0019-8501/01/$–see front matterPII S0019-8501(99)00123-6

Industrial Marketing Management

30, 575–586 (2001)© 2001 Elsevier Science Inc. All rights reserved.655 Avenue of the Americas, New York, NY 10010

Can You Buy a Business Relationship?

On The Importance of Customer andSupplier Relationships in Acquisitions

Helén AndersonVirpi HavilaAsta Salmi

Mergers and acquisitions have become a popular strategyfor gaining growth. Studies show, however, high failure ratesfor acquisitions. Earlier literature concentrates on the strate-gic or organizational fit between companies and integrationprocesses and fails to recognize the companies’ external busi-ness relationships. An implicit assumption seems to be thatthrough acquisition the market position of the target firm canbe taken over. We argue that it is not always easy or even pos-sible to take over a company’s customer and supplier relation-ships. We elaborate on the various problems related to rela-tionships that acquisitions may give rise to. Our conceptual

discussion is illustrated with a case study from the graphics in-dustry. © 2001 Elsevier Science Inc. All rights reserved.

INTRODUCTION

Mergers and acquisitions (M&A) have been, and con-tinue to be, a very popular strategic alternative for com-pany growth and/or diversification. Motives promptingmergers include increase of market share, reduction orelimination of competition, quick and economical entryinto a business, impulse purchase of a bargain-pricedbusiness, reduction of overdependence on geographicalpresence, acquisition of new technology, exploitation ofmultiple synergies, and a desire to grow rapidly [1].

Address correspondence to Helén Anderson, Linköping University,Department of Management and Economics, SE-581 83 Linköping, Sweden.

The authors appear in alphabetical order.

576

The phenomenon of M&A has attracted strong aca-demic interest too. Studies have emerged in the fields offinancing, industrial economics, strategic management,and organization theory. On the one hand, the literatureconcentrates on comparing the acquiring and the targetfirms: the strategic and organizational fit and synergy be-tween the two companies [2, 3]. On the other, analysis ofprocess—concerning, for example, premerger negotia-tions, acquisition behavior, postmerger integration, andperformance—has been prominent [1, 4, 5]. Earlier liter-ature shows that expected gains from takeovers seldommaterialize and that most M&As fail [2, 4, 6]. By failure,it is meant that the acquisition or merger does not im-prove the performance or does not measure up to manag-ers’ evaluations. Several studies [1, 5, 7] also suggest thatfailures in the integration process are important reasonsfor M&A failure.

The literature thus far has concentrated on the charac-teristics of the two merging companies and their integra-tion. In our view, this focus fails to recognize the interde-pendence between a firm and its environment and istherefore too narrow. A large proportion of the M&A lit-erature seems to be based on the assumption that mana-gerial actions have a major influence on the success ofthe acquisition or merger (cf. [8]). The resource-depen-

dence view, however, would argue that external factorsgreatly influence the success of any company operations[9]. In this article, we take the more contextual approachto acquisitions. We argue that another reason for failuremay be lack of recognition of the context of the mergingcompanies, that too much effort is concentrated on themutual fit of the two merging companies.

To provide new understanding of the phenomenon ofM&A, we focus on the merging companies’ externalbusiness relationships. We propose that an acquisition in-fluences and is influenced by not only the two mergingcompanies, but also by their customer and supplier rela-tionships. And that the way these relations are influencedmay have a decisive effect on the outcome of the acquisi-tion. Moreover, as Johanson and Mattsson [10] point out,“ . . . [T]he major aim of the acquisition may be to getcontrol of the exchange relationships, to change theircharacter, or to change the connections between ex-change relationships. Control of exchange relationshipsthrough acquisitions is, however, never certain, sincethere are always two actors involved” (p. 217). We there-fore raise the question whether external relationships,with regard to their character of being continuouslyformed through interaction, can be taken over, i.e.,bought, when buying a company.

The purpose of this article is to discuss what type ofeffect—intended and unexpected—acquisitions mayhave on the existing customer and supplier relationshipsof the merging companies. Our discussion is conceptualin character but is illustrated with a case study. The em-pirical data concern the graphics industry. We focus onone Swedish company in particular that has been in-volved in several M&As. We point out that external busi-ness relationships should be given explicit attention inboth premerger and integration phases.

In the literature, mergers and acquisitions often arediscussed simultaneously and grouped under the heading

HELÉN ANDERSON’S research interests lie in the area of industrial marketing, technological innovation, and market strategy.

VIRPI HAVILA’S dissertation dealt with changes in international business relationships, and her current interests are dynamics in business networks and termination of business relationships.

