How much is that company worth?: interorganizational relationships, uncertainty and acquisition premiums

Administrative Science Quarterly,  Sept, 1994  by Pamela R. Haunschild

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The interorganizational transfer of routines, practices, and structures plays a central role in several theories of organizational action, but we have little knowledge of the mechanisms or conditions surrounding such transfers. Theories of organizational learning, for example, specify that organizations learn by observing and importing the practices of other organizations (Levitt and March, 1988; Lant and Mezias, 1990; Huber, 1991). Strategic choice theories discuss second-mover advantages, which result when competitors copy each other in a way that confers strategic advantage (e.g., Porter, 1980; Dutton and Freedman, 1985; Lieberman and Montgomery, 1988). Theories of imitation and institutional isomorphism specify that organizations adopt the legitimated practices, routines, and structures of other organizations (e.g., March, 1981; DiMaggio and Powell, 1983). Finally, the network and diffusion of innovation literatures focus on how organizational characteristics and network position affect the diffusion of practices among organizations (e.g., Rogers, 1983; Burt, 1987).

Researchers have recently begun to focus on the mechanisms through which transfers occur and to trace empirically the transfer of a specific practice or structure from one independent firm to another (Galaskiewicz and Wasserman, 1989; Davis, 1991; Mizruchi, 1992; Haunschild, 1993; Palmer, Jennings, and Zhou, 1993). This research all demonstrates the following: (1) that firm A does "X"; (2) firm B is exposed to firm A through some interorganizational linkage; and (3) later, firm B does "X." The "X"s studied are firm practices, structures, and major strategic decisions. The primary linkage studied is the director interlock. Davis (1991) showed that the likelihood of a firm adopting a poison pill (a firm-level defense against unwanted takeover) is increased when that firm is interlocked with other firms that previously adopted one. Haunschild (1993) showed that the number and types of acquisitions that firms do are affected by acquisitions their interlock partners did. Palmer, Jennings, and Zhou (1993) showed that firms were more likely to adopt the multidivisional form when interlocked with others that previously adopted it.

Overall, this research shows that interlocks act as a mechanism for the transfer of major practices and structures among organizations. Yet this focus on interlocks ignores the fact that firms have many other types of interorganizational relationships. Research on noninterlock relationships is just beginning to occur. Galaskiewicz and Wasserman's (1989) study, for example, showed that intercorporate acquaintanceship networks affected decisions involving who would receive corporate philanthropy. Other types of noninterlock relationships are also likely to act as a source of influence on firm practices (see Mizruchi, 1992; Palmer, Jennings, and Zhou, 1993). For example, many firms have relationships with professional organizations such as attorneys, accountants, and investment bankers. These relationships can be quite stable and long-lasting (Levinthal and Fichman, 1988) and are likely to have the same kinds of effects as directorships.

A second issue with the research to date is that much of the theory behind interorganizational transfers implies that uncertainty or ambiguity is the driving force behind such transfers. There is a long history of research on the effects of uncertainty on organizations. Most of this research focuses on the problems that uncertainty causes organizational decision makers and on the structural solutions to such problems (e.g., Dill, 1958; Lawrence and Lorsch, 1969; Duncan, 1972). Uncertainty has been shown to lead firms to take various actions designed to stabilize interorganizational transactions (Williamson, 1975, 1981; Pfeffer, 1972; Pfeffer and Salancik, 1978; Leblebici and Salancik, 1982) and buffer them from the problems of uncertainty. Yet uncertainty may have another effect. It may cause managers to look outside their own organizations and incorporate the routines, practices, and structures of other organizations in their field. Various social psychological and organizational theories support this idea. Neoinstitutional theorists say that uncertainty drives mimetic isomorphism, in which, organizations adopt the legitimated practices of others (DiMaggio and Powell, 1983). Festinger's (1954) social comparison theory states that uncertainty causes individuals to compare their behavior with that of relevant others and adjust accordingly. Decision-making theories propose that uncertainty causes firms to economize on search costs (Cyert and March, 1963). Imitating others is an efficient way to economize.

Taken together, these theories suggest that social information plays a bigger role under conditions of uncertainty. Uncertainty prompts an active search for models and information from others. I propose that interorganizational partners are a likely source of such models and information. Accordingly, the transfer of practices and structures through various interorganizational relationships should be more likely under conditions of uncertainty. To date, studies of interorganizational transfers have not included measures of uncertainty. By not measuring uncertainty, we are left with several unanswered questions about its effects. We don't know whether uncertainty is necessary for interorganizational transfers. If uncertainty is necessary, does the level matter? Are transfers more likely to occur with high uncertainty than low uncertainty? We also don't know whether uncertainty differentially affects the likelihood of transfers through various relationships. It is possible, for example, that uncertainty makes transfers from professional firms more likely than transfers from partners in cooperative relationships. Exploring these types of questions will lead to a better understanding of the conditions under which interorganizational relationships influence the adoption of practices and structures.