Integration Capability and Merger Success: The Case of Professional Service Firms

Sarah Kim

This thesis examines the impact of integration capability on merger outcomes. Derived from the resource-based view of the firm, integration capability is defined as the firm's capability to conduct M&A integration by adopting and effectively using a bundle of best practices that have been identified to contribute to merger success.

Despite their popularity, empirical studies have repeatedly demonstrated that less than half of all mergers and acquisitions (M&As) meet initial expectations. While M&As have attracted substantial interest and research attention from a variety of management disciplines over the past 30 years, their failure rates remain high (Cartwright and Schoenberg, 2006). The question of why so many mergers and acquisitions fail remains largely unsolved (Cartwright and Cooper, 1993). The present study seeks to contribute to an understanding of merger success and failure by focusing on the implementation side (or the integration process) of M&A deals. It investigates key areas of concern to organisations seeking competitive advantage through development of superior integration capability as an organisational competence and a core capability.

The research is centred on three case studies of different mergers involving large international professional service firms in Australia. It examines each merging firm's integration process in detail and how integration approaches varied across the three cases. The integration approach is explored in terms of four behavioural aspects of integration that the existing literature has named as best practices for superior merger outcomes. These practices are identified in the research as planning and execution of the integration program, effective leadership behaviour, focus on people integration and human resources management issues and focus on clients. The research uses qualitative data derived from semi-structured interviews with employees at all levels of organisation and practitioners in the field, and from various secondary sources about the case study firms.

The cases reveal the following findings. First, they highlight the importance of integration to overall M&A outcomes. Second, they show that differences in merger outcomes are closely associated with differences in integration approaches. Third, the findings show that these differences may reflect differences in integration capability. Different firms appear to have varying levels of integration capability, as seen in their different integration approaches, to create and execute a distinct bundle of best practices in M&A integration that determine overall merger outcomes. It is important to note that in each case study the acquiring company which performed most poorly among the three M&A cases studied demonstrated a consistently lower level of adoption of all four dimensions of integration approach. Fourth, the findings identify firm-specific factors associated with superior levels of integration capability. These include strategic approach to the deal, localised management style, people-oriented culture, and learning from previous M&A experience. The intangible and firm-specific nature of these factors enhances the inimitability and rarity of the integration capability. Finally, the case study findings suggest that integration capability is likely to constitute a firm's distinctive second-order capability that is rare, valuable and difficult to imitate and therefore cannot be easily acquired or developed. This may offer an explanation, in part, as to why only some firms adopt and effectively use best practices while others do not.

This thesis contributes to our practical understanding of the complex M&A phenomenon. It suggests steps that corporate strategists can take to enhance their competitive advantage through the development of integration capability as a core competence. It also offers tools for managers to better assess whether their resources and capabilities base will enable the firm to exercise superior integration capability, before embarking on a merger.

Supervisors

Dr Nick Wailes and Dr Leanne Cutcher

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