5

Mergers, MNEs and Innovation

The Need for New Research Approaches

Christian Berggren

1. INTRODUCTION

Since the mid-1990s, a wave of merger has been sweeping through Europe and North America, affecting a wide range of sectors: banking, telecommunications, cars, pulp and paper, oil, and so on. Increasingly, these mergers are of the cross-border kind. According to UN estimates, cross-border mergers and acquisitions rose from the level of $86 billion a year in 1991 to $1.1 trillion in 1999 (United Nations, 2000). The record figure for 1999 represented a doubling of the previous year's figure, itself a record. Many of these deals have brought together firms of comparable size, with the result that the entity as a whole has roots in at least two countries. Examples include BP–Amoco, Astra–Zeneca, Daimler–Chrysler, Hoechst–Rhone Poulenc and Vodafone–Mannesmann. Recurrent merger waves have been part of economic life in Western economies since the end of the 19th century, and a rich literature of merger studies has emerged. In the financially oriented studies the focus is on economic outcomes, defined in various ways. In the management and organisation science field, the emphasis tends to be on post-merger implementation processes and problems such as culture clashes, competitive position games, communication challenges or learning potentials. In much of this management literature, the basic financial rationale and economic imperative justifying the merger is more or less taken for granted (see e.g. Haspeslagh & Jemison, 1991). The explicit or implicit agenda is to help managers manage the implementation process in a more effective way.

This article argues that the current merger phenomenon needs to be investigated in a fundamentally more critical way in management research. The purpose is first to problematise mergers – their economic rationale and behavioural motives, and their second-order effects on innovation and creativity. The aim is to contribute to a further debunking of deterministic notions about “economic imperatives”. Second, an agenda for future merger research is proposed. This comprises two aspects, namely collaborative approaches to uncover the special-interest groups that drive the proposal to merge, and cross-disciplinary studies to investigate the long-term effects of mergers on creativity, projects and innovation in engineering.

Efficiency theory, which views mergers as effective instruments for reaping benefits of scale and scope, is still widely used as a basis for merger studies, sometimes being taken for granted without any qualifications (e.g. Seth, 1990). Efficiency theory lies at the heart of the prescriptive handbooks on merger strategies, and provides the ground for the public relations exercises that accompany merger announcements. The second section below thus offers a detailed review of the performance literature. A distinctive feature of the current merger wave is the prevalence of horizontal amalgamations, whereby firms in the same industry are combined. Compared to conglomerate structures these amalgamations are very difficult to dissolve; essentially they constitute irreversible processes. This highlights the importance of analysing motives and probable outcomes.

As is well known to the informed reader, most outcome studies present a bleak picture of financial post-merger performance. Much less attention is paid to the effects of mergers on innovative ability and engineering creativity. Studies of organisational learning and cognition tend to emphasise the positive potential of mergers for shared learning. One example is Leroy and Ramanantsoa (1997), which studied collaborative problem-solving workshops over an 8-month implementation period. In conclusion, these authors stress the importance of the merger implementation as a complex learning process, with “each firm being simultaneously a learner and a teacher”, and advises managers to “improve the implementation process” by encouraging “learning between the merging firms” (pp. 889, 890). This interest in the opportunities of shared learning has been well received, but it tends to overlook the more long-term energy-absorbing processes of technological integration. Building on case studies of engineering management in merging companies, our third section highlights the specific difficulties of unifying product platforms in technology-intensive companies, the opportunity costs and the tendency to redirect R&D personnel from creative performance to engineering routines. With some important exceptions (Ridderstråle, 1996; Bresman & Birkinshaw, 1996) these difficulties are not captured by the literature on post-merger implementation problems, partly because of the very general orientation and the short-time focus, and partly because of the lack of interest in the interaction between organisation, behaviour and technology, or in the choice of firms where technology integration is not a critical issue.

Section 4 discusses the “merger enigma”. Given the evidence that most mergers produce disappointing results, why is the phenomenon so persistent? This question is not new. After a brief review of previous studies of managerial merger motives, the article discusses recent explanations derived from game theory that purport to give managerial action a new type of “rational explanation”. So far these approaches lack empirical support. The same seems to apply to one popular explanation in the business press of repeated merger behaviour, namely the assumption regarding an “M&A learning curve”. The role of calculation asymmetries in the merger process – i.e. detailed pre-calculations at the time of the announcement, followed by a virtual absence of ex post calculations in the post-merger phase – is emphasised.

Section 5 develops an argument for an expanded agenda of merger studies, with the emphasis on two areas: (1) Merger motives and merger drivers, in particular the role of external financial promoters and the corporate finance industry. (2) Mergers and innovation. In this second area, two types of studies are suggested: micro-level studies of technology integration efforts and post-merger performance of previously innovative R&D units; and studies of industries in which contrasting logics and strategies obtain, so that economies of scale and size and economies of innovation and flexible networking exist side by side, or processes of “fusion” (mergers and acquisitions) occur alongside processes of “fission” (de-mergers and new-firm generation).

2. RESEARCH ON MERGER PERFORMANCE

“If merger incentives are taken into consideration at all, a group of firms is typically said to have incentives to merge if the profits of the merged entity in the new equilibrium is higher than the combined profits of the merging firms before the merger, this is the traditional criterion for merger incentives in the industrial organisation literature” (Horn and Persson, 1999, p. 2, our italics).