ASTA SALMI’S research is focused on business networks and their dynamics, emerging markets in Eastern Europe,

strategies, and international business.

Mergers and acquisitions continue to be a very popular strategic alternative . . .

literature shows that most M&As fail.

577

M&A. In this article, our focus is on acquisitions, eventhough similar argumentation would apply to mergers aswell. The article is organized as follows. Section 2 offersa review of M&A literature. Section 3 discusses cus-tomer and supplier relationships as assets of a company,and section 4 elaborates on customer and supplier rela-tionships in a wider context. Section 5 includes themethod and the empirical base. There we also discuss theeffects of acquisitions on our case companies’ existingcustomer and supplier relationships. Finally, section 6gives conclusions and managerial implications.

THE LITERATURE ON MERGERSAND ACQUISITIONS

The main reason behind M&A activities is a belief inpotential economic gains. In general (following the U.S.Federal Trade Commission classification), the followingforms of merger activity can be distinguished: (1) hori-zontal, (2) vertical, (3) product extension, (4) market ex-tension, and (5) conglomerate. The first four activitiesconcern related businesses, whereas the fifth concernsunrelated businesses of financial character. So-calledportfolio investments are concentrated on reducing risksand gaining financial synergies through the acquisition ofanother company (see e.g., [11]).

In this article, we concentrate on the related merger ac-tivities where operative as well as managerial synergieswith related business activities are the focus. Severalstudies show that diversification seems to be positivelycorrelated to profitability [12, 13]. The early research inthis area concentrates on empirical measurements com-paring performance and degree of diversification withinrelated industries. From such studies of economic perfor-mance, both the degree and number of related productswithin the companies [14] and the market structure fac-tors emerge as explanatory factors [15].

A more recent observation is that the extent to whichcompanies are integrated affects the merger process. Inlater studies of M&A, more and more of the interest hasbeen directed toward the merger process as such and onfirm level rather than on industry level. Jemison and Sit-kin [16] and Datta [3] concentrate their analyses on thestrategic and organizational fit between the (two) merg-ing parties. These studies point out difficulties with theintegration process.

Shrivastava [1] separates three different types of inte-gration. First, procedural integration involves combiningsystems and procedures of the merged companies at theoperating, management control, and strategic levels. Sec-ond, physical integration of resources and assets involvesthe consolidation of product lines, production technolo-gies, R&D projects, plant and equipment, and real estateassets. Finally, managerial and sociocultural integrationis perhaps the most difficult postmerger integration prob-lem. It involves a complex combination of issues relatedto the selection or transfer of managers, the changes inorganizational structure, the development of a consistentcorporate culture, and a frame of reference to guide stra-tegic decision making, the gaining of commitment andmotivation from personnel, and the establishment of newleadership.

The complexity of merging two separate organizationsis well described by Shrivastava’s categorization. It takesinto account the costs and efforts that administrative,technical, and organizational integration creates. In addi-tion, managerial and sociocultural dimensions have givenrise to many hindrances—there is a perceived differencebetween belonging to the acquiring company and belong-ing to the acquired company. Shrivastava’s key aspectsof handling these problems are coordination, control, andconflict resolution by the merging parties.

Human relations and management turnover issues dur-ing and after an acquisition also are emphasized in the lit-

. . . [R]eason for failure may be lack of recognition of the context of the merging

companies . . . .

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erature on M&A [5, 8, 17]. Comprehensive integration isrequired to transfer competence, and especially in thecase of R&D transfer, intensive personal contacts andjoint projects between the merging companies areneeded. It has been recognized that to maintain the mana-gerial and technical competence, the personnel of the ac-quired company should be retained. However, studiesshow that there is widespread top management transferand turnover after mergers and acquisitions [5].

The focus in M&A research has developed to grasp theintegration process, but we find that little attention is di-rected toward the context within which the merging com-panies operate. Moreover, the context is not regarded ashaving sociocultural dimensions such as relationships be-tween firms. Hunt [4] postulates that different contextssuggest different acquisition processes (including target-ing, negotiating, and postacquisition implementation)and discusses contextual variables, such as buyer’s strat-egy, industry, ownership, health of seller, compatibilityof size, experience of buyer, and access to audit. Again,this approach essentially concentrates on the two compa-nies alone. In M&A literature, customers and suppliers tothe merging companies have been only mentioned inpassing, e.g., they represent one group of relevant stake-holders who should be provided with general informationabout the likely impact of the merger [1]. In our view,this is not enough. For instance, the managerial turnoveralone is likely to influence interaction in business rela-tionships and in this way also affect relationships withcustomers and suppliers. Although a large proportion ofM&A literature lies in the area of strategic management,it focuses on internal integration processes, and an im-plicit assumption seems to be that in buying a firm, itsbusiness relationships are also automatically acquired.We argue that a contextual view that recognizes firms as

being connected to each other through exchange busi-ness relationships can contribute to the strategic thinkingconcerning mergers and acquisitions (cf., [18, 19]). Suchan argument leads us to regard business relationshipsas assets.

