This paper constructively diagnoses problems within the current merger & acquisition (M&A) theories and provides an alternative theory of corporate behaviour. We contend that humans are the hosts for a replicating entity known as `memes'. Since finance based motivational studies on M&A activities have not established that this activity `adds value' to the acquiring firm, it is our thesis that certain managers gain power through mergers and acquisitions. Thus, M&A from the point of view of the acquiring firm can be seen as driving the evolution of ideas, shaping the flow of technology, information, and tastes rather than as `value adding'. In simple terms, managers (the meme holders) use mergers and acquisitions to enhance their power, and in gaining this power managers unconsciously provide an improved medium through which their memetic `stories' may be replicated.
The paper first introduces popular theories surrounding M&As, the motivation for M&A is developed further in an examination of the need for managerial power, we then discuss how this power struggle relates to the `battlefield' of corporate asset allocation allowing `stories' to be told and replicated, and finally we ask questions and develop hypotheses that provide direction for future research.
Mergers and takeovers have attracted a great deal of attention from the financial press and other media in recent times (The terms merger and acquisition "are used interchangeably to mean any transition that forms one economic unit from two or more previous ones" (Lubatkin & Shrieves, 1986, p. 497)). Their characteristics and resulting values pre and post formation have been studied thoroughly in the financial literature (see Jensen and Ruback, 1983, for a review). Theoretically, a company will enter into an acquisition or merger agreement if they believe that the NPV (company A + company B) > NPV (company A) + NPV (company B), where NPV is Net Present Value. Or simplistically, the economic value of these firms combined is greater than the economic value of these two firms as separate entities.
Financial theory implies that acquisitions and mergers occur in the hope of positive synergistical effects, with many managers citing synergy arguments in order to justify their actions (Friedman and Gibson, 1988; Maremont and Mitchell, 1988; Porter, 1987). Reasons for these effects have been offered, such as gaining fast access to new technologies or new markets, benefiting from economies of scale in research and/or production, tapping into sources of know how located outside the boundaries of the firm and finally monopoly type advantages. Lubatkin lists M&A motivation into seven main theoretical areas:
The motivations for merger and acquisition activity seem logical and worthy of study as has been the case in the past (see Berkovitch and Narayanan, 1993, Markides & Oyon, 1998 & Trautwein, 1990). However, mergers may not lead to positive performance outcomes. The evidence to date suggests that most acquisitions cost more than they are worth and most mergers fail. Ravenscraft and Scherer (1987) and Herman and Lowenstein (1988), examine the earnings performance after takeovers and conclude that merged firms have no operating improvements. Porter (1987) found that more then half of the acquisitions by major US companies failed. Whilst Hunt states that "most studies of acquisitions produce a success to failure rate (using accounting or finance or managerial assessments) of 50%" (Hunt, 1990, p.70). Finally, Lorenz (1986) observed that takeovers are "at best an each way bet".
In Jensen and Ruback's 1983 review paper, they suggest that studies of the abnormal returns to takeover participants show that in general bidding firms seem to have no significant positive returns. Additionally, Loughran and Vijh (1997), Travlos (1987), Warnesly, Lane and Yang (1987), Franks, Harris, and Mayer (1988), Asquith, Bruner, and Mullins (1987), and Servaes (1991), find that acquirers paying with stock earn significantly negative abnormal returns. It is no surprise that this lacklustre performance in merger and acquisition returns has been summarised as unquestionably poor (Doz, 1988). In a 1970 paper that surveyed the findings of the finance research on mergers, Hogarty asked:
"What can fifty years of research tell us about the profitability of mergers? Undoubtedly the most significant results of this research has been that no one who has undertaken a major empirical study of mergers has concluded that mergers are profitable; i.e. in the sense that they are more profitable then alternative forms of investment."(Hogarty, 1970, p. 220).McKinsey and Company revealed that 43% of a sample of international acquisitions failed to produce a financial return that met or exceeded the acquirer's cost of capital (Bleeke & Ernst, 1993). Non-financial studies show little improvement over Kitching's (1974) early finding that between 45% and 50% of acquisitions are considered failures or not worth repeating by the managements involved. Further support comes from Michael Porter's (1987) examination of the diversification record of large US firms over the period 1950-1986. He found that 53% of all acquisitions were subsequently divested, rising to 74% for unrelated acquisitions.