The problem that is not discussed here is: how do firms “know” that the combined profit will be higher? Maybe they think it will be, but what if they are wrong? Since the early 1970s a plethora of studies have tried to discover the actual financial consequences of mergers.

Three research approaches predominate:

• Stock market or event studies, i.e. studies focusing on the stock market reaction to merger announcements (the “event”);
• accounting studies, i.e. studies of corporate performance as reflected in quarterly or annual reports, comparing pre-merger with post-merger performance, or comparing the performance of merging companies with a control sample of non-merging companies;
• interview and survey studies exploring the results of mergers and possible reasons for failures or successes.

Less frequently, there have also been attempts to explore the effects of mergers and acquisitions on other economic indicators, such as market share. Of the three main approaches – performance, market and interview studies – interview studies tend to be most positive. This might be a result of self-selection bias, as companies with a dismal post-merger performance would be reluctant to discuss this with external researchers. In these studies it may also be problematic to define “success” in rigorous terms.

2.1. The Disappointing Results of Stock Market and Accounting Studies

Bild (1998) provides an extensive overview of accounting and market studies from the 1920s to the mid-1990s. A cautious conclusion from his survey of performance studies, which cover a total of 2600 mergers, is that “companies engaging in merger activity do not earn a post-merger return that is different than the average of their industry, or any other chosen benchmark”. If there is a tendency it is negative (Bild, 1998, p. 159). In a well-known overview, Scherer and Ross (1990) were more outspoken after finding that half the acquired businesses in a comprehensive sample of US manufacturing corporations had experienced “disastrous performance declines” after their mergers. “The picture that emerges is a pessimistic one: widespread failure, considerable mediocrity and only occasional success” (pp. 172, 173).

In evaluating market studies it is important to distinguish between effects on stock values for the acquirers and for the targets, and between the longand short-term effects. If there is a positive effect on share prices at the time of a merger announcement, the gains accrue to the target's shareholders. Most acquisitions either have no value consequences or the consequences for the stockholders of the acquiring firms are negative. Several event studies comparing the stock market value of the involved firms, however, argue that the combined stock market gains are positive (Fridolfsson & Stennek 1999, p. 2). This result is greatly influenced by the length of the measurement period, normally a few weeks or days before and after the event. During this short period the stock market is heavily exposed to the orchestrated public relations efforts of the merger proponents – the top managers and their financial promoters and media channels. It takes longer for more critical information and analyses to make an impact on the discussion and evaluation. Unsurprisingly, the upward effect on share prices tends to be short-lived.

A recent case has been the much publicised Daimler–Chrysler merger. When this deal was announced, it was presented by Business Week as a “marriage in automotive heaven”. Further, “if ever a merger had the potential for that elusive quality – synergy – this could be the one”, and investors applauded by pushing Chrysler's shares up almost 20% after the announcement (Vlasic, Kerwin, & Woodruff, 1998). Since then, share prices and financial results have been on a long down-hill slide. This accords with other market studies that allow more time for measuring the stock performance of the acquiring firms. These studies have demonstrated a significant deterioration of the stock value over 1–3 years following the merger (Scherer & Ross, 1990, pp. 169, 170). It may be that while the capital market reaction at the time of the announcement reflects positive expectations that are supported by massive public relations exercises from the actors involved in the deal, disappointment follows as the proclaimed “synergies” fail to materialise. Rau and Vermaelen (1998) also found that merger firms tend to underperform on the stock market in the 3 years after the merger. Their explanation is that market and management both over-extrapolate from the past performance of successfully managed acquirers, so-called “glamour firms”.

Most of these studies cover the merger waves of the 1960s and 1980s, while few scholarly investigations of the many horizontal M&As of the 1990s have been published up to now. However, reports from various consultants indicate that the problems of post-merger underperformance persist. According to a study by A.T. Kearner of 135 large-scale international mergers (1 billion dollar plus) between 1993 and 1996, 58% underperformed in terms of shareholder value 2 years after the merger. Moreover, the costs of failed mergers were higher than the gains of successful deals (Hedberg, 1998). A similar result was obtained in an interview study made by an international consultant firm in 1999 (KPMG 1999).

2.2. Mergers and Market Share – Adding to the Bleak Picture

Studies of mergers and market share are less common but tend to support the pessimistic conclusions of most accounting studies. In a study of mergers in the 1950s and 1960s it was found that the market share of acquired business lines deteriorated significantly relative to control samples of nonmerging businesses, in the case of both conglomerate and horizontal mergers (Mueller, 1985). In an analysis of the pharmaceutical industry, changes in the market share of merging companies between 1993 and 1997 were compared with companies that were mainly growing organically. All the companies involved in major mergers – Smithkline/Beecham, Bristol&Myers/ Squibb, American Home/American Cyanamid, Roche/Syntex, Glaxo/ Wellcome, Pharmacia/Upjohn, Hoechst Roussel/Marion Merrel Dow – had lost market shares (AFV 1999). The “organic growers”, from Pfizer to Astra, had all expanded their market shares during the same period. More recently, however, several firms in this group have also joined the merger camp.