BUSINESS RELATIONSHIPS AS ASSETS

As interorganizational theory [9, 20] has developed,the focus in business studies has been extended from theperspective of the single firm to include the interactionbetween several firms. Relations between organizationshave been studied to increase our understanding of a mar-ket form [21], of industry [22], of distribution systems[23], and of transactions in works inspired by Williamson[24]. Attention has been directed to a company’s externalrelationships with, for example, customers and suppliers[25–27].

Whereas traditional market models postulate that mar-ket transactions are isolated events taking place betweensellers and buyers, there is an increasing amount of evi-dence pointing on long-term relationships between inter-dependent economic actors [28–31]. The interorganiza-tional perspective gives considerable attention to the timeaspect; relationships are seen to be formed over time, andboth history and future expectations of the involved par-ties are seen as affecting the relationship [26, 29, 32, 33].Furthermore, because there are always two actors in-volved in a business relationship, it cannot be created bya unilateral decision. Thus, business relationships arerarely constructed, but rather, evolve over time.

Through interaction, the involved actors have an im-pact on the character of the relationship, which meansthat over time it changes in content and strength ([29], p.269). For example, two parties may adapt to each other

. . . to discuss what type of effect—intended and unexpected—acquisitions may have on

the existing customer and supplier

relationships of the merging companies.

579

technically, logistically, administratively, or financially[31, 34]. Trust and commitment are two central featuresin relationships, which have been given attention in re-search [35, 36]. In addition, the fact that a business rela-tionship always involves at least two individuals, onefrom each party, gives business relationships a socialcharacter. This has been denoted as social bonding be-tween the actors [29].

It takes both time and resources to establish, main-tain, and develop business relationships between firms.Relationship activities therefore can be seen as formingmarket investments: when a company commits resourcesin specific relationships, important market assets areformed for future use [37]. These relationships give thecompany access to resources of other business actors. In-vestments in relationships are cumulative, and interde-pendent: commitments made in one relationship influ-ence the company’s opportunities to enter into and actwithin other relationships.

Only recently has it been acknowledged that thesemarket-based assets must be cultivated and leveraged toincrease shareholder value [38]. Of course, evaluationof market-based assets, such as customer relationships,channel relationships, and partner relationships, is diffi-cult due to their largely intangible nature. This complex-ity should not, however, lead to ignoring these assets; af-ter all, there is a growing recognition that today, asignificant proportion of the market value of firms lies inintangible, off–balance sheet assets [4, 38]. The compli-cation with these assets compared with traditional assetsis their tacit and subjective nature.

To sum up, to establish and develop a business rela-tionship is a resource-intensive process. It is also a pro-cess in which the two involved parties invest in differentways. Therefore, established relationships form an im-portant asset for any company, and as far as acquisitionsare concerned, it becomes a central issue to what extentthese market assets are transferable (cf. [37] p. 191). Thatis, the outcome of any acquisition depends on how wellmanagers succeed in recognizing external relations andon whether established business relationships can betaken over.

BUSINESS RELATIONSHIPS IN AWIDER CONTEXT

The dyadic relationship joining two firms is alwaysconnected with other relationships to other parties [26,29]. For instance, customers’ customers and suppliers’

suppliers may have a decisive impact on the business re-lationship. In this way, companies become connected,both directly and indirectly, to other companies and formnetworks of business relationships.

Owing to the connectedness of business relationships,changes in the focal relationship affect not only the twoparties directly doing business with each other, but alsoother connected parties. Anderson, Håkansson, and Johan-son [26] refer to these effects and distinguish between pri-mary and secondary functions of relationships (p. 3). Byprimary functions they mean the positive and negative ef-fects on the two partner firms of their interaction in a focaldyadic relationship. The secondary functions, in turn, con-cern a focal business relationship’s effects on the con-nected parties. Connectedness of relationships means thatthere are always several parties who have made invest-ments on the basis of the focal business relationship. Achange in the focal business relationship therefore alsomay affect other, directly or indirectly, connected parties.Moreover, their reaction, in turn, is bound to affect the fo-cal relationship. Thus, changes initiated in the interactionbetween any two parties are likely to cause multiple ac-tions and counteractions in its context.

