caveat venditor: trust asymmetries in acquisitions of ... · caveat venditor: trust asymmetries in...

CAVEAT VENDITOR: TRUST ASYMMETRIES INACQUISITIONS OF ENTREPRENEURIAL FIRMS

MELISSA E. GRAEBNER

University of Texas at Austin

I explore the role of trust in acquisitions of entrepreneurial firms, taking a dyadic viewthat gives equal attention to buyers and sellers. The two parties have asymmetric viewsregarding whether their counterparts are trustworthy. I outline how these asymmetriesemerge, persist, and influence behavior, including tendencies to behave deceptivelyand to guard against deception. I also find that buyers’ and sellers’ beliefs concerningwhether their counterparts are trustworthy and trusting are often erroneous. I explorethe implications of these findings for developing a theory of trust asymmetries andargue that selecting buyers on the basis of trust increases rather than diminishesentrepreneurs’ vulnerability.

Interorganizational trust is a subject of substan-tial interest to organizational and managementscholars. Previous research has focused primarilyon trust in the context of long-term alliances, par-ticularly long-lasting relationships between buyersand suppliers (e.g., Dyer & Chu, 2000; Sako &Helper, 1998; Saparito, Chen, & Sapienza, 2004).Scholars have examined how trust develops be-tween alliance partners (e.g., Doz, 1996; Ring & Vande Ven, 1994), influences subsequent partner selec-tion (Gulati & Gargiulo, 1999), and shapes out-comes such as governance structures (Gulati &Singh, 1998), information sharing (Larson, 1992;Uzzi, 1996), satisfaction with partnerships (Ander-son & Narus, 1990; Mohr & Spekman, 1994), andfinancial performance (Luo, 2002).

Interfirm trust has received much less attentionin the context of an equally significant set of interor-ganizational transactions, mergers and acquisitions(M&A). Acquisitions are important strategic toolsthat enable companies to obtain valuable technol-ogy (Puranam, Singh, & Zollo, 2006), spur innova-tion (Ahuja & Katila, 2001; Paruchuri, Nerkar, &Hambrick, 2006), penetrate international markets(Birkinshaw, Bresman, & Hakanson, 2000; Ver-meulen & Barkema, 2001), and reconfigure firmresources (Capron, Dussauge, & Mitchell, 1998).Yet, despite the importance of these transactions,mergers and acquisitions have received little atten-tion in the organizational trust literature (Stahl &Sitkin, 2005).

Similarly, trust has received little attention in thelarge literature on mergers and acquisitions. The

M&A literature provides some hints that trust playsa role in mergers and acquisitions, but ultimatelythese hints raise more questions than they answer.Case study data suggest that acquisition targets fa-vor acquirers they trust (Graebner & Eisenhardt,2004), and larger-scale studies indicate that acqui-sition deals are more likely to occur when a buyerand seller have a prior direct relationship (Schildt& Laamanen, 2006; Vanhaverbeke, Duysters, &Noorderhaven, 2002) or shared network ties(D’Aveni & Kesner, 1993), circumstances that mayfoster trust (Gulati, 1995; Larson, 1992; Uzzi, 1997).Yet despite these signs that trust may be presentbetween buyers and sellers, authors have describeddeception by buyers as “standard practice” (Buono& Bowditch, 1989: 256) and noted that distrustoften emerges after deals close (Buono, Bowditch, &Lewis, 1985; Haspeslagh & Jemison, 1991), whenbuyers’ “prior promises mean nothing” (Marks &Mirvis, 2001: 87).

The apparent coexistence of trust and deceptionin acquisitions is puzzling. On the one hand, ifbuyer deception is common, it is not surprising thatsellers would prefer buyers they trust. But if sellersfavor buyers they trust, how can deception by buy-ers remain so common? If buyers and sellers oftenhave prior direct relationships or shared third-party ties, why are sellers so often mistaken in theirassessments of buyers? Moreover, knowing they aretrusted by sellers, why do buyers not feel the senseof moral obligation to behave in good faith thathas been observed in alliances (Larson, 1992)? Whyaren’t buyers more concerned with the negativeimplications of deception for postdeal cooperationby acquired employees, or for their firms’reputations?

My thanks go to Editor Sara Rynes and the three anon-ymous reviewers for their helpful comments, and toPersephone Doliner for her heroic copyediting.

� Academy of Management Journal2009, Vol. 52, No. 3, 435–472.

435

Copyright of the Academy of Management, all rights reserved. Contents may not be copied, emailed, posted to a listserv, or otherwise transmitted without the copyright holder’s expresswritten permission. Users may print, download or email articles for individual use only.

These questions are especially perplexing for ac-quisitions of knowledge-based, technology-inten-sive firms, an important source of innovation andgrowth in high-technology industries (Ahuja &Katila, 2001; Puranam et al., 2006). In knowledge-intensive markets, firm leaders have more discre-tion to choose their acquirers (Coff, 2003), suggest-ing acquisition targets may be particularly able toselect buyers they trust. Technology-intensive in-dustries are often tightly networked (Castilla,Hwang, Granovetter, & Granovetter, 2000; Powell,1990), implying that sellers should have easy ac-cess to information about buyers. Moreover, thesuccess of a technology-based acquisition dependson the continued presence and cooperation of ac-quired employees (Granstrand & Sjolander, 1990;Ranft & Lord, 2002), raising the potential costs tobuyers of behaving deceptively. These factorsshould make the coexistence of trust and deceptioneven less likely.

In the current work, I seek to unravel these puz-zles. The purpose of this study is to explore trustand deception in acquisitions of technology ven-tures, giving equal attention to the views of buyersand sellers. In examining these issues, I aim toaddress calls for more context-specific examina-tions of trust (Kramer, 1999; Krishnan, Martin, &Noorderhaven, 2006; Schoorman, Mayer, & Davis,2007). I find that trust and deception can coexist inthe context of acquisitions because of a complex setof asymmetries and errors in both parties’ viewsregarding trust and trustworthiness. I examine howthese patterns both emerge from and influence ac-quisition events and behavior. A central theoreticalcontribution of this research is a greater under-standing of trust asymmetries, a topic that has beenidentified as a “pressing unanswered question” intrust theory (Gulati & Sytch, 2008: 277). Prior interor-ganizational trust research rests on an implicit as-sumption that trust between partners is symmetric,yet it “has not examined the empirical validity ofthis assumption nor the antecedents and the out-comes of asymmetric trust in interorganizationalrelationships” (Zaheer & Harris, 2005: 193). Thecurrent study begins to address these gaps by de-scribing how trust asymmetries emerge, persist,and influence decision making and behavior in thestrategically important setting of mergers and ac-quisitions. In addition, this study helps to developa dyadic perspective on acquisitions by givingequal attention to the viewpoints and actions ofselling firms (Graebner, 2004; Graebner & Eisen-hardt, 2004), a group largely neglected by priorresearch.

METHODS

This study grew out of a broader research en-deavor examining acquisition processes and deci-sion making from the viewpoints of both buyersand sellers. Trust was not a concept that was iden-tified a priori as being of interest but one thatemerged from the data as an important influence onacquisition decision making. A subsequent reviewof the interorganizational trust literature revealedvery little previous work on trust in acquisitions,suggesting the need to extend theory in this area.

The general approach of this study is “theoryelaboration” (Lee, Mitchell, & Sablynski, 1999).Drawing upon prior research, I define trust as apositive expectation regarding the conduct of an-other party in a situation involving risk or vulner-ability (Lewicki, McAllister, & Bies, 1998; Rous-seau, Sitkin, Burt, & Camerer, 1998; Zaheer,McEvily, & Perrone, 1998). I adopt the perspectivethat trust is a multilevel concept (Currall & Inkpen,2002) and define interorganizational trust as the“collectively-held orientation” of a group’s individ-ual members toward another group or firm (Zaheeret al., 1998: 143). By this definition, groups andorganizations as well as individuals can both trustand be trusted. Trust at the top management teamlevel may be particularly critical in interorganiza-tional transactions, since senior management is re-sponsible for major strategic actions such as alli-ances and acquisitions (Schoorman et al., 2007;Zaheer, Lofstrom, & George, 2002). Therefore, inthis study, I focus specifically on trust between thetop management teams of the buyer and seller en-gaged in an acquisition (or, if the buyer is a verylarge firm, the top management team of the relevantbusiness unit).

The research design is a qualitative, multiple-case study (Eisenhardt, 1989). Case studies are apreferred research strategy for examining complexsocial phenomena because they allow researchersto develop a holistic understanding of real-lifeevents (Yin, 2003) and to elucidate dynamic pro-cesses involving multiple causal chains (Pettigrew,1992). In comparison to single-case, ethnographicstudies, the multiple-case method trades off a de-gree of detail in favor of greater generalizability(Yin, 2003).

Setting

The research setting was acquisitions of entrepre-neurial, technology-based ventures. This setting of-fered several advantages. As stated previously, ac-quisitions of technology ventures have particularrelevance for developing theory on trust in acqui-

436 JuneAcademy of Management Journal

sitions. Trust may be especially pertinent in thesetransactions because technology-intensive firmsare more able to choose their own buyers (Coff,2003) and have access to dense industry networksthat may supply useful information about potentialpartners (Powell, 1990). In addition, privately heldtargets represent the majority of acquisition activityin the United States (Capron & Shen, 2007), andacquisitions of entrepreneurial firms are the subjectof substantial and growing research interest (e.g.,Puranam et al., 2006; Schweizer, 2005).

The current study focuses on the acquisitionwave of 1999–2000. Most merger and acquisitionactivity occurs in waves (e.g., Andrade & Stafford,2004; Rhodes-Kropf & Viswanathan, 2004). Thesewaves are often triggered by technological advance-ment or other industry shocks (Harford, 2005),coincide with peak market valuations, and arefollowed by market declines (Rhodes-Kropf, Rob-inson, & Viswanathan, 2005). Following this pat-tern, the 1999–2000 acquisition wave was triggeredby a significant technological advance (the growthof the Internet) and coincided with a “boom-bust”cycle in the financial markets.

Sample

The primary sample included 12 entrepreneurialfirms and eight acquirers. Table 1 summarizes var-ious characteristics of the firms in this sample.Three entrepreneurial firms were sampled in eachof four industries: networking hardware, commu-nications software, financial software, and onlinecommerce. The sampled industries differed on keystrategic dimensions such as cost structure, cus-tomer profile, and method of sales and distribution.In each industry, two of the entrepreneurial firmswere acquired (for a total of eight acquisitions), andthe remaining firm received interest from buyersbut remained independent. The eight completedacquisitions provided a dyadic view of the entireacquisition process. However, to understand iftrust influences whether an acquisition occurs atall, it was also useful to examine deals that wereconsidered but never realized. I therefore gathereddata on deals that any of the eight buyers and 12potential targets considered but did not complete.

Entrepreneurial activity is spatially concentrated(Schoonhoven & Romanelli, 2001; Sorenson & Stu-art, 2001). Since regional clustering could influ-ence the dynamics of trust in acquisitions, I sam-pled both target-acquirer pairs that were located inthe same region and pairs that were located inregions distant from one another (e.g., a Europeanfirm acquiring a Silicon Valley start-up). The com-pleted acquisitions included four target-acquirer

pairs located in the same local region and four pairslocated in distant regions. All acquisitions tookplace less than six months prior to data collection,improving the likelihood that informants accu-rately remembered events that had occurred (Huber& Power, 1985). Six acquisitions were ongoing dur-ing data collection. This allowed incorporation ofboth real-time and retrospective data, a useful com-bination for understanding the sequence and flowof events (Pettigrew, 1992). Retrospective data al-low for efficiency in data collection, and real-timedata improve depth of understanding of how eventsevolve over time (Leonard-Barton, 1990).

The mean acquisition price in the sample was$175 million, which is very similar to the averageacquisition price of $155 million for U.S. venture-funded companies in the study time period, ac-cording to the database VentureSource. All acqui-sitions involved the purchase of 100 percent of thetargets’ equity. The sampled acquisitions were paidfor with the buyers’ equity, as was typical duringthe study time period (Schultz & Zaman, 2001) andis typical during merger waves in general (Rhodes-Kropf & Viswanathan, 2004).

Agency theory suggests that the acquisitionmotives and preferences of a target firm’s manag-ers and its shareholders may differ (Jensen &Meckling, 1976). I therefore collected informa-tion about the ownership structure of the targetfirms. Of the eight companies that were acquired,management owned a controlling share in four,and investors owned a controlling share in four.Five acquired firms had received venture capital,and the remaining three were funded throughother sources, such as self-financing and angelinvestment. I also collected information on ac-quired firm board composition. The mean num-ber of directors was 5.1; 32 percent of the direc-tors were active company managers; 44 percent,investors; and 24 percent, outsiders. This break-down was similar to the board composition re-ported in other studies of entrepreneurial firms(Kaplan & Stromberg, 2003; Lerner, 1995).1

The buyers in the sample were more diverse andincluded both young entrepreneurial firms and es-tablished multinational corporations. There weresix publicly traded and two privately held buyers.The average number of employees among buyers

1 Lerner (1995) reported an average of 5.0 directors inhis sample (including 27 percent active managers, 46percent investors, and 25 percent outsiders), and Kaplanand Stromberg (2003) reported an average of 6.0 directors(35 percent active managers, 41 percent investors, 23percent outsiders).

2009 437Graebner

TABLE 1Cases

Seller, Industry Seller Profilea, b Buyer, Price Buyer Profileb Interviewees

MonetNetworking

hardware

175 employees; four yearsVenture capital; investor-

controlledEastern United StatesExperience: TMT; board

Picasso $500M 16,000 employeesPublicDistant regionExperience: Firm; TMT; board

Seller: CEO (board member); CFO;venture capitalist (boardmember)

Buyer: VP, business development;VP, technical integration; chieftechnology officer (boardmember)

RocketNetworking

hardware

20 employees; three yearsSelf-funded; manager-

controlledSilicon ValleyExperience: Board

North $57M 50,000 employeesPublicDistant regionExperience: Firm; TMT; board

Seller: CEO (board member); chieftechnology officer; outsideboard member

Buyer: VP, line of business;head of business unit; M&Amanager

JunketNetworking

hardware

335 employees; four yearsVenture capital,

institutional investors;investor-controlled

Silicon ValleyExperience: TMT; board

Acquisition wasnot completed

Seller: CEO (board member);venture capitalist (boardmember)

TrendFinancial

software

50 employees; three yearsVenture capital; investor-

controlledSilicon ValleyExperience: TMT; board

Armor $400M 400 employeesPublicLocal regionExperience: Board

Seller: CEO (board member); VP,services; VP, sales; venturecapitalist (board member)

Buyer: CEO (board member); VP,business development

IsleFinancial

software

40 employees; two yearsVenture capital; manager-

controlledSilicon ValleyExperience: None

Harbor$125M

300 employeesPublicLocal regionExperience: Board

Seller: CEO (board member); VP,business development (boardmember); chief technologyofficer, product manager

Buyer: director businessdevelopment; M&A manager;manager of strategy

Modelc

Financialsoftware

95 employees; three yearsVenture capital; investor-

controlledWestern United StatesExperience: Board

Armor;Acquisition wasnot completed

400 employeesPublicDistant regionExperience: Board

Seller: CEO (board member); twoventure capitalists (one boardmember)

Buyer: CEO (board member); VP,business development

Concept 35 employees; three years Karma 150 employees Seller: CEO (board member); VP,Communications

softwareVenture capital and angel

investors$125M Private, became public three

months after acquisitionbusiness development (boardmember); angel investor (board

Investor-controlled Local region member); venture capitalistSilicon ValleyExperience: TMT; board

Experience: TMT; board (board member)Buyer: CEO (board member); VP,

sales; industry expert

Fastlane 120 employees; four years Craze $140M 700 employees Seller: CEO (board member); VP,Communications

softwareVenture capital; investor-

controlledEastern United StatesExperience: TMT; board

PublicDistant regionExperience: Firm; TMT; board

sales; venture capitalist (boardmember)

Buyer: VP, business development;VP, M&A; VP, technology;director of integration

Regimenc 70 employees; two years Karma;Acquisition wasnot completed

150 employees Seller: CEO (board member)

Continued


was 8,500, with a range of 150 to 50,000. Becausesome research has suggested that prior acquisi-tions may create routines that shape buyers’ be-havior in subsequent deals (Zollo & Singh, 2004),I collected data on buyers’ acquisition experi-ence. I gathered information on whether a firm asa whole had conducted prior acquisitions, as wellas whether individual members of the firm’s topmanagement team or board of directors had ac-quisition experience. Three of the eight buyershad acquisition experience at the firm level andhad developed dedicated M&A staff. Of the re-maining five buyers, three had acquisition expe-rience among both the top management team andthe board of directors. The remaining two buyershad acquisition experience within the board ofdirectors only. For completeness, I gathered thesame experience information for sellers. Al-though no seller had acquisition experience atthe firm level, 10 of the 12 sellers had acquisitionexperience within their top management team,board of directors, or both.

Data Collection

I used several data sources: (1) quantitative andqualitative data from semistructured interviewswith key acquisition participants from both sellingand buying firms, (2) e-mails and phone calls toclarify interviews and track real-time processes,and (3) archival data, including company websites,business publications, and regulatory filings. I con-ducted more than 80 interviews. The first phaseincluded 15 pilot interviews with managers whohad sold their companies, managers who had pur-chased companies, investors in companies thatwere sold, and acquisition intermediaries. The pi-lot interviews indicated that sellers’ acquisition de-cisions were usually made by a small set of people,typically the chief executive officer and two orthree key executives and/or board members. Buy-ers’ decision processes involved somewhat broaderparticipation, but decisions were ultimately madeby the top management team of the firm or, if thebuyer was very large, the top management team of

TABLE 1(Continued)

Seller, Industry Seller Profilea, b Buyer, Price Buyer Profileb Interviewees

Communicationssoftware

Venture capital; investor-controlled

Silicon ValleyExperience: TMT

PrivateLocal regionExperience: TMT; board

Buyer: CEO (board member); VP,sales; industry expert

GoalieOnline

commerce

25 employees; two yearsAngel investors; manager-

controlledEastern United StatesExperience: TMT

Ciao $15M 200 employeesPrivateDistant regionExperience: TMT; board

Seller: CEO (board member); VP,business development (boardmember); angel investor (boardmember)

Buyer: CEO (board member); VP,business development; venturecapitalist (board member)

Spur/Primed

Onlinecommerce

25 employees; three yearsAngel investors; manager-

controlledSilicon ValleyExperience: TMT; board

Checkmate$35M

350 employeesPublicLocal regionExperience: TMT; board

Seller: CEO—Spur (boardmember); CEO—Prime (boardmember); VP, businessdevelopment; two angelinvestors (both board members).

