Advances in Mergers and Acquisitions, Volume 6 (Advances in Mergers and Acquisitions)

ADVANCES IN MERGERS AND ACQUISITIONS ADVANCES IN MERGERS AND ACQUISITIONS Series Editors: Cary L. Cooper and Sydney F...

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ADVANCES IN MERGERS AND ACQUISITIONS

ADVANCES IN MERGERS AND ACQUISITIONS Series Editors: Cary L. Cooper and Sydney Finkelstein Recent Volumes: Volumes 1–2: Volumes 3–5:

Edited by Cary L. Cooper and Alan Gregory Edited by Cary L. Cooper and Sydney Finkelstein

ADVANCES IN MERGERS AND ACQUISITIONS VOLUME 6

ADVANCES IN MERGERS AND ACQUISITIONS EDITED BY

CARY L. COOPER Lancaster University Management School, Lancaster University, UK

SYDNEY FINKELSTEIN Tuck School of Business, Dartmouth College, USA

Amsterdam – Boston – Heidelberg – London – New York – Oxford Paris – San Diego – San Francisco – Singapore – Sydney – Tokyo JAI Press is an imprint of Elsevier

JAI Press is an imprint of Elsevier Linacre House, Jordan Hill, Oxford OX2 8DP, UK Radarweg 29, PO Box 211, 1000 AE Amsterdam, The Netherlands 525 B Street, Suite 1900, San Diego, CA 92101-4495, USA First edition 2007 Copyright r 2007 Elsevier Ltd. All rights reserved No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means electronic, mechanical, photocopying, recording or otherwise without the prior written permission of the publisher Permissions may be sought directly from Elsevier’s Science & Technology Rights Department in Oxford, UK: phone (+44) (0) 1865 843830; fax (+44) (0) 1865 853333; email: [email protected]. Alternatively you can submit your request online by visiting the Elsevier web site at http://www.elsevier.com/locate/permissions, and selecting Obtaining permission to use Elsevier material Notice No responsibility is assumed by the publisher for any injury and/or damage to persons or property as a matter of products liability, negligence or otherwise, or from any use or operation of any methods, products, instructions or ideas contained in the material herein. Because of rapid advances in the medical sciences, in particular, independent veriﬁcation of diagnoses and drug dosages should be made British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library ISBN: 978-0-7623-1381-5 ISSN: 1479-361X (Series) For information on all JAI Press publications visit our website at books.elsevier.com Printed and bound in the United Kingdom 07 08 09 10 11 10 9 8 7 6 5 4 3 2 1

CONTENTS LIST OF CONTRIBUTORS

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INTRODUCTION

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THE GROUP PSYCHOLOGY OF MERGERS & ACQUISITIONS: LESSONS FROM THE SOCIAL IDENTITY APPROACH Johannes Ullrich and Rolf van Dick

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PRE-MERGER IDENTIFICATION: TIES WITH THE PAST BIND US TO THE FUTURE? Shandana Abedin and Gary Davies

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A COMPARATIVE OVERVIEW OF THE IMPACT OF CULTURAL DIVERSITY ON INTER-ORGANISATIONAL ENCOUNTERS Satu Teerikangas

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MOTIVE ARCHETYPES IN MERGERS AND ACQUISITIONS (M&A): THE IMPLICATIONS OF A CONFIGURATIONAL APPROACH TO PERFORMANCE Duncan Angwin

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EXPLAINING THE EFFECT OF M&A ON TECHNOLOGICAL PERFORMANCE Maria Chiara Di Guardo and Giovanni Valentini

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STOCK MARKET REACTIONS TO KNOWLEDGE-MOTIVATED ACQUISITIONS Ricardo Romero Gerbaud and Anne S. York

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THE IMPORTANCE OF TARGET FIRM CUSTOMERS IN ACQUISITIONS OF TECHNOLOGY-BASED FIRMS Margaret Dalziel

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ACQUIRING BIOPHARMACEUTICAL RESEARCH: IS MARKET APPROVAL A DEAL BREAKER? Karen Ruckman

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LIST OF CONTRIBUTORS Shandana Abedin

Manchester Business School, Booth Street West, Manchester, UK

Duncan Angwin

Strategic Management Group, Warwick Business School, University of Warwick, Coventry, England

Margaret Dalziel

School of Management, University of Ottawa, Ottawa, Canada

Gary Davies

Manchester Business School, Manchester, UK

Rolf van Dick

Institute of Psychology, Goethe University, Frankfurt, Germany and Aston University, Birmingham, UK

Maria Chiara Di Guardo

Universita´ di Cagliari, Cagliari, Italy

Ricardo Romero Gerbaud

Tecnologico de Monterrey Campus Queretaro, Me´xico

Karen Ruckman

Simon Fraser University, Burnaby, BC, Canada

Satu Teerikangas

Institute of Strategy and International Business, Department of Industrial Engineering and Management, Helsinki University of Technology, Finland

Johannes Ullrich

Institute of Psychology, Goethe University Frankfurt, Frankfurt, Germany

Giovanni Valentini

Bocconi University, Milan, Italy

Anne S. York

Creighton University, College of Business Administration, Omaha, NE, USA vii

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INTRODUCTION We are celebrating our sixth annual volume of the Advances in Mergers and Acquisitions. We have attempted over the years to include a range of disciplines and orientations from occupational psychology to economics, to corporate strategy, to corporate ﬁnance, to marketing. This volume is no exception with academics from a range of disciplines and a number of countries (e.g. Germany, Finland, UK, Canada, Italy, US, and Mexico). The unimpeded growth in mergers and acquisitions (M&A) activity globally means that research and practice in this ﬁeld is likely to become even more signiﬁcant as large developing countries such as China, India, and Brazil begin to go globally and inﬂuence markets in a different but dynamic way. In this volume, we have ﬁve chapters that provide conceptual frameworks and provide extensive literature on signiﬁcant new areas of research on M&As. The ﬁrst chapter by Johannes Ullrich and Rolf van Dick explores the group psychology of M&As, highlighting the usefulness of Social Identity Theory to understand the negative reactions of employees to mergers. And given that between 60% and 80% of M&As are deemed to have failed, this method of assessing post-merger identiﬁcation is signiﬁcant in understanding M&A integration and success. This is followed by a paper by Shandana Abedin and Gary Davies who explores the impact on premerger identiﬁcation and subsequent commitment to the merger. It argues that commitment to a merger, rather than the commitment to the organization, drives behavior in the merger. In creating her model she highlights different forms of commitment and their impact (affective, continuance, and normative commitment). The third chapter provides a theoretical framework that explores the impact of cultural diversity on inter-organizational encounters. Since so many M&As and joint ventures are created over international borders, it is important for success these encounters to understand the cultural dimensions. This paper brings together research in the ﬁeld to understand how culture has been approached by researchers in M&As on the one hand, and alliance and joint ventures on the other. By bringing together both ﬁelds, Satu Teerikangas argues that we can learn more about how cross-cultural encounters work. Duncan Angwin argues that another dimension of signiﬁcance in the success and performance of ix

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M&As is the underlying motives of senior management. To assess performance, he argues, you need to understand the motives. The usual motive suggested by senior management is that the M&A ‘must create greater value for acquiring shareholders’ and that if this is the basis for assessing performance then many of the studies in the ﬁeld which show little shareholder value are ﬂawed. By examining the ‘real’ motives in M&As we might be able to better assess the performance indicators. And ﬁnally, the ﬁfth chapter by Maria Chiara di Guardo and Giovanni Valentini proposes a model to explain how and why M&As can affect a company’s technological performance. Their thesis is that ‘‘M&A inﬂuence technological performance by altering simultaneously the resources ﬁrms can use in their innovation process as well as the incentives ﬁrms undergo in the innovation process’’. As editor over the years, we have decided to also include in the Advances series a number of studies on topics of international signiﬁcance. Ricardo Romero Gerbaud and Anne York present a study examining stock market reactions to knowledge-motivated acquisitions. They found that ‘‘the market punishes acquirers of knowledge-based resources more than those that buy property-based resources due to the perceived uncertainty regarding the value of targets’ knowledge resources’’. Margaret Dalziel, on the other hand, looks at the importance of target ﬁrm customers in acquisitions of technology-based ﬁrms. She shows that ‘‘the degree to which the acquisition creates or destroys value for the target ﬁrm’s customers is a signiﬁcant predictor of acquisition success’’. And ﬁnally, Karen Ruckman empirically assesses the proﬁt impact on externally sourcing technology through acquisition in the biopharmaceutical sector. They argue that ‘‘companies with lower R&D intensity than their targets beneﬁt from acquisitions of pre-marketed drugs more than they would with marketed drugs because of a complementary combination of competitive assets’’. We hope you will gain from both the conceptual/theoretical work and research reviews, and from the speciﬁc pieces of research in terms of their contributions to their topics as well as better understanding the various methodologies in the ﬁeld. Cary L. Cooper Sydney Finkelstein Editors

THE GROUP PSYCHOLOGY OF MERGERS & ACQUISITIONS: LESSONS FROM THE SOCIAL IDENTITY APPROACH Johannes Ullrich and Rolf van Dick ABSTRACT The presumed financial benefits of mergers & acquisitions (M&As) often do not materialize. At the same time, M&As are reported to create a host of negative reactions on the part of the employees involved. In recent years, these circumstances have led many scholars to use the social identity approach (SIA) in order to better understand the group psychology of M&As. This paper reviews recent M&A research inspired by the SIA and derives three general lessons that are explained in some detail: First, postmerger identification is important for M&As integration and success. Second, M&As pose a threat to organizational identification. Therefore, and third, if you have to merge – merge right.

The psychology of the group has long been recognized as the backbone of successful mergers and acquisitions (M&As). For instance, famous James

Advances in Mergers and Acquisitions, Volume 6, 1–15 Copyright r 2007 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 1479-361X/doi:10.1016/S1479-361X(07)06001-2

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McKinsey almost 80 years back already identiﬁed the ‘‘development of a proper esprit de corps among the employees of the new organization’’ (McKinsey, 1929, p. 334, italics in original) as a major challenge for merging companies: ‘‘Each group of employees is inclined to be loyal to its former company and to doubt the efﬁciency of the employees of the other companies. It usually takes a considerable period of time and the exerting of a considerable amount of diplomacy on the part of the management to develop the same spirit of loyalty in the new organization as existed among the employees of the separate organizations.’’ (p. 334) Thus, the problem is old, and it has been given various labels. Group-based psychological reactions to M&As have been described in terms of problems of, e.g., esprit de corps (McKinsey, 1929), morale (e.g., Levinson, 1970), family atmosphere and camaraderie (Buono, Bowditch, & Lewis, 1985), trust (e.g., Jemison & Sitkin, 1986; Stahl & Sitkin, 2005), commitment (e.g., Schweiger & DeNisi, 1991), culture collisions (e.g., Cartwright & Cooper, 1993b), employee resistance (e.g., Larsson & Finkelstein, 1999), acculturation (e.g., Larsson & Lubatkin, 2001; Nahavandi & Malekzadeh, 1988), in-group bias (e.g., Terry & Callan, 1998), post-merger identiﬁcation (e.g., van Knippenberg & van Leeuwen, 2001), or as downright ‘‘organizational MADness’’ (Marks, 2003). While each label certainly carries unique meaning and theoretical depth, it cannot be overlooked that all of these labels are interrelated insofar as they refer – directly or as its consequence – to the precarious bond between the individual employee and the larger group constituted by the post-merger entity. It is probably no accident, then, that during the late 1990s, when industry deregulation and technological advances brought about dramatic increases both in terms of the number and value of M&As worldwide (Andrade, Mitchel, & Stafford, 2001; Pryor, 2001), researchers have renewed their interest in integrating M&A research with social psychological theories of group processes and intergroup relations. In this paper, we review the recent wave of M&A research that is rooted in the related theories of social identity (Tajfel & Turner, 1979), self-categorization (e.g., Turner, 1985), which together are known as the social identity approach (SIA, see Haslam, 2004; van Dick, 2004), extended by the theory of optimal distinctiveness (Brewer, 1991). The ﬁrst section of this paper introduces the central theoretical assumptions of the SIA which provide a coherent framework for understanding and managing psychological reactions to M&As. The subsequent sections are organized in terms of the distinct insights and advances revealed by our review. Finally, we discuss open questions and promising areas for future research.

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THE BASIC ASSUMPTIONS OF THE SOCIAL IDENTITY APPROACH The SIA begins with an appreciation of different aspects of people’s selfconcepts (Tajfel & Turner, 1979). Depending on the situation, people conceive of themselves rather as individuals, deﬁned by the attributes that distinguish them from other individuals (their personal identity), or as members of a social group such as organization X, deﬁned by the attributes that render them similar to (or, in fact, interchangeable with) other organizational members and different from members of another organization Y (their social identity). More speciﬁcally, these two different aspects of the self mark the ends of a theoretical continuum from interpersonal to intergroup behavior. A common driver of both types of behavior is people’s desire for a positive self-concept. As with all evaluative judgments, selfevaluations can only be made with reference to a comparative standard. Accordingly, most people in the Western world feel good about themselves when they compare favorably to others. However, one of the great insights of Tajfel and Turner was that the situational salience of different aspects of the self can fundamentally alter the kind of comparisons people make, so that the resulting motivation to act can vary considerably. Group norms of piece-rate workers illustrate. An assembly-line worker may try to maximize his utility function by increasing his hourly output (perhaps comparing himself to his co-worker), but when his social identity as a member of this workgroup is salient, he may avoid exceeding the output norm of his workgroup so as to protect the interests of his workgroup vis-a`-vis management. It is precisely this nuanced view of the motivational force of identities that has sparked considerable interest in applying the SIA in the context of organizational behavior. Simply put, and to foreshadow our review of the SIA literature on mergers, SIA’s promise is to provide clues as to when and how an employee involved in the merger of, e.g., carmakers Daimler-Benz and Chrysler will act as a Daimler–Chrysler person (i.e. deﬁnes him- or herself as member of the post-merger larger organization), a Daimler-Benz or Chrysler person, respectively (i.e. maintains a self-concept in terms of either of the pre-merger entities), or plainly as Mrs. Smith who cares much less about any of these collectives than what is in the merger for herself. Most M&A theorists would agree that anything but the ﬁrst of these alternatives would be lamented about in practice. In order to understand the conditions that give rise to these different situational self-deﬁnitions of employees, we need to consider principles of categorization and basic human needs.

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According to self-categorization theory (Turner, Hogg, Oakes, Reicher, & Wetherell, 1987), people routinely parse the social world for its potential to be simpliﬁed and summarized in terms of social categories. As a result of this process, the self emerges as a member of one social category (the salient selfcategory or ingroup) and a non-member of another category (outgroup), provided that these categories sufﬁciently fit the given context and are relatively accessible. For instance, the categories ‘employers’ and ‘union’ will ﬁt well in a context in which people act in accordance with expectations about typical actions of tariff partners (normative fit) and the differences between the categories outweigh the differences between the people classiﬁed therein (comparative fit). Furthermore, people’s readiness to use the categories ‘employers’ and ‘union’ will increase in times of wage negotiations and strikes, and especially among members of the bargaining committees. Finally, the accessibility of a given ingroup–outgroup categorization momentously depends on the extent to which people have internalized their group membership, that is, on the extent of their identification with that group. Whereas the salience of self-categorizations can vary strongly across situations, identiﬁcation refers to the chronic importance of a group membership to the individual’s self-concept. A recent meta-analysis has shown that organizational identiﬁcation, i.e. people’s attachment to the organizations they work for, is positively associated with job satisfaction and extra-role behaviors, and negatively correlated with turnover intentions (Riketta, 2005). Findings such as these have led scholars to conclude that ‘‘[i]nsofar as the ﬁrm can proﬁtably motivate its employees through such attachments, these investments should be considered a part of the capital of the organization, its motivational capital’’ (Akerlof & Kranton, 2005, p. 29, italics in original). Although organizational identiﬁcation is often treated as a chronic selfaspect, it can be subject to change, too. From the many determinants of social identiﬁcations, we would like to single out two fundamental needs as discussed by optimal distinctiveness theory (Brewer, 1991), which seems particularly relevant to the analysis of M&As. According to this theory, when people identify with social groups, they seek to strike a balance between two fundamental human needs. On the one hand, people have a need to belong and to validate their worldviews (Baumeister & Leary, 1995). On the other, they also have a need to be special and unique (Snyder & Fromkin, 1980). Combining these two needs, optimal distinctiveness theory predicts that identiﬁcation will be strongest for social categories that are neither too large nor too small. In line with this prediction, a recent meta-analysis has shown that people tend to identify more strongly

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with their workgroup than with the larger organization (Riketta & van Dick, 2005).

SOCIAL IDENTITY LESSONS FOR M&As Equipped with the essentials of the SIA as described in the previous section, we are now in a position to analyze more closely the group psychology of M&As. The main emphasis of the following review is on studies that explicitly build on the SIA in analyzing M&As. The review is organized in terms of three lessons extracted from a review of social identity-based M&A research.

Lesson #1: Post-Merger Identification is Important for M&As Integration and Success! M&As create a new social category by combining two previously separate organizational identities. The SIA suggests that when employees adopt this category as a viable self-deﬁnition by identifying with it, and when situational circumstances render it salient, this would give rise to group behavior aimed at furthering the interests of the collective deﬁned by the merger. Since the main challenge of merger integration is to have employees cooperate effectively across the boundaries of management levels and premerger organizational memberships, it is highly desirable to encourage a common-goal orientation, which lies at the core of intergroup behavior (Richter, West, van Dick, & Dawson, 2006; van Knippenberg, 2003). Thus, post-merger identiﬁcation is viewed as a ‘‘valid indicator of the extent to which an employee is psychologically engaged with (i.e. has ‘signed onto’) the change’’ (Millward & Kyriakidou, 2004, p. 17). Lacking identiﬁcation with a ‘‘common ingroup’’, i.e. the larger post-merger organization comprising the two former organizations as sub-groups (e.g., Gaertner, Rust, Dovidio, Bachman, & Anastasio, 1994), employees will have little incentive to cooperate with colleagues from the respective other merger partner beyond what is absolutely necessary. Moreover, at least during merger planning and the beginning of integration, ingroup–outgroup categorizations will become salient and lead to ingroup bias and negative stereotyping (e.g., Buono et al., 1985; Haunschild, Moreland, & Murrell, 1994; Terry & Callan, 1998). A recent meta-analysis has documented the negative effects of cultural differences on

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socio-cultural integration outcomes (Stahl & Voigt, in press). These effects were stronger for differences in organizational rather than national cultures, which supports the assumption that pre-merger identities can stand in the way of successful integration until a common ingroup identity forms. What to expect from ‘‘merely merging’’ without fostering post-merger identiﬁcation has been shown in a ‘‘realistic’’ laboratory experiment. Weber and Camerer (2003) had their participants take on the roles of managers and employees and communicate to each other which of several photographed work-environments they prefer. In the course of the experiment, participants became more and more efﬁcient in helping the other identify their preferred pictures, which became evident in sharply decreasing task completion times. After the dyads were merged with another group, however, they lost their efﬁciency and developed hostile attitudes toward each other. For instance, one ‘‘employee’’ was quoted as angrily saying: ‘‘Stop telling me what they’re wearing and just tell me how many people are in the picture!’’ (p. 412). This experiment shows how merely combining people from previously distinct groups can result in frustration and hostility even in the absence of other risk factors typically surrounding M&As, such as job insecurity and fear of downsizing (see van Dick, Ullrich, & Tissington, 2006, for an elaboration of this point). In sum, although executives and marketing departments may be quick to concoct a new identity of the merging organizations, it is of vital importance that employees adopt this identity as self-deﬁning. Self-categorization theory suggests that all careful work on strategic mission and corporate image that is offered as a new set of collective norms, beliefs, and values may be futile unless people identify with it (cf. Guimond, 2000; Reicher, 2004).

Lesson #2: M&As Pose a Threat to Organizational Identification! By deﬁnition, an organization will grow through a M&A so that the social category associated with the pre-merger organization will become more inclusive. From an optimal distinctiveness perspective, this means that the organization will become less attractive as a target for identiﬁcation. On the basis of the general ﬁnding that employees feel less strongly attached to their organization as a whole compared with smaller subunits (Riketta & van Dick, 2005; van Knippenberg & van Schie, 2000), one would also expect post-merger identiﬁcation to be lower than pre-merger identiﬁcation. Indeed, this is what a number of studies ﬁnd (e.g., Amiot, Terry, & Callan, in press; Boen, Vanbeselaere, Hollants, & Feys, 2005; Newman &

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Krzystoﬁak, 1993; van Dick, Wagner, & Lemmer, 2004; van Knippenberg, van Knippenberg, Monden, & de Lima, 2002). If it were only for the increasing inclusiveness of a self-category, there might be some quick ﬁxes. For instance, people’s distinctiveness needs could be satisﬁed by making the M&A category appear distinctive at the group level. For instance, a large and potentially overinclusive club such as Mensa (an organization of the gifted) provides its members with distinctiveness by setting them apart from people with less exceptional intelligence (cf. Hornsey & Jetten, 2004). A comparable strategy in merger contexts might amount to pointing out that due to the M&A, the company is now industry leader or uniquely capable of creating a new product or service. Unfortunately, however, there are a number of factors apart from distinctiveness concerns that are likely to threaten organizational identiﬁcation. At the most fundamental level, organizational identiﬁcation is threatened by the fact that an M&A changes not only the size but also the content of a selfcategory. This issue has received substantial attention from SIA researchers who have studied how organizational identiﬁcation is affected by the perceived continuity of pre-merger identity and the nature of the representation of the pre-merger organization within the post-merger organization. Daan van Knippenberg and colleagues have demonstrated that the relationship between organizational identiﬁcation before and after a merger depends on a sense of continuity of one’s pre-merger identiﬁcation (van Knippenberg et al., 2002; van Knippenberg & van Leeuwen, 2001; van Leeuwen & van Knippenberg, 2003; van Leeuwen, van Knippenberg, & Ellemers, 2003). Laboratory as well as ﬁeld studies provided support for the idea that because one of the merging organizations is bound to be more dominant in shaping the merger entity, its employees are likely to perceive the new identity as a continuation of their pre-merger organization’s identity to a greater extent than members of the dominated organization(s). Consistent with van Knippenberg’s model of continuity, recent research has found that members of high-status organizations (which are expected to dominate the merger process) prefer different ways of merging than members of low-status organizations (Giessner, Viki, Otten, Terry, & Ta¨uber, 2006). Giessner and colleagues speciﬁcally varied the type of representation of the two merger partners. They found that members of high-status organizations prefer a merger pattern where the low-status organization assimilates to the high-status organization or is represented only by a proportion rule. In contrast, members of low-status organizations prefer a merger pattern where their group is equally well represented in the merger as the high-status group. This study also corroborates the

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assumption that establishing a sense of continuity is more of a problem for the low-status or less dominant merger partner. One may argue, however, that the fact that pre- and post-merger identiﬁcation are more closely correlated among employees with a stronger sense of continuity does not rule out the possibility that the absolute level of identiﬁcation decreases even among those perceiving more continuity. Yet converging evidence from other laboratories suggests that to the extent that one’s pre-merger group is sufﬁciently represented within the merged entity, identiﬁcation does not necessarily decrease. In a study by Boen, Vanbeselaere, Brebels, Huybens, and Millet (2007), for instance, high representation was achieved by maintaining pre-merger group features such as colors, symbols, and labels – under this condition, participants’ identiﬁcation with the post-merger group was higher compared with premerger identiﬁcation. Finally, even under the rosy (yet unrealistic) scenario that size and content of the pre-merger social categories remain unaffected by an M&A, organizational identiﬁcation may be threatened by a host of stressor variables that are well known (e.g., Amiot, Terry, Jimmieson, & Callan, 2006; Cartwright & Cooper, 1993a, 1997; Marks & Mirvis, 1985; Schweiger & DeNisi, 1991; Terry, Callan, & Sartori, 1996) and need only be sketched here with regard to post-merger identiﬁcation. For instance, employees of organizations undergoing an M&A can be faced with unclear job prospects, increased workloads, changes in regulations and reporting arrangements, reduced power or status, possibility of job transfer or relocation, role ambiguity, among others. Moreover, many of the stressors are likely to be more intense in mergers compared with acquisitions, mainly because more time will pass between the announcement of the merger and actual changes, prolonging the ‘‘organizational limbo’’ (Cartwright & Cooper, 1997). The SIA would suggest that unless the pending restructuring is perceived as affecting entire business units or workgroups in a uniform way, these stressors can be assumed to increase the salience of one’s personal identity. The nature and amount of additional duties and overtime, for instance, may vary from one employee to the next, which can instigate interpersonal comparisons and therefore reduce organizational identiﬁcation. Similarly, career threats posed by the merger might activate more basic needs (e.g., safety or existence needs) than are associated with social identities (cf. Haslam, Powell, & Turner, 2000), which implies that employees might identify less with their organization and more with their own career (for a discussion of career identiﬁcation, see van Dick, Wagner, Stellmacher, & Christ, 2004).

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However, the SIA would also suggest that a shared social identity can help employees to cope with M&A-related stressors (cf. Haslam, 2004, Chapter 4). For instance, given high levels of pre-merger identiﬁcation, employees may come to perceive many of the aforementioned stressors as posing a threat to their group rather than to themselves as individuals. As a consequence, they may more proﬁtably use social support to normalize or reframe the stressors. Despite the importance of understanding how social identiﬁcations and M&A stressors inﬂuence each other, there is a dearth of research directly examining this link. In the context of a merger between a domestic and an international airline, Amiot and colleagues (2006) reported a time-lagged correlation of .03 between the perceived stressfulness of the merger and post-merger identiﬁcation. However, taking into account the length of the interval between measurements, the conclusion that stressors and identiﬁcation are unrelated seems premature. Whereas perceived stressfulness was measured three months after major change processes had set in, post-merger identiﬁcation was measured approximately two years later, which may mask important short-term dynamics. Thus, at present there is insufﬁcient empirical evidence for judging the beneﬁcial impact of pre-merger identiﬁcation on coping processes during an M&A, or conversely, the detrimental impact of stressors on identiﬁcation. It is conceivable that shortly after the announcement of an M&A, many of the stressors discussed above add to the negative impact of M&As on organizational identiﬁcation. Over time, however, when post-merger identiﬁcation has been allowed to develop, it may help employees to cope with stress. In the light of the mass of stressors associated with M&As, more empirical research on these questions is clearly indicated.

Lesson #3: If You Have to Merge – Merge Right! The lessons we have so far drawn from SIA research on M&As obviously point to a dilemma for organizations that intend to merge. On the one hand, it is important that employees identify with the organization after the merger in order for merger integration to run smoothly and efﬁciently and to create the synergies expected from the merger. On the other, it appears that by their very nature, M&As put this important motivational capital at stake. We would like to suggest that a rational way out of this dilemma would either be not to merge at all – or to challenge either of Lessons #1 and #2. Let us ﬁrst consider the option of not merging at all.

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A recent meta-analysis by King, Dalton, Daily, and Covin (2004) scrutinized the raison d’eˆtre of M&As – its impact on ﬁnancial performance – by statistically summarizing the post-merger performance of 206,910 companies engaging in M&A activity. The ﬁndings of King and colleagues update and qualify an earlier meta-analysis by Datta, Pinches, and Narayanan (1992) with somewhat more optimistic conclusions. Speciﬁcally, King and colleagues found that the only (!) signiﬁcant ﬁnancial returns from M&As are obtained on the day of an announcement and are particularly strong for the share prices of the target organizations. This effect is strong but quickly reverses into a negative effect for many of the performance indicators. For most of the indicators considered in their meta-analysis such as ROA or ROI, however, no effects could be established. Although King and colleagues noted a large amount of unexplained heterogeneity in the results, currently available evidence obviously suggests that M&As cannot as a rule be expected to improve an acquiring ﬁrm’s ﬁnancial performance. Nevertheless, companies will probably continue to believe they have good reasons to merge, and future research might in fact reveal important moderator variables to aid executives in determining from the outset whether an M&A would be of any value. Therefore, it is important to try to the square the circle of our contradictory lessons from the SIA. Given the many beneﬁts of organizational identiﬁcation (which extend far beyond the positive effects on cooperation and motivation during merger integration, cf. Akerlof & Kranton, 2005; Riketta, 2005; van Dick, 2004), we ﬁnd it difﬁcult to challenge Lesson #1. However, in the recent literature there have emerged some possible qualiﬁcations of Lesson #2. To recapitulate, research has identiﬁed a sense of continuity among employees of merging organizations as the key determinant of post-merger identiﬁcation (e.g., van Knippenberg & van Leeuwen, 2001). At the same time, there appears to exist an inevitable asymmetry of continuity between the merger partners, because nearly always one of the organizations is more dominant in shaping the post-merger entity (usually the acquiring organization). Does this mean that post-merger identiﬁcation is necessarily threatened among employees of the less dominant merger partner? In a qualitative study of a large industrial merger, Ullrich, Wieseke, and van Dick (2005) found a possible solution to this dilemma. Results from interviews with middle management suggested that the subjective experience of continuity may depend not only on the transition from the past to the present but also on the expected transition to the merged organization’s future. More speciﬁcally, Ullrich et al. found evidence that the asymmetry of

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continuity may be conﬁned to what the authors called observable continuity, i.e. the past-to-present changes in identity and job contents. Equally important to employees, however, is the clarity about the merged organization’s future and the employees’ role in it. In contrast to observable continuity, projected continuity refers to the ‘‘subjective belief that the relationship between path and goal is clear and controllable’’ (Ullrich et al., 2005, p. 1562) and can equally be established for all parties involved in a merger. For organizations to be able to provide employees with projected continuity, this research has identiﬁed two important preconditions. First, organizational change can be expected to translate into feelings of projected continuity to the extent that employees participate in the change process not as passive recipients of instructions but as active collaborators on the project of creating the new organizational mission (cf. Wegge & Haslam, 2003). This argument resonates with recent research highlighting the importance of fair procedures during organizational change. Tyler and de Cremer (2005) studied employee reactions in a situation of being taken over by another company. They found that employees who were strongly identiﬁed and perceived the change as procedurally fair were most supportive of the change entailed by the merger. Second, according to the SIA, organizational leaders ‘‘make or break’’ the change process. Much of the leaders’ inﬂuence derives from perceptions of the leader being prototypical for the group of followers that he or she aspires to lead (van Knippenberg & Hogg, 2003). The CEO in the case study presented by Ullrich et al. (2005) had no connection to any of the premerger companies. As an outsider, he had considerable difﬁculty in garnering support for the merger project. Several symbolic actions served to increase the distance between him and his potential followers. To avoid such mistakes, leaders need to be attentive to the self-conceptions of employees. For instance, when the envisioned change entails inconvenient and painful consequences such as working overtime and a redeﬁnition of one’s job, organizational leaders can stabilize projected continuity by offering self-sacriﬁces along the lines of the changes expected from employees, which can be expected to increase both the clarity and the controllability of change. Similarly, in the words of an executive evaluating a merger: ‘‘The top management can earn employee trust by showing them how much they care and how strongly they are identifying themselves with the new company and proving this by their actions that go beyond the shortterm range’’ (Engeli, 2005, p. 107, italics added).

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CONCLUSION The considerations discussed above provide some reason for being optimistic about the potential to diminish negative group-based reactions to M&As and to improve their track record. To be sure, learning from the lessons we suggested would not mean that managers had to learn new or very different strategies for planning and executing merger integration. Established strategies for optimal communication or the management of job insecurity or stress (see Cartwright & Cooper, 2000) are still valid and useful. The difference and contribution we hope to introduce into mainstream management knowledge consists of a coherent and robust theoretical framework. Social identity and self-categorization processes impact on almost every stage of the merger development – understanding these phenomena better seems thus key for future M&A success. However, it should be noted that the empirical evidence accumulated so far lends more support to the ﬁrst two lessons than to the third. We hope that future research puts the above assumptions to empirical tests and further clariﬁes the meaning of ‘‘merging right’’.

ACKNOWLEDGMENT We are grateful to Steffen Giessner for his comments on a draft of this paper.

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PRE-MERGER IDENTIFICATION: TIES WITH THE PAST BIND US TO THE FUTURE? Shandana Abedin and Gary Davies ABSTRACT In the context of the conflicting results of earlier studies, this chapter proposes a model of pre-merger identification and commitment to merger (in a pre-merger setting) by taking into account the multi-dimensional nature of commitment. First it argues that commitment to merger, rather than commitment to organization, drives behaviour in a merger. Then premerger identification is hypothesized to be positively related to normative and continuance commitment and either negatively or not significantly related to affective commitment.