An acquisition, for example, always affects the relation-ship between the two (or several) companies involved. Inaddition, changes are not necessarily confined to the rela-tionship between the merging parties but may spread intoconnected relations and become more extensive networkeffects (cf. [39]). Earlier research on mergers and acquisi-tions has ignored the connectedness of business relation-ships; i.e., research has concentrated on the primary func-tions of relationships and neglected the secondary. Giventhe connectedness of business relationships, this seems toleave untouched several important factors affecting theoutcomes of acquisitions. Acknowledgement of connect-edness and external relations offers then important mana-gerial implications of acquisitions as well.

To capture the connectedness of a dyadic relationship,Anderson, Håkansson, and Johanson [26] propose twoconcepts: anticipated constructive and anticipated delete-rious effects on network identity of a firm. Similarly,acquisitions have both positive and negative anticipatedeffects. Here, we aim at focusing on the strategic dimen-sion of acquisitions, and we propose that acquisitionshave both planned and intended and unexpected effectson external relations. The intended effects come from re-garding relationships as any asset possible to take over.The unexpected effects are those that occur because therelationship also has an intangible interactive dimension,

580

which is most often, neglected prior to an acquisition.And that one reason thereof can be found in the characterof the relationships: their continual development dependsupon how the parties act and react within them. Our dis-cussion will concentrate on the intended and unexpectedeffects of acquisitions on the companies’ customer andsupplier relationships.

ACQUISITIONS IN THE GRAPHICS INDUSTRY: THE CASE OF ALPHA, A SWEDISH COMPANY

Method

The empirical data presented in this article originatesfrom an ongoing larger research project that analyzes dy-namics within business networks.

1

A longitudinal approachwas needed to study the complexity of effects of acquisi-tions on companies’ customer and supplier relationshipsand the possible outcomes of this over time, and accord-ingly the approach we have chosen is a case study [40, 41].For the sake of confidentiality at this stage of the study pro-cess, we will refer to the focus companies as “Alpha”,“Beta”, “Theta” (in Sweden), and “Gamma” (in Finland).

We have collected data through in total 15 managerialinterviews with 10 different managers representing bothgeneral management and separate fields of operations inthese companies (see Table 1). In addition, three personalinterviews were conducted in three connected compa-nies. Thus, our analysis is based on different viewpoints:we have learned from the perceptions of several compa-nies, of several business areas, and also of several indi-viduals. Our research group includes Finnish and Swed-ish researchers so we have been able to interview eachrespondent in his/her native language. The interview datawere complemented with archival material such as an-nual reports from the companies and newspaper articles.

Description

T

HE

G

RAPHICS

I

NDUSTRY

W

HERE

A

LPHA

O

PER-

ATES

. Our empirical data originate in the graphics in-dustry, which represents both the traditional manufactur-

ing industry with old and proud traditions and handcraftsand an emerging modern mass communication industry.Few changes took place within the industry during itsfirst 500 years, i.e., since Johannes Gutenberg inventedbook printing by movable type. It was during the 1970sthat great changes within the industry started to occur:first, the changeover from lead-setting to photo-settingmeant a change in the type of competence needed withincompanies operating in the graphics industry [42]. Due totechnological changes and new media developments dur-ing the 1980s and the 1990s, this industry has gone, andis still going, through revolutionary changes. In recentyears, for example, digital data transfer has dramaticallychanged the industry’s structure. Another reason forchanges in the industry structure in some of the Nordiccountries was the recession in the beginning of the 1990s,which, among other things, led to overcapacity in andseveral bankruptcies among the printing companies [43].A current phenomenon within this industry, which re-flects the companies’ will to survive and seek new rolesand positions in the industry, is mergers and acquisitions.The financial manager at Alpha in November 1997 ex-pressed their reason for an acquisition as follows: “Youmust be big if you are going to survive.”

A

LPHA

AS

A

T

ARGET

FOR

A

CQUISITIONS

IN

1973,

IN

1992

AND

IN

1995. Alpha has been involved in severalacquisitions between 1973 and 1998. It is a Swedish com-pany and was founded in 1839. Since the end of the 19thcentury, Alpha has operated under a well-known name inSweden. In 1973, it was acquired by another Swedishcompany (referred to in this article as the Conglomerate)and became one of this company’s divisions. At that time,Alpha had approximately 450 employees. Later on, theConglomerate decided to concentrate on its core business,and accordingly, Alpha along with other businesses wassold in January 1992. Already during the late 1980s and inthe beginning of the 1990s, Alpha had lost market sharesand in 1992 was not as prosperous as it had been duringmost of its 150-year existence. One reason for the loss ofmarket share was that it had, due to technological progress,become cheaper for customers to buy the fairly standard-ized product abroad that in turn meant that the customersnow had more suppliers to choose from. The loss of cus-tomers resulted in financial crisis during autumn 1991. Noteven a layoff of 66 employees helped to improve Alpha’ssituation, and the company was sold at a nominal price ofone Swedish crown.

