Deconstructing Dong and Wang’s “A Pre-Emption Model of Mergers”

Introduction

In order to find solutions to the problem known as the merger paradox, researchers pay much attention to developing models and theories that can explain and address this complex phenomenon. In their article “A Pre-Emption Model of Mergers,” Dong and Wang (2014) focused on studying the paradox associated with value-destroying mergers with reference to a sequential negotiation model. The purpose of this paper is to describe the deconstruction of Dong and Wang’s (2014) article in order to conclude about the appropriateness of the proposed model and findings to present the solution to the problem of developing value-destroying mergers. Although the authors of the article are inclined to propose a novel theory regarding value-destroying mergers in order to address the problem of the merger paradox, their conclusions failed to be credible and valid because of the following weakness: the framework of the article is based on conflicting concepts, and their inappropriate manipulation and interpretation lead to creating a confused and weakly supported model.

Appropriateness of Deconstruction to Find Solutions to Problems

This paper is aimed at deconstructing Dong and Wang’s (2014) research article, and the reason is the importance of analyzing the author’s argument and the proposed framework to state whether they are effective to provide the solution to the problem. Deconstruction is a critical approach to analyzing research articles is based on examining each separate part of an article’s framework to demonstrate how authors can use self-contradictory or weak statements (Fook, 2016). The utility and appropriateness of this approach are in the fact that such analysis allows for indicating articles that can be weak to solve the discussed problems because of their ineffective frameworks and assumptions. As a result, deconstruction allows for discussing the quality of a research article from several perspectives, focusing on both strengths and limitations of a work (Fook, 2016). If there is any self-contradiction in a text, such an article is inappropriate to provide solutions to problems. Therefore, deconstruction is important to support the critical analysis of works and provide a researcher with opportunities to discuss an article from several perspectives in order to state its appropriateness and validity.

Effectiveness of the Novel Theory and Framework to Address the Problem

The purpose of this section is to discuss the framework of the analyzed research article as a constructed system with a focus on all its components. The article by Dong and Wang (2014) consists of five sections, and they are organized logically to address the purpose of the study. In the first section, the authors explain the purpose of their work and the background of the discussed problem. According to Dong and Wang (2014), in the paper, they address the merger paradox and “show that the winner’s curse like overpaying never occurs in a simultaneous competitive bidding process,” and “it may arise in the target firm initiated sequential negotiations,” so, “if the merger is successful, then it is never value-destroying for the combined firm” (p. 188). It is possible to state that the problem discussed by the authors is important to research because its solution is required to conclude about the efficiency of mergers and acquisitions, as well as benefits for all parties that participate in the process.

In the introductory section of their article, the authors provide the background for their research while referring to several theories and notions that present a conceptual framework. Dong and Wang (2014) focus on discussing the merger paradox, and they introduce the following models and concepts to study it: the post-merger performance puzzle, a sequential bargaining model to practice in business, the concept of the winner’s curse, and the pre-emption theory. The review of the literature and discussed concepts are integrated into the introductory section, and the prior work in this field is explained.

The second section introduces a novel model proposed by the authors to explain firms’ performance after the process of merging. The authors apply a sequential negotiation model with the focus on the synergy that is private information in this case (Dong & Wang, 2014). The provided formula and calculations demonstrate that when there is a competitive bidding process, the winner’s curse of overpaying cannot be observed. It is possible to state that the creation of a new model on the basis of the previously used formula is described in detail, and the overall description of the model is sufficient. In their study, Korican, Barac, and Jelavic (2014) also propose a specific model to examine mergers’ performance. This approach is adopted in similar studies on the topic.

In the next two sections, the authors discuss the results of their study. Dong and Wang (2014) explain that “if the merger is successful then the outcome is never value-destroying for the combined firm” (p. 187). This finding can be viewed as rather novel from the perspective of the existing literature in the field, and the authors provide some support for their two propositions and related conclusions. The analysis of the phenomenon divided into sections on the nonexistence results and the extension of the basic model contributes to discussing the proposed solution in detail.

The final section presents the conclusions related to the novel model formulated by the authors of the article. In spite of the fact that the model is based on previously applied concepts and strategies, such as a sequential bargaining model, the pre-emption theory, and the concept of the winner’s curse, the researchers demonstrate how these concepts can be applied to another context (Dong & Wang, 2014). The authors also show how these models and concepts can be interpreted to explain that, at the final stage, the desired acquisition premium comes to target firms in contrast to the previously used theories and pre-emptive models (Filipovic, Vrankic, & Mihanovic, 2014). In their articles, Harvey (2015) and Tripathi and Lamba (2015) also selected similar models and theories to discuss the post-merger performance of firms. Therefore, the proposed results and conclusions seem to support the authors’ assumptions and propositions regarding their vision of the post-merger performance puzzle.