Therefore, if the discussed synergistical effects are present and financial capital budgeting techniques are utilised, why is it that bidder shareholders often never experience wealth increases? Correspondingly, in light of the historical evidence why do firms continue to undertake such seemingly inefficient capital investments?
Our aim (albeit a struggle) is to escape out of the constraining `straight jacket' view that shareholder wealth maximisation places on the study of finance, to examine an alternative and perhaps radical foundation for the reasons behind many corporate mergers and acquisitions. It is proposed that mergers and acquisitions are both a medium through which managerial power is increased and a vehicle through which the `corporate story' that we as consumers unconsciously absorb is skilfully replicated. The `corporate story' represents an idea or combination of ideas that are transferred via hosts such as managers or employees within the corporate organisation. Theorists have examined this replicative dominance transfer of ideas, in which ideas that behave as competing, self-replicating entities are known as `memes' (Dawkins, 1976).
According to Blackmore (1999) memes are basically ideas, "they are much like genes or viruses in how they spread...we humans because of our powers of imitation have become the physical hosts needed for the ideas to get around." (Blackmore, 1999, p.8). Memes (or alternatively the term `ideas' may be used for ease of thinking) are synthesised from host to host (human brains) and by way of natural selection, evolution logically fabricates memes that `survive' efficiently and spread widely through their human hosts. As Blackmore states "evolution may appear to proceed in the interests of the individual or for the good of the species but in fact it is all driven by the competition between genes," (Blackmore, 1999, p.8). This view also holds for the study of memetics (the study of memes), for memes serve no greater purpose. In a sentence they are selfish independent ideas operating only to get themselves copied (note that selfish does not refer to any sort of active human characteristic, rather it is used only to describe the isolated functioning of memetic replication). Blackmore states that "the selfish replicators are transmitted and copied, and they do this as often as possible, so long as they have the machinery (human brains) and the building blocks they need for that copying.... In this way evolutionary design comes about" (Blackmore, 1999, p.13).
Although memes were not termed or theorised until recent times, the notion of replication has been examined for many years. As early as 1896 Baldwin posited the idea of a new factor in evolution `social hereditary' referring to the imitation in society (Baldwin, 1896). Further intrigued with this notion of imitation and instruction, Baldwin later implied that natural selection was not purely a law of biology but pertained to all the sciences, including the mind (Baldwin, 1903). The obvious question thus arises, what helps a meme make further duplications of itself or conversely what inhibits it?
It is our thesis that certain managers gain power through mergers and acquisitions, thus driving the evolution of ideas, shaping the flow of technology, information and tastes. In simple terms, managers (the meme holders) use mergers and acquisitions to enhance their power and in gaining this power managers unconsciously provide an improved medium through which their memetic `stories' may be replicated (the term story refers to the managers vision or ideas of the future (memes), and the ideas they shape through their instruction upon people, products and services). The important notion in this theory is that managers are not, except by coincidence, acting so as to maximise shareholder wealth, but are attempting to gain power through acquiring more strategic resources, thus enabling story (meme) replication. Using an analogy from science, M&As can be seen as an agar plate through which stories are cultivated, easily replicated and ultimately imitated throughout human communities.
Having introduced the notion of memes it is not the intention of this paper to examine in depth the theoretical constructs built about the study of memetics, rather it is applied to suggest that there are alternative reasons that may be offered for human action and that managers have ideas (stories) and gain power whereby they are better able to express such ideas (creating replicative opportunities), with mergers and acquisitions used as an improved environment for replication. As Powell states, "The stereotypical competitive market is the paradigm of individually self interested, non-cooperative, unconstrained social interaction." (Powel, 1990, p.302). As such markets (and more specifically mergers and acquisitions) have powerful incentive effects for they are the arena with which each party (managers in particular) can fulfil its own internally defined needs and goals, in doing so providing memes with an environment that is conducive for further replication.
This discussion is developed further following a three-prong approach; first looking at the need for managerial power as motivation for M&As; secondly how this power struggle relates to the `battlefield' of corporate asset allocation, allowing `stories' to be told and replicated; and thirdly we pose questions and develop hypotheses, which provide direction for future research to confirm our alternative view of M&A activity relative to memetic transference.
