Determinants of successful acquisition processes in the US lodging industry

Hospitality Management 18 (1999) 285}307

Determinants of successful acquisition processes in the US lodging industry Kyung-Hwan Kim *, Michael D. Olsen
Department of Hotel and Restaurant Management, Kyonggi University, San 94-6 Yiui-Dong, Paldal-Gu, Suwon, South Korea 442-760
Department of Hospitality and Tourism Management, Virginia Polytechnic Institute and State University, 362 Wallace Hall, Blacksburg, VA 24061-0429, USA

Abstract The objective of this study was to uncover the critical success factors that have signi"cant value-added impacts on corporate acquisitions in the lodging industry. The "ndings of this study indicate that the most important acquisition objective for acquirers in the lodging industry is to accelerate the growth of their "rms. One of the most signi"cant "ndings of this study was that hotel executives gave relatively higher importance to pre-acquisition management strategy than to the post-acquisition integration process. In terms of post-acquisition performance evaluation criteria, measures from a value-based management (VBM) approach received the highest rank in evaluating the economic gains of corporate acquisitions in the lodging industry.  1999 Elsevier Science Ltd. All rights reserved. Keywords: Corporate acquisitions; Acquisition process; Lodging industry; Critical success factors

1. Introduction Corporate acquisitions represent part of a corporate/business strategy used by many "rms to achieve various objectives. For example, acquisitions can be used to penetrate into new markets and new geographic regions, gain technical/management expertise and knowledge, or allocate capital. In order to survive and grow, business organisations often utilize mergers and acquisitions strategically. However, many poorly understood and managed acquisitions result in disappointing performance,

* Corresponding author. Tel./fax: #82-331-249-9531. E-mail addresses: [email protected] (K.-H. Kim), [email protected] (M.D. Olsen) 0278-4319/99/$ - see front matter  1999 Elsevier Science Ltd. All rights reserved. PII: S 0 2 7 8 - 4 3 1 9 ( 9 9 ) 0 0 0 2 8 - 6

286

K.-H. Kim, M.D. Olsen / Hospitality Management 18 (1999) 285}307

and up to 50% are regarded as generally unsuccessful (Business Week, 1985; Louis, 1982). Moreover, according to Mercer Management Consulting (Cited in Smith and Hershman, 1997), in the 1990s the success rate of corporate acquisitions is barely 50% and in the 1980s, 57% of acquisition deals failed. To date, US corporations utilize acquisitions as one of the most frequently selected instruments for growth. Sophisticated and systematic corporate acquisitions research can help acquirers' pre-acquisition understanding and post-acquisition performance, as well as in achieving other acquisition objectives. However, Sirower (1997) stated that, `despite a decade of research, empirically based academic literature can o!er managers no clear understanding of how to maximize the probability of success in acquisition programsa (p. 13). Understanding the sources and/or determinants of value creation or value loss is vital to comprehending the causes of success and failure of corporate acquisitions. The unprecedented wave of corporate acquisition activities has radically changed the lodging industry's competitive landscape. In the area of corporate acquisitions in the United States, 1997 was a historic year representing a total of 11,029 deals. In good economic conditions that allow steady growth, low in#ation, low interest rates, and a bullish stock market, acquisition activities proliferate in all sectors of the industry (The Economist, 1998). According to Securities Data Co. (1998), the total value of US domestic acquisition deal announcements reached $908 billion, representing a 47% increase over the total for 1996, which itself was a record year. The lodging industry was one of the most active industry sectors for acquisitions during 1997. The lodging industry occupied some 3.8% of the total volume of acquisition deals in 1997 (Securities Data Co., 1998). In 1997 alone, the lodging sector's total amount of acquisition deals, both announced and pending, reached some $43.4 billion (Coopers and Lybrand Lodging Research Network, 1998). Despite the importance of mega-trends, relatively little research on determinants of successful acquisition has appeared in the lodging industry literature. Moreover, relatively little has been done in terms of formulating a multi-dimensional framework addressing mergers and acquisitions. In previous research about corporate acquisitions, most studies (Barney, 1991,1988; Bradley et al., 1983; Cannella and Hambrick, 1993; Cartwright and Cooper, 1993; Chatterjee, 1992,1986; Datta et al., 1992; Loughran and Vijh, 1997; Martin and McConnell, 1991; Napier, 1989; Pablo, 1994; Ravenscraft and Scherer, 1988; Schweiger and DeNisi, 1991; Trautwein, 1990; Walter and Barney, 1990; Weber, 1996) have attempted to discover evidence about a part of the whole acquisitions process, such as motives or objectives of acquisition, post-acquisition performance, either stock returns or operating performance, sources of shareholder wealth in corporate acquisitions, in#uences on post-acquisition integration, and others. These previous studies have investigated the above corporate acquisition issues within uni-dimensional frameworks, i.e., one issue at a time. Instead, this study adopted an integrated and holistic viewpoint that includes the most critical corporate acquisition issues simultaneously and in a multi-dimensional framework. The purpose of this study is to "ll some of these gaps. That is, to uncover the determinants of successful acquisitions through adopting a process perspective. Jemison and Sitkin (1986) stated that the acquisition process itself has the most

K.-H. Kim, M.D. Olsen / Hospitality Management 18 (1999) 285}307

287

important role in determining acquisition activities and outcomes. This study attempted to determine the most important, in#uential factors that have signi"cant, valueadded impacts on corporate acquisitions in the lodging industry. Speci"cally, the study attempted to systematically discover evidence about the determinants of a successful pre-acquisition management process, and the determinants of successful postacquisition integration, as well as the identi"cation of appropriate evaluation criteria for determining the post-acquisition performance of an acquisition deal. In addition, this study tried to identify important acquisition objectives of hotel acquirers.

2. Methodology In order to organize and prioritize the collective judgement of a group of practitioners and specialists about corporate acquisition issues in the lodging industry, the Delphi technique was employed as a primary method that involved iterative surveying of the same group. Delphi can be de"ned as `a method for structuring a group communication process so that the process is e!ective in allowing a group of individuals, as a whole, to deal with a complex problema (Linstone and Turo!, 1975, p. 3). The unit of analysis of this study was the overall acquisition process. The overall acquisition process identi"ed for this study was classi"ed into three stages, including pre-acquisition management, post-acquisition integration, and post-acquisition performance evaluation. Again, the acquisition process itself has a crucial role in deciding the success of the acquisition deal (Jemison and Sitkin, 1986). In this study, the overall acquisition process is constituted of a total of "fteen dimensions, each consisting of one to nine items, with a total of 60 items. Each dimension's de"nition is given in Table 1. The "fteen dimensions (and the number of items used to measure each) were: intent (6 items); information (9 items); value (5 items); price (3 items); approach in the pre-acquisition phase (6 items); approach in the post-acquisition phase (7 items); people (5 items); culture (4 items); organisation (4 items); strategy (4 items); accounting pro"ts (1 item); stock returns (2 items); market share (1 item); operating e$ciency (1 item); and cash #ow (2 items). In order to achieve this study's objectives, more than 300 operational indicators were initially identi"ed from the general M&A literature. Following discussions with the advisory board, the variables were reduced from more than 300 to 60, in the process of developing the survey instrument. Then, assistance was sought in the form of a Delphi panel, from a group of M&A practitioners and specialists in order to identify other important variables and to rate diverse critical success factors in the corporate acquisitions process for the lodging industry. The procedure was to distribute the initial 60 operational indicators and ask the respondents to rate these variables according to their importance (or relevance). In each succeeding round, participants received feedback in the form of their own previous responses and any statistical or other data describing the entire group. This enabled the participants to rea$rm original opinions, alter some, and/or add new items to the original list. It is believed that the Delphi technique leads to consensus on major points, as well as identi"es minority opinions.