Buyer: CEO (board member), VP,business development

EvergreenOnline

commerce

127 employees; threeyears

Venture capital; investor-controlled

Western United StatesExperience: None

Acquisitionwas notcompleted

Seller: CEO (board member); twoventure capitalists (both boardmembers).

a “Years” refers to time since founding. “Control” (manager vs. investor) refers to ownership majority (50 percent or more of the firm’sequity). “TMT” is “top management team.”

b “Experience” refers to prior acquisition experience by firm, top management team members, and/or members of board of directors.c In the cases of Model and Regimen, buyer profiles appear for Armor and Karma because these potential buyers were interviewed,

although the acquisitions were not completed.d Spur and Prime were both acquired by Checkmate, in a combined deal.

2009 439Graebner

the relevant business unit. Other individuals atboth firms had limited awareness of the eventstaking place until late in the acquisition process.

In the primary data collection, I interviewed mul-tiple senior-level informants from each firm. (SeeTable 1 for a list of the positions of these interview-ees.) Use of multiple informants mitigates subjectbiases (Golden, 1992; Miller, Cardinal, & Glick,1997) and leads to a richer, more elaborated model(Schwenk, 1985). The pilot interviews guided myidentification of the informants who were the mostinfluential in each acquisition process. To furtherensure that the sample included the most impor-tant individuals, I used snowball sampling. My ini-tial entry was typically made through either theCEO of the selling firm or the head of businessdevelopment at the buying firm. Each informant thennamed other individuals who had been actively in-volved in the acquisition within both the buyer andseller. Selling firm informants typically included theCEO and senior vice presidents (VPs), as well as oneor more investors who were board members and/orhad led a funding round. Buying firm informantstypically included the CEO or business unit head, thevice president of business development, and one ormore other senior managers or board members whowere involved with the acquisition.

The interviews were 60 to 90 minutes in length.Interviews began with background information andthen asked the informant for an open-ended chro-nology of the company’s acquisition-related activi-ties and decisions. Open-ended questioning leadsto higher accuracy in retrospective reports (Lipton,1977; Miller et al., 1997). Examples of questionsinclude, “When did you first begin thinking aboutacquisition?” “What alternatives to acquisition didyou consider?” “What potential buyers/targets didyou consider, and what kind of interaction did youhave with them?” “Could you describe the negoti-ation process?” and “What happened after the ac-quisition closed?” No questions specifically men-tioned trust, deception, or related issues. However,these topics emerged unprompted in informants’discussions of the pros and cons of various poten-tial partners and their descriptions of negotiationprocesses. Each interview concluded with severalclosed-ended questions about the firm, includingits founding date and number of employees. Inaddition to the buyers and sellers, I interviewedseveral individuals who had extensive acquisitionexperience, such as the head of technology mergersat a prominent investment bank. These interviewsincluded questions that were idiosyncratic to theexpertise of the informant.

All interviews were audiotaped and transcribed.The transcriptions totaled 1,260 double-spaced

pages. I asked follow-up questions via phone ore-mail when clarification was required. If acquisi-tion events were ongoing, I conducted subsequentinterviews when a major event occurred, such asclosure of the deal or the departure of an acquiredexecutive. This procedure allowed me to captureevents and viewpoints as they emerged. I inter-viewed informants as many as three times.

Throughout data collection, I took steps to min-imize informant biases. First, as noted above, thesample comprised cases in which the events ofinterest had occurred no more than six monthsprior to data collection. Prior research has sug-gested that informant recollections are stable overperiods of this length (Huber, 1985). Second, thesample included real-time as well as retrospectivecases. During the analysis phase, I compared thereal-time and retrospective cases and confirmedthat no differences were present. Third, the infor-mants included multiple individuals from eachselling and buying firm. Such individuals are likelyto have different perspectives on and interests inthe acquisition process. If retrospective (or other)bias were an issue, I would have seen significantdifferences in their event descriptions (Seidler,1974). I did not. Fourth, I took care to interviewindividuals at the center of the acquisition process.Highly influential and knowledgeable informantsare the most reliable, particularly when they arerecalling important, recent events (Huber & Power,1985; Kumar, Stern, & Anderson, 1993; Seidler,1974). Fifth, I promised confidentiality to encour-age candor (Glick, Huber, Miller, Doty, & Sutcliffe,1990; Huber & Power, 1985; Miller et al., 1997).Finally, I addressed potential subject bias by em-ploying multiple data sources (Jick, 1979). I com-pared informants’ responses not only with those ofother informants, but also with archival data (fromsources such as acquisition announcements andregulatory filings) where appropriate.

Data Analysis

Data analysis was partly planned and partlyemergent. Throughout the analysis, I shifted backand forth between the raw data, the patterns emerg-ing from the data, and extant theory on trust ininterorganizational transactions. The analysis tookan iterative rather than a linear path but for sim-plicity is presented here in distinct stages.

Stage 1. Because the purpose of this study was toexamine the role of trust throughout the acquisitionprocess, a first analytical step was to understandand organize key acquisition events. I began bywriting detailed case studies (Eisenhardt, 1989).The case studies were 40 to 70 pages in length and


included informant quotes as well as tables andtimelines summarizing the key facts of each acqui-sition. A second researcher also examined the rawdata and formed an independent perspective,which was incorporated into each case.

I used a temporal bracketing strategy to distill aprocess model from the cases (Denis, Lamothe, &Langley, 2001; Langley, 1999). This strategy in-volves identifying discrete time periods, or phases,within a process. In this study, phases were demar-cated by changes in the individuals involved, thenature of the activities taking place, and the phys-ical location of these activities. Five acquisitionphases emerged from this analysis. The first phaseis screening, in which CEOs and business develop-ment officers initially evaluate both potential part-ners and potential partnership structures (i.e., ac-quisition versus alliance). The second phase issocializing, in which the CEOs or business unitheads of the two firms informally interact in non-work settings. The third phase, which may overlapwith socializing, is agreeing in principle. In thisphase, the top managers’ discussions shift frompersonal topics to drafting the outlines of the ac-quisition agreement. The fourth phase is legaliza-tion, in which managers work with attorneys andfinancial advisors to create formal, legally bindingacquisition documents. This phase concluded withthe official closing of a deal. The last phase isimplementation, in which managers from the twofirms begin integrating the businesses.

Stage 2. The second stage of analysis was aimedat understanding how informants described andconceptualized trust in the context of acquisitions.Prior research has used many different dimension-alizations and measures of trust (e.g., Cummings &Bromiley, 1996; Currall & Judge, 1995; Mayer,Davis, & Schoorman, 1995). Because none of thesemeasures has emerged as dominant (McEvily &Tortoriello, 2007), and because many wereuniquely tailored to their original settings, I ini-tially cast a broad net. I examined each interviewtranscript in detail, using existing interorganiza-tional trust research in a “sensitizing” role (Miles &Huberman, 1984; Strauss & Corbin, 1998). The trustliterature drew my attention to comments regardingtrust, vulnerability, integrity, deception, commit-ment fulfillment, reliability, and other related con-cepts. In this process, I discovered a correspondencebetween informants’ comments and the trust dimen-sions developed and validated by Cummings andBromiley, who described trust as “an individual’sbelief or common belief among a group of individualsthat another individual or group (a) makes good-faithefforts to behave in accordance with any commit-ments both explicit and implicit, (b) is honest in

whatever negotiations preceded such commitments,and (c) does not take excessive advantage of anothereven when the opportunity is available” (1996: 303).

In the present context, evidence of trust on Cum-mings and Bromiley’s (1996) “a,” “b,” and “c” di-mensions (described above) included the followingexamples: (a) “We totally trusted them. We likedhow they did business—they do what they say theyare going to do”; (b) “When we got into the detailsof the deal [during negotiations] . . . [the CFO] . . .was just unbelievable to us. He was a straight shot”;and (c) “You can trust them. . . . If we thought [buy-er’s management] were out to get us and wanted todrive us to the bone and sweat us out and were outto screw us over, I wouldn’t have done the deal.”Evidence of distrust on these dimensions includedcomments such as: (a) “There’s never a sure thing.[The deal] is not done until it’s signed and deliv-ered,” (b) “During the courtship, everyone putstheir best foot forward. Then you find out later,”and (c) “You get the feeling that they are going totake you for a ride, chip away at your value—andthat leaves you exposed.” As in Cummings andBromiley (1996), the three dimensions were closelyrelated; in no case did leaders from a firm expresstrust toward a given counterpart on one dimensionand distrust toward the same counterpart on anyother dimension.

Stage 3. In the final stage of analysis, I integratedthe findings from the preceding stages to under-stand how the presence or absence of trust influ-enced the unfolding of the acquisition process, andvice versa. The process model developed in stage 1served as an analytical guide. I examined each ofthe phases, noting how buyers’ and sellers’ beliefsconcerning trust and trustworthiness both emergedfrom and affected the activities taking place. I usedstandard cross-case analysis techniques (Eisen-hardt, 1989) to look for patterns and revisited thedata often, using charts and tables to facilitate com-parisons between cases (Miles & Huberman, 1984;Yin, 2003).

FINDINGS

Trust Asymmetries and the Acquisition Process

In this section, I address how buyers’ and sellers’trust-related views both emerge from and influenceevents throughout the phases of the acquisitionprocess. I find asymmetries between buyers andsellers regarding whether trust is important in thetransaction and find both asymmetries and errorsin firms’ assessments of whether their counterpartsare trustworthy and trusting. In the screeningphase, sellers eliminate distrusted partners, but

2009 441Graebner

buyers do not. This creates a fundamental asymme-try in which most sellers trust their buyers, butmost buyers distrust their sellers. During the nexttwo phases of the acquisition process, socializingand agreeing in principle, trust asymmetries growand deception is common, particularly among buy-ers. Deception ranges from negotiation-relatedbluffing to more serious, material deception. Theoccurrence and form of deception are related towhether the deceiver trusts and feels trusted by theother party. However, beliefs about whether theother party is trustworthy and/or trusting are ofteninaccurate. In the legalization phase, asymmetricviews of one another’s trustworthiness lead mostbuyers, but few sellers, to engage in extensive duediligence and to implement protective deal terms.During postdeal implementation, deception may berevealed and trust damaged. I explore why buyersare willing to behave deceptively, despite potentialrisks to postdeal cooperation and industry reputa-tion. Finally, I outline the complex relationshipsbetween trust asymmetries, trust errors, and acqui-sition behavior and explore implications for devel-oping a broader theory of trust asymmetry in interor-ganizational transactions.

Screening: Emergence of Trust Asymmetries

For both buyers and sellers, the acquisition pro-cess began with the decision to pursue some formof partnership with another firm. Firm leadersviewed partnerships as opportunities to obtaintechnologies, products, and expertise more quicklythan they could be developed internally. As a busi-ness development executive at Checkmate com-mented, “It is all about timing. It is like a race inthis market.” Having decided to seek a partnership,firm leaders faced two intertwined, and often si-multaneous, sets of decisions: choosing the bestform of partnership, and choosing the best partner.

Forms of partnership. Although partnershipscan take many forms, leaders of both buyers andsellers focused their initial decision making on thebroad choices of acquisition or alliance. Prior workhas proposed several theoretical explanations forfirms’ decisions to acquire rather than ally (for re-views, see Schilling and Steensma [2002], Villa-longa and McGahan [2005], and Wang and Zajac[2007]), and these theories have differing implica-tions for the role of trust in acquisitions. One ex-planation draws upon transaction cost economics(Williamson, 1975, 1985), focusing on a firm’s needto minimize opportunistic behavior by transactionpartners. If concerns over opportunism are rela-tively low, alliance is considered more efficientthan acquisition (Alston & Gillespie, 1989; Schill-

ing & Steensma, 2002). However, alliances mayenable partners to misappropriate knowledge(Steensma & Corley, 2000), particularly in technol-ogy-intensive industries (Villalonga & McGahan,2005). In addition, alliances often require renegoti-ation at a later date, subjecting a firm to “small-numbers bargaining” and possible exploitation byits partner (Pisano, 1990). Acquisition avoids bothproblems, since it provides the acquirer with theability to monitor and control the acquired organi-zation and to redirect its activities without engag-ing in renegotiation. Therefore, if the risk of oppor-tunism is high, transaction cost arguments favoracquisition over alliance.

A second explanation for the choice between al-liances and acquisitions draws from real optionstheory (Folta & Miller, 2002; McGrath, 2000). Alli-ances may offer firms greater flexibility since theyare easier to reverse than acquisitions, yet still offerthe larger firm the option of later acquiring thetarget (Kogut, 1991). Such flexibility is particularlyimportant if there is uncertainty regarding whethera technology will work or will have commercialsuccess (Steensma & Corley, 2001).

A third theoretical explanation for firms’ choicebetween acquisition and alliance draws on the re-source-based (Wernerfelt, 1984) and knowledge-based (Grant, 1996) views of the firm. These per-spectives focus on creating sustainable competitiveadvantage and suggest that acquisitions offer twoadvantages over alliances. First, the hierarchicalcontrol resulting from an acquisition may promotefaster and more effective coordination of knowl-edge-based resources across multiple individuals(Conner & Prahalad, 1996). Second, acquisitionprovides the buyer with exclusive access to thetarget’s technology and expertise, providing thebuyer with a resource that is unique and difficult toimitate (Kale & Puranam, 2004). In contrast, evenan exclusive alliance leaves open the possibilitythat a partner could eventually be acquired by acompetitor of the larger firm.

To the extent that acquisitions are motivated bytransaction cost concerns, we might expect buyersto be likely to distrust their targets. In contrast, realoptions and resource-based explanations for acqui-sition versus alliance decisions have no clear im-plications for whether trust would or would not bepresent in an acquisition (Conner & Prahalad,1996). In the current study, both transaction costand real options explanations received some lim-ited support. Harbor’s leaders expressed a transac-tion cost logic for choosing between alliance andacquisition, while Picasso’s leaders expressed areal options logic, indicating that alliances and mi-nority investments were useful for exploring uncer-


TABLE 2Reasons for Acquisition vs. Alliance

Buyer Buyer Rationale Illustrative Quotes SellerSeller

Rationale Illustrative Quotes

Picasso Closer coordination “This market was going tobe strategic for us. Weneeded to have a fullset of products in our

Monet Closercoordination,Signaling

Acquisitions allow closer coordination.“Alliances don’t work very well inour industry. Partnerships just don’tseem to work very well.” (CEO).

portfolio. . . . You needto have the technologyin-house so that youcan provide an end-to-end solution. You can’tdo that with a partner’sproduct.” (VP, businessdevelopment)

Alliances don’t establish credibility aseffectively as acquisition: “[Customers]were not willing to bet their networkon a 100 person start-up.” (CEO)

North Block competition “They had money from[our competitor] on thetable. [Our competitor]was the one we didn’twant to see on thetable. . . . We had theinterest in keepingcompetition out.” (headof business unit)

Rocket Closercoordination

Alliances would not provide sufficientcoordination of manufacturing andinventory: “As time went on,acquisition became more likely becausewe were a box company, which meanswe would have to manage inventory, asales channel and manufacturing,which would get to be a problem whenwe turned up the volume.” (CEO)

Armor Block competition “We tripped over the factthat one of ourcompetitors wasactually in the midst ofattempting to do anacquisition of them. . . .We can’t let thishappen.” (VP, businessdevelopment)

Trend Blockcompetition

Wanted to ensure that Armor did notpartner with a competitor instead: “Ithink if we had not been acquired byArmor, they would have acquiredsomeone else. And maybe it would bea company that was a year behind usin technology, but with Armor’sbacking in the market, having the besttechnology isn’t always the mostimportant thing . . . we could easilylose just because somebody else had astronger arm.” (VP, services)

Harbor Limit opportunism,blockcompetition

“If we help [alliancepartner] grow theirbusiness are we lockedin, now they’re themarket leader and we’velost all power? . . . Ourcompetitor called themand said they’d pay lotsmore money, so ourpartner went over tothem.” (M&A manager)

Isle Blockcompetition

Wanted exclusive access to Harbor’sresources. Acquisition would tieHarbor to Isle, ensuring Harbor wouldnot partner with one of Isle’scompetitors instead: “Basically,whoever could get Harbor was going tobe automatically the leader in thespace. . . . So that was what drove ourdecision making.” (VP, businessdevelopment)

Karma Closer coordination “Our first attempt was tosign partnerships with allthese guys. . . . What westarted to realize was thatbecause our customerswere purchasers ofsoftware, the natural thingwas to have a combinedsystem. . . . We startedlooking at the marketplaceto see if there is acompany we couldacquire.” (CEO)

Concept Closercoordination

Combining the firms ensured that theproducts would be integrated andcompatible. This was desirablebecause customers typically neededboth products: “Every time we sold acopy of our software, we had to sell acopy of theirs, or something like it.”(VP, business development)

Continued

2009 443Graebner

tain technologies without the commitment of anacquisition. No other firms mentioned either trans-action cost or real options rationales for choosingacquisition rather than alliance. Table 2 summa-rizes the rationales for the studied acquisitions.