The next owner, who already operated within thegraphics industry in Sweden, immediately laid off more

1

The project “Dynamics in Business Networks” is a cooperation projectbetween four researchers representing four different business schools/universities in two Nordic countries. The aim of the research project is todevelop better conceptual tools for analyzing change and dynamics—i.e.,forces creating change—in business networks. For the project, empirical datafrom the Nordic graphics industry has been collected, including writtenmaterial (statistics, annual reports, journal articles, books) and interviews withmanagers and experts within the field.

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people, and the number of employees was now down toapproximately 200. However, the new owner did notmanage to run Alpha more than half a year: in November1992 Alpha went into bankruptcy. The day after thebankruptcy, it already had a new owner. The selling pricethis time was 50,000 Swedish crowns. This owner, whohad been a successful sportsman and was a well-knownperson, had been involved in one bankruptcy in the past.He ran the business two days before he filed a bankruptcypetition. After some weeks, he started to operate Alphaagain, now with approximately 140 employees. Somesuppliers, who did not trust this new owner, reacted im-mediately by increasing their prices and by refusing togive any credit to Alpha. Alpha also lost those customerswho refused to do business with the new owner; in addi-tion, Alpha was forced to lower its prices to some othercustomers. As a result, at the end of 1994, Alpha wasagain close to a bankruptcy.

In 1995, Alpha was sold again to a holding company.At that time, it had 135 employees and sales of 110million Swedish crowns. The holding company alreadyowned a small company, which operated in the sameindustry as Alpha. The owners of the holding companyintended to further develop their business within thegraphics industry, and accordingly, in January 1998,the holding company acquired one of Alpha’s competi-tors. In the following discussion, this company will becalled Beta.

A

LPHA

’

S

A

CQUISITION

OF

D

ELTA

IN

THE

B

EGINNING

OF

1990

S

. In the beginning of 1990s, Alpha acquired asmall company, Delta, located in another town. The rea-son for this acquisition was that Alpha wanted to increaseits production facilities regarding the last step in its pro-duction process. Most of Alpha’s competitors (such asBeta) do not have this last step in-house; instead, theybuy it from companies specializing in this type of pro-duction. Only few larger companies within this field inSweden have the type of “complete” production process,which Alpha now gained. A complete production process

includes three different steps, which usually are takencare of by small, often family-owned, companies. Afterthe acquisition several of Delta’s former customersstarted to buy from other companies. The reason givenwas that they did not feel confident that Alpha-Deltawould give the same priority to their orders as Delta haddone previously.

A

LPHA

AND

B

ETA

AS

M

EMBERS

OF

A

G

ROUP

FROM

1J

ANUARY

1998. Beta is a Swedish company and is lo-cated approximately 200 kilometers from Alpha. Theproducts Alpha and Beta offer are direct substitutes foreach other. However, because Alpha and Beta have dif-ferent local markets, they are not competitors with regardto the local customers. The companies aimed at maintain-ing existing exchange relationships with local customersand at continuing to deal with them in the same manner.The parties were not allowed to enter into each other’sterritory. This indicates that the management regardedthe existing exchange relationships to be important, andthat the local customers were not to become influencedby the merger. Typical within this industry is that thereare several companies operating in the same town/area,which means that the local customers to Alpha and Betahad several alternative suppliers.

Alpha and Beta were regarded as competitors for somenonlocal customers, meaning that some of their salesmenvisited the same customers. Because the two companiesoffered a similar product, the main way to compete hadbeen to offer a lower price. The future sales activities wereto be coordinated so that only one salesman would visiteach nonlocal customer. From the perspective of the non-local customers and their possibility to choose betweendifferent suppliers, this coordination is a change for theworse. One of the customers was very clear about this: “Ifyou want to know my honest opinion, I don’t like it.”

Within the graphics industry, as in many others, thecustomers are demanding quicker deliveries, and the timefrom order to delivery is becoming shorter. Thus, this hasbecome a means to compete within the industry. An ac-

TABLE 1Personal Interviews

Company Interviewed Persons Interview Months

Alpha (in Sweden) CEO1, CEO2, financial manager, sales manager, controller, purchaser

May 1997 (2 interviews), November 1997, February 1998, March 1998, April 1998, June 1998, December 1998

Beta (in Sweden) CEO October 1998Gamma (in Finland) CEO, production manager February 1998, June 1998, February 1999Theta (in Sweden) CEO April 1998, September 1998, February 1998

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cepted delivery time of six weeks some years ago wasdown to two weeks in 1998.