288

K.-H. Kim, M.D. Olsen / Hospitality Management 18 (1999) 285}307

Table 1 De"nitions of the "fteen dimensions in the integrated/incremental approach model Dimension

Intent Information Value Price Approach

Approach People Culture Organization Strategy

Accounting pro"ts Stock returns Market share Operating e$ciency Operations cash #ow

De"nition Pre-acquisition management: Concerns the time period before the deal is done A set of motives and/or objectives to undertake the purchase of a competitor or a business A wide variety of facts and data necessary to maintain and reinforce a purchasing decision The worth of an acquisition deal created mainly from anticipated synergistic bene"ts of the combining company A payment of necessary capital to acquire a target company or a business A variety of surrounding procedures to persuade the target "rm to "nalize an intended acquisition deal Post-acquisition integration: Concerns the time period after the deal is done A variety of surrounding procedures to reconcile a pre-determined acquisition intent to the target "rm, while minimizing problems and obstacles A group of the merging company's organizational members, who have either positive or negative perceptions toward an acquisition deal A set of important assumptions, such as norms, value and politics, that members of an organization share in common A wide variety of organizational con"gurations, including formal and informal structures, systems, and processes A set of consistent alignment e!orts to achieve long-term goals of the merging company based upon the acquisition intent Post-acquisition performance evaluation: Concerns whether or not the deal is successful A set of conventional measures of "nancial performance (i.e., ROE, ROI, Pro"t margin, etc.) The acquiring "rm's stock price changes either surrounding acquisition announcement date or certain periods of time after the deal is announced The ratio of sales revenue of the combined "rm to the total sales revenue of all "rms in the particular industry, including the merged "rm itself Value-added gains from realized synergies, including operational and managerial synergies Sales, minus cost of goods sold and selling administrative expenses, plus depreciation and goodwill expenses

To test the reliability of the survey instrument developed in this study, an alpha measure for all the 68 variables, or items, was calculated. Second, a measure for each phase (objective, pre-acquisition management, post-acquisition integration, and post-acquisition performance evaluation) was calculated to check for internal consistency. Table 2 presents the results of these tests. In general, the internal consistency of the survey instrument is su$cient if Cronbach's alpha values are 0.80 or higher. As can be seen from Table 2, the overall coe$cient alpha was more than the suggested guideline, even though two sub-divisions' measurements were noticeably lower. In this study, all variables in the survey instrument rated more than 2.00. That is, in terms of the aggregated value, all variables were considered by the Delphi panel either

K.-H. Kim, M.D. Olsen / Hospitality Management 18 (1999) 285}307

289

Table 2 Reliability coe$cient for the integrated/incremental acquisition process instrument Scale

Cronbach's alpha value

Acquisition intents/objectives The pre-acquisition management phase The post-acquisition integration phase The post-acquisition performance evaluation Overall scale

0.4696 0.8199 0.8522 0.5943 0.8888

as slightly important (or relevant) or above (scale 2 or above). No variable in the study was considered as unimportant or irrelevant. In other words, no variable was rated as 1 on the scale. This face validity is achieved by a thorough M&A literature review and advisory members' advice on their discipline areas about M&A issues. The present study employed multiple informants. As Neuman (1994) stated, if a study has identical measurements from diverse sources, it may achieve greater validity than another study employing a single source or similar sources. Therefore, by adopting multiple informants, which consisted of hoteliers and non-hoteliers, this study improved measurement validity. Moreover, one of the important characteristics of the Delphi is its iterative nature that leads to ensuring the validity of the instrument. Through iterative rounds of the Delphi, the initial survey instrument was well supported and validated by the Delphi panel. This study is the "rst to investigate the acquisition process in the lodging industry. Thus, based upon this study's outcome, further studies may improve validity issues. The group of respondents consisted of senior o$cers of hotel "rms, industry consultants, and M&A specialists in investment banks as a group of respondents. In terms of the panelists' positions in their organizations, all hoteliers (14) who participated in this study were directly subordinate to the CEO or were at least vice presidents of large US lodging "rms. The non-hoteliers were either industry consultants in the hospitality divisions of two big accounting "rms, or hotel industry experts in investment banks (see Table 3). The total of 14 respondents represents nine US lodging "rms. As of the end of 1997, of these nine lodging organizations, six were C-Corporations and three were lodging REITs. The total number of hotel properties accounted for by the participating nine lodging "rms was 3940 hotel/motels, while their total number of employees reached 216,959 people. Their total sales revenue in the "scal year of 1997 was approximately $16.7 billion. The nine participating lodging "rms' in this Delphi study had a total market capitalization of 27.6 billion as of June 5, 1998. The nine lodging acquirers participating in this study have experienced at least one or more company-to-company acquisitions over the last "ve years. These nine "rms represent the most active acquirers over the past "ve years in the lodging industry. For example, based upon publically available information on lodging industry corporate acquisitions since 1996, nine acquirers experienced more than 20 corporate

290

K.-H. Kim, M.D. Olsen / Hospitality Management 18 (1999) 285}307 Table 3 Positions/occupations of the Delphi panel Position

Number

Percentage

Vice Chairman President & COO Executive Vice President & CFO Executive Vice President Senior Vice President & CFO Senior Vice President Vice President Chief Operating O$cer Chief Financial O$cer Investment Banker (Non-hotelier) Hospitality Industry Consultant (Non-hotelier) Total

1 2 1 1 2 2 3 1 1 5 2 21

4.8% 9.5% 4.8% 4.8% 9.5% 9.5% 14.3% 4.8% 4.8% 23.8% 9.5% 100%

acquisition deals. The total amount of money invested in these 20 deals was approximately $19.5 billion. The panel examined the list of variables provided, generated new variables it considered important, and arrived at a "nal list of 68 critical success factors it judged relevant or important to the hotel acquirers in their corporate acquisitions. Each item was rated in terms of its perceived in#uence on the entire acquisition process, based on a 4-point Likert-scale scale: a score of one (1) represents unimportant (or not relevant); two (2) denotes slightly important (relevant); three (3) represents important (relevant); and four (4) denotes very important (relevant). Panelists who failed to respond to Round 1 were not included in Round 2, and similarly those who were unwilling to respond in Round 2 were not incorporated in Round 3 (see Table 4). A brief account of the process involved in conducting the group communication process of managing and interpreting the data output follows: 2.1. Round 1 The Round 1 Questionnaire and cover letter were distributed to the "rst batch of 71 potential respondents, along with a set of guidelines for answering instructions, between May 15, and May 18, 1998. The coordinator requested the return of the answers by fax. On June 19, 1998, the total number of Round 1 questionnaires completed and returned reached the "gure of 26, which was considered adequate for commencing work on processing the Round 1 returns and preparing the Round 2 questionnaires. In the Round 2 questionnaire, the ratings made by panelists in Round 1 of the critical success factors in the acquisition process were summarized. The data provided for each item rated include: (i) the frequencies of the panel rating for each variable; (ii) the panel's aggregated mean for each variable; (iii) the panel's mode for each variable, and (iv) the standard deviations (SD) of the variables. Along with these summaries,