As in other research on technology acquisitionsduring this time period (Uhlenbruck, Hitt, & Sema-deni, 2006), resource- and knowledge-based per-spectives played a more prominent role in acquir-

ers’ decisions. The desire to keep a target’s skillsand expertise out of the hands of competitors was amotivator for five of the eight acquirers. A vicepresident at Craze explained, “We’ve created aportfolio of the best companies. . . . We’ve acquiredthe best companies off the market, so no one elsecould.” A need for closer coordination also moti-vated buyers to seek acquisition rather than alli-ance. A business development executive at Picasso

TABLE 2(Continued)

Buyer Buyer Rationale Illustrative Quotes SellerSeller

Rationale Illustrative Quotes

Craze Block competition “There is so much premiumplaced on first-moveradvantage in thisspace. . . . We’ve created aportfolio of the bestcompanies. . . . We’veacquired these companiesoff the market, so nobodyelse could. . . . We’resetting the direction forour competitors.” (VP,M&A)

Fastlane Signaling Alliances don’t establish credibilitywith customers. “In the telecomindustry, scale is tremendouslyimportant. . . . With size comes theperception of reliability, thepossibility of better terms andconditions on deals, and to getinto transactions that you wouldotherwise not be able to get into,and attract money at valuationsthat are exceptionally better.”(CEO)

Ciao Signaling “We want to do enough[acquisition] deals nowthat prove to themarketplace that we’reserious . . . and we’re notjust doing businessdevelopment deals. Wethink the market sees rightthrough businessdevelopment deals. . . .The acquisition of Goalieput a stake in the ground:we can acquire companies,we can integratecompanies, we know howto think about synergisticbusinesses.” (venturecapitalist/board member)

Goalie Closercoordination

Alliances do not promote the samedegree of coordination: “Whenyou’re just a partner withsomeone, in many ways, althoughyou go into the partnership sayingboth companies are going to get alot from it, both parties almost putin the minimum amount, justbecause they have so many otherpartnerships, and it’s hard toreally maintain them. But whenyou really have a team that’sworking together on a daily basis,it becomes different.” (VP,business development)

Checkmate Block competition “We believe that to thewinner go the spoils inthese markets. We will notenter a market in whichwe think we will not bethe leader. . . . Who thecompetition is matters. Ifyou have the opportunityto acquire someone who isthe market leader, youhave improved your timeto market and you havetaken out a potentialcompetitor. So that is areason for acquisition.”(CEO)

Spur/Prime

Closercoordination

“It was clear that it would bedifficult for us to work with[multiple companies] in as close arelationship as we needed to. . . .You have to ally with one andpick the best one and make themarriage work. The logicalextension [is] to be acquired byone of them.” (Spur CEO)


reasoned, “This market was going to be strategic forus. We needed to have a full set of products in ourportfolio. . . . You need to have the technology in-house so that you can provide an end-to-end solu-tion. You can’t do that with a partner’s product.”

Sellers also played an important role in the de-cision to engage in an acquisition rather than analliance. Like buyers, sellers viewed acquisition asa means to achieve closer coordination and to en-sure their partners did not combine with competi-tors instead. An executive at Isle explained, “Basi-cally, whoever could get Harbor was going to beautomatically the leader in the space. . . . So thatwas what drove our decision making.” In addition,both buyers and sellers mentioned that acquisitionsplayed a signaling role that could not be fulfilled byan alliance. Buyers viewed acquisitions as a signalto financial analysts that their firms were able toaggressively enter new markets. A board member atCiao reasoned, “The market sees right through busi-ness development deals. . . . The acquisition ofGoalie put a stake in the ground: we can acquirecompanies, we can integrate companies, we knowhow to think about synergistic businesses.” Sellersviewed merging with a larger firm as signaling scaleand credibility to potential customers in a way thatalliances could not.

In sum, these acquisitions were primarily moti-vated by resource-based and signaling concerns,and only secondarily by transaction cost logic.Thus, the decision to participate in an acquisitionversus an alliance was not in itself an indication ofdistrust. Nonetheless, as discussed below, clearpatterns of trust and distrust began to emerge asbuyers and sellers evaluated the pros and cons ofspecific partners.

Choice of partners. In tandem with decidingwhether acquisition or alliance was more attrac-tive, firm leaders evaluated specific partners. Bothbuyers and sellers often considered many possiblepartners. A leader at a seller, Concept, recalled,“We had a list of people we thought would be goodcandidates to get acquired by. . . . Somebody knowssomebody, that sort of thing.” Both buyers andsellers narrowed their lists of potential partners onthe basis of strategic fit, including such character-istics as product line complementarity and technol-ogy platform similarity. For sellers, however, trust-worthiness was also an important criterion forscreening partners. Potential buyers were favored ifthey were perceived as trustworthy and were elim-inated if perceived as not trustworthy. Table 3Asummarizes the role of trust in sellers’ screening ofbuyers. Sellers based their judgments of trustwor-thiness on prior direct relationships, includingfriendships and business partnerships; shared

third-party ties; industry reputation; and impres-sions formed during initial partnership-relatedconversations.

For example, Monet’s leaders favored one buyer,Picasso, because of its industry reputation for trust-worthiness. According to Monet’s chief financialofficer, “Screwing companies is not Picasso’s rep-utation.” Conversely, Monet’s leaders refused toconsider acquisition by a potential buyer that theydid not trust, as Monet’s CEO explained:

We have the same board chairman as they do, butwe didn’t like their CEO. He’s dishonest. He tries tonegotiate deals with employees behind the backs ofinvestors. He is just not somebody our managementteam wanted to do business with.

Monet was not unusual. Eleven of the 12 sellers,including both management-controlled and inves-tor-controlled firms, indicated that trust was a sig-nificant criterion for screening buyers. If a sellerdistrusted a buyer, talks ended quickly. Sellers whodistrusted all of the buyers approaching them sim-ply rejected all offers and remained independent.The CEO of Evergreen explained why she rebuffedall of her company’s potential suitors thus: “Wewere really suspicious of them. We trusted themzip.”

Buyers did not demonstrate a reciprocal concernfor the trustworthiness of sellers, however. Table3B summarizes the role of trust in buyers’ screeningof sellers. Although buyers were not acquiring tar-gets because of distrust per se, lack of trust was notviewed as a reason to eliminate a target, either. Sixof the eight buyers expressed distrust in their even-tual targets. Buyers suspected these sellers of hid-ing their motives, exaggerating the state of theirtechnology development, and secretly negotiatingwith other parties. Typical buyer comments includ-ed: “This all seemed like ‘vaporware,’” “Theyshowed a demo, but demos are always smoke andmirrors,” and “They were playing us.” Nonethe-less, buyers were willing to acquire these targets.

Why might buyers and sellers assess the impor-tance of trust in acquisitions so differently? Onepotential explanation is that buyers chose to ac-quire precisely because they distrusted the target.However, as noted earlier, fear of opportunism wasnot the primary motivator for these acquisitions. Asecond explanation is that sellers were younger,less experienced firms, and perhaps were more na-ıve than buyers about acquisitions. These distinc-tions likely had an impact, but the data suggestdisparities in experience cannot be the entire ex-planation. First, both seasoned (e.g., Picasso) and

2009 445Graebner

novice (e.g., Harbor) acquirers were willing to ne-gotiate with distrusted targets. Moreover, althoughno selling firm had previously been acquired, manyindividual selling firm leaders had experience withacquisitions at other firms. Yet both more- and less-experienced selling firm leaders valued trustwor-thiness in their buyers.

A final explanation arises from considering theroles that buyers and sellers have in the acquisition

process, the risks that are involved, and the shift inpower that occurs after deals close. In the course ofan acquisition, sellers lose power while buyers gainpower. This asymmetry is an inherent feature ofacquisitions, regardless of the motivation for a dealor the experience levels of either buyer or seller.This shift in power seems to have engendered buy-ers’ and sellers’ disparate views of the importanceof trustworthiness.

TABLE 3ARole of Trust in Sellers’ Screening of Buyers

SellerTrustsBuyer Illustrative Quotes Outcome

Acquisition completedMonet Yes “We totally trusted them.” (CFO) Pursued acquisition (with Picasso)

“They do what they say they’re going to do. . . . We figured thatPicasso would treat us fairly.” (CFO)

Rocket Yes “An honorable company, and ethical” (outside board member). Pursued acquisition (with North)“We got to trust them.” (CEO)

Trend Yes “Neither environment has a lot of fear or distrust. They’repretty open.” (VP, services)

Pursued acquisition (with Armor)

Isle Yes Buyer has “lots of goody-goody stuff,” is “dripping withwholesomeness.” (chief technology officer)

Pursued acquisition (with Harbor)

Concept Yes “Once you’re on his team, he will do whatever it takes to makesure you’re covered.” (VP, business development)

Pursued acquisition (with Karma)

Fastlane No “You get the feeling that they are going to take you for a ride,chip away at your value—and that leaves you exposed.”(CEO)

Pursued acquisition (with Craze)

Goalie Yes “There was a lot of good faith being shown on both sides.”(VP, business development)

Pursued acquisition (with Ciao)

“It was a good-faith agreement.” (CEO)

Spur/Prime Yes “High-integrity, tremendously honest.” (Prime CEO) [It isimportant to] “sell to the right company and their level ofintegrity and commitment.” (Prime CEO)

Pursued acquisition (withCheckmate)

“We looked each other in the eye and knew our intentions.”(Spur angel investor/board member)

Acquisition not completedMonet No “[Their CEO] is dishonest. . . . He is just not somebody that our

management team wanted to do business with.” (CEO)Rejected acquisition

Trend No “There wasn’t a trust that was building there.” (VP, services) Rejected acquisition

Junket No [Potential buyers] “had their own agendas. They wanted tohave more access to technology, have us give them ourintellectual property. . . . We were never willing to do that.”(CEO)

Pursued alliance instead ofacquisition

Evergreen No “We were really suspicious of them. We trusted them zip.”(CEO)

Rejected acquisition

Model No “For the second time in the meeting, they changed their storyvery quickly. . . . I’m going to tell them, “I don’t believe youguys.” (CEO)



Power, risk, and the importance of trust. Thebuyers and sellers in this study began the acquisi-tion process with approximately equal bargainingpower. As one buyer noted, “Quite honestly, theyneeded us as much as we needed them.” Power-dependence theory (Emerson, 1972a, 1972b) sug-gests that actors have power in an exchange if theyhave viable alternatives—that is, if their desiredresource is available from more than one potential

partner. Both buyers and sellers had alternatives toacquisition, allowing them to walk away from un-attractive deals. Sellers typically had multiplewould-be suitors as well as investors willing tofurther fund them as independent firms, and buy-ers had multiple would-be targets offering roughlycomparable technologies. A vice president at Ciaonoted this: “There are two companies a week thatwant to be acquired by us. It’s just overwhelming.”

TABLE 3BRole of Trust in Buyers’ Screening of Sellers

BuyerTrustsSeller Illustrative Quotes Outcome

Acquisition completedPicasso No “By nature they are trying to be bought. They are telling us a

ship date that is a stretch target as opposed to a basetarget. . . . Monet is a big risk. It’s a big uncertainty.” (VP,technical integration).

Pursued acquisition (of Monet)

North No “We had to be careful” (head of business unit). Pursued acquisition (with Rocket)“It was worrying in the sense that we didn’t know what he

was after.” (head of business unit)

Armor Yes “They have a common set of values: High integrity.” (CEO) Pursued acquisition (of Trend)

Harbor No “They showed a demo, but demos are always smoke andmirrors.” (manager of strategy)

Pursued acquisition (of Isle)

Karma Yes “We got over and talked to those guys. They werecommitted. . . . I think we got everyone to trusting thatthey were going to stay.” (CEO)

Pursued acquisition (of Concept)

Craze No “They were playing us.” (VP, business development) Pursued acquisition (of Fastlane)“During the courtship, everyone puts their best foot forward.

Then you find out later.” (director of integration)

Ciao No “There was sort of this question about what’s the truth andwhat isn’t the truth of the deal. . . . You’re saying this, butwhat are you really going to do?” (CEO)

Pursued acquisition (of Goalie)

Checkmate No “This all seemed like vaporware to us in the beginning.”(director of business development)

Pursued acquisition (of Spur andPrime)

“You make a specific decision whether you are going to bethe predator or prey. . . . We made the decision to be thepredator.” (CEO)

Acquisition not completedHarbor Yes Had an “amicable partnership” with target, but “it’s not

really core, so there’s no real reason to own it right now.”(M&A manager)

Pursued alliance instead ofacquisition

Ciao No Expected target would “weasel their way” throughnegotiations (CEO), but rejected target on the basis of weakmanagement team.


Checkmate No Distrusted target, but would have done deal for a lowerprice: “For that whole day, we sat there and shot holes ineverything. . . . That all did not make sense to us. So wewalked away. We actually thought they would come back[with a lower price], but they didn’t.” (VP, businessdevelopment)


2009 447Graebner

Yet after the deal closed, a buyer’s and seller’srelative power would be very different. The buyertypically dominates key managerial positions aswell as the board of directors of the combined firm(Harford, 2003; Hartzell, Ofek, & Yermack, 2004;Wulf, 2004). Given their prospects of heightenedpower, buyers viewed sellers’ trustworthiness asnonessential. A leader of Craze explained that if hedid not trust a seller, Craze would simply planmore intensive postdeal intervention:

If we are to acquire this, we need to come in immedi-ately with an integration team, pour effort into beefingthis up and making it work. . . . If the motivation isthere from a revenue and market perspective, the out-look is pretty much, “You have to make it work, nomatter what.” We could have swooped in right awayand “Oh my God, this is going to be hard” and fixed it.

Sellers, however, lose power after acquisitionsclose. Sellers face the risk that buyers will imposeunwelcome practices and strategies on acquiredfirms (Jemison & Sitkin, 1986), replace acquiredmanagers, change leadership succession plans(Hartzell et al., 2004), or even close acquired firmsentirely (Santos & Eisenhardt, 2009). If a buyer haddeceived them during negotiations, the seller’s topmanagement team and employees would suffer. Avice president at Trend commented on the sense ofobligation she felt toward her employees: “You feelan incredible amount of responsibility for helpingthese employees. . . . My biggest concern was thatthey not be disregarded, that they be given goodpositions.” Similarly, the CEO of Model remarked:

When I think of [employee], I think, “He deservesthe best possible place to work that the world canpossibly give him, because he’s that kind of person.”I feel that tremendous debt of gratitude for the em-ployees. . . . I’m looking for a company that valuespeople as well as results.

Although these arguments help explain manag-ers’ preferences for trustworthy buyers, an intrigu-ing question is why sellers’ investors would sup-port such preferences. Agency theory suggests thatalthough selling firm executives might prefer atrustworthy buyer for the sake of themselves ortheir employees, investors would be concernedonly with obtaining the highest price (Jensen &Ruback, 1983).2 However, in this sample, bothmanager-controlled (e.g., Rocket, Isle, Goalie, Spur)and investor-controlled (e.g., Monet, Trend, Con-

cept, Junket) firms screened buyers on the basis oftrust. Investors in these ventures believed that onlysenior management could decide whether and towhom to sell a company. A venture capitalist andboard member in Junket, an investor-controlledfirm, commented: “This is a personal philosophyissue. I will not make any decisions for manage-ment. They have to make that call.” One reason thatventure capitalists did not want to force the handsof managers was concern about access to futureinvestment opportunities. Venture capitalists com-pete for access to attractive investments, and a neg-ative reputation among entrepreneurs could be acompetitive liability. A venture capital investor inEvergreen explained, “As a venture investor, yourreputation is part of what makes you successful,and entrepreneurs, if you do wrong by them, theyare not going to come back to work with you.”

A final question is why buyers so often distrustedtheir sellers. Assuming that concerns over oppor-tunism were not the primary reason for acquiring,there is no a priori reason why buyers would bemore likely to acquire distrusted versus trustedcompanies. The explanation seems to be twofold.First, buyers (and sellers) had a generalized distrustof most potential partners. The firms were engagedin rapidly changing and intensely competitive mar-kets. As technologies developed, adjacent marketsand products converged, and partners who beganin slightly different sectors could quickly becomecompetitors. Experimental evidence suggests thatas conflict becomes more salient, exchange part-ners are less likely to be viewed as trustworthy(Molm, Peterson, & Takahashi, 2003). Similarly,competitive industry dynamics seemed to foster a“predator or prey” mind-set that encouraged wari-ness of outside firms. Second, selling firms weregenerally younger and smaller than buyers. As aresult, buyers were somewhat more likely than tar-gets to feel that they lacked sufficient knowledge totrust their counterparts (cf. Kotha, Rajgopal, & Ven-katachalam, 2004). One buyer commented about atarget thus: “We tried to dig out information onthem. . . . But the best we could find was they wereworking at an apartment on Sand Hill Road.”

Socializing: Trust Asymmetries andConflicting Interpretations

Once a buyer and seller had identified acquisi-tion as an attractive means of partnering and iden-tified one another as attractive partners, the nextphase was typically socializing between the leadersof the two firms. In six of the eight completedacquisitions, buyer and seller leaders met infor-mally in nonoffice settings, including restaurants,

2 “[Selling firm] stockholders have no loyalty to in-cumbent managers; they simply choose the highest dollarvalue offer from those presented to them” (Jensen &Ruback, 1983: 6).


coffeehouses, a CEO’s home, and even a vacationretreat. Though acquisition was on the minds ofboth buyer and seller, the conversation topics were

much more personal, including college memories,hobbies, and life philosophies.

Buyers and sellers had distinct and often con-

TABLE 4Socializing: Differing Interpretations

Seller/Buyera Social Interaction

Seller Perception: BuildRelationship through

Honest TalksBuyer Perception: Ingratiate, Gather

Information, Gain Bargaining Advantage

Monet/Picasso Dinner at restaurant “We totally trusted them. . . . Itstarted out very low-key overdinner. We told them that wewould let them know aboutany problems. . . . The wholeprocess was friendly andopen.” (CFO)

Gather information. Initial relationshipbuilding is intended to provide informationon seller’s prospects: “The acquisition isnot preordained.” (chief technology officer)“We want the team to prove that they candeliver a product.” (VP, technicalintegration)

Rocket/North Series of meetingsat a coffeehouse

“We met off and on from Januaryto July. It was a good time forus both to learn. We werepretty open, too. We got totrust them that way. Opennessis the best policy.” (CEO)

Gather information, ingratiate. “We were justfishing information from them. . . . I thinkmy role and actions were to keep friendlyconversation open and daily contact. . . . Isat with [seller CEO] a couple of times inthe Starbucks cafe across the street andhaving conversations about life and theuniverse and everything. . . . It was just thisendless discussion. . . . It worked reallywell.” (head of business unit)

Trend/Armor Informal evening atArmor CEO’shome

On the basis of this interaction,trusted Armor enough todecline another acquisitionoffer prior to formal writtenoffer from Armor. (CEO)

Ingratiate. “What our CEO did is, he sat downwith [Trend CEO] personally. He asked himto come over later that evening and sit downand talk. I think [Trend CEO] very muchenjoyed the conversation. A very good

Disclosed a potential accountingissue to buyer early on, beforeengaging in full negotiations.(venture capitalist/boardmember)

move we made during that process was thatwe bear-hugged them at just the rightmoment. Those two days that we spentwith their people were very effective.” (VP,business development)

Concept/Karma Breakfast atrestaurant

During breakfast discussion, “Iwas being very direct andhonest.” (CEO)

Gather information. “We tried to dig outinformation on them. We’ve been a littlesecretive. It became a funny dance, a trickyone.” (CEO)

Goalie/Ciao Dinner at restaurant “We were very open andhonest.” (VP, businessdevelopment)

Gain bargaining advantage. Socialized tocircumvent seller’s financial advisors: “Imet with them on a weekend in Chicago. I

“We went to the same college,[and] it was like a ‘click.’ Helooked at me and said, ‘We’regoing to do big things.’ I said,‘I have no doubt.’” (CEO)

called her at home—I said, hey, you guyshave a few minutes, let’s talk. That waspartly because we felt that one, they weregetting bad advice, and two, we thoughtthat would just raise the price sooner orlater.” (venture capitalist/board member)

Spur/Prime/Checkmate Lunch meeting,weekend at sellerCEO’s vacationhome

“We [buyer and seller] lookedeach other in the eye andknew our intentions and feltthe certainty of that.” (Spurangel investor/board member)

Ingratiate. “I had to get his affection for thisdeal. They arranged a lunch which endedup taking four hours with me just trying towin him over on the deal. . . . He wantedSpur to run its own course, to reach a

“Conversations were over cigarson my deck. They were alwaysfriendly.” (Prime CEO)

billion dollars someday. . . . I had to makehim think we could pull this off. Once I gothim on board, it made the whole deal a loteasier.” (CEO)

a Cases not listed (Fastlane/Craze and Isle/Harbor) did not involve social interaction prior to the signing of letters of intent.