According to Mitchel, Agle and Wood, "most common definitions of power, at least in part derive from the early Weberian idea" (Mitchel, Agle and Wood, 1997, p. 865), that power is the probability that one actor within a social relationship would be in a position to carry out one's own will despite resistance (Weber, 1947). Pfeffer rephrases Dahl's (1957) definition of power as "a relationship among social actors in which one social actor A, can get another social actor B to do something that B would not have otherwise done." (Pfeffer, 1981, p. 3). Both Pfeffer and Weber acknowledge that power may be awkward to define, but it is not that arduous to recognise- it seems that it is the capacity of those who posses power to bring about the effect they desire.
Power orientated behaviour refers to individual actions aimed primarily at acquiring and using power and can be catergorised into potential power and power (Kotter, 1979). Recognition of this behaviour is useful, as psychologists who have studied managers have said that power (potential or not) is relevant and important, because managers tend to have a high power motivation (Prince, 1972). Logically, the field of psychology dominates the power literature. Correspondingly, academics recognising the importance of power in the study of finance have made some attempts to integrate psychology literature with financial literature in their explanations of the financial marketplace. For example, theories such as `Empire Building' (Lubatkin, 1983) have been assembled around the very notion of power and it's corresponding effects. This corporate control theory of M&A motivation has arisen in order to account for possible shareholder/management goal deviations. According to this theory, mergers and acquisitions are planned and executed by managers who thereby maximise their own utility instead of their shareholders. Although seemingly understudied, the common thread in the `Empire Building' theory, specifically the maximisation of manager's goals subject to constraints put upon them by the capital markets, is most supported in the literature.
Whilst "such alternative merger and acquisition motives have received only modest attention" (Trautwein, 1990, p. 189), Mueller states, "there seems little doubt that the motives behind merger activity are not simply those that lie behind the more typical investment decisions, but are overlaid to a considerable extent by management attitudes and certain rationale that does not accord with our assumed over-riding management objective of shareholder wealth maximisation." (Mueller, 1970, p. 189). Newbold (1970) found that the reasons given by top managers for initiating merger motives did not explicitly include maximisation of shareholder wealth (Newbold, 1970), commenting and expanding on Newbolds report, Mueller (1970) summarises by stating that, "the reasons given by managers for merger and acquisition activity appear to be lacking in precision" (Newbold, 1970, p. 197).
In terms of M&A activity, "the heightened proclivity of larger firms to enter alliances has led some to conclude that the quest for market power may be an important consideration in such ties" (Pate 1969, Berg and Friedman 1978). Hence, it is possible that many takeovers and mergers are built around the battle for internal power. They have a direct bearing on power struggles with the increased industrial might for the company translating into greater influence, prestige and pay for the executives. More importantly, M&As are built around the battle for external power. By combining, corporations aim to enhance their market might, their innovative strength, their bargaining muscle and their ability to influence economic actors. To the extent that size is power, the merging and acquiring corporations have become more potent and the weakening of anti-monopoly intervention under open market focused politicians has opened the floodgates to a massive wave of activity in communications, financial services and drugs amongst others.
The theme still remains that managers regularly acquire and use power. They do so intentionally and wilfully, as well as instinctively and unconsciously. They exploit a variety of methods in this quest, some of which are well known, others of which are not. Indeed, so powerful have contemporary organisations and their managers become that economists such as Galbraith have overturned conventional economic theory about consumer sovereignty in brace of a revised sequence, with substantial corporations moulding demand, fixing prices and planning production so as to subsume the market (Bell, 1975). In a summary of earlier studies concerned with the acquisition process, Power (1983) reported that the acquisition practice was not a comprehensively rational decision, suggesting problems such as suppressed uncertainty, lack of planning, political influences, varying process participants and no agreed upon acquisition criteria. Song (1988) gathered evidence that supports the assertion that senior executives background plays a role.
"A successful manager, by the nature of his assignment as a manager, has access to considerable power over human beings in an economic sense, in an educational sense and also in a propaganda sense" (Mueller, 1979, p. 162). Thus, controlling managers usually succeed in securing compliance with their decisions simply because they posses the organisational power, which is obviously enhanced through further M&A activity. In interviews carried out by Kotter, he states that "although no executive would admit it, at least publicly, they all spent considerable time in activities that were at least partially aimed at acquiring or attaining power for themselves" (Kotter, 1979, p. 4) further adding that "Managers were willing to admit privately that power dynamics were an important part of their work and that seemingly political behaviors are usually considered a way of life at the top levels of the organization." (Kotter, 1979, p. 385).