K.-H. Kim, M.D. Olsen / Hospitality Management 18 (1999) 285}307

291

Table 4 Number of participants in three rounds Group

Initial pool

Round 1

Round 2

Round 3

Hoteliers Non-hoteliers Total

42 29 71

17 9 26

14 7 21

14 7 21

each panelist received a summary of his/her Round 1 ratings for each variable. In addition, all panelists were given the opportunity to either rea$rm or change the Round 1 rating after considering the summary of the panel ratings. Moreover, it was requested of respondents that they rate eight additional variables identi"ed by their peers. The Second Round questionnaire was expanded from that sent out for Round 1 because of the eight variables that were added by respondents. 2.2. Round 2 Materials for Round 2 were sent out by fax on June 22, 1998 to the "rst 26 respondents from Round 1. During the 2nd Round, it was identi"ed that some panelists failed to rate the eight additional items identi"ed in Round 1 by other respondents. Therefore, the researcher made either phone calls or faxed a letter to ask them to complete the questionnaire. On July 10, 1998, 21 responses had been received, and this was considered adequate to begin analysis of the Round 2 responses, and to begin preparation of the Round 3 questionnaire. 2.3. Round 3 On July 10, 1998, the Third Round Delphi questionnaire was distributed to those 21 respondents who answered in Round 2 of the study. The researcher requested in the accompanying cover letter that the completed questionnaire be returned within 10 days. Unlike the "rst two rounds, during the Final Round, panelists responded quickly by the required return date, which was July 21, 1998, except for one respondent who was on leave for her vacation. On July 23, 1998, the remaining one respondent returned the completed questionnaire so that the Final Round response rate was an impressive 100%. Also, during the Final Round, some panelists failed to rate the eight additional variables identi"ed in Round 1. However, in Round 3, the response rate on these variables substantially improved.

3. Findings Descriptive statistics were used to identify the most important/relevant factors in the corporate acquisition process in the lodging industry. Based upon the Round 3 results, the most important factors in each phase in the overall acquisition process

292

K.-H. Kim, M.D. Olsen / Hospitality Management 18 (1999) 285}307

for the lodging industry were identi"ed. Ranks were solely decided upon each factor's mean score. First, in terms of acquisition objectives, Table 5 shows that the "rst four variables achieved distinctively high mean scores and their standard deviations were small, and therefore consensus on these items was strong. These variables were considered to be the most explicit and important acquisition objectives in the lodging industry. Second, in terms of critical success factors in the pre-acquisition management phase, Table 6 shows that the "rst ten variables received relatively high mean scores. These ten variables also reached a relatively high degree of consensus. That is, it is indicated that these ten variables are the most important critical success factors in the pre-acquisition management process for the lodging industry. Third, in terms of key success factors in the post-acquisition integration phase, Table 7 also shows that the "rst ten variables have relatively high mean scores. These ten variables also reached a relatively high degree of consensus. That is, this indicated that the ten variables are the most important critical success factors in the postacquisition integration phase for hotel acquirers. Finally, in terms of the most relevant post-acquisition performance evaluation criteria, Table 8 shows that the "rst three variables received relatively high mean scores. These three variables also had a relatively high degree of agreement. That is, it is indicated that these three measurements are the most appropriate post-acquisition evaluation criteria for the lodging industry. In sum, it was realized that higher the mean score, the stronger the consensus among participants and vice versa.

4. Discussion In addition to discussing the factors that the Delphi panel found most signi"cant in each of the four dimensions of the study's framework, this section also will provide some "ndings that are contradictory to previous research. Table 5 Most important acquisition objectives Variable

Rank

Mean

SD

Accelerate growth of the acquiring company Acquire accretively to enhance stockholders' value Expand capacity at less cost than constructing new hotel properties Capture scale economies to save costs through combining two "rms within an industry Utilize synergistic attributes of the acquired company with reference to the acquiring company Broaden the acquiring company's customer base by extending products and services (i.e., application of portfolio management, globalization) Improve credit capacity of resultant company Achieve the personal goals, vision, and particular objectives of the acquiring company's chief executive

1 2 3 4

3.86 3.69 3.57 3.14

0.48 0.60 0.68 0.65

5

2.95

0.80

6

2.95

0.86

7 8

2.65 2.43

0.79 0.93

K.-H. Kim, M.D. Olsen / Hospitality Management 18 (1999) 285}307

293

Table 6 Critical success factors in the pre-acquisition management phase Variable Identify the trend of target's cash #ow from operations Identify potential operating synergy (i.e., improved operating e$ciency) Extent of accretion or dilution of stock/Cash #ow/FFO Identify the target's property locations of market served Due diligence Understanding how various constituents will react to the deal (i.e., shareholders) Identify the trend of target's overall performance (i.e., occupancy, RevPAR, free cash #ow, and ADR) Identify the target's capital expenditure requirements (i.e., properties' potential renovation costs) Identify potential improvements in brand and reputation Method of payment (i.e., cash, stock, etc.) Identify strategic relatedness between the acquirer and the target Identify the fact that the present value of anticipated synergies will be greater than the premium paid Amount of acquisition premium Mode of acquisition (i.e., merger, hostile takeover, etc.) Identify potential "nancial synergy (i.e., lower cost of capital, lower tax rate) Bidding price is based upon the target's competitive position in the lodging industry Multiple bidders (i.e., contested bid) Identify potential demand for products/services of combined "rm over the next "ve years Identify potential managerial synergy (i.e., enhanced target's competitive position by transferring management expertise by the acquirer) Identify the target's management fees and franchise fees Broad involvement throughout of the acquirer's key sta!s and employees in the planning of an acquisition Getting advice from best investment bankers Identify the target's capital structure and cost of capital Identify the target's distinctive cultural aspects compared to the acquiring company Identify the target's connectivity and compatibility with the acquirer's information systems infrastructure

Rank Mean SD 1 2 2 4 4 6 7

3.76 3.67 3.67 3.62 3.62 3.58 3.52

0.44 0.58 0.59 0.50 0.50 0.51 0.60

7

3.52

0.68

7 10 11 12

3.52 3.48 3.38 3.33

0.68 0.60 0.80 0.80

13 13 15 16

3.29 3.29 3.24 3.14

0.56 0.56 0.83 0.73

17 18

3.10 3.05

0.77 0.80

19

2.95

0.67

19 19

2.95 2.95

0.80 0.86

22 23 24

2.81 2.76 2.43

0.75 0.83 0.75

25

2.24

0.83

4.1. Acquisition intents/objectives Unlike the last wave of consolidations in the early 1990s, which were motivated by a desperate e!ort to slash costs through downsizing and restructuring, recent acquisition deals strive for growth. Because the US economy has shown continuous growth since the recession earlier this decade, many business organizations have assumed a continuing growth cycle (Business Week, 1997). This study found that the most important acquisition objective for lodging "rms is to accelerate their growth momentum. In order to achieve the goal of growth, hotel acquirers have been seeking new customers, strategic complementary businesses, new markets or segments of markets, and the opportunity to leverage existing competitive advantages with new ones.

