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When an organization becomes significantly distressed, drastic reorganization, dissolution, or the sale of many or all of its assets may be necessary (Weitzel & Jonsson, 1989). This research concerns the last alternative--the sale of all the assets of a distressed firm to another firm. Selling out may be the most commonly chosen alternative for organizations in which internally directed turnaround efforts have failed (Bibeault, 1982). Yet being acquired need not only be the choice of last resort for a distressed firm. If a firm has greater value as a going concern than it would have if liquidated, and if a buyer can be found with special competence or a good strategic fit, an acquisition may be beneficial for all parties (Hambrick, 1985). Indeed, consummation of such a deal prior to any internal turnaround attempt should be strongly considered when there is a significant likelihood that the attempt will be a failure that will drain firm resources and start the firm on an unstoppable downward spiral (Hambrick & D'Aveni, 1988).
Acquisitions of financially distressed firms seem to occur regularly (Grinyer, Mayes, & McKiernan, 1988), but no systematic empirical evidence exists on whether such acquisitions are generally successful or unsuccessful. This study eliminated that void by identifying a set of constructs that appear to predict success in the acquisition(1) of distressed firms and empirically testing those predictions.
POTENTIAL VALUE IN THE ACQUISITION OF DISTRESSED FIRMS
Several factors may make the acquisition of a distressed firm attractive to a buyer and to the distressed firm itself. A horizontal acquisition of firms with previously inferior market shares can result in a business combination that has significant market power and influence over prices (Chatterjee, 1986; Hitt, Harrison, Ireland, & Best, 1993). Economies of scope may be achieved by an acquisition that combines businesses that share some resource, such as a distribution network (Seth, 1990). Acquisitions that produce economies of scale may be attractive to an acquirer, regardless of the target's past performance, if the managers of the acquirer believe they can smoothly integrate the desired activities of the target with their own. Scale economies produced through acquisition may be attractive to the managers of a distressed target because it is an opportunity for cost saving.
An acquisition that combines businesses...