potential for social desirability bias also existed in that respondents may portray a more favorable image of themselves and the firm they represent rather than providing truthful responses when assessing items related to justice and performance. We carefully examined the relevant items to determine whether social desirability would be a concern. Shapiro-Wilk tests of normality indicated that market position measures for both time periods and informational justice had normal distributions and considerable variance in responses. The financial return measures were skewed negatively, indicating that more respondents viewed acquisition performance less favorable, which is consistent with the general belief that more acquisitions fail rather than succeed. Overall, evidence from item analyses suggests that social desirability does not adversely affect the reported results. Dependent variables Consistent with arguments provided by Cannella and Hambrick (1993), Capron (1999), Datta et al. Copyright  2008 John Wiley & Sons, Ltd.

(1991) and others, we believe that top executives within a firm are in the best position to have knowledge about the combined firm’s post-deal value creation. Moreover, key informants are able to more directly evaluate the performance impacts of the acquisition itself, which is the primary focus of our study (Datta, 1991). This, in turn, compensates for the fact that archival performance measures are aggregate in nature and influenced by exogenous events experienced by the acquirer during the time period of interest, the effects of which are extremely difficult to parcel out (Capron, 1999). Because key informants can provide an assessment of the isolated performance effects of the acquisition itself that is much closer to reality than archival measures such as profitability ratios, sales growth, and abnormal returns, we use perceptual measures of post-deal value creation. To capture multiple dimensions of value creation, we developed a scale that included five key indicators, most of which are comparable to measures used in existing studies (e.g., Capron, 1999; Datta, 1991). Managers evaluated changes in the combined firm’s sales growth, market share, profitability, stock price, and innovation/research and development on a five-point scale that ranged from significant decrease (=1) to significant increase (=5). Further, because our hypotheses focus on the value-creation effects of justice during integration and post-integration, respondents assessed the five indicators for two time periods—one year after finalizing the deal itself and one year after completing the integration process. Results from the initial factor analyses and the scree plot indicated that the five items represented two factors. Combined, these factors accounted for almost 70 percent of the variance. Moreover, the two factors generated were interpretable. The first factor, referred to as market position, consisted of sales growth, market share, and innovation/research and development—all critical components of a firm’s ability to create value from its product and services. The second factor, labeled financial return, included profitability and stock price—both important financial accounting-based indicators of value created by the acquisition. To further bolster the use of our more comprehensive value-creation indicators, we assessed the correlation between the perceptual measures of value creation for which secondary data is available (i.e., sales growth, stock price, and profitability) and the corresponding accounting and stock market-based Strat. Mgmt. J., 30: 137–161 (2009) DOI: 10.1002/smj

Justice in the Integration of Related Acquisitions measures. We gathered total sales, total assets, net income, and stock price data for the acquiring and target firms one year prior to the deal from Compustat, the Center for Research in Security Prices (CRSP), and 10-K reports. In addition, we gathered the same four data items for the combined firm one year after the acquisition itself and one year after the integration process was completed. The correlation between the perceptual measures and archival measures of changes in sales growth (during integration: r = 0.21; post-integration: r = 0.36), stock price (during integration: r = 0.26; post-integration: r = 0.40), and return on assets (during integration: r = 0.30; post-integration: r = 0.43), were all highly significant (p < 0.001), and consistent with correlations reported in other studies utilizing perceptual measures of performance (Krishnan, Martin, and Noorderhaven, 2006; Li et al., 2007). Collectively, these correlations indicate support for the validity of the perceptual measures of value creation. As such, we used the resulting factor scores as dependent variables in subsequent regression analyses. Independent variables We draw on the work of Kim and Mauborgne (1993) along with existing M&A studies examining constructs such as autonomy and communication with employees (i.e., Datta and Grant, 1990; Ranft and Lord, 2000), which reflect how the integration process is managed, to develop multiple items to assess procedural justice and informational justice. Similar to the approach used by Li et al. (2007) in assessing procedural justice in the new product development process, we made slight modifications to the wording of the scale items adapted from Kim and Mauborgne (1993) to ensure the items reflected an acquisition context. More specifically, phrases such as ‘acquiring firm’ and ‘acquired firm’ (as opposed to ‘corporate headquarters’ and ‘subsidiary units’) were incorporated to emphasize the two key parties involved in this type of strategic transaction. These items included: (1) bilateral communications between members of both firms, (2) disclosure of details related to decision making to members of the acquired firm, (3) consistency in procedures applied when making decisions, and (4) ability of the acquired firm to refute decisions. The fifth item, autonomy maintained by the acquired firm in strategic/operational Copyright  2008 John Wiley & Sons, Ltd.

147

decision making, was comparable to the singleitem measure used by Ranft and Lord (2000) to assess overall autonomy. Each item was measured along a five-point scale, where 1 indicated the characteristic did not exist at all and 5 signified the feature existed to a very large extent. Two factors explaining 74 percent of the variance emerged. The first three items loaded strongly on a factor we labeled informational justice. Bilateral communication reflects the extent to which there is open information sharing, disclosure reflects information sharing through explanation of procedures, and consistency reflects the reliability of information about procedures and may help employees assess the validity of explanations provided about decisions. The other two items loaded on a factor called procedural justice. The ability to refute reflects the extent to which acquired firm’s organization members have an opportunity to control the integration process by having a voice, and the provision of autonomy reflects the acquired firm manager’s ability to have some control over the course of actions taken during the integration process. Both factors had eigenvalues that exceeded 1.0. Moreover, the items for informational justice and procedural justice had high loading coefficients (0.79 or greater) and communality estimates ranging from 0.68 to 0.81. To further assess if the items identified as informational justice and procedural justice represented single underlying constructs, we tested their internal reliability. This test yielded a Cronbach’s alpha of 0.79 for the three items capturing informational justice, and a Cronbach’s alpha of 0.70 for the two items tapping procedural justice. The Cronbach’s alpha associated with both justice types falls within accepted guidelines (Nunnally, 1978). We used the resulting factor scores for informational justice and procedural justice in the subsequent regression models. Control variables Issues of fit Among the most widely studied variables in the M&A literature are those pertaining to preexisting fit between the two firms. Because of their potential influence on integration efforts, we controlled for the most common issues of fit: strategic fit (Lubatkin, 1983; Shelton, 1988; Singh and Montgomery, 1987), cultural fit (Chatterjee et al., 1992; Strat. Mgmt. J., 30: 137–161 (2009) DOI: 10.1002/smj

