Resource-based theory and mergers and acquisitions*

A senior manager at a major US corporation was recently overheard describing how her firm had successfully ‘snatched’ a strategically important acquisition from a bevy of competing firms. Her enthusiasm for this acquisition was contagious. Not only did this acquisition add economic value to her firm in the short term, she argued, it also created important long-term strategic advantages. This manager’s enthusiasm reflects the widespread belief, among managers and academics alike, that merging with or acquiring strategically related firms can increase the economic value of successful bidding firms (Salter and Weinhold 1979). A great deal of effort has gone into describing the sources of strategic relatedness that exist between a bidding and target firm (Lubatkin 1987; Singh and Montgomery 1987), and how this relatedness is translated into economic profits for the shareholders of bidding firms once an acquisition is completed (Haspeslagh and Jemison 1987). This ‘relatedness hypothesis’ in mergers and acquisitions has not gone untested. Unfortunately, results are not consistent with these managerial or academic expectations. Lubatkin (1987), for example, found no significant difference in returns to bidding firm shareholders for strategically related and unrelated acquisitions. Also, Singh and Montgomery (1987), despite controlling for the type and degree of strategic relatedness between bidding and target firms, found that these acquisitions did not generate superior returns for shareholders of bidding firms. Singh and Montgomery (1987) did find that the shareholders of related target firms obtain higher profits than the shareholders of unrelated target firms. Indeed, the results of numerous studies, reviewed in Porter (1987) and Jensen and Ruback * This chapter draws from Barney (1988).