The Value of Ties: Impact of Director Interlocks on Acquisition Premium and Post-acquisition ...

179 Pages·2014·1.03 MB·English

by  Lawani, Uyi

THE VALUE OF TIES: IMPACT OF DIRECTOR INTERLOCKS ON ACQUISITION

PREMIUM AND POST-ACQUISITION PERFORMANCE

Uyi Lawani, B.Sc., PGD (M), MBA

Dissertation Prepare d for the degree of

DOCTOR OF P HILOSOPHY

UNIVERSITY OF NORTH TEXAS

May 2014

APPROVED:

Grant E. Miles, Major Professor
Lewis A. Taylor III, Committee Member
Tomas Mantecon, Committee Member
Vicky Goodwin, Chair of the
Department of Management
Finley Graves, Dean, College of Business
Mark Wardell, Dean of the Toulouse Graduate
School
Lawani, Uyi. The Value of Ties: Impact of Director Interlocks on Acquisition Premium
and Post-acquisition Performance. Doctor of Philosophy (Management), May 2014, 170 pp., 28
tables, 15 figures, references, 294 titles.
Mergers and acquisitions (M&A) evolved as alternative governance structures for firms
seeking to combine resources with other firms, access larger markets, or acquire strategic assets.
In spite of managers’ enthusiasm about the practice, studies show mixed results regarding post-
acquisition performance of acquiring firms. The impact of acquisitions on the performance of
acquiring firms has therefore remained inconclusive. A few reasons for this have been suggested
and recent meta-analytic research efforts indicate that studies in M&A may have ignored
variables that have significant effects on post-acquisition performance.
In a bid to extend the literature on M&A and identify cogent variables that impact on
acquisition performance, this dissertation draws on social network theory to advance a
proposition for the value-of-ties. This was done by examining the impact of directorate interlocks
on acquisitions specifically and organizational strategy in general.
A non-experimental cross-sectional study of 98 interlocked directorate companies
simultaneously involved in acquisitions was conducted. Several multiple regression analyses
were conducted and the results obtained suggest that there is a positive linear relationship
between director interlocks and post-acquisition performance and that to some extent this
relationship is moderated by acquisition experience. The study also showed that director
interlocks have a negative linear relationship with acquisition premium. This study complements
the body of knowledge on acquisitions and network theory. It also successfully combined a
multi-level approach to research on organizations and strategic management.
Copyright 2014
by
Uyi Lawani
ii
ACKNOWLEDGEMENTS
This dissertation could not have been done without the help, counsel, support and
encouragement of several people. Among these individuals to whom I am immensely grateful,
are friends and colleagues in the Department of Management and the college of Business at the
University of North Texas. It was, and will continue to be, an honor for me to be identified with
UNT. I am also grateful to several other people with whom I have interacted during the course of
my doctoral program.
More importantly, I was fortunate to have on my side dedicated scholars in the persons
of: Dr. Grant Miles, my dissertation chair; Dr. Lewis A. Taylor III and Dr. Tomas Mantecon, my
dissertation committee members. All three of them took personal interests in my progress and
provided timely and consequential intervention to guide and guard me along the path to success.
My gratitude to them for their patience, tolerance, and support knows no bounds.
I appreciate the unyielding love and support of my wife, Rachel E. Uyi-Lawani for her
gentle prodding and unwavering support while we endured the pain and rigor that comes with an
effort of this magnitude. To other members of my family—dad, siblings (particularly Ese, Egbe
and Abies), uncles, aunts, cousins, and in-laws—I say a big thank you for the resources and
prayers and for your understanding at various occasions when I could not be there. To my dear
friends too numerous to mention, I am in your debt forever.
Finally, I dedicate this work to the memory of my mother, Mrs. Kate Osaretin Lawani,
who toiled ever so hard but could not wait another year and eight months just to see this time.
Mama, you are forever in my heart!

