Research: How Management Practices Impact M&A Outcomes


Illustration by Mark Harris; PM Images/Getty Images

How do a firm’s management practices influence outcomes when it comes to mergers and acquisitions? A recent study leveraged U.S. Census data to quantify the extent to which more than 35,000 manufacturing plants employed structured management practices, and found that firms with more-structured management were more likely to become acquirers, while those with less-structured management were more likely to be acquired. They also documented a strong spillover effect: After an acquisition, the target company tended to adopt more-structured management practices more similar to those of their acquiring company. In addition, the researchers found that more-structured management practices correlated with stronger performance in a number of financial success metrics, suggesting that investing in these practices can be an effective strategy for any company to improve business outcomes.

Common wisdom suggests that good management is good business — but actually quantifying the impact of management practices on key business outcomes such as M&As and financial performance is often easier said than done.

To address this challenge, we leveraged data from the U.S. Census Bureau’s 2010 Management and Organizational Practices Survey (the most recent edition available when we began our study). The survey quantified management practices at more than 35,000 U.S. manufacturing plants, providing a level of visibility into the inner workings of these companies that is difficult to come by in other industries. While management is extremely subjective and difficult to measure, this survey used a series of rigorous questions to determine how structured the company’s management practices were, looking at areas such as the extent to which managers consistently tracked employee performance, whether they used that data to improve their practices, how production goals were set, and whether managers were employing standardized incentive systems. For example, survey questions included:

  • How many key performance indicators (KPIs) were monitored at this establishment?
  • What best describes the time frame of production targets at this establishment?
  • What were non-managers’ performance bonuses usually based on?

In general, we defined more-structured management practices as those that were more specific, formal, frequent, or explicit. We converted the qualitative multiple-choice answers to each of the survey questions to numerical values between 0 and 1 to reflect the extent to which that answer suggested the company followed more-structured practices. For example, responses to the question “What best describes what happened at this establishment when a problem in the production process arose?” were: i) No action was taken, ii) We fixed it but did not take further action, iii) We fixed it and took action to make sure that it did not happen again, and iv) We fixed it and took action to make sure that it did not happen again, and had a continuous improvement process to anticipate problems like these in advance. In this example, responses (i) to (iv) received values of 0, 1/3, 2/3, and 1, respectively. This allowed us to define numerical scores for each plant’s performance in each of the survey questions, which we then averaged to calculate an overall management score.

Next, we used the U.S. Census’ Longitudinal Business Database to track mergers, acquisitions, and partial ownership transfers (when a firm only acquires a subset of a target’s plants) for the companies included in the management practices survey. This database also included information on sales, employee counts, and assets at each plant, enabling us to measure plant-level performance and productivity with more granularity than traditional metrics such as stock prices or net profits. We also looked at a metric we call “normalized value added”; that is, the value of a plant’s outgoing shipments minus its labor and material costs — similar to traditional measures of profitability.

So, what did we find? First, even after controlling for productivity, firms with a one standard deviation higher management score were 7.5% more likely to become acquirers, while plants with a one standard deviation lower management score were 2.8% more likely to become targets of an acquisition. In other words, companies with more-structured management practices were more likely to acquire companies with less-structured management practices.

We also observed a “spillover effect,” meaning that after companies with more-structured management practices acquired plants with less-structured management practices, the target plants began to adopt more-structured management practices, making their practices look more similar to those of their acquirers. Specifically, we found that plants’ management scores increased by an average of 26% after they were acquired. Moreover, we found that this effect held true both for overall management scores, and for scores in individual types of management practices such as KPI monitoring, goal-setting, and incentive practices.

Second, our analysis revealed that when a target plant was acquired and began to adopt more-structured management practices, they often exhibited improved performance in a number of productivity and value-added metrics, suggesting that acquisitions can often lead to strong, positive business outcomes for the acquired plant. For example, for plants whose management scores increased by one standard deviation following their acquisition, productivity increased by an additional 3.3%, while value added per employee, value added per worker-hour, and profit margins increased by an additional 3.13%, 4.19%, and 1.16% respectively.

To be sure, the M&A integration process is seldom without its challenges. Different cultures and norms bump up against each other, power structures are realigned, and even core values at the two organizations can sometimes feel at odds. But our findings emphasize the huge potential of management spillover effects to add value and improve practices at the target company. Moreover, our research suggests that even without a merger to catalyze improvements, developing more-structured management practices can help any company add value and improve business outcomes across a wide variety of success metrics.


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