It is possible to state that the proposed framework is appropriate to facilitate the solution to the problem of value-destroying mergers. The reason is that the researchers proposed a new perspective from which it is possible to discuss the merger paradox, and they formulated the principles of the novel model, according to which it is probable to build the merging process while orienting to further benefits and post-merger gains. Thus, the findings addressed the research objectives, and Dong and Wang (2014) stated that the acquirer’s overpaying can be observed when target firms choose to solicit bids from the selected acquiring firms sequentially, depending on a sequential bargaining model. In this case, the synergy is presented as private information. These aspects allow for explaining the phenomenon of value-destroying mergers. From this point, Dong and Wang’s (2014) novel theory is based on pre-emptive motives, and it differs from other traditional theories in this field. The authors’ conclusions that negative tendencies for mergers are observed because of the phenomenon of overpaying propose a new perspective for discussing the problem, and they seem to facilitate the solution.

Deconstruction of the Framework and the Weakness

The process of deconstructing the research article by Dong and Wang (2014) is important to understand whether the discussed work is appropriate to support the solution to the merger paradox as a problem identified for the field of mergers and acquisitions. The purpose of this section is to analyze the article’s framework and focus on its possible weaknesses. One specific weakness found in the article by Dong and Wang (2014) will be discussed and analyzed in detail in this section.

Deconstructing the Framework

While deconstructing the framework of the selected article, it is important to apply more critical thinking to analyze the article’s structure and appropriateness in the context of the studied issue. The focus on the research problem indicates that the merger paradox or the problem of the post-merger underperformance puzzle is more complex than it is stated by the researchers because several opposite viewpoints exist regarding the development of this phenomenon in the sphere of business (Dong & Wang, 2014; Duppati, Rao, & Locke, 2017; Galperina & Klen, 2017). In addition, it is possible to state that the previous studies in the field, as well as applied theories, are not discussed properly, and little attention is paid to the contradictions in researchers’ studies that are associated with different perspectives on the problem and its solution. As a result, there is a risk that the discussed concepts and their roles in explaining the problem can be confused by Dong and Wang (2014) or interpreted ineffectively because of the lack of descriptions of these theories and concepts in the literature review and conclusion.

While analyzing other sections of the article with the focus on the idea of deconstruction, it is possible to state that the proposed model and formulated propositions that are oriented to explaining what consequences to expect for acquiring and target companies after the merger are supported by Dong and Wang’s (2014) experiments and references to the previous literature, but they are not justified. The conclusions seem to be logical, but there is a lack of justification with reference to those theories and models that are mentioned by the authors for further application in their research (Fook, 2016). The complex character of the discussed problem and the involvement of many concepts, elements, processes, and theories in the investigation with an emphasis on the further expansion of the formulated model prevents the authors from making credible conclusions.

It is important to note that in spite of the fact that Dong and Wang (2014) demonstrate how the formulated model can be applied to the context of the merging process in order to explain the phenomenon of negative outcomes and value-destroying mergers, the conclusions are rather questionable. From this perspective, it is almost impossible to state that Dong and Wang’s (2014) ideas can be applied to all situations discussed in the paper because they are not actively supported by the literature. Furthermore, even if Dong and Wang (2014) note that their conclusions are justified by the findings of several researchers, and references are provided, the concluding section of the article lacks discussion and support to justify the findings. Therefore, it is important to concentrate on a certain weakness in the article’s framework and discuss it in detail in the following sub-section.

Weakness in the Framework

The key weakness of the framework proposed in the article by Dong and Wang (2014) is that it is based on conflicting concepts and theories previously formulated in the field, and the authors of the article inappropriately manipulated and interpreted the existing models and theories in order to create their novel model. As a result, it is important to state that a new theory that was formulated to address the problem is rather confusing and unsupported because only a few prior studies can support its validity. It is also possible to state that the problem is in the inability of the authors to refer to those models and ideas that are less contradictory and that can provide the full support for the study’s findings.

Referring to the complex character of the weakness that influences the overall discussion in the article, it is important to note that the weakness appears in such section of the framework as the conclusion. Thus, Dong and Wang (2014) mentioned in the introduction that the views of researchers on explaining and addressing the merger paradox differ, but they failed to focus on this aspect in detail in the discussion or conclusion sections. There is no effective conceptual framework in the article, and therefore, there is no appropriate support for the proposed findings. In the conclusion, the authors admit that findings are rather unique and unsupported, but the problem is that these outcomes can be a result of applying conflicting concepts to developing the model and addressing the problem. As a result, the existence of the problem associated with the merger paradox is supported by the authors of the article, but the reference to conflicting models and theories in developing a novel model in order to address it leads to impossibilities to provide an effective solution to the discussed issue. In addition, the lack of academic support for the provided findings and model negatively affects the validity of the research.