2009 449Graebner

flicting interpretations of these social interactions.Sellers viewed socializing through the lens of trustformation, and they perceived social interaction asbuilding deeper relationships through honest ex-change of information. Buyers viewed the sameevents through the lens of bargaining and saw so-cial interaction as a way to gain influence oversellers. As a result, the disparity between buyers’and sellers’ views of one another’s trustworthinessgrew. At the same time, socializing influenced bothparties’ emerging beliefs regarding whether theywere trusted by their counterparts. Firm leaders’views of whether their counterparts were trusting,as well as trustworthy, played an important role inshaping subsequent behavior, particularly deceit.Table 4 presents case information and exemplaryquotations about socializing and its interpretation.

Deepening of sellers’ trust. For sellers, socializ-ing was an opportunity to deepen trust by develop-ing sincere personal relationships with buyers. Forbuyers, informal interaction was an opportunity togain bargaining leverage by gathering information,engaging in ingratiation, and isolating sellers fromtheir legal and financial advisors. Trend and itsbuyer, Armor, offer an example. Early in the twofirms’ acquisition talks, Armor’s CEO invitedTrend’s CEO to his home for an evening. An Armorvice president observed that the conversationstrayed from acquisition: “[The CEOs] just shotthe s—. We didn’t talk much about the company.”On the basis of this personal interaction, Trend’sleaders trusted Armor sufficiently to refuse an at-tractive offer from a competing bidder, even beforereceiving a formal written offer from Armor’sboard. Armor’s leaders, however, viewed socializ-ing with Trend’s CEO as a negotiating tactic in-tended to prevent Trend from accepting an acqui-sition offer from Armor’s biggest competitor.Armor’s vice president of business developmentexplained:

We tripped over the fact that one of our competitorswas actually in the midst of attempting to do anacquisition of them. I called our CEO and said, “Getyour butt down here! This company is off the chartscompared to everything else we’ve looked at. Wecan’t let this happen.” What our CEO did, which iswhat he does so well, is he sat down with [Trend’sCEO] personally. They spent the afternoon together.And then he asked [Trend’s CEO] to come over laterthat evening and sit down and talk with him. Wespent the rest of the evening talking about thingsother than the acquisition. We talked about his as-pirations, our aspirations. I think [Trend’s CEO]very much enjoyed the conversation.

The vice president regarded this socializing, or“bear hugging,” as an excellent persuasion tool:

It stood out as a very good move that we made. We“bear-hugged” them at just the right moment. Thosetwo days that we spent with their people were veryeffective. Slowly but surely, the management beganrealizing they didn’t want to work for the otherbuyer.

Fortunately for Trend’s leaders, Armor’s state-ments to Trend during the socializing process wereessentially accurate. This was not true for otherbuyers. Most buyers neither expected sellers to betrustworthy during social interactions, nor felt ob-ligated to be trustworthy themselves. An illustra-tion of this pattern is the case of Rocket and North.Rocket was in the process of raising a round ofventure capital financing when approached byNorth about a potential partnership, possibly in-cluding an acquisition. Rocket’s CEO and North’sbusiness unit head began a series of informal meet-ings at a nearby coffeehouse. Rocket’s CEO viewedthese talks as an honest exchange of informationthat built a personal relationship and reinforced histrust in North. He recalled:

We met off and on from January to July. It was agood time for us both to learn. We were pretty open,too. We got to trust them that way. We told them wewere on an IPO track and talking with venture cap-italists. Openness is the best policy.

North’s representative felt quite differentlyabout the meetings, saying, “We were just fishinginformation from them.” He explained that heviewed the coffeehouse sessions as a way to im-prove North’s bargaining position by convincingRocket not to take additional venture capital in-vestment, which would have increased Rocket’svaluation. As a stalling tactic, he intentionallymisled Rocket’s CEO by suggesting that Northwould be willing to provide capital to Rocket asan independent firm:

That was a tricky time. [Rocket] had some [venturecapital] term sheets on the table. The companywould have been more expensive after VCs got in.North pretended [we were] interested in throwing in$5 to $10 million for a VC round. That was theofficial story. I think my role and actions were tokeep friendly conversation open and daily contact. Iwas making sure they didn’t sign the VC stuff. I satwith [Rocket CEO] in the Starbucks cafe having con-versations about life and the universe and every-thing. It was this endless discussion.

North’s representative concluded that the infor-mal conversations had “worked really well” inpersuading Rocket to decline financing and pur-sue acquisition.

Perceptions of counterpart’s trust. In addition toasymmetrically deepening sellers’ trust in their


TABLE 5Buyers’ and Sellers’ Actual and Perceived Trusta

Seller Buyer

BuyerTrustsSeller

(Table 3B)

SellerBelieves

It IsTrusted

by Buyer Illustrative Evidence

SellerTrustsBuyer

(Table 3A)

BuyerBelieves

It IsTrustedby Seller Illustrative Evidence

Monet Picasso No Yes Believed that buyerresponded to seller CEO’ssignals regarding fairnessand equity: “[Our CEO]wouldn’t violate anagreement. . . . Picassounderstood exactly whathe was saying.” (sellerCFO)

Yes Yes Buyer believed that seller trustedthem to follow through onnonbinding agreement: “Thereis a well-understood socialcontract in place.” (buyer chieftechnology officer/boardmember)

Rocket North No Yes Believed buyer trusted sellerbecause buyer seemed todisclose sensitiveinformation: “[Buyerexecutive] probably toldus more than he shouldabout their businessstrategy and how we fitin.” (seller CEO)

Yes No “I don’t believe that [seller] wasnaıve that nothing was goingon.” (buyer head of businessunit)

Trend Armor Yes Yes Believed that buyer wouldnot acquire a companythey didn’t trust: “Armor’sphilosophy is that culturecomes first. . . . Culturallythe companies were verysimilar. . . . Neitherenvironment has a lot ofdistrust. They’re prettyopen environments.”(seller VP, services)

Yes Yes Buyer believed seller was willingto turn down higher competingoffer because distrustedcompetitor and trusted Armor.“They were quite worriedabout working for the othercompany.” (buyer VP, businessdevelopment)

Isle Harbor No No Believed buyer would notagree to alliance, ratherthan acquisition, becausebuyer did not trust sellerand wanted total control.“They felt like just doinga partnership wasn’t goingto be strong enough, bothin terms of control and ifthey did something andwe did something else,they could lose thepartnership.” (seller VP,business development)

Yes Yes Believed seller accepted buyer’sstatements at face value:“[Seller] thought they wereselling just a normal businessdevelopment deal. . . . Theulterior motive I had was that Ithought we probably wanted tobuy them.” (buyer manager ofstrategy)

Concept Karma Yes No “It got a little uncomfortableat one point, I remember,because I asked sometough questions . . . and Ithink maybe that was oneof the reasons why theywere nervous about me.”(seller CEO)

Yes No Believed seller distrusted thembecause Karma had backed outof previous negotiations: “Wehad to tell them that as oftoday, we will not have anymore acquisition discussions.. . . I think they were prettypissed off at us because we hadbrought them along for twomonths.” (buyer CEO)

Continued

2009 451Graebner

buyers, socializing provided an opportunity forboth buyers and sellers to develop beliefs regardingwhether they were trusted by their counterparts.Surprisingly, these assessments were often wrong.Table 5 contrasts the actual and perceived trust ofboth parties. Five sellers (Monet, Rocket, Concept,Goalie, and Prime) misread whether their buyerstrusted them. Four of these five sellers believedthey were trusted by buyers, when the opposite wastrue. Two buyers (North and Karma) also madeerrors. In both cases, buyers mistakenly believedthat sellers did not trust them.

In the case of Rocket and North, both buyer andseller were mistaken. Their informal interactionat the coffeehouse left Rocket’s CEO feeling thatNorth’s leader was demonstrating his trust inRocket by being very forthcoming. Rocket’s CEOcommented that North’s leader “probably told usmore than he should about their business strategyand how we fit in.” In fact, North’s representativedistrusted Rocket’s CEO, commenting, “We hadto be careful . . . it was worrying that we didn’tknow what he was after.” For his part, North’s

leader erroneously believed that Rocket’s CEOviewed him with skepticism and knew that hewas not being entirely honest. Although Northpretended to be interested in providing venturecapital rather than acquiring Rocket, North’sleader believed that Rocket’s CEO was savvyenough to know better: “I don’t believe that he wasnaıve enough [to think] nothing was going on.”

Whether correct or not, leaders’ views of theother firm’s trust, as well as its trustworthiness,influenced leaders’ behavior in important ways.Specifically, leaders’ views of whether theircounterparts were trustworthy and/or trustingshaped decisions regarding whether to behavedeceptively. This influence became particularlyapparent during the next phase of the acquisitionprocess.

Agreeing in Principle: Trust, Distrust,and Deception

Agreeing in principle, which often followedquickly after socializing, involved signing a non-

TABLE 5(Continued)

Seller Buyer

BuyerTrustsSeller

(Table 3B)

SellerBelieves

It IsTrusted

by Buyer Illustrative Evidence

SellerTrustsBuyer

(Table 3A)

BuyerBelieves

It IsTrustedby Seller Illustrative Evidence

Fastlane Craze No No Seller interpreted all buyers’extensive informationrequests as signs ofdistrust: “The enormousamount of hours that youhave to spend to begin thedue diligence, all thecalls.” (seller venturecapitalist/board member)

No No Believed seller had chosen to usean investment bank becausethey did not trust potentialbuyers. “It’s always nicerwhen there’s no investmentbanker involved.” (buyer VP,business development)

Goalie Ciao No Yes “You start to learn, ‘Hmmm,I trust Goalie, they’redoing a kick-ass job.’ I’mguessing that’s what[buyer CEO] is thinking.”(seller CEO)

Yes Yes ‘They really trusted [our boardmember]. . . . to some extentthey trusted him more thanthey trusted their ownfinancial advisors.” (buyer VP,business development)

Spur/Prime Checkmate No Yes Seller firm leaders believedbuyer was willing to trusttheir statements: “Theykind of took it on goodfaith from ourconversation.” (PrimeCEO)

Yes Yes Believed seller trusted thembecause seller agreed to extendno-shop for a long period.“The point was that Spur’sboard had to believe thatCheckmate was a goodcompany. . . . That was thefirst thing they wanted to talkabout.” (buyer VP, businessdevelopment)

a Bold indicates examples in which there are trust errors (i.e., a “yes” and a “no”).


binding acquisition letter of intent, or term sheet,3

outlining the proposed deal. Signing a letter ofintent could be a risky matter, particularly for sell-ers. Term sheets typically include a legally binding“no-shop” clause that requires the two firms tonegotiate exclusively until either the deal closes ora specified time period expires. If the acquisitionfails to come to fruition, both buyer and sellercould lose valuable time in their searches for suit-able partners. For sellers, an even more criticalissue was delays in raising additional capital. Sell-ers often put fundraising plans on hold during ac-quisition talks, which put their solvency at risk ifthe buyer withdrew from the deal.

However, because most sellers trusted their buy-ers, they viewed an agreement in principle as tan-tamount to a completed deal. Sellers expected thatonce a letter of intent had been signed, the remain-ing details were formalities. A Goalie founder ex-plained that he had no doubt that Ciao would fulfillits promise to complete the acquisition: “Eventhough we [still] had to talk to the lawyers a lot, webasically had agreed to compromise on all the is-sues. If you can trust them, you feel like they’regood people, and all of the small little details willbe worked out.”

Buyers approached the letter of intent differ-ently, as a means of gathering additional informa-tion before making a final decision about the deal.As an executive from North commented, “Our am-bition with the term sheet is basically to get in anddo some due diligence, to make sure the technicalside is working.” Moreover, many buyers behaveddeceptively during this phase. Deception took twoforms: negotiation-related deception, or “bluffing,”and a more serious form of misrepresentation,which will be termed material deception.4 Bothforms were related to the deceiver’s beliefs con-cerning whether the opposite party was trustwor-thy and/or trusting. Table 6A summarizes informa-tion on buyers’ trust and perceived trust and offersillustrative evidence on buyers’ deception, and Ta-ble 6B presents similar information for sellers.

Negotiation-related deception. Negotiation-re-lated deception involved providing misleading in-formation about the presence of alternative targetsor buyers, the prices of competing offers, and dead-lines for making decisions. Negotiation-related de-ception was common, with seven of the eight buy-ers and three of the eight sellers exhibiting thisbehavior (Tables 6A and 6B). Both young firms(e.g., Concept and Karma) and large, experiencedfirms (e.g., Picasso and North) engaged in negotia-tion-related deception.

An example is the buyer Harbor. Harbor inten-tionally misled Isle’s leaders about how much Har-bor was willing to pay for the company. A Harborexecutive recalled, “We started out at a pretty lownumber, and we negotiated pretty hard to keep itlow . . . they certainly had a lot more room to go.Which, to this day, they’re not aware of. They wereat a pretty big disadvantage.” A second example isthe seller Craze, which manipulated buyers’ viewsregarding the presence of competing bidders. ACraze board member explained that the negotiationinvolved “A lot of ‘Kabuki theater.’ I mean, a lot ofeffort was made to make the buyers believe thatcertain companies were part of the auction process.”

One reason that negotiation-related deceptionwas so common is that bluffing was viewed as awidespread practice in bargaining situations. In thewords of one informant, acquisition talks are “likea poker game.” This view is consistent with state-ments in the negotiation literature that bluffing is“an accepted part of the negotiation process”(Schweitzer, 2005: 3). Because negotiation-relateddeception was viewed as so commonplace, only ina narrow set of circumstances would firm leadersnot engage in this behavior. As Tables 6A and 6Bindicate, only when firm leaders both trusted andfelt trusted by their counterparts did they refrainfrom negotiation-related bluffing. Figures 1A and1B demonstrate this pattern graphically.

The combination of trusting and feeling trustedby the opposite firm seemed to trigger a logic ofcooperation, partnership, and fairness that discour-aged any deception, even negotiation-related bluff-ing. Armor, the lone buyer to not engage in anydeception, both trusted and felt trusted by its target.Armor’s CEO explained how these views shapedthe negotiation process: “We just sat down andballparked a number. We didn’t try to play hardballand we tried to be generous. The term sheet wasvery simple.” Sellers generally followed the samepattern as buyers, refraining from negotiation-re-lated deception if (and only if) they both trustedand felt trusted by their counterparts. However,

3 Technically, a term sheet is an attachment to aletter of intent. However, informants used the termsinterchangeably.

4 Note that this form of deception was not necessar-ily “material” in the legal sense of constituting fraud.The U.S. legal system allows for considerable misrep-resentation within negotiation contexts, and partici-pants are usually protected from fraud allegations ifthey abide by the letter of a contract, regardless ofstatements made during negotiations (Schweitzer,2005; Shell, 1991).

2009 453Graebner

because sellers were more likely to hold these spe-cific beliefs, the frequency of negotiation-relateddeception among sellers was lower than the fre-quency among buyers. The CEO of Prime, one ofthe five sellers that did not engage in negotiation-related deception, reported:

I kind of look at both sides of the equation and go forthe point of fairness early. . . . We both went tosomething that was fair and stuck there. . . . Youhave to work out deals in this world where buyerand seller both feel like they have a fair deal becauseyou are partners the next day. . . . I went early to fairinstead of always trying to get the best deal.

Table 6ABuyers’ Trust, Perceived Trust, and Deception

Buyer/Seller

BuyerTrustsSeller

(Table 3B)

BuyerBelieves ItIs Trustedby Seller(Table 5)

BuyerDeception Illustrative Evidence

Picasso/Monet No Yes Negotiation Surreptitiously gathered information from seller’s investors:“Picasso had more information on this company than theyever should have. They had every single business plan,every little number. . . . It is just too incestuous there. . . .We kind of ended up with an inside deal.” (seller venturecapitalist/board member)

North/Rocket No No Negotiation Falsely indicated to seller that buyer was willing to invest:“North pretended it was interested in throwing in $5 to $10million for a VC round.” (buyer head of business unit)

Armor/Trend Yes Yes None “We didn’t play hardball.” (buyer CEO)“There haven’t really been any issues. Thank God, my sense

of the culture turned out to be correct and theopportunities were good.” (seller CEO)

Harbor/Isle No Yes Negotiation,material

Misled seller on reservation price: “We negotiated hard . . .they certainly had a lot more room to go. Which, to thisday, they’re not aware of. They were at a big disadvantage.”(buyer manager of strategy)

Misled seller about integration plans: “It was sort of halftelling them what was going to happen and half still a salespitch.” (buyer manager of strategy)

Karma/Concept Yes No Negotiation Bluffed about walkaway price: “All the negotiations totallybroke down. . . . I said, ‘You don’t want to talk about it,’and he was like ‘no, it’s just 10%.’ He wouldn’t engage inthe conversation. . . . And four days later he called me”[deal closed at 15% of buyer’s equity]. (seller CEO)

Negotiation involved “dances.” (buyer CEO)

Craze/Fastlane No No Negotiation Bluffed about deadline for seller to decide between offers.