294

K.-H. Kim, M.D. Olsen / Hospitality Management 18 (1999) 285}307

Table 7 Critical success factors in the post-acquisition integration phase Variable Establish a post-acquisition strategy early in the process Identify and retain key employees and managers of the target Determine the degree of post-acquisition integration (i.e., extensive, moderate, no interruption of the target's autonomy) Develop a formal integration plan by top management teams of both companies Establish an e!ective communication strategy to keep the target's employees well informed Establish a sense of unity between the two "rms Align acquisition intent and operating strategy Identify the value drivers of the acquisition and focus on these Provide su$cient resources for post-acquisition integration Public relations } orchestrate e!ective communication with the public Move rapidly as planned Integration of information systems infrastructure between merging "rms Immediate announcement of career in#uencing post-acquisition plans (i.e., key roles and responsibilities, layo! plans, etc.) Deal with the people you are not retaining "rmly, fairly, and quickly Establish an e$cient resource allocation system Establish appropriate internal mechanisms for transferring competencies and assets across the business units Link compensation to improvements in cash #ows Di!erences in management style between merging "rms Degree of centralization and autonomy of the target's employees Identify a new set of opportunities for enhancement of competitive position of merged "rm Establish procedures for building common tools, practices, processes, and languages Assimilate the acquirer's cultural systems (i.e., values, norms) into the target's culture Establish a new set of competitive methods (i.e., portfolios of products/services) Inject new management people into the target "rm immediately Establish new training and development programs Establish new performance appraisal programs Establish new procedures for competitor analyses

Rank

Mean

SD

1 2 3

3.81 3.67 3.62

0.40 0.48 0.59

4

3.48

0.51

4

3.48

0.68

6 6 8 9 10 11 12 13

3.43 3.43 3.40 3.33 3.30 3.29 3.24 3.19

0.60 0.75 0.50 0.48 0.57 0.78 0.70 0.51

14 15 16

3.15 3.10 3.05

0.93 0.70 0.74

17 17 17 20

3.00 3.00 3.00 2.95

0.55 0.71 0.77 0.67

21

2.86

0.65

22

2.71

0.72

23 24 25 26 27

2.52 2.38 2.19 2.14 2.10

0.68 0.67 0.75 0.65 0.62

Another speci"c objective that motivates management to engage in acquisition activities is the goal of enhancing shareholders' value. Since the 1980s, the ultimate goal of "rms' executives has shifted to that of maximizing stockholders' wealth. Walter and Barney (1990) identi"ed that one of the important acquisition objectives is to promote the investors' visibility. In Hilton Hotels Corporation's 1996 annual report, Hilton (which is one of the most active acquirers in the hotel and casino industries) executives emphasized their strategic goal of creating value for their stockholders. This study found this objective to be the second most important acquisition objective in the lodging industry.

K.-H. Kim, M.D. Olsen / Hospitality Management 18 (1999) 285}307

295

Table 8 Most relevant post-acquisition performance evaluation criteria Variable

Rank

Mean

SD

Return on total invested capital (Relative to WACC) Free cash #ow per share Operating cash #ow (i.e., sales, minus cost of goods/services sold and selling administrative expenses, plus depreciation and goodwill expenses) Accounting pro"ts (i.e., ROE, ROI, ROA, ROS) Traditional lodging industry performance evaluation criteria (i.e., changes in occupancy, RevPAR, and ADR) Market share gains (or losses) Stock price changes at 1 or more years after the deal is announced Stock price changes surrounding the deal announcement dates

1 2 3

3.83 3.76 3.57

0.38 0.44 0.75

4 5

3.43 3.38

0.68 0.59

6 7 8

3.29 3.24 2.71

0.78 0.89 0.90

Rumelt (1974) found that acquisitions are animated by the acquiring companies' desire for expanding current/existing markets. Walter and Barney (1990) identi"ed that the goal of takeovers is to amplify capacity at less cost than developing new facilities, equipment, and/or physical assets. The authors concluded that this objective is a means for "rms to expand an existing array of product lines and markets. Similarly to the above "ndings, this study identi"ed that expanding capacity at less cost than constructing new hotel properties was the third most important objective of corporate acquisitions in the lodging industry. Although its heyday is over, one of the most compelling reasons for consolidation in the full-service segment of the lodging market is that due to overbuilding of upscale hotels in the late 1980s, hotel operators or developers have not concentrated on building new upscale hotels, because hotel buyers can easily purchase older hotels at about 70% of replacement costs. In other words, building a new hotel costs much more than buying old hotel properties. The fourth most important objective (`capture scale economies to save costs through combining two "rms within an industrya) of hotel acquirers can be seen as a market power viewpoint. In fact, this category is one of the most traditional viewpoints about corporate mergers and acquisitions. Walter and Barney (1990) found another acquisition intent in the creation of scale economies through related capacity expansion. This view holds that corporate mergers or acquisitions are ways for business organizations to gain and exploit scale economies. Hotel acquirers have believed that they could slash costs by combining two "rms. For example, when Hilton Hotels Corporation announced their acquisition of Bally's Entertainment, a Hilton executive explained that the combined company saved operating costs of approximately $60 million. Moreover, when Bollenbach, Hilton's CEO and President, announced his bid for ITT in January 1997, he argued that the acquisition of ITT would save operating costs of as much as $100 million a year. One of the interesting "ndings throughout the study was that participants contradicted the idea that recent acquisition deals involved an objective of widening the acquirer's customer base by expanding products and services. Some big hotel "rms

296

K.-H. Kim, M.D. Olsen / Hospitality Management 18 (1999) 285}307

identify portfolio management and globalization as their merger or acquisition goals. For example, Marriott's acquisitions of Ritz-Carlton and Renaissance and Bass's takeover of Inter-Continental enhanced their platforms to access emerging opportunities for foreign markets and revealed their global corporate strategies. The merger between Doubletree and Promus enhanced its competitiveness over most segments in the lodging industry. 4.2. Critical success factors in the pre-acquisition process According to the discounted cash #ow (DCF) model, which is one of the most popular methods for corporate valuation, the value of a company is equivalent to the present value of its future cash #ow generation capability. In other words, the pure value of a business is the future estimated cash #ow discounted at a rate that mirrors the risk of cash #ow (Copeland et al., 1994). Unlike accounting measures, such as earnings, DCF conceptualizes the importance of projected cash #ows and the time value of money. Proponents of the DCF approach argue for its superiority by saying `cash is king,a or `cash is fact, pro"t is opinion.a Cash #ow from operations re#ects the di!erence between cash in#ows and out#ows from operating units. These cash #ows are relevant for projecting business value because they represent the cash available for a "rm's "nancial obligations, such as debt and dividends (Rappaport, 1998). Thus, in corporate acquisitions, the accurate identi"cation of a target's cash #ow generation capability is crucial to the acquirer. This study found that astute information about the trend of the target's cash #ow from operations is the most important critical success factor in the pre-acquisition management phase for hotel acquirers. Synergy would be realized when cash #ows are increased through higher sales revenue from operations or higher prices and/or through slashing costs (Sirower, 1997). This study found that the identi"cation of the potential operating synergy of a combined "rm was the second most important critical success factor before the deal is done. Brush (1996) found that operational synergy is a key reason for acquisitions and is a determinant of post-acquisition performance. That is, post-acquisition operating e$ciency is the key for achieving the anticipated synergistic bene"ts for a merging company. Scale economies and cost saving are the primary goals of operational synergies. As mentioned before, Hilton attempted to create value from acquisitions of Bally and ITT through combining and improving operating units between two "rms. On the "nancial side of an acquisition, one of the key issues that should be addressed is: `what are the cash #ow and balance sheet implications of the acquisition?a (Rappaport, 1998). Among several valuation models in mergers and acquisitions, the consequences model attempted to know the pro forma impact of doing the acquisition deal. `Will earnings be diluted? What will happen to the stock price?a (Wasserstein, 1998) are the central issues in this model. An exceptional acquirer is not concerned about the immediate dilution of earnings or stock price, but instead, productive acquirers emphasize long-term earnings and cash #ow impact as appropriate determinants of how a deal will be perceived (Wasserstein, 1998). This study