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TABLE OF CONTENTS
Page
ACKNOWLEDGEMENTS ........................................................................................................... iii
LIST OF TABLES ......................................................................................................................... vi
LIST OF FIGURES ..................................................................................................................... viii
CHAPTER I INTRODUCTION .................................................................................................... 1
CHAPTER II REVIEW OF THE LITERATURE......................................................................... 9
Mergers and Acquisitions ................................................................................................... 9
Network Theory ................................................................................................................ 15
Networks (Social Ties) and Executive Behavior .................................................. 19
Director Interlocks ................................................................................................ 26
Hypotheses Development ................................................................................................. 36
Director Interlocks and Acquisition Performance ................................................ 36
Director Interlocks and Acquisition Premium ...................................................... 39
Effect of Board Independence .............................................................................. 44
Effect of Acquisition Experience .......................................................................... 46
CHAPTER III RESEARCH METHODOLOGY ........................................................................ 51
Sample and Data Collection.............................................................................................. 51
Measures: Operational Characterization of Variables ...................................................... 56
Dependent Variables ............................................................................................. 56
Independent Variable ............................................................................................ 62
Moderators ............................................................................................................ 63
Control Variables .................................................................................................. 66

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CHAPTER IV DATA ANALYSIS AND RESULTS ................................................................. 70
Addendum on Data Collection .......................................................................................... 71
Sample Characteristics ...................................................................................................... 74
Ex-Post Adjustments to Variables and Measures ............................................................. 76
Descriptive Statistics and Bivariate Correlations ............................................................. 83
Hypotheses Testing ......................................................................................................... 104
Summary ......................................................................................................................... 118
CHAPTER V DISCUSSION ..................................................................................................... 120
Discussion of Findings .................................................................................................... 121
Direct Effects ...................................................................................................... 123
Moderating Effects...............................................................................................130
Limitations of the Study.................................................................................................. 138
Directions for Future Research ....................................................................................... 141
Summary ......................................................................................................................... 142
APPENDIX A LIST OF COMPANIES (ACQUIRERS AND TARGETS) AND THE
ACQUISITION ANNOUNCEMENT DATES .......................................................................... 144

APPENDIX B DISCUSSION ON THE ANALYSIS OF RESIDUALS FOR THE
DEPENDENT VARIABLE: ACQUISITION PREMIUM ........................................................ 148

REFERENCES ........................................................................................................................... 151

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LIST OF TABLES
Page
1. Breakdown of Companies used in Sample by Acquisition Year and Presence or Not of
Director Interlocks .............................................................................................................75
2. Breakdown of Companies used in Sample by SIC Code Classification ............................76
3. Example of Model Output from Regression Analysis of Acquisition Premium versus
Director Interlocks (Binary Variable) ................................................................................80
4. Example of Model Output from Regression Analysis of Acquisition Premium versus
Director Interlocks (Binary Variable), Relative Acquisition Size, Target Profitability, and
the Polynomial Term C1SQ of Relative Acquisition Size.................................................81
5. Acquisition Experience: Comparison of Outliers with Test Sample Statistics ..................81
6. Casewise Diagnostics for the Dependent Variable ROI ....................................................82
7. Tests of Normality for the Dependent Variable ROI .........................................................83
8. Firm “Return on Investment”: Comparison of Outliers with Test Sample Statistics ........83
9. Test Sample Descriptive Statistics and Bivariate Correlations..........................................85
10. Model Summary and Coefficients for Dependent Variable (Abnormal Return, Model) ..89
11. Normality Tests for the Dependent Variable: Abnormal Return (Model) .........................91
12. Model Summary and Coefficients for Dependent Variable (Abnormal Return, Market) .92
13. Normality Tests for the Dependent Variable: Abnormal Return (Market) ........................94
14. Result of Auto-correlation Test for Dependent Variable: Acquisition Premium ..............95
15. Result of Auto-correlation Test for Dependent Variable: Return on Investment (ROI) ...96
16. Result of Multi-collinearity Test involving the Dependent Variable: Acquisition Premium
............................................................................................................................................97
17. Result of Multi-collinearity Test involving the Dependent Variable: Return on Investment
(ROI) ..................................................................................................................................98
18. Normality Tests for the Dependent Variable: Acquisition Premium...............................100
19. Normality Tests for the Dependent Variable: Return on Investment (ROI) ....................102
20. Runs Test for the Dependent Variable: Acquisition Premium ........................................103
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21. a. Regression Analysis Output for Hypothesis 1 (Director Interlocks, Binary) ..............107
b. Regression Analysis Output for Hypothesis 1 (Director Interlocks, Continuous) ......108
22. a. Regression Analysis Output for Hypothesis 1: Dependent Variable Abnormal Return
(Model); Independent Variable Director Interlocks (Continuous) ..................................109
b. Regression Analysis Output for Hypothesis 1: Dependent Variable Abnormal Return
(Market); Independent Variable Director Interlocks (Binary) .........................................110
23. a. Regression Analysis Output for Hypothesis 2 (Director Interlocks, Binary) ..............111
b. Regression Analysis Output for Hypothesis 2 (Director Interlocks, Continuous) ......112
24. Regression Analysis Output for Hypothesis 3a ...............................................................113
25. Regression Analysis Output for Hypothesis 3b ...............................................................114
26. Regression Analysis Output for Hypothesis 4a ...............................................................116
27. Regression Analysis Output for Hypothesis 4b ...............................................................117
28. Summary of Hypotheses Test Results .............................................................................118