Incidentally, the risk of losing market share was a major reason why the management of the Swedish truck producer Scania so vigorously opposed Volvo's take-over attempt in 1999–2000. Scania was finally salvaged by the veto of the European competition authorities. A study of the European heavy truck market in the period 1975–1997, cited by Scania managers, demonstrated that when going it alone the Swedish truck makers had enjoyed very respectable growth in market share. Volvo expanded its market share in Europe from 10.2% to 15.2%, and Scania increased its share from 8.8% to c15.1%, a 70% expansion of market share due entirely to organic growth. By contrast, several of the merging competitors suffered a disastrous decline. RVI, an amalgamation of Berlier, Saviem and Dodge UK saw its share fall from 13.7% to 11.5%, whereas Iveco, a combination of Enasa, FIAT-OM, Ford UK, UNIC, Magirus, Seddon–Atkinson and Astra, dropped from 19.2% to 11.2%, in an implosion of market share. The great exception to this pattern of unsuccessful mergers was the German heavy truck specialist MAN, which leveraged the acquisitions of Buessing and Steyr to double its market share during the studied period (Scania 1999, p. 5).

Spurred by the keen interest of the Federal Reserve in the US, mergers in the banking industry have received the most attention. Larsson (1997) summarises the results of 174 studies. Taken together these fail to support any efficiency arguments. There is no clear positive correlation between unit cost and volume, and big banks are on average no more efficient than smaller banks (the cost curve may be U-shaped, implying that macro and micro banks are the most inefficient). The same applies to the economy-of-scope argument, such that big full-service banks are no more successful than smaller niche banks. In spite of this negative historical track record, bank mergers have been on the increase for several years.

2.3. The Difficult Trade-off Between Cost-cutting and Revenue-enhancement

One recent interview study (Capron, 1999) provides interesting insights as to why the synergies that are so often invoked at the time of the deal, are so difficult to realise. The study is based on a comprehensive survey of 200 firms. Cost-cutting, asset divestiture, and streamlining are kept separate from revenue-enhancing measures involving various forms of resource redeployment. The cross-effect between these two categories are also explored. Further, measures aimed at the acquiring firms and the target firms are analytically separated. The study found that post-merger actions to rationalise the acquirers' assets are effective, but rare. Rather, most such action is directed towards divesting the assets of the target companies. However, such measures have either a negative or at least no significant impact on cost savings. Moreover, they tend to damage the revenue-enhancing resources and capabilities of the target firm. “Overall, these results show the difficulties in capturing benefits of post-acquisition divestiture actions and support the limits … with respect to the effectiveness of acquisitions as a means of rationalising assets” (Capron, 1999, p. 1007).

Regarding revenue-enhancing measures, resources from the target firm may be productively redeployed, but in this case there is also a negative effect on total acquisition performance. If, on the other hand, resources from the acquiring firm are redeployed to enhance capabilities, the effects tend to be unambiguously positive. However, this is not the most common route taken in the post-merger process. In sum, this study draws attention to the important problems of asymmetries and interaction effects, that the target firm “is very likely to bear the burden of post-acquisition asset divestiture”, and that cost-cutting activities often interfere with and damage long-term capabilities. The author comments: “Cost-based synergies, which have commonly been the focus of attention, are not easily achieved and may require more substantive changes in operating the business than those suggested by the dominant approach based on cost cutting and downsizing gains” (Capron, 1999, pp. 1009, 1010).

Thus, irrespective of research approach, be it stock market studies, accounting studies or interview studies, the majority of empirical investigations give no grounds for enthusiasm about mergers. If there are any discernible results at all, these tend to be disappointing. Studies of postmerger market shares confirm this: more often than not, merging companies suffer from declining market shares, sometimes even a veritable market implosion. And because of promises made to the stock market and the expectations it consequently maintains, the acquiring firms tend to focus on cost-cutting measures to the detriment of future revenue-enhancing capabilities. As will be shown in the next section, this is particularly problematic when it comes to the management of product technologies and product platforms.

3. MICRO-MERGER SNAFUS: THE UNDERESTIMATED PROBLEM OF INTEGRATING TECHNOLOGIES

The announcement of mergers in manufacturing industries is regularly accompanied by calculations to demonstrate the huge potential savings in production and purchasing costs. If the amalgamation results in a substantial increase in market share it may be possible for the new entity to put powerful pressure on suppliers to reduce their prices. A reduction of actual costs, however, requires the integration of idiosyncratic technical solutions into common technical platforms. This may be feasible in a relatively short time in fast-moving industries with short product lives, as in the ICT-sector (Cisco for instance stands out as a prominent example, or at least appeared to do so before the stock market tumble early in 2001). It is much more difficult and time-consuming, however, in other types of manufacturing or engineering sectors. In such cases there is seldom a simple set of objective parameters that can be used to select the superior design, be it a power transformer or a diesel engine. Instead there are dozens of relevant parameters relating to performance, cost, manufacturability, serviceability, customer preferences, user behaviour, etc. Moreover, engineers tend to have strong feelings about their designs, very different from the detached approach of financial analysts. The route to “integrated designs” is lined with long-drawn-out negotiations, tension, conflicts and compromises. And at the end, there is no guarantee that the best solution has been chosen. This process, which tends to be far more protracted than top management ever envisaged, is not captured adequately by general survey studies: longitudinal, in-depth, case studies are necessary. This is a time-consuming approach and therefore rather a rare one.

