Using CEO Succession to Integrate Acquired Organizations: A Contingency Analysis
| Author | Shoou‐Yih Daniel Lee,Jeffrey A. Alexander |
| Date | 01 September 1998 |
| Published date | 01 September 1998 |
| DOI | http://doi.org/10.1111/1467-8551.00083 |
Introduction
Related acquisition involves the purchase and con-
solidation of firms in the same or related product
markets (Ansoff and Weston, 1962; Chatterjee,
1992; Datta, 1991; Datta and Grant, 1990; Harrison
et al., 1991). Research has shown that about half
of related acquisition activities fail to achieve ex-
pected economic and synergistic benefits (Fairburn
and Geroski, 1989). Such failures have been attrib-
uted to the inability to effectively integrate newly
acquired organizations (Cartwright and Cooper,
1993). Although there is a growing interest in
post-acquisition integration, our understanding
of how integration is actually pursued remains
limited.
This study provides an empirical test of the
relationship between related acquisition and one
such integration strategy – CEO succession in
acquired firms. We maintain that the probab-
ility of CEO succession is high when all or a
majority share of an organization’s assets are
acquired (through purchase, exchange or gift) by
a suitor company. In such a situation, the acquirer
may encourage CEO succession as an integrative
mechanism to introduce its values, strategic pri-
orities and operational procedures into the
new subsidiary. However, it is unlikely that CEO
succession will occur in all acquired firms; there
may be conditions under which retaining the
acquired CEO may facilitate the goals of related
acquisition (e.g. the CEO’s knowledge of the
acquired firm may be needed during the inte-
gration phase of acquisition). In this study, we
focus on two organizational conditions that may
moderate the relationship between related acqui-
sition and CEO succession: the need for inte-
grative action and power of the acquired
organization. These arguments are explicated in
a theoretical model and tested with longitudinal
panel data on all US community hospitals from
1980 to 1988.
The study enhances understanding of post-
acquisition CEO succession in three respects. First,
British Journal of Management, Vol. 9, 181–197 (1998)
Using CEO Succession to Integrate
Acquired Organizations:
A Contingency Analysis
Shoou-Yih Daniel Lee and Jeffrey A. Alexander*
Department of Sociology, University of Illinois at Chicago, 1007 W. Harrison Street, Chicago, IL 60607-7140 and
*Department of Health Management and Policy, School of Public Health, The University of Michigan,
109 Observatory, Ann Arbor, MI 48109-2029, USA
The study proposes that organizations engaged in related acquisition may encourage
CEO succession as a mechanism for integrating acquired organizations. Further, we
suggest that the risk of CEO succession at the time of acquisition will vary based on
the need for integrative action and the power of acquired organizations. Results show
that CEO succession is more likely when the participating organizations have incom-
patible types of ownership and when acquired CEOs have longer tenure than their
counterparts. Conversely, the probability of CEO succession is lower among larger
acquired organizations. Performance of the acquired organization does not affect the
relationship between related acquisition and CEO succession.
© 1998 British Academy of Management
conceptualizing CEO succession as an integrative
strategy complements the prevailing contention
that takeovers serve as a disciplinary mechanism
for weeding out ineffective management (Jensen,
1986; Varian, 1988; Walsh and Seward, 1990). Sec-
ond, most previous research has been concerned
with the main effect of acquisition on CEO succes-
sion. Our study identifies factors that condition the
likelihood of succession among CEOs of acquired
organizations. Such analyses not only improve our
understanding of the dynamics of acquisition but
also demonstrate the critical role that CEOs play
in acquisition processes. Third, our study tests
how acquisition-related CEO succession occurs in
a population dominated by non-profit organiza-
tions. These analyses may therefore extend the
generalizability of previous acquisition research
on public, for-profit companies to the not-for-
profit sector.
Related Acquisition and Integration
Research on acquisition has commonly taken a
financial market approach (Hill and Hoskisson,
1987). This approach views related acquisition as
driven primarily by potential economic synergy. It
is assumed that synergy can be accomplished by
merging previously independent firms (Chatterjee,
1992; Datta, 1991; Datta and Grant, 1990; Harrison
et al., 1991).
The financial market perspective points to the
underlying motivation and potential economic
consequences of consolidation among com-
panies. However, it tends to overlook the import-
ance of integration after the transaction occurs.
Unlike conglomerate acquisition that aims to
enhance the financial position of the parent
corporation by incorporating firms in different
businesses, related acquisition focuses on en-
hancing the overall viability of the corporation
through combining the operations and structures
of similar, but previously independent, organ-
izations (Datta and Grant, 1990; Singh and
Montgomery, 1987). For example, a hospital may
acquire other hospitals in the same or adja-
cent service areas to achieve economies of
scale, to avoid costly duplication by offering
complementary services, or to form an inte-
grated health-delivery system with hospitals
providing different levels of care. Even if ser-
vices are not allocated rationally among the
facilities, management may be integrated to
solve problems posed by common regulatory and
market environments (Finkler and Horowitz,
1985). To achieve such synergistic benefits, it is
often necessary to transform and integrate
acquired companies in a manner consistent with
the corporation’s strategic policies (Buono,
Bowditch and Lewis, 1985; Datta, 1991; Pablo,
1994). Such transformation involves learning of
new organizational behaviours and adjustment to
a new corporate environment, and may also
require unlearning of the acquired organization’s
past practices so as to create an atmosphere for
capability transfer (Haspeslagh and Jemison,
1991; Hedberg, 1981).
Drawing on findings of CEO succession studies,
we suggest that when the need for integration is
high, acquiring firms may encourage succession
among acquired CEOs to facilitate integrative
changes during related acquisitions. The argument
is based on a well-established finding that CEO
succession creates opportunities for organizational
change (Meyer, 1978; Miller, 1993). Due to the
CEO’s visible position and symbolic function in
maintaining organizational stability (Pfeffer, 1981),
change in this top leadership position is likely to
facilitate dissolution of the acquired organization’s
boundaries, making it easier for the acquirer to
introduce suggested change. Furthermore, CEO
succession can signal the beginning of a new era
for the organization and may produce a symbolic
motivation for members of acquired organizations
to alter long-standing decision-making premises
(Hedberg, 1981; Miller, 1991; Pfeffer, 1981), thereby
increasing the capacity for learning new organ-
izational practices.
Although these arguments imply that the acquir-
ing firm may strategically force out an acquired
CEO, dismissal does not represent the only way
to replace the incumbent CEO. Acquirers, for
example, may act to evoke feelings of isolation
among acquired CEOs, thus encouraging CEOs
to resign voluntarily during acquisition (Hambrick
and Cannella, 1993); or CEOs of acquired organ-
izations may anticipate forthcoming dismissal
and quit before they are fired. Whether or not
the succession is voluntary or involuntary, depart-
ure of acquired CEOs creates ‘a vacuum of
power’ that enables intervention by acquiring
firms. Hence, from the acquirer’s perspective,
both types of succession represent an opportunity
to transform and integrate a new subsidiary
182 S.-Y. D. Lee and J. A. Alexander
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