vii
LIST OF FIGURES
Page
1. a and b: Model showing imitation theory perspective of director interlock activity .........23
2. Model showing network theory perspective of director interlock activity ........................24
3. Research model showing linkages between director interlocks, acquisition premium and
post-acquisition performance .............................................................................................50
4. Histogram showing the distribution of the standardized residuals of dependent variable:
abnormal return (model) ................................................................................................... 90
5. Plot of regression standardized residual for dependent variable: abnormal return (model)
............................................................................................................................................90
6. Histogram showing the distribution of the standardized residuals of dependent variable:
abnormal return (market) .................................................................................................. 93
7. Plot of regression standardized residual for dependent variable: abnormal return (market)
............................................................................................................................................93
8. Histogram showing the distribution of the standardized residuals of dependent variable:
acquisition premium...........................................................................................................99
9. Plot of regression standardized residual for dependent variable: acquisition premium ..100
10. Histogram showing the distribution of the standardized residuals of dependent variable:
return on investment (ROI) ..............................................................................................102
11. Plot of regression standardized residual for dependent variable: return on investment
(ROI) ................................................................................................................................102
12. Revised research model showing linkages between director interlocks, acquisition
premium and post-acquisition performance.....................................................................119
13. Graph showing relationship between ROI and the two predictor variables (relative
acquisition size and director interlocks (continuous)) .....................................................124
14. Graph showing relationship between acquisition premium and the two predictor variables
(director interlocks and relative acquisition size) ............................................................129
15. Graph showing the moderating effect of acquisition experience on ROI ........................134

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CHAPTER I
INTRODUCTION
The motives for corporate mergers and acquisitions have been a subject for scholarship
for some time now. Researchers have largely sought to provide insights that aim to rationalize
their practice. In line with Haleblian, Devers, McNamara, Carpenter and Davison’s (2009)
characterization, this study refers to the term “mergers and acquisitions” as “acquisitions” and
will hereafter use both terms interchangeably. While conducting a review of the sub-field,
Haleblian et al. (2009), categorized the managerial motives of acquisitions into four broad
groups: value creation, managerial self-interest (value destruction), environmental factors, and
firm characteristics. Some studies have suggested that acquisitions that involve vertical
integration may be geared toward resolving strategic “make or buy” decisions (Harrigan, 1985),
in which firms seek to minimize the cost of transactions along their supply chain. Building on
transaction cost economics (Williamson, 1981), firms may decide to become vertically integrated
by acquiring business units for the purpose of providing certain goods and services in-house
instead of purchasing such items from others.
Amihud and Lev (1981) suggest that another managerial motive for conglomerate
mergers may be to diversify largely undiversifiable employment risk. Using the agency cost
model, they contend that because managers’ income (and employment) is closely related to the
firm’s risk, risk-averse managers are driven to diversify employment risk by engaging their firms
in conglomerate mergers. Such managers’ expectations are that acquisitions can generally
stabilize the firm’s income stream and, in some cases, help to avoid the ruinous effects of
bankruptcy. Therefore, while mergers may not be of benefit to investors, they may be useful in
helping managers reduce their employment risk.
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