3.1. Protracted Technical Integration Problems at ABB

A much publicised case of international M&A in the 1990s concerned the electrotechnical firm ABB, the result of a merger between Swiss BBC and Swedish ASEA, and of subsequent acquisitions in the US. Numerous business journal articles and books have presented the new “global firm” as a resounding success; almost all of them based on interviews with top management (see e.g. Heimer & Barham, 1998). However, two of ABB's many business areas, Automation and Power Transformers, have been subjected to more thorough studies of the problems of integrating different technologies. In one of these the present author took part together with an international group (Berggren, 1996, 1999; Bélanger, Berggren, Björkman, & Köhler, 1999), while two researchers from Stockholm Business School were involved in the other (Bresman & Birkinshaw, 1996). Since such studies are not very common, the results will be presented in some detail below.

The first case is about product integration in the business area automation. When ASEA and BBC merged there were suddenly two competing systems in the industrial automation field, ASEA's Master and BBC's Procontrol. Which one was to survive? The rivalry between the two systems and their proponents led to tough arguments. When management decided to cease development of ProControl there “was blood on the floor” according to one participant (Berggren, 1999, p. 239). In 1990, ABB acquired Combustion Engineering in the US including Taylor Instruments whose control and supervision system for industrial processes enjoyed a higher market share in the chemical industry. ABB Automation decided to keep both systems but to merge them successively in future product generations, and eventually to market one system only world-wide. A huge international project was set up consisting of 20 subprojects. The intention was to launch a fully integrated system within 3 years, but in 1996, 6 years after the start of the integration project, there were still big differences. One reason was the installed base of the existing systems. This was an important asset for the company, since customers rarely switch to a new system supplier. However, it also represented a major obstacle to the development of a unified platform, since new product releases need to be compatible “backwards”, i.e. with all the existing installations.

Another reason for the difficulty in integrating the systems was the multisite development structure, a result of growth through mergers and acquisitions. At the US site, for example, there was limited interest in eliminating all the specific features of the local system in favour of an international platform, since this could pose a threat to their own future (Berggren, 1999, pp. 239, 240). In ABB's business area Power Transformers the problem of technological fragmentation was even more daunting. After all the mergers and acquisitions in the late 1980s and early 1990s, seven different product technologies were competing internally. A common product programme started in 1989 but proved to be much more complicated than envisaged. In 1996, 7 years after the start, a common product protocol was in place, but only 20% of the transformers delivered that year were produced in accordance with it (Björkman, 1999, p. 49).

3.2. The Soul of Established Machines – Competing Design Philosophies at Volvo and Scania

When Volvo Trucks announced its plan to take over Scania in 1999, Scania's CEO publicly expressed his worries about the amalgamated company's future market share, and as we have seen above he had good reasons for his worry. In a less public way, there was also widespread concern in Scania's product-development departments about problems to do with technological integration and standardisation. Volvo and Scania both build trucks for the heavy market segment. For financial analysts this means obvious cost synergies in consolidating product platforms and harmonising component designs. As the product engineers and process engineers who participated in a training programme run by the present author in 1999–2000 put it, the engineer's perspective is completely different. Despite external similarities, Volvo's and Scania's design philosophies are remarkably incompatible, as the way they design their six-cylinder diesel engines, the most expensive component in a heavy truck chassis, clearly illustrates. Whereas Volvo offers a “modern” design with overhead cam shafts and one solid cylinder head, Scania prefers a “conventional” approach with individual cylinder heads and no overhead cam shaft, motivated by reference to the low rotation speed of truck diesels compared to gasoline engines.

To the architects of mergers such differences may seem like a mundane technical issue, easily resolved on the basis of an analysis involving both parties. However, such an assumption is the root cause of many micro-merger problems. As Scania engineers have pointed out when interviewed, diesel engines can be evaluated on many criteria, such as manufacturing cost, life cycle-cost, reliability, power, emissions, fuel consumption, driving smoothness and convenience, serviceability, compatibility with auxiliary equipment, and so on. And just to add to the complexity, all these criteria can be assigned different weights. The choice of a particular design will affect not only suppliers and plant tooling, but also spare parts systems and thousands of service shops. Following a Volvo–Scania merger, a unified design would be necessary if the previously announced cost rationalisation were to be to achieved. But in the absence of simple agreed criteria, such design decisions can easily be disputed as being political. Whereas engineers in the pre-merger situation concentrated on doing their best to develop their own solutions and to let the market decide, the post-merger process is often affected by internal arguments between competing designs, resulting in a loss of tempo and customer focus. None of this is taken into account in the calculations of cost savings that are regularly presented when mergers are announced.

3.3. Opportunity Costs and the Diversion of Innovative Energy

The difficulty in integrating different technologies into a common platform not only means that the expected cost synergies take longer to realise than anticipated; there is also a substantial opportunity cost. Once the merger is legally finalised, then designers and product and process engineers tend to become absorbed for several years in questions of co-ordination and harmonisation instead of concentrating on innovation and the development of new products. Engineering is a discipline involving creative problemsolving, it is about creating and implementing new solutions. In an amalgamated company that is preoccupied with establishing “common platforms”, this role changes. To realise the economies of scale that have justified the merger, engineers and project managers are obliged to prioritise standardisation and formalisation, i.e. to establish common systems, common design rules, common purchasing policies, etc. Those in creative positions tend to be transformed into implementers, standardisers or engineering bureaucrats. This change is resisted by many. Some leave, perhaps going over to competitors. Others continue to fight for their own solutions and ideas, which is one reason why the technological integration process is so time-consuming.