Through the acquisition of Beta, Alpha and Beta wereable to use the each other’s free production capacity. Inthis way they expected to get new customers and also tosell more to the old ones in the future. Alpha also ex-pected to get new customers through Beta because Al-pha’s production process is “complete” compared withBeta’s, which is missing the last step. Beta, as most of theother companies within the field, had been buying thisfunction from specialized companies, which usually arelocal small companies. After the acquisition, Beta wasgoing to use Alpha for this last step, which means thatBeta now also could market itself as a company with acomplete production process. This soon proved to bevery important for Alpha and its survival as a company.

Both Alpha and Beta have production where specifictypes of input material are needed. Both companies usu-ally buy their supplies through industrial distributors,which are few in Sweden. One important reason for theacquisition of Beta was that as a larger company, theyhoped to create a better bargaining position vis-à-vis sup-pliers in negotiations concerning the price of supplies.

A

LPHA

AND

THE

L

OSS

OF

AN

I

MPORTANT

C

USTOMER

D

UE

TO

AN

A

CQUISITION

IN

1998. During the planningof the division of the work between Alpha and Beta, Al-pha was informed that one of its main customers, Theta,had been sold to a Finnish company, Gamma. Accordingto Gamma’s CEO, Alpha had sustained losses during the1990s and was expected to go bankrupt soon again.Therefore, Gamma planned to stop buying from Alphaand move the product into its own in-house production.As a result of higher production volumes, Gamma ex-pected to get better prices from its suppliers. This verysoon proved to be right regarding some suppliers.

Theta had been buying approximately 95% of oneproduct group of Alpha and had accounted for one third(approximately 30 million Swedish crowns) of Alpha’sturnover. For Alpha, the loss of Theta as a customermeant that it now was forced to concentrate on othertypes of products because the equipment needed to pro-duce the specific product for Theta had been owned byTheta. Directly after Gamma’s acquisition of Theta, theproduction equipment was moved to Gamma in Finland.This, in turn, meant that Alpha needed to shrink its pre-mises and dismiss a number of personnel. In September1998, Alpha had 80 employees left. One reason for Al-pha’s survival, despite a loss of one third of its sales“overnight,” was that Beta had started to use Alpha for

the last step in the production process. In this way, Alphagot new customers who to some extent could compensatefor the one they had lost.

Discussion: Effects of Acquisitions on Alpha’s Customer and Supplier Relationships

In our elaboration on the effects of the acquisitions onAlpha’s customer and supplier relationships, we shall in-vestigate more specifically how they may influence the ac-quisition and its outcomes. We limit our discussion to theimmediate customer and supplier relations of the mergingcompanies, although clearly, in any business market, vari-ous connections prevail. For example, such parties as sup-pliers of suppliers, customers of customers, governmentalorganizations, and financial intermediaries cause furthercomplications. Our discussion focuses on the followingacquisitions where Alpha has been “in one way or an-other” involved: Alpha’s acquisition of Delta in early1990s, the acquisition of Alpha in November 1992, the ac-quisition of its competitor, Beta, in January 1998, and theacquisition of its customer, Theta, in February 1998.

When planning an acquisition there are relationship ef-fects that managers expect to occur; we call these “in-tended effects.” There also may be effects of an acquisi-tion on customer and supplier relationships, which arenot planned (“unexpected effects”). For a manager, thelatter are clearly more critical as far as an acquisition out-come is concerned.

I

NTENDED

E

FFECTS

ON

R

ELATIONSHIPS

TO

C

USTOM-

ERS

AND

S

UPPLIERS

: A

CQUISITIONS

IN

J

ANUARY

1998

AND

F

EBRUARY

1998. The acquisition in January1998 meant that the former competitors, Alpha andBeta, were owned by the same holding company. Thisdid not influence Alpha’s and Beta’s business relation-ships with local customers; the two were 200 kilometersapart. Traditionally in this industry, it has been impor-tant to have the supplier located in the neighborhood.Here, the intended effects on customer relationshipswere that the relationships with local customers wouldnot be influenced.

The fact that Alpha and Beta now belong to the samegroup means that they use each other’s free productioncapacity. In this way Alpha and Beta are able to competeby way of shortening the time between order and deliv-ery, which has a positive and intended effect on both oldand new customer relationships. Another intended effect(which has been put into practice) is that Alpha hasobtained new customers through Beta who now uses

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the part of Alpha’s production process that Beta wasmissing.