148

K. M. Ellis, T. H. Reus, and B. T. Lamont

Very et al., 1997), and organizational fit (Datta, 1991; Datta et al., 1991). Based primarily on these studies, fit was measured as the extent to which the two firms were different or similar prior to the deal along the following dimensions: (1) general management style; (2) reward and evaluation systems; (3) core values, beliefs, and philosophy; (4) major products/services offered; (5) types of customers; (6) technology used in production/operations; (7) distribution channels utilized; and (8) geographic markets served. The five point-scale ranged from 1-very different to 5-very similar with 3-neutral. (Please see the Appendix for a list of all survey items.) Because the sixth item exhibited heavy cross-loadings in the initial factor analysis, we eliminated it from the final factor analysis. Three interpretable factors explaining 76 percent of the variance, and each with an eigenvalue greater than 1, emerged. The first three dimensions loaded on a factor labeled organizational fit, dimensions 4, 5, and 7 loaded on another factor referred to as strategic fit, and the final dimension loaded on an individual factor labeled geographic fit. To further assess if the items pertaining to organizational fit and strategic fit represented single underlying constructs, we tested their internal reliability. This test yielded a Cronbach’s alpha of 0.77 for the three items tapping organizational fit and a Cronbach’s alpha of 0.80 for the three items assessing strategic fit. We summed the items related to strategic and organizational fit to generate composite scores for these two control variables and used the single item to measure geographic fit. Management retention Retention of target firm top managers may also be critical to the integration process, thereby affecting the combined firm’s ability to create value following the acquisition (Bergh, 2001; Cannella and Hambrick, 1993; Krishnan, Miller, and Judge, 1997). The target firm’s top management team comprised those individuals at or above the vice president level prior to the acquisition as listed in its proxy statement or 10-K (Walsh, 1988). We content analyzed the proxy statements and 10-Ks filed by the combined firm at the fiscal year-end immediately after completing the focal acquisition to determine if any of the target firm’s top managers continued to serve in a similar capacity. The total number of the target firm’s top managers Copyright  2008 John Wiley & Sons, Ltd.

retained following the deal was divided by the target’s top management team size immediately prior to the deal. This percentage, representing the target firm’s management retention, was used in subsequent analyses.

Acquisition experience From a learning theory perspective, experience from recent acquisitions may facilitate improvements in the firm’s integration process, thereby affecting acquisition success (Haleblian and Finkelstein, 1999; Hitt et al., 2001). Moreover, given the many complexities associated with integrating firms of similar size, it is likely that more recent experiences will be most valuable (Barnett and Hansen 1996). Thus, consistent with previous studies, we measured prior acquisition experience as the number of acquisitions made by the acquiring firm during the four years prior to the focal acquisition (Bruton, Oviatt, and White, 1994; Fowler and Schmidt, 1989). Because of our focus on large acquisitions, only those previous acquisitions exceeding $100 million in transaction value were counted. Data were collected from the Mergerstat database and the Thomson Securities Data Corporation (SDC) Platinum database.

Prior performance Prior performance has also been linked to postacquisition value creation. Consistent with previous studies, we computed prior performance based on return on assets in those models predicting value creation via financial return and based on sales growth in those models examining changes in market position (Krishnan et al., 1997; Ramaswamy, 1997). Data for net income after taxes, total assets, and total revenue were gathered from Compustat and annual reports for the three-year period preceding the acquisition. Because of the focus on large, related acquisitions, we collected these data for both the acquiring and target firm as well as all firms operating in the same primary four-digit SIC code as the acquiring firm to generate a pro forma three-year average industry-adjusted return on assets and sales growth of the combined firm prior to the acquisition (Bergh, 1997; Dess, Ireland, and Hitt, 1990). Strat. Mgmt. J., 30: 137–161 (2009) DOI: 10.1002/smj

Justice in the Integration of Related Acquisitions Relative size Finally, relative size, which influences many aspects of the integration process, has been used as a control variable in several M&A studies. Consistent with such studies, we measured relative size as the ratio of the target firm’s total assets to those of the acquiring firm in the year immediately preceding the focal deal (Fowler and Schmidt, 1989; Haleblian and Finkelstein, 1999; Kusewitt, 1985; Ramaswamy, 1997; Zollo and Singh, 2004). Data were collected from Compustat and company annual reports.

RESULTS Table 1 provides the means and standard deviations for each item as well as the Pearson correlations between all items utilized in the regression analyses. Bivariate correlations indicate that informational justice was positively correlated with three of the four value creation measures. Also, several bivariate correlations among control variables and both justice types were statistically significant. However, these values were not so high as to indicate that they were measuring the same construct. In addition, the results of colinearity diagnostics indicated that estimated variance inflation factors (VIFs) associated with each independent variable ranged from 1.16 to 1.76, and the condition index associated with the last principal component of the overall model was 19.81. These results fall within accepted guidelines (VIFs < 10 and the condition index < 30) indicating no or weak colinearity issues. Moreover, no two variables when considered on an individual basis contributed a large portion of the variance (>0.50) to a single principal component of the regression model. Thus, multicolinearity did not appear to be a problem and all variables were retained for regression analyses. We present results in Table 2 for models predicting value creation during integration as measured by financial return (Panel 1) and market position (Panel 2). Model 1 under each panel includes control variables only, Model 2 adds informational justice and procedural justice, and Model 3 includes the interaction term. Informational justice was a significant predictor of changes in financial return (p < 0.01) as well as market position (p < 0.05 or lower) during the integration process. These results provide support for Hypothesis Copyright  2008 John Wiley & Sons, Ltd.

149

2. On the other hand, procedural justice did not have significant main effects on value creation during integration as measured by financial return or market position. As such, our results do not support Hypothesis 1, which posited a direct, positive relationship between procedural justice and value creation during integration. We proceeded to test the two-way interaction between procedural justice and informational justice. This interaction effect was significant in relation to during integration financial return (p < 0.10) and during integration market position (p < 0.05). Consistent with Hypothesis 3, the regression coefficient associated with the interaction term was positive and significant with regard to during integration market position (β = 0.19). However, contrary to our hypothesis, the interaction term had a significant negative effect (β = −0.14) on during integration financial return. To better understand the interaction effects, we plotted them. Figure 2a pertains to during integration financial return and Figure 2b pertains to during integration market position. When there is a high level of informational justice, procedural justice is negatively related with during integration financial return as shown in Figure 2a. Moreover, the combination of low procedural justice and low informational justice leads to the lowest levels of during integration financial return while low procedural justice and high informational justice leads to the highest levels of during integration financial return. When interpreting interaction effects shown in Figure 2b, the combination of high procedural justice and high information justice appears to have an amplifying effect on during integration market position. On the other hand, low informational justice combined with high procedural justice leads to the largest declines in market position during integration. Results for the models with post-integration financial return (Panel 3) and market position (Panel 4) as dependent variables are presented in Table 3. Procedural justice was a significant predictor of changes in market position (p < 0.05), but not financial return after the completion of integration efforts. This finding offers partial support for Hypothesis 4. Moreover, though we did not hypothesize longer-lasting effects of informational justice, our results indicate that this justice variable had significant, positive effects on post-integration Strat. Mgmt. J., 30: 137–161 (2009) DOI: 10.1002/smj

Copyright  2008 John Wiley & Sons, Ltd.

1

2

†p < 0.10, ∗ p < 0.05,

∗∗

p < 0.01,

∗∗∗

p < 0.001.

