Business Management

Research:
Practices How
Impact Management
M&A
Outcomes
by John Bai,
Wang Jin,
and Matthew Serfling
November 02, 2021

Illustration by Mark Harris; PM Images/Getty Images

Summary.   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

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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.

JB
John Bai is an Associate Professor of Finance at
Northeastern University. His research primarily
focuses on understanding internal firm
organization, mergers and acquisitions, and
linkages between firms’ financial,
organizational, and operating strategies. His
recent research investigates technology
adoption and uses textual analysis to
understand these issues.

WJ
Wang Jin is a research scientist at MIT
Initiative on the Digital Economy (IDE). His
research focuses primarily on the impacts of
emerging technologies and organizational
practices on firms’ productivity, employment,
and innovation capability using large-scale
proprietary data from the U.S. Census.
 MS
Matthew Serfling is an Associate Professor of
Finance at The University of Tennessee,
Knoxville. His research primarily focuses on
understanding how corporate decisions
interact with labor markets, other nonfinancial
stakeholders, and corporate governance
structures.