Besides the local customers, Alpha and Beta have ear-lier competed for some nonlocal customers. The two com-panies have been coordinating their sales forces so thatonly one seller will visit each nonlocal customer. This isone of the intended effects on the relations with nonlocalcustomers. It may lead to higher prices for these customersdue to the fact that there is one less competitor.

On the supplier side, the intention is to be able to nego-tiate better prices due to increased size. Whether this willoccur or not is still to be seen.

While not directly involved in the acquisition, whichtook place in February 1998, Alpha, as one of the mainsuppliers to the target firm Theta, felt its effects. TheFinnish company who acquired Theta had the intention toterminate Alpha’s and Theta’s relationship. This has oc-curred, and Theta now is buying a large part of its sup-plies from its mother company in Finland.

Because some production equipment was removedfrom Alpha, it also was forced to end production of oneproduct group. Consequently, it was not able to searchfor new customers and establish new relationships withthem, at least not immediately. Without doubt, it wasGamma’s intention to decrease risk of competition and tomake it more difficult to establish competing relations onthe Swedish market.

U

NEXPECTED

E

FFECTS

ON

R

ELATIONSHIPS

TO

C

US-

TOMERS

AND

S

UPPLIERS

: A

CQUISITIONS

OF

E

ARLY

1990

S

, N

OVEMBER

1992,

AND

F

EBRUARY

1998. Thereason for Alpha’s acquisition of Delta in the early 1990swas to add one finalizing stage to the production process.After the acquisition several of Delta’s former customersstarted to buy from other companies. Although customersin principle were offered better service by ensuring thatall steps of production were made in-house, they were

not confident that Alpha-Delta would be committed tothem anymore. Of course, this loss of customers as a re-sult of the acquisition was not expected.

For the acquisition in November 1992, the fact that Al-pha was acquired by a person with a “bad” reputation inthis industry had effects on Alpha’s customer and sup-plier relationships. Some of the customers refused to con-tinue to deal with Alpha, and some suppliers demandedimmediate payments. This can be seen as an unexpected(and negative) effect of the acquisition on customer andsupplier relationships. It shows that the persons repre-senting a company and their reputation also may play adecisive role in external business relationships.

For Alpha, the Finnish acquisition of Theta in Febru-ary 1998 meant a sudden and unexpected loss of an im-portant customer. Alpha lost one third of its turnover andwas forced to lay off personnel and sell machines. Thiscan be seen as an connected effect of the acquisition on asupplier relationship. However, contrary to Gamma’s ex-pectations, Alpha has not gone bankrupt but thus far hassucceeded in reorganizing its operations.

To summarize, our analysis shows that: (a) customerand supplier relationships do interfere with how the pro-cess of an acquisition will develop, (b) some of the effectscan be intended and “calculated,” and (c) some effectsmay be unexpected because managers underestimate oreven neglect to regard the connected parties. Thus, we candiscuss intended and unexpected effects on companies’customer and supplier relationships.

DISCUSSION AND CONCLUSIONS

Theoretical Implications

The literature concerning mergers and acquisitionsthus far has concentrated on the merging companies.

. . . most important to recognize that business relationships can develop in an

unforeseen way with unexpected effects on

other relationships

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More specifically, the focus is on the reasons why com-panies merge or acquire other companies, on how and towhat degree the companies are integrated, and on whatkind of effects an acquisition has on these companies, forexample, regarding their performance, location, produc-tion, and personnel. The effects on the involved compa-nies’ customers and suppliers have been largely ignoredin the M&A literature.

We have shown that, mergers and acquisitions haveimportant implications, either positive or negative, forthe merged companies’ customer and supplier relation-ships. We argue that this aspect should be given explicitattention in studies of M&A. An acquisition, for exam-ple, may strengthen and develop the customer and sup-plier relationships. The other extreme is that these rela-tionships can deteriorate or even be terminated. It isperhaps most important to recognize that business rela-tionships can develop in an unforeseen way with unex-pected effects on other connected relationships.

In accordance with the business relationship view, it ismeaningless and conceptually impossible to disconnectthe organization from its context [44]. Having observedthat mergers and acquisitions occur in the context ofbusiness relationship, we propose that it is relevant to askthe question: Can a business relationship be bought?

Our view of this question revolves around the under-standing of relationships as assets. Acquisition of a com-pany involves both tangible and intangible assets. For theformer, property rights can be assigned and transferred.For the latter, in turn, it is tricky to assign property rights.External relations with customers and suppliers belong tothis category. Owing to their interactive and intangiblenature, control of relationships by only one party is im-possible, although the relationships are crucial for the

success of the acquisition. It is central to acknowledgethat the potential positive economic gains depend uponthe willingness and ability of actors to develop furtherand to exploit the existing customer and supplier relation-ships. An attempt by one party to acquire a relationship isnot a sufficient move to secure such gains.