Strategic fit 11.52 2.91 — Organizational fit 7.55 2.53 0.06 — Geographic fit 3.28 1.39 0.10 −0.12 Management retention 0.25 0.29 −0.19† −0.08 Acquisition experience 0.73 1.75 −0.05 −0.13 Prior ROA −0.01 0.06 −0.01 −0.09 Prior sales growth 0.05 0.41 −0.17 0.18† Relative size 1.52 0.94 0.08 0.21∗ Informational justice 0.00 1.00 0.17† 0.23∗ Procedural justice 0.00 1.00 −0.23∗ 0.11 During integration financial return 0.00 1.00 0.12 0.16 During integration market position 0.00 1.00 0.13 0.06 Post-integration 0.00 1.00 −0.06 0.07 financial return 14. Post-integration market position 0.00 1.00 −0.01 −0.07

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13.

Mean s.d.

Table 1. Descriptive statistics and correlation matrix

— 0.01 −0.11 −0.14 −0.14 0.07 0.31∗∗∗ −0.19† 0.14 −0.25∗ 0.10

0.05

4

— −0.23∗ −0.08 0.05 −0.16 0.14 −0.08 −0.29∗∗ 0.16 −0.14 0.26∗

3

6

7

8

0.22†

0.05

10

12

—

13

0.79∗∗∗ 0.00

— 0.00 — 0.74∗∗∗ −0.07

11

0.11 −0.12

— 0.00 — 0.29∗∗ −0.07 0.23∗ 0.02 0.23† 0.05

9

0.14 −0.18 −0.06

— −0.02 — −0.01 −0.14 — 0.16† 0.07 0.16 — −0.12 0.03 −0.08 −0.07 −0.07 0.06 0.03 −0.07 −0.14 −0.16 0.02 −0.02 0.18† −0.19∗ 0.05 0.01 −0.02 0.15 0.15 0.05

5

150 K. M. Ellis, T. H. Reus, and B. T. Lamont

Strat. Mgmt. J., 30: 137–161 (2009) DOI: 10.1002/smj

Justice in the Integration of Related Acquisitions Table 2.

151

Regression analyses during integration performance Panel 1 During integration financial return

Panel 2 During integration market position

Model 1

Model 2

Model 3

Model 1

Model 2

Model 3

Procedural justice—H1

— —

Procedural justice × Informational justice—H3

—

0.02 (0.11) 0.26∗∗ (0.10) −0.14† (0.11)

—

Informational justice—H2

0.04 (0.11) 0.30∗∗ (0.10) —

0.07 (0.11) 0.19∗ (0.10) —

0.09 (0.11) 0.25∗∗ (0.11) 0.19∗ (0.12)

0.09∗∗ (0.04) 0.02 (0.04) −0.08 (0.08) 0.61 (0.39) 0.11∗ (0.06) 0.30 (0.26) −0.06 (0.11) 2.49∗∗ 0.22

0.08∗∗ (0.04) 0.02 (0.04) −0.10 (0.09) 0.63 (0.39) 0.09∗ (0.05) 0.34 (0.26) −0.09 (0.11) 2.55∗∗ 0.24

Control variables: Strategic fit

0.02 (0.03) 0.06 (0.04) 0.10 (0.08) −0.68† (0.36) −0.05 (0.06) −3.06† (1.61) −0.08 (0.11) 2.15∗ 0.14

Organizational fit Geographic fit Management retention Acquisition experience Prior performance Relative size F-value R-square Standard errors in parentheses. †p < 0.10, ∗ p < 0.05,

∗∗

1

Financial return

0 High

-0.5 -1 -1.5 -2

Procedural justice

Low informational justice High informational justice 1

Market position

0.5 0 -0.5

Low

High

-1 -1.5 -2 -2.5 -3

Procedural justice

Low informational justice High informational justice

Figure 2. Interactions between procedural justice and informational justice (2a) During integration financial return (2b) During integration market position Copyright  2008 John Wiley & Sons, Ltd.

0.00 (0.03) 0.02 (0.04) 0.11 (0.07) −0.82∗ (0.35) −0.05 (0.05) −3.82∗∗ (1.58) −0.04 (0.11) 2.67∗∗ 0.23

— 0.09∗∗ (0.03) 0.03 (0.04) −0.09 (0.08) 0.74† (0.39) 0.10† (0.06) 0.26 (0.26) −0.08 (0.11) 2.60∗ 0.18

p < 0.01.

0.5 Low

0.00 (0.03) 0.03 (0.04) 0.11 (0.07) −0.82∗ (0.36) −0.04 (0.06) −3.47∗ (1.57) −0.05 (0.11) 2.77∗∗ 0.22

—

financial return (p < 0.05). As expected, the interaction term was not a significant predictor of postintegration value creation, nor did its inclusion add explanatory power to the overall model. A few noteworthy results emerged with regard to the control variables. Retaining top managers from the target firm resulted in declines in financial return during integration (Panel 1) as well as after integration efforts (Panel 3), but appeared to enhance market position during integration efforts (Panel 2). Strategic fit had positive effects on changes in market position during the integration process (Panel 2), while operating in overlapping geographic markets led to positive changes in financial return post-integration (Panel 3). Moreover, the acquiring firm’s prior acquisition experience facilitated positive changes in market position at both time periods (Panels 2 and 4). Finally, lower performing firms prior to the acquisition were more likely to realize improvements in financial return during integration (Panel 1), whereas higher performing firms prior to the acquisition were more likely to enhance market position post-integration (Panel 4). Regardless, justice variables were found Strat. Mgmt. J., 30: 137–161 (2009) DOI: 10.1002/smj

152

K. M. Ellis, T. H. Reus, and B. T. Lamont

Table 3. Regression analyses post-integration performance Panel 3 Post-integration financial return

Panel 4 Post-integration market position

Model 1

Model 2

Model 3

Model 1

Procedural justice—H4

— —

Procedural justice × Informational justice

—

0.04 (0.19) 0.33∗ (0.17) −0.10 (0.18)

—

Informational justice

0.01 (0.18) 0.37∗∗ (0.15) —

−0.08 (0.06) 0.06 (0.06) 0.24∗ (0.11) −1.41∗ (0.64) 0.02 (0.09) 5.05 (3.49) −0.11 (0.18) 1.97† 0.19

−0.10 (0.06) 0.02 (0.06) 0.26∗ (0.11) −1.54∗ (0.62) 0.03 (0.09) 3.05 (3.57) −0.02 (0.18) 2.99∗∗ 0.27

−0.10 (0.06) 0.02 (0.06) 0.27∗ (0.11) −1.58∗ (0.63) 0.02 (0.09) 2.91 (3.61) −0.01 (0.18) 2.06∗ 0.27

Control variables: Strategic fit Organizational fit Geographic fit Management retention Acquisition experience Prior performance Relative size F-value R-square

Standard errors in parentheses. †p < 0.10, ∗ p < 0.05,

∗∗

Model 3

—

0.37∗ (0.20) −0.17 (0.16) —

0.39∗ (0.20) −0.20 (0.18) −0.07 (0.19)

0.04 (0.07) −0.00 (0.07) 0.09 (0.12) 0.67 (0.68) 0.22∗ (0.09) 1.21∗ (0.61) −0.45∗ (0.18) 1.82† 0.19

0.09 (0.07) −0.00 (0.07) 0.14 (0.13) 0.67 (0.67) 0.23∗∗ (0.09) 1.60∗∗ (0.63) −0.46∗∗ (0.18) 1.91† 0.25

0.08 (0.07) −0.00 (0.07) 0.14 (0.13) 0.64 (0.68) 0.22∗ (0.09) 1.56∗ (0.65) −0.45∗∗ (0.18) 1.70† 0.25

—

p < 0.01.

to add explanatory power to all models beyond the variance explained by the model with only control variables.