Ciao/Goalie No Yes Negotiation,material

Secretly contacted other potential buyers to convince them towithdraw their bids.

Lied about integration plans: “We only need five of theiremployees . . . [but] we didn’t go and tell them, ‘Hey, we’regoing to go out and fire 10 people.’” (buyer venturecapitalist/board member)

Checkmate/Spur/Prime No Yes Negotiation,material

Misled seller about walkaway price: “If we know it isbetween 10% and 20%, we will always negotiate reallyhard, but if it ends up at 20%, we’ll still do the deal.”(buyer VP, business development)

Suggested to Prime that they would retain Prime’stechnology, despite not intending to: “We know all alongthat we were going to rip out their technology.” (buyer VP,business development)


Material deception. Some firms also engaged ina second form of misrepresentation, which I term“material deception.” Material deception pertainedto topics that went beyond bluffing about prices orcompeting offers. For buyers, material deceptioninvolved misleading the seller about postintegra-tion plans such as layoffs, relocation of personnel,changes in strategic direction, or diminished rolesfor senior managers. For sellers, material deceptioninvolved misleading the buyer about the status ofthe seller’s product development efforts, the inten-

tions of key personnel to remain with the firm, orother issues related to the buyer’s future ability torealize value from the acquisition.

Material deception was viewed as a more seriousmatter than negotiation-related bluffing. The sameinformant who compared negotiation to a pokergame felt material deception was unacceptable,arguing:

You have to be very candid in these discussionsabout what your objectives are. You can’t make

TABLE 6BSellers’ Trust, Perceived Trust, and Deception

Seller/Buyer

SellerTrustsBuyer

(Table 3A)

Seller BelievesIt Is Trusted

by Buyer(Table 5)

SellerDeception Illustrative Evidence

Monet/Picasso Yes Yes None “The whole process was friendly and open.” (seller CFO)Did not talk to other buyers: “In our option agreement, we

promised not to do that, and our CEO wouldn’t violate anagreement.” (seller CFO)

Rocket/North Yes Yes None “We told them that we were on the IPO track and talking with VCs.Openness is the best policy. . . . We were clear to North, and thedeadlines were real.” (seller CEO)

Trend/Armor Yes Yes None Seller CEO ensured that selling firm leaders would stay at firm: “Ithink you have a responsibility in that if the value of thecompany is going to be maintained, you need to keep the people.. . . The night that [our CEO] signed the deal, we had dinner, theentire executive staff. At one point in the dinner he said, ‘I needto know you’re all on board. And if you’re not, I’m not going todo this.’” (seller VP, services)

Isle/Harbor Yes No Negotiation Exaggerated company’s ability to stay independent: “[Founder] wasalways the best salesperson. He was a good liar. He could smileand do these things, and usually that was an OK thing, becausehe could pump the thing even when he had doubts.” (chieftechnology officer)

Concept/Karma Yes No Negotiation Misled buyer about fallback options when competitive landscapechanged: “No one knows these thoughts, it was all our board—the first time we went through the discussion with Karma, wewere negotiating from a position of strength. Much more strengththan the second time. They didn’t realize it as much.” (seller VP,business development)

Fastlane/Craze No No Negotiation Led buyer to believe that more bidders were present: “A lot of‘Kabuki theater.’ I mean, a lot of effort was made to make thebuyers believe that certain companies were part of the auctionprocess.” (seller venture capitalist/board member)

Goalie/Ciao Yes Yes None “It was a good-faith agreement that we would negotiate to animpasse or to a deal . . . and I think that’s the fair way of doingit.” (seller CEO)

“We were very open and honest.” (seller VP, businessdevelopment)

Spur/Prime/Checkmate Yes Yes None “I look at both sides of the equation and go for the point of fairnessearly. . . . We both went for something fair and stuck there.”(Prime CEO)

2009 455Graebner

things up, “I intend to stay for the next two years,and I’ll stick around,” knowing that I’ll pull the plugone month later. I think not being honest aboutthings is a mistake.

As Tables 6A and 6B indicate, material deceptionoccurred less frequently than negotiation-relateddeception. Firm leaders seemed to use a differentlogic when considering whether to engage in thismore serious form of deceit. Like negotiation-related deception, material deception was linked towhether leaders trusted and felt trusted by theircounterparts in the other firm; however, a morerestrictive set of conditions had to be present formaterial deception to occur. Figures 2A and 2Billustrate patterns of trust and material deception,indicating that firms only engaged in material de-ception when they distrusted but believed theywere trusted by their counterparts.

An example is the case of Goalie and its buyer,

Ciao. Prior to acquisition discussions, Ciao leadershad assisted Goalie with introductions to venturecapital investors. Ciao correctly observed thatthrough this process, Goalie had developed trust inone of Ciao’s investors and board members. A Ciaovice president commented, “Goalie really trusted[our board member]. To some extent they trustedhim more than they trusted their own financialadvisors.’” Ciao did not trust Goalie, however, asCiao’s CEO explained: “There was this questionabout what’s the truth and what isn’t the truth ofthe deal. You’re saying this, but what are you reallygoing to do?”

Goalie’s trust in Ciao provided Ciao’s leaderswith the opportunity to behave deceptively. Ciao’sboard member acknowledged the temptation: “Ifyou get someone who doesn’t know what they’redoing, you can take advantage. . . . You like to takeadvantage where it’s to your benefit.” Moreover,

FIGURE 1Trust and Negotiation-Related Deceptiona

(1A) Buyer Behavior (1B) Seller Behavior

Yes CiaoHarborPicassoCheckmate

Armor Yes TrendGoaliePrime MonetRocket

Buyer Believes Seller Trusts It

No

North Craze

Karma SellerBelieves Buyer Trusts It

No

Fastlane ConceptIsle

No Yes No YesSeller Trusts BuyerBuyer Trusts Seller

a A “✓ ” signifies that a firm engaged in negotiation-related deception.

FIGURE 2Trust and Material Deceptiona

Yes CiaoHarborPicasso Checkmate

Armor Yes TrendGoalie Prime MonetRocket

No

NorthCraze

Karma

No

Fastlane ConceptIsle

No Yes No YesBuyer Trusts Seller Seller Trusts Buyer

Buyer Believes Seller Trusts It

SellerBelieves Buyer Trusts It

(2A) Buyer Behavior (2B) Seller Behavior

a A “✓ ” signifies that a firm engaged in material deception.


believing that Goalie was not trustworthy provideda rationale for justifying this behavior. Psychologi-cal research suggests that a fear of exploitation pro-vides a moral justification for deception based onself-defense (Bazerman, Curhan, Moore, & Valley,2000; Steinel & De Dreu, 2004). Similarly, Ciao’sboard member explained his negotiating tactics asself-protection: “Here’s the way we thought aboutit: we tried to limit our downside . . . so we playeda bit of the tough guy.”

Facing the combined forces of temptation andfear, Ciao leaders engaged in material deceptiontoward Goalie. Goalie’s founders were insistentthat none of their employees be terminated as aresult of the acquisition and that their company notbe relocated. Ciao leaders assured them this wouldnot happen, despite secretly intending to lay off themajority of Goalie’s personnel and move the com-pany to California. A Ciao board member recalled:

We only need five of their employees, [but] wedidn’t go and tell them, “Hey, what we’re going todo is go out and fire ten people.” We specificallysaid, “You can keep the business as-is, running inNew York, through April.” So we’re buying our-selves some time. And then on April 15, we say,“Here’s who has to move.”

Because they trusted Ciao, Goalie’s leaders tookCiao’s representations at face value. Goalie’s CEOaffirmed that relocating was “the one thing that wasnonnegotiable about the deal,” and another Goalieexecutive said, “There’s literally no overlap—noone who’s going to get fired. No layoffs.”

Two other buyers, Harbor and Checkmate, alsodistrusted their targets but felt trusted by them.Like Ciao, both Harbor and Checkmate engaged inmaterial deception. However, as indicated by Fig-ure 2b, no seller fell into the category of distrustingbut feeling trusted by the buyer, and no seller en-gaged in material deception. It is worth nothingthat material deception by sellers was not impossi-ble. Craze leaders related the story of a previousacquisition in which the seller had provided mis-leading information about headcount in a criticalarea. That acquisition differed from the other casesin that the seller was engaging with Craze not bychoice, but by necessity, because the seller’s origi-nally preferred buyer had just been acquired byanother firm. As this example suggests, materialdeception by sellers was possible, but unlikely,because most sellers only engaged in conversationswith buyers they trusted.

Seller trust and buyer deception. The frequencyof deception by buyers raises the question of whysellers originally believed these buyers were trust-worthy—and how they could so often be mistaken.

Prior research suggests that interfirm trust emergesgradually from a combination of direct experience,reputation, and third-party referrals (Gulati, 1995;Larson, 1992; Ring & Van de Ven, 1994; Sako &Helper, 1998; Uzzi, 1997), which provide “timely,relevant information on the . . . reliability of poten-tial partners” (Gulati & Gargiulo, 1999: 1446). Sim-ilarly, sellers based their assessments of trustwor-thiness on direct experience from friendships andprevious professional interactions, on a buyer’sgeneral industry reputation, and on shared tieswith third parties such as investors and past em-ployers. However, these sources did not seem to bereliable predictors of a buyer’s behavior in an ac-quisition. One reason is that acquisition situationsmay trigger behavior that is not seen under othercircumstances, such as personal friendship or eveninterfirm alliance. Prior interactions between buyerand seller are likely to differ greatly from an acqui-sition in risk and importance. Acquisitions involvehigh stakes, which can foster deception and othercompetitive behavior (Gneezy, 2005; Tenbrusel,1998). An informant from one buyer observed that theacquisition context generated a marked change inhis own firm’s senior executives. When a deal wasin jeopardy, the executives turned from “mild-man-nered” and “chummy” to angry and calculating:

They were livid. It’s interesting to sit in on a boardmeeting, because our CFO and chief legal guy arevery mild-mannered, but they were really mad. Andit’s interesting to hear the CFO saying, “We reallywant to dominate the world.” He’s a really chummysort of guy.

In several cases, buyers were experienced acquir-ers, providing sellers the opportunity to seek infor-mation about buyers’ previous behavior in acquisi-tion settings. Yet even this information was notnecessarily predictive of buyers’ actions in subse-quent acquisitions. Acquisitions are heterogeneousevents (Haleblian & Finkelstein, 1999; Zollo &Singh, 2004). As a leader from Craze explained,“Things change here all the time. [Acquisitions] arenot cookie-cutter.” Buyers’ circumstances and be-havior could change in a variety of ways from oneacquisition to the next. One serial acquirer evendescribed making a conscious decision to becomeless honest in future deals. The CEO had tried in aprevious acquisition to be very open and “show[the acquirees] what nice guys we were,” but afterexperiencing disappointing results, had decided infuture acquisitions to “be quite a bit more ruth-less . . . go in with a fairly Machiavellian set ofrules.” Finally, the model developed here suggeststhat a buyer’s actions may differ dramatically de-pending on whether the buyer views a specific

2009 457Graebner

seller as trustworthy and/or trusting. As a result, inone acquisition a buyer may be quite honest, butin the next, highly deceptive. All of these factorsmay make it difficult for sellers to accurately pre-dict whether a buyer will behave deceptively in aspecific acquisition.

Legalization: Trust Asymmetries and Precautions

The fourth phase of the acquisition process, le-galization, refers to the period between signing anagreement in principle and officially closing thedeal. The legalization period provides a finalchance for both buyers and sellers to protect them-selves against counterparts’ dishonesty. During thisperiod, both firms can take precautions, includingchecking references on the other party’s leaders,validating information about the opposing firm’stechnology and strategic plans, and designing dealterms to defend against possible misrepresenta-tions. Table 7 presents evidence about this stage foreach case.

Buyers typically took advantage of the legaliza-tion phase, conducting extensive due diligenceand developing deal terms such as escrow periodsthat protected the buyer if target leaders had be-haved deceptively. An example is Craze. Like mostbuyers, Craze conducted careful due diligenceon its target, reviewing important customer con-tracts, examining the quality of the seller’s technol-ogy, and even probing relationships among em-ployees. Craze’s chief technology officer outlinedthis process:

As we go further in the diligence, then we may askfor some more detail. Sometimes you notice that acertain person doesn’t want to work with this per-son, or they actually happen to mention that theirbusiness model won’t survive beyond next year, sothese tidbits of information. . . . [And] legal will askabout all their customer agreements and licenseagreements. We try to evaluate what componentsthe software is built out of, the cost of those compo-nents going forward, and will this be expensive tocontinue to develop and deploy? You ask thosequestions in the initial overview, and then in thesecond level of the diligence, you actually drilldown to seeing the contract, worldwide license, etc.

Seven of the eight buyers described both conduct-ing due diligence and implementing deal terms toprotect themselves against any misrepresentationby their targets.

It was possible for sellers to take similar precau-tions. For example, Trend’s leaders described gath-ering financial analysts’ reports to get outside as-sessments of Arbor’s management team and hiringan investment bank to assess Arbor’s financial

prospects. Fastlane’s CEO demanded a “sizeablebreak-up fee” to guarantee interim financing ifCraze withdrew from the acquisition deal. YetTrend and Fastlane were the only two of the eightsellers to take significant precautions during legal-ization. Four sellers did not describe taking anysteps to safeguard against a buyer’s possible dis-honesty, and the remaining two sellers took onlyminimal steps, engaging in limited due diligence.For example, an officer at Monet commented, “Iasked a few friends at other Picasso acquisitions,and they verified what we thought. But we didn’tdo any systematic checking.” Moreover, none of theeight sellers used both due diligence and deal termsto protect themselves.

A partial explanation for these differences is thatsellers were smaller firms with limited resources toexpend investigating buyers. In addition, becausethey were privately held, sellers did not face theprospect of shareholder lawsuits if their due dili-gence were lacking. However, these factors do notappear to tell the whole story. Even in the two casesin which the buyers were privately held and rela-tively safe from shareholder lawsuits, the firmstook far more precautions than sellers. Moreover,while sellers did not have unlimited resources,they did have the assistance of high-caliber attor-neys and experienced investors, many of whomgave cautionary advice. Yet sellers often did notheed the advice that these counselors provided. Forexample, one of Monet’s board members, a partnerat a prestigious venture capital firm, was concernedthat Picasso was behaving opportunistically towardMonet during negotiations. He advised Monet tohire an investment bank, to no avail:

I tried to interject the help of getting a bank in-volved, but the company said no. “Let me handleit,” said our CEO. The whole point of this game isthat if you let time go by, you lose leverage. AndPicasso doesn’t let time go by. It is, “Strike this deal,strike this deal.” We could’ve interrupted that ifwe’d done the right things, but there wasn’t anyinclination to.

Monet’s leaders also disregarded legal advice sug-gesting they were vulnerable to Picasso. Monet’schief financial officer explained:

The lawyers warned us about what we were doing,but didn’t drive the process. They warned us thatthe option agreement locked us with Picasso and leftus vulnerable. So the lawyers did their jobs. But wewent ahead anyway because we figured that Picassowould treat us fairly.

As this quotation suggests, one reason that sellingfirm leaders took fewer precautions during legaliza-


TABLE 7Legalization: Lopsided Precautions

Seller/BuyerSeller

Precautions Illustrative Quotes from SellerBuyer

Precautions Illustrative Quotes from Buyer

Monet/Picasso Limited duediligence

“I asked a few friends at otherPicasso acquisitions and theyverified what we thought. But wedidn’t do any systematic checking.”(CFO)

Due diligence,deal terms

“Manufacturing will get pulled in tohelp evaluate different companies,which one is further along, whichone has good parts that they’vepicked, things like that.” (VP,technical integration)

Implemented milestone-basedacquisition pricing structure.

Rocket/North None No mention. Due diligence,deal terms

“Everything was done in duediligence.” (head of business unit)

“Our ambition with the term sheetis basically to get in and do somedue diligence, to make sure thetechnical side is working.” (M&Amanager)

“We had discussions about splittingthat valuation in terms of earn-outs or some conditionalarrangements, where once theydemonstrate that the productswork, and we get customers andwe get benefits, they get benefitsas well.” (M&A manager)

Trend/Armor Duediligence

“Since it’s a public company, you getthe analysts’ reports, so you havesome insight. There waswidespread consensus from theanalysts’ standpoint.” (CEO)

Due diligence “We began talking to variouscompanies in the industry. . . . Wefigured we’d have as muchknowledge as we possibly could.”(VP, business development)

“We’ve met with the managementteam and hired an investment bankto look at their business prospects.We did a careful analysis of issueslike stock overhang.” (venturecapitalist/board member)

“We knew that our competitor hadbeen in there for weeks doing duediligence on them. So we figuredthat clearly everything was OKinside the company. So it’s purelydeduction—a calculated risk, inwhich we relied on the fact thatour competitor was good enoughthat they would not screw up adue-diligence process.” (VP,business development)

Isle/Harbor None No mention. Due diligence,deal terms

“We did due diligence on thefinancial front with the CFO’sgroup. We looked at paymentmechanisms they had. Theengineering guy who took a lookwas our head engineer, who metwith their head engineer andpronounced it sound.” (managerof strategy)

Implemented extended “no-shop”agreement.

Concept/Karma Limited duediligence

“The investors did a bunch ofreferences on [new buyer CEO] andthey knew who he was.” (CEO)


Buyer “had done all the duediligence—they got one of theirboard members to do the duediligence on the technology and heblessed it.” (seller venture capitalist/board member)

Implemented one-way “no-shop”agreement, escrow provisions.

Continued

2009 459Graebner

tion is that, unlike buyers, they believed they weredealing with trustworthy parties. One seller reasoned:

You have to know who you’re working with andwhether you can trust them. No matter how long thedocument, no matter what the reps and warranties andindemnifications, you can never capture in a docu-

ment the spirit of the deal. And it’s going to work notbecause of the document you create, but because of theway the two parties work together.

Due diligence and contractual safeguards simplydid not seem necessary to sellers when dealingwith trusted buyers.