Clearly, as illustrated in our case study, effects ofM&A vary in accordance with the connectedness thatprevails between the companies before the merger. In thecase of a related merger, the customer and supplier rela-tions of the two companies are more likely to be influ-enced than in the case of an unrelated merger—i.e., thenetworks of the companies are more overlapping (cf.[45]). Our empirical cases concern related M&A, and wehave shown that connected companies reacted in variousways—both in anticipated and unexpected ways—to theacquisitions. Although our analysis has not addressed theissue of connectedness in detail, there appears to be muchmore to do along these lines in future studies.

The disregard for customer and supplier relationshipshas led us to be critical toward the field of studies ofM&A. Our critique also is directed towards the field ofbusiness relationships. Mergers and acquisitions, to-gether with their effects on business relationships, clearlyfall into the area of interest for studies on interaction be-tween companies (see e.g., p. 217 in [10]). The main con-cern within these studies is developments that occur be-tween the two parties in a business relationship or at thelevel of the entire network of companies. Takeovers fromthe viewpoint of the involved companies (as investigatedin studies of M&A) have not yet been focussed on ex-plicitly. M&A, including issues such as getting control ofother firm’s resources (relationships), should belong tothe agenda of network researchers.

. . . [T]he potential positive economic gains depend upon the willingness to develop and

exploit the existing customer and supplier

relationships.

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Managerial Implications

We argue that one has to involve the companies’ cus-tomer and supplier relationships both within the pre-merger phase, where strategic evaluations and consider-ations are made, and the integration phase of the merger.Moreover, their intangible nature should be understood.

Explicit studies of the effects of M&A on customerand supplier relationships can provide better tools forcompanies when seeking and choosing target companies.It is important to have the right evaluation criteria andmeasures for finding a good partner. It is essential toevaluate the business relationships the potential partnerhas, to find out with whom the potential partner interactsregarding, e.g., product development, and to evaluatethese relationships both as investments and as potentials.By investments, we mean that the firm has to think ofwhat the alternative cost would be to develop such a busi-ness relationship from “scratch.” With such a procedure,the relationships will be given a value in the same man-ner as brand name and goodwill are given a price in anacquisition. Simultaneously, the company should be sen-sitive to the reactions of other actors. Our study showsthat customers may be less convinced about the commit-ment or reputation of the acquirer, for example, than ex-pected. To conclude, business relations represent a value,which can be exploited by both parties, but their valuealso depends on the actions of both parties. Therefore,managers should be interested in what happens to theseassets in connection with acquisitions.

It is also important to recognize when and how the in-tegration of the companies influences suppliers and cus-tomers. Establishing relationships with suppliers and cus-tomers is a time-consuming process where specificindividuals often are involved. Although it is not easy tocontrol the relationship, one way of nurturing relation-ships is to identify the key persons at both ends of the re-lationship. Moreover, one has to actively involve bothparties involved in the process; it does not seem to beenough to merely inform business partners about the po-tential effects of the merger or acquisition; rather, thenew situation should be tackled jointly. Recognizing theinteractive and subjective nature of customer and sup-plier relationships means that they have to be handled ac-tively also during the integration phase of the acquisition.

Our focus has been on the acquiring company, but weare certain that these considerations apply to the acquiredcompany as well. Resorting to relationship analysis andmanagement can be a powerful tool for enhancing coop-

eration and integration between the merging companies.Alternatively, relationship effects may be used as an ar-gument while negotiating potential mergers and acquisi-tions.

It is not an easy task for a manager to evaluate andhandle such intangible assets as business relationships.But we are confident that when managers realize the needfor relationship strategies and relationship management,they are able to tackle these issues. For instance, an un-derstanding of the problems and their appropriate han-dling in the postmerger integration process between themerging companies is applicable to a wider context ofconnected relations as well. Thus, coming back to thehigh failure rate of mergers and acquisitions, we suggestthat managers can better ensure a successful outcome ofacquisitions by giving explicit attention not only to thetarget firm but also to its relations to suppliers and cus-tomers. But business relationships become future poten-tials only if they are recognized and managed in a similarway as other parts of the company during the integrationphase. And, the potential can become realized only frominteracting with willing actors at the other end of the rela-tionship.

ACKNOWLEDGMENT

The authors acknowledge the financial support of the International GraduateSchool of Management and Industrial Engineering at Linköping University, ToreBrowaldhs Stifelse, the Academy of Finland and Finnish Cultural Foundation.

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