INTRODUCTION The toughest challenge is to get the entire organization engaged in the process. That challenge is coupled with the need to make sure that each individual understands his or her role in making change effective. It is absolutely critical that everyone moves toward a certain level of involvement and engagement in the change process. (Walter M. Oliver quoted in Laabs, 1996, p. 59)

The above quote highlights the importance of employee involvement and commitment to change but strategic changes such as mergers bring about a Advances in Mergers and Acquisitions, Volume 6, 17–35 Copyright r 2007 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 1479-361X/doi:10.1016/S1479-361X(07)06002-4

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whirlwind of turbulence shaking the very foundations of organizations. The employees of the merging organizations take the brunt of the gusts, enough to make their heads spin. ‘‘Even when organizational change is an avenue for survival, it has the power to stir up emotions and produce feelings of loss and uncertainty’’ (Margolis & Hansen, 2002, p. 277). These ‘trigger events’ put into play emotions and perceptions that affect employees’ reactions to these events. It is important to understand the dynamics of this sensemaking (Lawson & Angle, 1998, p. 2) because change initiatives like merger and acquisitions depend on the commitment of the people involved to make them work and most of these initiatives are met with resistance. Such resistance is a result of people’s dispositions, sense-making and their perceptions during the process of change and have important implications for satisfaction and commitment (Reichers, Wanous, & Austin, 1997). People are worried about their employment and their promotions in a merger period and usually consider issues related to their own beneﬁts (Buono & Bowditch, 1989). However, they are not just concerned about their personal security but also about their identity (Daniel & Metcalf, 2001). ‘‘Guaranteeing managers and employees their jobs is not enough to win them over. Individuals often hang on to seemingly insigniﬁcant things: The letterhead of the old company is kept for many years. Name tags with the old logo are not discarded. Employees refuse to use the new name in private conversations.’’ (Nahavandi & Malekzadeh, 1993, p. 3). This shows that fears and concerns during mergers go deeper than personal security and job retention. It is that subtle something that individuals hold on to and which is translated into lack of commitment to the merger. Most of the time ‘‘organizations are so intent on pushing forward y that they forget to help employees let go of the old. And very often people can’t let go, they often hold on, sometimes by resisting change. The reasons for this resistance include perceived loss of identity y’’ (Demers, Forrer, Leibowitz, & Cahill, 1996, p. 23). Commitment and productivity decline as people devote their energies to coping with the stress created by fear of loss of identity and all this leads to a destructive cycle both for the individual and the organization (Demers et al., 1996). Researchers agree that feelings of loss and uncertainty during a merger are usually the result of ‘an imbalance rooted in employees’ fears about the sustainability of the organizations identity’’ (Margolis & Hansen, 2002, p. 277). Such fears cripple people emotionally not only in the present (during the merger) but also in the future (when the merging process is over) (Margolis & Hansen, 2002). Emotions originating from a feeling of loss of identity from the merger suggest that it is crucial to have a knowledge of individual’s beliefs about an

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organization’s identity, as it is a useful tool for discerning how people see a change initiative, how important it is to them, what meanings do they attach to it, what emotions does it evoke and what attitudes and behaviours does it lead to? ‘‘These interpretations shaped by an organization’s identity, move individuals’ commitment, involvement, indifference, and resistance in particular directions and thereby direct and shape actions.’’ (Dutton & Dukerich, 1991, p. 347). The goal of all merger integration efforts is to make members of both merging organizations identify with the post-merger entity. But achieving that goal is not that easy since ties with the past (the pre-merger organizations) hold people back from moving on and developing new identiﬁcations. In many merger studies, pre-merger identiﬁcation has been presented as an insurmountable obstacle that prevents employees from not only identifying with the post-merger organization and something which also forms the basis for resistance to merger initiatives. But is it all negative about our attachments with the past? Or can we move towards the future with a positive attitude despite and/or even because of our ties to the past? The purpose of this chapter is to understand the role of identiﬁcation of employees with their pre-merger organization in merger integration by developing a conceptual model that explores the relationship between pre-merger identiﬁcation and commitment to merger.

MERGER: A THREAT TO IDENTITY When you have air, you don’t think about it at all. But if you take the air out of the room that you are in right now, you’d be running to get air. (Stephen R. Covey quoted in Laabs, 1996)

Identity and the processes related to that are subtle issues which usually surface when people perceive a threat to their identity (Dutton, Dukerich, & Harquail, 1994). Strategic change can create such threats to individual selfesteem, security and identity (Terry, Carey, & Callan, 2001), and these threats become particularly vital and taxing in case of an organizational merger ‘‘which, given the rapid speed of the change, the large-scale nature of the change, and the associated level of uncertainty, is likely to be particularly stressful type of change’’ (Terry et al., 2001). According to social identity theory, an individual’s social identity is a measure of his/her self-concept deﬁned by his/her association and afﬁliation with various social groups (Tajfel, 1982). These identities are organized into various hierarchically organized categories such as those based on age,

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gender, race and institutional and organizational associations (Elsbach & Kramer, 1996). Since organizational identity is part of the individual’s social identity, it is highly signiﬁcant to him/her and threats to an organization’s identity constitute a threat to members’ own social identity (Elsbach & Kramer, 1996). Moreover though people are part of different social groups and have multiple social identities, it is the collective organizational identity that comes to the surface when a merger threatens it. Mergers differ from other changes in that they shatter the very basics of an organization which ceases to exist as it blends with another to constitute a new entity. ‘‘In fact, in psychological terms, a merger has an effect similar to that of a black cloud in the sky; people take appropriate precautions and sometimes, if this is an option, retreat from the scene’’ (Dick, Ullrich, & Tissington, 2006, p. 69). The reasons for such insecurities extend beyond personal concerns and most often involve an evaluation of the merger’s effect on employees’ ‘collective identity’ and ‘self-esteem’ (Dick et al., 2006, p. 70). Since the salience of different groups depends upon contextual factors and mergers usually pose a threat to the current boundaries between two groups, the introduction of a merger is expected to increase the salience of one’s pre-merger group. This may result in increasing the level of identiﬁcation with the pre-merger group (Dick et al., 2006). This effect has been empirically demonstrated in experimental groups where individuals with prior interactions with a group showed more resistance to a merger between groups than those who did not have a common identity based on prior relations with the group (Haunschild, Mooreland, & Murrell, 1994).

IDENTIFICATION: MERGER OF THE SELF AND GROUP (TYLER & BLADER, 2000, P. 15) Members are said to ‘identify’ with an organization when the attributes they use to deﬁne the organization also deﬁne themselves. Organizational identiﬁcation is deﬁned by Mael and Ashforth (1995, p. 310) as a ‘‘form of social identiﬁcation in which people deﬁne themselves in terms of their membership in a particular organization.’’ While social identity has been deﬁned as ‘that part of an individual’s self-concept which derives from his knowledge of his or her membership of a social group (or groups) together with the value and emotional signiﬁcance attached to that membership’

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(Tajfel, 1978, p. 63). The strength of a member’s organizational identiﬁcation reﬂects the extent to which the content of a member’s self-concept is tied to his or her organizational membership, as compared to membership in other categories. Identiﬁcation is a sense of belonging to one’s group (Hogg & Abrams, 1988) to the extent that members perceive a group’s successes as their own and its failures as their own failures (Kusstatscher & Cooper, 2005). The strength of organizational identiﬁcation, therefore, depends upon the extent to which the central, enduring and distinctive aspects of the organization are considered worthy by members of the organization and the extent to which they incorporate these into their self-concept. (Dukerich, Golden, & Shortell, 2002). According to social identity theory, an individual’s self-concept is composed of a personal and a social identity (Tajfel & Turner, 1985). In order to make sense of the social environment, to locate themselves within it and to get guidance regarding appropriate behaviour related to that environment, individuals tend to categorize themselves into groups such as gender, class, age, nationality by looking at who they are similar to and who they are different from. Organizational membership is one such categorization. Their identiﬁcation with each group depends upon the extent to which their self-concept overlaps with the social category and this overlap is different for different groups and it also changes with time and the interplay of other situational and personal factors. At one extreme of the continuum of inclusiveness, individuals will see themselves as similar to all other human beings (as opposed to other species) and all other humans will be included in the group, while at the other extreme of the continuum individual will see themselves as different from all other individuals and nobody will be included in the group category. Organizational identiﬁcation and all other social identiﬁcations fall somewhere between these two extremes of the continuum (Dick et al., 2006). Organizational identiﬁcation is a form of social identiﬁcation in which individuals deﬁne themselves in terms of their membership in the organization (Lee, 2004). At the organizational level also, different categorizations are possible i.e. identiﬁcation with career, workgroup, or with the organization as a whole. Levels of self-categorizations become salient through changes in contextual variables, e.g. ‘through comparison between relevant comparison objects’ (Van Dick et al., 2004a, p. 172). For example, a conﬂict between another group and their own will make the group identity salient to the individual (Dick et al., 2006).

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IMPORTANCE OF ORGANIZATIONAL IDENTIFICATION Organizational identity is important to the study of people’s attitudes and behaviours as it is tied to their self-concept (their own personal identity). The self-concept is an interpretive structure that mediates how people behave and feel in a social context (Gecas, 1982; Markus & Wurf, 1987) and refers to ‘the totality of self-descriptions and self-evaluations subjectively available to an individual’ (Hogg & Abrams, 1988, p. 24). Theories of social identity assert that personal identity or distinctiveness is accentuated through interpersonal contexts (Tajfel & Turner, 1985). People’s self-concepts also get affected by the way others see them or the way they think others see them. Identity, image and construed image are constructs held in organization members’ minds. They are a basis for sense making, interpretations of issues and events and have signiﬁcant affects on individual motivation and behaviour (Dutton & Dukerich, 1991). Organizational identiﬁcation has been shown to have important consequences for the individual and the organization. It has the potential to satisfy individuals’ need for afﬁliation and association (Pratt, 1998, pp. 183–184). People who identify more with their organizations tend to engage in activities that are harmonious with the organizational values and identity (Ashforth & Mael, 1989; Cheney, 1983). A high level of organizational identiﬁcation leads to an intention to stay with the organization, cooperative behaviours and extra-role behaviours, also called organizational citizenship behaviours (Abrams, Ando, & Hinkle, 1998; Mael & Ashforth, 1995; Wan-Huggins, Riorden, & Griffeth, 1998). It has also been shown to moderate the relationship between trust and continuous improvement efforts (Lee, 2004). Since people high in organizational identiﬁcation see their identities and values being congruent with those of the organization, they are willing to exert more efforts on behalf of the organization that advances those values and goals. A continuation and progress in those areas is considered to be a continuation of their own self as they perceive it to be closely tied with their employing organizations. Organizational identiﬁcation has been shown to develop a sense of meaning, belonging, and control at work (Ashforth, 2001). Because of these outcomes, organizational identiﬁcation has been viewed as a positive variable bringing about positive outcomes at the individual, group and organizational levels (Kreiner & Ashforth, 2004). But the question is: Does organization identiﬁcation play the same positive role in mergers which pose a threat to an organization’s identity?

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PRE- AND POST-MERGER IDENTIFICATION Every merger strives for a smooth integration of the merging parties and because of its various positive outcomes, identiﬁcation with the post-merger organization can help achieve this objective. Just like organizational identiﬁcation, post-merger identiﬁcation has been shown to have positive consequences for the organization, the most important being discretionary or organizational citizenship behaviours (e.g. Dick et al., 2006). However, it is not easy to recompose and redirect identiﬁcation after a merger especially when the merger is between two competing organizations as is the case in most, if not all, horizontal mergers (Irrmann, 2002). The role of pre-merger identiﬁcation is, therefore, even more important to look at as most people identify highly with their pre-merger organizations. Even the ones who do not end up being attached to their old identities because of a perceived threat of a loss of identity with the introduction of the merger. The two papers related to identiﬁcation in one of the recent special issues of the British Journal of Management about mergers and acquisitions (Bartels, Douwes, De Jong, & Pruyn, 2006; Dick et al., 2006) and quite a number in other journals (e.g. Lipponen, Olkkonen, & Moilanen, 2004; Van Dick, Wagner, & Lemmer, 2004b) point to the emphasis placed on identiﬁcation in the case of mergers and also to the importance of the construct in explaining issues related to merger success and failure. In almost all these papers, social identity theory forms the basis of the theoretical framework for explaining the relationship between pre-merger identiﬁcation and its consequent variables like post-merger organizational commitment and post-merger identiﬁcation (Bachman, 1993; Terry & Callan, 1998; Van Dick et al., 2004b; Van Leeuwen, Van Knippenberg, & Ellemers, 2003; Van Knippenberg, Van Knippenberg, Moden, & de Lima, 2002).

ROLE OF PRE-MERGER IDENTIFICATION – POSITIVE OR NEGATIVE? Using social identity theory, one may argue that changes like mergers would be seen as a threat to the current group identity and might be met with resistance and/or a decline in identiﬁcation and commitment to the postmerger organization. Especially people who have high levels of pre-merger identiﬁcation would be strongly averse to the idea of forfeiting their current

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identity in favour of a new one. For example, identiﬁcation with one’s group leads to an increase in ingroup favouritism and outgroup discrimination (Tarrant, Hargreaves, & North, 2001). Many studies have shown that the idiosyncratic identiﬁcation of individuals with their social category has a direct inﬂuence on their ingroup favouritism and bias against outgroup (Branscombe, Wann, Noel, & Coleman, 1993; Branscombe, Ellemers, Spears, & Doosje, 1999; Jetten, Spears, & Manstead, 1996; Roccas & Schwartz, 1993). Therefore, in the case of a merger, identiﬁcation with one’s pre-merger organization will lead to an increase in discrimination against members of the other merging party. The reverse effect of this theory has been tested as well. That is, identiﬁcation with the merged organization was found to be negatively associated with ingroup bias within the merged groups (Terry et al., 2001). Because of such evidence, most scholars conclude that identiﬁcation with one’s pre-merger organization would make one susceptible to a high level of bias in favour of one’s own group (i.e. the pre-merger organization) and against another group (the other party to the merger) which would lead to greater difﬁculties in achieving a smooth integration (e.g. Kusstatscher & Cooper, 2005). However, this does not always appear to be the case. Pre-merger identiﬁcation, while expected to be negatively related to post-merger-identiﬁcation, has been found to be positively related to post-merger identiﬁcation (Bachman, 1993; Jetten, O’Brien, & Trindall, 2002; Van Dick et al., 2004b; Van Knippenberg et al., 2002). This positive relationship has been attributed to the partial continuity of pre-merger identity in the post-merger organization that takes the edge off of employees’ negative feelings of being threatened by the merger (Van Knippenberg et al., 2002) and to the existence and relative strength of multiple identiﬁcations (e.g. with workgroup and the organization as a whole) (Jetten et al., 2002). It was argued that if identiﬁcation at the organizational level was stronger than workgroup identiﬁcation it would end up being a positive predictor of post-merger identiﬁcation, as employees usually see mergers as a threat to their work-related settings and structure. The positive relation between pre-merger and post-merger identiﬁcation has also been explained by an argument that pre-merger identiﬁcation is often studied in a post-merger setting and the retrospective framework might have resulted in a loss of information that could have been captured in a pre-merger setting. The new arrangements and experiences, postmerger, could have affected respondents’ interpretation of their pre-merger identiﬁcation (Bartels et al., 2006). However, even the results of these studies

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are inconsistent as Bartels et al. (2006) and Boen, Vanbeselaere, Hollants, and Feys (2005) did not ﬁnd any signiﬁcant relationship between pre- and post-merger identiﬁcation. In some cases, the employees of two merged organizations start identifying more with their teams and workgroups or their group of most interaction rather than the post-merger organization (Hernes, 1997; Kramer, 1991). Despite numerous studies, the role of pre-merger identiﬁcation in explaining and predicting post-merger identiﬁcation, commitment and integration is still obscure and thus calls for further research into what does not appear to be a simple relationship. This chapter takes the stance that an understanding of the relationship between pre-merger identiﬁcation and post-merger identiﬁcation can be achieved by taking into account the relevant mediating variables that fall in the middle of the two – both in terms of causal analysis and time frame. Post-merger identiﬁcation is something that takes place after the merger. There are a number of variables interacting to affect the relationship between the present and the future. It is also important to study pre-merger identiﬁcation in a pre-merger scenario so as to avoid the risk of invalidity associated with collecting data in hindsight after the merger. Of particular interest in the pre-merger stage are variables that can affect the success or failure of the merger through their inﬂuence on behaviours that are of signiﬁcance during the merger process. It is therefore, important to assess employee commitment to merger at this early stage and to see how premerger identiﬁcation is associated with commitment to merger. Finally, commitment itself is not a uni-dimensional construct and the relationship between identiﬁcation and commitment may vary between different aspects of commitment and this is the main focus for the remainder of the chapter.

COMMITMENT – FOCI AND DIMENSIONS There is now a growing body of evidence that suggests commitment is not restricted to the organization only but extends to multiple foci including the organization (most often referred to as global commitment), management, union, work team and profession (Reichers, 1985). It has also been shown that the relationship of antecedents and behavioural outcomes varies across the foci (Becker, 1992; Bishop, Scott, & Burroughs, 2000). However, behaviour in a given context is best predicted by the foci of commitment that have the most proximity and relevance to the behaviour at that particular time and in that particular situation (Becker, 1992; Redman & Snape, 2005). It can be expected that employee behaviour in a merger will be

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guided more by their commitment to the merger rather than their commitment to the organization. Commitment has multiple dimensions and it has been demonstrated time and again that the different dimensions, while existing simultaneously, exhibit different relations with different concepts. Allen and Meyer (1990) explained it as ‘‘a force (mind set) that binds an individual to a course of action of relevance to one or more targets’’ (p. 475) and this force or mind set can have different forms such as affective, continuance and normative commitment. More speciﬁcally they deﬁned commitment to change as ‘‘a force (mind-set) that binds an individual to a course of action deemed necessary for the successful implementation of a change initiative.’’ Extending this idea and treating merger as a strategic change, commitment to merger can be deﬁned as: A force (mind-set) that binds an individual to a course of action deemed necessary for the success of the merger. This multi-dimensional construct is made up of: a. Affective Commitment: the desire to provide support for the merger, i.e. the ‘want to’ element of commitment to merger. b. Continuance Commitment: a realization of the costs associated with failure to support the merger, i.e. the ‘have to’ element of commitment to merger. c. Normative Commitment: a sense of perceived obligation to the success of the merger, i.e. the ‘ought to’ element of commitment to merger.

PRE-MERGER IDENTIFICATION AND COMMITMENT TO MERGER Prior research shows that members of an organization who perceive their self-concepts to be strongly tied to the organizational identity are more willing to exert efforts that perpetuate the goals of the organization and engage in behaviours that the organization expect of them to perform (Ahearne, Gruen, & Battacharya, 2005; Siegel & Sisaye, 1997). Identiﬁcation has also been shown to be positively linked with discretionary or organizational citizenship behaviours (Ahearne et al., 2005; Dukerich et al., 2002). Such behaviour is reasonable to expect as in most situations the behaviour most likely to occur is that which is perceived to enhance or maintain the individual’s self-concept (Rogers, 1961), which in the case of identiﬁcation is strongly tied to the organization’s identity. Strongly identiﬁed members are also more likely to accept changes in organizational

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programmes and support those changes (Siegel & Sisaye, 1997). Also, organizational identiﬁcation is shown to have a positive relation with organizational commitment (e.g. Bergami & Bagozzi, 2000; Siegel & Sisaye, 1997). It has also been shown in some studies that commitment (especially affective commitment) mediates the relationship between organizational identiﬁcation and the consequent variables like organization-citizenship behaviour (e.g. Bergami & Bagozzi, 2000). However, the focus of this chapter is commitment to merger rather than organizational commitment and the difference in the foci is expected to result in a different relationship between pre-merger identiﬁcation and commitment to merger than the relationship between organizational identiﬁcation and organizational commitment, which is largely positive. Dutton et al. (1994) quote Albert and Whetten (1985) in theorizing that a collective organizational identity often comes to the surface when members feel a threat to their collective identity. And it has been widely proposed that mergers pose a threat to organizational identity causing members of an organization to develop a feeling of loss (Buono & Bowditch, 1989; Cartwright & Cooper, 1996). Members who strongly identify with their pre-merger organization are going to feel this more, because a larger part of their self-concept is tied to their membership in the organization and they would be resistant to any changes that threaten the identity of this organization. Not only that, according to the social identity theory, ingroup favouritism and outgroup bias increase as a result of identiﬁcation with one’s group. Terry et al. (2001) found out that ‘‘the strength of group identiﬁcation is the critical mediating variable when explaining group behaviour, including group bias.’’ (p. 278). It has also been linked with increased rivalry and derogation of competitors (Dutton et al., 1994). Though organizational identiﬁcation is shown to have a positive relation with organizational commitment (e.g. Bergami & Bagozzi, 2000; Siegel & Sisaye, 1997), identiﬁcation with one’s present (or old) organization is believed to have negative affects on people’s involvement in case of a merger and is also shown to be negatively related to the integration process in mergers (Zaheer, Shomaker, & Genc, 2003). According to the selfcategorization theory, members seek to accentuate their distinctiveness and a strong sense of identiﬁcation with one’s group increases competition among non-members, as members of a group see themselves as similar and perceive themselves to be distinct from others (Dutton et al., 1994). According to the rationale of the self-categorization theory, it is logical to assert that a strong identiﬁcation with one’s present organization will increase the perceptual gap between the identity of one’s own organization

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PRE-MERGER IDENTIFICATION

+ve

+ve -ve or 0

NORMATIVE COMMITMENT

CONTINUANCE COMMITMENT

AFFECTIVE COMMITMENT

Fig. 1. Pre-Merger Identiﬁcation and Commitment to Merger.

and the image of the other merging entity thereby leading to more of the ‘us’ and ‘them’ feelings which will result in a lack of commitment to merger. However, commitment is composed of three distinct components, i.e. affective, normative and continuance commitment, and the relationship of pre-merger identiﬁcation with each of these would be different as they are based on different motivational processes (Fig. 1).

PRE-MERGER IDENTIFICATION AND NORMATIVE COMMITMENT Because of the insertion of the group membership in the individual’s selfconcept, the individual to some extent at least, will subscribe to the same

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values as those of the group. Thus, an individual who identiﬁes highly with his/her organization will frown upon breaking group norms (organization’s norms) as it would be almost the same as breaking his/her own (Dick et al., 2006). This is a similar process as considering the group successes as one’s own. Highly identiﬁed individuals will feel obligated to perpetuate the goals of the organization since they are considered to be the same as working towards their own. Therefore, it is expected that even in the case of changes being introduced by the organization such as mergers, highly identiﬁed individuals will support them. It is important to note here that this support will be based on their sense of obligation to the organization rather than their desire to do so. A similar line of reasoning follows from the theoretical argument that people, who perceive the post-merger identity to be a continuation of their pre-merger identity, identify more with the post-merger organization (Van Knippenberg et al., 2002). Hence those who identify more with the organization will see more of an overlap between their self-concept and the organizational identity with the result that if they see the merger as a continuation of the current organizational identity, they would be more likely to perceive it to be a continuation of their own identity. This will result in more support for the merger based on the feeling that they should support it because it perpetuates and extends the present identity. Identiﬁcation with one’s group is also perceived to be a source of fulﬁlment of some individual needs. For example, individuals identify with groups because they have a need for afﬁliation, and security and group membership and identiﬁcation meet such important personal needs (Pratt, 1998). Fulﬁlment of needs is a beneﬁt being received by individuals from their organization and most often people reciprocate in a similar manner in transactional situations even if the transaction relates to intangible beneﬁts (Ostrom & Walker, 2003). Looking at it from an exchange perspective (Blau, 1964) and using the principle of reciprocity, organizational members who identify more with their organization will perceive their afﬁliation and security needs being met by the organization and will be more likely to reciprocate the organization positively by supporting it in various ways. This support will be extended to a merger of their organization with another that requires efforts on their part to make it a success. This feeling of reciprocity, again, is based more on a sense of moral obligation rather than a ‘desire’ to return the beneﬁts. It is, therefore, proposed that: Pre-merger identiﬁcation would be positively related to normative commitment to merger.

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PRE-MERGER IDENTIFICATION AND CONTINUANCE COMMITMENT Continuance commitment is based on a feeling of being tied and locked in the organization either as a result of lack of alternatives or a perception of loss of investments already made in the organization (Fullerton, 2005). In most merger cases, there are threats to the loss of such investments that are a result of layoffs of employees who have spent a long period of time in the organization or have formed relationships. From a dependence perspective in channel relationships, where dependence is conceptualized to include motivational investment in the relationship (Anderson & Weitz, 1992), highly identiﬁed members of the pre-merger organization would perceive their identiﬁcation as an emotional investment in the organization. And like any other investment, it will make them feel tied to the organization. In the event of a change that calls for drastic modiﬁcations in the present situation, structure and culture, high identiﬁers would experience a fear of loss of those investments if they discontinued the present relationship and would be more likely to perceive the necessity of supporting the merger as they have ‘created mutual exit barriers’ (Anderson & Weitz, 1992; Geyskens, Steenkamp, Scheer, & Kumar, 1996, p. 306). This interpretative process and the resulting commitment will occur even in the absence of any material/tangible costs associated with non-committance. The arguments lead to the hypothesis that: Pre-merger identiﬁcation would be positively related to continuance commitment to merger.

PRE-MERGER IDENTIFICATION AND AFFECTIVE COMMITMENT Affective commitment, on the other hand, is based on involvement, emotional attachment and a desire to support a certain course of action. Strong identiﬁcation with one’s organization has been shown to be positively related to organizational commitment (Bergami & Bagozzi, 2000; Mael & Ashforth, 1992). However, when merger is the focus of such commitment, individuals who strongly identify with their pre-merger organizations are more likely to increase in their attachment with the premerger entity and would show less of a desire to support the merger that threatens the basis of their prior identiﬁcation. High identiﬁers have been

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shown to have more of a bias in favour of their group and against an outgroup (Branscombe et al., 1993, 1999; Jetten et al., 1996; Roccas & Schwartz, 1993). High identiﬁers in case of a merger are more likely to engage in ‘us’ and ‘them’ feelings and consequently lower their commitment to merger (Kusstatscher & Cooper, 2005). However, some prior studies have contradicted this theory by showing empirical results that a high level of initial identiﬁcation leads to long-term commitment to the organization (Jetten et al., 2002). As discussed earlier, even when applied to a merger situation, some studies show that pre-merger identiﬁcation is a positive predictor of identiﬁcation with the post-merger organization where post-merger identiﬁcation in some cases was taken to be similar to post-merger commitment (e.g. Bachman, 1993; Van Dick et al., 2004b; Van Knippenberg et al., 2002). In addition to these two conﬂicting views and ﬁndings, there exist some studies which further complicate matters by asserting that pre- and post-merger identiﬁcation are unrelated (e.g. Boen et al., 2005; Bartels et al., 2006). In the light of the above discussion, it is hypothesized that: Pre-merger identiﬁcation would either be negatively related or unrelated to affective commitment to merger.

CONCLUSION Organizational identiﬁcation has been linked with positive organization and work related outcomes such as organization citizenship behaviour (e.g. Tyler & Blader, 2000), support for organization (e.g. Mael & Ashforth, 1992) and low turnover (e.g. Abrams & Randsley de Moura, 2001). It has also been shown in some studies that commitment (especially affective commitment) mediates the relationship between organizational identiﬁcation and these consequent variables like organization citizenship behaviour (e.g. Bergami & Bagozzi, 2000). However in the case of a merger the effect of organizational identiﬁcation on these consequent variables has a different look. The model developed in this chapter points to a key issue that pre-merger identiﬁcation, contrary to earlier theory that it has a negative inﬂuence on most variables, will have some positive bearings in a merger setting. It should be looked at with a renewed perspective and considered an important variable in explaining and predicting some of the major variables that are of utmost importance in determining employee behaviour in mergers and consequently the success or failure of mergers.

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Terry, D. J., & Callan, V. J. (1998). In-group bias in response to an organizational merger. Group Dynamics: Theory, Research, Practice, 2(1), 67–81. Terry, D. J., Carey, C. J., & Callan, V. J. (2001). Employee adjustment to an organizational merger: An intergroup perspective. Personality and Social Psychology Bulletin, 27(3), 267–280. Tyler, T. R., & Blader, S. L. (2000). Cooperation in groups. Philadelphia: Psychology Press. Van Dick, R., Christ, O., Stellmacher, J., Wagner, U., Ahlswede, O., Grubba, C., Hauptmeier, M., Ho¨hfeld, C., Moltzen, K., & Tissington, P. A. (2004a). Should I stay or should I go? Explaining turnover intentions with organizational identiﬁcation and job satisfaction. British Journal of Management, 15(4), 351–361. Van Dick, R., Wagner, U., & Lemmer, G. (2004b). Research note: The winds of change – Multiple identiﬁcations in the case of organizational mergers. European Journal of Work and Organizational Psychology, 13(2), 121–138. Van Knippenberg, D., Van Knippenberg, B., Moden, L., & De Lima, F. (2002). Organizational identiﬁcation after a merger: A social identity perspective. British Journal of Social Psychology, 41(2), 233–252. Van Leeuwen, E., Van Knippenberg, D., & Ellemers, N. (2003). Continuing and changing group identities: The effects of merging on social identiﬁcation and in group bias. Personality and Social Psychology Bulletin, 29(5), 679–690. Wan-Huggins, V. N., Riordan, C. M., & Griffeth, R. W. (1998). The development and longitudinal test of a model of organizational identiﬁcation. Journal of Applied Social Psychology, 28(8), 724–749. Zaheer, S., Schomaker, M., & Genc, M. (2003). Identity versus culture in the merger of equals. European Management Journal, 21(2), 185–191.

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A COMPARATIVE OVERVIEW OF THE IMPACT OF CULTURAL DIVERSITY ON INTER-ORGANISATIONAL ENCOUNTERS Satu Teerikangas ABSTRACT Different forms of inter-organisational encounters, including joint ventures, alliances, mergers and acquisitions, have over the last decades become fashionable and much-sought means of globalisation. A continuous concern shared by managers involved in these different forms of inter-organisational encounters is the challenge of making them work in practice – their successful implementation and management. The cultural dimensions of these different kinds of inter-organisational encounters, particularly in cross-border contexts, have been deplored as being particularly difficult. This paper builds on prior research and aims to understand how the cultural dimensions of inter-organisational encounters have been approached by researchers on mergers and acquisitions on the one hand and researchers on alliances and joint ventures on the other hand. Based on a comparative literature review, the findings suggest that the two fields, despite their valuable contributions and the similarities in the phenomena they study, have remained surprisingly isolated from one another and would offer opportunities for cross-fertilisation. Through its theoretical contribution, the paper intends to offer insights to researchers in both streams of research. Advances in Mergers and Acquisitions, Volume 6, 37–75 Copyright r 2007 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 1479-361X/doi:10.1016/S1479-361X(07)06003-6

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INTRODUCTION During the last decades characterised by intensifying globalisation, the signiﬁcance of inter-organisational encounters has not ceased to increase. Strategic alliances, joint ventures (JV) as well as mergers and acquisitions (M&A) are examples of such inter-organisational encounters. They provide their owners with the opportunity of repositioning themselves in an increasingly complex competitive landscape by joining forces with another ﬁrm, and as such offer valuable opportunities in the context of companies’ competitive strategies. Setting aside the often euphoric feelings accompanying the announcement of such deals, most press releases fail to reveal the less encouraging truth: regardless of whether measured by research or consultant reports, typically at least half of these ventures do not end up reporting success. Research into the challenges of inter-organisational encounters has shown that as much as the early phases of partner selection and negotiation show signs of challenges, the post-contract implementation process seems to be even more difﬁcult. Given the international context of today’s inter-organisational transactions, an additional dimension of challenge stems from the cultural diversity of the partners engaged in the venture. This paper aims to address this issue from a theoretical perspective. In this paper, we will look at research on cultural diversity in the contexts of domestic and cross-border inter-organisational encounters. Throughout the paper, the notion of ‘cultural diversity’ is used to emphasise the fact that there is a myriad of different cultures surfacing throughout the inter-organisational encounter process, including but not limited to national, regional, organisational, subsidiary, professional, departmental, or team-speciﬁc cultures. The paper has two objectives. First, to understand which aspects of cultural diversity have thus far been studied in the context of inter-organisational encounters. Second, to ﬁnd out whether opportunities for cross-fertilisation of ﬁndings would exist between these research streams and to what extent these opportunities have been utilised. The paper begins by deﬁning the notion of ‘inter-organisational encounters’. Next, an overview of research on inter-organisational encounters is brieﬂy presented. Third and foremost, the way culture and cultural diversity have been studied in research on inter-organisational encounters is looked at from the perspectives of: (1) the way that cultural diversity has been deﬁned and studied, (2) ﬁndings on the relationship between culture and the performance of inter-organisational encounters, (3) the impact of culture on inter-organisational encounters, and (4) the management of cultural differences throughout the inter-organisational encounter process. For each

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of these themes, extant research is reviewed from the viewpoint of ﬁrst mergers and acquisitions, then alliances and joint ventures. Conclusions and ideas for cross-fertilisation of research end the paper.