DISCUSSION Two broad goals of this study were to use justice theory to enhance our understanding of postacquisition value creation, and to extend justice theory by testing expected outcome differences for informational justice and procedural justice along with their interactive effects in a new macro context. Results indicate both goals were accomplished. Organizational justice theory helped to integrate and inform a disparate literature on acquisition integration. And, our focus on large, related M&As involving similar-sized firms permitted the empirical documentation of relationships between two organizational justice types—procedural justice and informational justice—and value creation in a rather unique, yet appropriate, context. Copyright  2008 John Wiley & Sons, Ltd.

Model 2

Despite decades of research into factors that differentiate successful acquisitions from unsuccessful ones, few variables reliably account for much of the variance in acquisition success (King et al., 2004). Our results show that the inclusion of procedural justice and informational justice adds substantial explanatory value beyond a group of control variables documented in prior work and currently recognized among M&A researchers as being rather significant in explaining post-deal value creation. At a minimum, our findings provide empirical support for the importance of adding multiple process factors when examining determinants of post-deal value creation (Hitt et al., 2001; Jemison and Sitkin, 1986; Kitching, 1967; Shrivastava, 1986). Whether procedural justice and informational justice are among the most critical aspects of M&A integration related to value creation awaits cumulative research. Our results also extend the current understanding of differential value creation effects associated with procedural and informational justice. Informational justice had significant, independent Strat. Mgmt. J., 30: 137–161 (2009) DOI: 10.1002/smj

Justice in the Integration of Related Acquisitions effects on value creation during integration as well as post-integration. As such, it appears that efforts by the acquirer to justify how acquisition decisions were made played a critical role in the newly combined firm’s ability to implement changes necessary to realize improvements in market position during the integration process and achieve financial return gains both during and post-integration. This finding is consistent with other studies suggesting that specific, detailed information about the decision process is important to increasing perceptions of decision makers’ trustworthiness (Elsbach and Elofson, 2000; Kernan and Hanges, 2002; Shapiro, Buttner, and Bruce, 1994). Such trust appears important in making employees of the newly combined firm more receptive to initially disruptive restructuring efforts. In addition, though we did not hypothesize such effects, our results indicated that informational justice had more enduring effects on financial return after the completion of integration efforts. Contrary to the findings of Kernan and Hanges (2002) in which informational justice had significant effects on management trust initially but not two years subsequent to the initial announcement, it appears that, at least in the context of our study, providing adequate information had more lasting effects. Because communication influences the adoption of a new organizational culture, the level of ongoing stress experienced by employees of the combined firm, and other aspects of the change process itself, firms engaging in activities that engender a greater sense of justification and soundness of explanations are more likely to increase their productivity, achieve anticipated synergies, and create sustainable advantages (Appelbaum et al., 2000). Such benefits, especially those related to productivity improvements and sustainable advantages, would then be reflected in post-integration financial return gains. Our results offer evidence supporting this contention. Moreover, our study demonstrates the important role informational justice plays during the acquisition integration process and its positive impact on post-deal value creation (c.f. D’Aprix, 1996; Marks and Mirvis, 1998; Schweiger and DeNisi, 1991; Young and Post, 1993). While we argue that this relationship is more pronounced in related M&As, it seems likely that performance effects of informational justice may be found in most deals requiring trust and voluntary initiatives from employees remaining with the combined firm. Clearly, this is not always the case in acquisitions, Copyright  2008 John Wiley & Sons, Ltd.

153

as information provision is often neglected at a time when its effect is quite consequential (Appelbaum et al., 2000; Marks, 2006; Nahavandi and Malekzadeh, 1988). While the effects of informational justice were found to be generally positive, when considering the interactive effects of informational and procedural justice, a more complete picture emerges of the effects of organizational justice on value creation, especially during the integration process. Not surprisingly, low levels of both informational and procedural justice were associated with negative effects on market position as well as financial return. But the generally positive effects of informational justice were found to be importantly moderated by the level of procedural justice used to manage the integration process, and the effects differed by type of value creation in some surprising ways. For example, procedural justice was found to reduce the positive effects of informational justice on financial return during the integration process. And procedural justice magnified the effects of informational justice, both positively at high levels and negatively at low levels of informational justice, on the combined firm’s market position during the integration process. While some of these results were hypothesized, the counterintuitive ones, in particular, deserve more discussion. While unanticipated, an interesting and potentially important finding that highlights the utility of documenting linkages between different justice dimensions was the negative moderating effect of procedural justice on the relationship between informational justice and financial return during integration. That is, procedural justice was found to reduce the positive effects of informational justice on financial return while the two firms were being combined. Therefore, more procedural justice of a particular combination was actually detrimental. This finding implies that financial return gains during the integration process stem from justifying and giving details about decisions while not involving target firm managers in making decisions. It is likely that gains in financial accounting-based performance require difficult but inescapable decisions that are time-dependent. Improving financial return requires removal of critical organizational elements such as company names, departments, products, and people with which organization members feel tightly connected. During integration, it is apparently important for top management to Strat. Mgmt. J., 30: 137–161 (2009) DOI: 10.1002/smj

154

K. M. Ellis, T. H. Reus, and B. T. Lamont

provide information to justify decisions to organization members, but providing direct process control to organization members may slow down the decision-making activities too much at the expense of efficiency. As we hypothesized, we found a positive interaction between procedural justice and informational justice on market position while the two firms were being integrated. The exact nature of the observed interaction, however, deviated slightly but importantly from our expectations. We expected the effects of both procedural and informational justice to be positive, and the absence of either type of justice to suppress any positive effects of the other justice type. While this was generally true, we did not anticipate that situations of low informational justice and high procedural justice would be so detrimental to firms’ market positions during the integration process, much worse than providing low justice of both kinds. A likely explanation for this somewhat surprising finding lies in Haspeslagh and Jemison’s (1991) observation that acquisition partners often have very different views about the market position they envision following the acquisition. On the one hand, our findings suggest that procedural justice along with informational justice can help to overcome conflicting viewpoints about market position, to better explore core strengths of both acquisition partners, and, in general, to exploit improvements in market position more quickly, at least during integration. That is, when acquired units are provided some control over the integration process and are also given a clear justification for the acquisition by the acquirer, the newly combined firm is able to best improve its market position. On the other hand, our findings also suggest that providing acquired units control over the integration process, in the absence of clear justification and communication from the acquirer, only exacerbates the potential conflicts from the different views about market position between the two partners, leading to serious market position degradation during the process of combining the two firms. Clearly, to the extent that our findings can be corroborated in future research, it appears that the interrelationships between different organizational justice dimensions and their effects on value creation are more complex than was previously thought. Copyright  2008 John Wiley & Sons, Ltd.

