Board Interlocks Among Target Companies And The Success Of Merger And Acquisition

Since the1920s, developed countries have experienced five M&A waves. With the improvement of the capital market in China, more and more domestic enterprises try to improve corporate governance and performance by merging and restructuring. Gradually, mergers and acquisitions have become the main force in the modern economic environment and the hot issues in academic and practical circles. For the target company, the merger and acquisition means a significant corporate change, involving the transfer of a lot of resources’control and the livelihood and fate of many employees. And the failure cases of mergers and acquisitions make target companies increase the vigilance of M&A transactions. From the perspective of the target company, many failure cases are highly related with the acquisition-related information, knowledge and experience which have mastered by targets. For example, it is easy for target companies to overestimate the stock of acquirers and shrink their values if target companies don’t understand the true value of acquirers; it is hard for target companies to distinguish between friendly and hostile takeovers if target companies don’t quite know the mergers and acquisitions; the cost of collecting information, consulting and negotiating is high if target companies are not familiar with mergers and acquisitions; when target companies doubt and resist M&A transactions, there will be many post-merger integration difficulties and other difficulties. Therefore, any channels that will help target companies get the acquisition-related information, knowledge and experience all have economic values. Affected by Chinese traditional Confucian philosophy and the specificity of the current transition economic environment, enterprises in China are in the "relationship-oriented society" system which is different from in the Western context and social networks have become an important way of surviving and developing. There is a wide range of board interlocks in listed companies of China and interlocking directors are not only the network links of companies, but also an important channel of exchanging information, knowledge and experience in the board network. Thus, there is important theoretical and practical value studying the relationship between the interlocking directorship and the success or failure of merger transactions from the perspective of the interlocking directorship among target companies.This paper is based on the specific institutional context of "relational society" and studies the relationship between the interlocking directorship among target companies and the success or failure of merger transactions from the perspective of information theory, imitation theory and the resistance of target boards. Using the simple data of all the A-stock listed companies in China which experienced out-of-control takeover transactions during2004-2013, this study tries to answer the following questions through logistic regression and linear regression:if the company which has interlocking directorship with companies that have experienced out-of-control takeover transactions is more likely to be merged than the company which doesn’t have interlocking directorship with companies that have experienced out-of-control takeover transactions? If the company which has interlocking directorship with companies that have experienced out-of-control takeover transactions has better post-merger performance than the company which doesn’t have interlocking directorship with companies that have experienced out-of-control takeover transactions? This is a useful supplement to the current research gaps and will provide useful guidance to target companies, letting them take the takeover transactions seriously and take full advantage of the acquisition-related information, knowledge and experience exchanged through interlocking directorship channels and improving acquisition performance.The empirical results show that:(1) the company which has interlocking directorship with companies that have experienced out-of-control takeover transactions is more likely to be merged than the company which doesn’t have interlocking directorship with companies that have experienced out-of-control takeover transactions; the company which has interlocking directorship with companies that have experienced out-of-control takeover transactions has better acquisition performance than the company which doesn’t have interlocking directorship with companies that have experienced out-of-control takeover transactions;(2) the company which has inside interlocking directorship with companies that have experienced out-of-control takeover transactions is more likely to be merged than the company which has outside interlocking directorship with companies that have experienced out-of-control takeover transactions; the company which has inside interlocking directorship with companies that have experienced out-of-control takeover transactions has better acquisition performance than the company which has outside interlocking directorship with companies that have experienced out-of-control takeover transactions;(3) the current corporate performance of target companies has no moderating effect on the relationship between board interlocks of target companies and the possibility of being merged.Currently, the study of the relationship between interlocking directorates and mergers and acquisitions focuses on the overall impact of the network connection and the impact of directors’personal connection with the management. Although there are some papers studying the impact of the board interlocks among acquirers and targets, there is little literature studying the impact of interlocking directorates among target companies on the success or failure of takeover transactions. Compared with the existing research, the innovation of this article may lie in the following aspects:(1) this paper studies the relationship between the interlocking directorship among target companies and the success or failure of merger transactions which is a useful supplement to the current research gaps;(2) generally, the study on the relationship between interlocked directors and corporate mergers and acquisitions mainly focuses on the information theory or imitation theory, but this paper integrates the information theory, imitation theory and the resistance of target boards, enriching the theoretical studies;(3) affected by Chinese traditional Confucian philosophy and the specificity of the current transition economic environment, enterprises in China are in the "relationship-oriented society" system which is different from in the Western context and this paper is based on the specific institutional context of "relational society" and will provide useful guidance to target companies, letting them take the takeover transactions seriously and take full advantage of the acquisition-related information, knowledge and experience exchanged through interlocking directorship channels and improving acquisition performance.In addition, there are still some limitations and shortcomings in this paper. Firstly, this paper only considers the moderating effect of the current corporate performance on the relationship between board interlocks of target companies and the possibility of being merged. Future research can further explore the moderating effects of the board interlocks in the same industry and the same region on the success or failure of takeover transaction. Secondly, this paper is based on the specific institutional context of "relational society". Future research can further explore whether the conclusions of this article are applicable to other institutional backgrounds,increasing the significance of the theories and conclusions in this paper.