INTER-ORGANISATIONAL ENCOUNTERS: DEFINITIONS In their seminal theoretical overview, Borys and Jemison (1989) introduced the term ‘hybrid’ to deﬁne ‘organisational arrangements that use resources and/or governance structures from more than one existing organisation’ (p. 235). In this respect, various forms of strategic alliances between organisations including mergers, acquisitions, joint ventures, alliances, partnerships, contracting agreements could be regarded as examples of hybrids. Since this article launching an integrative perspective to the study of hybrids and calling for cross-fertilisation of research ﬁndings across different research streams, the scientiﬁc community has remained silent. In essence, as the ﬁndings of this paper will point out, each form of hybrid has largely been studied separately from one another. Only more recently have calls been made for a need to compare different hybrid forms (Yan & Zeng, 1999) and a need to consolidate current thinking on hybrids (Beamish & Killing, 1996). This paper aims to answer these calls by focusing speciﬁcally on mergers, acquisitions, joint ventures and alliances as forms of hybrids, thereby leaving out, e.g. partnerships or contracting agreements. Given the limited scope of this paper, to distinguish between Borys and Jemison’s (1989) deﬁnition, we deﬁne ‘inter-organisational encounters’ as organisational phenomena wherein two organisations, or parts of them, are combined under a joint identity, legal entity, and governance structure. In doing so, we conceive of mergers and acquisitions, joint ventures and corporate alliances as different forms of ‘inter-organisational encounters’. Fig. 1 presents an overview of the differences between these forms of interorganisational encounters. As managerial and organisational phenomena, these forms of inter-organisational encounters are distinct from one another and are used for different purposes. More speciﬁcally, mergers and acquisitions represent the similarity of two organisations merging to a greater or lesser degree following the closing of the deal. As deﬁnitions of mergers and acquisitions abound, it ultimately remains difﬁcult to set a clearcut distinction between the two phenomena (Parvinen, 2003). For the sake of clarity, in this paper, mergers will be invoked to represent the situation wherein two previously separate organisations, of roughly equal size, are

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SATU TEERIKANGAS The merger process 2 companies prior to a merger

The acquisition process

Merged companies following an integration process

2 companies prior to an acquisition

Merged companies following an integration process

The joint venture process

The alliance process

2 partner companies prior to a joint venture

2 companies prior to an alliance

The resulting joint venture company

Companies working in partnership in an alliance

Fig. 1. An Overview of Conceptual Differences Between Mergers and Acquisitions, Alliances, and Joint Ventures as Different Forms of Inter-Organisational Encounters.

formed to join either a new legal entity or a new organisational identity. In essence, two organisations are merged into one (Marchildon, 1991; Vaara, 2000). Acquisitions, in contrast, will be regarded as instances that involve the buying of one company (or part of a company) by another company. Following the deal, the ‘buying ﬁrm’ begins to operate the newly acquired company as part of its operations, deciding, depending on the situation at hand, whether it wishes to integrate the acquired ﬁrm fully, partly, or to some degree into its operations. This choice typically depends on the selected integration approach (Haspeslagh & Jemison, 1991). Thus, we note that in the case of acquisitions where the aim is the full integration of the acquired ﬁrm into the buying ﬁrm’s operations, mergers and acquisitions can be regarded as portraying processual and managerial similarities and challenges. The picture gets messier when one adds joint ventures and alliances to it. Indeed, looking at joint ventures and alliances from a deﬁnitional perspective, we are met with a similar degree of confusion, coupled with confusion as to how they relate to vs. differ from mergers and acquisitions. Indeed, practitioners typically mix these forms of inter-organisational encounters with one another. For example, the recent merger of Nokia and Siemens Networks was titled a ‘joint venture’, though a more thorough reading of the press releases pointed to a ‘merger’. The joint venture and alliances processes share the similarity of two companies cooperating in the context of another independent ﬁrm owned by both (in the case of joint ventures), or in the context of a contract of cooperation on a speciﬁc area of interest, such as R&D (in the case of alliances) (Newbury & Zeira, 1997).

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Despite these deﬁnitional inconsistencies, overlaps, and misuses, the scientiﬁc discourse tends to group the above kinds of inter-organisational encounters roughly into (1) the merger and acquisition vs. (2) the joint venture and alliances research streams. As all of them, from a cultural perspective, represent the challenges of organisation culture clashes in domestic encounters and both organisation and national culture clashes in cross-border settings, in this paper, the focus will be on comparing how (1) the merger and acquisition vs. (2) the joint venture and alliances literature have approached the topic of cultural diversity and its management.

OVERVIEW OF RESEARCH ON INTERORGANISATIONAL ENCOUNTERS In the following, a succinct overview of research on (1) mergers and acquisitions and (2) joint ventures and alliances, will be provided to the reader as a background against which to assess how the study of cultural diversity maps onto the overall research agenda in both streams of research. Mergers and acquisitions have been studied from several perspectives. The economics perspective has looked at the ﬁnancial side of mergers and acquisitions. These studies have at length analysed the ﬁnancial logic and performance of mergers and acquisitions (Jensen & Ruback, 1983; Lubatkin, 1983; Ravenscraft & Scherer, 1989). The strategy perspective has studied the performance impact of mergers and acquisitions on the ﬁrms involved (Datta, Pinches, & Narayanan, 1992; King, Dalton, Daily, & Covin, 2004). This school has gradually shifted towards integration-related topics and has looked at the best ways of managing the integration process (Mace & Montgomery, 1962; Jemison & Sitkin, 1986; Shristava, 1986; Haspeslagh & Jemison, 1991; Greenwood, Hinings, & Brown, 1994). The human resource perspective has viewed the acquisition process from the employees’ and managers’ viewpoint (Marks, 1982; Buono & Bowditch, 1989; Napier, 1989), whilst the cultural perspective has aimed to understand the role and management of cultural differences during M&A (Sales & Mirvis, 1984; Nahavandi & Malekzadeh, 1988; Cartwright & Cooper, 1992; Morosini, 1998; Child, Faulkner, & Pitkethly 2001). This paper focuses on ﬁndings from this latter stream of research. As regards research on alliances and joint ventures, a wealth of interest has centred on joint venture formation, whether from the perspective of motives (e.g. Hennart, 1988; Kogut, 1988), conditions supportive of joint venture

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formation (Madhok, 1997), or partner selection (Parkhe, 1991). Joint ventures and alliances retain high failure rates (Harrigan, 1988; Kogut, 1989; Inkpen & Beamish, 1997; Reuer, Zollo, & Singh, 2002; Luo & Park, 2004; Mohr, 2006). Research has pointed to implementation as being a key area of challenge, especially in international joint ventures (Buckley & Casson, 1988; Barkema & Vermeulen, 1997; Park & Ungson, 1997; Steensma & Lyles, 2000). Traditionally, when studying joint venture implementation, researchers were interested in control and governance-related issues (Hennart, 1989; Inkpen & Beamish, 1997; Kumar & Seth, 1998), with a greater focus on joint venture aims and outcomes rather than the process of reaching the outcome (Gulati, 1998). It has thus been deplored that the management of joint ventures has received too scant research attention (Barkema, Shenkar, Vermeulen, & Bell, 1997; Kumar & Seth, 1998). As an answer to this call, a more recent stream has focused on the ‘how’ of operating the venture (Barkema et al., 1997; Danis & Parkhe, 2002; Brouthers & Bamossy, 2006). Therein, the role of trust and conﬂict in ensuring the success of the joint venture (Park & Ungson, 1997) and the social (Madhok, 1995) and knowledge (Lam, 1997) processes taking place in the joint venture have been addressed. As regards alliances, the recent works of Simonin (2004) on alliances as knowledge transfer and learning processes and Reuer et al. (2002) on post-formation dynamics in strategic alliances have begun to shed light onto a process perspective to alliances. However, authors continue to deplore that the ﬁeld remains fragmented, each researcher focusing on one speciﬁc aspect of venture management. No one guiding overview of the joint venture or alliance process is available (Parkhe, 1991), as is for acquisitions (Haspeslagh & Jemison, 1991). In parallel to the managerial stream, cultural problems in both joint ventures and alliances have been raised (e.g. Brown, Rugman, & Verbeke, 1989; Lane & Beamish, 1990; Shenkar & Zeira, 1992; Barkema & Vermeulen, 1997; Brouthers & Bamossy, 2006). In sum, the above research review shows that despite being forms of interorganisational encounters and thus sharing organisational and managerial similarities, research on the topics of mergers and acquisitions on the other hand and alliances and joint ventures on the other have adopted differing and largely separate avenues. This might be explained by the fact that mergers and acquisitions represent an increase in a ﬁrm’s full ownership and require some degree of organisational integration, whereas in joint ventures and alliances, organisational integration and inter-ﬁrm cooperation take on a different form (Newbury & Zeira, 1997). Whilst both streams have awoken to the need to understand the managerial challenges involved in the inter-organisational encounter in question, based on the above review it

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would seem that this awakening took place at least a decade earlier in the merger and acquisition literature, in the 1980s, as compared to the joint venture literature, where the importance of a process and management perspective have arisen only increasingly over the recent years.

KEY THEMES IN CULTURE-RELATED LITERATURE ON INTER-ORGANISATIONAL ENCOUNTERS In the following, the focus will shift to understanding how culture has been studied in research on mergers and acquisitions on the one hand and alliances and joint ventures on the other. The overview is structured according to the following themes: (1) What culture is present in inter-organisational encounters? (2) The culture–performance debate; (3) The presence and impact mechanisms of organisational and national cultures in times of interorganisational encounters; (4) The management of cultural differences throughout the inter-organisational encounter process. What Cultures are Present in Inter-Organisational Encounters? Whilst the concept of culture entered management sciences and particularly research on inter-organisational encounters in the mid-1980s (see reviews in e.g. Hatch, 1997; Vaara, 1999; Parker, 2000; Alvesson, 2002), from a historical perspective it remains important to highlight that when dealing with the notion of ‘culture’, as management researchers we are dealing with a concept that we have largely inherited and borrowed from our fellow social scientists, more speciﬁcally from colleagues in the ﬁelds of anthropology, sociology, social psychology, psychology, cross-cultural psychology who have each studied culture from a different angle and theoretical or methodological perspective. In other words, we are not dealing with either a neutral or content-void concept, but rather a concept that not only is of central signiﬁcance across various disciplines of social sciences but also a concept that time has shown has proven to be particularly difﬁcult to deﬁne, hence a concept of which a myriad of competing and contrasting theoretical perspectives exist, a concept largely at the core of many philosophical and scientiﬁc debates, a concept that lends itself to various research methods depending on the discipline in question. In essence, we are dealing with a strongly ‘loaded’ concept. Having set this broad context, how has literature on inter-organisational encounters studied culture? Beginning with literature on mergers and

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acquisitions, the term ‘culture’ is, depending on the study, article, or book in question, deﬁned in various ways and given differing connotations (see also Stahl & Voigt, 2005; Teerikangas & Ve´ry, 2006). In the earliest works on culture in mergers and acquisitions, culture de facto referred to organisational culture (e.g. Marks, 1982; Buono, Bowditch, & Lewis, 1985; Nahavandi & Malekzadeh, 1988; Buono & Bowditch, 1989; Datta, 1991; Chatterjee, Lubatkin, Schweiger, & Weber, 1992). These studies concerned domestic mergers in a predominantly US context (Cartwright, 1998). Since the early 1990s, with the increase in the numbers of cross-border acquisitions and the awakening of European researchers, increasingly also national culture has been the focus of study either alone (e.g. Morosini, 1998; Angwin, 2000; Child et al., 2001; Cartwright & Price, 2003) or combined with the study of organisational culture (e.g. Weber, Shenkar, & Raveh, 1996; Ve´ry, Lubatkin, & Calori, 1996; Larsson & Risberg, 1998; Quah & Young, 2005). Apart from the work of David and Singh (1994) on cultural risk that included professional culture, research on mergers and acquisitions has by and large considered either organisational, national, or a mix of both cultures to be the cultural challenge in mergers and acquisitions. Thus, the issue of subcultures within organisations (Vaara, 1999) has largely been omitted, not to mention industrial, functional, or occupational cultures (Teerikangas & Ve´ry, 2006). In sum, despite the possible variety of cultures present in the context of mergers and acquisitions, extant literature has addressed only the most ﬂagrant examples of these, i.e. organisational and national cultures, largely omitting others. What is more, it can be argued that the ﬁeld remains somewhat confused as to what aspects of culture belong to the domains of national, organisational, or other cultures, respectively (Teerikangas & Ve´ry, 2006). In other words, what are the deﬁnitional boundaries of cultural diversity and the relationships between different levels of culture? For example, Olie (1990) argues that national culture forms the core of culture, whereas the practicelayer of culture is formed by organisational culture. Similarly, Calori, Lubatkin, and Ve´ry (1994) suggest that each ﬁrm is embedded in its national culture, which inﬂuences the control mechanisms, both formal and informal, used by a ﬁrm. Taking these considerations a step further, it would seem that unlocking the relationships between various cultures would potentially provide a key to understanding many present mysteries regarding the cultural challenges in mergers and acquisitions. These insights receive further proof when looking at the referencing used in the study of culture in research on mergers and acquisitions. References to the concept of ‘culture’ vary from literature in mergers and acquisitions to

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practitioner or scientiﬁc literature on organisational and national cultures, whilst only some further look at the way culture has been studied in the other, more established ﬁelds of social sciences. There seem to be relatively few attempts at keeping apace even with research on organisational culture in management research, and most research is further content with deﬁning national cultural differences along Hofstede’s dimensions (e.g. Calori et al., 1994; Morosini & Singh, 1994; Ve´ry et al., 1996; Weber et al., 1996; Lubatkin, Calori, Ve´ry, & Veiga, 1998; Angwin, 2000). In essence, it can be argued that researchers in the ﬁeld of mergers and acquisitions, when discussing and studying culture, remain conﬁned to a somewhat limited view of the concept itself given that inferences to its historical and current scientiﬁc foremothers – and fathers – remain scant. In literature on alliances and joint ventures, we ﬁnd some early confusion as to the usage of the term culture, which at present seems to be melting away, giving way to more robust deﬁnitions. In the earlier papers, terms such as ‘culture’, ‘cultural distance’, ‘country of origin’, or ‘organisational form’ were used, but one had to read through a paper to properly deﬁne what the implied deﬁnition of culture referred to. Indeed, in many of the early studies referred to in this paper, there is no deﬁnition of culture. Rather, culture was implied and used as a measurement variable to understand behaviour in cross-border alliances and joint ventures. Interestingly, some of these cases pertain to situations where at start a reader does not know what culture the paper will dwell on. A closer look reveals that a vast majority of the earliest studies on joint ventures and alliances actually refer to national culture (e.g. Pan, 1997; Park & Ungson, 1997; Worris et al., 1998). An increasing trend is the study of both national and organisational cultures (Brown et al., 1989; Cyr & Schneider, 1996; Lam, 1997; Fey & Beamish, 2001; Pothukuchi, Damanpour, Choi, Chen, & Park, 2002), and more recently the notion of professional culture has been added into the picture as well (Sirmon & Lane, 2004; Mohr & Puck, 2005). In parallel, researchers on joint ventures and alliances have increasingly become aware of the complexity of culture, thus multi-level deﬁnitions of culture are emerging. For example, Parkhe (1991) focused speciﬁcally on delineating dimensions of inter-ﬁrm diversity: he distinguishes between societal culture (implied national culture), national context (implying a country’s institutional environment), corporate culture, strategic directions of the ﬁrm, and the ﬁrm’s prevailing management practices. Salk and Brannen (2000) argue that culture is a more complex phenomenon than is given to understand and should be approached with caution. Fey and Beamish (2001) focus on organisational climate instead of organisational culture,

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thereby claiming the importance of delimitating between the concepts of organisational culture, national culture, and organisational climate. Recently, in their conceptual paper, Sirmon and Lane (2004) argued that national, organisational, and professional cultures would need to be accounted for during international alliances, further claiming that national cultures increase the inﬂuence of the partners’ differences in organisational and professional cultures. Mohr and Puck (2005) studied ‘functional diversity’ between partners involved in international joint ventures, deﬁning ‘functional diversity’ as differences in the partner companies’ preferred approaches to managing joint venture functions, e.g. ﬁnance, production, or R&D. In sum, it would seem that research on alliances and joint ventures, after an initial confusion regarding the concept of culture, has moved to a greater level of detail in the ways that culture is deﬁned and the relationships between different kinds and levels of culture than has research on mergers and acquisitions. As with literature on mergers and acquisitions, researchers on alliances and joint ventures have intuitively followed a similar trend in the way that culture has been referenced to. First, most studies refer back to other authors on culture within the ﬁeld of joint venture and alliances or to their colleagues studying mergers and acquisitions. Second, some studies refer further to scientiﬁc research on organisational culture. As regards national culture, most studies either use Hofstede’s dimensions (1980), delimitate the cross-border factor not through culture but through a domestic vs. crossborder comparison, or use the cultural distance index (Kogut & Singh 1988) borrowed from the international business literature. Interestingly, as with research in mergers and acquisitions, there remains scant attention to the deeper founding theories in social sciences on culture. These ﬁndings would seem to suggest that there is lack of a mutual understanding in the ﬁeld of inter-organisational research as to what culture is, what cultural diversity is, and what the cultural challenge in interorganisational encounters is. Given that culture is a word ‘known’ by all, it seems to easily lend itself to misuse without a proper deﬁnition. Indeed, the two streams seem to share similarities whilst in parallel being contrasted by differences in the way that they have deﬁned the word ‘culture’. Whilst research on mergers and acquisitions began with organisational culture, thereafter moving towards national culture, the opposite has taken place with alliances and joint ventures, where national culture was the predominant culture under study for long. Over the years, especially towards the end of the 1990s, both streams have begun to voice concerns as to the need to study the parallel effects of organisational and national cultures in inter-organisational encounters. In the alliances and joint venture stream this

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discussion seems to be further along both as regards the kinds of cultures discussed and the depth of the discussion than in research on mergers and acquisitions, where the debate remains restricted to relationships between organisational and national cultures. Whilst we saw that the concept of culture is particularly loaded in the ﬁelds of social sciences, we note, in contrast, how surprisingly superﬁcial a treatment the term has received by researchers in inter-organisational encounters. Indeed, both streams seem to be caught in an apparent lack of a deeper, historical view to culture rooted in social sciences. The fact that both streams tend to focus mainly on the last decades of research on culture in management sciences narrows down the reality behind the term culture and its multiple possible uses. Moreover, research in inter-organisational encounters does not seem to systematically keep up with developments in management research on either cross-cultural management or organisational culture. This is interesting of itself, given that inter-organisational encounters could be imagined to provide wonderful scenes to the study of cultural interactions in practice and hence provide arenas to the furthering of our theoretical understanding of culture. A reason for this apparent theoretical weakness towards the study of culture could stem from the fact that researchers on M&A, joint ventures and alliances study an applied topic in management science. Hence, they are confronted not only with a need to understand that topic, i.e. the organisational phenomenon they are interested in, but also all the related disciplines across various social sciences that could help in explaining this phenomenon. This overload of feasible sources of literature combined wih the complexity of the researched topic itself together could explain this apparent theoretical weakness towards the study of culture. To conclude, it seems that research on culture in the ﬁeld of interorganisational encounters could improve not only through meticulous efforts to use better-argued, grounded and referenced deﬁnitions of culture, but also by ensuring cross-fertilisation of learnings across disciplines. By doing so, over the years, an improved understanding of cultural diversity, in all its forms, can emerge.

The Culture–Performance Relationship In this section, we will focus on how research in mergers and acquisitions on the one hand and joint ventures and alliances on the other hand has studied the performance impact of cultural differences on inter-organisational encounters.

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Starting off with mergers and acquisitions, several studies have tried to assess whether and how culture impacts merger and acquisition performance. As with other studies of culture in the context of mergers and acquisitions, culture is at times taken as organisational, at times as national, at times as the intersection of both of the previous. These studies tend to be quantitative in nature, studying national or cross-border samples depending on the scope of the study. Initially, the focus was on the effect of organisational culture on the performance of domestic deals. Thus, based on a study on the impact of organisational ﬁt on post-acquisition performance, Datta (1991) found that organisational ﬁt should be evaluated together with the ﬁnancial evaluation of the deal. Organisational ﬁt was deﬁned as the differing management styles, reward and evaluation systems between the acquired and acquiring ﬁrms. He found that management styles were especially prone to causing difﬁculties in all types of acquisitions. Weber (1996) looked at the role of corporate cultural ﬁt, autonomy removal, and commitment of managers and the performance of mergers across different US industries. He tried to link culture and other human-related aspects to better understand merger performance. The ﬁndings showed that related mergers can be ﬁnancially successful despite cultural differences, possibly owing to the higher synergy potential that they represent. However, differences in organisational cultures can have destructive effects as well. Parallel to the rise of cross-border mergers and acquisitions, research shifted to the study of the international dimensions of merger and acquisition performance, thereby addressing the simultaneous impact of national and organisational cultures on performance. For example, David and Singh (1994) looked at the sources of cultural risk in mergers and acquisitions. They deﬁned cultural risk as the combination of environmental, interorganisational, organisational, and operational cultural risk. The culture distance between the two companies is deﬁned as differences in the national, professional, and organisational cultures involved in the deal. They conclude that there is always a cultural distance involved in mergers and acquisitions. Cultural risk is not static, but appears when there is a need to integrate the two companies, depends on the divisions that need to be integrated and the extent of integration required, and on the cultural risk inherent in the operations of the acquired ﬁrm prior to the deal. Further, acquisition cultural risk was found to vary according to the post-acquisition approach taken by the acquiring ﬁrm. In the works of Ve´ry et al. (1996) and Ve´ry, Lubatkin, Calori, and Veiga (1997), the complexity of the national vs. organisational culture debate

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becomes apparent. Both studies ﬁnd that domestic mergers might ultimately be more difﬁcult than cross-border ones. Initially, Ve´ry et al. (1996) looked at acculturative stress occurring in domestic and cross-border mergers and its impact on performance. They found acculturative stress to be a complex phenomenon, sometimes inﬂuenced by national culture, but not necessarily in the expected direction. Depending on the dimensions of acculturative stress and the home countries of the participating companies, acculturative stress would occur either in an attractive or a repulsive direction. National culture was found to inﬂuence the post-merger performance of the studied ﬁrms, but this inﬂuence was found to depend on the country and culture in question. In some cases of domestic mergers, acculturative stress was greater than in international ones. The study thus concluded that national culture is not the sole determinant of acculturative stress, and that organisational culture has to be considered as well. Later, Ve´ry et al. (1997) looked at relative standing and its impact on the post-merger performance of European ﬁrms using both national and organisational culture differences. They found no performance differences between domestic and cross-border mergers. Thus, they found scant evidence of cultures clashing in cross-border mergers; rather, acquirers should not underestimate the impact of organisational culture on domestic mergers. In other words, cultural differences should not be viewed as an automatic source of conﬂict in a merger. Further, a potentially positive link between post-merger performance and national cultures was found. In a somewhat similar vein, Larsson and Risberg (1998) found cross-border acquisitions performing better than domestic ones. They explain this seeming contradiction by the possibly greater awareness of cultural differences when acquiring abroad vs. in one’s home country environment. In contrast, some other studies have pointed to challenges in cross-border mergers and acquisitions. Weber et al. (1996) studied the role of national and organisational culture ﬁt in determining effective integration of domestic and cross-border mergers. They looked at the impact of cultural distance at the level of top management. In domestic mergers, organisational culture was found to result in lower top management commitment. In cross-border mergers, both national and organisational cultures were found to have signiﬁcance in determining merger success. They further found national culture to predict stress, negative attitudes towards the merger and co-operation better than organisational culture. In a similar vein, Krug and Hegarty (1997) found management turnover rates to be higher in cross-border than domestic mergers. As greatest turnover rates

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were found 3–4 years after the merger, the authors argued this to be the time that it takes before inter-ﬁrm cultural differences become manifest. On the most positive side of research on the impact of culture on acquisition performance is work by Morosini, Shane, and Singh (1998), who looked at differences in national culture as sources of competitive advantage to a global ﬁrm. In this context, cross-border acquisitions provide means of accessing these sources of competitive advantage. Drawing from the resource-based view of the ﬁrm, the authors argued that today’s multinational companies operating worldwide need a diverse set of organisational routines to maintain their competitive advantage. These routines can enhance performance through the learning and the specialisation to the local context that they provide. In this view, cultural differences are not only seen as detrimental, but capable of conferring competitive advantage to a multinational company. In their study, Morosini et al. (1998) found crossborder acquisitions to perform better as the distance between the national cultures involved increased. This was due to the fact that the greater the distance in national cultures, the more different the routines used by the two companies are likely to be, thus the more difﬁcult to imitate they are. The acquiring company thus enhances its competitive advantage by acquiring abroad, thereby gaining access to different types of routines, all difﬁcult to imitate. In sum, we can conclude that despite efforts to measure the culture– performance relationship in mergers and acquisitions, results remain inconclusive. What the ﬁndings do share is that there is some impact, although it seems challenging to predict upfront what this impact will be. It is suggested by most of the literature that culture be included in the decisionmaking and evaluation processes of mergers and acquisitions. Further, it seems that cultural distance does not necessarily augment with national culture, as domestic deals can represent greater cultural problems than cross-border ones. Finally, positive aspects of cultural differences are noted as well. It seems that one has to be careful with determining the impact of culture in any individual case without greater analysis of the context and cultures involved. Whilst M&A researchers began with the study of organisational cultures, then moved to the study of both organisational and national cultures, in contrast, a key concern among joint venture and alliance researchers relates to the impact of national cultures on the success of the venture. In this respect, they have studied the topic of national culture with greater intensity than have researchers in mergers and acquisitions. Early studies on the performance impact of national culture on joint ventures have predominantly reported a negative impact. Indeed, it has been

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found that differences in the cultural backgrounds of partners are a threat to a joint venture’s survival (Harrigan, 1988; Brown et al., 1989; Shenkar & Zeira, 1992; Brouthers & Bamossy, 2006). For example, Hennart and Zeng (2002) evidenced that national cultures have a negative impact on joint venture longevity given that domestic joint ventures tend to have greater longevity than international ones. Moving a step further, studies have shown that the chances of survival of international joint ventures are lower when the cultural distance between the home and host countries is large (Barkema, Bell, & Pennings, 1996; Li & Guisinger, 1991). This argument received further backing in the studies by Geringer and Hebert (1991) and Luo (2001). Geringer and Hebert (1991) used both objective and subjective measures to ﬁnd out what affects joint venture performance. Cultural differences have been found to lead to different objectives for joint ventures and to different means of cooperation and operating methods (e.g. Geringer, 1988; Brown et al., 1989). Thus, the authors argued that such differences might also impact the way the partners perceive one another and the joint venture. Differences would result in a lower degree of agreement regarding the joint venture’s performance. This argument received support, as they found that partners from culturally similar countries are likely to assess the performance of the venture more similarly than would partners from dissimilar cultures. Luo (2001) in turn looked at how personal attachments between boundary spanners within joint ventures are established and their impact on venture performance. He ﬁnds that greater cultural distance results in greater difﬁculty of communication between boundary spanners, thus making competence transfer between the parent ﬁrms more difﬁcult. At the organisational level, attachment is supported by goal congruity between parent ﬁrms but is impeded by cultural distance. He claims that economic, strategic, and social embeddedness factors together explain both attachment and the venture’s success. In addition to cultural distance, the performance impact of speciﬁc cultural dimensions has also been discussed. Barkema and Vermeulen (1997) studied the aspects in the national cultural backgrounds of partners in joint ventures that are detrimental to the venture’s success. Using Hofstede’s (1980) dimensions, they found that some cultural traits are more harmful than others, these being uncertainty avoidance and long-term orientation. These traits were found to impact the survival of the venture and made it more probable that the ﬁrm would choose to set up its own subsidiary instead of a joint venture in the country. A similar ﬁnding was recently made by Pothukuchi et al. (2002) who argued for a need for future research to look into the kinds of dimensions of national culture differences that have

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positive vs. negative performance impacts. In their study, Pothukuchi et al. (2002) found masculinity (Hofstede, 1980) to have a positive effect, whereas other Hofstede (1980) dimensions showed mixed results. They further argued that the impacts of different national culture dimensions are likely to differ depending on the organisational outcome under study, e.g. economic or socio-psychological outcomes. Finally, they found that the joint venture culture itself, e.g. one that successfully addresses cultural issues, might help alleviate potential cultural clashes and thereby impact performance positively. Positive implications of national cultures have also been noted (e.g. Li & Guisinger, 1991; Pennings, Barkema, & Douma, 1994). Shenkar and Zeira (1992) found certain kinds of cultural differences to have beneﬁcial, i.e. complementary effects on the venture. In the study of Park and Ungson (1997), cross-border joint ventures lasted longer than their domestic counterparts. They found that joint ventures can be regarded as enabling their parent ﬁrms to gain skills they would have more difﬁculty gaining on their own. Based on this ﬁnding, Park and Ungson (1997) argue that this statement makes partner complementarity a key issue in ensuring the stability of joint ventures. Whilst the ﬁeld has remained focused on the study of national culture on joint venture and alliance success, efforts to estimate the role of organisational culture on the performance of alliances and joint ventures have remained scant. In the following, an overview of extant ﬁndings is presented. In their study of Japanese–Western joint ventures, Brown et al. (1989) found organisational culture differences to potentially have signiﬁcant negative performance effects. Park and Ungson (1997) argued that organisational culture dissimilarity may result in time-consuming cooperation and thereby incur costs. Fey and Beamish (2001) reported no impact of national cultures. Rather, they highlighted the importance of similar organisational climates between the newly formed joint venture and the parent ﬁrm on the one hand, and between the two parent ﬁrms on the other. Thus, organisational climate was found to be more important than national culture in determining joint venture success. In a similar vein, Pothukuchi et al. (2002) argue that organisational culture needs to be accounted for. They ﬁnd that partner dissimilarity-related issues originate rather from organisational than national cultural differences. Moving a step further and focusing on functional diversity, in their study Mohr and Puck (2005) found that joint venture partner ﬁrms’ differences as regards the ways in which they managed their functional operations had a negative impact on joint venture performance. It is argued that functional diversity has a greater impact on joint ventures than on alliances owing to the greater amount of interaction and mutual involvement required in the former.

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Summing up, in research on alliances and joint ventures, the focus has predominantly been on the negative impacts of national cultural distance on performance. The ﬁeld agrees to a great extent that cultural distance impedes the success of international joint ventures and alliances, though also contradictory ﬁndings exist. Several studies have witnessed that the effect of national culture on the performance of alliances and joint ventures might be a more complex matter. For example, some dimensions of national culture have been found to be more prone to causing difﬁculties than others. As compared to the amount of efforts put into the study of the impact of national cultures on the performance of alliances and joint ventures, relatively little light has been shed on the parallel and possibly interrelated ways in which both organisational and national cultures impact the success of joint ventures and alliances. In conclusions, it seems that a lot of effort has been placed into understanding the culture–performance link in both streams of research. Interestingly, the two streams have undertaken different routes to the performance debate. Whilst merger and acquisition researchers began with the study of organisational culture, moving then to the cross-border setting, the opposite has taken place in the joint venture and alliance literature. Interestingly, both streams continue reporting fuzzy ﬁndings regarding the culture–performance relationship, regardless of how this relationship is measured and how culture is deﬁned. Whilst merger and acquisition researchers have by and large found positive effects of national culture, the opposite is taking place with joint ventures and alliances. Moreover, both streams have undertaken different routes to the study of the parallel effect of organisational and national cultures on the performance of inter-organisational encounters. Whilst at present cross-fertilisation and cross-referencing of studies across these streams remains scarce, the present review would suggest that the different research routes adopted by the two research streams would per se offer insights to researchers on both sides. Without crossfertilisation of ﬁndings, researchers on both sides remain at worst ‘stuck’ in a discourse related only to that stream of research.

Presence and Impact Mechanisms of Cultural difference in Times of Inter-organisational Encounters Researchers have further studied the impact mechanisms of cultural differences on the progress and outcome of mergers and acquisitions, joint ventures and alliances.

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In research on mergers and acquisitions, efforts have been made to delve into the dynamics of the organisational clash following mergers and acquisitions. This stream of literature can be seen as a conceptual extension of literature looking at the culture–performance link in mergers and acquisitions, taking the debate a step further, though, by entering merging organisations to understand what is happening. Whilst the nature of the cultural encounter as two organisations merge has been explored, the vast majority of studies in this area have concerned domestic rather than cross-border deals. For one, the notion of cultures clashing has been high on the agenda of researchers on mergers and acquisitions. Buono et al. (1985) introduced the notion of ‘culture shock’ occurring when two organisations and organisational cultures merge. As culture provides a frame of life for its members, cultural changes are among the most difﬁcult for people to cope with. Buono et al. (1985) found that culture shock following an organisational merger affected both organisations’ members by contributing to oscillating feelings and feelings of discomfort. Despite the employees’ rational understanding of the need to merge, the ensuing culture shock affected them and their willingness to be merged and accept the new era. For another, several studies have identiﬁed alternative cultural change strategies in mergers and acquisitions. This work parallels work on integration strategies and integration approaches (e.g. Haspeslagh & Jemison, 1991) that claim that mergers and acquisitions differ depending on the depth of integration and degree of inter-ﬁrm interaction sought in the post-deal years. For example, Buono and Bowditch (1989) deﬁned four modes of integrating cultures in mergers and acquisitions: cultural pluralism, cultural blending, cultural take-over, and cultural resistance. The work of Nahavandi and Malekzadeh (1988) has become a classic in the merger and acquisition literature. The authors used the acculturation model initially developed by cross-cultural psychologists to represent the cultural adaptation process following the merging of two organisations and their cultures. In particular, they focused on the range of alternative scenarios, i.e. acculturative modes, in the acculturation process. The choice of the adopted acculturative mode in a merger or acquisition is argued to depend on both the acquirer and the acquired company. When an acculturative mode accepted by both companies is accepted, less ‘acculturative stress’ is expected to occur. This contribution is signiﬁcant in that it recognises different approaches and choices for cultural integration. Cultural integration is a process whose implementation depends on the attitudes of both parties towards its progress. Further, the concept of acculturative stress highlights

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the negative human dimensions of badly managed integration and cultural integration processes. Moving further, some studies have explicitly addressed cultural change following mergers and acquisitions. For example, based on an extensive quantitative and qualitative dataset, Cartwright and Cooper (1992, 1993) studied cultural change and its implementation in domestic mergers. They related alternative cultural integration strategies and acculturation modes with organisational culture types. Based on this analysis, they diagnosed the expected cultural match and path of cultural change in different types of mergers. In essence, they argue that cultural match and cultural change take on different path depending on the merger type. Despite the rise in cross-border mergers and acquisitions over the past decades, little in-depth and grounded research into the cultural challenges inherent in cross-border deals has been taken forward, exploring the parallel presence, manifestations and impact mechanisms of national and organisational cultures in times of cross-border mergers and acquisitions. This topic gradually entered the radar screen of merger and acquisition researchers since the early 1990s. It has been noted that whilst the early cultural change researchers in the 1980s that took a focus on domestic organisational encounters were largely American ones, the generation of the 1990s became an increasingly European one. Owing to the great variety of national cultures on the European continent, these researchers became interested in the clash of both organisational and national cultures during mergers and acquisitions (Cartwright, 1998). As an example, in an early study on crossborder mergers and their integration, Olie (1990, 1994) was among the ﬁrst in this research stream to highlight that both organisational and national cultures meet in cross-border mergers. Further, he argued that a ﬁrm’s national cultural background inﬂuences its organisational culture. In another early study of acculturation in cross-border mergers and acquisitions, Larsson (1993) pointed out that national cultures create additional barriers to the development of joint corporate cultures in the postacquisition era. Some years later, Malekzadeh and Nahavandi (1998) took their discussion on acculturation to the context of cross-border mergers and acquisitions. They explain that in cross-border encounters, ‘double-layered acculturation’ (Barkema et al., 1996), i.e. changes in both national and corporate cultures, occurs. They conclude, though, that this research area is in its infancy and requires more research. The recent work of Quah and Young (2005), on a phased approach to mergers and acquisitions pointed to the parallel impact of organisational and national cultures in cross-border deals.