We also found that procedural justice had independent, lasting effects on value creation. In particular, implementing procedures and processes that allowed for target firm involvement in decision making was critical to improvements in market position post-integration, but not during integration. Giving target firm managers some voice in the decision-making process may be critical to maintaining customer relationships, determining the combined firm’s product offerings, and minimizing overall resistance to change, which, in turn, facilitate the combined firm’s ability to realize gains in its market position that are sustainable. While this may not always be the case, as our results about the integration process document, it does appear to be the case where market position gains are sustained post-integration. This finding supports arguments made in previous studies that some involvement by the target firm’s top managers is necessary to achieve post-deal value creation (Cannella and Hambrick, 1993; Krishnan et al., 1997). On the other hand, it is possible that within the context of our study, target firm managers’ actual process control and voice may be limited to decisions pertaining to market position, but not those related to financial returns. In order to achieve efficiency gains necessary to improve financial accounting measures following an acquisition, the combined firm must close facilities, eliminate redundancies in the workforce, rationalize product lines, and consolidate other activities in a relatively short time period. Involving target firm managers in such cost-cutting decisions may slow down or even derail the integration process, thereby having counterproductive effects on the combined firm’s ability to achieve desired benefits linked to productivity and efficiency improvements (Datta and Grant, 1990; Lind and Tyler, 1988; Meyer and Altenborg, 2007). Thus, the input of target firm managers in making such decisions may be very limited at best. Our results show that informational justice and procedural justice affect different components of value creation, at least in related M&As of similar-sized firms. Collectively, our findings and the theory suggest that certain justice types play unique roles in affecting employee attitudes and behaviors as the integration process unfolds, and as such influence post-deal value creation at different stages of the integration process and in different ways. In fact, we found evidence that both procedural justice and informational justice were related to some Strat. Mgmt. J., 30: 137–161 (2009) DOI: 10.1002/smj

Justice in the Integration of Related Acquisitions aspect of value creation following the acquisition. It appears that the effects of informational justice are rather consistent during and post-integration, while those of procedural justice are contingent on levels of informational justice during integration, but also build over time. Once the integration process is complete, the enduring effects of the two justice types appear quite distinct. Informational justice affects post-integration value creation in terms of financial return gains, whereas procedural justice affects gains in market position. For what may be both good and bad, the pattern of findings related to the control and contextual variables suggest that related M&As involving similar-sized firms may be a breed apart from other acquisitions. The control variables were included because of their prominent role in previous M&A studies. Our results, while possible to explain, were not readily anticipated in all cases. For example, strategic fit had positive effects on market position during the integration process, as one might expect. But, the emergence of the importance of a separate fit factor for geographic overlap between M&A partners does not really map well to previous acquisition research. Similarly, we found no support at all for the importance of organizational fit, despite substantial evidence of its performance effects in the general acquisition literature (e.g., Datta, 1991). Moreover, we found that prior acquisition experience was critical to improving the combined firm’s market position both during and post-integration. With regard to prior performance, our results suggest that lower performing firms improved financial return during the integration process, while higher performing firms were able to enhance their market position after completing the integration process. Finally, our results for management retention suggest that retaining top managers from the target firm had negative effects on financial return both during as well as after completing the integration process. Therefore, the good thing about this idiosyncratic pattern of results for our control variables is that it adds credence that large, related M&As, especially those involving similar-sized firms, are indeed different from other M&A types. On the other hand, our theory does not adequately inform these anomalies. The research opportunities are apparent. In addition, the generalizability of our results to other deal types appears deserving of future research attention. Copyright  2008 John Wiley & Sons, Ltd.

155

Limitations of this study, beyond those already noted, provide opportunities for future research. A primary limitation in our test of the theory is that we have no direct data on the micro justice processes underlying these macrodata and observed relationships. Whereas some consider using micro theory to explain macrodata and relationships highly appropriate (e.g., Staw, 1991), others may not. Although we attempt to clarify the micro processes that produce the predicted macro relationships in our theory development, the process is clearly multilevel, requiring data on other variables (e.g., trust, commitment, receptivity to change, and engagement) to fully test. While our results are consistent with our theory and document interesting linkages between different justice dimensions when they are not, they may be viewed best as only suggestive of the underlying processes involved until placed on firmer empirical ground with more direct multilevel data in future research. Also, such research could incorporate more detailed measurements of procedural and informational justice to further capture the sophisticated nature of efforts aimed at assuring fairness of procedures and processes in acquisition integration decision making. Moreover, future research can examine the perceptions of justice held by organizational members of both the acquiring and target firms and the importance of shared perceptions of fairness (c.f. Luo, 2005) in the context of acquisition implementation. Finally, while we focus our attention on the effects of procedural and informational justice in managing the integration process, the interpersonal treatment of employees and fairness of resource allocations following related M&As may also have implications for post-deal value creation. As such, future studies investigating the effects of interpersonal and distributive justice within the context of M&As would enrich our understanding of organizational justice at the macro level.

CONCLUSION The primary purpose of our study was to enhance our understanding of the acquisition process management–post-deal value creation linkage. Because existing studies have acknowledged that large, related acquisitions create integration challenges and complexities that exceed those associated with acquisitions in general (Olie, 1994; Shrivastava, Strat. Mgmt. J., 30: 137–161 (2009) DOI: 10.1002/smj

156

K. M. Ellis, T. H. Reus, and B. T. Lamont

1986), we decided to focus on this special deal type. Our results revealed the important effects of procedural justice and informational justice on firm financial return as well as market position both during and after integration. This supports recent contentions that effective post-acquisition integration efforts hinge on the combined firm’s ability to manage not just one, but several aspects of the integration process (Hitt et al., 2001; Larsson and Finkelstein, 1999; Ranft and Lord, 2002). Thus, we were able to contribute to the acquisition process management literature by drawing together disparate views with a coherent framework anchored in justice theory. Our other main goal was to usefully extend the more general justice literature. We did so in two ways. First, we demonstrated the applicability of organizational justice theory to a novel macro context. The results were supportive and informative. And second, we provided information on the relative importance of two justice types, informational and procedural, and their interactive effects to macro outcomes. When and how various justice types differentially affect outcomes associated with trust and commitment are central points of debate in the literature (Colquitt et al., 2001; Konovsky, 2000; Luo 2005, 2007). We reasoned that, in our context, informational justice and procedural justice would have independent and interactive effects on value creation during integration, whereas those related to procedural justice would be more important to value creation after integration. Again, our results were generally supportive, with some very interesting qualifications. To the extent that our results are duplicated in other organizational contexts characterized by major change and transformation, these contributions may be important. This research is of significant practical importance given the specific focus on large, related acquisitions involving similar-sized firms. While the popularity of these deals has surged over the last 10 years as industries consolidated and global competition intensified, countless articles and reports have documented the various difficulties combined firms encountered as they integrated the two previously separate entities (Adolph et al., 2001; Cools et al., 2007; Henry, 2002; Zaheer et al., 2003). Thus, the results of this research provide timely and potentially valuable insight into how initiating activities aimed at the target firm during the integration process that Copyright  2008 John Wiley & Sons, Ltd.

are procedurally fair influences near-term and more enduring changes in value creation associated with this unique M&A type. Also, management may need to vary its activities designed to reflect a fair decision-making process depending upon the relative importance of achieving post-deal gains in financial return or market position. As such, the findings may help corporate executives better manage difficulties often posed by such large-scale organizational transformations, thereby minimizing disruptions and facilitating their ability to create multiple sources of long-term value. Most large, related M&As fail to enhance firm value or fail to meet the expectations of their managers, investors, or consumers. However, the extent to which the process is managed fairly appears to distinguish usefully between the successful and unsuccessful ones, and in some interesting and previously undocumented ways. Macro organizational changes, therefore, appear to hold promise for further extension and application of organizational justice theory and research.

