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Caveat Venditor: In company acquisitions, sellers prove much more trusting than buyers, study finds

June 1, 2009

For more information, contact: Benjamin Haimowitz,

In the sphere of corporate acquisitions, trust is widely viewed as a medium in which symmetry rules, trust on one side being thought to evoke trust on the other. Mutual trust would seem essential to the success of an acquisition, after all, given that the two firms will soon be one.
Yet, now a new study in the Academy of Management Journal finds this symmetry to be a myth. Even in completed acquisitions, trust on one side frequently is met by distrust on the other, and trust turns out to be much more important to sellers than buyers, much to the detriment of the former.
"The best advice for sellers may be to retain their skepticism," writes the author of the new research, Melissa Graebner of the University of Texas at Austin. "Rather than relying on trust, a seller may be better off exercising an abundance of caution."
Considering the importance that entrepreneurial sellers assign to trust, though, that may be more easily said than done, the study implies, even though the financial as well as emotional pain that entrepreneurs experience when trusted buyers fail to keep their word can be quite considerable.
Meanwhile, executives who believe themselves skilled at discerning the trustworthiness or trustfulness of a potential buyer or seller turn out to be wrong almost as often as they are right. "Firms' assessments of whether they were trusted by their counterparts were frequently mistaken," the study finds. "This was particularly true for sellers, who often believed they were trusted by their buyers when the opposite was true."
Why are companies that buy companies less trusting than the firms they acquire -- and more inclined to deceive and cheat? Size may have something to do with it, buyers generally being larger than sellers. But perhaps even more important, Prof. Graebner writes, is that "in the course of an acquisition, sellers lose power while buyers gain power...Given their prospects of heightened power, buyers viewed a seller's trustworthiness as nonessential."
For sellers, in contrast, trust is akin to a psychological imperative. As Prof. Graebner writes, "Sellers face the risk that the buyers will impose practices and strategies on the acquired firm, replace acquired managers, change leadership succession plans, or even close the acquired firm entirely." Those possibilities might plausibly make sellers extremely inclined to caution; instead it seems to have the opposite effect, inclining them to trustfulness that often turns out to be misplaced.
"It isn't that the sellers in our study were forced to sell to a particular buyer," explains Graebner. "What was an imperative for sellers, though, was trust. At the very outset of the acquisition process, the screening phase, sellers eliminated distrusted partners, while buyers did not.This creates a fundamental asymmetry in which most sellers trust their buyers but most buyers distrust their sellers."
This asymmetry, she found, continues through successive phases of the acquisition process, perhaps most strikingly in the legalization phase, the period between signing an agreement in principle and closing the deal. "Buyers," she writes "typically took advantage of this opportunity, conducting extensive due diligence and developing deal terms such as escrow periods that protected the buyer if target leaders had behaved deceptively." In contrast, half the sellers "did not describe taking any steps to safeguard against a buyer's possible dishonesty," even though the average value of the deals Graebner investigated was $175 million.
Why the difference? "A partial explanation," Graebner writes, "is that sellers were smaller firms with limited resources to expend investigating buyers." But, small though they were, she continues, these firms "did have the assistance of high-caliber attorneys and experienced investors, many of whom gave cautionary advice. Yet sellers often did not heed the advice that these counselors provided...Unlike buyers, they believed they were dealing with trustworthy parties...Due diligence and contractual safeguards simply did not seem necessary to sellers when dealing with trusted buyers."
Given the comparatively little importance assigned by buyers to trust, it is hardly surprising that they revealed a much greater tendency than sellers to deceive and cheat. While some of the sellers studied by Graebner practiced what she calls "negotiation-related bluffing," (such as misleading a buyer about competing offers), none engaged in material deceptions that went beyond such bluffing -- for example, misleading a buyer about the status of product-development efforts or the intentions of key personnel to remain with the firm after acquisition. In contrast, buyers did engage in material deceptions, "misleading sellers about post-integration plans such as layoffs, relocation of personnel, changes in strategic direction or diminished roles for senior managers."
How did the buyers justify such conduct? In all cases of material deception, the buyers believed correctly that sellers trusted them but said they did not trust the sellers. "Psychological research suggests that a fear of exploitation provides a moral justification for deception," Prof. Graebner writes. "Facing the combined forces of temptation and fear, [the buyer's] leaders engaged in material deception."
Another excuse buyers offered for material deceptions was, in Graebner's words, "that financial incentives would be sufficient to assuage any post-deal disappointments for the seller," an assumption, Graebner observes drily, that "did not always prove to be accurate."  She adds: "Even if buyers felt that material deception was morally justifiable, it would seem to be a poor strategy for retaining and motivating acquired employees."
In illustration, she cites the words of an executive of an acquired company, outraged that an important promise by the buyers had been violated. "Me big geek," he told Graebner. "I'm a technologist. I want to build something that I want everyone to use and tell me how wonderful I am. I want my ego boost! I'm not here for a quick buck, I'm here to do my big thing." Many executives of that acquired company left their jobs after the deal's completion, Graebner notes, quoting an executive of the buyer firm that "the acquisition obviously was a disaster."
The study's findings derive from an in-depth investigation, including 80 interviews of 60 to 90 minutes each, of eight acquisitions that were brought to completion and four that were not. The sellers were from four industries -- networking hardware, communications software, financial software, and online commerce -- and all acquisitions involved the purchase of 100% of the target's equity. There were six publicly-traded and two privately-held buyers, which had from 150 to 50,000 employees. In contrast, sellers ranged in size from 20 to 335 employees. Graebner notes that,  although "no questions were specifically asked about trust, deception, or related issues...those topics emerged unprompted in informants' discussions of the pros and cons of various potential partners and their descriptions of the negotiation process."
The new study, entitled "Caveat Venditor: Trust Asymmetries in Acquisitions of Entrepreneurial Firms," is in the June/July issue of the Academy of Management Journal.  This peer-reviewed publication is published every other month by the academy, which, with more than 18,000 members in 103 countries, is the largest organization in the world devoted to management research and teaching. The academy's other publications are the Academy of Management Review, Academy of Management Perspectives and Academy of Management Learning and Education.
Media Coverage: Buyers Are Liars. (Wednesday, July 22, 2009).
Mergers and Acquisitions Journal. Who to trust?. (Tuesday, September 01, 2009). Sellers beware: Study finds distrust in buyers. (Wednesday, June 24, 2009).

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