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Leaving aside organisational cultures and their link to national cultures, some studies have explicitly focused on the impact of national culture on mergers and acquisitions. Morosini (1998) focused speciﬁcally on the management of differences in national cultures, emphasising for the need for managers with cross-cultural skills. Most studies in this stream have aimed to understand whether acquirers from different countries adopt different kinds of due diligence (Angwin, 2000) and integration approaches (Dunning, 1958; Jaeger, 1983; Calori et al., 1994; Lubatkin et al., 1998; Child et al., 2001; Larsson & Lubatkin, 2001), reﬂective of their national culture origin. In parallel, target ﬁrms from different countries have been found to prefer different kinds of integration approaches, in line with their home countries’ national cultures (Morosini, 1998; Cartwright & Price, 2003). Particular emphasis has been placed on the dimensions of uncertainty avoidance (Morosini, 1998; Schoenberg, 2000), risk orientation (Schoenberg, 2000), and individualism vs. collectivism (Morosini, 1998). Despite these preferences for integration approaches, it seems that acquisitions in which the target ﬁrm has been involved in the integration through informal activities are likely to be more successful than others (Calori et al., 1994; Child et al., 2001; Larsson & Lubatkin, 2001). This would seem to suggest that the involvement of acquired ﬁrms is a critical success factor in mergers and acquisitions. Finally, a wealth of recent research has taken a constructivist approach to the cultural encounter taking place in crossborder M&A (Gertsen, Soderberg, & Torp, 1998), looking at how cultural differences are constructed through the involved actors’ interpretations and sense-making processes (Vaara, 2000; So¨derberg & Vaara, 2003). To conclude, in the real of mergers and acquisitions, the focus has been on trying to unearth the nature of the cultural challenge occurring in times of mergers and acquisitions. Research has predominantly been qualitative, undertaking a single or multiple case-study approach using once-off interviews or a longitudinal setting. Interestingly, the above review highlights how the challenges stemming from organisational and national cultures have received separate attention. Whilst more is known of the domestic dimensions of cultural clash and cultural change, little other than anecdotal evidence exists as regards the nature of the cultural encounter in a cross-border setting wherein also national cultures are present. However, the manifestations and impacts of national cultures on acquisition approaches have been studied in greater depth. In sum, despite the expanding body of knowledge, there seems to be a need for a greater understanding of the process and mechanisms through which cultural differences, however deﬁned, impact the progress of M&A, especially in the context of cross-border deals (Nahavandi &

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Malekzadeh, 1988; Malekzadeh & Nahavandi, 1998; Schweiger & Goulet, 2000; Shimizu, Hitt, Vaidyanath, & Pisano, 2004; Stahl & Voigt, 2005; Teerikangas & Ve´ry, 2006). Interestingly, despite the seeming similarities of these inter-organisational encounters, the parallel track of research on alliances and joint ventures has taken a different research route. To begin with, in its studies on the merging of cultures, literature on alliances and joint ventures has tended to place greater emphasis on the interactions between national and organisational cultures than what we noticed above with regard to research on mergers and acquisitions. This is likely to be due to the fact that a lot of joint ventures and alliances are de facto cross-border ones, hence there is less research onto the cultural challenge in domestic ventures, as was initially the case with the largely US-based research agenda on domestic mergers and acquisitions. In this regard, Cyr (1995) found that in an inter-organisational context, as employees are focused on unlearning the old organisational culture and learning the new one, differences in national cultures have less an impact on the deal than organisational cultures, which are the focus of the change effort. Barkema et al. (1996) pointed to joint ventures and acquisitions being more difﬁcult to manage in cultural terms than subsidiaries, as they represent ‘double-layered acculturation’, i.e. instances where both national and organisational cultures meet. Salk and Shenkar (2001) found social identiﬁcation to be stronger towards nations than organisational cultures. Contradicting the above, Rodriguez (2005) found that in successful US–Mexican joint ventures, a ‘third’ culture emerged that was a mixture of both partners’ national cultures. In sum, in addition to a different focus of the research efforts in both research streams, researchers on alliances and joint ventures have, overall, placed less emphasis on the phenomenon of merging cultures, its strategies, dynamics and management than has research on mergers and acquisitions. They have, however, been more eager to understand the dynamics taking place during the simultaneous encounters of several cultures. Instead, the joint venture and alliance researchers have spent considerably more time studying the effects of national culture differences on the venture and its success. Differences in national cultures have been found to create barriers to cooperation owing to differing communication and management styles, languages, work ethics, and customer orientation approaches (Hamel, 1991; Inkpen & Dinur, 1998). As a result, national cultures have been shown to hamper cooperation and learning between alliance partners (Lane & Beamish, 1990; Parkhe, 1991; Lyles & Salk, 1996; Hennart & Zeng, 2002; Sirmon & Lane, 2004). Cultural differences have further been found to impact

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approaches to joint venture formation, as orientations towards risk and the political context of a country have been found to differ across cultures (Pan, 1997). In addition to these broad ﬁndings on the impact of national culture on joint ventures, attention has been placed on certain dimensions of national cultures that have been considered to be particularly critical in the joint venture or alliance context: differences in communication, cognitive, and conﬂict management styles, differences in ways of developing trust across cultures, and the cultural embeddedness of knowledge. These will be reviewed next. To begin with, a lot of emphasis has been placed on identifying the negative impacts of communication styles on joint ventures (for a summary, see Park & Ungson, 1997). Researchers agree that whilst inter-cultural communication can be difﬁcult, it can potentially lead to joint venture coordination problems, managerial conﬂicts, and even early dissolution (Camerer & Vepsalainen, 1988; Lane & Beamish, 1990). Cultural differences have further been found to hinder information ﬂow, organisational learning, and cooperation, all necessary to the success of joint ventures, also in international contexts (Hamel, 1991; Barkema et al., 1996; Barkema et al., 1997; Inkpen & Dinur, 1998; Bhagat, Kedia, Harveston, & Triandis, 2002). Especially in cross-border joint ventures, mistrust and poor communication can make the transfer of management practises and technologies very costly (Clegg, 1990; Pearlmutter & Hennan, 1986). The impact of national culture on cognitive styles has also received attention. In the context of alliance negotiations, Abramson, Lane, Nagai, and Takagi (1993) looked at how different cognitive styles can explain the perceived frustrations emerging during interactions between American and Japanese partners. More speciﬁcally, Abramson et al. (1993) focused on understanding the inﬂuence of culture on the process of information acquisition, manipulation, and communication. The ﬁndings support the initial hypotheses, i.e. cultures were found to differ in terms of their preference for a certain cognitive style. The authors claim that cognitive, value, and attitudinal differences together can be used to explain differences in approaches to problem solving between national cultures. Worris et al. (1998) looked at how cultural values (rooted in national culture) inﬂuence conﬂict-management styles in a US–Asian setting. The ﬁndings showed that both cultural groups have differing cultural values (namely individualism for the US and conformity and tradition for Asia). These values then transcend to the conﬂict-management style adopted in these cultures: Americans prefer a competing style, whilst Chinese managers prefer an avoiding style. Further, they found that the country differences in

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terms of value dimensions were greater than country differences in conﬂict style. This would seem to suggest that the inﬂuence of national values is nonnegligible as they permeate the context in which the managers are socialised, thus inﬂuencing their behaviour, e.g. their conﬂict-management style. Trust and its cross-cultural dimensions have received a wealth of attention by researchers on joint ventures and alliances. Johnson, Cullen, Sakano, and Takenouchi (1996) looked at how trust develops in an American–Japanese joint venture. They found that trust is developed differently in these two cultural settings. For example, partner complementarity, partner similarity and reciprocal trust had different effects on trust building in these cultures. However, sensitivity to the partner’s culture emerged as an important contributor to trust building in both cultures. Through the positive climate it creates, it provides the foundation for trust building. Doney, Cannon, and Mullen (1998) studied the inﬂuence of national culture on the development of trust. Their framework represents national culture through the assumptions, norms, and values it embraces as impacting the cognitive processes which in turn impact the building of trust. They ﬁnd that there are different patterns for trust building across cultures. The assumptions, norms, and values embraced within a national culture will impact the chosen pattern for building trust. Doney et al. (1998) conclude that when parties share similar norms and values, there is a greater probability of a trusting relationship to develop between them. Finally, knowledge across cultures has been studied. Lam (1997) analysed the embeddedness of knowledge and how this contributes to difﬁculties in knowledge transfer in joint ventures. The study looked at the topic from the perspectives of knowledge structures and work systems. The ﬁndings point to differences in the way knowledge is embedded in national cultures and organisational work systems. Thus, the degree of tacitness of knowledge, the way it is formed, structured, and utilised can differ across cultures. Such differences can lead to asymmetry, hence difﬁculties, in knowledge transfer. As a result, it should not come as a surprise that the notions of cultural proximity or similarity have arisen as of importance in the alliance and joint venture context. For example, Lane and Beamish (1990) conclude that cultural compatibility is one of the most important factors in the endurance of a global alliance. As culture inﬂuences behaviour and management systems, it holds potential to destabilise joint ventures. Similar cultural values have been found to reduce misunderstandings in joint ventures (Brown et al., 1989; Lane & Beamish, 1990), and inversely greater cultural distance is likely to induce problems in interaction. The greater the cultural

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distance between the partners is, the greater the differences in terms of organisational and administrative practices, employee expectations, interpretation of and responses to strategic issues (Kogut & Singh, 1988; Schneider & De Meyer, 1991). Indeed, geographical proximity and perceived cultural afﬁnity have been found to ease the forming of a joint venture (Pan, 1997), and cultural distance has been found to further hamper the cooperation between the important boundary spanners in joint ventures (Luo, 2001). In sum, it is interesting to note how two research streams that study relatively similar phenomena have undertaken rather different research routes. Whilst in the merger and acquisition area, the nature of the cultural encounter following mergers and acquisitions has been studied in depth especially in the context of organisational cultures clashing in domestic deals, in the joint venture and alliance stream the focus has been on understanding the linkage between organisational and national cultures following inter-ﬁrm encounters. Here, both streams could learn from one another. Moreover, whilst merger and acquisition researchers have studied the ways in which national cultures impact preferred integration styles and approaches, joint venture and alliance researchers have gone into greater detail and precision as regards the impact of national culture on speciﬁc behavioural and managerial attributes. Hence, the latter stream potentially holds a wealth of critical information as regards how national cultures are manifested in and impact cross-border inter-ﬁrm encounters, whilst the former stream’s input is potentially signiﬁcant vis-a`-vis country-speciﬁc governance styles be they in mergers and acquisitions, joint ventures, alliances, or subsidiaries of multinational ﬁrms.

The Management of Cultural Differences Throughout the InterOrganisational Encounter Process In this ﬁnal section of our literature review, the focus shifts to analysing how prior research on inter-organisational encounters has studied the management of cultural differences during these varied forms of inter-ﬁrm encounters. Starting with mergers and acquisitions, some studies have gone a step further from the culture–performance debate to understanding how the integration of two companies in a merger/acquisition can be made to succeed. This stream of research has found that cultural differences should be managed throughout the merger and acquisition process. In the following, an

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overview of the existing approaches to cultural integration in the merger and acquisition literature is presented: Include culture in pre-deal evaluation. Effective evaluation of the partners’ organisational and national culture differences prior to entering the deal has been found to be an early means of assessing the success potential in a merger (Cartwright & Cooper, 1992, 1993; Schweiger, Csiszar, & Napier, 1993). This evaluation should be made in parallel to the traditional ﬁnancial evaluation that guides the evaluation process (Datta, 1991). Have a culturally adapted integration strategy. The importance of strategy in guiding change processes has been noted time and again (e.g. Schweiger et al., 1993). It has further been argued that in cross-border mergers and acquisitions, buying ﬁrms should adopt a culture-aware post-acquisition strategy that is coherent with the target country’s national culture, i.e. a ‘national culture-compatible strategy’ (Morosini & Singh, 1994). This is deemed especially relevant in cross-border acquisitions, as organisational characteristics inﬂuenced by national culture are particularly difﬁcult to change. Adopting a national culture-compatible strategy can be a means of ensuring that the aspects of national culture most likely to cause challenges would be adequately managed throughout the merger or acquisition process (Morosini & Singh, 1994; Morosini, 1998). The significance of attitudes. Napier, Schweiger, and Kosglow (1993) looked at how organisational diversity is managed in cross-border mergers from a human resource management perspective. They found that assertive tolerance is a powerful attitudinal integration tool. Bringing forth cultural change. Cultural change following mergers and acquisitions is a time-consuming and phenomenally challenging task. In their seminal work on mergers and acquisitions, Buono and Bowditch (1989) identiﬁed the following factors as meaningful ways of inﬂuencing post-merger cultural change: changing the behaviour of organisational members, justifying this change, using cultural communication to facilitate the change, hiring and socialising new recruits to speed up the change, and removing deviants. Based on their work, Cartwright and Cooper (1992, 1993) see that cultural change following mergers requires an understanding of both cultures, an unfreezing of existing cultures, presenting a positive and realistic view of the future, the wide-scale involvement of organisational members, a realistic timescale, a process for monitoring progress of changes, and the identiﬁcation of problems prior to their escalation. Schweiger et al. (1993) present a practitioner viewpoint towards international mergers and acquisitions, concluding that the depth, location, speed,

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and nature of changes need to be considered. Finally, Olie (1990) found that the integration of cross-border mergers is a long-term process assisted by a sense of parity and common management programmes, tasks, and goals. Leadership, symbolic reconstruction of a new identity, superordinate goals, and introducing new multi-group membership are proposed as means of easing the integration (Olie, 1994). Need for pragmatic cross-cultural skills. Morosini (1998) looked at how cultural differences can be managed in cross-border mergers and acquisitions. He argues that pragmatic cross-cultural skills are required to succeed in the international arena and should be nurtured by companies. In sum, research on the management of cultural differences in mergers and acquisitions have found that culture, be it national or organisational, should be taken into consideration throughout the acquisition process, starting from evaluation, through strategy, through cultural change and the attitude and skills to have. Interestingly, the discussion on cultural change is more predominantly focused on organisational culture, whereas the debate on integration strategies and skills leans more towards national cultures. Overall, the discussion does remain on a rather general level with few practical pointers as to what managers would need to do to be successful. An overview of the management of cultural differences throughout the merger and acquisition process, including both organisational and national cultures, is also lacking. In such an overview, a distinction would be required between different kinds of acquisitions and mergers, as they represent respectively different cultural challenges (Napier, 1989). Similar themes have emerged in literature on alliances and joint ventures. Indeed, it has been claimed that cultural distance needs to be taken into account in the partner selection and the ongoing alliance management processes (Shenkar & Zeira, 1992): Include culture in partner selection criteria. Partner selection criteria have been allotted both task and partner-related dimensions in research on alliances and joint ventures. Task-related criteria relate to the operational skills and resources of the partner. Partner-related criteria relate to the efﬁciency and effectiveness of the partner’s operations. Here, the impact of both corporate and national culture can be noted, as well as trust between the top management team members (Parkhe, 1991). The impact of culture on negotiations. Negotiations in alliances and joint ventures have been found prone to cultural differences, making them more difﬁcult (Adler & Graham, 1989).

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Attitudes to successfully deal with the other party. Prior research has provided various tips to dealing with the other party in joint ventures and alliances. Attitudes including openness, respect, and learning have been brought forward. Indeed, the merging of cultures will require value negotiations and openness to new policies and procedures (Cyr & Schneider, 1996). Further, communication, mutual expectations, and commitments can contribute to a better understanding between the joint ventures partners (Ring & Van de Ven, 1994). Cyr and Schneider (1996) argue that ideally, both partners should learn more about one another, as the joint venture needs to ﬁnd its own value and norm base to succeed. This requires openness from the part of both its owners. Further, they found that the development of trust and respect for one another’s culture to be an imperative to ensure a joint venture’s success. Inter-cultural skills in working across cultures. Various studies have highlighted the behaviours needed to successfully operate across country cultural divides. For example, Peterson and Shimada (1978) looked at the sources of management problems in Japanese–American joint ventures. They claim that the instability of joint ventures can be attributed to the inability of both partners to understand the cultural basis for each other’s managerial perspectives. A focus on the epistemological foundations of each culture can help in this regard. Further, norms that foster learning and ﬂexibility have been found to help in the bridging of differences in strategic orientation or national culture, which exist between parent ﬁrms (Collins & Doorley, 1991; Parkhe, 1991). In a similar vein, Park, Lewis, and Fandt (1993) argue that micro-level behavioural dimensions of joint venture management deserve attention. They wonder whether the success of joint ventures could be dependent on fundamental behavioural dynamics. In this regard, they look at the impact of ethnocentrism on the development of managerial group cohesiveness. Ethnocentrism refers to one viewing one’s own culture as being superior to other cultures. They argue that ethnocentric attitudes can impact leadership, goal setting, and the organisational system that is adopted in the joint venture. Prior research has further shown that national culture and trust barriers could be overcome through processes enhancing learning and exchange, e.g. as regards language and business skills training and personnel exchange. Further, joint ventures with organisational cultures that are sensitive to cultural differences (Pothukuchi et al., 2002), that tend towards open cooperative problem-solving processes and that use local vs. expatriate managers have been found to have a better ability to overcome cultural barriers (Brouthers & Bamossy, 2006). Thus, post-formation processes

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can help to overcome national culture barriers and create trust. Through their impact on trust, there is an indirect inﬂuence on joint venture performance (Brouthers & Bamossy, 2006). Research on alliances and joint ventures has taken a different focus on the management of cultural differences. This can partly be explained by the differences between mergers and acquisitions and joint ventures and alliances as organisational and managerial phenomena (Newbury & Zeira, 1997). Indeed, as compared to research on mergers and acquisitions, joint venture and alliance research has paid scant attention to the cultural dimensions of the post-deal implementation phase, e.g. as regards cultural change. Instead, emphasis is on the attitudes and skills to have to successfully implement joint ventures and alliances. The roles of learning, respect, and openness emerge in greater detail as compared to being almost non-existent in the merger and acquisition literature. In a similar vein, the debate on inter-cultural skills is more advanced than in the merger and acquisition literature. Interestingly, also the cultural sides of negotiations are brought forward. As with mergers and acquisitions, an overview of the joint venture process from a cultural perspective is lacking. In sum, the comparative conclusions from this section looking at the management of cultural differences in various forms of inter-ﬁrm encounters continues drawing a picture that by now should be becoming familiar to readers. Whilst merger and acquisition researchers are by and large historically concerned with organisational culture, its change and dynamics, the joint venture and alliance researchers take their strength in the study of national culture and its management.

CONCLUSIONS This paper began with the intention of exploring and assessing how cultural diversity has been studied in literature on inter-organisational encounters, namely in research on mergers and acquisitions on the one hand and joint ventures and alliances on the other. In this comparative literature review, the focus has more speciﬁcally been on assessing how (1) the concept of culture, (2) the culture–performance debate, (3) the impact of cultural diversity, and (4) the management of cultural differences have been addressed in both research streams. The comparative analysis of extant research along these four dimensions of the study of cultural diversity consistently pointed to the two streams having undertaken differing routes.

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In other words, a similar path regarding each stream’s development in the study of cultural diversity emerged over and over again, as summarised in Table 1 and detailed in the text below. Research on the cultural dimensions inherent in mergers and acquisitions was initiated in the 1980s by American scholars. They studied domestic mergers and acquisitions, and were largely interested in the dynamics and management of the cultural encounter taking place following an organisational merger. This was followed since the early 1990s by a rise of interest in the cross-border dimensions of mergers and acquisitions. However, instead of continuing the largely qualitative study of the cultural encounter dynamics, researchers veered towards the quantitative study of the performance effects of culture in mergers and acquisitions. Using different operationalisations and research settings, researchers grew interested in attempting to prove whether domestic or cross-border mergers and acquisitions are more successful. From a cultural study perspective, this meant that the focus shifted from the mere study of organisational cultures to include also national cultures into the quantitative research setting. However, this is where the ﬁeld seems to be stuck at present. Critically speaking, studies undertaking more reﬁned deﬁnitions of culture to include various organisational subcultures, professional, occupational, departmental cultures, or regional and industry cultures are missing. Furthermore, attempts at unearthing the relationships between organisational and national cultures in times of mergers and acquisitions remain scant. In essence, merger and acquisition researchers have largely remained stuck in deﬁning the cultural problematique in mergers and acquisitions as one wherein largely ‘parallel’ organisational and national cultures clash. Research on joint ventures and alliances has undertaken a different path. It has by and large omitted the domestic dimensions of the cultural clash in joint ventures and alliances, focusing almost exclusively on their crossborder challenges. The ﬁeld emerged and has increased in signiﬁcance since the early 1990s, with a strong tendency to focus on the ways in which national cultures impact joint ventures and alliances. For one, the performance impacts of national cultures have been addressed in a plethora of quantitative studies. For another, the subtle ways in which national cultures are present in and manifested throughout joint venture and alliance processes have been discussed. Third, the management of intercultural situations in alliances and joint ventures have been detailed. More recently, ﬁne-tuned conceptualisations and analyses of the multi-level nature of the cultural challenge inherent in joint ventures and alliances have surfaced that both include a greater variety of cultural diversity in their

Summary Overview of the Status of Research on Culture in Inter-Organisational Encounters and Identiﬁed Areas of Cross-Fertilisation. (I) Definitions: What Culture Is Studied Mergers & acquisitions

Level of organisational culture

Level of national culture

No studies recorded

Mergers & acquisition s

Some studies on impact of organisational culture on performance

Relationship

Joint ventur es & alliances

No studies recorded

(III) Presence and Impact of Culture

Mergers & acquisitions

Cultural shock, acculturation, cultural change studied

Joint ventures & alliances

No studies recorded

(IV) Management of Cultural Differences Mergers & acquisitions

Joint ventures & alliances

Include culture in target evaluation Management of cultural change Importance of attitudes

Include culture in target selection No studies recorded

Impact of culture on negotiations Several skills to work across cultures identified No studies recorded

Since 1990s, studies also accounting for national culture

Most studies define culture at national level only

Few studies on impact of national culture on performance

Host of studies on the impact of national culture on performance

Impact of national culture on integration approaches studied

Impact of national culture on behavioural attributes, e.g. trust, communication, studied

No studies recorded

Since mid-1990s, studies accounting both organisational and national cultures

Since mid-1990s, stud ies that clearly delimit the level of analysis taken

Some studies on the parallel impact of organisational and national cultures on performance

Few studies on impact of organisational culture on performance

Parallel presenc e of national and organisational cultures mentioned

Parallel presence of national and organisational cultures studied

No studies recorded

One skill to work across cultures identified

Importance of attitudes

Note : Arrows identify those research areas where findings from one stream of research could be used to inform the other stream,with the arrow pointing in the direction of potential learning. Double-headed arrows refer to instances where both streams of research could benefit from one another.

SATU TEERIKANGAS

Both organisational and national cultures

Early studies focus on organisational level only

Joint ventures & alliances

(II) Culture-Performance

66

Table 1.

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deﬁnitions and aim at greater detail and precision regarding the relationships between these levels of analysis than do researchers in mergers and acquisitions. An observation to make based on this analysis is the seeming lack of an open debate and learning between these two streams of research that fundamentally are involved in the study of rather similar phenomena. Here and there, cross-referencing between the two streams does occur, more from joint venture and alliance researchers towards merger and acquisition research than vice versa, though. These remain individual islets of crossfertilisation in the overall research efforts characterised by separate streams that by and large debate only within their respective areas. However, as the present comparative literature review has pointed out, opportunities for mutual learning and cross-fertilisation of insights, concepts and ﬁndings would exist. In this respect, one objective of this paper is to raise awareness of research on cultural diversity in both research streams so that in the future, more efforts at mutual exploration would be undertaken. Opportunities for cross-fertilisation of research ﬁndings and conceptualisations would exist as follows. On the one hand, joint venture and alliance researchers could gain from learning how merger and acquisition researchers have studied the domestic organisational culture dimensions of mergers and acquisitions as regards the ways in which organisational culture is deﬁned, how its impact on performance has been studied, how the cultural encounter in mergers and acquisitions has been conceptualised, and how the management of cultural change in mergers and acquisitions has been addressed. On the other hand, merger and acquisition researchers could utilise the knowledge gained by joint venture and alliance researchers as regards the way that national culture has been studied as regards its performance impact, its manifestations and management throughout the joint venture and alliance processes. Moreover, merger and acquisition researchers could gain from keeping apace with recent developments in the joint venture and alliance ﬁeld, where the complexity and multi-level character of cultural diversity is at present being addressed at greater lengths than it is in the ﬁeld of mergers and acquisitions. In addition to opportunities for cross-fertilisation, the comparative analysis enabled to highlight grey areas, areas of weakness shared by both streams of research. A shared weakness in both streams is the lack of a consistent tying up of their culture debate to the way in which culture is being discussed by social scientists at large. The existence of this weakness can seem paradoxical, as researchers on inter-organisational encounters could be expected, through their access to organisations, to be best placed

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to further our understanding of cultural diversity, its complexity and interrelations in present-day organisations. In this respect, both streams could beneﬁt from a stronger grounding of their work in social sciences, instead of limiting their referencing to their own ﬁeld or to the most quoted culture-scholars (e.g. Hofstede, 1980) only. Another grey area relates to the performance debate. Despite many efforts, we still do not know much about the culture–performance relationship in any kind of inter-organisational encounter. Whilst ﬁndings in the M&A ﬁeld remain confusing, further confusion is brought into the picture by looking also at ﬁndings from joint ventures and alliances. In the former, national cultures have largely been seen in a positive light, whereas in the latter in a predominantly negative light. Plausible reasons behind these different ﬁndings could stem from the different nature of these inter-ﬁrm encounters (see Newbury & Zeira, 1997 for an excellent conceptualisation of their differences), or also from the different array of countries studied. Whilst merger and acquisition researchers have largely studied European ﬁrms or the European– US divide, a lot of joint venture and alliance research has focused on the US vs. Asia or the Eastern vs. Western Europe divide. Moreover, neither stream has yet managed to uncover how both organisational and national cultures impact their performance. Given the different approaches taken by researchers in both streams, opportunities for mutual exploration, learning, and cross-fertilisation of ﬁndings exist to ultimately shed light onto the ways in which cultural diversity impacts the performance of inter-ﬁrm relationships. A third grey area relates to the nature and dynamics of the cultural encounter taking place during inter-organisational encounters. For mergers and acquisitions, a lengthy discussion on cultural clash has ensued. The ﬁndings suggest that culture clash is not a static phenomenon, but is inﬂuenced by the strategy chosen for the acquisition. However, relatively little research exists as regards the impact of national cultures on mergers and acquisitions or the cross-border dimensions of cultural change. In contrast, researchers on alliances and joint ventures, instead of focusing on the merging of organisations, have focused on the ways in which national cultural differences show up and impact the venture. Trust, knowledge transfer, communication, and conﬂict management are examples of topics wherein a negative impact of culture has been demonstrated. Here, ample opportunities for cross-fertilisation and learning would exist both ways to enable a more ﬁne-tuned understanding of inter-ﬁrm cultural encounters in international settings. A fourth and ﬁnal grey area exists as regards the management of cultural differences during inter-organisational encounters, where ﬁndings are also

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disparate. In the case of mergers and acquisitions, the conclusion is that ‘‘culture should be taken into account early on’’, but little is known of how this can be done. Again, more systematic research on the topic is warranted. In the case of alliances and joint ventures, little emphasis has been placed on the implementation of the venture, let alone the cultural challenge in the implementation process. Both ﬁelds remain rather fragmented as regards the management of cultural differences throughout the venture process. In the case of mergers and acquisitions, a process perspective exists, yet has not been adapted to the cultural challenges at stake, especially in cross-border contexts. For alliances and joint ventures, research is fragmented, and this fragmentation seems to be echoed in the way the stream has looked at culture. An example of this is the implementation debate, which has received relatively scant attention in both general and culture-related literature on joint ventures. Overall, interestingly neither stream has dared to attack the interrelations between organisational and national cultures in detail, not to mention possibly other kinds of cultural differences at stake in interorganisational encounters. In sum, ample opportunities exist to enhance our understanding of the management of cultural diversity in inter-ﬁrm encounters. To conclude, the contribution of this paper has been to show the diversity of approaches to the study of culture in two related ﬁelds of research. Taken together, it seems striking how different a path both streams have taken to the study of culture, despite the relatedness of the phenomena under study. Given the different foci each stream has chosen, opportunities for crossfertilisation would seem manifold, as highlighted above. In light of the apparent fragmentation of research on culture in both ﬁelds and the little interaction they seem to share, it would seem of relevance to ask what each and everyone of us as researchers in these areas could do about it?

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Schweiger, D. M., & Goulet, P. K. (2000). Integrating mergers and acquisitions: An international research review. In: C. Cooper & A. Gregory (Eds), Advances in memrgers and acquisitions (Vol. 1, pp. 61–91). Amsterdam: JAI Press. Shenkar, O., & Zeira, Y. (1992). Role conﬂict and role ambiguity of chief executive ofﬁces in international joint ventures. Journal of International Business Studies, 23(1), 55–75. Shimizu, K., Hitt, M., Vaidyanath, D., & Pisano, V. (2004). Theoretical foundations of crossborder mergers and acquisitions: A review of current research and recommendations for the future. Journal of International Management, 10, 307–353. Shristava, P. (1986). Postmerger integration. Journal of Business Strategy, 7(1), 65–76. Sirmon, D. G., & Lane, P. J. (2004). A model of cultural differences and international alliance performance. Journal of International Business Studies, 35, 306–319. Simonin, B. L. (2004). An empirical investigation of the process of knowledge transfer in international strategic alliances. Journal of International Business Studies, 35, 407–427. So¨derberg, A-M., & Vaara, E. (2003). Merging across borders. Copenhagen: Copenhagen Business School Press. Stahl, G. K., & Voigt, A. (2005). Impact of cultural differences on merger and acquisition performance: A critical research review and an integrative model. In: C. Cooper, & S. Finkelstein, Advances in mergers and acquisitions (Vol. 4), Amsterdam: JAI Press. Steensma, H. K., & Lyles, M. A. (2000). Explaining IJV survival in a transitional economy through social exchange and knowledge-based perspectives. Strategic Management Journal, 21, 831–851. Teerikangas, S., & Ve´ry, P. (2006). The culture–performance relationship in mergers and acquisitions: From yes/no to how. British Management Journal, 17(s1), 31–48. Vaara, E. (1999). Cultural differences and post-merger problems. Misconceptions and cognitive simpliﬁcations. Organisasjonsstudier, 1(2), 59–88. Vaara, E. (2000). Constructions of cultural differences in post-merger change processes: A sense-making perspective on Finnish–Swedish cases. Management, 3(3), 81–110. Ve´ry, P., Lubatkin, M., & Calori, R. (1996). A cross-national assessment of acculturative stress in recent European mergers. International Studies of Management and Organisation, 26(1), 59–86. Ve´ry, P., Lubatkin, M., Calori, R., & Veiga, J. (1997). Relative standing and the performance of recently acquired European ﬁrms. Strategic Management Journal, 18(8), 593–614. Weber, Y. (1996). Corporate cultural ﬁt and performance in mergers and acquisitions. Human Relations, 49(9), 1181–1201. Weber, Y., Shenkar, O., & Raveh, A. (1996). National and corporate cultural ﬁt in mergers/ acquisitions: An exploratory study. Management Science, 42(8), 1215–1227. Worris, M. W., Williams, K. Y., Leung, K., Larrick, R., Mendoza, T. M., Bhatnagar, D., Li, J., Kondo, M., Luo, J-L., & Hu, J-C. (1998). Conﬂict management style: Accounting for cross-national differences. Journal of International Business Studies, 29(4), 729–748. Yan, A., & Zeng, M. (1999). International joint venture instability: A critique of previous research, a reconceptualization, and directions for future research. Journal of International Business Studies, 30(2), 397–414.

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MOTIVE ARCHETYPES IN MERGERS AND ACQUISITIONS (M&A): THE IMPLICATIONS OF A CONFIGURATIONAL APPROACH TO PERFORMANCE Duncan Angwin ABSTRACT Why do managers continue to transact merger & acquisition (M&A) deals, in massive number and dollar terms, when so many are deemed to fail? This paradox is central to the study of M&A. Despite considerable research effort being devoted to refining and redefining assessments of M&A performance the consensus of opinion remains that most M&A fail. Certain of the high percentage of M&A failure, performance academics infer that the continued massive levels of transactions can only be explained as misguided actions by managers. This chapter believes that the performance paradox can begin to unravel if we move beyond simple inference of managerial intentions and observe what actually takes place in practice. For instance the underlying assumptions of performance academics, that; 1) each M&A must create greater value for acquiring shareholders; 2) no other reasons for an M&A are legitimate, are not adequate for capturing ‘legitimate’ managerial action in practice. This suggests that part of the reason for so many M&A appearing to be failures Advances in Mergers and Acquisitions, Volume 6, 77–105 Copyright r 2007 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 1479-361X/doi:10.1016/S1479-361X(07)06004-8

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is a result of the ‘myopia’ of performance studies themselves, where assumed and simplified motives have resulted in crude categorisations and confounded data. These limitations in the M&A performance literature are addressed in this chapter by; 1) demonstrating a broader set of motivations for M&A; 2) establishing their legitimacy; 3) showing that motivations may not be singular in nature but intertwined and complex; 4) presenting a way in which this greater complexity may be conceived in order for more sensitive empirical tests to be performed.

