Creating value by combining two weak firms: the role of routine disruption in mergers and acquisitions

Abstract

I explore the conditions under which mergers of two poorly performing firms can create value and how such conditions behave differently in mergers including at least one well-performing firm. I argue that in mergers of poor performers, the greater the disruption of routines induced by the merger, the higher the post-merger performance. In this study, I conceptualize a merger as the combination of two firms' existing routines and propose that such a combination can provide the impetus necessary to break from the past by creating a new set of routines. When two weak firms merge, such a break from the past becomes desirable because the existing value creation system does not work properly and routine disruption becomes a necessary condition for deriving good post-merger performance. I test these ideas on a sample of M&As from multiple industries in the U.S. between 1994 and 2006. Using an industry-adjusted Tobin's q based on the "Chop-shop" approach as a criterion to classify firms into weak and strong categories, I find that disruption of routines is indeed desirable in mergers of poor performers while it should be minimized in mergers including a well-performing firm. This dissertation makes theoretical contributions by highlighting the role of a M&A in a firm's evolutionary process. It also has practical implications for managers and policymakers.