When IT capabilities are not scale-free in merger and acquisition integrations: how do capital markets react to IT capability asymmetries between acquirer and target?

Abstract

In mergers and acquisitions (M&A), a primary objective of acquirer is to integrate IT resources of the target with its own. IT M&A integration is assumed to create synergies, which in turn increase shareholder wealth by making the value of the merged firm greater than the sum of the standalone values of the two firms. In this study, we challenge this assumption and argue that IT M&A integration does not always lead to greater value creation. Prior research on IT M&A integrations indicates that IT resources are often not scale-free in M&A: that is, they do not transfer easily and costlessly from an acquirer to its target or vice versa. In fact, IT M&A integration can destroy value rather than create it when IT resources are not scale-free. We theorize about the contingencies under which IT M&A integration can create value for shareholders of acquirers. We test our hypotheses in a sample of 549 M&A transactions between 1998 and 2007. We find that, on average, capital markets react negatively with M&A announcements of acquirers whose IT capabilities are superior relative to those of the targets. The superiority of the acquirer's IT capabilities signals that the acquirer is likely to rip and replace IT resources of the target. This IT M&A integration approach increases risks of disruption to target's operations and revenue growth. Capital markets take such risks into account and reduce the stock price of the acquirer. One contingency that reduces the negative reactions of capital markets is industry relatedness of target. In a same-industry acquisition, an acquirer and its target have similar operating models, competitive dynamics, and regulatory context. Thus, ripping and replacing weaker IT resources of the target with superior IT resources of the acquirer creates expectations of more efficient operation, engenders positive stock price reactions, and increases shareholder wealth. Another contingency that reduces the negative reactions of capital markets is the acquirer's track record in profitable growth. A profitably growing acquirer that has superior IT capabilities increases the confidence of capital markets that it can minimize potential disruption risks of IT integration, continue its profitable growth pattern with newly acquired target, engender positive stock price reactions, and create shareholder wealth. These findings indicate that IT M&A integration does not always lead to greater value creation in M&A. The study makes a contribution by identifying the contingencies under which IT M&A integration creates wealth for acquirer's shareholders.

A Review of Information System Integration in Mergers and Acquisitions

“…IS organizational compatibility, and the organizational structures and cultures within the parties' IS functions have been examined six and five times, respectively. This category also includes relative IT capability (Du, 2015;Tanriverdi and Uysal, 2015), which treats the difference between IT capabilities as a capability gap. This has been examined five times.…”

Gestão do conhecimento de service desk: estudo de caso da integração em empresas adquiridas por uma corporação multinegócios

“…A despeito dessas controvérsias, existem razões relevantes para que o aumento de F&A ocorresse, pois tais transações contribuem para o sucesso das operações das empresas (Tanriverdi & Uysal, 2015). Entre esses fatores destacamse: mudanças tecnológicas, globalização, comoditização, baixo crescimento, Gestão do conhecimento de service desk: estudo de caso da integração em empresas adquiridas por uma corporação multinegócios excesso crônico de capacidade que conduz à consolidação, fragmentação, grandes investimentos de capital, volatilidade de preços, desregulamentação e aumento de capacidade (Ferreira & Callado, 2015;Ahern & Weston, 2007 (Johnston & Yetton, 1996;Marques-Ibanez & Altunbas, 2004), embora sejam citados com frequência os ganhos potenciais oriundos das sinergias, da ampliação da escala competitiva da empresa e do aumento do seu poder de barganha, da obtenção de retornos superiores anormais para os acionistas controladores decorrentes de uma performance superior aos concorrentes e da criação de valor para os acionistas.…”

“…No caso de F&A, a TI tem caráter estratégico, porque tem alto impacto na operação da empresa, uma vez que é fundamental para o encaminhamento correto dos processos e procedimentos da organização adquirida, além de seu alto impacto no que diz respeito à estratégia-chave da absorção dos conhecimentos da nova firma (Tanriverdi & Uysal, 2015). Assim, investimentos em gestão do conhecimento devem fazer parte do montante a ser considerado.…”

“…Em decorrência disso, a integração dos STIs pode proporcionar um grande ganho de escala, funções e processos, além de reduzir a redundância e a capacidade subutilizada na empresa. Ou seja, a empresa busca alcançar maior integração das tecnologias e sistemas de informação ao término do processo de fusão entre as organizações envolvidas, o que nem sempre ocorre (Tanriverdi & Uysal, 2015;Weber & Pliskin, 1996).…”

How Merger and Acquisition Affect Firm Performance and Its Quality

“…Theoretically, mergers and acquisitions are not the same. The merger is a process when two or more companies join and emerge as new companies, while the acquisition is a process where one company takes over another company and runs its business right (Tanriverdi & Uysal, 2015). Mergers and acquisitions are defined as activities involving corporate takeovers, corporate restructuring, or corporate control that change the ownership structure of the company (Rao & Kumar, 2013).…”