This of course does not mean that power is the only goal of managers, or that power is a fixed pie that businesses and individuals fight to divide, or that human interactions are reduced to a power nexus. Rather, it is merely to show that the efficiency based theories do not adequately explain corporate M&A behaviour, suggesting that it is power not reasoning that often drives the market and those in it. Extending this reasoning toward the influence of memetics we suggest that as managerial power increases, ideas that are transferred via such managers are ascribed greater credibility. Therefore, where managerial power plays a substantial role in a merger or acquisition ideas are transferred through the manager into the new combined entity, such that their story is better able to be told. The interaction of ideas and managerial power may be illustrated if a correlation can be established between `managers who have power' and the `replication and sustainability of ideas or stories' for which they are agents (carriers). This issue shall be visited later in a discussion on how thought contagion is influenced by power.
A further study, which brings together business and memetics, provides interesting insight into the area of market efficiency. Frank (1999) applies memetics to financial markets by asking the question "Do markets evolve toward efficiecy?" Based on memetic theory Frank reasons, "If there are many possible competing financial memes and only a small percentage of those memes are economically sound, chances are that the most psychologically appealing memes are not the most economically sound..." (Frank, 1999, pg. 9). It would therefore make sense to rule out "economically sound" as a criterion for ideas or stories that are likely to be successful. Following from the previous section, it is our proposition that the stories seen in society are the ones told by people with the most power (replicative power- derived through organisational power).
Logically, memes that induce thought contagion behaviour in their carriers that tends to reduce rival memes will be fitter then those that do not provoke such behaviour (able to survive longer and replicate further), since they will have more resources for themselves. The distinct outcome being that a group of hosts with various memes will tend towards homogeneity resulting from the imposition of the stronger meme and elimination of all non-conforming memes (Boyd & Richerson, 1985). This notion has interesting connotations for the influential role of money in persuading individuals and groups to conform, as powerful companies (those with strong market positions) have the ability to coerce and initiate self-fulfilling prophecies. That is, if they say that something will happen then it often will, simply because of the power they possess. It is also directly applicable in corporate control situations where management teams compete for increased market power in order to dictate the flow of information and resources.
It has also been suggested that memes group together to aid survival. Such groupings of memes are referred to as `meme-plexes' (Blackmore, 1998). This grouping of memes makes sense in terms of natural selection; if a story meme could group with a defence meme, it could decrease the chance of outside memetic attacks (i.e. the fight for limited space in the mind), thus enhancing its replicative ability. Perhaps this is why we see managers of possible target firms set in place popular anti-takeover strategies to help shield their story memes. ` Poison Pills', `Lock-Up' strategies `Pac Man' defences, `Shark Repellent' defences, `Sale of the Crown Jewels', `Scorched Earth' Strategies and `Supermajority' amendments are only a few of the prevalent anti-takeover defence mechanisms that have arisen in recent times. These anti-takeover defence strategies occur frequently in the business world, even though it has been proven extensively that on average target companies are paid a substantial premium and shareholders of these companies experience positive wealth gains when they are taken over, (Jensen and Ruback (1983), Loughran and Vijh (1997), Travlos (1987), Warnesly, Lane and Yang (1987)).
Power is a cultivator through which thought contagion breeds, evidenced by various ideas that spread through a society by those hold power, reverberating the notion of memetic transfer. Remember that "memes are ideas that propagate themselves around the world by jumping from brain to brain, memes are stored in human brains and passed on by imitation, individuals learn from society by imitation instruction. Ultimately, human life is permeated through and through with memes and their consequences" (Blackmore, 1999, p. 6).
Historically religion has been used as an example of thought contagion (memetic transference), with large powerful groups creating different beliefs in god. In the past, religion that promoted large families were successful because they created more people to adopt the faith from their parents, this example draws resemblance for the memetic advantages of M&A activity, with religion and ceremonies very much likened to business ideas and practices, both of which are spread by one person copying another, creating large fellowship and belief.
As discussed, the way that we see and understand the world is guided by thought contagion (or the replication of memes). Certain characteristics enable thoughts or ideas to enhance their replicative ability. As stated by Dawkins (1976), the criterion for a successful replicator (successful in the sense that they create multiple duplicates) consists of three elements: Fidelity, Fecundity and Longevity. When examining mergers and acquisitions on this three-factor (fidelity fecundity and longevity) success scale, the theme remains that greater market strength places companies in a position where they are further able to supply the market with their ideas. Logically, mergers and acquisitions allow this to happen as they have the enhanced power and distribution channels to make a vast number of exact copies (fidelity & fecundity), with the pooled research, design and marketing capabilities to defend against competitors and ensure continued expression (longevity).