ACKNOWLEDGEMENTS We are extremely appreciative of the challenging critiques and stimulating suggestions provided by the two anonymous referees that strengthened the article considerably. We also thank Editor Edward J. Zajac for his insightful comments and efforts devoted to shepherding our study through the review process.

REFERENCES Adolph G, Buchanan I, Hornery J, Jackson B, Jones J, Kihlstedt T, Neilson G, Quarls H. 2001. Merger integration—delivering on the promise. July report, Booz Allen & Hamilton: McLean, VA. Available at: http://www.boozallen.com/media/file/76776.pdf. Angwin D. 2004. Speed in M&A integration: the first 100 days. European Journal of Management 22(4): 418–430. Appelbaum SH, Gandell J, Yortis H, Proper S, Jobin F. 2000. Anatomy of a merger: behavior of organizational factors and processes throughout the preduring- post-stages (part 1). Management Decision 38(9): 649–662. Barnett WP, Hansen MT. 1996. The red queen in organizational evolution. Strategic Management Journal Summer Special Issue 17: 139–157. Strat. Mgmt. J., 30: 137–161 (2009) DOI: 10.1002/smj

Justice in the Integration of Related Acquisitions Bastien DT. 1987. Common patterns of behavior and communication in corporate mergers and acquisitions. Human Resource Management 26(1): 17–34. Bergh DD. 1997. Predicting divestiture of unrelated acquisitions: an integrative model of ex ante conditions. Strategic Management Journal 18(9): 715–731. Bergh DD. 2001. Executive retention and acquisition outcomes: a test of opposing views on the influence of organizational tenure. Journal of Management 27(5): 603–622. Berman DK. 2007. Can M&As’ ‘Best of times’ get better? Wall Street Journal: 2 January. Bies RJ, Shapiro DL. 1988. Voice and justification: their influence on procedural fairness judgments. Academy of Management Journal 31(3): 676–685. Birkinshaw J, Bresman H, H˚akanson L. 2000. Managing the post-acquisition integration process: how the human integration and task integration processes interact to foster value creation. Journal of Management Studies 37(3): 395–425. Brockner J. 2002. Making sense of procedural fairness: how high procedural justice can reduce or heighten the influence of outcome favorability. Academy of Management Review 27(1): 58–76. Brockner J, Greenberg J. 1990. The impact of layoffs on survivors: an organizational justice perspective. In Applied Social Psychology and Organizational Settings, Carroll JS (ed). Erlbaum: Hillsdale, NJ; 45–75. Brockner J, Hite T, Davies DK, O Malley MN. 1987. Reward allocation and self-esteem: the role of modeling and equity restoration. Journal of Personality and Social Psychology 52(4): 844–850. Brockner J, Wiesenfeld BM. 1996. An integrative framework for explaining reactions to decisions: interactive effects of outcomes and procedures. Psychological Bulletin 120(2): 189–208. Bruton GD, Oviatt BM, White MA. 1994. Performance of acquisitions of distressed firms. Academy of Management Journal 37(4): 972–989. Buono AF, Bowditch JL. 1989. The Human Side of Acquisitions. Jossey-Bass: San Francisco, CA. Calori R, Lubatkin M, Very P. 1994. Control mechanisms in cross-border acquisitions: an international comparison. Organization Studies 15(3): 361–379. Camerman J, Cropanzano R, Vandenberghe C. 2007. The benefits of justice for temporary workers. Group & Organization Management 32(2): 176–207. Cannella AA, Hambrick DC. 1993. Effects of executive departures on the performance of acquired firms. Strategic Management Journal , Summer Special Issue 14: 137–152. Capron L. 1999. The long-term performance of horizontal acquisitions. Strategic Management Journal 20(11): 987–1018. Capron L, Dussauge P, Mitchell W. 1998. Resource redeployment following horizontal acquisitions in Europe and North America, 1988–1992. Strategic Management Journal 19(7): 631–661. Copyright  2008 John Wiley & Sons, Ltd.

157

Carey D. 2000. A CEO roundtable on making acquisitions succeed. Harvard Business Review 78(3): 145–154. Chatterjee S, Lubatkin MH, Schweiger DM, Weber Y. 1992. Cultural differences and shareholder value in related acquisitions: linking equity and human capital. Strategic Management Journal 13(5): 319–334. Citera M, Rentsch JR. 1993. Is there justice in organizational acquisitions? The role of distributive and procedural fairness in corporate acquisitions. In Justice in the Workplace: Approaching Fairness in Human Resource Management , Cropanzano R (ed). Erlbaum: Hillsdale, NJ; 211–230. Colquitt JA, Conlon DE, Wesson MJ, Porter COLH, Ng KY. 2001. Justice at the millennium: a metaanalytic review of 25 years of organizational justice research. Journal of Applied Psychology 86(3): 425–445. Cools K, Gell J, Kengelbach J, Roos A. 2007. The brave new world of M&A: how to create value from mergers and acquisitions. July report, Boston Consulting Group: Boston, MA. Available at http://www.bcg.com/publications/files/Brave New World MA Aug 2007.pdf. Cropanzano R, Greenberg J. 1997. Progress in organizational justice: tunneling through the maze. In International Review of Industrial and Organizational Psychology, Cooper CL, Robertson I (eds). Wiley: New York; 317–372. Daly JP, Geyer PD. 1994. The role of fairness in implementing large-scale change: employee evaluations of process and outcome in seven facility relocations. Journal of Organizational Behavior 15(7): 623–638. D’Aprix R. 1996. The challenge of integration in the information age. Communication World 13(1): 18–21. Datta DK. 1991. Organizational fit and acquisition performance: effects of post-acquisition integration. Strategic Management Journal 12(4): 281–297. Datta DK, Grant JH. 1990. Relationships between type of acquisition, the autonomy given to the acquired firm, and the acquisition success: an empirical analysis. Journal of Management 16(1): 29–44. Datta DK, Grant JH, Rajagopalan N. 1991. Management incompatibility and postacquisition autonomy: effects on acquisition performance. In Advances in Strategic Management (Vol. 7), Shrivastava P (ed). JAI Press: Greenwich, CT; 157–182. Dess GG, Ireland RD, Hitt MA. 1990. Industry effects and strategic management research. Journal of Management 16(1): 7–27. Economist. 2000. DaimlerChrysler: marital problems. 12 October, 76–78. Elsbach KD, Elofson G. 2000. How the packaging of decision explanations affects perceptions of trustworthiness. Academy of Management Journal 43(1): 80–89. Finkelstein S, Haleblian J. 2002. Understanding acquisition performance: the role of transfer effects. Organization Science 13(1): 36–47. Strat. Mgmt. J., 30: 137–161 (2009) DOI: 10.1002/smj