K.-H. Kim, M.D. Olsen / Hospitality Management 18 (1999) 285}307

297

identi"ed an accurate valuation regarding the magnitude of accretion or dilution of stock/cash #ow/FFO (Fund from Operations) as the third most important key success factor in the pre-acquisition management stage. According to Ernst and Young (1994), evaluation of a target "rm in the preacquisition phase includes three categories: industry competitive factors, operating strategy, and the target's competitive position. Among others, the target's market served and market boundaries are important factors that should be included in the list. The present study found that accurate information about a target's lodging property locations of the market served is one of the most important factors in the pre-acquisition process. Traditional wisdom in the lodging industry also has emphasized the importance of location. Also, one participant in this study mentioned in a hospitality trade magazine that the acquisition of Red Lion by Doubletree in 1996 was driven by the location of Red Lion's business/convention hotels in the Paci"c and Mountain regions (Malley, 1998). He further pointed out that the acquisition of Clubhouse Hotels by Wyndham Hotels in 1997 was also driven by the desire to achieve superior locations (Malley, 1997). E!ective due diligence in the acquisition process leads to a deliberate acquisition strategy for the acquiring "rm. Henderson (1989) pointed out that the acquirers must be straightforward with targets during due diligence discussions, guide post-acquisition goals by making a responsible statement, and outline how they anticipate accomplishing these goals, while attempting to avoid unrealistic expectations. Oftentimes, acquiring "rms ignore the importance of due diligence in gaining their intended synergy. For example, the recent turmoil surrounding the Cendant Company re#ects in part the strategic aspect of due diligence in acquisitions. HFS and CUC agreed to merge, and then to create Cendant. However, on April 15, 1998, Cendant announced accounting irregularities in CUC's previous years' earnings reports. One professional auditing "rm uncovered what was described as the `widespread and systemic practice of overstating or fabricating resultsa (Business Week, 1998). Given this bad news, Cendant, once highly praised by Wall Street, lost 43%, or more than $20 billion, of its market value within a day. In fact, this loss converted into expensive costs for its shareholders. Although it is not over yet, as of the writing of this study, it seems obvious that CUC had been `cookinga the accounting numbers. This study identi"ed that due diligence is one of the crucial success factors in the pre-acquisition process. In the lodging industry, conventional wisdom is used to measure corporate or an individual property's performance, and includes occupancy rate, revenue per available room (RevPAR), and average daily room rate (ADR), in addition to free cash #ow. This study found that the identi"cation of precise information about the trend of the target's above four performance measures is a critical success factor for hotel acquirers in planning and executing the deal. Ernst and Young (1994) proposed a general guide for information that should be collected during the target's evaluation. On the "nancial side, Ernst and Young (1994) pointed out the importance of the target "rm's capital expenditure requirements after the deal is done. This study found the importance of information about the target's capital expenditure requirements as one of the important key success factors in

298

K.-H. Kim, M.D. Olsen / Hospitality Management 18 (1999) 285}307

evaluating the deal. In the lodging industry, cyclical renovation of an individual hotel property is a crucial factor in capital expenditures. Depending solely on public information is a disadvantage for the acquiring "rm. The acquirer must rely on the accuracy of "nancial statements, which may not be su$ciently detailed to give an accurate picture of the target's "nancial condition. In 1988, Merv Gri$n acquired Donald Trump's Resorts International, Inc. and then problems arose after the deal was closed. Part of the problem was due to an inaccurate projection of the cash #ows of Resorts, as well as the underestimated cost of maintaining some of Resort's assets. For example, renovation costs for the hotel-casino in Atlantic City and the "rm's facilities on Paradise Island in the Bahamas proved to be higher than expected. Gri$n estimated that the renovation costs would run to some $50 million. However, after the deal was done, he discovered that at least $100 million would be necessary (Yoshihashi and Barsky, 1989). It is clear that the value of Resort's assets was overestimated. Brand is an intangible asset, but oftentimes possesses much more value than tangible assets. In the hotel business, a hotel chain's brand is a crucial source of comparative advantage in keen competition. Parr (1993) pointed out, `the brand may be worth more to the buyer than the seller because the deal unlocks hidden values. Under accounting rules, the company that developed a brand cannot assign it a value or carry it on the balance sheet as an identi"able intangible asset. But once the brand changes hands, the buyer can value it and plug it into the balance sheeta (p. 36). One participant in this study mentioned that the takeover of Westin and ITT by Starwood, Extended Stay America's acquisition of Studio Plus, and Patriot American Hospitality's merger with Wyndham had been driven by well-established brands where strategic conversion or re#agging opportunities were vital (Malley, 1997). In sum, as shown in Table 9, among other dimensions, the information dimension received the most signi"cant attention because among the top ten CSFs, four items were categorized in the information dimension. This re#ects that the attainment and evaluation of information about the target is the most important dimension in the pre-acquisition management phase. In this study, there were some contradictory "ndings about the pre-acquisition process. In a rational choice perspective of corporate acquisitions, there are two key points: strategic "t and organizational "t (or cultural "t). Weber et al. (1996) stated that, `Management should pay at least as much attention to cultural "t during both the pre-merger search process and during the post-merger integration process as it does to "nance and strategic factors. A lack of cultural "t may undermine the prospect of achieving synergy or add cost to the integration process, thus o!setting one of the main raison-d'etre of the mergera (p. 1225). Surprisingly, this study found strategic "t as only a moderately important factor in the pre-acquisition management stage. More importantly, this study identi"ed that the cultural "t between two "rms was the second least important factor within the study's framework, which presented 25 diverse in#uential items in the pre-acquisition process. A tentative speculation about this issue is that both strategic "t and cultural "t may be too conceptually broad compared to other items, and less tangible or manageable.

K.-H. Kim, M.D. Olsen / Hospitality Management 18 (1999) 285}307

299

Table 9 Critical success factors and their dimensions in pre-acquisition process Variable

Mean rating

Dimension

Identify the trend of target's cash #ow from operations Identify potential operating synergy (i.e., improved operating e$ciency) Extent of accretion or dilution of stock/Cash Flow/FFO Identify the target's property locations of market served Due diligence Understanding how various constituents will react to the deal (i.e., shareholders) Identify the trend of target's overall performance (i.e., occupancy, RevPAR, free cash #ow, and ADR) Identify the target's capital expenditure requirements (i.e., properties potential renovation costs) Identify potential improvements in brand and reputation Method of payment (i.e., cash, stock, etc) 3.48 Approach Identify strategic relatedness between the acquirer and the target Identify the fact that the present value of anticipated synergies will be greater than the premium paid Amount of acquisition premium Mode of acquisition (i.e., merger, hostile takeover, etc) Identify potential "nancial synergy (i.e., lower cost of capital, lower tax rate) Bidding price is based upon the target's competitive position in the lodging Industry Multiple bidders (i.e., contested bid) Identify potential demand for products/services of combined "rm over the next "ve years Identify potential managerial synergy (i.e., enhanced target's competitive position by transferring management expertise by the acquirer) Identify the target's management fees and franchise fees Broad involvement throughout of the acquirer's key sta!s and employees in the planning of an acquisition Getting advice from best investment bankers Identify the target's capital structure and cost of capital Identify the target's distinctive cultural aspects compared to the acquiring company Identify the target's connectivity and compatibility with the acquirer's information systems infrastructure

3.76 3.67 3.67 3.62 3.62 3.58

Information Value Price Information Approach Approach

3.52

Information

3.52

Information

3.52 3.38

Value Information

3.33

Price

3.29 3.29 3.24 3.14

Price Approach Value Price

3.10 3.05

Approach Value

2.95 2.95

Information Approach

2.81 2.76 2.43

Approach Information Information

2.24

Information

Another interesting "nding was that hotel acquirers ranked advice from investment bankers as one of the least important factors in the pre-acquisition process, as opposed to the opinion suggested by Copeland et al. (1994), who advocated the importance of advice from investment bankers. Finally, this study found the target's connectivity and compatibility with the acquiring "rm's information systems is the least important factor in managing pre-acquisition. Further discussion of this issue will be presented in the post-acquisition integration section.

