Managerial Overcommitment in Corporate Acquisition Processes

• Published in: Organization science (Providence, R.I.) R.I.), 1994-11, Vol.5 (4), p.528-540
• Main Authors: Haunschild, Pamela R, Davis-Blake, Alison, Fichman, Mark
• Format: Article
• Language: English
• Subjects: Acquisitions & mergers; Bidding; Boards of directors; Business strategies; Business structures; commitment; Commitments; Corporate acquisitions; Corporate mergers; Decision making; Due diligence; Economic competition; Enterprises; Income estimates; Managers; Mergers; mergers and acquisitions; Organizational behavior; Process management; Statistical analysis; Studies; Target acquisitions
• ISSN: 1047-7039; 1526-5455
• DOI: 10.1287/orsc.5.4.528

This study investigates a problem that may occur during corporate acquisitions: managers who become committed to acquiring a particular target firm, regardless of benefit to the acquiring firm. Three factors that may create commitment to a particular target were investigated: (1) personal responsibility for the decision to acquire the target, (2) competition for the target, and (3) whether the decision to acquire the target is public. These factors were varied in a simulated corporate acquisition where participants began an acquisition and then were given negative information about the target. They were later given the choice of continuing with the acquisition or withdrawing and investing elsewhere. As predicted, personal responsibility for the decision to acquire the target, competition for the target, and a public decision context all increased participants' commitment to acquiring the target, despite the negative information. Participant work and acquisition experience did not affect these results. Field studies of acquisitions suggest that commitment to acquiring a specific target occurs during the acquisition process. Since the acquisition process is a potentially important determinant of acquisition outcomes, commitment to targets has negative implications for these outcomes. This study adds a systematic empirical investigation of the determinants of commitment in acquisition situations. Studies in nonacquisition settings have demonstrated that personal responsibility affects commitment. However, the presence of competition has not previously been studied, and a public decision context has only been studied in a limited way. These are important factors in generating commitment to acquisitions. These results suggest that managers should recognize that overcommitment can and does occur during acquisitions. Further, the factors that cause overcommitment to targets have implications for managers who wish to avoid this commitment. Activities that should help avoid overcommitment problems include assigning target choice and due diligence activities to different individuals, and limiting news of impending acquisitions.