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Balance Between Information Gathering and Processing Affects Acquisition Performance

4/15/2004 --

Firms that achieve balance between their information-gathering and information-processing capabilities make more successful acquisitions.

ANN ARBOR, Mich. – Countless U.S. firms make acquisitions every year, but often the acquiring companies suffer from poor performance related to inadequate strategy, weak capabilities, overpayment for the target firm and poor integration.

Researchers at the University of Michigan Business School argue that the acquirer's abilities to collect and process information have an important influence on how well the firm performs during and after the acquisition of its target.

Jay Anand, assistant professor of corporate strategy and international business, and Ph.D. student Alexander Sleptsov propose that firms with high levels of both information-gathering and information-processing capabilities make better acquisitions than companies with low levels of these skills, other things being equal. At the same time, when one of these capabilities is low, increasing the other capability may lead to a further decline in the acquisition performance.

Information gathering refers to the organizational routines a firm uses to collect relevant external information on potential acquisition targets. Information processing is the way that the collected information is digested and turned into acquisition knowledge and decisions. Firms differ in their abilities to obtain and analyze transaction-specific data, and may choose different ways of structuring acquisitions, depending on how much information and knowledge they obtain. This, in turn, can lead to variations in performance.

"Every stage of the acquisition decision-making process is information intensive," Anand says. "Companies that possess superior acquisition information about suitable targets and knowledge of how best to structure and implement the acquisition can ensure the compatibility between their organization and the target firm in terms of strategic fit, capabilities, price and integration."

When either information-gathering or information-processing capability is at a low level, however, having a high level of the other capability may be harmful to the acquirer's performance, according to Anand and Sleptsov.

¿Low information-processing capability leads to inadequate decision rules that may restrict the amount of acquisition information the firm can use productively. This may result either in very slow decision-making or in fast, ill-advised decisions," Anand says. "On the other hand, low information-gathering ability causes a firm to consider acquisitions similar to those it made in the past, thus making the introduction of new decision rules less effective.¿

Information gathering and processing skills are interdependent and changeable, the researchers say, because information is a critical input for building organizational knowledge and because the effectiveness of information processing can influence a company's willingness to collect additional information.

For example, a firm with a high initial level of information-gathering ability will gradually develop more new decision rules. However, when the company has a high level of information-processing skill, the demand for new information may decline as the managers repeatedly seek information suitable for the sophisticated decision rules they already have. Eventually, that disincentive may lead to a long-term decrease in a firm's information-gathering capability, which can be detrimental.

For more information, contact:
Bernie DeGroat
Phone: (734) 936-1015 or 647-1847