Another consequence of large-scale mergers is that innovative individuals and groups in design and development departments become surrounded by, and have to report to, various new organisational and hierarchical layers. This exhausts scarce human capacities, and strains or severs the crucial direct links between innovators, manufacturing experts and advanced users. A legendary innovator in engine technology, Per Gillbrand at Swedish Saab, came up against this sort of increase in organisational layers and managerial reporting requirements, after Saab was acquired by GM. Instead of focusing on the early introduction of advanced combustion and ignition technologies, exploiting the advantage of their own small-scale inter-disciplinary environment, Gillbrand and his colleagues had to waste much of their energy trying to persuade various committees in the central US development office with its 23,000 heavily departmentalised engineers. (Interview by the author, 10 January 2001.)

Innovative projects call for a strong culture and practice of crossfunctional and inter-disciplinary information exchange and problem-solving. In the mega-enterprises spawned by the cross-border mergers of the 1990s, hierarchical structures are reinforced in order to reap the hoped-for synergies and economies of scale. The global product managers or functional managers take precedence over cross-functional project management. This may promote the sale and refinement of existing products but erode the capacity for future innovation.

4. THE CONUNDRUM: PERFORMANCE SO POOR, DEALS SO MANY

”Perhaps merger booms and stock market trading are behavioral phenomena – human beings, like some animals, are more active when the weather is sunny” (Brealey & Myers, 1996, p. 942).

When mergers are being announced, favourite arguments advanced to support the deal concern cost synergies, cost-rationalisation, and elimination of overlap. It is also commonly argued that mergers are a way of correcting managerial failure, that is, inefficient managers are weeded out by an active market in corporate control. The evidence does not support the view that striving for greater efficiency is the main motivation for mergers. At the beginning of the 1990s, it was already being shown that target firms significantly outperformed comparable non-targets in terms of profitability (Scherer & Ross, 1990, p. 170). This pattern has been confirmed more recently in Franks and Meyer (1996), where it is demonstrated that firms subject to take-overs tend to have outperformed the market over the previous 5 years, thereby contradicting what the efficiency arguments predict. Support for the general “weeding-out” hypothesis is thus weak.

4.1. A Positive Merger Learning Curve?

In recent years, management research has shown a great interest in organisational learning. Transposed to the M&A field this suggests the assumption of an “acquisitions learning curve”, and the notion that “the experienced acquirer” would be more successful than the less experienced. Empirical studies fail to find support for this assumption. Studies reported in Raven-scraft and Scherer (1987) found active acquirers to be less profitable than the US industry average, and less successful in terms of long-term stock performance. An explanation of this outcome in organisational behaviour terms would be that although executives ride the learning curve of acquisitive assessments and negotiations, the managerial ranks tend to become exhausted, and their commitment to be further eroded by every new acquisition or restructuring or restaffing exercise. In conversations with the author, professional investors have suggested a performance curve shaped like an inverted U. First, the acquirer experiences a positive learning curve as its executives learn to assess targets and to direct post-merger integration more effectively. After a series of successful acquisitions, however, top management tends to over-extend, trying to digest objects that are too large and to become less attentive to details, with the result that their merger performance starts to deteriorate. The evolution of Electrolux between the 1960s and the 1990s is cited as a case in point (L. Låftman, senior pension fund manager, interviewed by the author, 8 February 2001).

One reason for the survival of the claims regarding efficiency is the lack of follow-up studies, either within companies or in the business press. Quantitative analyses of expected benefits are often used ex ante, but very seldom ex post. In an in-depth financial analyses of seven merger cases, it was found that very few companies conducted any post-audits of merger performance. And if they did do so, it was at the explicit request of the board. As one financial director put it: “Ex post evaluations are seldom made. Restructurings protect the management from evaluations” (quoted in Bild 1998, p. 95). The absence of follow-ups or critical scrutiny of track records is evident even in cases where relevant information is easily accessible from public sources, such as annual reports. In 1995, for example, ABB announced the merger of its traction division (trains and railway systems) with German AEG, owned by Daimler-Benz. At the press conference the CEO of ABB described a very positive future for the new entity, known as Adtranz. The expected synergy effects would quickly result in new orders and increased profitability, he said, and he was convinced that “we will improve earnings every year” (SvD, 1995). The same year the ABB traction division was still a profitable business, reporting earnings of USD 207 million. The next year the results of the amalgamated entity had slipped into the red (USD 2 million), and by 1997 its economic performance had gone from bad to worse (USD 111 million). In 1998 ABB sold the whole business. That very year the same CEO, but now in a different position, was espousing the virtues of merging the Swedish pharmaceutical company Astra with British Zeneca. This was an industry of which he had no experience, and yet he was never confronted by the grossly misleading ex ante calculations of the Adtranz merger, an industry of which he had 15 years experience. The corporate lack of interest in ex post calculations seems to be shored up, at least in small countries, by the media's deference for the grandiose executive merger promoters.