TABLE 7(Continued)

Seller/BuyerSeller

Precautions Illustrative Quotes from SellerBuyer

Precautions Illustrative Quotes from Buyer

Fastlane/Craze Deal terms “[We had] a sizeable break-up fee, avery limited number of thingscould be reviewed. . . . It is veryimportant that companies gothrough that process and protectthemselves. . . . It’s a lot of moneyat stake.” (CEO)


“As we go further in the diligence,then we may ask for some moredetail. Legal will ask about alltheir customer agreements andlicense agreements. We try toevaluate what components thesoftware is built out of, the cost ofthose components going forward,and will this be expensive tocontinue to develop and deploy?You ask those questions in theinitial overview, and then in thesecond level of the diligence, youactually drill down to seeing thecontract, worldwide license, etc.”(head of technical integration)

Offer had “detailed terms andconditions.” (seller CEO)

Goalie/Ciao None No mention. Due diligence,deal terms

“I interviewed the people . . . wedid the best due diligence we can.We want to keep a certain percentof their shares in escrow. . . . Andpart of the reason we’re doing thatis, we just don’t know what we’vegot here . . . [in case] it turns outthere’s a real misrepresentation.”(CEO)

“We had our technology peoplecome in and they spent a coupleof hours talking about architectureand ad system and platform andthings like that.” (VP, businessdevelopment)

Spur/Prime/Checkmate None “I took it less personally with thingslike where my office would be afterthe acquisition, or employmentagreements, etc. It is moreimportant that you are selling tothe right company and their level


“There is a lot of due diligence youcan do. Call people they claim toknow, their investors,colleagues. . . . You talk to peopleand you learn about the people.”(VP, business development)

of integrity and commitment.”(Prime CEO)

“I had to go to their board, givethem a list of things which weneeded to get done. They need todo an audit, put the deal together,get accounts lined up, etc. Therewas a whole bunch of legaldocument stuff which I went overwith them.” (VP, businessdevelopment)

Implemented extended no-shopagreement.


This pattern of behavior raises the question ofhow buyers could engage in extensive due dili-gence and propose complex deal terms withoutraising doubts in sellers’ minds about whetherbuyers trusted them or were trustworthy. Buyerssucceeded in this behavior partly by designatingspecific roles to be played by different individu-als within their firms. The individual who hadsocialized with the seller stayed away from diffi-cult conversations. A vice president at Trendexplained:

[Our chief financial officer] did the negotiation—Idon’t do negotiating, because I’m supposed to betheir friend. And that’s one of the things we do: wedivide up the responsibility. There is a Dr. No. I staypristine because I’m the bear-hug guy. . . . So Dr. Nois the CFO.

Ciao employed a similar separation of roles whenlegalizing the deal with Goalie. This strategy al-lowed sellers to attribute an individual’s aggressivebargaining behavior to the characteristics of thisperson, rather than to the characteristics of a buy-ing firm as a whole. When dealing with the toughCEO of Ciao, Goalie’s leaders attributed his behav-ior to being new at his job: “I could not get a feelingfor him. He was more evasive. And that was be-cause he just started. He had a ton of cleaning up todo.” Separation of roles led sellers to continue totrust and feel trusted by buyers, even as buyersprotected their own interests.

Implementation: Distrust and Misperceptions ofSeller Goals

A surprising aspect of buyers’ behavior duringacquisition negotiations was their apparent lack ofconcern with the potential consequences of decep-tion. Negotiation-related deception might never berevealed (some buyers commented that even afterdeals had closed, sellers did not realize they hadbeen deceived), and it was viewed as only slightlyreprehensible, suggesting that even if caught bytheir negotiation counterparts, deceivers might notsuffer substantial repercussions. However, materialdeception was another matter. Before deal close,selling firm leaders discussed a variety of goalswith buyers and typically believed they had estab-lished satisfactory informal agreements regardingissues such as the destiny of the seller’s technolo-gies, the degree of autonomy acquired leaderswould have in the combined firm, and employeeterminations and relocations. After the dealsclosed, if buyers began to implement layoffs, relo-cations, and other unexpected strategic changes,sellers could realize they had been deceived. More-

over, material deception occurred only in situa-tions in which sellers trusted their buyers, suggest-ing sellers could feel particularly betrayed whenthis deception was revealed. Even if the buyers feltthat material deception was morally justifiable, itwould seem to be a poor strategy for retaining andmotivating acquired employees.

One potential explanation for buyers’ readinessto engage in material deception (despite knowingthey were likely to be caught) is that buyers wereacquiring companies primarily for their assets, andthey were not concerned with whether acquiredpersonnel remained with the firms. However, as inother studies of technology acquisitions (Graebner,2004; Granstrand & Sjolander, 1990; Ranft & Lord,2002), the data suggest that retaining acquired em-ployees was essential for realizing value from thesedeals. One buyer noted, “Unless you retain theleadership of the talent, you discount what you’veacquired fairly substantially.” Similarly, a leaderat Checkmate, one of the most deceptive buyers,commented, “We are buying the top managementteam.” Buyers’ inclination to behave deceptivelyseemed to arise not from a willingness to lose ac-quired personnel, but from a belief that despitebeing betrayed, acquirees could be retained andmotivated by appropriate financial incentives andcontractual terms. Because they distrusted theirtargets, buyers doubted sellers’ stated goals andpriorities, believing sellers exaggerated their non-monetary concerns. Table 8 summarizes evidenceregarding sellers’ actual goals and buyers’ beliefsabout sellers’ goals. A board member at Ciao dis-missed Goalie’s statements about location, layoffs,and autonomy, describing them as “blah blah blah”and “playing mouthpiece.” He claimed that Goal-ie’s leaders “undoubtedly did [the acquisition] aseach one of them trying to figure out, ‘What’s thebest way to get dollars out of the system.’” Accord-ingly, Ciao leaders assumed that financial incen-tives would be sufficient to assuage any postdealdisappointments for the seller.

Such assumptions did not always prove to beaccurate. For example, buyers Harbor and Check-mate distrusted their targets, but believed (cor-rectly) that the targets trusted them. Both Harborand Checkmate engaged in negotiation-related andmaterial deception. The goals that Isle’s leadersexpressed to Harbor prior to deal close includedremaining in their original location, retaining au-tonomy, and finding the largest audience for theirtechnology. Isle’s chief technology officer said thisabout himself:

“Me big geek.” I’m a technologist. I want to buildsomething that I want everyone to use and tell me

2009 461Graebner

TABLE 8Implementation: Buyers Misperceive Sellers’ Goals

Seller/Buyer Seller GoalsBuyer Perceptions of Seller Goals,

Incentives Offered

Monet/Picasso Autonomy. “We wanted to remain a business unit, to be asignificant entity. . . . We wanted to sustain growthrates. We wanted to keep on hiring people without a lot

Financial. “[Acquired employees] are gettingrich, so they have every incentive to stay.”(chief technology officer/board member)

of red tape.” (CEO) “If you want to have motivated employees . . .one of the key issues in valuation is, are theengineers going to be happy with thesenumbers.” (VP, business development)

Autonomy. “Why will these people stay? Theyhave to have a great opportunity in terms ofthe impact they can have inside thecompany, and the impact they can have intheir own business. . . . Autonomy is veryimportant.” (VP, business development)

Rocket/North Future of technology. “We believe in the technology, andwant to see it work. I want to see the product succeed.”(CEO)

Financial. “You spread the valuation. Youpush it over time to make sure that at leastthe people you think are critical to get this

Interesting work. “You have to make a living, but it’smore fun to make a living doing something cool andinteresting that no one else is doing than to makemaybe a little better living doing something that you’rebored with, that isn’t stimulating or challenging.” (chieftechnology officer)

done get economic benefits, but also are tiedby vesting over time. You need to make surethat the people who you’re interested in getincented to stay. You get some mergerconsideration tied into people showing upand being dedicated to work.” (M&Amanager)

Trend/Armor Autonomy. “I wanted to structure a marketing organiza-tion—the chartering of the teams, the structure, whatare they supposed to do. I think you get to a pointwhere you want to make the decisions, you want to doit your own way. . . . I have not been happy with whatI’m doing . . . am I walking away from money? Yes, I’mwalking away from money. You would say it’s a lot ofmoney.” (CEO)

Financial. “I modified my package becausethey wanted to have something to reassuresome retention for me to stay. . . . Theacquiring company was worried about mypackage. Are people going to stay? That kindof jazz.” (seller CEO)

Isle/Harbor Future of technology. “‘Me big geek.’ I’m a technologist. Iwant to build something that I want everyone to useand tell me how wonderful I am. I want my ego boost!I’m not here for a quick buck, I’m here to do my bigthing.” (chief technology officer)

Financial. “They were paid in Harbor stock.They have to stay here to get all of these.‘You were just bought, we just paid a lot ofmoney. Do what we say. You just have to dowhat we say.”’ (head of business unit)

Product strategy. “Our goal, and what they told us, was tocontinue to go forward, continue to go out there and tryto get deals. We thought that was fine.” (VP, businessdevelopment)

“In order to make the deal fairly palatable tothe players, we negotiated with them on theprice. They sure got a lot for a short amountof work, so I don’t think they’re unhappy.”

Location. Sellers preferred that the company remain in itscurrent location.

(manager of strategy)

Concept/Karma Influence. “It was understood that the CEO and I wouldhave executive positions in the company. If I felt in anyway like what I had to say or my contribution or thethings I was doing weren’t valued or weren’t valuable,then I would have been gone.” (VP, business development)

Financial. “We knew that they were not goingto have access to their shares for at least ayear and we thought that gave them a goodincentive to maximize the value of thoseshares [by remaining at the firm].” (CEO)

Work environment. “Part of it was, I think wegot everyone to trusting that as long as wegave them a fun and exciting place to work,they were going to stay.” (CEO)

Fastlane/Craze Commitment to employees. “I care deeply about how theyare treating my people.” (CEO)

Financial. Ensure retention “through comppackages, including bonuses.” (VP, businessdevelopment)

Continued


how wonderful I am. I want my ego boost! I’m nothere for a quick buck, I’m here to do my big thing.

Harbor’s leaders were aware of these desires butintentionally misled Isle’s leaders in order to facil-itate the deal, later admitting:

[We were] sort of half telling them what was going tohappen, and half still a sales pitch. It’s almost as ifwe never really told them completely what wewanted to do. We told them what they wanted us towant to do.

Harbor’s leaders justified this behavior as necessaryto close the deal and avoid being exploited by Isle.At the same time, Harbor’s leaders were relativelyunconcerned about deceiving Isle, because they be-lieved that economic incentives would ultimatelypacify Isle’s leaders. As a manager at Harbor re-called, “In order to make the deal fairly palatable tothe players, we negotiated with them on the price.They sure got a lot for a short amount of work, so Idon’t think they’re unhappy.” Harbor’s manage-ment viewed Isle’s financial gain as fair compensa-tion for relocation, loss of autonomy, and changesin technical direction. The leader of Harbor’s post-merger integration effort explained the message shetried to convey to the acquirees: “‘You were justbought, we just paid a lot of money. Do what wesay. You just have to do what we say.’”

When Harbor did not abide by informal agree-

ments, Isle leaders felt their trust had been be-trayed, and many left their jobs, despite economicincentives to stay. A Harbor executive describedhow Isle’s leaders viewed a loss of autonomy as abetrayal that money could not remedy:

[Isle leaders] genuinely felt that Harbor had commit-ted to them that they could do their own thing. Andthey just could not tolerate the fact that it would notbe that way. The founders were very unhappy withthe way this was going. These people are walkingaway from a lot of money. The guy who just leftwalked away from everything that was not vested.

Although still convinced that their deceptive tac-tics had served the purpose of closing the deal,Harbor leaders began to realize that they had lostvaluable assets when Isle’s management de-parted. As a Harbor executive commented: “Theacquisition obviously was a disaster.”

Another example of a buyer’s erroneous assump-tions about seller motives is the acquisition of Spurand Prime by Checkmate. The CEOs of both sellingfirms were experienced leaders who valued havinginfluence and believed Checkmate had agreed toprovide them with considerable responsibility. TheCEO of Prime said, “I have an employment agree-ment, but I’ve expressed myself to [Checkmate] thatas long as I’m helping, I’ll be here.” Similarly, theCEO of Spur reported this: “What I’ve told Check-

TABLE 8(Continued)

Seller/Buyer Seller GoalsBuyer Perceptions of Seller Goals,

Incentives Offered

Autonomy. “It’s not really about money, but about beingable to make decisions . . . people are staying around tofulfill the acquisition agreements, but once things settledown, everybody will see what their role will be andmove on.” (VP, sales)

“We have given them stay-on bonuses to getthe brain drain out of these people.” (VP,M&A)

Goalie/Ciao Location, no lay-offs. “The one thing that was non-negotiable about the deal was moving to California.”(CEO)

Autonomy, work environment. “Our reason for startingthis company wasn’t money. It wasn’t that we wantedto start a company and retire. We wanted to work forourselves and create a great work environment, havefun, and if we can create something of lasting value,great. I’m not saying money doesn’t matter, but it’s notthe most important thing.” (VP, business development)

Financial. “They wanted to be rich.” (VP,business development)

“They’re tied principally through employmentcontracts.” (venture capitalist/board member)

“They undoubtedly did [the acquisition] aseach one of them trying to figure out, ‘What’sthe best way to get dollars out of thesystem?’ ” (venture capitalist/board member)

Spur/Prime/Checkmate

Influence. “What I’ve told them is simply to put me intoa position in which I can influence the companysignificantly and make sure I’m not bored. If not, I’mnot going to stay.” (Spur CEO)

“I have an employment agreement but I think I’veexpressed to them that as long as I’m helping, I’ll behere.” (Prime CEO)

Financial. “That is the single best way to keepsomebody. The economic umbilical cord.”(CEO)

“We ask that they contribute 35% of the sharesback into a pool to be vested. . . . We don’twant them to be able to leave. We are buyingthe team.” (VP, business development)

2009 463Graebner

mate is simply to put me into a position in which Ican influence the company significantly and makesure I’m not bored. If not, I’m not going to stay.”The seller CEOs trusted Checkmate to comply withthese agreements, but Checkmate leaders did notfeel bound by their informal predeal conversations.Instead, Checkmate’s CEO felt that the “economicumbilical cord” was the “single best way to keepsomebody.” When Checkmate failed to provide in-fluential positions, the CEOs of both Prime andSpur became discontented and exited Checkmateonly months after their companies were acquired.Spur’s leader explained that even before he left thefirm, he began withdrawing from his responsibili-ties: “At some point I realized I was just in for theride, so I hung out and didn’t do much. There’sdefinitely some bitterness. I feel I’ve been used.”Firm leaders seemed unhappily surprised by theseevents, describing the results of the acquisition as“abysmal” and “nonfunctioning.”

DISCUSSION

The objective of this study was to explore trustand deception in acquisitions. In contrast to theprevailing assumption in interorganizational trustresearch that the members of a dyad share trustingbeliefs—that is, the assumption that trust is sym-metric across a dyad (Dyer & Chu, 2000, 2003; Lui& Ngo, 2004; Ring & Van de Ven, 1994; Schoormanet al., 2007; Zaheer & Harris, 2005)—I found a morecomplex pattern. Buyers and sellers often hadasymmetric views regarding whether trust was im-

portant in choosing a partner and whether theircounterparts were trustworthy. Moreover, bothbuyers’ and sellers’ assessments of their counter-parts’ trust and trustworthiness were often mis-taken. Table 9 summarizes these asymmetries anderrors. This study has also explored underlyingcauses for the trust asymmetries between buyersand sellers and argued that these imbalances fosterseller vulnerability and buyer deceit.

In the discussion below, I examine the implica-tions of these findings for developing a broadertheory of trust asymmetries in both acquisitionsand other interorganizational relationships. In a re-cent assessment of the state of organizational trustresearch, Gulati and Sytch identified trust asymme-tries as an important theoretical gap, asking, “Whatare the antecedents of such asymmetries, how sus-tainable are those asymmetries, and what implica-tions could they have for behavioral dynamics inthe dyad?” (2008: 277). Two other recent appraisalsof interorganizational trust research (Schoormanet al., 2007; Zaheer & Harris, 2005) also identifiedtrust asymmetries as a significant gap in extanttheory. The following discussion is intended tobegin to address this oversight by examining theemergence, persistence, and consequences of trustasymmetries.

Trust Asymmetries: Emergence, Persistence,and Consequences

Emergence. I earlier observed that buyers andsellers often held asymmetric views of one anoth-

TABLE 9Trust Asymmetries and Errors

Seller/Buyer

Views of Partner’s Trustworthinessa Views of Partner’s Trustb Perceived Trust Asymmetryc

1. Asymmetry2. Error by

Seller3. Error by

Buyer4. Error by

Seller5. Error by

Buyer6. Perceived by

Seller7. Perceived by

Buyer

Monet/Picasso ��

Rocket/North ��

Trend/ArmorIsle/Harbor ��

Concept/Karma ��

Fastlane/CrazeGoalie/Ciao ��

Spur/Prime/Checkmate ��

a “Is my partner trustworthy?”:Asymmetry � X trusts Y but Y distrusts X.Error � X trusts Y but Y behaves deceptively.Or X distrusts Y but Y is trustworthy (no deception of either type occurs).

b “Does my partner trust me?”:Error � X trusts Y, but Y believes X distrusts Y; or X distrusts Y, but Y believes X trusts Y.c X trusts Y, but X believes Y distrusts X.Or X distrusts Y, but X believes Y trusts X.


er’s trustworthiness (Table 9, column 1) and arguedthat this pattern emerged from a combination ofseveral factors. First, both buyers and sellers had ageneral distrust of other firms, heightened by theircompetitive, “land-grab” industry environment.Second, sellers expected to lose power after theacquisitions closed, while buyers expected to gainpower. This disparity led sellers to favor the fewbuyers they trusted; but buyers did not discrimi-nate between trusted and distrusted targets.

Although these factors may partially reflect thespecific characteristics of the time period and ofacquisition transactions, there is reason to believethat similar patterns may sometimes emerge inother settings. Even in less intensely competitiveenvironments, firm leaders may be inclined to dis-trust most potential partners because of in-group/out-group bias (Williams, 2007). In any transactioninvolving a shift in power, the “losing” party islikely to favor those few partners it trusts, but the“gaining” party has no reason to reciprocate; in-stead, a combination of competitive dynamics andin-group bias may lead the “gaining” party to adopta default position of distrust. The result is thatmany transactions entail trust by one partner butdistrust by another.