The identified weakness seems to be typical for articles where complex and understudied problems are discussed. The reason is that there is a lack of research in the field in order to demonstrate the consensus of opinion on the problem solution and support the proposed strategies. According to Dong and Wang (2014), their novel model based on regarding pre-emptive motives of acquisitions is supported by some recent studies in the field that also refer to the pre-emption theory while explaining their findings. Furthermore, the proposed theory differs from the models that are based on ideas of simultaneous bidding and ad hoc assumptions observed during the process of discussing possibilities for merging. As a result, Dong and Wang (2014) accentuate the difference between sequential bidding and simultaneous bidding connected with a target firm’s position, but they do not provide enough academic support in order to state why their focus on a sequential bargaining model is more effective in this context.

Thus, the authors justify their choice stating that the empirical literature supported the selection of sequential bargaining, but they referenced only one study in this field. Furthermore, only one source is used to support the authors’ vision of the role of the winner’s curse in acquisitions (Dong & Wang, 2014). In spite of the fact that the referenced studies are in line with the authors’ ideas, other studies do not support these approaches, as is noted in the articles by Narayan and Thenmozhi (2014) and Patel and Shah (2016). As a result, it is possible to state that there is a lack of a single idea in the field regarding the actual causes of developing value-destroying mergers, and there are only a few theoretically supported solutions to address the merger paradox.

The overall approach used by Dong and Wang (2014) to develop a novel model can be discussed as extremely complex as the authors of the article build their framework to address several complicated concepts and processes: a synergy effect, a sequential bargaining model, and the concept of overpayment that is selected instead of the winner’s curse notion. Furthermore, in addition to a range of other conclusions associated with the sequential bargaining model, Dong and Wang (2014) also provide a unique conclusion regarding the overpayment that is explained by the authors as “a primary reason for value-destroying for the acquirer” (p. 202). Still, while stating that all these conclusions are supported and justified with reference to the other literature in the field, the researchers do not provide citations to provide the grounds for their statements. This aspect significantly affects the quality of the proposed argument.

In addition, the analysis of the existing literature in the introductory section indicates that there are many conflicting ideas regarding the problem, and the findings associated with the model (that is developed according to the pre-emption model) require additional support. On the one hand, there are studies that do not support the idea regarding the value-destroying character associated with mergers. On the other hand, there are many researchers who support the merger paradox (Dong & Wang, 2014; Filipovic et al., 2014; Yaghoubi, Yaghoubi, Locke, & Gibb, 2016). Furthermore, a separate group of researchers is focused on discussing the concept of pre-emption as important to explain value-destroying mergers (Dong & Wang, 2014). In addition, experts and researchers cited by the authors of the article also do not provide a single idea regarding the use of such a concept as the winner’s curse. Moreover, there are also debates regarding the use of the notion of “overpayment” instead of the winner’s curse, as it was proposed by Dong and Wang (2014). From this point, the inappropriate analysis of the conflicting literature on the topic leads to formulating the potentially weak model and to the absence of effective evidence to support it.

How the Weakness Enables the Problem

Referring to the findings, Dong and Wang (2014) state that, in most cases, mergers are rather profitable, and acquirers can face negative problems primarily when overpaying is observed. Furthermore, overpaying is not typical of a simultaneous competitive bidding context. Still, these conclusions are not in line with the studies cited in the paper and other research articles in the field (Gagnon & Volesky, 2017; Sharma, 2016; Tripathi & Lamba, 2015; Zhang, 2016). As a result, the authors’ impossibility to provide an effective conceptual framework to support the novel model while avoiding the impact of conflicting ideas on the study findings and conclusions leads to weakening the ability of the discussed article to explain the problem of the merger paradox and propose an effective solution. Instead of this, the inappropriate framework of the article seems to amplify the problem because of the impossibilities to state whether the proposed model is a relevant one to explain under what conditions Dong and Wang’s (2014) conclusions regarding profitable mergers can become true. The researchers do not provide enough theoretical and logical support for their novel theory and findings, therefore, the question about the causes and ways to overcome the merger paradox remains to be open.

Thus, the weakness of Dong and Wang’s (2014) framework in the article is in the fact that it is rather confusing and unsupported. According to Korican et al. (2014), it is possible to discuss the impact of a range of factors on changes in the bidding company performance, but to support conclusions, it is necessary to provide a lot of evidence related to the problem. In their work, Dong and Wang (2014) seem to lack this important evidence. In their articles, Gagnon and Volesky (2017), Korican et al. (2014), and Mensah and Onumah (2017) focus on creating an effective framework that should include the problem statement, the formulated hypotheses, the literature review, the model and data analysis, the discussion of the results, and conclusions. The article by Dong and Wang (2014) lacks some of these components. As a result, the proposed framework is rather weak.