4.2. An Explanation Building on Game Theory

The conundrum of “performance so poor, deals so many” has not been resolved. So many studies have revealed the economic disappointments of mergers, and yet their numbers continue to increase. A survey of existing studies of merger motives (Trautwein, 1990) has suggested a list of possible explanations, such as the bounded rationality of decision processes, managerial self-interest and hopes of higher compensation and more power, and of “empire-building”. Executive hubris is another hypothesis (Roll, 1986). Several studies support such explanations, but so far the empirical evidence seems to be limited and a bit dated. The World Investment Report (UN, 2000) asked basically the same question: why are there so many mergers, when the results are so discouraging? The short answer is that fear is a more powerful driver than greed (although on a personal management level the two appear together). A dubious deal is preferred to no deal at all.

Recently economists have sought to formulate a “rational” explanation along the same lines, using game theory to formalise the argument (Fridolfsson & Stennek, 1999, pp. 3–4). According to this theory of ”pre-emptive or defensive merger motives”, mergers are performance-reducing propositions for all the actors in an oligopolistic industry. But company A would rather take the initiative and merge with B, than wait for a merger between B and C and becoming an outsider: “Even if a merger reduces the profit flow compared to the initial situation, it may increase the profit flow compared to the relevant alternative – another merger… . In particular, the event studies can be interpreted to show that there exists an industry-wide anticipation of a merger and that the relevant information content of the merger announcement is which firms are insiders and which are outsiders” (Fridolfsson & Stennek, 1999, p. 3, 4, 17). This may sound plausible, but two questions remain. First, are “merger insiders” actually more successful than outsiders? So far, such a hypothesis is not supported by empirical evidence, showing that outsiders' stock value suffer, or that outsiders are less profitable than the merging insiders (Fridolfsson & Stennek, 1999, pp. 23, 24). Second, how and by whom is the “industry-wide anticipation of a merger” created and sustained? This leads us to the role of the financial promoters of mergers.

4.3. The Increasing Importance of the Corporate Finance Industry

Most merger studies focus on the motives of acquiring firms. A different approach is taken by studies specifically concerned with the role of matchmakers and financial promoters. The conclusion drawn in studies of the first American merger waves has been summarised by Scherer and Ross (1990, p. 161): “the quest for promotional profits was the most important single motive for merger during the frenzied 1897–1899 and 1926–1929 periods”. The hectic and dubious activities of financial match-makers rushing into the market for corporate control in the early 20th century, was also observed by the Swedish Commission of Anti-Trust Legislation in 1921 (Rydén, 1972).

In the 1960s the deal-makers seem to have played a less prominent role. But the 1980s witnessed explosive growth in the number of corporate finance firms and management strategy consultants, and their involvement in M&A businesses. “We were in the era of megabid mania. The City was awash with money. One was getting approaches from banks all over the world offering all sorts of propositions for any sort of deal that one could think” (Ernest Saunders, former CEO of Guinness, quoted in O'Shea & Madigan, 1997, p. 236). The prizes for participation in mega deals are difficult to resist. For example, in 1986 when Guinness took control of Distillers, the largest British corporate acquisition of the time, the transaction generated more than USD 250 million in fees to brokers, consultants, bankers and others (O'Shea & Madigan, 1997, p. 241).

In the late 1990s American firms were at the forefront of the merger wave in Europe, while the relative importance of German and other mainland European banks was declining. According to an estimate in Business Week (1 November 1999), Goldman Sachs was involved in European mergers and acquisitions totalling 430.9 billion dollars during the first 10 months of 1999 alone. Morgan Stanley's European M&A business totalled deals of 421.3 billion dollars during the same period. These two firms were No. 1 and No. 2 in the market for mergers and acquisitions in Europe, outdistancing by far any local rivals. Corporate finance advisors and consultants are not neutral service providers. Since mergers present them with good opportunities for earning large commissions, they are active contributors to the making of new deals: “I would rather say that they/the investment banks/are accelerating corporate restructuring. It's their job to present analyses and proposals for transactions all the time” (Senior advisor at Morgan Stanley AFV 2000, p. 34).

Previous research has revealed the importance of managerial self-interest in driving mergers. However, apart from anecdotal evidence, there are very few studies of the role of “financial advisors” and deal-makers in the recent merger booms. Consulting firms are going through a phase of concentrations and mergers themselves, and many of them now constitute a key component of the current international business environment, alongside governments and international organisations. Moreover, in the case of the so-called “Big Five”, a potential conflict of interest exists between the roles of these firms as advisors and auditors (Perks, 1993). More broadly, the issue is about the role of these special interests in the shaping of the M&A agenda. What part do the financial mediators and “advisors” play in shaping the “industrywide anticipation of a merger”, referred to above by Fridolfsson and Stennek (1999), as a precondition for merger moves which for all those involved will result in a lower level of performance relative to a no-merger development?

5. THE NEED FOR AN EXPANDED RESEARCH AGENDA TO INCLUDE DEAL-MAKERS AND THE IMPACT OF MERGERS ON INNOVATION

As this article has shown there is a rich literature on merger performance, as measured in a variety of ways. However, the new wave of international crossborder mergers starting in the 1990s calls for further study of the merger-making process, and specifically of the role of external financial promoters, deal-makers and consultants. The question of the extent to which the wave of mergers is driven by models and economic interests perpetuated by dealmakers is clearly an important one. Case studies are needed to investigate the role of financial advisors and consultants in selected processes from the initial steps in the drafting of a business case and its financial motivation, on to participation in negotiations and the setting up of financial arrangements, and finally to involvement in post-merger restructuring and integration. To achieve this, efforts would be necessary on the part of academics to team up with insiders, perhaps with executives who have recently retired. Cross-disciplinary studies will be needed, involving students of financial economics, organisational behaviour and economic sociology.

