Too Big to Learn: The Effects of Major Acquisition Failures on Subsequent Acquisition Divestment
| Published date | 01 July 2015 |
| Date | 01 July 2015 |
| Author | Pierre‐Xavier Meschi,Emmanuel Métais |
| DOI | http://doi.org/10.1111/1467-8551.12101 |
British Journal of Management, Vol. 26, 408–423 (2015)
DOI: 10.1111/1467-8551.12101
Too Big to Learn: The Eects of Major
Acquisition Failures on Subsequent
Acquisition Divestment
Pierre-Xavier Meschi and Emmanuel M´
etais1
CERGAM, IAE Aix-en-Provence, Aix-Marseille Universit´
e and SKEMA Business School, Chemin de la Quille,
13 540, Puyricard, France and 1EDHEC Business School, 393 Promenade des Anglais, 06 202, Nice Cedex,
France (E-mail: emmanuel.metais@edhec.edu)
Corresponding author email: pierre-xavier.meschi@iae-aix.com
We examine whether firms learn from their major acquisition failures. Drawing from a
threat-rigidity theoretical framework,we suggest that firms do not learn from their major
acquisition failures. Furthermore, we hypothesizethat host-country experience reinforces
the negativeeects of major acquisition failures. Our research hypotheses are tested using
an event history analysis of 741 acquisitions undertaken by French listed and non-listed
firms in the USA between January 1988 and December 2008. We use failuredivestment
(divestment resulting from acquisition failure) as a proxy for acquisition performance.
Consistent with our theoretical framework, wefind that major acquisition failures have a
negative impact on future acquisition performance. Furthermore, wefind that such nega-
tive eects are reinforcedby fir ms’host-country experience.
Introduction
There is a general consensus that a significant
proportion of acquisitions fail (Papadakis and
Thanos, 2010; Schoenberg, 2006). Although
failures are considered an invaluable source of
learning (Cyert and March, 1963; Haunschild and
Sullivan, 2002; Lant, Milliken and Batra, 1992;
Madsen and Desai, 2010; March, 1981; Sitkin,
1992), prior research has not investigated this
issue in any depth in the context of acquisitions.
Many scholars have examined the relationship
between acquisition experience and acquisition
performance (Barkema and Schijven, 2008a;
Finkelstein and Haleblian, 2002; Haleblian
and Finkelstein, 1999; Hayward, 2002; In-
We are grateful to Stephanie Dameron and two anony-
mous reviewers for their outstanding feedback. Support
from EDHEC Executive Educationis acknowledged.We
also acknowledge the important conceptual and empiri-
cal insights from Philippe Very and Louis Hebert. Susan
Leclercq provided excellentediting assistance.
gram and Baum, 1997; Porrini, 2004; Zollo,
2009; Zollo and Singh, 2004) and, while this
stream of research gives us significant in-
sights into how firms learn from their acqui-
sition experience, the specific eects of past
acquisition failures on subsequent acquisition
performance have tended to be left to one side.
Only Hayward (2002), drawing from a small losses
rationale, finds that minor acquisition failures
improve the performance of the subsequent
acquisition.
However, the extant literature on organizational
learning shows that the way organizations learn
from their failures varies according to the mag-
nitude of the failure: while organizations appear
to learn eectively from their minor failures, they
seem less ecient when it comes to learning from
their major failures (Madsen and Desai, 2010;
Sitkin, 1992). Building on a threat-rigidity ar-
gument, several scholars thus posit that firms
do not learn from major failures (Sagan, 1993;
Sitkin, 1992; Staw, Sandelands and Dutton, 1981).
© 2015 British Academy of Management. Published by John Wiley & Sons Ltd, 9600 Garsington Road, Oxford OX4
2DQ, UK and 350 Main Street, Malden, MA, 02148, USA.
Too Big to Learn 409
This view contends that when organizations feel
threatened by a major failure they implement
well-established responses, thereby avoiding the
need to adapt or to search for new solutions. In
other words, they do not learn from their major
failures and tend to repeat the same course of ac-
tion, leading to poor future performance.