When ineffective frameworks are observed in research articles, it is possible to state that their credibility is also affected. Therefore, the presence of weaknesses in research articles leads to the inabilities to use these studies to address the problem because the proposed solutions can be discussed as inappropriate (Korican et al., 2014). From this point, such weaknesses create a situation when research articles are viewed as enabling or amplifying the problem (Fook, 2016). The reason is that, if such controversies and weaknesses as presented in Dong and Wang’s (2014) article exist, researchers and experts can fail to use the models proposed in these articles to address the problem. Such a situation creates more issues and misunderstandings. Therefore, the deconstruction approach is important to address this problem in the field of research.

Recommendation to Address the Weakness

In order to address the weakness identified in the framework of the article by Dong and Wang (2014), it is important to propose an effective modification of the article’s structure. While paying attention to the fact that the weakness is in applying conflicting concepts and theories to developing a novel model, it is possible to recommend adding the detailed discussion section to the article’s components. The authors seem to ineffectively manipulate concepts and interpret findings associated with their work (Dong & Wang, 2014). As a result, the presence of conflicting and problematic views and the absence of detailed discussions of the authors’ conclusions with reference to the existing literature weaken the results of the authors’ work that can be discussed as original and innovative. Therefore, much attention should be paid to demonstrating how conflicting opinions presented in the current literature on the studied topic can be addressed to support the relevance of the authors’ model to solve the problem.

In spite of the fact that the literature review with the detailed analysis of conflicting ideas is also required for this article, the main weakness of the work is the absence of the support and justification of results with reference to other sources in the concluding parts of the article. The model proposed by Dong and Wang (2014), as well as associated findings, is rather provocative and questionable because of the lack of consensus regarding this point among researchers. Still, this aspect is reflected in the sections of the article only partially, and the lack of support or explanation does not allow for discussing or viewing the authors’ conclusions as credible.

Therefore, the discussion section should be added to the article in order to explain how a certain finding can be in line with previous study results or how it can be contradicting. This section should follow the sections about the model development and precede the conclusion section. A similar framework is proposed in other articles that present the examination of the topic of mergers and acquisitions (Gagnon & Volesky, 2017; Korican et al., 2014; Mensah & Onumah, 2017). The discussion section is important to explain the logic of the authors’ conclusions when the studied topic is new or complex, and there are different views on it that are presented in research articles. If Dong and Wang (2014) provide more explanations and grounds for developing their model and selecting certain concepts in their discussion part, it is possible to expect that the validity of the study will increase, and it will contribute to solving the problem. Figure 1 represents the initial framework. Figure 2 provides the revised framework.

Reflection on Deconstruction

The experience of deconstructing the research article by Dong and Wang (2014) is important for me to develop skills in analyzing sources critically before using them as evidence in a research paper. While reviewing the selected article for the first time, I focused only on the strong features of the research, and I regarded the proposed novel theory as rather effective to be used while addressing the merger paradox and discussing the problem of value-destroying mergers. The reason is that that focus was on the original conclusions made by the authors, their contribution to the discussion of the topic, and their argumentation that seemed to be logical in the context of a variety of conflicting views on the problem. This experience was important for writing the first parts of this paper and analyzing the components of the framework as a constructed system.

However, while reviewing the article for the purpose of deconstructing the framework, I found certain weaknesses in the article’s structure and the authors’ argumentation. It was rather problematic to identify only one weakness that could negatively influence the process of finding the solution to the problem, and I focused on the feature that could have an impact on the appearance of other weak points in the article and its framework. This experience allowed me to improve my skills in analyzing research articles while focusing not only on their strong areas but also on their weaknesses that can affect the validity of researchers’ conclusions. Therefore, my approach to evaluating the article changed during my work on the assignment, and I was able to concentrate on both constructing and deconstructing exercises in order to conclude about the appropriateness of this article to contribute to the problem solution in the area of mergers and acquisitions without amplifying the problem.

Conclusion

The purpose of this assignment was to deconstruct the selected article on the problem known as the merger paradox, analyze the components of the article’s framework, discuss the major weakness in the framework, propose a modification to improve the article and the authors’ argumentation, and to reflect on the completed tasks. The paper addresses all these objectives in separate sections. It is possible to state that the identified weakness is associated with the presence of conflicting opinions regarding the problem solution and the impossibility of the authors to prove their novel model with reference to various studies in the field. As a result, the lack of the consensus of opinion on the topic and the lack of evidence to support the researchers’ findings and conclusions significantly affect the validity of the research. Therefore, it is possible to note that the weakness in the framework does not contribute to lessening the problem or finding approaches in order to address it. The ambiguity of the authors’ conclusions is also a result of the identified weakness.

References

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