Can community trust and social connections drive M&A success?

Social capital plays an important role in M&A success, influencing acquisition decisions, financial outcomes and long-term corporate performance

Mergers and acquisitions (M&A) are among the most complex and important decisions a business can make. When companies engage in an acquisition, traditional metrics like revenue synergies, cost savings, and market expansion typically dominate deal analysis.

However, recent research suggests another critical factor may influence M&A success: the strength of social connections and community trust in regions where acquiring companies operate. Social capital influences how businesses operate, make decisions, and interact with stakeholders.

The research, which was published in The British Accounting Review, found that companies headquartered in high-social-capital regions experience significantly better M&A outcomes. These firms tend to make more disciplined acquisition decisions, navigate deal complexities more efficiently, and achieve stronger long-term financial performance. For business leaders, this underscores the importance of considering social capital as an external governance mechanism that can mitigate risks and enhance the value of acquisitions.

Understanding the social capital advantage

The study, Is social capital valuable? Evidence from mergers and acquisitions, was conducted by Jo-Ann Suchard, Associate Professor in the School of Banking and Finance at UNSW Business School, together with Dr Giang Nguyen from Macquarie University, and Wang Yuelin from the London School of Economics and Political Science.

"Social capital reflects the set of beliefs and values that foster mutual trust and cooperative actions in a society," the researchers explained. Their analysis revealed that companies located in regions with strong social connections and community trust experienced significantly better outcomes in merger and acquisition (M&A) deals.

The research examined 2832 completed M&A transactions between 2010 and 2019, using novel county-level social capital data from the US Congress Joint Economic Committee's Social Capital Project. This comprehensive dataset measured factors including family unity, community health, institutional strength, and collective efficacy across American counties.

“The research focused on mergers and acquisitions (M&As) as they are large and complex investments and often associated with severe agency problems that destroy the acquirers’ value,” said A/Prof. Suchard. “Social capital has the potential to act as an effective environmental corporate governance mechanism and help alleviate agency problems in acquirers.”

How social capital drives real success

The findings were compelling: "Acquirers located in a county with a high level of social capital experience larger announcement returns," the study found. In fact, one standard deviation increase in social capital leads to a 0.28% increase in the acquirer's announcement returns, which translates into an increase of US$46.79 million.

This advantage stems from how social capital shapes corporate behaviour. In regions with a high level of social capital, the researchers said close social relationships, dense social networks, and frequent social interactions facilitate information sharing and the enforcement of good codes of conduct.

“Self-serving manager behaviour violates co-operative social norms, and there are high marginal costs and penalties for breaching these as well as benefits of engaging in coordination and cooperation,” A/Prof. Suchard explained. “Thus, managers of acquirers in high social capital regions may be more likely to be aligned with and act in the interests of shareholders.”

Read more: How to drive merger and acquisition success by buying the right intangible assets

This effect was particularly pronounced in deals with specific characteristics. "The effect is more pronounced when agency problems in the acquirers are more severe," the study showed. This was especially evident in larger transactions and deals with significant stock-based payment components, where social capital acted as an informal governance mechanism.

The strength of these findings extended beyond immediate financial returns. The researchers discovered that acquirers located in high social capital counties tend to be smaller in size. They have a lower leverage ratio and expenditure but higher Q than acquirers in low social capital counties. This suggested that companies in high social capital regions maintained more efficient operations and made more disciplined acquisition decisions.

Real-world examples: Social capital in action

There are numerous examples of acquisitions around the world which demonstrate the importance of social capital. In 2018, for example, Zoetis, a leading animal health company, completed its acquisition of Abaxis, a provider of veterinary point-of-care diagnostic instruments, for almost US$2 billion.

Zoetis is headquartered in Morris county, New Jersey, a region characterised by high social capital. The acquisition enhanced Zoetis' presence in the veterinary diagnostics sector, a rapidly growing segment of the animal health industry. By leveraging its established relationships and reputation within the veterinary community, Zoetis effectively integrated Abaxis' diagnostic instruments into its product offerings, providing comprehensive solutions to veterinarians.

Another example is Beacon Roofing Supply's acquisition of Allied Building Products. In 2017, Beacon Roofing Supply, the largest publicly traded distributor of roofing and complementary building products in North America, completed its acquisition of Allied Building Products for US$2.625 billion.

Beacon is headquartered in Fairfax County, Virginia, an area whose social capital index ranks in the top 10% of counties. The acquisition significantly expanded Beacon's geographic footprint and product offerings, strengthening its position in the building materials distribution industry. The company's ability to leverage its strong relationships and reputation within the industry likely played a crucial role in the successful integration of Allied's operations.

In both cases, the high social capital of the acquiring companies' headquarters regions likely contributed to disciplined decision-making, efficient integration processes, and the realisation of strategic objectives, aligning with research findings that link social capital to M&A success – all key findings highlighted in the research paper.

The power of community connection in deal-making

The study revealed that social capital's impact extended beyond initial deal announcements. "Acquirers in a county with higher social capital tend to undertake acquisitions with better long-term stock and accounting performance than acquirers located in low social capital counties," the researchers found.

The long-term benefits were particularly evident in operating metrics. The study found that one standard deviation increase in social capital increases the long-term industry-adjusted operating performance increases by 26.11%. “This suggests that in high social capital environments, managers of acquirers tend to act in the interest of shareholders in making long-term value-adding acquisitions,” said A/Prof. Suchard.

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The study also revealed an interesting pattern in deal completion efficiency: "We document that social capital reduces deal duration, supporting the conjecture that managers of the acquirer located in high social capital regions exert greater efforts to complete the acquisition," the researchers said in the paper. The impact of social capital was greater when deals were more complex and demanded greater managerial effort. This efficiency in deal execution can translate into reduced transaction costs and faster realisation of synergy benefits.

Practical implications for business leaders

For investors and external board directors located in low social capital countries, these findings highlight the importance of considering social capital in deal planning. The research suggests that companies should evaluate not just financial metrics, but also the strength of community connections and trust in regions where potential acquisition targets operate.

"Our research findings emphasise the importance of internal and external monitoring mechanisms when firms are located in low-social-capital regions because managers of these firms tend to make acquisition decisions that are value-destroying," said the researchers, who suggested companies in lower-social-capital regions may need stronger internal governance mechanisms and oversight during M&A processes. “These mechanisms include board independence, robust audit committees and effective risk management and executive renumeration,” A/Prof. Suchard concluded.