Systematic efforts are also needed to explore the impact of mergers on technological development and innovation, within both firms and industries. The exploration of mergers and innovation at the level of the firm would benefit from case studies, involving researchers in organisational behaviour as well as engineering management. One line would be to look at efforts to harmonise technological platforms and design structures: the time required relative to the initial forecasts, departmental relations and friction, opportunity costs, and changes in the overall activities and orientation of the R&D staff in the merging firms. It would also be interesting to see how new-product development projects are affected by increasing organisational complexity and hierarchical reporting requirements – or perhaps in some cases how they escape from such things. It would be particularly important to study the kind of highly uncertain development projects that tend to depend on informal networks, cross-departmental problem-solving and project autonomy, all of which may be at risk after international mergers, which normally generate more complex management layers and more stringent requirements regarding formal progress reviews. It is also vital to identify particular innovative units or in-company networks, perhaps by checking earlier patents, to see whether they become surrounded and compartmentalised by additional organisational boundaries and intermediaries and – if so – to what extent. This applies to the problem of opportunity costs, and to the type of management, through trust or formal reviews. If innovative units lose their direct contact with process specialists or advanced customers, this will not only slow down their problem-solving but may even degrade their innovative abilities in general.

Longitudinal, in-depth case studies will be important to capture the effects of mergers on innovativeness and the orientation of the R&D staff in the firms. This is a difficult undertaking, however. The potential for bias that affects multi-firm interview studies is even greater in the context of in-depth case studies. Most insider stories are published by journalists, who provide a mass of imaginative details and outspoken opinions but tend to be highly partisan and lacking any comparative perspectives. A recent example of this was the all-American account of the Daimler–Chrysler merger in Vlasic and Stertz (2000). Academic case studies on the other hand tend to be cautious and restrained, refraining from interviewing dissidents and external critics and sometimes failing to clarify the role of the researchers concerned: are they investigators or dialogue partners for senior management? This was a highly controversial issue for the research team behind the ABB study “Being local world-wide”, in which the present author was a key participant (Bélanger et al., 1999). In other cases it might be very difficult to get the stories released for publication. This has been the case for the planned publication “Acquisitions: the management of social drama” by John Hunt at London Business School, a well-known specialist in merger processes and co-author of Hunt, Lees, Grumbar, and Vivian (1987). The new book was to have been released by the Oxford University Press in 1998, but by 2000 no definite date had yet been settled, for reasons explained in a personal communication to the present author (16 February 2000): “We are having great problems getting the cases released. Of the 10 acquisitions we studied only one has so far been released. The problem, as you know, is that the ‘real’ story is very personal. It is this story we want to tell. It is not the story corporations want to read in public.” Mergers are strategically important affairs, and reports of failures and stifled innovation will land squarely on the table of top management, sometimes affecting the share price, but almost certainly affecting the relationship of the researchers to management in the future.

As MacDonald and Hellgren (1994) have noted “most management researchers who interview in organisations crave access to the executive suite”. This applies particularly to merger studies. The focus on the top levels exacerbates the problems of selectivity and subtle adaptation: “It is hard to question closely a manager who normally would not tolerate being questioned at all. It is much easier simply to accept what is said, … It is easier still, and much more conducive to reaping the benefits that flow from the satisfaction of those interviewed, to ask the questions managers wish to answer and to ask them in ways managers will find immediately acceptable. Thus, for example, a question on the role the manager has played in corporate success is much more acceptable than a question about his role in corporate failure” (MacDonald & Hellgren, 1994, pp. 13, 15). Corporate failures, however, abound in merger processes. One way out of the dilemma, albeit a time-consuming one, may be to go for lower levels of the organisation, which are anyway the most important for investigating the effects on innovation and development projects. A complementary approach that might help to counter the problems of publication could be to focus on project, rather than firm performance.

Another type of meso-oriented approach should also be explored, alongside the rich longitudinal case studies, in order to capture the effects of mergers on industrial dynamics and innovativeness. Such an approach would mean identifying industries within which companies pursuing international economies of scale come up against firms, or clusters of firms, which seek to exploit knowledge networks and innovation as their means of competition. The Swedish industry that embraces pharmaceutical and biotechnical companies, roughly defined, can represent such a case. For many years this industry was dominated by two domestic giants, Pharmacia and Astra. Both these firms experienced rapid growth based on original innovations, but increasingly they both changed orientation, first Pharmacia and then Astra, focussing instead on incremental product refinement and international scale. In the 1980s Pharmacia embarked on a series of mergers and acquisitions that ended in the cross-border merger with American Upjohn. In the Swedish debate this merger has been viewed as a particularly disastrous deal, followed by exorbitant implementation costs and repeated rounds of restructuring and relocation exercises (Frankelius, 1999). For a long time Astra professed its belief in organic growth, but in 1998 it joined forces with British Zeneca, a descendant of ICI. In the Pharmacia case corporate control was transferred to the US, and in the Astra case to London. The merger proponents saw this as a deterministic development due to the new economies of scale and the demands of a global presence, but the consequences at the local level were often demoralising.