300

K.-H. Kim, M.D. Olsen / Hospitality Management 18 (1999) 285}307

4.3. Critical success factors in the post-acquisition integration phase Ashkenas et al. (1998) discussed the acquisition integration process framework that was utilized by GE Capital Services. The authors argued that acquisition integration is not a distinct step of a transaction and should not begin only after the deal is done. Instead, acquisition integration and due diligence processes should be planned, concurrent, and should be managed as an ongoing task. Similarly, this study found that the establishment of a post-acquisition integration plan early in the process was by far the most important critical success factor after the deal is closed. Corporate acquisitions consist of not only the acquisition of assets and technology, but also people. Bergsman (1997) provides a suggestion for acquirers regarding the value of the target's people by saying, `If IBM acquires Microsoft and Bill Gates decides to join another company, is IBM buying the full value of Microsoft?a (p. 60). Proper management of acquired personnel can have a tremendous impact on creating value for the acquirers. This study found that the identi"cation and retention of the target's key managers and employees was the second most important critical success factor in the post-acquisition integration phase. The integration, retention, and motivation of key employees from merging "rms is central to a successful acquisition (Henderson, 1989; Ashkenas et al., 1998; Barney, 1988; Cannella and Hambrick, 1993). When the acquirer considers post-acquisition integration in terms of organizational structure, it may be advantageous to analyze and synthesize the structural in#uence of the united "rm. Pablo (1994) analyzed post-acquisition integration problems by de"ning levels of integration as `the degree of post-acquisition change in an organization's technical, administrative, and cultural con"gurationa (p. 806). There are three levels of integration: low, moderate, and high. Likewise, this study found that the determination of the degree of post-acquisition integration was the third most important critical success factor after the deal is closed. Napier (1989) stated that collaborative mergers occur when a combined "rm generates bene"ts through a blend of operations, assets, cultures, and managerial functions (synergy-collaborative), or through a transformation of know-how, skills, and knowledge of each other (exchange-collaborative). Speedy and collaborative work is the best way to resolve business problems and achieve continuing, positive results (Ashkenas et al., 1998). Jointly formulating an integration plan, including 100-day and communication plans, can e!ectively improve the combined "rm's performance. Similarly, this study found that the development of a formal integration plan by top management teams of merging "rms was one of the distinctively important key success factors in managing the post-acquisition process. In order to be certain of their acquisition objectives, acquiring "rms should establish an e!ective communication strategy to keep employees well informed and to provide them with a comfortable working environment. Raab and Clark (1992) stated that, `Communications must be frequent and clear but should not unduly raise expectations,a and `communications to employees need to start on the day the deal is announced and include the objectives and bene"ts of the combination and the implementation process and time framesa (p. 20). The current study found this e!ective communications strategy to be one of the notably important factors in the

K.-H. Kim, M.D. Olsen / Hospitality Management 18 (1999) 285}307

301

transition process. Based upon a good communication strategy, the acquirers should be able to integrate two di!erent cultures and power systems, two di!erent human resource policies, two di!erent organizational issues, and two di!erent operational strategies. In sum, as shown in Table 10, the approach dimension received the highest attention because among the top ten CSFs, seven variables were occupied by the approach dimension. This represents the fact that an e!ective, immediate transition strategy must be considered as signi"cant in the post-acquisition integration process for hotel acquirers. Also, in the post-acquisition integration phase, there are some contradictory facts that resulted from this study. First, previous research emphasized rapid movement after the deal is closed, as planned by the acquirers (Ashkenas et al., 1998; Smith and Hershman, 1997; Copeland et al., 1994). However, this study supported this factor only as being of moderate importance. Marks and Mirvis (1998) supported this result by saying that a careful approach is much more time consuming and labor intensive, but worth the investment. The authors further argued that rushed implementations or decisions can result in picking the wrong managers and employees, or systems that oppress the united "rm. Second and "nally, in the pre-acquisitions management phase, information about connectivity and compatibility between merging "rms was not viewed as an important factor. However, in the post-acquisition integration stage, the integration of information systems of two "rms received the highest of the moderate rankings. Moad and Carlyle (1988) identi"ed that senior managers often view information systems as the cost of doing business, rather than a signi"cant contribution to their competitive e!ectiveness. The reasons for this lack of attention to IS are lack of time, the low priority of IS functions compared to other functional activities (Harvey, 1990), or that IS activities are not discussed or represented by the acquisition management team in the pre-acquisition phase (Loverde, 1990; Harvey, 1990). Through this study, it was found that less attention has been paid to the role of IS in "rms engaged in acquisition activities before the deal is completed. Improved attention after the deal is done can be interpreted that although hotel acquirers perceived the importance of the consolidation of two "rms' information systems, this technical problem is not a signi"cant consideration in strategic deals made for the purpose of growth momentum. However, lodging industry acquirers have realized the implications of information systems for seizing immediate opportunities for the combined "rm. Based upon the two stages, pre-acquisition management and post-acquisition integration, some meaningful "ndings have emerged. First, in general, this study found that hotel executives and industry specialists voted higher rankings for variables in the pre-acquisition stage than the post-acquisition stage, as shown in Tables 9 and 10. It can be argued that this is one of the reasons why some acquisition deals have failed. Supporting this argument, Smith and Hershman (1997) stated that only post-acquisition management is an essential source of value creation in the major deals of the last decade. Second, in both the pre- and post-acquisition stages, this study identi"ed that hotel executives emphasized the importance of an incipient platform in both stages more than other dimensions. The evaluation of the target's information received the highest ranking before the deal, while e!ective post-acquisition transition

302

K.-H. Kim, M.D. Olsen / Hospitality Management 18 (1999) 285}307

Table 10 Critical success factors and their dimensions in post-acquisition integration Variable

Mean rating

Dimension

Establish a post-acquisition strategy early in the process Identify and retain key employees and managers of the target Determine the degree of post-acquisition integration (i.e., extensive, moderate, no interruption of the target's autonomy) Develop a formal integration plan by top management teams of both companies Establish an e!ective communication strategy to keep the target's employees well informed Establish a sense of unity between the two "rms Align acquisition intent and operating strategy Identify the value drivers of the acquisition and focus on these Provide su$cient resources for post-acquisition integration Public relations } orchestrate e!ective communication with the public Move rapidly as planned Integration of information systems infrastructure between merging "rms Immediate announcement of career in#uencing post-acquisition plans (i.e., key roles and responsibilities, layo! plans, etc.) Deal with the people you are not retaining "rmly, fairly, and quickly Establish an e$cient resource allocation system Establish appropriate internal mechanisms for transferring competencies and assets across the business units Link compensation to improvements in cash #ows Di!erences in management style between merging "rms Degree of centralization and autonomy of the target's employees Identify a new set of opportunities for enhancement of competitive position of merged "rm Establish procedures for building common tools, practices, processes, and languages Assimilate the acquirer's cultural systems (i.e., values, norms) into the target's Culture Establish a new set of competitive methods (i.e., portfolios of products/services) Inject new management people into the target "rm immediately Establish new training and development programs Establish new performance appraisal programs Establish new procedures for competitor analyses

3.81 3.67 3.62

Approach People Approach

3.48

Approach

3.48

Approach

3.43 3.43 3.40 3.33 3.30 3.29 3.24 3.19

Culture Strategy Approach Approach Approach Approach Organisation People

3.15 3.10 3.05

People Organisation Organisation

3.00 3.00 3.00 2.95

People Culture Culture Strategy

2.86

Organisation

2.71

Culture

2.52

Strategy

2.38 2.19 2.14 2.10

Approach People People Strategy

management practices, particularly for immediately after the deal is completed, received the highest value in the post-acquisition process. These two issues usually were considerations in the very "rst stage in both processes. 4.4. Most relevant post-acquisition performance evaluation criteria In corporate acquisitions, although there is no "rm agreement on the most accurate measure of appropriate post-deal "nancial performance, in general, there are two