INTRODUCTION The world is currently witnessing the greatest volume of mergers and acquisitions (M&A) activity ever recorded. This wave is the latest in a series which extend back at least a century, with records identifying a merger wave in the USA beginning in 1897 (Gaughan, 1994). Despite the vast amount of transactions recorded, a substantial body of analysis of M&A performance, spanning at least 40 years, shows failure rates for acquirers of between 45% and 82% on a wide variety of measures (cf. Kitching, 1967; Jensen & Ruback, 1983; Hunt, 1990; Jarrell & Poulsen, 1994; Mueller, 2003). This raises a paradox core to the study of M&A; why do acquiring managers continue to transact M&A deals, and on such a massive scale in both number and dollar terms, when so many are deemed to fail? In order to resolve this paradox, researchers have focused attention upon two issues: (1) are the performance assessments accurate and (2) might managers be misguided in their motivations?1 Clearly, ﬂawed performance measurement might vindicate managerial decisions to transact M&A and so resolve the paradox. Similarly if managers are misguided, through human frailty for instance, their insistence on transacting M&A might be explained when so many are deemed to fail (Hayward & Hambrick, 1997). Addressing the ﬁrst question, considerable efforts continue to be devoted to reﬁning performance measures, in terms of variables used, and using different methods of analysis in order to assess whether these choices affect acquirer’s success rates. Whilst this has had the effect of nuancing performance results, these reﬁnements in themselves have not managed to change the overall picture of M&A, as failure rates remain within the range mentioned above. Substantial efforts have also been directed at moving below the global picture of M&A to investigate performance for sub-groups on the basis that some types of M&A may perform better than others. Strategists in particular have focused attention upon variation amongst

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M&As in terms of different economic bases for transactions. Although some variations in performance have been associated with different ‘classical’ categories, these ﬁndings remain contentious (see for instance the longstanding debate over diversiﬁcation performance reviewed in Grant, 2000). The overall conclusion from hundreds of studies is that most M&A fail, and that identifying robust differences in performance between different strategic classiﬁcations of M&A is difﬁcult to achieve. With this ‘certainty’ of poor performance, the dominant conclusion is that managers must therefore be misguided in their motivations (cf. Sirower, 1997). The inference that managers must be at fault has caused performance researchers to focus upon the second question, why managers might act contrary to value maximising behaviour? The main explanations are managers as agency problem (Jensen, 1986), as exhibiting hubris (Roll, 1986), being subject to a winner’s curse (Varaiya & Ferris, 1987) and gambler’s ruin (Wilcox, 1971). Researchers in pyschology and human behaviour have helped elaborate on why managers might be ﬂawed in their desires to engage in M&A (cf. Marks & Mirvis, 2001) with explanations including myopia, bounded rationality, loss aversion (Fanto, 2001). Whilst many case studies now exist of managerial frailty in M&A, it is instructive to note that linking managerial characteristics with performance is rarely tested empirically. This maybe explained by the strength of the underlying assumption about what constitutes ‘legitimate’ M&A; [1] the acquiring company will only engage in M&A where it will increase economic value for acquiring shareholders. In other words, it is assumed that any manager engaging in an M&A which may provide neutral or negative returns is transacting an illegitimate deal and so is a ‘bad’ manager. This simplistic logic denies the possibility that managerial actions could be in the best interests of the ﬁrm and yet may not result in improved ﬁrm value from that particular transaction. The assumption of what constitutes ‘legitimate’ M&A derives from the ﬁnance discipline and is a deterministic view of how practitioners must act. Its force comes from post hoc assessments of outcomes, of being wise after the event, and ignores the ex ante nature of decisions with which managers are faced, of not having knowledge of how things will actually work out. However, it is not the intention of this chapter to engage in the problem of timing so much as to challenge the core assumption that ‘managers must only engage in M&A where they will maximise economic value for the ﬁrm’. From the standpoint of managerial actions in practice, it will be shown in this chapter that M&A are undertaken which on a single transaction basis may not ‘proﬁt maximising’, but are for the good of the ﬁrm. From these

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observations the chapter will show that (1) practitioner motives may not be completely constrained by assumption [1]; and (2) these ‘other’ motives may not necessarily be ‘illegitimate’. If one accepts, and as this chapter will argue, that there can be M&A which are justiﬁable although not ﬁtting entirely within the narrow deﬁnition of ‘legitimacy’ deﬁned above, then the basis of many performance studies maybe seriously ﬂawed. M&A transactions will have been included in calculations where the ‘legitimate’ motivations of management were not focused on increasing shareholder value per se for instance, but for a purpose which may arguably have been of greater importance. By including these sorts of M&As into performance studies, where the assumption is that all M&A enhance ﬁrm economic value, success outcomes may have been biased downwards. This chapter argues that current assessments of M&A performance lack rich appreciation of motivations for M&A. The ‘myopia’ of performance studies, with oversimpliﬁcation of motives and outcomes by ﬁnance, strategy and economics scholars, may in part explain some of the paradox identiﬁed at the beginning of the chapter. These narrow assumptions have led to crude categorisations which will have confounded data; where data are deemed to be ‘the same’ and therefore able to be aggregated and subjected to tests, when in fact fundamental differences are present and obscured. Such assumptions, which maybe at odds with a more complex reality, may help explain why so many deals appear to perform poorly in performance studies and go towards explaining why so many M&A deals continue to take place. This chapter presents a richer picture of motivations for M&A to counter the oversimpliﬁcation of legitimate motivations. This more sensitive picture is closer to actual M&A practice ‘on the ground’ and raises new questions over the way in which M&A performance maybe assessed. A more sophisticated view of motivations may cause M&A performance appraisals to be revised in the light of ‘actual’ rather than ‘inferred’ practice and also help unravel the performance paradox. The chapter begins by reviewing classical M&A motivations. Additional motivations from a broader literature and managerial practice are then introduced and their ‘legitimacy’ discussed. The atomistic way in which motivations are treated is then questioned and the case for motivational interaction examined. To represent this complexity a series of motivational archetypes is proposed to enable a more accurate reﬂection of managerial motivations for M&A in practice. They lend themselves to testable hypotheses about different performance outcomes and raise questions about appropriate performance measures.

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Four contributions to the M&A literature on performance are made; (1) a broader set of motivations for M&A than is current in the literature is presented; (2) the ‘legitimacy’ of these new motivations is established; (3) motivations are shown to be not only singular in nature but also intertwined and complex; (4) an approach for capturing this greater complexity is presented in order for more sensitive empirical tests to be performed.

‘CLASSICAL’ APPROACHES TO M&A MOTIVATION In this section ‘classical’ approaches to the reasons why acquires engage in M&A are reviewed. Here ‘classical’ refers to common approaches to motivation in the M&A performance literature. These motives can be ascribed to the ﬁelds of ﬁnance, economics and strategy, and share common assumptions that there are single intentional rational2 motives. The main motivations are summarised as follows: The ﬁnance literature assumes that shareholder wealth is the goal of the ﬁrm. Motives are generally one-time gains and include reducing the cost of capital. This maybe through scale effects for instance or through buying a listed company (if a private ﬁrm) for instance; reductions of tax liabilities,3 tax beneﬁts can also be achieved cross-border; adjusting the debt proﬁle of the acquired company;4 asset stripping; acquirers borrow against the cash balances of the target company; accessing cash in the target company to reduce overall leverage; improving stock market measures such as share price/eps/PE; purchasing a bargain, or ‘cheap’ deal – (Wernerfelt, 1984) where companies maybe undervalued. This maybe because acquiring managers have better information about the target than the stock market (Ravenscraft & Scherer, 1987). The economics literature regards the ﬁrm as a homogeneous decisionmaking unit concerned with maximising long-run proﬁtability through achieving sustained advantage over its rivals. Commonly cited motives in this literature focus upon ﬁrms gaining competitive advantage through cost reduction or increasing market power. economies of scale, i.e. increasing volume of production reduces unit cost; economies of scope, i.e. spreading advertising costs across more strategic business units (SBUs);

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increasing bargaining power along the value chain, i.e. increasing market power to capture value from the customer; increasing power over suppliers to reduce transaction costs. The classical strategy literature shares many of the assumptions of the economics literature outlined above, although challenges have come from more recent strategy insights. Classical strategy literature, which maybe broadly described as the positioning school, focuses upon the position of the ﬁrm in its industry and clearly overlaps with economics described in brief above. For instance, Porter’s (1985) work on industry structure straddles both domains. Motivations which can be included here include overcapacity reductions, where there is overcapacity in the industry this has a depressing effect upon prices in the market. By purchasing competitors and closing them down, this reduces overcapacity and buoys up prices; collusive synergies (Chatterjee, 1986), where potential entrants to an industry are deterred by the potential competition; concentric acquisition by a market leader (Steiner, 1975); mutual forbearance (Porter, 1985), where an acquirer deters entrant of new competitor into the acquirers market, or affect pricing ability in mutual markets through acquiring in a competitors’ main market. These synergies represent wealth transfers from the ﬁrms’ customers (Trautwein, 1990). The strategy literature also overlaps with the ﬁnance literature in considering the role of risk and return. The main motivation here is often referred to as diversiﬁcation. greater diversity may improve stability of earnings and reduce portfolio risk (Haspeslagh & Jemison, 1991). This may make a ﬁrms stock more attractive to investors. More recently the strategy school has focused upon the unique and valuable characteristics of a ﬁrm’s resources as the source of sustainable advantage. As a consequence, motivations are explained in resource-based terms (Penrose, 1959; Wernerfelt, 1984; Barney, 1991; Dierickx & Cool, 1989), where ﬁrms consist of idiosyncratic costly-to-copy capabilities the exploitation of which may give a competitive advantage. Firms then can be viewed as a bundle of capabilities, which are immobile, valuable, rare and difﬁcult to imitate or substitute (Barney, 1991) in a highly imperfect market. Such ﬁrms may well become acquisition targets as they offer the potential

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for acquirers to achieve above-normal economic proﬁts through exploiting valuable, rare and private synergies between both ﬁrms. The motivations cited here include: acquiring new capabilities, i.e. knowledge acquisition (i.e. know-how), owning innovation (buying entrepreneurial ﬁrms); acquiring new resources, i.e. unique assets (i.e. brands, patents, intellectual property). All of the strategy motivations for M&A above are based upon the assumption that the M&A deal will make the ﬁrm ‘better off’ (Porter, 1987) in a demonstrable way using conventional performance indicators, i.e. reported earnings, share price, market share. The strategy literature has sought to classify M&A deals in order to create a more ﬁne-grained appreciation of performance. The classic descriptions are horizontal, vertical and diversiﬁcation (Ansoff, 1957; Rumelt, 1982), relating respectively to acquiring within one’s industry, along the supply chain, and outside of one’s industry or supply chain. These are frequently used in performance tests (cf. Rumelt, 1982; Singh & Montgomery, 1987). Further permutations on this theme have resulted in further classiﬁcations of Concentric M&A, related and unrelated diversiﬁcation, and other versions attempt to capture the internal (rather than external) relatedness of merging organisations through terms such as related linked and related constrained. More recently categorizations which attempt to cover industry dynamics, product/market overlaps and the overlap of internal unique resources have been proposed such as overcapacity M&A, geographic roll up, product and market extension, M&A as R&D and industry convergence (Bower, 2001). All of the above reasons for M&A assume rational managerial motivation based upon improving ﬁrm performance rather than examine motives. Rather than rely upon these largely assumed motivations, and recognising that anomalies exist in motivation and performance outcomes, this chapter now examines other motivations which have not been fully recognised or not been recognised at all in the M&A performance literature. Some of these motivations ﬁt within classic assumptions, some overlap and some contradict.

Other Motivations Recognised in the Literature The success bias in performance studies has caused the majority to focus upon testing the positive and legitimate motivations outlined above. However, there are motivations which are well known, which receive far

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less attention. The most famous has been inferred by the ﬁnance literature as an explanation why M&A fail. It focuses upon managers acting rationally in terms of maximising their own beneﬁts at the expense of ﬁrm welfare and shareholder returns – the so-called agency problem (Jensen & Meckling, 1976). Managers may also exhibit behaviour which can be described as ‘hubris’ (Roll, 1986), excessive conﬁdence (Hayward & Hambrick, 1997; Kets de Vries, 1990), which can result in ﬂawed decisions such as overpayment. These human frailties are generally offered up as an explanation for why acquisitions fail, rather than necessarily being tested in its own right,5 or indeed incorporated into performance studies. Additionally, it is important to note that attributing poor M&A outcome to negative characteristics of managers is an acknowledgement that managers affect outcome and that their positive attributes also may have an affect. The sweeping generalisation that the failure of M&A is due to the frailty of the human condition has provoked authors to suggest that failure may not be entirely due to subversive motivations and an agency problem. Managers may also believe that their role is to protect and honour community values (Selznick, 1957). The concept of stewardship (Davis, Schoorman, & Donaldson, 1997), argues that top manager(s) can act out of altruistic intent. Although Davis et al. (1997) ultimately argue that stewardship aligns with shareholders interests, this may not always be the case. Tensions between the agency and stewardship perspectives may result in M&A which underperform in shareholder terms but may beneﬁt other stakeholders (Angwin, Stern, & Bradley, 2004). This raises a fundamental issue of whether the ﬁnancial markets are always best placed to value the actions of top management. For instance, an altruistic CEO through deep embeddedness in an industrial context maybe expected to be more of an expert on how ﬁrms should be run and necessary investment decisions which should be made (such as M&A) than ﬁnancial analysts and shareholders far removed from the situation and with other calls on their time. The CEO may take actions which may not result in positive shareholders returns in the short run but could be of fundamental importance to the long-term success of the ﬁrm. This raises fundamental issues about motivations which are rational but not due to human frailty and are not fully recognised in the classical M&A literature. UnderRecognised Motivations Intentional and Rational Decisions to Acquire The following are acquirer motivations to acquire ﬁrms for intentional and rational reasons.

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Exploration: The vast majority of M&A literature is predicated upon M&A as an exploitative mechanism for achieving gains. The attraction of this assumption is that it offers certainty about how gains should be achieved – through cost reduction for instance. However, this is to deny M&A as a method for ﬁrms to explore (Angwin, 2003). As new territories, markets, knowledge, emerge, there will always be a need to engage in these areas as ﬁrst movers as well as later entrants. By deﬁnition there will be signiﬁcant uncertainty, as acquirers cannot know the future. They can form views about whether the potential of an acquisition maybe high, but in new unfamiliar territories (geographic, informational, technological, etc.) the information available maybe extremely unreliable and even where there is information it maybe very difﬁcult to interpret. In cases of M&A into new territories, it maybe that no one outside of the target company (e.g. early acquirers into China), and indeed in extreme cases inside the ﬁrm itself (such as the sell-off of businesses in E. Germany and other former communist countries post-liberation) really knows what the business is like. There are huge question marks over the real state of the acquisition, its potential over time, how the market may evolve or in some cases, whether a market will actually emerge at all. In deal terms, it is likely to be a failure in conventional terms, but over time the deal could be hugely signiﬁcant in inﬂuencing market development and placing the acquirer in a privileged position for future strategic moves.6 Viewed another way, not to participate may also have a cost of being late or even being excluded from participation later on. Ownership: There is a strong assumption in the M&A literature that M&A has to improve returns to shareholders. However, this is to ignore ownership structures other than public companies in an Anglo-American context. Private companies for instance may engage in M&A for reasons other than maximising shareholder value. Indeed there are many instances of public companies going private for the very reason that they feel market pressure for shareholder return harms their businesses, i.e. thwarting creative endeavours (cf. The Really Useful Group of Andrew Lloyd Webber). Not-for-proﬁt businesses also have different agendas to for-proﬁt business. Their concerns are generally for multiple stakeholders with conﬂicting agendas. In many instances the key funder, such as a government, may have an agenda for the ﬁrm which is not couched in terms of proﬁtability but more in terms of ‘social good’. Countries other than Anglo-Amercian ones can have very different views about the purpose of business. The social economic system of

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Northern Europe has values which are more closely linked to business as a mechanism for improving community. Here the dominance of the shareholder cannot be taken for granted. Indeed in some countries such as Holland and Germany the employee’s perspective is enshrined in the governance of the ﬁrm. Here concerns over worker welfare and job protection are important considerations in M&A strategy (Morgan, 2007). The experience of foreign acquirers from an Anglo-American context attempting to acquire in these countries on the basis of cost reduction through layoffs has often come to grief as employment laws have thwarted attempts to downsize workforces. Affecting competitive dynamics: M&A can be used as a weapon to inﬂuence the actions of other competitor ﬁrms. Although recognised in some areas of economic theory and by game theorists, this motivation does not feature prominently in performance studies. Here performance is less about the contribution of the target ﬁrm to the new parent, but more in terms of the damage done to a competitor. In other words, an acquisition might have a neutral effect upon the parent but may severely hamper a competitor and so future competition. For instance, when Rowntree was acquired by Nestle for a huge premium, this effectively ended Suchard’s hopes of building a stake in the chocolate countline business, as there were no other viable M&A targets. Suchard was subsequently acquired itself. Had Nestle lost the contest to Suchard, it is likely they would have had the same problem as Suchard, as they had failed repeatedly in-house to move organically into the market area and there were no other viable targets.7 Thwarting a competitor may prevent further signiﬁcant change or challenge in an industry and also improve strategic options in the future. Innovation stifling: M&A is often used as a way to affect future potential competition. For instance, buying infant ﬁrms and closing them down prevents any possibility of takeoff beneﬁts which could change industry dynamics. The purchase and closure of these ﬁrms may result in a loss to the acquirer but this maybe substantially less damaging than allowing the ﬁrm to blossom. This ‘innovation stiﬂing’ has been seen in the IT and biotech industries. An alternative to closure is to purchase infant ﬁrms so that the acquirer can control the rate of innovation leakage into an industry. The acquisition itself may not result in a positive return, but current and future cash ﬂows maybe protected as well as preserving some strategic options. A private ﬁrm maybe acquired to prevent from it from carrying out an IPO or listing on a stock exchange. The acquirer’s motivation is to

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prevent the private ﬁrm from becoming more tradable and so available to competitors. Indeed many pharmaceutical companies have stakes in biotech for this very reason. These sorts of acquisitions are not likely to result in enhanced shareholder value but could become signiﬁcant in the future if they are not purchased in terms of how value might be lost. M&A to internalise risk: Although some of the earliest performance studies examined diversiﬁcation as a risk-reducing mechanism, this was in terms of internal portfolio balance rather than as a mechanism for internalising exogenous risk. For instance, an argument put forward by CEOs of international banks is that had Western Banks owned more ﬁnancial institutions in Asia, the Asian currency crisis may not have happened. Through direct ownership banks such as Citigroup and HSBC, both of whom have been acquiring aggressively around the world, hope to control external volatility; a source of massive costs in the banking industry. M&A for critical mass: Although it is well recognised that ﬁrms engage in M&A to increase market power for monopolistic beneﬁts in the market, there are two other reasons why critical mass can be important (1) small ﬁrms aiming to ﬂoat on a stock market or launch an IPO may make a series of acquisitions simply to grow the ﬁrm to a critical size. The prize is the IPO rather than individual deals which may well not create value in themselves. (2) In some instances ﬁrms will merge in order to create sufﬁcient mass for an industry to takeoff (so not a consolidation M&A in the traditional sense). This is happening at the moment in the Canadian online transaction services industry. Through the merger of the two leading ﬁrms, they have managed to increase the adoption rate of this technology more rapidly amongst new customers than if they had remained in competition with each other. Multi-business M&A: It is entirely possible that an acquisition may make sense at different levels of a multi-business but may not make sense for the ﬁrm as a whole and detract from overall strategy. An example might be IMASCO’s acquisition of Roy Rogers restaurant chain (Neupert, 1996), where the rational decision from the parent’s perspective would have been not to invest in Roy Rogers, as the division was underperforming the group and the acquisition would have absorbed resources and still not helped overall performance. However, from the divisional point of view, it was clearly the right decision in order to improve competitive position. This raises the question of what is the appropriate way to assess M&A performance for multi-businesses as the acquiring group share price may fall on announcement and yet proﬁtability at the divisional level may rise.

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M&A as self-protection: More M&A is the result of fear of takeover than is widely admitted and there is an assumption that by making the ﬁrm larger, it is in some way less vulnerable to acquisition itself. Although this sort of acquisition is recognised, it is rarely discussed in the literature. A variant which is not discussed at all, relates to recently privatised ﬁrms. The vast majority tend to embark on cross-border M&A in order to protect themselves against re-nationalisation. These acquisitions may not be successful in classical terms, but may create sufﬁcient obstacle for political attempts to re-nationalise them to fail. Examples include privatised utility companies in the UK. M&A as influence: A case made famous in Japan was the acquisition by Livedoor of NBS (Japan Times, 2005). The purpose of this acquisition was to gain power over Fuji TV, in which NBS was a leading shareholder, and through this have power in the Fujisankio Communications Group. The acquisition was about achieving inﬂuence elsewhere and was less focused upon beneﬁts being achieved in the immediately acquired ﬁrm. M&A to win political favour: Sometimes acquirers engage in an acquisition speciﬁcally to win political favour, even though this may not result in conventional direct economic beneﬁt to the ﬁrm. However, these actions may lead to favourable opportunities in the future. Examples include foreign acquisitions into China, where conventional wisdom is that these actions may lead to the building and developing of trust which can be most useful in gaining future beneﬁts, and also the activities of Chinese acquirers in the US. Sequential M&A: Linked to the exploration motivation described above, in some instances ﬁrms make small M&A in order to learn and understand a sector, perhaps as a prelude to a later larger acquisition (or other forms of entry). This is common practice amongst Japanese ﬁrms in cross-border M&A. Although the original acquisition may well perform poorly in economic terms, the beneﬁts of preparation for more substantial activity can be substantial. Firms may engage in a series of M&A in order to achieve a particular strategic position. Whilst individual M&A may not appear successful, the whole sequence may bring signiﬁcant rewards, perhaps by achieving market leadership for instance. This approach to serial acquisition means that acquirers will view acquisitions as a portfolio of investments rather than on a deal-by-deal basis. This is similar to the way venture capitalists (VCs) and start-up funds evaluate their portfolios where one huge success outweighs several failures.

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Negotiated and Political Decisions to Acquire M&A as process: ‘Internal’ motivations may not be the result of a coherent rational decision from top management as they can result from political processes within the ﬁrm (Trautwein, 1990). A myriad of impulses from within the ﬁrm may result in the whole being put onto an acquisition footing resulting in an acquisition far removed from original impulses. Although this internal process view has received some recognition, the M&A performance literature generally persists in assuming that top managements make coherent rational decisions. The negotiation process itself is also ignored in performance studies. A multitude of deal conﬁgurations are possible (Angwin, 2001) which may distort original intentions and can affect ultimate results (Jemison & Sitkin, 1986; Smith, 2007). Here there can be distorting affects from the personalities of the protagonists, actions of competitors, regulatory and competition authorities and a range of other stakeholders. Where there has been signiﬁcant research into M&A process is in the post-acquisition phase. Disruption of integration plans have been attributed to employee distress through culture clash (Nahavandi & Malekzedah, 1988; Cartwright & Cooper, 1992) and difﬁculties in integrating and redeploying embedded and less tangible resources (Nelson & Winter, 1992). Whilst there is some evidence that researchers are now linking personality, affect and motivation (PAM) variables to performance (cf. Capron, 1999), these are still few on the ground. The ‘external’ process of M&A decisions has been virtually ignored in performance studies. The evidence for these non-planned events include hostile battles between two ﬁrms where a third company maybe approached as a potential white knight and so be drawn into the fray; the spoiling actions of competitors causing regulators to examine deals which might otherwise have gone through (i.e. iSoft/Torex); competitor actions in negotiating side deals for parts of assets and so distorting the original balance of the deal (i.e. the actions of UK supermarkets when Morrisons bid for Safeways).

IMPOSED MOTIVATION There are motivations which can be imposed upon ﬁrms from external sources.

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Customer/supplier pressure: In some instances powerful customers or suppliers can force ﬁrms into making M&A. For instance, in the IT industry Nokia brought pressure to bear on one of its suppliers to purchase a high tech ﬁrm as they wanted aspects of this technology integrated into the components they were sourcing, but they did not want to purchase the ﬁrm themselves. The supplier, wanting to keep its main client had no choice. It may not have beneﬁted from the actual M&A but to lose Nokia as its primary customer would have been a far worse fate. Competitor actions: The actions of a competitor may precipitate a ﬁrm into engaging in M&A. It is well known that when an industry begins to consolidate there is a rush of other ﬁrms to follow suit, i.e. UK Banking, professional services ﬁrms, oil companies, steel businesses. Arguably, the motive here is fear of being taken over. There is evidence that medium-sized ﬁrms are likely targets in consolidating industries and this pattern appears to exist across different industries. Engaging in M&A in this situation maybe more about self-preservation and living to ﬁght another day than achieving substantial post-acquisition beneﬁts through integration. Financial community: Financial institutions can exert considerable pressure upon ﬁrms to merge either through fear or offering opportunities. It is not unknown for VCs to bring signiﬁcant pressure upon a ﬁrm’s management, in which they have investments, to make M&A deals in order to grow the ﬁrm rapidly, perhaps as a prelude to ﬂotation or IPO. Here growth is good in itself so increase in scale is more important than other success measures. VCs are also known to use the threat of M&A as a stick to beat ﬁrms in which they have investments. The ﬁnancial community is also subject to fads and fashions and there are times when M&A is heavily encouraged, either positively through direct encouragement, or negatively through the fear of takeover. Political persuasion: Central governments can bring substantial pressure to bear upon top managements to act in ways which would further the national interest. For instance, in France there has been substantial pressure upon utilities ﬁrms to merge rather than accept approaches from Italian and Spanish ﬁrms. ‘Many of the large utilities deals in Europe reflect a confluence of interests between companies and governments eager to create national champions that can fend off hostile offers from foreign companies. The proposed Suez-GDF merger is one such example: it is a direct response to rumors in late 2004 that Italian utility Enel might make a hostile offer for Suez.’ The business rationale for the merger remains vague’ (Energy Business Review online, 2006). When the Government is a major

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shareholder in a ﬁrm and tells them to make an acquisition as it is in the national interest, the acquisition is a success in these terms, although it may underperform in conventional economic and ﬁnancial terms. Olivetti was encouraged to acquire Telecom Italia (‘TI’) to prevent it falling into German hands as ‘the Italian government, which owned a ‘‘golden share’’ in TI and could block any takeover, was itself unhappy about the merger with the German company’ (BBC News online, 1999). Post-deal, Olivetti was heavily indebted and its share price fell. At the moment, the Central Bank of Nigeria is forcing the majority of Nigerian banks to merge in order to improve the robustness of the ﬁnancial system. Although ﬁrms can seek partners from this limited pool, it is clear that individual banks will fail (as their banking licences will not be renewed) if they do not merge. Although individual mergers may not be so successful for individual banks, as there is plenty of evidence that there will be very signiﬁcant integration costs with problematic redundancy decisions, it may well be a case of ‘losing the battle and winning the war’ for merging banks. They will be able to renew their licences and, with fewer larger players and more marginal players excluded, be part of a more manageable, efﬁcient and robust ﬁnancial system. In China, the government is also active in forcing underperforming and often heavily indebted Semi-State Owned ﬁrms (SOEs) to actively ﬁnd overseas merger partners for re-invigoration. This means the companies which China is actively putting forward for merger are not in good health and are likely to result in less than successful deals for foreign partners in the short term. However, if a foreign ﬁrm wishes to enter this rapidly growing market, the bigger long-term gain in new connections and new opportunities may outweigh the short-term costs. Social, ethical, environmental pressures: The rise of what maybe loosely termed Corporate Social Responsibility (CSR) captures a wide range of pressures upon ﬁrms to operate responsibly in society. This follows growing belief that certain business practices are damaging to society and others, if unchecked, will cause irreversible damage to the environment, i.e. pollution leading to global warming. These varied pressures include ethical dealings with all stakeholders (i.e. employees, customers, suppliers), adopting environmentally sound policies (i.e. waste disposal, carbon emission) for instance. The way in which ﬁrms are being inﬂuenced by these pressures are through media-driven shaming and the campaigning of activist groups. These can severely damage a ﬁrm’s reputation and share price. There are also increasing direct controls though legislation and prosecution. The impact upon M&A has been in

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some instances to increase post-acquisition costs in order to achieve compliance or anticipate future CSR pressures. It has also resulted in M&A taking place in areas where these pressures are currently nonexistent or low in order that acquirer activities in highly ‘pressurised’ parts of the world might be reduced or closed down. More positively ﬁrms do purchase ‘socially responsible’ ﬁrms in order that the reputational effect of the speciﬁc acquisition may improve the overall reputation of the acquirer. It may make sense to carry out a small acquisition which generates little ﬁnancial beneﬁt if it has the effect of reducing CSR and activist pressure, or the potential for these pressures, upon the acquirer as a whole.

A TYPOLOGY OF FIRM LEVEL MOTIVES The previous sections have highlighted a number of reasons why M&A may take place which are underrecognised or ignored in the M&A literature. A few of these might be located within the classical approach, although requiring different methods of evaluation, i.e. serial acquisitions require aggregate rather than single deal measurement. Most of the motivations presented here, however, show broader and more complex concerns than just increasing ﬁrm value per deal. Overall the reasons can be grouped into four categories: (1) the ‘exploitation’ of the target through synergies to increase acquirer value with a high degree of certainty; (2) ‘exploration’ – acquiring in new areas for potential value and future opportunities with low certainty of improving returns to the acquirer; (3) ‘stasis’ – attempting to preserve the acquirer’s competitive situation through fossilising or closing down the acquired ﬁrm (few if any direct beneﬁts are extracted from the acquisition itself); (4) ‘survival’ – attempting to prevent the acquirer’s demise through acquisition – the acquisition may result in the acquirer losing value, but this maybe better than not acquiring at all.8 In their pure forms the payoffs for these different types of M&A is different (see Table 1). From ‘exploitation’ deals there should be reasonable certainty about value created. ‘Exploration’ deals may have the potential for much greater returns than exploitation deals as well as much higher risk about whether those returns will be achieved and how far into the future. For ‘stasis’ deals the acquirer may not receive any direct beneﬁt, with neutral or even mildly negative returns but the negative threat of severe future change maybe reduced. ‘Survival’ deals are not so much about increasing value as to survive potential takeover threat or current demise of the ﬁrm. For ‘stasis’

Motive Archetypes in Mergers and Acquisitions

Table 1. Motivation Categories

Motivation Types and Payoffs.

Motivations

Exploitation

Classical motivations Building critical mass

Exploration

Sequential Learning Reinvigoration Inﬂuence

Stasis

Survival

Political favour Innovation stiﬂing Damage competitors Customer/Supplier driven Self-protection Regeneration Political/Institutional CSR

93

Payoffs

Maximise shareholder return Aggregate deals to achieve critical size for credibility and ﬁnal payoff (i.e. IPO, listing) Assembling a long-term industry/market position for long-term payoff Small deal(s) to build understanding for later potential large investment (and payoff) Find new potential markets/products / technologies/ideas for future growth Indirect control of other assets for potential beneﬁts Future indeterminate beneﬁts Prevent deterioration of competitive situation Prevent competitors from presenting a threat in the future Engage in M&A to preserve/maintain relationships Size as a defence against predations M&A as passage to more promising industry/ area Cope with imposed M&A as least worst outcome M&A in anticipation of potentially fundamental changes in the way business must be conducted

and ‘survival’ type deals, value creation maybe an inappropriate way of viewing performance. Instead we propose a ‘worse off test’; [2] ‘would the acquirer be substantially worse off if they did not transact a particular acquisition?’ To have a break-even deal and survive to ﬁght again could be a good outcome.

MULTIPLE MOTIVATIONS Whilst it is appealing to researchers to be able to categorise M&A into single motives or single categories such as horizontal, vertical or diversiﬁed to aid analysis, analytical convenience does lead to oversimpliﬁed assumptions of why M&A are transacted. It is highly unlikely that top management views

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acquisition in such crude terms. Indeed in a survey conducted in 1999 of the CEOs of 100 domestic acquirers in the UK (Angwin, 1999, 2000), an open ended question about their motivations for carrying out a speciﬁc M&A transaction elicited up to seven distinct reasons in some instances, 45% gave three or more distinct reasons and 71% of CEOs gave two or more reasons.9 On this basis single motivations for M&A are unlikely. Multiple motives may result in conﬂicts in how different requirements might be reconciled post-acquisition. Pre-deal, multiple reasons for an M&A may appear attractive and perhaps indicate rich opportunities to shareholders, but postacquisition these wishes may conﬂict at a fundamental level and so compromise performance. For instance, an acquirer’s stated motives maybe primarily to build market share and also to achieve substantial cost reductions through economies of scale. However, it is not unusual in the post-acquisition period for the latter to come to dominate when anticipated savings are slow to materialise and hopes of building market share vanish (cf. Mueller, 1985; Anand & Singh, 1997). Within gross categorisations such as ‘horizontal’ M&A it is likely that there are many acquisitions which are not ‘pure’ and contain elements of paradoxical motives. Post-acquisition integration attempts to realise all beneﬁts will most likely struggle. In order to reﬂect the complexity of multiple motives, the main types of M&A identiﬁed in the previous section have been combined in Fig. 1 so for instance an exploration M&A may also contain elements of exploitation, or survival may contain elements of exploitation and exploration. Motives do not occur in a vacuum and the ‘context’ serves to frame and determine, through institutions, the acceptable types of M&A that may take place. Affecting all parties involved in M&A is the distorting role of ‘process’, internally and externally to the ﬁrm. This may work to undermine clear motivations as well as to result in creative and innovative outcomes.

