Acquisitions - Agency and Resource perspectives

The agency theory perspective is very popular in explaining why firms engage in ineffective M&A. The agency logic predicts that manager-controlled industrial firms will pursue conglomerate diversification. A firm's managers may benefit from the increase in firm size in that these firms are less likely to fail and executive pay is often linked to firm size. Bank managers have an incentive to improve their employment stability through acquisition since governments are reluctant to close large troubled banks because the failure of a large bank would create severe problems throughout the banking system.

From the resource-based perspective, the firm is composed of a bundle of tangible and intangible resources. Resources do not create value statically or independently and their value comes from their interactions with other resources (Gupta and Roos, 2001). If complementary resources are not under its ownership control, the firm has difficulty in realizing the true potential of its resources. Consequently, the firm has an incentive to merge or acquire other firms that own complementary resources. Hagedoorn and Dysters (2002) suggest that M&A can be one of the alternatives that firms have to exploit external sources of innovative competencies to protect their core businesses. Firms can also pursue non-synergistic acquisitions to grow dramatically and maintain sustained returns at the same time. The resource-based scholars tend to emphasize how a firm that has heterogeneous scarce, valuable and inimitable resources can lead to sustainable competitive advantage (Barney, 1991).

The agency logic predicts that manager-controlled industrial firms will pursue conglomerate diversification. A firm's managers may benefit from increases in firm size in that these firms are less likely to fail.



Barney, J.B. (1991), "Firm resources and sustained competitive advantage", Journal of Management, Vol. 17 pp.99-120.



Barney, J.B., Zajac, E.J. (1994), "Competitive organisational behaviour: Toward an organisationally-based theory of competitive advantage", Strategic Management Journal, Vol. 15 pp.5-9.


Gupta, O., Roos, G. (2001), "Mergers and acquisitions through an intellectual capital perspective", Journal of Intellectual Capital, Vol. 2 No.3, pp.297-309.


Hagedoorn, J., Dysters, G. (2002), "External sources of innovative capabilities: the preference for strategic alliances or mergers and acquisitions", Journal of Management Studies, Vol. 39 No.2, pp.167-88.