K.-H. Kim, M.D. Olsen / Hospitality Management 18 (1999) 285}307

303

widely adopted performance measures: accounting pro"ts and stock returns (Cochran and Wood, 1984). However, accounting pro"tability's integrity has been brought into question because it inherently possesses biases and distortions, including changes in the bargaining power of merging partners, changes in sales to one another's customers, changes in tax implications, gearing ratios or leverage ratios, changes in accounting norms in the year of the acquisition, and changes in goodwill arising from the acquisition (Meeks and Meeks, 1981). Although it has been often considered as an obsolete measure in the current "nancial world, surprisingly, accounting measures captured the highest ranking in the `moderatea category. Stock price perspective studies (primarily event studies) have had little success in relating the market value of equity gains to improvements in corresponding corporate performance (Caves, 1989). This implies that stock value advances could be due to capital market ine$ciency stemming from the production of an overvalued security (Healy et al., 1992). In order to decide whether success or failure in acquisition deals are from real economic gains or capital market ine$ciencies, share price research has analyzed unsuccessful acquisitions (Bradley et al., 1983; Ruback, 1988). Healy et al. (1992) further criticized stock performance studies, citing that they fail to determine whether acquisitions create pure economic returns, and to identify the sources of such gains. This study found that these two categories of stock price performance measures were perceived as by far the least important yardsticks to measure real economic gains from corporate acquisitions in the lodging industry. In contrast, value-based management (VBM)'s economic performance measures, such as return on invested capital (ROIC), free cash #ow per share, and operating cash #ows, gained the highest ranking in this study. In a value-based management approach, company or business value is decided by its future discounted cash #ow generation capability, and value is created only when "rms invest capital that exceeds the cost of capital (Copeland et al., 1994). Further, this approach emphasized that there are two core "gures for drivers of cash #ow, and ultimately value: growth and ROIC. In sum, this study's results re#ect the ubiquitous popularity of VBM nowadays. It is recommended that a better approach for evaluating value both before and after the acquisition deal is a triangulation approach. For example, Wasserstein (1998) suggested a triangulation process in pre-acquisition valuation by saying that, `The outputs of various models are assessed with an understanding of the limitations of each technique and what assumptions were used as inputs. Even if the models are perfect, the room for fundamental error is huge because models assume a projection of future value based on the world of today. In addition, the terminal value in the DCF model, and the comparable companies in that analysis, re#ect today's market valuea (p. 531). In terms of a triangulation viewpoint, hotel executives revealed a highly biased interest in the VBM performance measures shown in this study. It is suggested that they consider a more balanced perspective. It may be argued that hotel executives are correct on many points, but are wrong on the key point of: protecting and enhancing shareholders' value.

304

K.-H. Kim, M.D. Olsen / Hospitality Management 18 (1999) 285}307

5. Conclusion A major conclusion of this study is the discovery of critical success factors in corporate acquisitions in the lodging industry. The discovery of these factors supports the e!ectiveness of the theoretical framework developed for this study from the general literature. The unprecedented trend toward corporate mergers and takeovers has become one of the most signi"cant events in the business environment, a trend that radically changed not only the competitive landscape of the lodging industry, but also all industries. After desperate e!orts to save costs through restructuring and downsizing up until early 1990s, many US "rms turned to an attempt to establish fresh growth momentum. An important "nding of this study was that hotel acquirers revealed identical acquisition goals. In order to seize synergy through acquisitions, a precise evaluation of the target is the "rst and foremost task for acquirers. Another vital "nding of this study was that this accurate evaluation of the acquired "rm is the most important critical success factor before the deal is completed. Since the current acquisitions boom is driven by strategic logic rather than by "nancial concerns, synergy between the acquiring "rm and the acquired "rm should be estimated based upon the realistic assumptions that lead to appropriately projecting the target's value and properly assessing the costs of realizing synergy (Walter and Weinhold, 1979). Another notable "nding of this study is that a timely development of postacquisition strategy along with due diligence in the pre-acquisition phase is crucial for successful takeovers. As Ashkenas et al. (1998) mentioned, GE Capital, one of the most important value-creating "rms through acquisitions in the world, planned and executed concurrently both integration strategy and due diligence. Development and execution of an e!ective transition strategy immediately after the deal is done is the most vital dimension in the post-acquisition integration process. One of the most signi"cant "ndings of this study is that hotel executives emphasized the importance of the pre-acquisition process more than a post-acquisition integration strategy. This "nding apparently contradicts Smith and Hershman's (1997) argument. The authors stated that the only source of value-adding acquisition deals is accurate post-acquisition management. It could be argued that after the deal is completed, for the acquirer the estimated synergistic bene"ts are `just words,a but the acquirer should be able to transform the intended goal into a realized goal. In order to achieve a realized synergy, the same or a more extensive e!ort than that spent in the pre-acquisition process should be planned and executed. Ignorance of the importance of integration may be the source of the deteriorated performance experienced by a certain number of acquirers. Another signi"cant "nding of this study is that performance measures in a valuebased management (VBM) model received the highest importance in evaluating economic gains from acquisitions in the lodging industry, whereas stock price performance measures received the lowest importance in the same area. It is necessary to explore this contradictory "nding through further research. However, as Wasserstein (1998) suggested, a triangulation approach is an appropriate evaluation method

K.-H. Kim, M.D. Olsen / Hospitality Management 18 (1999) 285}307

305

because each performance measure possesses its own important assumptions, and also its critical limitations. Finally, this study adopted a multi-dimensional approach that includes the entire acquisition process in its framework. The study's framework was very useful in identifying critical success factors in acquisitions for the lodging industry. As Young (1981) mentioned, `knowing what to do at the appointed time can make the di!erence between achieving success or failurea in corporate acquisitions. For future acquirers in the lodging industry, any "rms pursuing the creation of value through acquisitions must be able to nurture, accumulate, and regenerate tacit and explicit knowledge about the overall acquisition process over time and across place. 6. Recommendations for future research 1. This study attempted to identify `whata are the building blocks of a good theory in the world of corporate acquisitions. Thus, this study's results can be utilized to answer the questions of `when, how, and why,a which are the primary goals of a theory. Future inquiries into corporate acquisitions in the lodging industry should be able to answer these critical questions so that they serve to cross-validate the current study, and thus enrich the body of knowledge in the areas covered by this study. 2. The 68 critical success factors are by no means exhaustive, and therefore could be expanded by a larger Delphi panel. The larger the Delphi panel, the higher the possibility of the accuracy of the generalization of "ndings. 7. Limitations One limitation of this study is that the size of the respondent groups was relatively small, so that it would be di$cult to generalize from the study's results. However, as mentioned before, this study included the most active acquirers in the lodging industry, and consideration should be given to the hotel respondents' signi"cant positions in their "rms' acquisition decision-making processes. The second limitation of this study is that the professional representation by "eld, by respondents, was not in balance (e.g., 14 from hotel "rms and 7 M&A specialists or consultants). Balanced representation would be ideal. However, in consideration of the Delphi technique's distinctive iterative process, this problem could be overcome because participants exchanged opinions after reviewing the opinions of the other respondents, and then decided to a$rm or change their initial opinions during the last two rounds. References Ashkenas, R.N., DeMonaco, L.J., Francis, S., 1998. Making the deal real: how GE capital integrates acquisitions. Harvard Business Review, 165}178.