158

K. M. Ellis, T. H. Reus, and B. T. Lamont

Folger R, Konovsky MA. 1989. Effects of procedural and distributive justice on reactions. Academy of Management Journal 32(1): 115–130. Folger R, Skarlicki DP. 1999. Unfairness and resistance to change: hardship as mistreatment. Journal of Organizational Change Management 12(1): 35–50. Fowler KL, Schmidt DR. 1989. Determinants of tender offer post-acquisition financial performance. Strategic Management Journal 10(4): 339–350. Greenberg J. 1987. A taxonomy of organizational justice theories. Academy of Management Review 12(1): 9–22. Greenberg J. 1993. The social side of fairness: interpersonal and informational classes of organizational justice. In Justice in the Workplace: Approaching Fairness in Human Resource Management, Cropanzano R (ed). Erlbaum: Hillsdale, NJ; 79–103. Greenwood R, Hinings CR, Brown J. 1994. Merging professional service firms. Organization Science 5(2): 239–257. Gutknecht JE, Keys JB. 1993. Mergers, acquisitions and takeovers: maintaining morale of survivors and protecting employees. Academy of Management Executive 7(3): 26–36. Haleblian J, Finkelstein S. 1999. The influence of organizational acquisition experience on acquisition performance: a behavioral learning perspective, Administrative Science Quarterly 44(1): 29–56. Haspeslagh PC, Jemison DB. 1991. Managing Acquisitions: Creating Value through Corporate Renewal . Free Press: New York. Hayward MLA, Hambrick DC. 1997. Explaining the premiums paid for large acquisitions: evidence of CEO hubris. Administrative Science Quarterly 42(1): 103–127. Henry D. 2002. Mergers: why most big deals don’t pay off. BusinessWeek 14 October: 60–70. Hitt MA, Harrison JS, Ireland RD. 2001. Mergers and Acquisitions: A Guide to Creating Value for Stakeholders. Oxford University Press: New York. Homburg C, Bucerius M. 2006. Is speed of integration really a success factor of mergers and acquisitions? An analysis of the role of internal and external relatedness. Strategic Management Journal 27(4): 347–367. Huber GP, Powell DJ. 1985. Retrospective reports of strategic-level managers: guidelines for increasing their accuracy. Strategic Management Journal 6(2): 171–180. Jemison DB, Sitkin SB. 1986. Corporate acquisitions: a process perspective. Academy of Management Review 11(1): 145–163. Johnson JP, Korsgaard MA, Sapienza HJ. 2002. Perceived fairness, decision control, and commitment in international joint ventures management teams. Strategic Management Journal 23(12): 1141–1160. Kent RL, Moss SE. 1994. Effects of sex and gender role on leader emergence. Academy of Management Journal 37(5): 1335–1346. Kernan MC, Hanges PJ. 2002. Survivor reactions to reorganization: antecedents and consequences of procedural, interpersonal, and informational justice. Journal of Applied Psychology 87(5): 916–928. Copyright  2008 John Wiley & Sons, Ltd.

Kim WC, Mauborgne RA. 1991. Implementing global strategies: the role of procedural justice. Strategic Management Journal , Summer Special Issue 12: 125–143. Kim WC, Mauborgne RA. 1993. Procedural justice, attitudes, and subsidiary top management compliance with multinationals’ corporate strategic decisions. Academy of Management Journal 36(3): 502–526. Kim WC, Mauborgne RA. 1995. A procedural justice model of strategic decision making: strategy content implications in the multinational. Organization Science 6(1): 44–61. Kim WC, Mauborgne RA. 1998. Procedural justice, strategic decision making, and the knowledge economy. Strategic Management Journal , April Special Issue 19: 323–338. King DR, Dalton DR, Daily CM, Covin JG. 2004. Metaanalyses of post-acquisition performance: indications of unidentified moderators. Strategic Management Journal 25(2): 187–200. Kitching J. 1967. Why do acquisitions miscarry? Harvard Business Review 45(6): 84–101. Konovsky MA. 2000. Understanding procedural justice and its impact on business organizations. Journal of Management 26(3): 489–511. Korsgaard MA, Sapienza HJ, Schweiger DM. 2002. Beaten before begun: the role of procedural justice in planning change. Journal of Management 28(4): 497–516. Korsgaard MA, Schweiger DM, Sapienza HJ. 1995. Building commitment, attachment, and trust in strategic decision-making teams: the role of procedural justice. Academy of Management Journal 38(1): 60–84. Krishnan HA, Miller A, Judge WQ. 1997. Diversification and top management team complementarity: is performance improved by merging similar or dissimilar teams? Strategic Management Journal 18(5): 361–374. Krishnan R, Martin X, Noorderhaven NG. 2006. When does trust matter to alliance performance? Academy of Management Journal 49(5): 894–917. Kusewitt JB Jr. 1985. An exploratory study of strategic acquisition factors relating to performance. Strategic Management Journal 6(2): 151–169. Larsson R, Finkelstein S. 1999. Integrating strategic, organizational, and human resource perspectives on mergers and acquisitions: a case survey of synergy realization. Organization Science 10(1): 1–26. Leventhal GS. 1980. What should be done with equity theory? In Social Exchange: Advances in Theory and Research, New approaches to the Study of Fairness in Social Relationships. Gregen K, Greenberg M, Willis R (eds). Plenum Press: New York; 27–55. Li H, Bingham JB, Umphress EE. 2007. Fairness from the top: perceived procedural justice and collaborative problem solving in new product development. Organization Science 18(2): 200–216. Lind EA, Tyler TR. 1988. The Social Psychology of Procedural Justice. Plenum Press: New York. Strat. Mgmt. J., 30: 137–161 (2009) DOI: 10.1002/smj

