Make It or Break It - Trust in Corporate Acquisitions

Acquisitions often seem to fail during the all-important phase of integration, and lack of trust maybe a key reason. Professors Günter Stahl and Sim Sitkin build a model that points out the key stages in the development of trust that can be applied proactively to facilitate the process of integration.

by Günter Stahl, Sim Sitkin
Last Updated: 23 Jul 2013

Mergers and acquisitions (M&A) have become a popular way for corporations to grow and diversify. But too many firms have discovered (many times, too late) that what might look good on paper does not ensure success. The two firms involved must endure a process of integration wherein the separate entities strive to find common ground and function together in terms of activities, organizational structures and cultural amalgamation. No wonder so many M&A failures occur in the integration phase. But why?

In this recent working paper, Günter Stahl, Assistant Professor of Asian Business at INSEAD, and Sim Sitkin, Associate Professor of Business Administration at the Fuqua School of Business, factor in the consideration of trust. They develop a model identifying the key stages wherein trust should be developed between the people involved (and not just the firms) to facilitate the process of integration.

The authors draw on M&A literature and synthesize the critically important factors dealing with the process and outcomes of acquisition integration. Specifically, they focus on intra- and inter-organizational trust as key variables, explaining that the level of trust between the parties, or lack of it, plays a critical role. Then they introduce their model with integrated trust factors, elaborating several propositions that address inter-firm trust relations and identifying certain variables that combine to determine the overall level of trust one party has for the other: ability, integrity, benevolence, openness and value congruence.

The authors also discuss other relevant variables that shape how corporations build trust, depending upon the type of relationship between the two firms and the acquiring firm’s integration management decisions: takeover friendliness, differing levels of power and performance between the firms, the cultural climate and positive interaction history.

Noting that M&A situations are highly complex, they identify a set of factors that affect the development of trust, for example, a friendly mode of takeover, relatively similar levels of power, or strong acquiring firm performance in the past. Also, trust tends to be higher if the two parties are “culturally similar,” and if the firms have a positive interaction history.

In terms of integration, a target firm appreciates an integration process that leaves them with a higher degree of autonomy. Usually, the quicker the process, the better, and if the acquiring firm is sympathetic to cultural differences and communicates well, it can enhance trust. Also, there is more trust if the acquirer’s HR practices and reward systems are superior to those of the target firm, leading to greater job satisfaction, more job security, and increased prospects for promotion and compensation.

The model also looks at the dynamic aspect of the relationship development. The behavior and attitude of the target firm management will have a significant impact on trust. A performance ethic, eagerness to take risks and willingness to subjugate personal goals for organizational ones demonstrates the belief in working together. This applies to both the target and acquiring firms’ attitudes. In fact, trust or distrust between the members of the two firms involved in an acquisition is often contagious. Members of the target firm may signal and create distrust through their unwillingness to cooperate with the acquirer, and managers of the acquiring firm may do the same by imposing rigorous controls on the target firm. If unaddressed, the mutually reinforcing distrust that can grow in intensity until relationships are irreparably damaged and integration fails.

This research reinforces the need to address socio-cultural implications when considering M&As, and it also identifies specific actions and processes allowing both parties to jumpstart successful integration.

INSEAD 2002

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