Despite this discrepancy in learning outcomes
between minor and large failures, to our knowl-
edge the specific learning eects generated by
major acquisition failures have not been inves-
tigated to date. Analysing such specific learn-
ing eects could contribute to the literature on
acquisition performance whose findings at present
remain mixed (Barkema and Schijven, 2008b;
Ellis et al., 2011). If, in keeping with prior liter-
ature on learning from failure, major acquisition
failures have a negative impact on future acquisi-
tion performance,then the magnitude of the acqui-
sition failure could be a crucial contingency fac-
tor that needs to be taken into account as it may
partly explain variations in subsequent acquisition
performance. This paper aims at filling this gap in
the literature.Drawing from a threat-rigidity ratio-
nale, we hypothesize a negative impact of a ma-
jor acquisition failure on future acquisition perfor-
mance. We examine this hypothesis using an event
history analysis of 741 acquisitions undertaken by
French firms in the USA between 1988 and 2008.
Furthermore, the literature on organizational
learning shows that the stock of a firm’sexperience
is a key moderator in learning from failures (Co-
hen and Levinthal, 1990; Haunschild and Sullivan,
2002; Madsen and Desai, 2010; Zollo and Reuer,
2010). Elaborating from the threat-rigidity frame-
work, we therefore hypothesize that host-country
experience reinforces the detrimental eect of a
major acquisition failure in the same country. In
other words, what a firm already knows about in-
vesting and managing a local subsidiary in a par-
ticular country reinforces its inabilityto learn from
a major acquisition failure in the same country.
The present paper contributes to four streams
of literature.First, it contributes to the acquisition
performance literature by showing that the mag-
nitude of an acquisition failure is a key contin-
gency factor in understanding whether a firm will
learn from it or not. The magnitude of the acquisi-
tion failure is defined here by the extent of the di-
vested acquisition’s financial losses. Second, it con-
tributes to the literature on learning from major
failures by confirming that the threat-rigidity ar-
gument is relevant in the context of acquisitions.
Third, it contributes to the international business
literature by showing that host-country experience
reinforces the negative impact of major acquisi-
tion failures in the same host country. Fourth,
we contribute to existing work on stock market
returns, accounting-based performance measures
and measures based on managerial perception by
focusing on acquisition divestment as an acquisi-
tion performance measure. Extant literature has
providednumerous definitions and measures of ac-
quisition performance (Cording, Christmann and
Weigelt, 2010; Zollo and Meier, 2008). Following
Bergh (1997), Montgomery and Thomas (1988),
and Nadolska and Barkema (2007), we consider
acquisition deals that were divested during a pe-
riod at risk due to poor post-acquisition outcomes
(e.g. failure of the integration process or poor eco-
nomic performance).
Theory development and hypotheses
Organizational learning theory stipulates that,
over time, firms accumulate experience which
helps to improvetheir performance (Levinthal and
March, 1993). By analysing the dierences be-
tween the expected outcomes of their decisions
and the real consequences of their successive ac-
tions, firms improve their routines by repeating
the actions that are more successful and limiting
the actions that produce negative results. The se-
lection process contributes to a gradual improve-
ment in performance (March, 2006). This the-
ory is empirically supported by research on the
experience curve (Argote, Beckman and Epple,
1990; Benkard, 2000; Darr and Argote,1995; Yelle,
1979).
Learning from failures
As a consequence, there is a general consensus that
organizations learn from their failures (March,
2006). Failures are critical and noticeable events
that organizations will analyse in order to im-
prove their performance. This view is widely ac-
cepted in the literature (e.g. Baum and Dahlin,
2007; Chuang and Baum, 2003; Iyer and Miller,
2008; Pangarkar,2009; Yang, Li and Delios,2006).
Failures are considered to be absolutely necessary
for learning (Lee et al., 2004). Haunschild and Sul-
livan (2002) and Sitkin (1992) even consider that
© 2015 British Academy of Management.
To continue reading
Request your trial