The current study focused on acquisitions, yetother transactions in which one actor voluntarilycedes power to another may have similar asymme-tries, with the actor “losing power” favoring trustedpartners while the actor “gaining power” does not.Examples of such transactions include managers’and union leaders’ selection of an arbitrator to re-solve a labor dispute; industry leaders’ creation of a“self-policing” or “watchdog” organization; or eventhe selection of a new dean by a faculty hiringcommittee. In all of these examples, both partiesbegin with the ability to walk away, but afterthe decision is made, one party must submit to thepower of the other. Hence, we might expect theparties to employ differing screening criteria, lead-ing to trust asymmetries.

The emergence of trust asymmetries need not belimited to situations involving an impending asym-metry in power, however. Trust asymmetries mayalso arise when two parties have unequal informa-tion about one another, as might be the case, forinstance, when one firm is more established andbetter-known than its counterpart. More generally,when facing any risky transaction, firms maychoose either to transact only with trusted partners,or to exercise vigilance with whatever partner theychoose. Any occasion in which one party choosestrust while the other chooses vigilance can createinitial trust asymmetries. Furthermore, under cer-

tain conditions, trust asymmetries may persist forsome period of time.

Persistence. Prior theory has suggested that trustimbalances will be short-lived. If one party trustsanother, the trusted party will feel obliged to recip-rocate, leading to symmetric trust (McEvily, Per-rone, & Zaheer, 2003; Zaheer & Harris, 2005). Al-ternately, if one party distrusts another, thedistrusted party will lose faith, leading to the de-velopment of symmetrical distrust (Ferrin, Bligh, &Kohles, 2007). This argument requires making twoassumptions. The first is that firm X’s leaders real-ize they are trusted by firm Y. This assumption isbased on the belief that firm X accurately interpretsY’s behavior—for instance, information sharingrather than monitoring—as signaling trust ratherthan distrust (Das & Teng, 1998; Ferrin et al., 2007).The second assumption is that believing firm Ytrusts them causes firm X’s leaders to trust firm Y inreturn (e.g., Ferrin et al., 2007; Johnson, Cullen,Sakano, & Takenouchi, 1996). This relationship hasoften been posited without a specific rationale (e.g.,Das & Teng, 1998; Serva, Fuller, & Mayer, 2005).However, one possible explanation draws uponlinks between affect and trust (e.g., Dunn &Schweitzer, 2005; McAllister, 1995). Knowing theyare trusted may lead firm leaders to experiencepositive affect, which may in turn lead to trust.Conversely, knowing that they are distrusted couldfoster negative affect, leading to distrust.

The current study suggests that neither of thesetwo assumptions may be entirely accurate. As col-umns 4 and 5 of Table 9 indicate, both firms’ as-sessments of whether their counterparts trustedthem were frequently mistaken. This was particu-larly true for sellers, who often believed their buy-ers trusted them when the opposite was true. Thisstudy suggests several reasons why firm leadersmay not accurately assess whether they are trustedby their counterparts, even after observing behaviorsuch as information sharing or monitoring. First,communication may hold different meanings forthe trusting and distrusting parties. The trustingparty may view social interaction and informationsharing as building trust, while the distrustingparty primarily views these activities as an oppor-tunity for ingratiation and strategic reconnaissance.Second, monitoring activities may be delegatedonly to a few individuals within the distrustingfirm. The trusting party may attribute monitoringbehavior to the characteristics of those individuals,rather than reassessing its views of the firm as awhole.

Even if firm leaders accurately assess whetherthey are trusted or distrusted by their counterparts,it is not clear that this will cause leaders to change

2009 465Graebner

their own beliefs to match. As columns 6 and 7 inTable 9 indicate, firm leaders frequently distrustedtheir counterparts but felt trusted by them, or viceversa. These mismatches occurred in either of twoscenarios. In one scenario, firm leaders trustedtheir partners, but felt they were distrusted in re-turn. This was the case for the leaders of sellersConcept and Isle and buyer Karma. In all threecases, firm leaders felt that they were distrustedbecause of a misunderstanding or an event beyondtheir control. Concept’s CEO believed his forth-rightness during a breakfast meeting was miscon-strued; Isle believed Harbor was wary because of aprior deal gone bad; and Karma believed Conceptwas nervous because Karma had to pull out of earlynegotiations after it had itself received an acquisi-tion offer. None of these “depersonalized” explana-tions for being distrusted seemed to produce nega-tive affect or to trigger reciprocal distrust. Weber,Malhotra, and Murnighan (2005) provided a com-plementary argument, suggesting that vulnerableparties may ameliorate their anxiety through moti-vated cognition, in effect convincing themselvesthat the more powerful party is trustworthy. As apower-reducing transaction moves forward, thetrustor may become increasingly powerless. Thismay encourage individuals to stick to their trustingbeliefs despite feeling they are distrusted in return.

In a second scenario, firm leaders distrust theirpartners, but feel that they are trusted. This was thecase for buyers Ciao, Harbor, Picasso, and Check-mate. These buyers believed they were simplymore savvy than their sellers. A vice president ofCiao (a firm that was itself still private and had notdone any prior acquisitions) compared his firm fa-vorably to Goalie, commenting, “They actually hada lot of naivete.” A common feature of both mis-match scenarios is that firm leaders interpretedtrust imbalances in ways that reflected positively,or at least not negatively, on themselves. Such pos-itive interpretation may have removed any impetusto change their beliefs. This pattern is consistentwith other evidence that trusting (or distrusting)beliefs are not easily altered. For example, a dis-trusting party that is engaging in active vigilanceand monitoring is unlikely to ever develop trust inits counterpart (Ghoshal & Moran, 1996; Sapienza &Korsgaard, 1996; Strickland, 1958).

Consequences. Finally, this study’s findings sug-gest potential consequences of trust asymmetries. Ifind that trust asymmetries foster both negotiation-related and material deception, though in some-what different ways. Deception is only eliminatedin the condition of perceived symmetrical trust, inwhich an actor both trusts and feels trusted by its

counterpart. Material deception only occurs in theasymmetrical scenario in which a party distrustsbut feels trusted by its counterpart. Prior theorysuggests that if focal firm leaders believe theircounterparts are trusting, these leaders will refrainfrom opportunism out of a sense of moral obliga-tion and out of concern about potential harm to therelationship and to the focal firm’s reputation (Lar-son, 1992). However, this study suggests that evenif a firm’s leaders view another party as trusting,the leaders may feel no sense of moral obligation ifthe other party is not viewed as trustworthy. More-over, negative consequences only deter deception ifthe firm’s leaders believe that the deception will berevealed and that the deceived party cannot bepacified through another means. For example, inthis sample buyers typically felt that negotiation-related deception would not be revealed and thatfinancial incentives could counteract material de-ception. Because buyers did not typically trusttheir sellers, they did not accept sellers’ represen-tations that other issues were as important as finan-cial gain. Because tendencies to deceive are greaterwhen the costs to others are perceived to be low(Gneezy, 2005), this discounting of sellers’ nonfi-nancial motives may have further encouraged buy-ers’ deceit. As a result, as columns 2 and 3 of Table9 indicate, trusted parties, particularly buyers, of-ten engaged in deception. Furthermore, this decep-tion often went undetected, because trusting par-ties did not feel the need to engage in due diligenceor other forms of vigilance.

Limitations and Future Research

As with all case study research, an importantissue is the degree to which the findings are gener-alizable to a broader sample. This is ultimately anempirical question that will be answered only byfuture studies. However, a variety of indicators sug-gest that this study’s findings may generalize toother acquisitions. First, like the cases in thisstudy, the majority of U.S. mergers and acquisitionsinvolve privately held targets (Capron & Shen,2007); are conducted in friendly rather than hostilenegotiating conditions (Andrade, Mitchell, & Staf-ford, 2001); and occur during wave periods, whichcoincide with high market valuations (Maksimovic& Phillips, 2001; Rhodes-Kropf et al., 2005). Evi-dence also suggests that acquisitions in the studytime frame were similar in important respects toacquisitions that have occurred in other time peri-ods. For example, the financial returns for most1998–2001 acquirers were only “trivially” differentfrom acquisition returns in the preceding 20 years(Moeller, Schlingemann, & Stultz, 2005: 763).


Nevertheless, other types of acquisitions may dif-fer in ways that influence the dynamics of trust.The acquisitions studied here were primarily mo-tivated by a desire to create competitive advantagethrough valuable and inimitable resources. Someacquisitions may be motivated by a transaction costlogic, which could possibly lead to different pat-terns of trust and deception. In addition, these sell-ers were relatively high-performing firms, and sothey had the opportunity to decline buyers they didnot find attractive. In acquisitions of distressedfirms, managers may be forced to sell to acquirersthat they distrust. In addition, if a seller is a publicfirm with greater exposure to shareholder lawsuits,we might expect investors and board members todemand that the target simply accept the highestacquisition offer, regardless of whether firm leaderstrust the buyer. However, anecdotal evidence sug-gests this is not always the case. For example, liti-gation following the Daimler-Chrysler merger sug-gests that Chrysler’s investors trusted Daimler-Benz’s leaders and were angry to find that thebuyer’s informal promises were not fulfilled afterdeal close.

Another factor that may lead to different patternsof trust in acquisitions is whether buyer and sellerhave prior acquisition experience. Acquisition ex-perience could theoretically influence sellers, mak-ing them more skeptical of buyers’ promises, orcould influence buyers, either making them morecynical and deceptive, or perhaps making themmore aware of the potential negative effects of de-ception. A comparison of the more and less expe-rienced buyers and sellers in this sample did notprovide clear evidence of such patterns, but differ-ences might be apparent in a larger sample. If abuyer had conducted prior acquisitions, this couldalso provide the seller with better information re-garding the buyer’s trustworthiness in subsequentacquisitions. However, as argued earlier, even be-havior in previous acquisitions was not a particu-larly reliable guide to a buyer’s future actions,given the heterogeneity of acquisition events.

A final area for future research is trust asymme-tries in other types of interorganizational transac-tions, including strategic alliances. In prior workthe typical assumption has been that trust withinan alliance is symmetric (e.g., Dyer & Chu, 2000,2003; Lui & Ngo, 2004; Ring & Van de Ven, 1994;Schoorman et al., 2007; Zaheer & Harris, 2005).However, this assumption may not always be accu-rate. For example, Zhang and Rajagopalan (2002)found evidence that international joint venturepartners may differ in their abilities to exert a cred-ible threat of retaliation for bad behavior. It seems

plausible that such disparities could lead to differ-ences in the degree to which each partner trusts itscounterpart.

Conclusion

This study’s aim was to explore issues of trustand deception in acquisitions. In this research Imoved beyond the oft-studied setting of long-termbuyer-supplier alliances and observed how a differ-ent context—mergers and acquisitions—may influ-ence the development of trust. In addition, thisstudy provides insights into trust asymmetries, anarea that several scholars have identified as a sig-nificant void in interorganizational trust theory.

I conclude with some advice for managers, par-ticularly entrepreneurs. Smaller firms have re-ceived little attention in research on interorganiza-tional relationships, although these firms may havedifferent viewpoints and face distinctive risks inboth alliances (Alvarez & Barney, 2001; Prashan-tham & Birkinshaw, 2008) and acquisitions (Graeb-ner & Eisenhardt, 2004). This study suggests thatthe role of seller is a difficult one, with no obvioussolution. Strategies that have been suggested asways to reduce deception in negotiations, such asscreening potential partners on the basis of reputa-tion or developing a social relationship prior tonegotiating (Schweitzer, 2005), may actually in-crease a seller’s vulnerability. Both practices arelikely to increase a seller’s trust in a buyer, butsince trustworthiness cannot be predicted with cer-tainty from either past behavior or social interac-tion, any sense of security may be false. The bestadvice for sellers may be to retain their skepticism.A leading technology investment banker, dubbedby another informant the “king of M&A,” gave thefollowing words of caution:

Some buyers can put out a lot of bulls__. “We’llmake you CEO, we’ll make you president, you’ll bethe next guy in line.” I’ve told my client, “This isbulls__. You know this is not a commitment. I readthis guy, and he is not going to do it. If you are finewith this, and you just want more money, that isfine, but if you are thinking you are going to be theCEO, don’t do it for that reason.”

Rather than relying on trust, a seller may be betteroff exercising an abundance of caution. As trust-worthy as a buyer may seem, a seller would be wiseto verify the buyer’s statements, ensure that impor-tant issues are resolved in written contracts, andfollow the advice of experienced attorneys. To doany less may simply set a seller up for futuredisappointment.

2009 467Graebner

REFERENCES

Ahuja, G., & Katila, R. 2001. Technological acquisitionsand the innovation performance of acquiring firms:A longitudinal study. Strategic Management Jour-nal, 22: 197–219.

Alston, L., & Gillespie, W. 1989. Resource coordinationand transaction costs: A framework for analyzing thefirm/market boundary. Journal of Economic Behav-ior and Organization, 11: 191–212.

Alvarez, S. A., & Barney, J. B. 2001. How entrepreneurialfirms can benefit from alliances with large partners.Academy of Management Executive, 15(1): 139–148.

Anderson, J. C., & Narus, J. A. 1990. A model of distrib-utor firm and manufacturer firm working partner-ships. Journal of Marketing, 54(1): 42–58.

Andrade, G., Mitchell, M., & Stafford, E. 2001. New evi-dence and perspectives on mergers. Journal of Eco-nomic Perspectives, 15: 103–120.

Andrade, G., & Stafford, E. 2004. Investigating the eco-nomic role of mergers. Journal of Corporate Fi-nance, 10(1): 1–36.

Bazerman, M. H., Curhan, J. R., Moore, D. A., & Valley,K. L. 2000. Negotiation. In S. T. Fiske, D. L. Schacter,& C. Zahn-Wexler (Eds.), Annual review of psychol-ogy, vol. 51: 279–314. Palo Alto, CA: AnnualReviews.

Birkinshaw, J., Bresman, H., & Hakanson, L. 2000. Man-aging the post-acquisition integration process: Howthe human integration and task integration processesinteract to foster value creation. Journal of Manage-ment Studies, 37: 395–425.

Buono, A. F., & Bowditch, J. L. 1989. The human sideof mergers and acquisitions. San Francisco:Jossey-Bass.

Buono, A. F., Bowditch, J. L., & Lewis, J. W. 1985. Whencultures collide: The anatomy of a merger. HumanRelations, 38: 477–500.

Capron, L., Dussauge, P., & Mitchell, W. 1998. Resourceredeployment following horizontal acquisitions inEurope and North America, 1988–1992. StrategicManagement Journal, 19: 631–661.

Capron, L., & Shen, J.-C. 2007. Acquisitions of private vspublic firms: Private information, target selectionand acquirer returns. Strategic Management Jour-nal, 28: 891–911.

Castilla, E. J., Hwang, H., Granovetter, E., & Granovetter,M. 2000. Social networks in Silicon Valley. In C.-M.Lee, W. F. Miller, M. G. Hancock, & H. S. Rowen(Eds.), The Silicon Valley edge: 218–247. Stanford,CA: Stanford University Press.

Coff, R. 2003. Bidding wars over R&D-intensive firms:Knowledge, opportunism, and the market for corpo-rate control. Academy of Management Journal, 46:74–86.

Conner, K. R., & Prahalad, C. K. 1996. A resource-basedtheory of the firm: Knowledge versus opportunism.Organization Science, 7: 477–501.

Cummings, L. L., & Bromiley, P. 1996. The organizationaltrust inventory (OTI): Development and validation.In R. Kramer & T. R. Tyler (Eds.), Trust in organiza-tions: Frontiers of theory and research: 302–330.Thousand Oaks, CA: Sage.

Currall, S. C., & Inkpen, A. C. 2002. A multilevel ap-proach to trust in joint ventures. Journal of Interna-tional Business Studies, 33: 479–495.

Currall, S. C., & Judge, T. A. 1995. Measuring trust be-tween organizational boundary role persons. Orga-nizational Behavior and Human Decision Pro-cesses, 64: 151–170.

Das, T. K., & Teng, B.-S. 1998. Between trust and control:Developing confidence in partner cooperation in al-liances. Academy of Management Review, 23: 491–512.

D’Aveni, R. A., & Kesner, I. F. 1993. Top managerialprestige, power and tender offer response: A study ofelite social networks and target firm cooperationduring takeovers. Organization Science, 4(2): 123–151.

Denis, J.-L., Lamothe, L., & Langley, A. 2001. The dynam-ics of collective leadership and strategic change inpluralistic organizations. Academy of ManagementJournal, 44: 809–837.

Doz, Y. L. 1996. The evolution of cooperation in strategicalliances: Initial conditions or learning processes?Strategic Management Journal, 17: 55–83.

Dunn, J. R., & Schweitzer, M. E. 2005. Feeling and be-lieving: The influence of emotion on trust. Journalof Personality and Social Psychology, 88: 736–748.

Dyer, J. H., & Chu, W. 2000. The determinants of trust insupplier-automaker relationships in the U.S., Japan,and Korea. Journal of International Business Stud-ies, 31: 259–285.

Dyer, J. H., & Chu, W. 2003. The role of trustworthiness inreducing transaction costs and improving perfor-mance: Empirical evidence from the United States,Japan, and Korea. Organization Science, 14: 57–68.

Eisenhardt, K. M. 1989. Building theories from casestudy research. Academy of Management Review,14: 488–511.

Emerson, R. M. 1972a. Exchange theory, part I: A psy-chological basis for social exchange. In J. Berger,M. Zelditch Jr., & B. Anderson (Eds.), Sociologicaltheories in progress, vol. 2: 38 –57. Boston:Houghton-Mifflin.

Emerson, R. M. 1972b. Exchange theory, Part II: Ex-change relations and networks. In J. Berger, M.Zelditch Jr., & B. Anderson (Eds.), Sociological the-ories in progress, vol. 2: 58–87. Boston: Houghton-Mifflin.

Ferrin, D. L., Bligh, M. C., & Kohles, J. C. 2007. Can I trust


you to trust me? A theory of trust, monitoring, andcooperation in interpersonal and intergroup rela-tionships. Group & Organization Management, 32:465–499.