The overall fitness of a meme can be determined by identifying whether it will maintain within an individual's memory and spread to other individuals or be eliminated. M&As illustrate the effect of this as they impose changes on business environments, overpowering the acquired companies and enhancing their story. De Jong (1999) illustrates how institutions act as filters for new concepts, which filters reflect dominant behavioural and conceptual practices. Concepts that survive organisational restructuring (M&As) may become institutionalised, forming part of the story being told.
When acquisitions and mergers occur the acquiring company is also able to increase its organisational networks, which aids replicative ability. As noted "an organisation's power is determined less by its internal resources than by the set of resources it can mobilise through its contacts. The more such contact the firm has, the better it is `plugged in' to the key task and influence process of the industry" (Galaskiewicz, 1979, p. 478).
Resulting from this, once those in power decide the direction of their environment, in general it is very tough for people to stop the flow and assume the `old way' of life, (or if you like the replaced meme way of life). It is important to note that the competitive game here is not played at the level of the firm, but rather at the level of the idea itself. Victory in this `game' means that the idea becomes adaptive (adaptive in the sense that the idea or meme creates a contagion type effect with a higher probability of `survival' and `reproduction').
In terms of managers replicating their meme driven stories (individual fitness) perhaps we should invoke the analogy of two people sitting on respective ends of the rope in a tug-o-war competition, each heaving like mad to serve their own selfish replication, with the stronger competitor eventually able to drag the weaker competitor: power creating compliance! Correspondingly, M&As are an excellent launch pad for memetic transference, for the power they build helps the propagation of ideas and the continual replicative muscling of such ideas.
Clarifying the relationship of thought contagion and power, M&As are transactions in which organisational power is transferred, where the acquiring firm holds the power and in turn memetic transference sees that acquirers story is replicated. In biological terms Mokyr states that, "the environment into which seeds are sown is of course the main determinant of whether they will sprout" (Mokyr, 1990, p.299). Whether or not comparisons between evolution and cultural or management progress are valuable has been the focus of a substantial and spirited debate in the literature, as Mokyr states "the parallels are inevitably incomplete and do not provide the researcher with sharp analytical conclusions." (Mokyr, 1990, p. 275). Additionally, it must be noted that at present we cannot predict exactly how stories will evolve over time, we can only stand back and watch with a greater understanding as they unfold. We can however find deep, underlying reasons governing the unpredictable flow of such activity. Being at least in part, that those in power have the higher ability to dictate the flow of information and resources, ultimately shaping the products, services, systems and ideas that the economy maintains.
Fundamental questions that one may naturally be compelled to ask are: Is it in fact managerial need for power that drives M&A or are memes themselves the drivers of such corporate activity? Contrastingly, do memes motivate managers to acquire power so that they can be replicated? Are memes indeed better replicated through M&As? If M&As are driven by stories rather than the need for power, does the story being told have any relation to subsequent performance of the newly combined corporate entity? Does industry classification offer any explanatory value in the replication and sustainability of stories that are told through M&A? Do M&As and their resultant stories refute our theories of memetic transfer by creating an entirely new story that cannot be explained by current logic?
Establishing quantifiable variables to test when addressing issues in behavioural finance is integral to producing acceptable conclusions. We propose the following testable hypotheses and offer reasoning as to how each one supports the framework of M&As and memetics.
Several theories have developed to explain this ongoing activity. Theories relating to efficiency and wealth enhancement have been largely discounted. Power based theories, on the other hand, have gained considerable support: Monopoly, empire building, and management entrenchment. But again, we must ask: Why?
Why is the power story so important? Why is it that managers are able to `finesse' their shareholder wealth maximization responsibilities and instead seek power? We suggest that insight can be gained by an understanding of memetic transference. Memes and meme-plexes, which are successful, are those who replicate. M&A increases management power so that memes can spread more widely. Access to more resources provides memes with more chance to selfishly attempt to replicate themselves. When observed from this perspective, M&A activity appears to be an arena where power is not the end goal, but rather the means to the end. Memetic transference is the end goal.
Empirical testing of memetic transference is never easy. But the testing of several resulting hypothesis about M&A activity offers an opportunity to begin this process.
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