MOTIVATION SUMMARY There are far more motivating factors in M&A than are really captured by performance studies which tend to focus on single items or, in the strategy literature resort to broad single categories. This is to judge M&A in narrower terms than is warranted as signiﬁcant motivations are overlooked, their complexity grievously underestimated and the role of context and process largely ignored. These omissions may mean the results of performance studies maybe biased as many deals are being assessed on

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Context(s) Exploitation Classical motivations Critical mass

Stasis

Multiple motivations

Damaging competitors Innovation stifling Internalising risk

Process

Exploration New territories / products/ technologies To learn Influence Political Favour Multiple M&A

Survival Accommodate pressures - Institutional (political, financial - Competitive CSR

Fig. 1.

Multiple Motives in M&A.

bases which were never the main intention of top management in the ﬁrst place. In summary 1. there are types of acquisition which have been ignored in performance studies; 2. complexities in motivations mean conventional categories of M&A are too simple; 3. overly simpliﬁed views of M&A motivations may have resulted in distorted views of performance; 4. strategists need a better framework for capturing actual ‘motivations’ rather than impugned ones. This also raises the issue of whether the additional motivations in this chapter are ‘legitimate’ and who decides? The answers to these questions are context dependent as certain stakeholders, their preferences and priorities will vary depending upon different socio-economic-political systems.

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Fig. 2.

Ways in Which Actual and Reported Motivations May Combine.

However, to test M&A performance, this chapter argues that management’s acquisitions should at least be judged in terms of what they were trying to achieve rather than imposing assumptions and then attacking a straw man for failure. There is a great deal more innovation and creativity in M&A than managers are given credit for and they are not constrained by neat academic prescriptions. On this basis all motivations should be included in testing performance rather than just assuming all acquisitions ﬁt a narrow set of imposed terms. Care is required for eliciting actual motives as those reported, in offer documents, public statements, even surveys, maybe designed for public consumption and to comply with legal and institutional requirements rather than representing the full or, in some cases, even the real reasons for acquisition (Angwin, 2003) (Fig. 2). Researchers will not ﬁnd top management in print saying that they are carrying out M&A because they think they should experiment and have little idea of how it will work out, or that they have a hubristic CEO, or because they are terriﬁed of being acquired. Instead the reported motivation will be classically described in the legitimate language of economics and ﬁnance with broad intent to improve ﬁnancial

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returns (Trautwein, 1990). To gather information on motivations therefore requires careful and in-depth data collection.

MOTIVATION ARCHETYPES In addition to classical motivations for M&A and their meta-categories, attention has been directed to (1) motivations which are recognised and not assessed; (2) motivations which are unrecognised and; (3) distorting effects within and upon motivations. As motivations are likely to be a mix of factors, there is a need to create archetypes to reﬂect this closer view of reality. With these archetypes, hypotheses can be generated about the conﬁguration of motives which may result in superior outcomes and those which maybe damaging. In order to generate archetypes the dimensions along which these may exist needs identiﬁcation. The dimensions chosen here are; (1) acquiring ﬁrm level motives: are these dominantly classic value maximising motives aimed at improving shareholder value through enhanced competitiveness in the short term or more about creating opportunities through exploration, or stasis and survival measures? (2) the extent to which external contextual drivers are powerful or weak and whether they are consonant or dissonant with the acquiring ﬁrm’s competitiveness; (3) the extent to which top management are acting selﬂessly on behalf of the ﬁrm and investors, or whether they are more interested in their own beneﬁts – the classic agency problem. (1) Acquiring ﬁrm motives value maximising behaviour (exploitation) non-value maximising (exploration, stasis, survival) (2) Contextual drivers Consonant Dissonant (3) Top management Agent Agency problem Each dimension is envisaged as a continuum where a mixture of motives and pressures is more the norm than the extremes. To operationalise these axes a careful exercise of weighting each motivation in relation to others will need to be carried out.

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M&A Motivational Archetypes

2.

8. 1.

Agency problem

4.

6.

Non-maximising Survival/exploratory

Classicalvalue maximising

Top management motivations

3.

Agent

Dissonant

5.

Consonant

Unbidden contextual drivers

7.

Firm level motivations

Dr Duncan Angwin (2006) Fig. 3.

Motivational Archetypes.

Using these three dimensions, eight archetypes can be identiﬁed (Angwin, 2006, see Fig. 3).10 To illustrate how these archetypes might affect classical descriptors, it is possible for instance to see a ‘horizontal’ type of acquisition in each of the boxes, but as the subsequent discussion will show, the anticipated outcomes are likely to vary substantially. Type 1: This is the classic type of M&A and one assumed in the performance literature. Here the ﬁrm is conducting M&A on the basis of rational value maximising strategies, such as cost reduction, to enhance shareholder value. The top management are acting as good agents and the contextual drivers encourage this sort of M&A. This type of M&A can reasonably be expected to succeed in conventional terms. Type 2: Contextual pressures in this type maybe at odds with the ﬁrm’s wishes to maximise shareholder value. In this type there maybe conﬂict between ﬁrm and top manager rational value maximising motivations and

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those of the context. Although the merger will be conducted in classical terms, it may well be very difﬁcult for the acquiring ﬁrm to do well out of the deal. For instance, in 1988 the British Government encouraged British Aerospace (BAe) through a cash payment to take over the ailing British car manufacturer, Rover group, to avoid a political problem of foreign ownership and large job losses. There were no synergies between the businesses and BAe subsequently divested the business as soon as it could.11 Type 3: Contextual factors maybe at odds with classic ﬁrm motivations but maybe accommodated if the ﬁrm is motivated by non-maximising motives. There could be tension with a top management focused upon shareholder value in the short term. It is unlikely that the acquisition will succeed in conventional terms but maybe beneﬁcial long term. Examples might include a recently privatised ﬁrm fearing re-nationalisation, embarking on an acquisition spree to protect independence, or an acquirer, under increasing ethical pressure from a vocal context, making an acquisition to avoid likely censure in the media. Type 4: Contextual factors set conditions for classic M&A and top management are aligned with this pressure. However, the returns maybe in the future, requiring exploratory M&A. For instance, business maybe anticipating the convergence of industries/technologies, which suggest proﬁtable opportunities in the future. M&A in this situation may not realise short-term returns, and is likely to be risky, but may also result in signiﬁcant long-term beneﬁts. Examples here might include M&A into new geographic markets such as China, or acquiring technology companies in anticipation of technological convergence. In conventional terms these M&A are likely to underperform. Type 5: Contextual pressures may pressure the acquirer into deals which do not ﬁt with classical ﬁrm motives and there is also an agency problem. The latter may result in a deal which suits top management and addresses the context, but is unlikely to beneﬁt the ﬁrm in conventional terms. An example here would include ﬁrms which are caught up in an M&A fashion and over acquire, i.e. Enclean, where their rate of acquisition accelerated to please the markets, the top management thrived on the deals (rather than day-to-day management) and the expansion went beyond the capabilities of the ﬁrm. Type 6: Contextual pressures maybe propitious for M&A in terms of maximising ﬁrm value. An agency problem may mean that top management seek to beneﬁt personally from the deal, although this does not exclude the

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possibility of the deal being successful. The acquisition of Blue Circle by Lafarge is an example of the acquirer seeking to achieve global dominance through acquisition and enhance proﬁtability through economies of scale. It was widely suggested that the CEO of the acquirer was an example of an agency problem as he occupied the ofﬁces of chairman and CEO and was seen to overpay for the ﬁrm. The deal was regarded as a success. Type 7: Contextual pressures maybe counter to the ﬁrm’s classical motives, but could ﬁt with exploratory motives. For instance, the interest in global warming could provide ﬁrms with the opportunities to acquire prototype environmentally friendly technology in anticipation of this trend continuing. An agency problem does give top management scope to beneﬁt personally and so it is unlikely that such a deal would bring beneﬁts to the ﬁrm. Type 8: Contextual pressures maybe favourable for M&A by the ﬁrm although the ﬁrm maybe motivated by non-maximising outcomes. This may enable the ﬁrm to engage in speculative acquisitions with low-commercial rational. They maybe encouraged by top management where there is an agency problem. Based upon this set of archetypes different sorts of outcomes are apparent. Importantly, it is clear that only a few archetypes can be described as classically oriented towards improving shareholder value. Most of the archetypes are likely to result in underperformance in conventional terms. Studies which therefore treat all M&A as homogeneous are including those which are not designed primarily to achieve these gains, and so results are likely to be biased downwards. A more reﬁned approach to M&A motivations could potentially result in quite different results. Many testable hypotheses are possible from this approach and the following are not exhaustive: Hypothesis 1. Acquirers acquiring in a propitious context with top managers acting as agents (Archetype 1) will exhibit higher levels of performance than other archetypes in conventional terms. Hypothesis 2. Acquirers acquiring in propitious conditions with top managers acting as agents but using exploratory types of M&A (Archetype 4) are likely to underperform short term, but may achieve substantial long-term gains. Hypothesis 3. Acquirers acquiring in dissonant conditions, with top management exhibiting an agency problem, and acquiring in an exploratory way (Archetype 7) are likely to be less successful than other archetypes.

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CONCLUSIONS Studies of M&A performance in the strategy literature have tended to use a broad typology of assumed motivations for deals. The results of these performance studies have led to ambiguous results. This chapter argues that one reason for this confusion is due to imposing crude categories upon M&A, from which simple assumptions about intentions and beneﬁts are drawn rather than using real motives. The link which is being tested is therefore between abstract categories, and performance rather than real motives and intended performance. For example a horizontal acquisition maybe ‘authentic’ in classical terms, with coherence between context, management and ﬁrm aims, or for instance, simply a label, or legitimating term which disguises real intentions. Without the link to what is actually intended, the data in performance studies maybe confounded. This chapter identiﬁes a number of reasons for M&A which have been underrecognised in the literature and some of which do not ﬁt neatly with classical prescription. These motivations highlight different pressures upon ﬁrms to engage in M&A and need to be recognised in order for more complete understanding of why ﬁrms embark upon these deals. The chapter also argues that single motives for deals are rare and multiple motives more the norm and that these motives are not necessarily in alignment. To capture this complexity, three dimensions are identiﬁed. They give explicit recognition to differences in ﬁrm motivations (recognising that not all deals are about proﬁt maximisation and important types of deal are about exploration, survival and stasis); contextual pressures imposing motivations (consonant pressures which might encourage deals for proﬁt and dissonant pressures which might be contrary to classical prescriptions, such as governmental interference); top management intentions (which maybe to maximise proﬁts for shareholders or work for personal gain at the expense of shareholders). From these three dimensions, eight archetypes are identiﬁed along with outcomes in classical performance terms. It can be seen that in only two archetypes are there good reasons to suspect that all M&A should succeed in directly enhancing acquirer performance. The other archetypes suggest aggregate underperformance in conventional terms although longer term many individual deals may witness impressive outcomes. If performance studies are examining M&A as homogeneous in these terms, is it any wonder that so many appear to underperform? Does this mean that the other archetypes identiﬁed are not legitimate forms of M&A if they are not maximising value for shareholders? Clearly

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this maybe the case with Archetype 7, where top management has signiﬁcant opportunity to exploit a propitious situation to personal advantage at the expense of the ﬁrm. However, the other archetypes offer more complex situations such as whether it is right to experiment and explore for future gain, or whether it is right to accede to governmental pressure which maybe vital for survival. In these situations ﬁrms maybe signiﬁcantly worse off than if they do not engage in M&A. To highlight ﬁrm’s efforts to prevent potential/actual deterioration, a ‘worse off test’ is proposed. Why is it not more apparent in M&A research that there are greater complexities in motivation? First, it is convenient for researchers to use broad secondary categories than to attempt to identify the variables highlighted in this chapter. Also in defence of the researcher it is important to note that public deals have to convince a broad audience that they are in the ﬁrm’s best interests. For this reason public pronouncements about M&A will always be in a legitimate language and will downplay other ‘less acceptable/recognised’ motives. For this reason it is highly likely that there are fewer classical M&A in practice that there are ‘in public’. However, if we are really to get to grips with how M&A perform, the complex motivations behind M&A need to be recognised and examined (Angwin, 2007). A more sensitive appreciation of the real reasons why M&A is carried out may well help resolve the paradox of why so many deals are transacted when so manyapparently fail.

NOTES 1. ‘Motivations’ in this chapter is taken in its broadest sense to be reasons and impulses for acquirers to engage in M&A. It therefore includes external pressures upon acquirers and their top management from different contextual layers (such as institutional and competitive inﬂuences), as well as in-ﬁrm socio-political dynamics. It also includes the individual motivations of executives inﬂuential in making acquisition decisions. 2. Rational from the manager’s point of view. 3. This maybe through judicious application of tax loss carry forwards from the target ﬁrm, tax treatment of goodwill, or other special tax treatment, and in leveraged acquisitions the transfer of value through reduction in the cost of capital base on the tax deductability of interest. 4. In turnarounds, higher risk debt maybe renegotiated down by providing guarantees (Haspeslagh & Jemison, 1991). 5. The author is aware of just one study that seeks to test explicitly for managerial hubris Hayward and Hambrick (1997). 6. It is this issue which recent developments in real option valuation are addressing. However, this technique falls short of really capturing the essence of exploration through M&A.

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7. The only other targets were not freely traded (with shares held in charitable trusts) or with small exposure to the market area in their overall portfolios. 8. Survival could be said to underlie all ﬁrms’ strivings, but here it is meant in terms of avoiding a terminal situation. 9. Distinct means reasons which are not reasons which could be interpreted as coincident. 10. Please note that the ‘precision’ of the boxes is not intentional but more a limitation of the graphics available to the author – zones with overlaps would be closer to the author’s ideals. 11. It is noteworthy that this acquisition is not mentioned on BAe’s website which lists its M&A activity.

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Nelson, R. R., & Winter, S. G. (1992). An evolutionary theory of economic change. Cambridge, MA: Harvard University Press. Neupert, K. E. (1996). IMASCO Ltd: The Roy Rogers Acquisition. In: K. E. Neupert & J. N. Fry (Eds), Cases for contemporary strategy analysis. Blackwell Business. Penrose, E. (1959). The theory of the growth of the firm. Oxford: Oxford University Press. Porter, M. E. (1985). Competitive advantage. New York: Free Press. Porter, M. E. (1987). From competitive advantage to corporate strategy. Harvard Business Review, May/June, 43–59. Ravenscraft, D. J., & Scherer, F. M. (1987). Mergers, sell-offs, and economic efficiency. Washington, DC: The Brookings Institute. Roll, R. (1986). The hubris hypothesis of corporate takeovers. Journal of Business, 59, 197–216. Rumelt, R. P. (1982). Diversiﬁcation strategy and proﬁtability. Strategic Management Journal, 3, 359–369. Selznick, P. (1957). Leadership in administration. New York: Harper & Row. Singh, H., & Montgomery, C. A. (1987). Corporate acquisition strategies and economic performance. Strategic Management Journal, 8, 377–386. Sirower, M. L. (1997). The synergy trap: How companies lose the acquisition game. New York: Free Press. Smith, C. (2007). M&A as Illusion. Images Series. In: D. N. Angwin (Ed.), Mergers and acquisitions, (Chapter 3). Steiner, P. O. (1975). Mergers: motives, effects, policies. Ann Arbor: University of Michigan Press. Trautwein, F. (1990). Merger motives and merger prescriptions. Strategic Management Journal, 11, 283–295. Varaiya, N. P., & Ferris, K. R. (1987). Overpaying in corporate takeovers: The winner’s curse. Financial Analysts Journal, 43(3), 64–70. Wernerfelt, B. (1984). A resource based view of the ﬁrm. Strategic Management Journal, 5(2), 171–180. Wilcox, J. W. (1971). A gambler’s ruin prediction of business failure using accounting data. Sloan Management Review, 12(3), 1–10.

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EXPLAINING THE EFFECT OF M&A ON TECHNOLOGICAL PERFORMANCE Maria Chiara Di Guardo and Giovanni Valentini ABSTRACT We propose a model to explain how and why merger & acquisition (M&A) can affect firms’ technological performance. The model presents two key novel features. First, we conceptualize technological performance as a bi-dimensional construct that includes both the quantity of innovations produced as well as their quality (or type). Second, we characterize the outcome of the innovation process as essentially dependent on two variables: the resources available in the process and the organizational incentives that govern the use of these resources. We then argue that two types of resources are particularly relevant to explain technological performance: technological resources and complementary assets. Moreover, we contend that not only do incentives influence the propensity of firms to innovate (i.e., the quantity of innovations produced), but they also shape the type of innovations pursued. Our thesis is that M&A influence technological performance by altering simultaneously the resources firms’ can use in their innovation process as well as the incentives firms undergo in the innovation process. Some preliminary empirical findings along these lines are also discussed.

Advances in Mergers and Acquisitions, Volume 6, 107–125 Copyright r 2007 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 1479-361X/doi:10.1016/S1479-361X(07)06005-X

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Over the last decades, there has been a substantial increase in the number of mergers and acquisitions (M&A) concluded in high-tech industries. Besides being motivated by the ‘‘traditional’’ pursuit of economies of scale, gains in market share, or geographical expansion, M&A are now carried out also to obtain highly developed technical expertise and R&D skills, experienced personnel, and speciﬁc new technologies in fast-paced industries (e.g., Cassiman & Colombo, 2006; Inkpen, Sundaran, & Rockwood, 2000; Kozin & Young, 1994; Ruckman, 2005). In this paper, we will discuss the effect of M&A on the technological performance of the companies that engage in such deals. In so doing, not only do we contribute to the analysis of the long-term results of M&A, but we also shed some new light on the fundamental drivers of technological performance. Within the context of this paper, technological performance refers to the accomplishment of companies with regard to the combination of their R&D input and their research capabilities aimed at producing new knowledge embodied in inventions and innovations (Griliches, 1998). In the next sections, ﬁrst we motivate our study relying upon both empirical and theoretical insights. After having reviewed the relevant literature, we then introduce a novel framework that may help reconciling the previous – scattered and conﬂicting – empirical evidence on the M&A impact on technological performance. We conclude discussing suggestions for future research.

HI-TECH M&A IN THE BUSINESS PRACTICE In the 1990s, high-tech assets as acquisition targets accounted for 21% of all U.S. M&A activity by number and 39% by value (Inkpen et al., 2000). After a slight inﬂection, technology M&A are valued higher in 2006 than any year since the dot.com bust, according to some analysts. Through the ﬁrst three quarters of 2006, M&A were valued at $186.3 billion, compared to $164.6 billion for all of 2005 (Jones, 2006). M&A are increasingly used to absorb external technological capabilities in order to compete successfully in radically changing economies (de Man & Duysters, 2005). Cisco Systems is a classical example of a company that builds its innovation strategy relying upon technology M&A. Cisco engages in relatively little internal R&D: it adopts the strategy of acquiring those technology corporations that it needs. Also in the telecommunications arena, in the wake of Cisco’s strategy, other more traditionally organic growth ﬁrms have started to expand on the M&A track. Nokia, inter alia,

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has been recently buying a number of small technology-focused ﬁrms. In the software sector, over the past few years Microsoft has also being buying small companies to bring new technologies ‘‘within the tent’’, while in the past it had traditionally focused primarily on internally driven innovation. The recent upward trend of technology M&A results from the concomitance of several factors. On the one hand, there is an increased pressure on ﬁrms’ technological performance, driven by a stronger market competition, which in turn requires continuous innovation and a faster development cycle of new products (e.g., D’Aveni, 1994). In addition, the increasing complexity and multidisciplinarity of the resources required for innovation, coupled with the necessity of being responsive to both local and global markets, have made internal development more difﬁcult and ultimately insufﬁcient (e.g., Bartlett & Ghoshal, 1997; Rigby & Zook, 2002). Accordingly, companies ever more rely on external sources of knowledge in their innovation process (e.g., Chesbrough, 2003). On the other hand, while markets for technologies are emerging and developing in several industries (Arora, Fosfuri, & Gambardella, 2001), the traditional failures in the market for knowledge still cause ﬁrms to buy and sell entire businesses rather than discrete-speciﬁc resources (Capron, Dussauge, & Mitchell, 1998). Therefore, M&A may constitute a preferred channel to source external knowledge and technologies. Does this strategy work?

HI-TECH M&A IN THE LITERATURE Given the continuing popularity of M&A in the business practice of hightech sectors – where innovation is or should be key to competitive advantage – we would expect to observe substantial improvements in technological performance as a consequence of these deals. However, previous empirical studies on the effect of M&A on ﬁrms’ technological performance present conﬂicting evidence. In the past, a relatively dominant view was that M&A were negatively associated to technological performance. Hall’s (1990) seminal study, based on data about 2,500 U.S. manufacturing ﬁrms, provides some evidence that restructuring activities may have a negative effect on R&D spending and more speciﬁcally that a ﬁrm’s increase in leverage is signiﬁcantly correlated with a decline in R&D intensity. Hitt, Hoskisson, Ireland, and Harrison (1991) contend that acquisition activity is a negative predictor both of R&D intensity as well as of patenting intensity. The explanation offered mainly relies on a higher risk aversion of managers engaging in M&A, and on its

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possible effect on their commitment to innovation. In a subsequent study, Hitt, Hoskisson, Johnson, and Moesel (1996) ﬁnd again that a ﬁrm’s innovation activity is negatively inﬂuenced – both directly and indirectly – by acquisition intensity. The rationale proposed for the direct effect takes into consideration the fact that acquisitions absorb managers’ time and energy, diverting them from other activities and fostering a short-term perspective, which in turn makes long-term R&D investments less likely. The indirect effect is explained through the control system used: acquisition intensity is shown to be negatively related to the use of strategic controls – that employ long-term, strategic indicators – and positively related to rigid ﬁnancial controls, that are more short-term oriented, and may therefore discourage R&D investments. Ernst and Vitt (2000) show that the behavior of key inventors, individuals characterized both by a high-patent activity and a high-patent quality, and who are therefore of critical importance for the technological performance of the ﬁrm, is deeply inﬂuenced by corporate acquisitions. About 65% of key inventors of the ﬁrms in their sample could be found in a new position after an acquisition, and a general decrease of inventors’ performance is observed. This could negatively inﬂuence the technological and economic results of the ﬁrms involved in the deal, particularly if we consider that one of the keys to success in high-tech acquisitions is retaining the ‘‘right’’ people (Chaudhuri & Tabrizi, 1999; Ranft & Lord, 2000). However, the empirical literature is not unanimous in its concern over the effects of M&A on innovation. Capron (1999) argues that under certain circumstances, M&A can enhance innovation capabilities improving product features and organizational and marketing effectiveness, thanks to a resource redeployment, and Hsieh and Tsai (2005) suggest that M&A allow achieve signiﬁcant synergies in R&D. Ahuja and Katila (2001) assess the effects of acquisitions on the acquiring ﬁrms’ patenting output in a sample of ﬁrms taken from the global chemical industry. First, they detach technological acquisitions from non-technological ones, and then argue that the latter non-signiﬁcantly affect the post-acquisition innovation output. Within the framework of acquisitions that aim to provide technological inputs, they suggest that a balance of both relative knowledge base size of the involved ﬁrms and relatedness of knowledge favor the patenting output. Cassiman, Colombo, Garrone, and Veugelers (2005) show that the effect of M&A on technological performance is contingent upon technological and market relatedness between M&A partners. M&A between partners with ex-ante complementary technologies result in more active R&D performers after the M&A. In sharp contrast, when merged entities are technologically

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substitutive, they signiﬁcantly decrease their R&D level after the M&A. Moreover, R&D efﬁciency increases more prominently when merged entities are technologically complementary than when they are substitutive. Next, for cases in which partners were active in the same technological ﬁelds before the M&A, the reduction of R&D is more prominent and the R&D efﬁciency gain is smaller if merged entities were rivals in the product market prior to their merger than if they were non-rival. This suggests that M&A between rival ﬁrms reap little technology gains from mergers. The lack of conclusive empirical evidence in the literature that has analyzed the relationship between M&A and technological performance may be due to several factors. First, in line with much of the M&A literature, the unit of analysis of previous studies has varied. Some papers simply consider the acquiring ﬁrm as the relevant unit of analysis (e.g., Ahuja & Katila, 2001), others only the target (e.g., Ernst & Vitt, 2000). Yet, measures of post-acquisition performance should focus on the acquiring and target ﬁrms considered together as a single entity, using as a baseline the sum of what the two ﬁrms were accomplishing independently (Seth, 1990). Second, issues of endogeneity may have affected prior econometric speciﬁcations, as the decision to engage in M&A has been frequently treated as exogenous. Third, and perhaps most importantly, the underlying process that should lead to the creation (or destruction) of technological synergies is not always speciﬁed or fully tested in its assumptions and implications. As an example, consider Hall’s (1990) paper. She observes a slight decrease in R&D intensity after a merger. Nonetheless, she argues that this could be equally due to the cut of potential good projects because of market myopia or, assuming ﬁnancial market efﬁciency but allowing the existence of agency costs, to the avoidance of substandard projects that before the merger were inefﬁciently approved. Without zeroing in on the process through which M&A may result in increased (or decreased) technological performance, empirical research is bound to lead to inconclusive results. To address this issue, in the next sections we provide a stylized model of the innovation process, and we then describe how M&A can inﬂuence the key variables of interest.

RESOURCES, INCENTIVES, AND TECHNOLOGICAL PERFORMANCE The apparently contradicting results the previous analysis highlighted – some of which indicate a decreased innovativeness in the aftermath of M&A,

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Technological performance Resources No. of Innovations

M&A Incentives

Type of innovations

Fig. 1. The Effect of M&A on Technological Performance.

others that hint just at the opposite – call for a deeper analysis of the factor and the contingencies that can explain how and why M&A may have some bearing on ﬁrms’ technological performance. To do so, we propose a framework that presents two elements of novelty with respect to prior literature. First, we conceptualize technological performance as a bidimensional construct that include both the quantity of innovations produced as well as their quality (or type). Second, we characterize the outcome of the innovation process as essentially dependent on two key variables: the resources available in the process and the organizational incentives that govern the use of these resources. We then argue that two types of resources are particularly relevant to explain technological performance: technological resources and complementary assets. Moreover, we contend that not only do incentives broadly determine the propensity of ﬁrms to innovate (i.e., they inﬂuence the number of innovations produced), but they also shape the type of innovations pursued. Our thesis is that M&A inﬂuence technological performance by altering simultaneously the resources ﬁrms’ can use in their innovation process as well as the incentives ﬁrms undergo in the innovation process. A simple representation of this model is presented in Fig. 1. Technological Performance: Not Only Quantity Matters Owing to rapid technological change, short product life-cycles, and increasing global competition, continuous innovation has become crucial to achieve a sustainable competitive advantage. The ability to produce multiple innovations in quick succession is undeniably critical in highvelocity environments (Brown & Eisenhardt, 1997). Hence, the most obvious dimension prior literature has considered to characterize technological performance is the number of innovations.1 Despite this emphasis, however, evidence is growing that innovation processes are not yielding the beneﬁts they should (Linder, Jarvenpaa, &

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Davenport, 2003). Firms’ attention has been excessively drawn on innovativeness rather than on innovation performance and value. The result is the search for the realization of a high number of innovations, with a high proportion of commercial and ﬁnancial failures (Andrew & Sirkin, 2003). Innovations display a huge variance in their economic signiﬁcance and usefulness (Gambardella, Harhoff, & Verspagen, 2006; Hall, Jaffe, & Trajtenberg, 2001; Trajtenberg, 1990) and prior literature has highlighted that (also) the type and the quality of innovations a ﬁrm produces have a relevant effect on ﬁrms’ survival and long-term success (e.g., Henderson, 1993; Christensen, 1997). Hence the extraordinary importance of understanding the drivers of the quality of ﬁrms’ innovations, besides their quantity. Yet, while patenting output is a relatively good measure to assess quantitatively technological performance, another relevant problem arise: how to measure innovation quality? No consensus has been achieved thus far, and the literature suggests employing multiple measures. Speciﬁcally, Trajtenberg, Jaffe, and Henderson (1997) and Hall et al. (2001), inter alia, consider three dimensions of innovations’ quality: impact, originality, and generality. The impact of an innovation denotes its inﬂuence on future innovations and inventors, the extent to which new innovations will have to build upon or refer to it. The generality of an innovation signiﬁes its degree of applicability across scientiﬁc and technological ﬁelds. And ﬁnally, the originality of an innovation indicates the extent to which an innovation synthesizes different inputs departing from the current state of knowledge. The idea is therefore to measure innovation quality through both the acceptance they received ex-post (i.e., how often they have been referred to and how widely by subsequent innovations and inventors), as well as through the knowledge on which they are built ex-ante (i.e., how widely the ﬁrm searched to achieve them, the notion being that the synthesis of divergent ideas is characteristic of research that is original and valuable). Considering both innovations quantity and quality is important for a better understanding of the effect of M&A on the innovation process. Valentini (2005), applying a matching estimator to data from the U.S. ‘‘Medical devices and photographic equipment’’, ﬁnds that M&A have a (conditional) positive effect on patenting output, but decrease patent impact, originality and generality. These results thus indicate that while M&A bring about important efﬁciencies in the production of knowledge through economies of scale and economies of scope, they also change the type of innovations pursued within the merging ﬁrms.2

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Changes in the Resources Having described the two dimensions of technological performance, we now turn to the analysis of their main determinants. Innovating ultimately means producing new knowledge building upon previously held knowledge (Fleming, 2001; Nelson & Winter, 1982; Schumpeter, 1939). Within this framework, the innovation process is cumulative in nature, and past experience does matter. Those ﬁrms who invested deeply in the past and built a wide technological knowledge base are expected to be more productive in their current R&D investments. The innovation process, in Dierickx and Cool (1989) terminology, displays assets mass efﬁciencies. The amount of knowledge produced is not merely determined by current R&D expenditures, but also by the available knowledge base (e.g., Afuah, 1998; Ahuja & Katila, 2004). M&A constitute a preferred device to acquire, transfer, and redeploy resources otherwise not readily available because of the failure of the market for resources (Capron et al., 1998). In particular, they allow the combination and redeployment of technological resources (Capron, 1999; Ahuja & Katila, 2001). By providing new technological resources, M&A can change both the number of innovations as well as their quality. To begin with, M&A can simply expand the technological base. Inventors belonging to ﬁrms that encompass a greater technological diversity are more likely to put together a previously untried combination (Fleming, 2001, 2002). Ahuja and Katila (2001) accordingly ﬁnd that the post-acquisition increase in the available knowledge base fosters patenting output.3 Besides a quantitative add-on, M&A can also contribute qualitatively to the enhancement of ﬁrms’ knowledge base. In particular, complementary technological resources between bidder and target increase the chances of drawing from new component sets and of developing radically different ideas and more inventions. Knowledge and technology complementarity of participants has been shown to enhance learning and outcomes in other interorganizational agreements such as R&D consortia, strategic alliances, and technological agreements (Sakakibara, 1997; Dussauge, Garrette, & Mitchell, 2000; Sivadas & Dwyer, 2000). Complementary technological resources between bidder and target may increase the chances of drawing from new component sets and of developing radically different ideas and more original innovations. Bridging and drawing upon complementary knowledge bases is the ultimate source of the quality of ideas (Burt, 2004). Moreover, knowledge complementarities have a positive inﬂuence on dynamic knowledge accumulation and capability development in response

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to changing environmental conditions (Helfat, 1997; Morosini, Shane, & Singh, 1998). Not only do knowledge complementarities potentially provide more combinations, but they may also decrease the cost of searching for new combinations through economies of ﬁtness (Larsson & Finkelstein, 1999) and economies of scope (Henderson & Cockburn, 1996).

Resources that Change Incentives In addition to complementary knowledge bases, M&A may also provide additional resources in terms of ‘‘complementary assets’’ (Teece, 1986). Complementary assets are the resources necessary to bring inventions to the market and to appropriate the value they create; they typically include ﬁrms’ capabilities (e.g., manufacturing capabilities, sales expertise) as well as ﬁrms’ tangible and intangible assets (e.g., brand name, customer relationships, distribution channels). Technological performance depends not only on the resources available, but also on the incentives ﬁrms undergo in the innovation process. In turn, these incentives are contingent upon the expected proﬁt from innovation.4 Yet proﬁting from technological innovation is not an easy task, and being an effective innovator requires more than just developing inventions: it requires getting those inventions to the market and being able to appropriate the value they create. Invention is merely the ﬁrst in a series of uncertain stages in the innovation process (Stigler, 1956). In particular, value appropriation is not automatic. History abounds with examples of ﬁrms that innovated but were not able to appropriate the results of their innovative activities. Value capture from innovation depends on the prospects of ﬁrms to preserve the uniqueness of their innovation, that is, on their ability to control the knowledge generated by the innovation itself. To this end, the effectiveness of the intellectual property system plays a major role. Second, value capture opportunities depend on the control ﬁrms have on the assets necessary to exploit the knowledge generated by innovation, or ‘‘complementary assets’’ (Teece, 1986). These assets in some instances allow ﬁrms to proﬁt by innovations even if they are not unique. Firms that are better able to appropriate the value of their innovations will receive a higher proﬁt from them. In turn, higher expected proﬁts will lead to a bigger effort in R&D activities. Therefore, if M&A allow the redeployment of complementary assets, ﬁrms will enjoy a renewed incentive to innovate

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which will lead to an enhanced technological performance. As the Global Business Manager of General Electric Medical Systems observed, ‘‘a big part of the value that we bring to the companies we buy is to be able to leverage our existing infrastructure, our distribution and service capabilities’’.5 Accordingly, Valentini (2006) ﬁnds that when the acquiring ﬁrm endows the target with complementary manufacturing capabilities there is a signiﬁcant increase in post-acquisition patenting output.