Justice in the Integration of Related Acquisitions Lipponen J, Olkkonen ME, Moilanen M. 2004. Perceived procedural justice and employee responses to an organizational merger. European Journal of Work and Organizational Psychology 13(3): 391–413. Lubatkin M. 1983. Acquisitions and the performance of the acquiring firm. Academy of Management Review 8(2): 218–225. Lubatkin M. 1987. Merger strategies and stockholder value. Strategic Management Journal 8(1): 39–53. Luo Y. 2005. How important are shared perceptions of procedural justice in cooperative alliances. Academy of Management Journal 48(4): 695–709. Luo Y. 2007. The independent and interactive roles of procedural, distributive, and interactional justice in strategic alliances. Academy of Management Journal 50(3): 644–664. Luo Y. 2008. Procedural fairness and interfirm cooperation in strategic alliances. Strategic Management Journal 29(1): 27–46. Marks ML. 2000. Mixed signals: if you want to avoid them, don’t say merger when you mean acquisition. Across the Board 37(5): 21–26. Marks ML. 2006. Workplace recovery after mergers, acquisitions, and downsizings: facilitating individual adaptation to major organizational transitions. Organizational Dynamics 35(4): 384–399. Marks ML, Mirvis PH. 1998. Joining Forces: Making One Plus One Equal Three In Mergers, Acquisitions, and Alliances. Jossey-Bass: San Francisco, CA. McFarlin DB, Sweeney PD. 1992. Distributive and procedural justice as predictors of satisfaction with personal and organizational outcomes. Academy of Management Journal 35(3): 626–637. Mergerstat. 2006. Global M&A wrap up for 2005. Business Wire: 3 January. Available at: http://findarticles. com/p/articles/mi m0EIN/is 2006 Jan 3/ai n26714542. Meyer CB. 2001. Allocation processes in mergers and acquisitions: an organizational justice perspective. British Journal of Management 12(1): 47–66. Meyer CB, Altenborg E. 2007. The disintegrating effects of equality: a study of a failed international merger. British Journal of Management 18(3): 257–271. Nahavandi A, Malekzadeh A. 1988. Acculturation in mergers and acquisitions. Academy of Management Review 13(1): 79–90. Napier NK, Simmons G, Stratton K. 1989. Communication during a merger: the experience of two banks. Human Resource Planning 12(2): 105–122. Nunnally J. 1978. Psychometric Theory. McGraw-Hill: New York. Olie R. 1994. Shades of culture and institutions in international acquisitions. Organization Studies 15(3): 381–405. Podsakoff PM, Organ DW. 1986. Self-reports in organizational research: problems and prospects. Journal of Management 12(4): 531–544. PricewaterhouseCoopers. 2000. While M&A outlook remains strong for 2001, acquirers look for more than size as they struggle with new economy growth model. Business Wire 18 December. Ramaswamy K. 1997. The performance impact of strategic similarity in horizontal acquisitions: evidence Copyright  2008 John Wiley & Sons, Ltd.

159

from the U.S. banking industry. Academy of Management Journal 40(3): 697–715. Ranft AL, Lord MD. 2000. Acquiring new knowledge: the role of retaining human capital in acquisitions of high-tech firms. Journal of High Technology Management Research 11(2): 295–319. Ranft AL, Lord MD. 2002. Acquiring new technologies and capabilities: a grounded model of acquisition implementation. Organization Science 13(4): 420–441. Ravenscraft DJ, Scherer FM. 1987. Mergers, Sell-offs, and Economic Efficiency. The Brookings Institution: Washington, DC. Saxton T, Dollinger M. 2004. Target reputation and appropriability: picking and deploying resources in acquisitions. Journal of Management 30(1): 123–147. Schweiger DM. 2002. M&A Integration: A Framework for Executives and Managers. McGraw Hill: New York. Schweiger DM, DeNisi AS. 1991. Communication with employees following a merger: a longitudinal field experiment. Academy of Management Journal 34(1): 110–135. Schweizer L. 2005. Organizational integration of acquired biotechnology companies in pharmaceutical companies: the need for a hybrid approach. Academy of Management Journal 48(6): 1051–1074. Shapiro DL, Buttner EH, Bruce B. 1994. Explanations: what factors influence their perceived adequacy? Organizational Behavior and Human Decision Processes 58(3): 346–368. Shelton LM. 1988. Strategic business fits and corporate acquisition: empirical evidence. Strategic Management Journal 9(3): 279–287. Shrivastava P. 1986. Postmerger integration. Journal of Business Strategy 7(1): 65–76. Singh H, Montgomery CA. 1987. Corporate acquisition strategies and economic performance. Strategic Management Journal 8(4): 377–386. Sirower ML. 1997. The Synergy Trap: How Companies Lose the Acquisition Game. Free Press: New York. Staw BM. 1991. Dressing up like an organization: when psychological theories can explain organizational action. Journal of Management 17(4): 805–819. Steensma H, van Milligen F. 2003. Bases of power, procedural justice outcomes of mergers: the push and pull factors of influence tactics. Journal of Collective Negotiations 30(2): 113–134. Thibaut J, Walker L. 1975. Procedural Justice: A Psychological Analysis. Erlbaum: Hillsdale, NJ. Van den Bos K, Vermunt R, Wilke HAM. 1997. Procedural and distributive justice: what is fair depends more on what comes first than on what comes next. Journal of Personality and Social Psychology 72(1): 95–104. Very P, Lubatkin M, Calori R, Veiga J. 1997. Relative standing and the performance of recently acquired European firms. Strategic Management Journal 18(8): 593–614. Walsh JP. 1988. Top management team turnover following mergers and acquisitions. Strategic Management Journal 9(2): 173–183. Strat. Mgmt. J., 30: 137–161 (2009) DOI: 10.1002/smj

160

K. M. Ellis, T. H. Reus, and B. T. Lamont

Young M, Post JE. 1993. Managing to communicate, communicating to manage: how leading companies communicate with employees. Organizational Dynamics 22(1): 31–43. Zaheer S, Schomaker M, Genc M. 2003. Identity versus culture in mergers of equals. European Management Journal 21(2): 185–191.

Copyright  2008 John Wiley & Sons, Ltd.

Zollo M, Singh H. 2004. Deliberate learning in corporate acquisitions: post-acquisition strategies and integration capability in U. S. bank mergers. Strategic Management Journal 25(13): 1233–1256.

Strat. Mgmt. J., 30: 137–161 (2009) DOI: 10.1002/smj

Justice in the Integration of Related Acquisitions APPENDIX: SURVEY ITEMS Justice types Respondents assessed the extent to which each of the following activities existed during the period leading up to and including the process. A fivepoint Likert scale was used where 1 = not at all and 5 = to a very large extent. Informational justice Extensive bilateral communications/information sharing between members of both firms Full account of final decisions provided to members of acquired firm Consistent procedures applied in making decisions and carrying them out Procedural justice Full ability of acquired firm to challenge or refute decisions of acquiring firm Acquired firm maintained autonomy in strategic and operational decision making Issues of fit Respondents assessed the extent to which the two firms were different or similar along each of the following dimensions prior to the deal. A fivepoint Likert scale was used where 1 = very different and 5 = very similar.

Copyright  2008 John Wiley & Sons, Ltd.

161

General management style (i.e., formality, employee participation, risk propensity) Reward and evaluation systems Core values, beliefs and philosophy Major products/services offered Types of customers Technology used in production/operations Distribution channels utilized Geographic markets served Performance Respondents were asked to consider both firms prior to the deal and then assess the extent to which the following performance indicators of the combined firm changed at two time periods—one year after the transaction itself and one year after completing the integration process. Respondents were instructed to skip the second time period if the integration process was not yet complete. A fivepoint Likert scale was used where 1 = significant decrease and 5 = significant increase. The performance indicators were listed in the middle and to the left was the five-point scale for each indicator for period one and to the right was the same five-point scale per indicator for period two. Sales growth Market share Profitability Stock price Innovation/research and development

Strat. Mgmt. J., 30: 137–161 (2009) DOI: 10.1002/smj