However, in a highly unintentional process the Swedish pharmaceutical and biotechnical industry has been granted a new lease of life by a plethora of research-based start-ups, often stemming from university projects but managed by former employees of Astra or Pharmacia. Specialising in narrow niches, these firms tend to cluster in the Uppsala region – the “Cambridge” of Sweden and the previous headquarters of Pharmacia. Here they form close knowledge networks with academics and other dedicated firms (Thorén, 2000). The jury is still out as regards the long-term prospects for this breed of small-scale, research-intensive firms. From the perspective of industrial innovation this process of fission offers a challenging antidote to the largescale processes of mergers and “fusion”, which has been proclaimed for so long as the only way forward for a competitive pharmaceutical industry. A study of this or similar cases would include long-term growth in earnings and high-tech job creation, as well as specific company strategies for circumventing the problems of small scale and resource restrictions compared to the accumulated powers of international mega-companies.

6. SUMMARY AND CONCLUSION

Historically there have been several merger booms in the Western economies. In the US and in Sweden, the first three decades of the 20th century witnessed major waves of horizontal amalgamations, often with the explicit motive of creating dominant market positions. Tight anti-trust legislation in the US made this more difficult in the decades following the Great Depression. The merger booms in the 1960s and 1980s were consequently dominated by the conglomerate type of combination. Among the expressed motives for mergers in the waves of the 1960s and 1980s, financial risk reduction due to diversification and cross-industry technological synergies, figured prominently. During the 1980s there was a considerable relaxation of American antitrust legislation. Encouraged by this trend, the new boom of the late 1990s was once again characterised by horizontal mergers, involving firms in the same industry and the same principal market. In many industries this implied a renewed move towards consolidation and oligopoly. Compared to previous amalgamations, the scale and volume increased by an order of magnitude. This was accompanied by an ideology proclaiming the benefits of size and economies of scale despite recent advances in flexible manufacturing technologies and the increasing importance of customisation. While most of the mergers of the early 20th century and of the 1960s and 1980s remained domestic in nature, the mergers in the 1990s were predominantly of a cross-border character. The diffusion of international mergers was supported by a new “deal-making industry” of consultants, corporate lawyers, investment banks and corporate finance specialists. These bodies seemed to be driving the merger process in a manner somewhat reminiscent of the role of the financial promoters of the early 20th century, but in a decidedly more international and aggressive way.

This article opened with a review of studies of the historical performance of mergers, singling out three types of approach: stock market, accounting and interview studies. The content of this overview supported the observation in Bild (1998, p. 216): “It is striking that the three approaches have largely presented fairly similar, that is, mostly insignificant, results. Where any significant outcomes have been found, they have been reported to be predominantly negative.” Available studies of the mergers of the 1990s did not deviate from this bleak picture. After marshalling the evidence for disappointing performance the article has delved more deeply into one specific reason for post-merger problems: namely the difficulties involved in integrating idiosyncratic corporate technologies into common product platforms. A related argument focused on the opportunity costs of mergers. By concentrating on cost synergies and streamlining, it has been argued, mergers in knowledge-intensive industries tend to distract and impede innovative energy. This development is aggravated by the tendency to redirect product and technology units towards standardisation and uniformity at the expense of innovation and experimentation.

After reviewing mergers from the perspective of performance and the effects on innovation, a conundrum was presented: why are there so many mergers when most of them perform so dismally? The “rational propositions” inspired by game theory that have recently been suggested were found to lack empirical support, and the need for a closer look at the industry of merger-makers has been emphasised. The problematic influence of these financial intermediaries was noted as early as the merger boom in the first decades of the 20th century, and again in the analyses of the notorious role played by Drexel Burnham Lambert and Kohlberg, Kravis and Roberts in the US merger boom of the 1980s (Stearns & Allan, 1996). The time is now due for further studies involving the co-operation of academic scholars with senior ex-insiders from business. Inter-disciplinary studies combining research in business and engineering management are necessary in order to investigate the “micro-merger” problems of integrating diverse technologies and, more broadly, to assess the complex impact of mergers on innovation.

In-depth studies in individual companies are important here, but need to be complemented by analyses of selected industries, in which very contradictory logics obtain, ranging from large-scale mergers or “fusions” to smallscale “fissions”, i.e. spin-offs and new start-ups initiated or inspired by the former employees of big firms and their professional networks. In many industries, such as the car industry, the capital intensity of production or distribution systems erect steep barriers against new entrants, even when the mergers result in enormous inefficiencies. In other sectors, scientific and/or technical breakthroughs may succeed in demolishing previous barriers. A possible case in point could be the pharmaceutical/biotechnological sector, for example in Sweden. Here the persistent pursuit of size and scale on the part of the dominant firms ended in international mergers and relocations between 1995 and 1999. Since the late 1990s, however, this route has come up against a new industrial logic of networking and research-based entrepreneurial start-ups, frequently managed by veterans of the merging giants. Studies of such diverging logics within industries are important not only for the insights they will provide about factors supporting or impeding innovative processes, but even more importantly for any contribution they make to the deconstruction of the economic determinism, the arithmetic modelling and linear thinking that are so popular in the era of international mega-mergers.

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