Changes in Organizational Incentives If the redeployment of complementary assets may strengthen the incentive to pursue more innovations, other changes in the organizations brought about by M&A may also modify the type of innovations pursued. In the ﬁrst place, engaging in M&A with a ﬁrm operating in a complementary business and redeploying its complementary assets, other things being equal, may provide increased incentives to pursue innovations applicable in broader market scopes. Acquiring complementary downstream resources reinforces the incentive to invest in innovations of wide applicability in different markets, and through newly acquired economies of scope it intensiﬁes the incentive to pursue general innovations. Accordingly, Valentini and Di Guardo (2006) ﬁnd that an enlarged market demand ‘‘pulls’’ more general and more original innovations. Second, M&A generally lead to an increase in the size of the ﬁrm. Since the seminal contribution of Schumpeter, organizational size has been always considered a fundamental determinant of ﬁrms’ incentive to produce innovation. While Schumpeter (1934) initially argued that small and entrepreneurial ﬁrms were the engine of most inventions and innovations, he subsequently suggested that large ﬁrms, operating in concentrated markets, are likely to be the most powerful source of technological change (Schumpeter, 1942). Numerous empirical studies have been carried out to test the consequential hypothesis that the propensity to innovate increases more than proportionally with a ﬁrm’s size (Cohen & Levin, 1989), and a number of alternative theoretical models have been developed (Tirole, 1988). Nonetheless, the results on the effect of size on innovation still appear inconclusive, maybe because of the reliance of empirical researches on inappropriately aggregated data (Henderson & Cockburn, 1996). Among the reasons that have been sustained for justifying a positive effect of size over innovativeness there are market inefﬁciencies – that assure large

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ﬁrms a higher chance of getting their risky R&D project ﬁnanced – the ability to share ﬁxed costs, economies of scale in the R&D process, positive complementarities between R&D and other departments, complementary assets to exploit inventions and bring them to the market (Cohen & Levin, 1989; Henderson & Cockburn, 1996). General counterarguments to the proposition that innovativeness increases more than proportionally with size argue that larger ﬁrms are more likely to loose managerial control and that a higher level of bureaucracy will restrain innovative efforts (Cohen & Levin, 1989). Moreover, small ﬁrms are also thought to be better able to offer performance-contingent contracts that attract and retain highly skilled engineers, and that induce high levels of effort (Zenger, 1994). There is more agreement, however, around the idea that an increase in ﬁrm size may signiﬁcantly alter innovations’ type. As a matter of fact, an increase in size is generally expected to be followed by a type of R&D more focused on minor improvements as opposed to major, radical innovations (Henderson, 1993; Williamson, 1975). The basic argument is that major innovations are usually high-risk activities. The larger corporations, even if endowed with more resources, may be structurally ill-suited to bear these activities. Size favors incremental innovations over more radical ones because of the fear of cannibalization of previously held lines of products. An increase in size due to M&A is also followed by an increase in the tendency to build and rely upon previous innovative activities, and reﬁne and elaborate older areas of technology (Sorensen & Stuart, 2000). Firms will tend to allocate resources primarily to research that responds to the needs of existing powerful clients (Christensen & Bower, 1996), and produce less general innovations (i.e., applicable in narrower ﬁelds). Along the same lines, larger ﬁrms usually have larger sunk costs in several R&D activities. In turn, larger sunk costs entail that a ﬁrm is more likely to pursue existing lines of businesses or research trajectories instead of alternative opportunities in new and more original areas (Gambardella & Giarratana, 2006). In Henderson and Cockburn (1996, p. 55) words, ‘‘the primary advantage of size has become the ability to exploit internal returns to scope’’. Accordingly, Valentini (2005) ﬁnd that on average M&A bring about less impactful, original, and general innovations, and Valentini and Di Guardo (2006) observe that the higher the ratio of organizational size between acquiring ﬁrm and target, the more negative the effect on innovations’ originality. Consistent with Williamson (1975), they ﬁnd that small targets acquired by large established ﬁrms decrease the originality of their innovations adjusting to modiﬁed internal incentives.

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Summary In order to fully understand the M&A impact on technological performance, it has to be recognized that two dimensions of performance have to be explored: the number of innovations produced and their type. Recognizing it may help reconciling previous results. As Henderson (1993) has shown that the traditional conﬂicting prediction on the effect of market power on the incentive to innovate6 can be explained by the fact that incumbents have an incentive to extend their monopoly power when an innovation is incremental, but have no opportunity to do so when innovation is sufﬁciently radical, we contend the same may hold for M&A. It may have a positive effect on innovation output, but may at the same time decrease innovations’ impact, originality, and generality (Valentini, 2005). These different effects can be justiﬁed by a framework of the innovation process that relies on two key determinants: resources and incentives. M&A may bring about signiﬁcant changes in both.

TOWARD FUTURE RESEARCH While M&A have been traditionally seen as a means to achieve economies of scale, gains in market share, or geographical expansion, the importance of technological motives for M&A has increased sharply. In this chapter, we have shed some new light on the drivers of post-acquisition technological performance. Lot of room is left for future research, however. While the short-term effects of M&A on shareholders’ wealth have been studied extensively (Jarrell, Brickley, & Netter, 1988), long-term effects have received considerably lower attention (Pesendorfer, 2003). Speciﬁcally, we suggest three relevant avenues for future research characterizing different units of analysis. The ﬁrst stream, along the lines of much of the prior research, focuses on the ﬁrm as the relevant unit of analysis. It is often believed that ﬁrms can strategically decide to pursue innovation through two general approaches: internal development and external acquisition (Goodman & Lawless, 1994). Firms may in other words decide to either develop preferably internally their technological resources, investing in in-house R&D, or they may opt to principally acquire on the market the solutions to their technological needs. Blonigen and Taylor (2000) actually ﬁnd that not only are low-R&D intensive ﬁrms more likely to acquire, but that over time a ﬁrm is more likely to acquire during periods of lower R&D intensity, thus suggesting that R&D

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investments and corporate acquisitions may be substitutes. However, recent studies (e.g., Arora & Gambardella, 1994; Chesbrough, 2003; Cassiman & Veugelers, 2006) provide mounting evidence that the potential for combining internal and external sourcing modes as complementary innovation activities should not be ignored. It has been shown that ﬁrms combining internal and external activities outperform those that base their innovation strategy on one single activity, and acquiring external know-how is found to signiﬁcantly increase technological performance only when the ﬁrm at the same time is engaged in internal R&D activities (Cassiman & Veugelers, 2006). Future research may thus proﬁtably explore the relationship between internal R&D and technology M&A. Overall, if a high-absorptive capacity (Cohen & Levinthal, 1990) is associated with a better chance to successfully identify, integrate and apply new, external knowledge, this may also enhance the process of identifying and integrating suitable targets in technology M&A. A ﬁrm that decides to acquire external technological knowledge without investing in internal capabilities (i.e., to acquire external resources in substitution of internal development) may therefore be in a worse position to create potential synergies. Moreover, a higher internal technological capacity is often coupled with a better protection of the new knowledge developed through secrecy, complexity, or lead time, and with a superior capability at appropriating the returns of innovation (Cassiman & Veugelers, 2002). Opportunities therefore exist to characterize the relationship between internal R&D and M&A strategy. A second possible avenue for future research deepens the underlying mechanisms that govern the M&A impact on innovation, and focuses at the inventor level as the relevancy unit of analysis. Ultimately, when a ﬁrm buys out or merges with another ﬁrm, it acquires not only the target ﬁrm’s technologies, but also its capability to build new technologies in the future. This capability resides largely in the R&D and Design & Engineering (D&E) personnel. Hence the extraordinary importance of understanding the effect of M&A on these employees. Yet the results concerning this area of inquiry fall far short from consensus. There is some empirical evidence hinting at the fact that the uncertainty brought about by the acquisition and a possible clash of cultures may encourage the departure of inventors from the merging organizations (Ernst & Vitt, 2000; Stuart & Sorenson, 2003). Yet we still lack more ﬁne-grained evidence. Key issues that are left unresolved include: what factors can explain the propensity of a scientist or an engineer to leave the ﬁrm in the aftermath of the M&A? And where do they move to? What does it happen to the technological ﬁeld cultivated by the R&D or D&E staff who quit the ﬁrm after an M&A deal? Does the ﬁrm keep investing in it, or does it

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drop it? Do other ﬁrms pick it up? Are these the same ﬁrms where the R&D (D&E) staff move to? What changes are observable – if any – in the activities of the R&D and D&E personnel that do not leave the merging ﬁrms? Not only would these issues be interesting from a strategy perspective, but they would also proﬁtably inform public policy studies. From this latter perspective, it is interesting to understand the effect of M&A deals on the mobility and innovative behaviors of scientists and engineers. A long tradition of research has been interested in understanding the possible consequences of M&A and restructuring on the R&D process, moved by the concern that M&A may limit technological process and ultimately economic growth. For example, ﬁnding that the lines of research pursued by scientists leaving their company after a M&A deal are dropped by the company itself, and not picked up by any other company, would suggest that M&A may result in the wasteful dispersion of innovation efforts. Finally, a scarcely explored ﬁeld is that which analyzes the effect of M&A on the overall innovative performance of the key players of the market where deals occur. Bertrand and Zuniga (2006) investigate the incidence of national and cross-border M&A on private research and development investments at the industry level in OECD countries over the period 1990–1999. Two main ﬁndings stand out. First, the last M&A wave did not affect signiﬁcantly domestic R&D activities. M&A contributed to increase R&D investment only in some speciﬁc industries. Second, their results offer evidence that domestic and cross-border M&A differed in their impact on R&D investment. Yet prior literature at the ﬁrm level has broadly ignored the externalities that an M&A may exert on the other key players of the industry. Whatever the effect of M&A on the merging ﬁrms may be, this may modify the incentives to invest in R&D of rival ﬁrms due to strategic interdependence in oligopolistic markets (in both product and innovation markets). Simply put, the other players should take the R&D expenses of merging ﬁrms into consideration while deciding their own R&D expenses. Strategic interdependence may be due to the presence of technological spillovers, patent races, or other externalities. It would be therefore interesting to analyze what these mutual inﬂuence relationships are. Evidence on this issue would also contribute signiﬁcantly to the antitrust literature. As a matter of fact, also the antitrust scholars (e.g., Katz & Shelanski, 2004) are increasingly acknowledging that technological performance and innovation are remarkable dimensions of post-acquisition performance that need to be considered more thoroughly. Studying the impact of M&A on the innovation strategy of the other key players in the market would shed some new light on the

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trade-off between static and dynamic efﬁciency, and will allow to more carefully deﬁne issues of merger regulations at level of market deﬁnition, anticompetitive effects, and efﬁciency gains through a focus on the innovation dimension of competition.

NOTES 1. In the prior related literature, the ‘‘quantitative side’’ of technological performance has been traditionally measured through the number of patents (e.g., Ahuja & Katila, 2001). Others (e.g., Puranam, Singh, & Zollo, 2006) have also used the number of new product introduced. Still, patents have been empirically shown to correlate very well with other possible measures of technological performance, such as new products or innovation counts in high-tech industries (Hagedoorn & Cloodt, 2003). 2. We use the terms innovation type and innovation quality interchangeably. We want to highlight the fact that if on the one hand innovations do vary in their quality (i.e., impact, originality, generality), it is not necessarily optimal to always maximize innovation quality, hence the neutral locution ‘‘type’’. 3. Yet, Ahuja and Katila (2001) further argue that for the two merging ﬁrms to be able to proﬁtably exploit the newly created knowledge base, the original two knowledge bases have to be combined and redeployed. To this end, the relative size between target’s and bidder’s knowledge bases plays a fundamental role. For successful assimilation and application of the newly acquired knowledge, many changes have to be introduced into the functioning of the organization. Pathways of communication, routing of work and authority, and formal and informal organizational structures all have to be adapted to incorporate the acquired unit’s knowledge. If the acquired ﬁrm’s knowledge base is small relative to the acquirer, the modiﬁcations required are likely to be minor, and therefore not very disruptive. 4. True enough, proﬁts from the commercialization of inventions do not constitute the only driver of ﬁrms’ incentive in the innovation process. Research spending is often the admission ticket that ﬁrms pay in order to enter a network of scientiﬁc information (Rosenberg, 1990). Firms with in-house R&D capabilities are more effective at scanning the environment and detecting valuable opportunities (Arora & Gambardella, 1994) as well as more effective at internalizing them (Cohen & Levinthal, 1990). Yet, ﬁrms primarily invest in R&D to proﬁt from the subsequent commercialization of technological innovations. 5. See T. Khanna, ‘‘General Electric Medical Systems, 2002’’, 9-702-428 Harvard Business School case. 6. Among others, Gilbert and Newberry (1982) suggest that incumbent ﬁrms with some degree of monopoly power will likely commit to innovation preventing potential entrant investments in R&D in order to keep proﬁting from their market power. Conversely, Reinganum (1983) argues that under uncertainty a monopolist will rationally invest less in innovation than entrants will, for fear of cannibalizing the rents of existing products.

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STOCK MARKET REACTIONS TO KNOWLEDGE-MOTIVATED ACQUISITIONS Ricardo Romero Gerbaud and Anne S. York ABSTRACT This study uses a new, fine-grained, firm-based measure of target resources to investigate the relationship between target resource type and acquirer stock market performance. Our findings suggest that the market punishes acquirers of knowledge-based resources more than those that buy property-based resources due to the perceived uncertainty regarding the value of targets’ knowledge resources. In support of the underlying uncertainty argument, we find that managers announcing knowledge-based mergers provide more information in their press releases than those announcing property-based transactions. While prior studies have suggested that resource relatedness may moderate the resource type and acquisition performance link, our findings do not support either a direct or moderating relationship.

Despite a signiﬁcant upsurge in acquisition activity in the 1990s, an acquisition’s impact on acquirer performance is a phenomenon not yet fully explained by the strategy or the ﬁnancial economics research literature. While theory suggests that acquisitions can be a highly effective tool for value

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creation, empirical evidence shows that most acquisitions have not increased the shareholder value of acquiring ﬁrms (Bruner, 2002). Thus, the persistence of seemingly irrational behavior by acquiring ﬁrm managers warrants further investigation. To date, strategy researchers have studied mergers and acquisitions largely as a method of diversiﬁcation (Trautwein, 1990; Walter & Barney, 1990) and the performance effects of diversiﬁcation strategy types (Chang & Thomas, 1989; Lubatkin, 1983; Lubatkin & O’Neill, 1987; Nayyar, 1993; Palepu, 1985; Rajan & Ramanujam, 1987; Rumelt, 1982; Seth, 1990a; Singh & Mongomery, 1987). However, inconclusive results from this research stream have prompted some to call for a different approach. ‘‘A focus on speciﬁc resources rather than strategy types in the merger and acquisition research may better explain ﬁrm performance’’ (Harrison, Hitt, Hoskisson, & Ireland, 1991, p. 187). While the performance beneﬁts of having knowledge-based resources have been supported by many empirical studies (Bharadwaj, Bharadwaj, & Konsynski, 1999; Chan, Lakonishok, & Sougiannis, 2001; De Carolis, 2003; Hatch & Dyer, 2004; Miller & Shamsie, 1996; Villalonga, 2004; Wiklund & Shepherd, 2003), the performance implications of purchasing knowledge-based resources through corporate acquisitions have not (with two exceptions: Arikan, 2004a; Jones, Lanctot, & Teegen, 2001) yet been explored. This study investigates the link between the type of target resources acquired and acquirer market performance by developing and employing a ﬁne-grained, ﬁrm-level measure of knowledge and property resources. Then it hypothesizes and directly tests the role that uncertainty and information asymmetry play in the amount of information that managers communicate about acquisitions motivated by different resource types. To assure that the effects of the explanatory variables being studied are attributable to those variables, standard ﬁnance controls (including payment method, accounting method, relative size, year, and deal consummation) are added to the acquisition performance equation. The possible effect of relatedness is included as a moderator. These relationships are explored using standard event study methodology and a two-day event window. The key contribution of this research is the ﬁnding that unlike internally generated knowledge, acquired knowledge does not result in superior acquiring ﬁrm performance. The results speciﬁcally suggest that while the type of target resources acquired is signiﬁcantly associated with an acquirer’s short-term market performance, the mean performance of propertymotivated acquisitions is more favorable than that of knowledge-motivated acquisitions. The uncertainty and information asymmetry associated with

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valuing knowledge resources seem to explain the underperformance of knowledge-motivated acquisitions relative to property-motivated transactions. In support of the underlying information asymmetry hypothesis, we ﬁnd that managers communicate their motives for acquiring knowledge resources in more detail.

RELATING RESOURCES TO FIRM PERFORMANCE Many measures of acquiring ﬁrm performance have been used by researchers, but short-term market performance is the dominant one in both ﬁnancial economics (Agrawal, Jaffe, & Mandelker, 1992; Bradley, Desai, & Han Kim, 1988; Jarrell & Poulsen, 1989; Yook, 2003) and strategic management (Capron & Pistre, 2002; Chatterjee, 1992; Hayward, 2002; Lubatkin, 1983; Singh & Mongomery, 1987). In ﬁnancial economics studies, performance has been found to be mostly a function of payment method, target type (public or private), size, hostility or friendliness of the bid, and accounting method (Chang, 1998). The ﬁeld of strategic management has studied mergers and acquisition performance largely as a function of diversiﬁcation, focusing on the motives for different types of combinations with mixed results (Chang & Thomas, 1989; Lubatkin, 1983; Lubatkin & O’Neill, 1987; Rajan & Ramanujam, 1987; Seth, 1990a; Singh & Mongomery, 1987; Trautwein, 1990; Walter & Barney, 1990). Accordingly, strategy researchers have suggested that future studies focus on the types of target resources being acquired, which may better explain acquirers’ market performance (Black & Boal, 1994; Coff, 1999, p. 158; Harrison et al., 1991). While resource-based theory has been criticized due to the difﬁculties inherent in how resources have been operationalized (Conner, 1991; Godfrey & Hill, 1995; Miller & Shamsie, 1996), recent works have found empirical support for speciﬁc propositions relating ﬁrm resources to competitive advantage (Bharadwaj et al., 1999; Carmeli & Tishler, 2004; Chan et al., 2001; De Carolis, 2003; Hatch & Dyer, 2004; King & Zeithaml, 2001; McEvily & Chakravarthy, 2002; Miller & Shamsie, 1996; Villalonga, 2004; Wiklund & Shepherd, 2003). However, Coff (1999) was the ﬁrst to investigate the role of resource type within an acquisition context. Coff’s ground-breaking study used resource-based theory to motivate his ﬁndings that managers employ coping strategies, including discounting the premiums paid for targets, when faced with increased uncertainty associated with acquisitions in knowledge-based industries. He proposed that knowledge

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resources create information dilemmas for buyers due to scarce or tacit information, uncertain transferability, and uncertain synergy potential. Additionally, a study by Jones et al. (2001) contrasted the performance implications of internal technology development with its external acquisition. While they did not ﬁnd signiﬁcant relationships between external technology acquisition and various types of performance measures (product, market, ﬁnance), the direction of the relationship (negative in all cases) implies that external technology acquisition may be detrimental to performance. Though neither Coff’s nor Jones et al.’s study investigated the relationship between target resource type and acquirer market performance, both suggest a valuediminishing aspect of knowledge resources within an acquisition setting and thus invite further investigation. Arikan’s (2004a) is the only study found to date in the strategy literature that directly examines the market assessment of knowledge-based resources in a corporate acquisition context. It investigates the long-run abnormal performance effects of acquiring target resources, which are classiﬁed into intangible versus tangible categories. Intangibility of target resources is proxied by multiple measures (i.e. R&D, advertising, human capital stocks, and Tobin’s q). Arikan’s results show that, on average, acquirers of intangible targets earn negative abnormal returns, whereas acquirers of tangible targets break even. The explanation given for this ﬁnding is that intangible assets are more likely to be nonredeployable, although the nonredeployability hypothesis is not tested. There are reasons to believe that the nature of the acquisition activity has changed from the period covered by Arikan’s work in ways that may alter the study’s results. For example, the sample covers mergers that occurred over a decade ago (1988–1991), while the 1990s wave of the U.S. mergers seems to have more of a strategic focus, seeking to expand into new markets or take advantage of perceived synergies (Gaughan, 2002). This likelihood is further supported by Miller and Shamsie (1996), who found that intangible or knowledge-based resources are more valuable in dynamic industry environments. Further, operationalizing knowledge-based resources using accounting measures of intangibles such as R&D, advertising, and intangibles-in-books may be ‘‘inadequate because they disregard intangible resources and peoplebased skills – probably the most strategically important resources of the ﬁrm’’ (Grant, 1991, p. 119). Even though the use of Tobin’s q (market value/ replacement value of tangible assets) is the most common measure used to estimate the intangibility of ﬁrm’s resources, it, too, is considered overly broad, and the need for more ﬁne-grained measures has been suggested

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(Villalonga, 2004). As such, the validity of these measures has been questioned in today’s knowledge economy (Marr & Spender, 2004). To summarize, while the resource-based view of the ﬁrm is the theoretical framework used by many strategy scholars to justify corporate takeovers, the performance implications of acquiring different resource types have received very little explicit attention with a few exceptions (Arikan, 2004a; Jones et al., 2001). Clearly, this is an under-explored area of empirical research. To motivate further exploration, we propose speciﬁc hypotheses that relate resource type, uncertainty and acquirers’ market performance.

HYPOTHESES The Link between Target Resource Type and Acquirer Stock Market Performance Barney (1991) was among the ﬁrst to propose a theoretical link between resources and acquirer market performance. According to Barney (1991), a resource is deﬁned as any asset, capability, organizational process, ﬁrm attribute, information, knowledge, etc., controlled by a ﬁrm that enables the ﬁrm to conceive of and implement strategies that improve its efﬁciency and effectiveness. He suggests that knowledge resources may be particularly valuable as sources of competitive advantage because their complexity and embeddedness tend to make them more difﬁcult to imitate (Barney, 1991). Having knowledge-based resources has been found to have a positive impact on a ﬁrm’s performance (McEvily & Chakravarthy, 2002) due to their higher degree of inimitability by potential competitors, which tends to isolate capabilities within the ﬁrm. However, acquirers of knowledge-based resources are likely to suffer signiﬁcant problems valuing, transferring, and integrating such resources, due to their causal ambiguity, complexity, and tacitness, all of which increase uncertainty. Coff (1999) argues that it is more difﬁcult for buyers to assess the value of targets in knowledge-intensive industries because quality is more difﬁcult to observe or measure, the buyer cannot be certain exactly what can be transferred, and the prospects for synergy are difﬁcult to assess. While standardized ways of estimating the value of property resources exist, the valuation of knowledge-based resources is plagued with numerous sources of uncertainty (Chi, 1994; Lippman & Rumelt, 1982). Aboody and Lev (2000) ﬁnd that intangible resources such as R&D are a major contributor to information asymmetry between acquirers and targets. They

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argue that because knowledge-based resources are ‘‘unique to the developing [target] ﬁrm’’ compared with tangible resources that share characteristics across ﬁrms, it is difﬁcult for outsiders, including acquiring managers, to gain information with respect to their value, unlike property resources that are traded in organized markets. From a ﬁnancial economics perspective, the role of uncertainty is central to asset pricing. Campbell, Lo, and MacKinlay (1997) suggest that ‘‘the starting point for every ﬁnancial model is the uncertainty facing investors, and the substance of every model involves the impact of uncertainty on the behavior of investors and, ultimately, on market prices’’. The transferability of a target’s knowledge-based resources is another source of uncertainty which may affect valuation. The target’s knowledge resources that motivate the transaction might not be transferable to the acquirer’s operations because they are ﬁrm-speciﬁc (De Carolis, 2003; Grant, 1996). Firm-speciﬁc knowledge-based resources may be harder to transmit because few parties other than the developer can beneﬁt from the application of that knowledge (McEvily & Chakravarthy, 2002). The transfer of new target knowledge depends on its potential to be aggregated with existing bidder knowledge. In contrast, property-based resources are easily transferred from one ﬁrm to another by just acquiring their legal ownership. Firms that are efﬁcient in exploiting others’ knowledge are more the exception than the rule (Zack, 1999, p. 137). Thus, some theorists (Grant, 1996; Spender, 1996) view ﬁrms as institutions for knowledge development and integration in part because valuable knowledge-based resources cannot be readily acquired in the market (Barney, 1986). Finally, tacitness, social complexity, and speciﬁcity can slow learning and hinder knowledge transfer and recombination within organizations (Galunic & Rodan, 1998; Kogut & Zander, 2003; Ranft & Lord, 2002; Szulanski, 1996; Zander & Kogut, 1995). Buyers of knowledge-based resources expect to have post-event integration problems (Shrivastava, 1986; Vaara, 2003), increasing the risk of not fully realizing expected synergies. The ability to capture acquisition synergies is subject to human implementation issues, such as retention of key personnel, culture compatibility, etc. When a company is taken over, the acquirer can be conﬁdent that it has possession of the property-based resources, but it cannot be certain that it will retain the knowledge-based resources. Human resources can ultimately ‘‘walk away’’ (Hambrick & Cannella, 1993), having a negative effect on post-acquisition performance (Cannella & Hambrick, 1993; Leshchinskii & Zollo, 2004) or reducing their productivity (Ernst & Vitt, 2000).

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Because the valuation, transferability, and integration of knowledgebased resources are more uncertain than those of property-based resources, it is plausible to assume that investors will react less favorably to an acquisition motivated by knowledge resources. This logic leads to the following hypothesis: H1. The type of target resources acquired will be signiﬁcantly associated with an acquirer’s short-term market performance. The mean performance of property-motivated acquisitions will be more favorable than that of knowledge-motivated acquisitions.

The Link between Uncertainty, Information and Resource Type While Coff (1999) suggests that uncertainty surrounding resources in knowledge industries leads acquiring managers to discount the value of targets, he did not directly test that explanation nor did he relate it to acquirer performance. The amount of uncertainty associated with the acquisition of knowledge-based resources is the main argument justifying unfavorable short-term acquirer market performance in this study. Uncertainty, as used in the ﬁnance literature, can be deﬁned as a condition in which the information available to the decision-maker is too imprecise to be summarized by a probability measure; the terms ‘‘vagueness’’ or ‘‘ambiguity’’ can serve as close substitutes. Even though ambiguity is a subjective variable, one can identify objectively some situations likely to present high ambiguity by noting situations where available information is scarce, unreliable, or conﬂicting or where expressed conﬁdence in estimates tends to be low (Kogut & Zander, 2003). Similarly, the organizational theory literature deﬁnes uncertainty as the absence of information and suggests that increased information processing can reduce ambiguity, equivocality, or uncertainty (Daft & Lengel, 1986). ‘‘An individual’s perception of uncertainty in the environment is signiﬁcantly associated with the acquisition of information from the environment’’ (Brown & Utterback, 1985). Because information about a target’s knowledge-based resources and their potential beneﬁts is ambiguous and generally unavailable to the public, the assessment of their value is a highly complex task; task complexity is considered a source of uncertainty and of increased information processing requirements (Tushman & Nadler, 1978). To compensate for the uncertainty of assessing a target’s knowledge-based resource value, it is plausible to

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expect that the amount of information provided by acquiring management to justify or explain the beneﬁts of a knowledge-based acquisition will be greater than the amount of information provided about more certain property-based acquisitions. If the dominant motivation behind an acquisition is gaining access to property-based resources, the bidder’s justiﬁcation of the deal is expected to be short, because the value assessment of these resources follows standard procedures and their transferability is not under question. Because acquisition events are generally announced via press conference and press release, theoretically lengthier and more detailed communications regarding knowledge-based acquisitions would be expected than those regarding property-based acquisitions, resulting in the following hypothesis: H2. The amount of information communicated to the public in acquisition announcements will be greater in knowledge resource-motivated deals than in property resource-motivated deals. Relatedness as Moderator of the Resource Type/Acquirer Performance Link Moderator variables provide information regarding the conditions under which the direct effect or relationship is likely to be stronger. Research on the acquisition integration process suggests several factors that contribute to an acquirer’s ability to capture merger synergies. A factor that is of special interest for this research is acquirer and target strategic relatedness. Historically, strong theoretical arguments have supported the direct association of relatedness with value creation through acquisitions, even though the empirical literature is rather inconclusive on the subject. The present study empirically considers the role of relatedness as a moderator of the target resource type and acquirer performance relationship. Strategy theorists (Amit & Schoemaker, 1993; Dierickx & Cool, 1989; Hall, 1993) suggest that an acquirer’s ability to capture synergies from strategic knowledge-based resources depends not only on the level of resources it accumulates by buying another ﬁrms but also on the interconnectedness between target and acquirer resources. They argue that the costs of integrating a target’s resources should decline if the acquirer has knowledge related to the technology being acquired. ‘‘These costs are derived

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from the efforts of codifying and teaching complex knowledge to recipients; the more effort that must be expended, the less capable the user’’ (Kogut & Zander, 2003). Grant and Baden-Fuller (2004) suggest that the beneﬁts of an unrelated acquisition are likely to be offset by the difﬁculty of reconciling the different routines and operating rules required by different industries. In a related context, previous research on intra-ﬁrm knowledge transfer suggests that knowledge overlap between the source and recipient affects the ease with which a technology or best practice is assimilated by a new organizational unit (Cohen & Levinthal, 1990). Despite the theoretical attention devoted to resource type and relatedness in an acquisition context, Coff’s (1999) is the only empirical study to investigate this issue, ﬁnding somewhat counter to theory that because managers of related ﬁrms are more informed and thus more wary of the uncertainty associated with a target’s knowledge-based resources, they discount their value. While no prior empirical literature has investigated the moderating effect of relatedness on the target resource type and acquirer performance link, the relationship between knowledge resource type, relatedness, and performance has been analyzed within a joint venture context in several recent strategy studies (e.g. Mowery, Oxley, & Silverman, 1996; Tsang, Nguyen, & Erramilli, 2004; Zander & Kogut, 1995) with results mostly consistent with theoretical predictions. Additionally, Lane and Lubatkin (1998) found that the similarity of ﬁrms in an alliance is positively related to the ﬁrm’s ability to learn and to apply knowledgebased resources from another ﬁrm. These ﬁndings suggest that relatedness between the ﬁrms in an acquisition context might also reduce the value uncertainty of knowledge-based resources and moderate the relationship between a knowledge-motivated acquisition and the market performance of the acquirer. Considering the previous arguments that support the idea that relatedness between acquiring and target ﬁrms will improve the likelihood of a positive market reaction to the acquisition, the following hypothesis is proposed: H3. The relationship between acquirers’ short-term market performance and target resource type will be moderated by the degree of relatedness between acquirer and target businesses. An acquirer’s short-term market performance in knowledge resource-motivated acquisitions will be more favorable when the acquirer and target businesses are related.

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SAMPLE, MEASURES, AND METHODS Sample Selection Criteria The sample for this study was selected from a population of acquisitions listed in Securities Data Corporation’s (SDC) U.S. Mergers and Acquisitions database between 1990 and 2000. The consolidation of the U.S. industries initiated in the 1980s continued in the 1990s, but while 1980s activity was distinguished by its use of leveraged buyouts and hostile takeovers (Holmstrom & Kaplan, 2001), 1990s mergers have been viewed as a distinctly new wave that was driven by strategic, synergistic factors (Gaughan, 2002). Thus, the time frame 1990–2000 was chosen because it covers strategically motivated transactions in the most recent acquisition wave but avoids the possible confounding effects of the subsequent market bubble burst on the investor community. Also, the period is considered long enough to have a large sample with available data. The acquirers and targets in this study are the U.S. ﬁrms publicly traded on the Amex, Nasdaq, or NYSE, whose market return data is listed on the Center for Research in Security Prices (CRSP) ﬁle. Acquisitions with the following characteristics were excluded from the sample: acquirers that had more than a 10%-controlling stake in the target ﬁrm before the transaction was announced; acquisitions in which less than 100% of the target’s stock was sought; transactions in which acquirers’ primary Standard Industrial Classiﬁcation (SIC) codes were in the public administration, ﬁnancial services, holding company, and nonclassiﬁable or unknown establishment segments; hostile deals; transactions with no announcement date or with two different dates; deals where the SDC announcement date was more than 3 days apart from the one found on the acquisition announcement press release; transactions with confounding events; and, ﬁnally, spin-offs, recapitalizations, self-tenders, exchange offers, repurchases, acquisitions of a minority stake, and acquisitions of remaining interest. All of these exclusion criteria, which are widely used in strategy and ﬁnance studies, result in a cleaner sample. To assure a large enough sample size for the analysis, all transactions with available data were included irrespective of whether the deal was consummated or not (Moeller, Schlingemann, & Stulzc, 2004; Travlos, 1987). While the SDC U.S. Mergers and Acquisitions database contains 115,472 deals categorized as mergers or acquisitions during the 1990–2000 time frame of this study, this number of transactions was reduced to 679 after meeting all of the sample selection criteria discussed above. The SDC

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database is one of the products offered by Thomson Financial Securities Data, a major provider of ﬁnancial data. The sample ﬁrms’ stock market data was obtained from the CRSP database and their ﬁnancial data from the COMPUSTAT database. Measures Acquisition Motive Type: Property vs. Knowledge The motives described in the acquiring ﬁrm’s acquisition announcement typically suggest which target resources are being sought and why. Consistent with resource-based theory, in this study acquisition motives were determined based on the type of target resources described in press releases about the transactions. At least three factors suggest that acquirers’ motives in acquisition announcements provide relevant information to the stock market about the resources being acquired: (a) acquiring ﬁrm managers have insider information regarding their own resource potential (Aboody & Lev, 2000), (b) they are in a privileged position to identify potential synergies available from target resources as a result of the due diligence process (Barney, 1986; Denrell, Fang, & Winter, 2003), and (c) they are motivated to convince investors that the deal is worthwhile so as not to risk a devaluation of their stock (Eckbo, Giammarino, & Heinkel, 1990; Sirower & Lipin, 2003, p. 27; Walter & Barney, 1990, p. 79). Categorizing Resources as Knowledge vs. Property-Based When focusing on characteristics that allow resources to be sources of competitive advantage, scholars have developed different categorical schemes that ﬁt their research interests. Some of these resource categorizations include tangible and intangible, assets and competencies (Hall, 1992, 1993), resources and capabilities (Amit & Schoemaker, 1993; Grant, 1991), commodity and complex resources (Denrell et al., 2003), property and knowledge-based resources (Miller & Shamsie, 1996), and contained and system resources (Black & Boal, 1994). Each author outlines particular characteristics for their resource categories, but common ground is shared by most of them. For the purpose of this study, the property–knowledge typology (Alessandri, Ilinitch, & McDaniel, 1999; Miller & Shamsie, 1996) is used as a starting point, and the theoretical similarities of other categorical schemes are considered to deﬁne the basic criteria to classify all resources as property or knowledge-based. A property-based resource is deﬁned by Miller and Shamsie (1996) as a ﬁrm’s asset that has ownership rights defendable by law. Property-based

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resource categories are associated with the assets valued in a balance sheet as well as with other tangible assets which add value by allowing access to new markets, facilitating competitive deterrence or increasing the ﬁrm’s size or scale. A knowledge-based resource is deﬁned as an individual, team, or organizational capability. Knowledge-based resource categories are associated with functional skills, capabilities, processes, and employee experience. Many knowledge resources can be attributable to the unique history of a ﬁrm; as such, they are causally ambiguous and/or socially complex (Barney, 1991). Efﬁciency acquisition motives are also considered knowledge-based resources because they are more process than asset-related. Considering the theoretical contributions of a variety of resource-based scholars to deﬁning the nature of resources as sources of competitive advantage, the main differences between property and knowledge-based resources and the resource motive categories of each resource type are as follows. Property-based resources are related to ‘‘having’’ (Hall, 1993, p. 608), are people independent (Amit & Schoemaker, 1993), are defendable by law (Mahoney & Pandian, 1992, p. 138; Hall, 1993; Miller & Shamsie, 1996), and are transferable from one ﬁrm to another (Teece, 1998). Knowledgebased resources, however, are related to ‘‘doing’’ (Grant, 1996), are people dependent (Amit & Schoemaker, 1993; Grant, 1996; Makadok, 2001; Teece, Pisano, & Shuen, 1997), are not defendable by law, and are nontransferable due to their embeddedness. Table 1 contains a complete list of the resource categories used to code acquisition motives.

