In an Effort to Explain why Business Acquisitions Often Fail

Reading Passage Question

In an effort to explain why business acquisitions often fail, scholars have begun to focus on the role of top executives of acquired companies. Acquired companies that retain their top executives tend to have more successful outcomes than those that do not. Furthermore, existing research suggests that retaining the highest-level top executives, such as the CEO (chief executive officer) and COO (chief operating officer), is related more positively to post acquisition success than retaining lower-ranked top executives. However, this explanation, while insightful, suffers from two limitations. First, the focus on positional rank does not recognize the variation in length of service that may exist in top executive posts across companies, nor does it address which particular top executives (with respect to length of service) should be retained to achieve a successful acquisition outcome. Second, the relationship between retained top executives and acquisition outcomes offered by existing research is subject to opposing theoretical explanations related to length of service. The resource-based view (RBV) suggests that keeping acquired company top executives with longer organizational tenure would lead to more successful outcomes, as those executives have idiosyncratic and nontransferable knowledge of the acquired company that would be valuable for the effective implementation of the acquisition. The opposing position, offered by the upper echelons perspective (UEP), suggests that retaining top executives having short organizational tenure would lead to more successful outcomes, as they would have the adaptability to manage most effectively during the uncertainty of the acquisition process.

Responding to these limitations, Bergh conducted a study of executive retention and acquisition outcome that focused on the organizational tenure of retained company top executives in 104 acquisitions, followed over 5 years. Bergh considered the acquisition successful if the acquired company was retained and unsuccessful if it was divested. Bergh’s findings support the RBV position. Apparently, the benefits of long organizational tenure lead to more successful outcomes than the benefits of short organizational tenure. While longer tenured top executives may have trouble adapting to change, it appears that their perspectives and knowledge bases offer unique value after the acquisition. Although from the UEP position it seems sensible to retain less tenured executives and allow more tenured ones to leave, such a strategy appears to lower the probability of acquisition success.

“In an effort to explain why business acquisitions often fail” - is a GMAT reading comprehension passage with answers. Candidates need a strong knowledge of English GMAT reading comprehension.

This GMAT Reading Comprehension consists of 3 comprehension questions. The GMAT Reading Comprehension questions checks the candidates’ abilities in understanding, analyzing, and applying information. Candidates can actively prepare with the help of GMAT Reading Comprehension Practice Questions.

Solution and Explanation

Question 1. According to the passage, the research mentioned in line 6 suggests which of the following about lower-ranked top executives and post acquisition success?

(A) Given that these executives are unlikely to contribute to post acquisition success, little effort should be spent trying to retain them.
(B) The shorter their length of service, the less likely it is that these executives will play a significant role in post acquisition success.
(C) These executives are less important to post acquisition success than are more highly ranked top executives.
(D) If they have long tenures, these executives may prove to be as important to post acquisition success as are more highly ranked top executives.
(E) Post acquisition success is unlikely if these executives are retained.

Question 2. The resource-based view, as described in the passage, is based on which of the following ideas?

(A) The managerial skills of top executives become strongest after the first five years of their tenure.
(B) Company-specific knowledge is an important factor in the success of an acquisition process.
(C) The amount of non transferable knowledge possessed by long-tenured top executives tends to be underestimated.
(D) Effective implementation of an acquisition depends primarily on the ability of executives to adapt to change.
(E) Short-tenured executives are likely to impede the implementation of a successful acquisition strategy.

Question 3. The passage suggests that Bergh and a proponent of the upper echelons perspective would be most likely to disagree over which of the following?

(A) Whether there is a positive correlation between short organizational tenure and managerial adaptability
(B) Whether there is a positive correlation between long organizational tenure and the acquisition of idiosyncratic and nontransferable knowledge
(C) Whether adaptability is a useful trait for an executive who is managing an acquisition process
(D) Whether retaining less-tenured top executives of an acquired company is an optimal strategy for achieving post acquisition success
(E) Whether retaining highest-level top executives of acquired companies is more important than retaining lower-ranked top executives

Question 4. According to the passage, prior to Bergh’s study, research on the role of top executives of acquired companies in business acquisition success was limited in which of the following ways?

(A) It did not address how the organizational tenure of top executives affects post acquisition success.
(B) It did not address why some companies have longer-tenured CEOs than others.
(C) It did not consider strategies for retaining long-tenured top executives of acquired companies.
(D) It failed to differentiate between the contribution of highest-level top executives to post acquisition success and that of lower-ranked top executives.
(E) It underestimated the potential contribution that lower-level top executives can make to post acquisition success.

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