306

K.-H. Kim, M.D. Olsen / Hospitality Management 18 (1999) 285}307

Barney, J., 1991. Firm resources and sustained competitive advantage. Journal of Management 17 (1), 99}120. Barney, J., 1988. Returns to bidding "rms in mergers and acquisitions: Reconsidering the relatedness hypothesis. Strategic Management Journal 9, 71}78. Bergsman, S., 1997. Personnel problems plague merger. NREI 60. Bradley, B., Desai, A., Kim, E.H., 1983. Synergistic gains from corporate acquisitions and their division between the stockholders of target and acquiring "rms. Journal of Financial Economics 21, 3}40. Brush, T.H., 1996. Predicted change in operational synergy and post-acquisition performance of acquired business. Strategic Management Journal 17, 1}24. Business Week, 1985. Do mergers really work? 88}100. Cannella, A.A., Hambrick, D., 1993. E!ects of executive departures on the performance of acquired "rms. Strategic Management Journal 14, 137}152. Cartwright, S., Cooper, C.L., 1993. The role of culture compatibility in successful organizational marriage. Academy of Management Executives 7 (2), 57}70. Caves, R., 1989. Takeovers and economic e$ciency: foresight vs. hindsight. International Journal of Industrial Organization 7, 151}174. Chatterjee, S., 1992. Sources of value in takeovers: synergy or restructuring } implications for target and bidder "rms. Strategic Management Journal 13, 267}286. Chatterjee, S., 1986. Types of synergy and economic values: the impact of acquisitions on merging and rival "rms. Strategic Management Journal 7, 119}139. Cochran, R.L., Wood, R.A., 1984. Corporate social responsibility and "nancial performance. Academy of Management Journal 27, 42}56. Coopers and Lybrand Lodging Research Network, 1998. Copeland, T., Koller, T., Murrin, J., 1994. Valuation: Measuring and Managing the Value of Companies, 2nd ed. Wiley, New York. Datta, D.K., Pnches, G.E., Narayanan, V.K., 1992. Factors in#uencing wealth creation from mergers and acquisitions: a meta-analysis. Strategic Management Journal 13, 67}84. The Economist, 1998. Travel and Tourism 7}8. Ernst, Young, 1994. Mergers and Acquisitions, 2nd ed. Wiley, New York. Harvey, D., 1990. Marriage guidance for IT mergers. Director. Healy, P.M., Palepu, K.G., Ruback, R.S., 1992. Does corporate performance improve after mergers? Journal of Financial Economics 31, 135}175. Henderson, A.R., 1989. Business sales and acquisitions: post-acquisition integration. CMA Magazine, 32}36. Jemison, D.B., Sitkin, S.B., 1986. Corporate acquisitions: a process perspective. Academy of Management Review 11 (1), 145}163. Linstone, H.A., Turo!, M. (Eds.), 1975. The Delphi Method: Techniques and Applications. Addison}Wesley Publishing Company, London. Loughran, T., Vijh, A.M., 1997. Do long-term shareholders bene"t from corporate acquisitions? Journal of Finance LII(5), 1765}1790. Louis, A.M., 1982. The bottom line of 10 big mergers. Fortune, 84}89. Loverde, L., 1990. Technology driven deals in mergers and acquisitions: how are they di!erent? The Corporate Growth Report. Malley, M., 1998. Deals place lodging in spotlight as industry pro"ts continue to soar. Hotel & Motel Management 42, 58. Marks, M.L., Mirvis, P.H., 1998. Joining Forces: making one plus one equal three in mergers, acquisitions, and alliances. Jossey-Bass, San Francisco. Martin, K.J., McConnell, J.J., 1991. Corporate performance, corporate takeovers, and management turnover. Journal of Finance XLVI(2), 671}687. Moad, J., Carlyle, R.E., 1988. A rash of top-level departures erupts at IS shops across nation. Datamation. Napier, N.K., 1989. Mergers and acquisitions, human resource issues and outcomes: a review and suggested typology. Journal of Management Studies 26 (3), 271}289. Neuman, W.L., 1994. Social Research Methods: Qualitative and quantitative approaches, 2nd ed. Allyn & Bacon, Boston.

K.-H. Kim, M.D. Olsen / Hospitality Management 18 (1999) 285}307

307

Pablo, A.L., 1994. Determinants of acquisition integration level: a decision-making perspective. Academy of Management Journal 37, 803}836. Parr, R.L., 1993. The double-barreled bene"ts of acquiring a brand name. Mergers and Acquisitions, 36}38. Raab, D., Clark Jr., A.E., 1992. Mindful management for merger mania. Bankers Monthly, 17}20. Rappaport, A., 1998. Creating Shareholder Value, 2nd ed. The Free Press, New York. Ravenscraft, D.J., Scherer, F.M., 1988. Mergers and managerial performance. In: Co!ee, J.C., Lowenstein, L., Rose-Ackerman, S. (Eds.), Knight, Raiders, and Targets. Oxford University Press, New York, pp. 194}210. Ruback, R.S., 1988. Comment. In: Auerbach, A.J. (Ed.), Corporate Takeovers: Courses and Consequences. University of Chicago Press, Chicago. Rumelt, R.P., 1974. Strategy, Structure, and Economic Performance Harvard University Press, Cambridge. Schweiger, D.M., DeNisi, A.S., 1991. Communication with employees following a merger: a longitudinal "eld experiment. Academy of Management Journal 34, 110}135. Securities Data Co., 1998. Sirower, M.L., 1997. The Synergy Trap: How Companies Lose the Acquisition Game. The Free Press, New York, NY. Smith, K.W., Hershman, S.E., 1997. How M&A "ts into a real growth strategy. Mergers and Acquisitions, 38}42. Trautwein, F., 1990. Merger motives and merger prescriptions. Strategic Management Journal 11, 283}295. Walter, G.A., Barney, J.B., 1990. Management objectives in mergers and acquisitions. Strategic Management Journal 11, 79}86. Wasserstein, B., 1998. Big Deal: The Battle for Control of America's Leading Corporations. Warner Books, New York. Weber, Y., 1996. Corporate cultural "t and performance in mergers and acquisitions. Human Relations 49 (9), 1181}1202. Weber, Y., Shenkar, O., Raveh, A., 1996. National and corporate cultural "t in mergers/acquisitions: an exploratory study. Management Science 42 (8), 1215}1227. Yoshihashi, P., Barsky, N., 1989. Merv Gri$n's plunge into casino gambling could prove a loser. The Wall Street Journal A1, A7. Young, J.B., 1981. A conclusive investigation into the causative elements of failure in acquisitions and mergers. In: Lee, S.J., Colman, R.D. (Eds.), Handbook of Mergers, Acquisitions and Buyouts. PrenticeHall, New Jersey.

About the authors Kyung-Hwan Kim is a Full-time Instructor of Strategic Hospitality Management in the Department of Hotel and Restaurant Management at Kyonggi University, Suwon, South Korea. He received his Ph.D. from Virginia Polytechnic Institute and State University, Blacksburg, Virginia, USA. He received his B.S. and M.S. degrees from Florida International University, Miami, FL, USA. His major research interests are in the areas of strategic management, information systems, knowledge management, and "nance. Michael D. Olsen is a Professor of Strategic Management in the Hospitality Industry in the Department of Hospitality and Tourism Management at Virginia Polytechnic and State University. Michael Olsen is currently regarded as a leading scholar in the area of strategic management as it applies to the hospitality industry. He has consulted with many leading multinational "rms and organizations in the areas of strategic management and specializes in environmental scanning and visioning the future activities.