Managerial Control in Mergers of Equals: The Role of Political Skill

Abstract

Academics across disciplines have long explored research regarding how power and status dynamics determine organizational outcomes (Child, 1972; Salancik and Pfeifer, 1974; Pfeifer and Salancik, 1978; Pfeifer, 1981; Richmond et al, 1983; Finkelstein and Hambrick, 1990; Abrahamson and Park, 1994; Thye, 2000). In mergers and acquisitions, scholars have examined how the struggle for power influences top management team (TMT) turnover (Walsh, 1988), acculturation (Nahavandi and Malekzadeh, 1988), pursuit of market power (Chatterjee, 1991), integration decisions (Haspeslagh and Jemison, 1991), and in the context of mergers of equals (MOE), how they can be better managed. MOE involve the merging of two large, related firms of similar size (Ellis et al., 2009). They require significant strategic and operational restructuring in order to blend the two involved legacy firms (Haspeslagh and Jemison, 1991). To do so, the retention and cooperation of TMTs is needed from both firms in order for the merger to be successful. I his is done to foster the cooperation of key employees in blending the firm and recognizing cross-organizational synergies (Graebner, 2004). However, MOE are predicated on a false premise that both firms will emerge equal partners in the new combination. Yet, that is rarely if ever true (Brew, 2014). As a result of the "friendly" merger transaction, the firms will often take on a combined company name, relocate headquarters, and reconfigure management to represent equal stakes in the new company. Through preliminary discussions, the firms' respective chief executive officers (CEOs) and TMTs will broker shared power agreements to distribute control. However, MOE oftentimes becomes a euphemism for the power struggles that subsequently ensue. Following the consummation of MOE, it often becomes clear that any equality was in name only. Executive infighting develops as each party to the exchange pursues their own firm agendas, ideals, and initiatives. Furthermore, it becomes clear that equality was never truly part of either firm's intent as the more dominant management team can emerge quite rapidly. For example, chairman of DaimlerChrysler, Jurgen Schrempp, later contended that he always saw Chrysler as being simply a division of Daimler and that a shared stake in the company was never his vision. This was evidenced by the exodus of Chrysler's managers along with their prompt replacement with German counterparts (Landler, 2005). Similarly, misrepresentation prior to the AOL-Time Warner merger of equals led to a power struggle that helped provoke shareholder value destruction totaling over $200 billion. This led to the sell-off of AOL by Time Warner several years later (Davidolf, 2009; Perez-Pena, 2009). Using power and status theory, this study contends that political skill and power differences between the merging firms' CEOs predict who prevails as the controlling party. Power is defined as a property of a social relationship, where one party holds authority over another (Emerson, 1962). Power allows those who hold it (e.g., CEOs) to assign directives and mobilize resources toward desired objectives. Conversely, political skill is a relatively static personality trait. It is defined as an individual's ability to understand others and use this knowledge to act in a manner that benefits personal and organizational objectives (Ferris, Treadway et al., 2005). This type of social savvy is ideal in group settings, allowing individuals to accomplish goals in a seamless matter that fosters cooperation (Ferris et al, 2007). In focusing on political skill, this study aims to evaluate political skill at the organizational level and answer the call of recent research to focus on specific dimensions of political skill (Ferris et al., 2012; Kimura, 2014). Accordingly, the study focuses on two of its four dimensions that extant work suggest are particularly important to managerial effectiveness, social astuteness and networking ability (Ferris, Treadway et al. …