CHOICE OF OUTCOME VARIABLE

In chapter two I mentioned four categories of outcome variables; employee reactions, combination success, cultural outcome and fmancial performance. Use offmancial performance as outcome variable would have several problems in my study. First, accounting and market measures are often strongly influenced by exogenous

variables, and isolating the merger or acquisition from other events therefore becomes very difficult (Datta and Grant, 1990). Due to the banking crisis and the recession in the Norwegian economy in the late 1980s and the early 1990s, this is a particular valid problem in the study of the bank merger. The improvement in the merged bank's performance was inevitable as the banking crisis subsided and the economy

recovered. Disentangling the effects of the merger from the impact of the crisis in the fmancial sector is therefore an almost impossible task in this particular case.

Secondly, abnormal gain or wealth effects to stockholders as a result of an acquisition or merger announcement or consummation, merely reflects performance expectations, . not actual outcomes (ibid). Thus strategy theorists have been less persuaded that the immediate stock market reactions provide a good measure of ultimate ex post performance (Cannella and Hambrick, 1993).

Recent research (Chatterjee et al., 1992) has found that investors do appear to consider human related contextual factors such as cultural fit when valuing a merger. However, since the event studies focus on the immediate shareholder wealth effects, factors and features that are associated with the post-combination process are neglected in this stream of research. Furthermore, the event studies assume that the future is

predictable. Thus they do not take into account that the change process is often incremental and experimental as the combination partners learn about each other (Schweiger, Csiszar and Napier, 1993), or that itis virtually impossible for managers

to specify every integration decision prior to or even just after the closing (Schweiger, Ridley and Marini, 1992).

U se of stock market performance would also restrict the sample of mergers and acquisitions to companies listed on the stock exchange. This would be a particular problem for the combination in the insurance industry, where the acquiring firm was a mutual company.

Perceptual measures where respondents are asked to rate performance, have the advantage over strictly mathematical formulae in that they overcome the difficulties of combining historically different accounting procedures and practices (Cartwright and Cooper, 1992). However, perceptual measures do have the disadvantage ofbeing subjective and are more unreliable than accounting measures. Hayes and Hoag (1984) for example, found that executives' assessments ofperformance were strongly

influenced by whether they had left or remained with the company. Moreover, it is reasonable to believe that the informants will experience the same problems of disentangling the merger or acquisition from other events as in the case of other performance measures.

Because of the many difficulties and problems associated with the use of financial performance in my study of mergers and acquisitions, other outcome variables should be considered. Employee reactions, success and cultural outcome are all intermediate outcome variables, and as such it is necessary to relate these outcomes to financial performance. One advantage of using intermediate outcomes is that it brings the employees as stakeholders into consideration. This adds to the financial economics perspective that views the shareholder as the pre-eminent stakeholder. Furthermore, it adds to the the industrial economics perspective that focuses on the implications for the society as a whole.

Though not empirically tested, the research on employee reactions predicts that dysfunctional outcomes are harmful to financial performance. However, for outcomes such as turnover the relationship to performance is less clear cut. In horizontal

combinations voluntary turnover may be one of the ways of realising efficiency gains, and as such it may be positively related to performance. On the other hand, research also suggests that the departure of acquired executives and other key employees is disruptive and negatively related to post acquisition performance (Cannella and Hambrick, 1993).

As for the accounting and market measures it seems reasonable to assume that employee reactions such as turnover, absenteeism and intention to quit, will be influenced by exogenous variables such as economic climate. One would for example expect less voluntary turnover and more lay-offs in recessions than in periods of economic growth. Thus in studies where the impact of economic climate cannot be controlled, isolating the effects of the merger and the environmental impact will be an almost impossible task.

Apart from the research on executive departure, few studies on employee reactions have, as mentioned above, examined the same set of factors or applied the same methodology. Many studies suffer from insufficient reporting and lack of statistical tests. Taking the existing research on employee reactions into consideration, I would suggest that there is a need for quantitative studies testing consistent sets of features and factors in relation to these outcomes within and across different mergers and acquisitions. Moreover, surveys of employee reactions can be useful when used in combination with other data collection methods.

Regarding the third outcome variable, combination success, most studies using combination success as their outcome variable fail to specify what they mean by success and how this feature has been assessed. In my view, this concept is too vague and inspecified to be used in my study.

Unfortunately, as is the case with combination success, the literature focusing on cultural outcomes of mergers and acquisitions is not very well developed in the sense of a coherent concept being developed and tested. Contributions often employ phrases such as making one from two (Blumberg and Wiener, 1971; Blake and Mounton, 1983), spirit ofunity (Jones, 1982), creating a viable new organisation, establishing a cohesive entity and development ofsense ofunity (Ollie, 1994) without elaborating on what is actually meant by these concepts and how they can be assessed.

However, since a primary objective of this dissertation is to study how merger and acquisition processes evolve over time, attention is directed to the process features discussed in chapter two. In particular it is desirable to choose an outcome variable that can reflect the on-going process as well as the state of the combination.

The discussion on process in chapter two was divided into three parts. These included stages of and tasks in merger and acquisition processes, timing change and cultural change. Since the requirement is that the variable should reflect both the state and the

process, stages in the process and timing change are excluded. The variable discussed in the section on process that best seems to fit my requirements is organisational integration.

Besides being an important feature in the merger and acquisition literature, organisational integration is a factor often mentioned in the interviews which this study relies upon. Moreover, the process of integration will be especially important in horizontal combinations where the two companies are closely related in products and markets and where the realisation of efficiency gains is often dependent on the elimination or absorption of activities.

The two contributions in the section on process that treat the concept of integration in some depth are Shrivastava (1986) (tasks in merger and acquisition processes) and Elsass and Veiga (1994) (cultural change).

In line with the literature on cultural outcome, Shrivastava (1986) argues that the primary problem in effectively managing merged firms is integrating them into a single unit. In contrast to the literature on cultural outcomes and cultural change, Shrivastava focuses on post-merger integration at several levels, including integration of procedures, physical assets and cultures.

While Shrivastava looks at the integration process in mergers and acquisitions in particular, Elsass and Veiga (1994) focus on the concept of organisational integration defmed as the organisational need for cultural groups to work together. However, in line with other literature on cultural change, Elsass and Veiga limit their attention to cultural integration. I intend to combine Shrivastava's (1986) and Elsass and Veiga's approaches.

Following Elsass and Veiga I intend to focus on the concept of organisational integration, using mergers and acquisitions as the context for studying the

phenomenon. Moreover, in line with Shrivastava (1986) I wish to focus on more than one dimension of organisational integration.

According to Lawrence and Lorsch (1967) organisational integration can be defmed as "the state of collaboration that exists among departments that are required to achieve unity of effort by the demands of the environment" (p. 11). Elsass and Veiga use Lawrence and Lorsch's (1967) description of organisational integration as their point of departure, but argue that in addition to the interdepartmental integration,

organisational integration in mergers and acquisitions also include organisation-wide cultural integration, smaller intradepartmental sub-groups and individual integration.

While Lawrence and Lorsch use the term integration primarily to refer to the state of interdepartmental relationships, they also use it to describe the process by which this state is achieved and the organisational devices used to achieve it. The latter aspect of organisational integration, is further elaborated in Galbraith (1973) and Mintzberg (1979) (see Larsson (1990) for an extensive discussion of the literature on co-ordination).

I will argue that the use of organisational devices influences the state of organisational