Mergers and acquisitions often have a pretty dreadful success rate, and one tactic firms deploy to try and improve their chances of success is to try and retain at least one board-level direct from the target company.  While there is a degree of logic to the strategy, it’s one that research from the University of Notre Dame suggests is not always that effective.

The idea behind the strategy is that staff from the acquired company struggle to really feel at home in the new firm.  What’s more, having directors move over can help with any cultural issues as the two companies come together, with both of these things undermining any possible synergies.  The logic is that as well as bringing across expertise from the acquired firm, it also signals to employees that the leadership has been valued.

Poor performance

Unfortunately, the reality is not quite so straightforward.  The researchers examined the performance of firms after they have bought another company and whether they had retained directors from the acquired firm.

“Across several time frames of post-acquisition performance, statistical techniques and different samples of acquisitions, we consistently find that director retention tends to undermine post-acquisition performance compared to firms that did not retain a director,” the researchers say.

In all, the researchers analyzed over 550 acquisitions that had taken place between 2004 and 2014.  Each of the acquisitions saw full control gained over the target firm.  The composition of the board of directors was assessed in each acquisition both before and after to understand whether any directors from the target firm were brought across.

They were particularly keen to understand whether retaining a director was linked to any long-term investor value appropriation, which is a measure that captures the value to shareholders.  They measured this one, two, three, and five years after the acquisition.

“In supplementary analyses, we also offer a preliminary look at factors which might enhance or suppress this relationship, which we hope opens the door for future research to gain a more comprehensive understanding of why this negative relationship exists,” the researchers explain.

Questioning the value of continuity

The authors question the merit of retaining directors from the target firm.  The analysis found that the buying firm is often hesitant in doing so but often acquiesce to help smooth the transaction in some way.  This is seldom an approach that ensures good results ensue, not least due to what this approach says about the power dynamic between the two firms.

“Although this component is exploratory in our study,” the researchers conclude, “we tentatively find that director retention might say more about the relatively stronger power of the target firm than the desires of the acquirer. Acquiring managers might not think twice about onboarding a new director, though, so we are hopeful our research encourages them to view requests from the target like this through a more critical lens.”