Folta, T. B., & Miller, K. D. 2002. Real options in equitypartnerships. Strategic Management Journal, 23:77–88.

Ghoshal, S., & Moran, P. 1996. Bad for practice: A cri-tique of transaction cost theory. Academy of Man-agement Review, 21: 13–47.

Glick, W. H., Huber, G. P., Miller, C. C., Doty, D. H., &Sutcliffe, K. M. 1990. Studying changes in organiza-tional design and effectiveness: Retrospective eventhistories and periodic assessments. OrganizationScience, 1: 293–312.

Gneezy, U. 2005. Deception: The role of consequences.American Economic Review, 95: 384–394.

Golden, B. R. 1992. The past is the past—or is it? The useof retrospective accounts as indicators of past strat-egy. Academy of Management Journal, 35: 848–860.

Graebner, M. E. 2004. Momentum and serendipity: Howacquired leaders create value in the integration oftechnology firms. Strategic Management Journal,25: 751–777.

Graebner, M. E., & Eisenhardt, K. M. 2004. The seller’sside of the story: Acquisition as courtship and gov-ernance as syndicate in entrepreneurial firms. Ad-ministrative Science Quarterly, 49: 366–403.

Granstrand, O., & Sjolander, S. 1990. The acquisitionof technology and small firms by large firms. Jour-nal of Economic Behavior and Organization, 13:367–386.

Grant, R. M. 1996. Toward a knowledge-based theory ofthe firm. Strategic Management Journal, 17: 109–122.

Gulati, R. 1995. Does familiarity breed trust? The impli-cations of repeated ties for contractual choice inalliances. Academy of Management Journal, 38:85–112.

Gulati, R., & Gargiulo, M. 1999. Where do interorganiza-tional networks come from? American Journal ofSociology, 104: 1439–1493.

Gulati, R., & Singh, H. 1998. The architecture of cooper-ation: Managing coordination costs and appropria-tion concerns in strategic alliances. AdministrativeScience Quarterly, 43: 781–814.

Gulati, R., & Sytch, M. 2008. The dynamics of trust [Re-view of Handbook of trust research]. Academy ofManagement Review, 33: 276–278.

Haleblian, J., & Finkelstein, S. 1999. The influence oforganizational acquisition experience on acquisitionperformance: A behavioral learning perspective. Ad-ministrative Science Quarterly, 44: 29–56.

Harford, J. 2003. Takeover bids and target directors’ in-

centives: The impact of a bid on directors’ wealthand board seats. Journal of Financial Economics,69: 51–83.

Harford, J. 2005. What drives merger waves? Journal ofFinancial Economics, 77: 529–560.

Hartzell, J. C., Ofek, E., & Yermack, D. 2004. What’s in itfor me? CEOs whose firms are acquired. Review ofFinancial Studies, 17: 37–61.

Haspeslagh, P. C., & Jemison, D. B. 1991. Managingacquisitions. New York: Free Press.

Huber, G. P. 1985. Temporal stability and response-orderbiases in participant descriptions of organizationaldecisions. Academy of Management Journal, 28:943–950.

Huber, G. P., & Power, D. J. 1985. Retrospective reports ofstrategic-level managers: Guidelines for increasingtheir accuracy. Strategic Management Journal, 6:171–180.

Jemison, D. B., & Sitkin, S. B. 1986. Corporate acquisi-tions: A process perspective. Academy of Manage-ment Review, 11: 145–163.

Jensen, M. C., & Meckling, W. H. 1976. Theory of thefirm: Managerial behavior, agency costs and owner-ship structure. Journal of Financial Economics, 3:305–360.

Jensen, M. C., & Ruback, R. S. 1983. The market forcorporate control: The scientific evidence. Journalof Financial Economics, 11: 5–50.

Jick, T. D. 1979. Mixing qualitative and quantitativemethods: Triangulation in action. AdministrativeScience Quarterly, 24: 602–611.

Johnson, J. L., Cullen, J. B., Sakano, T., & Takenouchi, H.1996. Setting the stage for trust and strategic integra-tion in Japanese-U.S. cooperative alliances. Journalof International Business Studies, 27: 981–1004.

Kale, P., & Puranam, P. 2004. Choosing equity stakes intechnology-sourcing relationships: An integrativeframework. California Management Review, 46(1):77–99.

Kaplan, S. N., & Stromberg, P. 2003. Financial contract-ing theory meets the real world: An empirical anal-ysis of venture capital contracts. Review of Eco-nomic Studies, 70: 281–315.

Kogut, B. 1991. Joint ventures and the option to expandand acquire. Management Science, 37: 19–33.

Kotha, S., Rajgopal, S., & Venkatachalam, M. 2004. Therole of online buying experience as a competitiveadvantage: Evidence from third-party ratings for e-commerce firms. Journal of Business, 77: S109–S133.

Kramer, R. M. 1999. Trust and distrust in organizations:Emerging perspectives, enduring questions. In J. T.Spence (Ed.), Annual review of psychology, vol. 50:569–598. Palo Alto, CA: Annual Reviews.

Krishnan, R., Martin, X., & Noorderhaven, N. G. 2006.

2009 469Graebner

When does trust matter to alliance performance?Academy of Management Journal, 49: 894–917.

Kumar, N., Stern, L. W., & Anderson, J. C. 1993. Conduct-ing interorganizational research using key infor-mants. Academy of Management Journal, 36:1633–1651.

Langley, A. 1999. Strategies for theorizing from processdata. Academy of Management Journal, 24: 691–710.

Larson, A. 1992. Network dyads in entrepreneurial set-tings: A study of the governance of exchange rela-tionships. Administrative Science Quarterly, 37:76–104.

Lee, T. W., Mitchell, T. R., & Sablynski, C. J. 1999. Qual-itative research in organizational and vocational psy-chology, 1979–1999. Journal of Vocational Behav-ior, 55: 161–187.

Leonard-Barton, D. 1990. A dual methodology for casestudies: Synergistic use of a longitudinal single sitewith replicated multiple sites. Organization Sci-ence, 1(3): 1–19.

Lerner, J. 1995. Venture capitalists and the oversight ofprivate firms. Journal of Finance, 50: 301–318.

Lewicki, R. J., McAllister, D. J., & Bies, R. J. 1998. Trustand distrust: New relationships and realities. Acad-emy of Management Review, 23: 438–458.

Lipton, J. P. 1977. On the psychology of eyewitness tes-timony. Journal of Applied Psychology, 62: 90–95.

Lui, S. S., & Ngo, H.-Y. 2004. The role of trust andcontractual safeguards on cooperation in non-equityalliances. Journal of Management, 30: 471–485.

Luo, Y. 2002. Contract, cooperation, and performance ininternational joint ventures. Strategic ManagementJournal, 23: 903–919.

Maksimovic, V., & Phillips, G. 2001. The market for cor-porate assets: Who engages in mergers and assetsales and are there efficiency gains? Journal of Fi-nance, 56: 2019–2065.

Marks, M. L., & Mirvis, P. H. 2001. Making mergers andacquisitions work: Strategic and psychological prep-aration. Academy of Management Executive, 15(2):80–92.

Mayer, R. C., Davis, J. H., & Schoorman, F. D. 1995. Anintegrative model of organizational trust. Academyof Management Review, 20: 709–734.

McAllister, D. J. 1995. Affect- and cognition-based trustas foundations for interpersonal cooperation in or-ganizations. Academy of Management Journal, 38:24–59.

McEvily, B., Perrone, V., & Zaheer, A. 2003. Trust asan organizing principle. Organization Science, 14:91–103.

McEvily, B., & Tortoriello, M. 2007. Measuring trust inorganizational research: Review and recommen-

dations. Working paper, Rotman School of Manage-ment, University of Toronto.

McGrath, R. T. 2000. Assessing technology projects usingreal options reasoning. Research-Technology Man-agement, 43(4): 35–50.

Miles, M., & Huberman, A. M. 1984. Qualitative dataanalysis. Beverly Hills, CA: Sage.

Miller, C. C., Cardinal, L. B., & Glick, W. H. 1997. Retro-spective reports in organizational research: A reex-amination of recent evidence. Academy of Manage-ment Journal, 40: 189–204.

Moeller, S. B., Schlingemann, F. P., & Stultz, R. M. 2005.Wealth destruction on a massive scale? A study ofacquiring-firm returns in the recent merger wave.Journal of Finance, 60: 757–782.

Mohr, J., & Spekman, R. 1994. Characteristics of partner-ship success: Partnership attributes, communicationbehavior, and conflict resolution techniques. Strate-gic Management Journal, 15: 135–152.

Molm, L. D., Peterson, G., & Takahashi, N. 2003. In theeye of the beholder: Procedural justice in socialexchange. American Sociological Review, 68:128–152.

Paruchuri, S., Nerkar, A., & Hambrick, D. C. 2006. Acqui-sition integration and productivity losses in the tech-nical core: Disruption of inventors in acquired com-panies. Organization Science, 17: 545–562.

Pettigrew, A. M. 1992. The character and significance ofstrategy process research. Strategic ManagementJournal, 13: 5–16.

Pisano, G. P. 1990. The R and D boundaries of the firm:An empirical analysis. Administrative ScienceQuarterly, 35: 153–176.

Powell, W. W. 1990. Neither market nor hierarchy: Net-work forms of organization. In B. M. Staw & L. L.Cummings (Eds.), Research in organizational be-havior, vol. 12: 295–336. Greenwich, CT: JAI Press.

Prashantham, S., & Birkinshaw, J. 2008. Dancing withgorillas: How small companies can partner effec-tively with MNCs. California Management Review,51(1): 6–23.

Puranam, P., Singh, H., & Zollo, M. 2006. Organizing forinnovation: Managing the coordination-autonomydilemma in technology acquisitions. Academy ofManagement Journal, 49: 263–280.

Ranft, A. L., & Lord, M. D. 2002. Acquiring new technol-ogies and capabilities: A grounded model of acqui-sition implementation. Organization Science, 13:420–441.

Rhodes-Kropf, M., Robinson, D. T., & Viswanathan, S.2005. Valuation waves and merger activity: The em-pirical evidence. Journal of Financial Economics,77: 561–603.

Rhodes-Kropf, M., & Viswanathan, S. 2004. Market val-


uation and merger waves. Journal of Finance, 59:2685–2718.

Ring, P. S., & Van de Ven, A. H. 1994. Developmentalprocesses of cooperative interorganizational rela-tionships. Academy of Management Review, 19:90–118.

Rousseau, D. M., Sitkin, S. B., Burt, R. S., & Camerer, C.1998. Not so different after all: A cross-disciplineview of trust. Academy of Management Review, 23:393–404.

Sako, M., & Helper, S. 1998. Determinants of trust insupplier relations: Evidence from the automotive in-dustry in Japan and the United States. Journal ofEconomic Behavior and Organization, 34:387–417.

Santos, F., & Eisenhardt, K. M. 2009. Constructing mar-kets and shaping boundaries: Entrepreneurial powerand agency in nascent fields. Academy of Manage-ment Journal, 52: In press.

Saparito, P. A., Chen, C. C., & Sapienza, H. J. 2004. Therole of relational trust in bank-small firm relation-ships. Academy of Management Journal, 47: 400–410.

Sapienza, H. J., & Korsgaard, M. A. 1996. Proceduraljustice in entrepreneur-investor relations. Academyof Management Journal, 39: 544–574.

Schildt, H. A., & Laamanen, T. 2006. Who buys whom:Information environments and organizationalboundary spanning through acquisitions. StrategicOrganization, 4: 111–133.

Schilling, M. A., & Steensma, H. K. 2002. Disentanglingthe theories of firm boundaries: A path model andempirical test. Organization Science, 13: 387–401.

Schoonhoven, C. B., & Romanelli, E. 2001. The entrepre-neurship dynamic: Origins of entrepreneurshipand the evolution of industries. Stanford, CA: Stan-ford University Press.

Schoorman, F. D., Mayer, R. C., & Davis, J. H. 2007. Anintegrative model of organizational trust: Past,present, and future. Academy of Management Re-view, 32: 344–354.

Schultz, P., & Zaman, M. 2001. Do the individuals closestto internet firms believe they are overvalued? Jour-nal of Financial Economics, 59: 347–381.

Schweitzer, M. E. 2005. Negotiators lie: Here’s how toprevent and defuse deception at the bargaining table.Negotiation, December: 3–5.

Schweizer, L. 2005. Organizational integration of ac-quired biotechnology companies in pharmaceuticalcompanies: The need for a hybrid approach. Acad-emy of Management Journal, 48: 1051–1074.

Schwenk, C. R. 1985. The use of participant recollectionin the modeling of organizational decision pro-cesses. Academy of Management Review, 10: 496–503.

Seidler, J. 1974. On using informants: A technique forcollecting quantitative data and controlling measure-ment error in organization analysis. American So-ciological Review, 39: 816–831.

Serva, M. A., Fuller, M. A., & Mayer, R. C. 2005. Thereciprocal nature of trust: A longitudinal study ofinteracting teams. Journal of Organizational Be-havior, 26: 625–648.

Shell, G. R. 1991. When is it legal to lie in negotiations?Sloan Management Review, 32(3): 93–101.

Sorenson, O., & Stuart, T. E. 2001. Syndication networksand the spatial distribution of venture capital invest-ments. American Journal of Sociology, 106: 1546–1588.

Stahl, G. K., & Sitkin, S. B. 2005. Trust in mergers andacquisitions. In G. K. Stahl & M. Mendenhall (Eds.),Mergers and acquisitions: Managing culture andhuman resources: 82–102. Palo Alto, CA: StanfordUniversity Press.

Steensma, H. K., & Corley, K. G. 2000. On the perfor-mance of technology-sourcing partnerships: The in-teraction between partner interdependence andtechnology attributes. Academy of ManagementJournal, 43: 1045–1067.

Steensma, H. K., & Corley, K. G. 2001. Organizationalcontext as a moderator of theories on firm bound-aries for technology sourcing. Academy of Manage-ment Journal, 44: 271–291.

Steinel, W., & De Dreu, C. K. W. 2004. Social motives andstrategic misrepresentation in social decision mak-ing. Journal of Personality and Social Psychology,86: 419–434.

Strauss, A., & Corbin, J. 1998. Basics of qualitative re-search: Techniques and procedures for developinggrounded theory (2nd ed.). Thousand Oaks, CA:Sage.

Strickland, L. 1958. Surveillance and trust. Journal ofPersonality, 26: 200–215.

Tenbrusel, A. E. 1998. Misrepresentation and expecta-tions of misrepresentation in an ethical dilemma:The role of incentives and temptation. Academy ofManagement Journal, 41: 330–339.

Uhlenbruck, K., Hitt, M. A., & Semadeni, M. 2006. Mar-ket value effects of acquisitions involving Internetfirms: A resource-based analysis. Strategic Manage-ment Journal, 27: 899–913.

Uzzi, B. 1996. The sources and consequences of embed-dedness for the economic performance of organiza-tions: The network effect. American SociologicalReview, 61: 674–698.

Uzzi, B. 1997. Social structure and competition in inter-firm networks: The paradox of embeddedness. Ad-ministrative Science Quarterly, 42: 35–67.

Vanhaverbeke, W., Duysters, G., & Noorderhaven, N.2002. External technology sourcing through alli-ances or acquisitions: An analysis of the application-

2009 471Graebner

specific integrated circuits industry. OrganizationScience, 13: 714–733.

Vermeulen, F., & Barkema, H. 2001. Learning throughacquisitions. Academy of Management Journal, 44:457–476.

Villalonga, B., & McGahan, A. M. 2005. The choiceamong acquisitions, alliances, and divestitures.Strategic Management Journal, 26: 1183–1208.

Wang, L., & Zajac, E. J. 2007. Alliance or acquisition? Adyadic perspective on interfirm resource combina-tions. Strategic Management Journal, 28: 1291–1317.

Weber, J. M., Malhotra, D., & Murnighan, J. K. 2005.Normal acts of irrational trust: Motivated attribu-tions and the trust development process. In B. M.Staw & R. N. Kramer (Eds.), Research in organiza-tional behavior, vol. 26: 75–101. Greenwich, CT: JAIPress.

Wernerfelt, B. 1984. A resource-based view of the firm.Strategic Management Journal, 5: 171–181.

Williams, M. 2007. Building genuine trust through inter-personal emotion management: A threat regulationmodel of trust and collaboration across boundaries.Academy of Management Review, 32: 595–621.

Williamson, O. E. 1975. Markets and hierarchies: Anal-ysis and antitrust implications. New York: FreePress.

Williamson, O. E. 1985. The economic institutions ofcapitalism. New York: Free Press.

Wulf, J. 2004. Do CEOs in mergers trade power for pre-mium? Evidence from “mergers of equals.” Journalof Law and Economics, 20: 60–101.

Yin, R. K. 2003. Case study research: Design and meth-ods (3rd ed.). Thousand Oaks, CA: Sage.

Zaheer, A., & Harris, J. 2005. Interorganizational trust. InO. Shenkar & J. J. Reuer (Eds.), Handbook of strate-gic alliances: 169–197. Thousand Oaks, CA: Sage.

Zaheer, A., Lofstrom, S., & George, V. P. 2002. Interper-sonal and interorganizational trust in alliances. InF. J. Contractor & P. Lorange (Eds.), Cooperativestrategies and alliances: 347–377. Kidlington, U.K.:Elsevier.

Zaheer, A., McEvily, B., & Perrone, V. 1998. Does trustmatter? Exploring the effects of interorganizationaland interpersonal trust on performance. Organiza-tion Science, 9(2): 141–159.

Zhang, Y., & Rajagopalan, N. 2002. Inter-partner crediblethreat in international joint ventures: An infinitelyrepeated prisoner’s dilemma model. Journal of In-ternational Business Studies, 33: 457–478.

Zollo, M., & Singh, H. 2004. Deliberate learning in cor-porate acquisitions: Post-acquisition strategies andintegration capability in U.S. bank mergers. Strate-gic Management Journal, 25: 1233–1256.

Melissa E. Graebner ([email protected]) is an assistant professor of management in theMcCombs School of Business at the University of Texas atAustin. She received her Ph.D. in management science andengineering at Stanford University. Her research interestsinclude mergers and acquisitions, trust, alternative modelsof corporate governance, and qualitative research methods.


caveat venditor: trust asymmetries in acquisitions of ... · caveat venditor: trust asymmetries in...

Documents