Identifying Resource Motives Through Content Analysis of Acquisition Announcements A major assumption of this study is that acquirers’ motives are stated in their press releases announcing the transaction. Since an acquisition represents a major transaction with signiﬁcant strategic impact on the acquirer, the FTC mandates that the market be informed about the acquirer’s activities. It is assumed that acquiring ﬁrm managers have more inside information about their ﬁrm than is available to the public and that they are in a special position to assess the beneﬁts of such an important transaction. The acquisition announcement is typically used by management to suggest what direct economic and strategic beneﬁts that they believe will come from the integration of speciﬁc target resources acquired. Thus, to categorize acquisition motives based on the types of resources acquired, content analysis was applied to the press releases announcing the acquisitions. Content analysis may be brieﬂy deﬁned as a systematic, replicable technique

Stock Market Reactions to Knowledge-Motivated Acquisitions

Table 1.

Property and Knowledge-based Resource Coding List.

Property-based resources P1 P2 P3 P4 P5 P6 P8 P9 P10 P11 P12 PX

139

Knowledge-based resources

Access to new markets Property, plant, equipment Market position/market consolidation, market share Bargaining power

K1 K2 K3

Market knowledge and skills Efﬁcient processes, procedures Economies of scale, cross-selling

K4

New product, business, service Intellectual property-brands, trademarks, copyrights, patents Contracts, agreements, licenses Critical mass, minimum efﬁcient scale Financial capital Data bases Distribution networks Other property resource motives

K5 K7

Restructuring efﬁciencies, economies of scale Managerial knowledge, skills Technological knowledge, skills

K8 K9 K10 K11 K12 K13 KX

IT knowledge, processes Human capital (nonmanagement) Relationships, networks Culture Company reputation, image Product technology Other knowledge resource motives

for compressing many words of text into fewer content categories based on explicit rules of coding (Neuendorf, 2002). To facilitate the coding process, press releases were obtained from the LexisNexis Academic database using PR Newswire and Business Wire as sources. These communication outlets are most commonly used by acquiring ﬁrms to announce this type of transaction and are considered the ﬁrst ofﬁcial announcements of the deals. They usually contain a description of the transaction terms, the acquirer and target ﬁrms, and the motives that justify the acquisition. All subsequent media coverage of the transaction generally are based on these press releases. A pilot screening of 200 acquisition press releases was used to develop a dictionary of deﬁnitions for each resource motive category. These deﬁnitions include the most common wording or phrases of the acquisition motives found in actual press releases. Coders were required to keep to the literal wording of the deﬁnitions to avoid interpretive variance. Because some deals involved the acquisition of both property and knowledge resources, acquisitions were classiﬁed as knowledge-based if at least 50% of the motives identiﬁed in the press release fell within the knowledge categories of this resource motive type (York & McDaniel, 2003). Following Neuendorf’s (2002) recommendation, reliability tests were performed on the classiﬁcation assigned to the primary resource motive

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type; the average percent agreement among the three raters was 84%, Scott’s Pi 77%, and Cohen’s Kappa 77%, all of which are considered acceptable based on agreed-upon standards. The ﬁnal sample was composed of 43% (296) property-based and 57% (391) knowledge-based acquisitions. Detailed documentation of the content analysis procedures, the coding protocol, and the market reaction sensitivity to a more stringent coding scheme are available from the authors to ensure that others can replicate the study if desired. Amount of Publicly Communicated Information In a review of psychological and organizational research describing uncertainty, Gifford, Bobbitt, and Slocum (1979) assign the general concept of information load to uncertainty measures that involve overall evaluations of the amount of data, cues, or stimuli available to the decision maker and the timeliness with which it is received. Following their deﬁnition, in this study uncertainty is associated with the amount of publicly communicated information about an acquisition, which is operationalized as the word count of the acquirer press release announcing the transaction. The word count is considered an objective measure because it does not depend on coder judgment. Acquirer and Target Relatedness Relatedness of the acquisition is measured using SIC similarity. Speciﬁcally, the relatedness of the acquirer’s and target’s primary lines of business was operationalized as a binary variable (0 for unrelated; 1 for related) at the twodigit SIC level, where the ﬁrm’s primary 2-digit SIC classiﬁcation was taken from the SDC database. This approach has been taken in past cross-sectional work (Kusewitt, 1985; Moeller et al., 2004; York & McDaniel, 2003). Acquirer’s Short-Term Market Performance Many measures of acquiring ﬁrm performance have been used by ﬁnancial economics and strategy researchers, but the market-based returns measure is the dominant one (see Agrawal et al., 1992; Bradley et al., 1988; Capron & Pistre, 2002; Chatterjee, 1992; Hayward, 2002; Jarrell & Poulsen, 1989; Lubatkin, 1983; Singh & Mongomery, 1987; Yook, 2003). In this research, standard event study methodology using stock market returns is used to assess acquiring ﬁrm performance. The acquisition announcement is assumed to be a relevant event for the acquiring ﬁrm that releases new information to the market. An effect on the acquirer’s stock price is expected because such transactions are generally major events with signiﬁcant

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economic impact on the ﬁrm. The timing of the release of information about the transaction is part of the negotiation strategy of the ﬁrms involved and is regulated by the Securities Exchange Commission to avoid the use of privileged information in the stock market. Generally, the information about a friendly acquisition is kept conﬁdential until the negotiations are well underway and then is released to the market through an ofﬁcial press wire where the ﬁrms involved in the deal announce the transaction, describe ‘‘how’’ the deal will be carried out, and explain ‘‘why’’ it is a good deal for their business and stockholders. The market reevaluates the acquirer’s share price to reﬂect their perception of how the transaction affects the value of the ﬁrm. Since Fama, Fisher, Jensen, and Roll (1969) introduced event study methodology, it has become the standard method in strategy and ﬁnancial economics research for measuring security price reaction to some business event. If an event (i.e. the announcement of an acquisition) has an information effect on the wealth of the ﬁrm’s security holders, there should be a nonzero stock-price reaction on the event date (Fama et al., 1969). Thus, inference is based on the statistical signiﬁcance of abnormal returns, termed ‘‘the announcement effect’’, during an event window. Normal or predicted returns for a security are those returns expected to be observed if no event occurs. These normal returns are estimated over a time period, called the estimation window, prior to the event window. The estimation period should be other than the days immediately surrounding the event date because the information about the deal negotiation process normally starts to leak to the market some days before the ofﬁcial announcement date, and the effects of the new information may continue to show up in the share price for several days after. The event window to evaluate the impact of an acquisition announcement should be as short as possible but more than one day, ‘‘including at least the day of the announcement and the day after the announcement’’ (MacKinlay, 1997, p. 15; McWilliams & Siegel, 1997, p. 636). Large event windows present various problems. The larger the event window, the more difﬁcult it is to control for confounding events, and the ability of the event study methodology to detect nonzero abnormal returns is severely compromised (Brown & Warner, 1980, 1985). In this study, day 0 is deﬁned as the acquisition announcement date. Even though the market might show some reaction before the announcement date because of possible information leakage, it is considered that the days after the announcement day are more suitable to capture any abnormal return resulting from the transaction announcement. The press release, where the

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dominant resource motivation for the transaction is stated by the acquirer, is assumed a more reliable source of information than the rumors of the deal before it is ofﬁcially announced. The SDC announcement date was corroborated with the ﬁrst press release that announces the deal. For the reasons stated above, this study evaluates the market reaction using a 2-day event window represented as (0,+1). Schwert’s (1996) ﬁndings suggest that the market starts to react to an acquisition 42 trading days (roughly 2 months) before the ofﬁcial announcement date. For this reason, the period or window used to estimate the market model does not include the 45 days prior the announcement date. Studies with daily data tend to use about one year of observations for the estimation period (Binder, 1998). In this study, the market model is estimated by ordinary least squares, using data from a 255 trading-day estimation period ending 46 trading days before the event date. During the estimation period, the determinants of the normal return are not expected to change due to the event under study (acquisition announcements). Three classes of techniques may be used to estimate normal or expected common stock returns: (1) market models; (2) mean-adjusted models; and (3) market-adjusted models. There may be several variations within each class, but the market model is the standard. The advantages of the market-model method over the others are that it controls for the risk (market factor beta) of the security and removes the effects of economy-wide factors from the security’s return, leaving only the portion of the return attributable to the event-speciﬁc information. The variance of the abnormal return is reduced by removing the portion of the return that is related to variation in the market return. This in turn leads to increased ability to detect event effects. The market model requires two time series of return data for each security event: an estimation period time series for estimating the benchmark parameters, and an event period for computing prediction errors based upon the estimated parameters which are assumed constant during both periods. The benchmark parameters in the market model specify a linear ex ante relation between the return on the securities of ﬁrm i and the return on a market index (such as the equally weighted CRSP index or the S&P 500 index). This study uses as the market index the equally weighted CRSP index, which is the most commonly used in merger and acquisition event studies. The equally weighted index is more likely to detect abnormal security returns due to its greater degree of correlation with the security returns; the greater the precision of the estimated parameters, the more easily detectable are the abnormal returns (Peterson, 1989). The prediction errors represent abnormal returns. The estimation period and the event

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period (window) do not overlap to avoid biasing the parameter estimates in the direction of the event effect. Further event study details and formulas for calculating returns can be found in McWilliams and Siegel (1997) and are also available from the authors.

Controls To assure that the effects of the independent variables that are being studied are in fact attributable to those variables, variables of demonstrated importance in explaining acquisition performance in prior ﬁnancial economics and strategy studies – payment method, accounting method, relative size, year, and deal consummation – are included as controls. Following Coff (1999), the payment method is operationalized as the portion of the offer that is paid in cash as reported by the SDC database. The accounting method used for the combination of the ﬁrms involved in the deal is operationalized as a dummy variable (1 for pooling of interests and 0 for purchase). This information was also obtained from the SDC database. Following Moeller et al. (2004) and Sirower (1997), relative size of the deal is the transaction value divided by the equity market capitalization of the acquirer at the end of the ﬁscal year prior to the acquisition announcement. The market capitalization data was obtained from the COMPUSTAT database, and the SDC database provided the transaction value. The variable ‘‘year’’ is deﬁned as the acquisition year minus 1989. A dummy variable is included representing whether the transaction was consummated (1) or not (0).

EMPIRICAL RESULTS Descriptive Statistics and Correlation Matrix Table 2 shows sample characteristics by resource type. Highlights of this descriptive data are that while deal size, consummation, and relatedness are similar for both property and knowledge-motivated transactions, deals motivated by a target’s property resources are characterized by less negative abnormal returns, more cash, and more frequent use of the purchase (as opposed to pooling) method of accounting than deals motivated by a target’s knowledge resources. The distribution of acquisitions by year and industry classiﬁcation is available from the authors. While the analysis by year and industry gave

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Table 2.

Summary Statistics Sorted by Acquisition Type.

Number of deals Cumulative abnormal Returns (0,+1) Cash in payment (%) Relative deal size Related deals Accounting method (pooling) Consummated deals

Table 3. Variablesb 1. 2. 3. 4. 5. 6. 7. 8.

Performance (CAR) Resource type Payment method Accounting method Relative size Deal consummation Relatedness Year

1 .112 .216 .168 .125 .090 .025 .047

All

Property

Knowledge

679 0.018 28.53 0.58 0.66 0.35 0.86

291 0.009 32.95 0.57 0.67 0.29 0.84

388 0.025 25.22 0.59 0.64 0.41 0.88

Pearson Correlationsa. 2

.093 .126 .008 .057 .033 .044

3

.508 .142 .128 .099 .075

4

.028 .078 .110 .021

5

.106 .033 .049

6

.024 .050

7

.029

a

N=679. For resource type, 1=‘‘property-based’’, 0=‘‘knowledge-based’’, for accounting method, 1=‘‘pooling of interests’’, 0=‘‘purchase’’, for deal consummation, 1=‘‘consummated’’, 0=‘‘not consummated, for relatedness, 1=‘‘related’’, 0=‘‘not related’’. po0.01 level. po0.05 level, two-sided tests. b

nonsigniﬁcant results due to the small sample size available for testing, sensitivity analysis suggests that the role of time frame may be worth pursuing further. The Pearson correlation matrix is presented in Table 3.

Hypotheses Tests H1:. The type of target resources acquired will be signiﬁcantly associated with an acquirer’s short-term market performance. The mean performance of property-motivated acquisitions will be more favorable than that of knowledge-motivated acquisitions.

Stock Market Reactions to Knowledge-Motivated Acquisitions

Table 4.

Results of Cross-Sectional Regression Analysis for Acquirers’ Market Performancea.

Independent Variablesb Constant Resource type Payment method Accounting method Relative size Consummation Relatedness Year R2 Adjusted R2 F

145

b

SE

.023 .013 .000 .015 .008 .017 .001 .002

.012 .006 .000 .007 .003 .008 .006 .001

.078 .068 8.081

a

n=679. For resource type, 1=‘‘property-based’’, 0=‘‘knowledge-based’’, for accounting method, 1=‘‘pooling of interests’’, 0=‘‘purchase’’, for deal consummation, 1= ‘‘consummated’’, 0=‘‘not consummated’’, for relatedness, 1=‘‘related’’, 0=‘‘not related’’. po .05. po .01. po .001. b

Hypothesis 1 was tested in two ways. First, the signiﬁcance of the difference between cumulative abnormal returns (CAR) means of property and knowledge-based acquisitions (shown in Table 2) was assessed with a t-test; and second, the relationship between resource type and acquirer’s short-term performance (CAR) was tested using a multiple regression model controlling for other variables that have been associated with acquirer performance in previous studies (payment method, accounting method, relative size, year, and deal consummation). Table 4 shows the results of the cross-sectional regression. The ﬁndings using both the bivariate and multivariate methods support H1. H2. The amount of information communicated to the public in acquisition announcements will be greater in knowledge resource-motivated deals than in property resource-motivated deals. A t-test was used to test Hypothesis 2. Table 5 shows that the word count mean of acquisition press releases is signiﬁcantly larger for knowledgemotivated (1,144.3) than for property-motivated deals (999.12). This

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Table 5. Word Count Statistics of Acquisitions Announcement Press Releases. Resource Type Knowledge Property

N

Word Count Mean

Standard Deviation

388 291

1144.30 999.12

561.53 580.15

t

df

Signiﬁcant (two-tailed)

Mean Difference

3.287

677

0.001

145

empirical evidence supports the argument that knowledge-based acquisitions involve more uncertainty than property acquisitions. H3. The relationship between acquirers’ short-term market performance and target resource type will be moderated by the degree of relatedness between acquirer and target businesses. An acquirer’s short-term market performance in knowledge resource-motivated acquisitions will be more favorable when the acquirer and target businesses are related. Hypothesis 3 suggests that relatedness between the primary industry of the acquirer and the target moderates the relationship between acquisition resource motives and acquirer short-term market performance, with a larger CAR mean for knowledge-based acquisitions expected in related than in unrelated deals. Table 6 shows that in the two-way ANOVA, the main effect of relatedness is not signiﬁcant, and the interaction effect is small but not signiﬁcant. Unrelated property transactions offered the only positive average abnormal returns of the four categories. Thus, H3 was not supported.

DISCUSSION, CONTRIBUTIONS, IMPLICATIONS, FUTURE DIRECTIONS Acquisitions have an important economic impact and represent an important strategy available to corporations that need access to valuable resources. However, empirical evidence indicates that the economic beneﬁts of these transactions historically have not been captured by the acquirers. Thus, at least two questions remain unanswered: Why do acquirers continue doing deals? and Do knowledge-based acquisitions produce better performance results than other types? The present study suggests that not

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Table 6. Industry Relatedness between Acquirer and Target as a Moderator of the Resource Type and Performance Relationship. (A) Two-way ANOVA for Acquirer CAR Mean by Resource Type and Firm Relatedness Source

Sum of Squares

Resource type Relatedness Resource type * Relatedness Within Total

df

CAR Mean Square

F

Signiﬁcant

11.5803 1.0847 3.3524

0.0007 0.2980 0.0675

0.0616 0.0058 0.0178

1 1 1

0.0616 0.0058 0.0178

3.5902 3.6573

675 678

0.0053

(B) Difference of CAR Means Statistics between Relatedness and Resource Type PANEL A Relatedness

Unrelated Related

Resource type

Property Knowledge Property Knowledge

N

95 139 196 249

CAR Mean 0.0031 0.0282 0.0141 0.0235

CAR Mean Difference

t-test

Signiﬁcant (twotailed)

0.0313

3.2635

0.0013

0.0094

1.3394

0.1811

CAR Mean Difference

t-test

PANEL B Resource Type Property Knowledge

Relatedness

Related Unrelated Related Unrelated

N

196 95 249 139

CAR Mean

0.0141 0.0031 0.0235 0.0282

Signiﬁcant (two-tailed)

0.0172

1.8758

0.0617

0.0047

0.6123

0.5407

all deals are equal by speciﬁcally exploring the relationship between target resource type and acquirer performance. Its ﬁndings show that the strategy of acquiring knowledge-based resources is associated with lower acquirer performance and that the amount of information used to announce knowledge-based transactions is representative of the uncertainty associated with their resource value. The bidder’s short-term market performance results support the ﬁrst hypothesis (H1), which suggests an adverse market reaction to knowledgemotivated acquisitions when compared with property-motivated acquisitions. This result is congruent with the ﬁndings of Arikan (2004a, 2004b) on long-term market performance of knowledge-based acquisitions and of

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Jones et al. (2001) on external technology acquisition. The ﬁndings also are consistent with Coff’s (1999) association of lower acquisition premiums with knowledge acquisitions. The second hypothesis (H2), which proposed that the amount of information communicated through acquirers’ press releases announcing the takeover would be greater for knowledge than for property-motivated acquisitions, was also supported. This result not only provides an underlying reason for the H1 ﬁndings, but also suggests that Coff’s uncertainty explanation is more plausible than Arikan’s nonredeployment theory, neither of which was directly tested empirically. The results support the notion that acquiring managers believe that the higher uncertainty associated with a target’s knowledge resources may affect the market’s reaction to the acquisition and thus, as a result, they may attempt to decrease the knowledge resource disadvantage by providing more information about those transactions. The third hypothesis, which proposed a moderating role of relatedness in the resource type and acquisition performance relationship, was not supported.

Contributions and Implications of the Research This research makes contributions to the acquisition performance research stream in three areas: methodological, empirical, and theoretical. The primary methodological contribution of this study is the novel and generalizable way in which target resource type and uncertainty are operationalized. While access to knowledge via acquisitions is mentioned by scholars and practitioners as the main motivation for these strategic events, measures used to operationalize knowledge resources have been limited in past studies to the use of broad characterizations of resources, which oversimplify by using ﬁnancial data. The present study is the ﬁrst cross-sectional acquisition research to use content analysis to identify the speciﬁc target resources that motivate deals from the acquirer’s management perspective in order to assess their effect on the acquirer’s market performance. As such, this research enriches the theoretical classiﬁcation criteria and resource categories deﬁnitions developed by Miller and Shamsie (1996) and reﬁned by York and McDaniel (2003), and develops a detailed coding protocol that will facilitate future use of the resource typology. It also provides evidence of the reliability, accuracy, and precision of the classiﬁcation measure. Additionally, the present study operationalizes the degree of uncertainty in resource acquisition as the amount of information

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provided by the acquiring managers in press releases announcing the deal. This measure has the advantages of availability and objectivity; it is easily obtained from the press releases and its value does not depend on researchers’ or coders’ judgments. The primary empirical contribution made by this research is the contradictory ﬁnding that having knowledge-based resources, which has been found to have a positive impact on ﬁrm performance (Carmeli & Tishler, 2004; De Carolis, 2003; Hatch & Dyer, 2004; McEvily & Chakravarthy, 2002; Villalonga, 2004), does not seem to translate into an acquisition setting, despite the increase in acquisitions motivated by gaining access to a target’s knowledge resources. While providing support for Arikan’s (2004a) similar ﬁndings, the present study varies both methodologically and operationally from her study of the relationship between resource type and acquirer’s performance in terms of sample size, time frame, dependent variable, and resource type categorization. It also adds relatedness as a moderating variable and directly tests the underlying cause of the relationship between resource type and acquirer market performance, providing empirical evidence for Coff’s (1999) explanation that the uncertainty associated with knowledge resources activated acquirers’ coping strategies rather than for Arikan’s nonredeployment explanation. The fact that both this and Arikan’s studies arrive at the same conclusion, however, provides strong evidence for a negative relationship between knowledge resource acquisition and acquirers’ market performance. The main theoretical contribution is the focus of the present study on acquiring managers’ resource motives rather than on target resource composition (e.g. using a target ﬁrm’s Tobin’s q). This approach is theoretically consistent with Walter and Barney’s (1990) resource theorybased suggestion that investigating the pattern of acquisition goals should provide important insight into corporate strategy. Future research should explore in more depth such questions as whether a target’s knowledge resources are actually less valuable than property resources due to the reasons mentioned above, or might the market simply be unable to correctly assess their long-term impact, due to incomplete information. The implications of the ﬁndings for managers making strategic acquisition decisions are clear. They suggest that the decision to acquire a target ﬁrm in order to gain access to their knowledge resources should be approached with caution. The likely negative market reaction to knowledgemotivated transactions suggests the need to use improved methods to assess the potential value of such resources and to accurately communicate that value to investors.

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Limitations and Directions for Future Research Although the results reported here are provocative and the research approach has provided a rich dataset with which to analyze managerial motives in business acquisitions, this study has important limitations. First is the use of a subjective source (management motives) as a proxy for actual target resources acquired. This measure reﬂects the relatively difﬁcult task of identifying knowledge-based resources with potential synergies in a business acquisition. In this study, coarse-grained resource measures (ﬁnancial ratios or Tobin’s q) were replaced with a more speciﬁc and multi-faceted resource identiﬁcation measure. Although it is not without difﬁculties, this subjective measure more directly captures what the deal is about than measures of a ﬁnancial nature. Second, the issue of nonrandom data availability or sample selection bias affects this study as it does most other similar studies. The external validity of the results may be affected by the fact that sample ﬁrms might not be representative of the merger activity during some years covered by the study. A related issue is that the study’s ﬁndings may not generalize to the time frame following the 2000 stock crash. The internet bubble at the turn of the decade marked a ﬁn de siecle, where errors in internet and related high-tech stocks valuation were evident (Malkiel, 2003). Changes in accounting and reporting regulations demanding more clarity in valuing ﬁrms’ resources may have affected the market’s assessment of acquisitions after the market bubble burst. The fact that the results are contingent on the time frame used indicates the need to validate previous ﬁndings using post-2000 data that is just becoming available. Third, the design of this study did not include serial acquirers (i.e. those with more than one acquisition within a single year) because such situations could obscure market reaction to the acquisitions of interest. While empirical evidence suggests that differential short-term performance is not achieved by knowledge-based acquisition, continuous knowledge acquisition is said to be critical to survive and outperform in rapid change industries. A performance study of ﬁrms with multiple knowledge-motivated acquisitions over a longterm time frame might begin to answer the question of why there is still so much acquisition activity despite the mounting evidence of lackluster deals. Another stream of research that might shed some light on the link between target resource type and acquirer’s performance is the use of real options as a method to unlock the value embedded in target resources that many scholars and practitioners believe exists but have been unable to quantify.

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Uncertainty typically is considered bad for the valuation of traditional cash ﬂows. In contrast, uncertainty increases the value of real options. Fourth, even though a few key variables that signiﬁcantly moderate the relationship between resource type and acquirer performance were identiﬁed, acquisitions are such a complex phenomenon that the performance variance explained by the model was relatively low (7%). With so many possible variables inﬂuencing acquirers’ short-term performance, additional or alternative explanations may exist for the study’s results. Clearly, there is a need for further theoretical development. Fifth, while Arikan’s ﬁndings suggest that even the longer term market reactions to knowledge resource acquisition are negative, additional exploration of longer term performance and the acquisition of knowledge resources has merit. Such studies may resolve the apparent conﬂict between ﬁrms that have knowledge resources and those that buy them. It may be that the ﬁrm’s ability to successfully achieve knowledge transfer will bridge the gap. As such, the development of knowledge transferability measures related to knowledge integration may prove useful in this regard (Bannert & Tschirky, 2004; Ranft & Lord, 2002). Finally, the fact remains that there is a disconnection between the anecdotal and theoretical emphasis on knowledge access through corporate takeovers and the empirical ﬁndings that the market responds negatively to such strategies. If corporate acquisitions are to continue as a viable way to access knowledge rather than become merely a passing fad, future research will need to solidly link this strategy to the creation of economic value for acquirers’ shareholders. Because it is clear that the performance implications of knowledge acquisition vary according to industry setting (see also Miller & Shamsie’s ﬁndings, 1996), the relationship between the resource type and acquirer market performance will need to be investigated within the environmental context in which they occur.

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THE IMPORTANCE OF TARGET FIRM CUSTOMERS IN ACQUISITIONS OF TECHNOLOGY-BASED FIRMS Margaret Dalziel ABSTRACT In acquisitions of technology-based firms the focus is typically on the technology and the target firm’s engineers and scientists. But a firm is a social entity with a range of important internal and external relationships that are essential to the exploitation of existing capabilities, and the development of new ones. These relationships need to be maintained, subsequent to acquisition, to preserve the target firm’s ability to innovate and compete. I argue for the importance of the target firm’s relationships with its customers, and show that the degree to which the acquisition creates or destroys value for the target firm’s customers is a significant predictor of acquisition success.

INTRODUCTION Mergers and acquisitions facilitate the evolution of ﬁrms and industries. They are prevalent in high-growth, technology-intensive industries where Advances in Mergers and Acquisitions, Volume 6, 157–170 Copyright r 2007 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 1479-361X/doi:10.1016/S1479-361X(07)06007-3

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many new, technology-based ﬁrms are founded, but where few manage to develop the full spectrum of capabilities that are required to sustain independence. Acquisitions of technology-based ﬁrms allow buyers to broaden the scope of their product offerings and to address new markets (Chaudhuri, Iansiti, & Tabrizi, 2005; Mayer & Kenney, 2004; Puranam, Singh, & Zollo, 2006). They provide sellers with a means of overcoming strategic hurdles to growth, and an opportunity to capitalize on complementarities with buyers (Graebner & Eisenhardt, 2004). The challenge in acquisitions of technology-based ﬁrms is to integrate the target ﬁrm into the acquirer’s operations in such a way as to preserve its innovative capabilities. Researchers addressing this challenge have focused on the target ﬁrm’s technology (Ahuja & Katila, 2001), the scientists and engineers that create it (Kapoor & Lim, 2005), and on the relationship between the target ﬁrm’s stage of development and the level of integration (Chaudhuri et al., 2005; Puranam et al., 2006). In general, the literature on acquisition success has paid little attention to the impact of the acquisition on the target ﬁrm’s customers or its sales people. Exceptions include two studies that examine the impact of acquisitions on the target ﬁrm’s sales people (Bekier & Shelton, 2002; Capron & Hulland, 1999). Capron and Hulland (1999) ﬁnd that while sales and marketing resources are more frequently redeployed from the acquirer to the target, the redeployment of the target ﬁrm’s marketing expertise has an unexpected positive impact on the prospects of the combined ﬁrm. Bekier and Shelton (2002) describe the importance of the target ﬁrm’s sales people for continued revenue generation and outline an approach for their retention. In a study that models the relationship among different metrics of acquisition success, Zollo and Meier (2006) ﬁnd a signiﬁcant relationship between customer retention and acquisition success. While this is an important ﬁnding, Zollo and Meier focus on the relationships amongst different measures of acquisition performance, and make little attempt to explain why customer retention ﬁgures so prominently in their model. Taken together, these studies suggest that the target ﬁrm’s customers and sales people are important constituents in the post-acquisition integration of the target ﬁrm into the acquirer’s operations. In this chapter, I examine the important knowledge-generating role of the customers of technology-based ﬁrms, and argue that the target ﬁrm’s relationships with its customers must be maintained, subsequent to acquisition, to preserve the target ﬁrm’s ability to innovate. The empirical setting is the communications equipment industry, a large and important industry, and the setting of many large ﬁrm acquisitions of small,

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technology-based ﬁrms. During the late 1990s, industry leaders such as Cisco, Nortel, and Lucent acquired dozens of technology-based ﬁrms in an effort to offer a complete range of technological solutions to a broad range of customers. As part of a larger study, I conducted 80 interviews on large– small ﬁrm relations in the communications equipment industry, including 33 interviews with executives responsible for acquisitions. My analysis considers the impact of the acquisition on the target ﬁrm’s customers, investors, and employees, and shows that the degree to which the acquisition creates or destroys value for the target ﬁrm’s customers is a signiﬁcant predictor of acquisition success.

TARGET FIRM CUSTOMERS AND ACQUISITION SUCCESS Customers are essential to the creation and growth of a technology-based ﬁrm. This is true even when the ﬁrm has yet to earn revenues, as potential customers provide important inputs into the new product development process. If customers are essential to the target ﬁrm’s ability to create and capture value, then we might expect acquirers to work to maintain the target ﬁrm’s relationships with its customers following the acquisition. But forces conspire to create a tendency for acquirers to overlook the target ﬁrm’s customers and the sales people and channel partners that serve them, notwithstanding the likely negative impact of this neglect on the success of the acquisition. The Importance of Customers of Technology-Based Firms For technology-based products to offer value to customers, there must be a ﬁt between the product and the context in which it will operate (Alexander, 1964; Iansiti, 1998). The context may be essentially technological in nature, as is the case when the product is a component that will be embedded in a more complex system (Baldwin & Clark, 2000), for example a microchip for a computer, or it may be essentially social in nature, as is the case when the product is a stand-alone system such as a computerized tomography (CT) scanner, to be used by radiologists and radiological technologist (Barley, 1986). In either case, it is the customers who have knowledge of the context in which the product will operate, even if the knowledge is tacit and dispersed among agents and artifacts.

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The importance of the knowledge of customers to the achievement of ﬁt between product and context has been demonstrated in the aircraft industry where the knowledge of aircraft manufacturers extends into the domain of its engine suppliers, suggesting that systems integrator customers tend to ‘know more than they make’ (Brusoni, Prencipe, & Pavitt, 2001). Product-context ﬁt has been shown to impact both technological and market performance across a number of other empirical settings including the personal computer, internet software, workstations and servers, mainframe processor modules, and semiconductor components (Iansiti, 1998). In these settings, projects and new product development initiatives with a high level of product-context ﬁt were completed more quickly, used less resources, and achieved the same or better ends as those with as low level of ﬁt (Iansiti, 1998). The information that customers have regarding the context in which the new product will be used is likely to be sticky, that is, costly to acquire, transfer, and use (Von Hippel, 1994). The value of sticky information is demonstrated by its impact on the locus of innovation-related problem solving. Where user information is sticky, problem-solving activities are frequently transferred to the user site and where multiple user sites are involved, problem-solving activities may iterate among user sites. At the limit, producers will make efforts to ‘un-stick’ their knowledge by producing toolkits that facilitate user innovation (Von Hippel, 1994). ‘Generative relationships’ allow ﬁrms to access existing customer knowledge, including sticky knowledge, and to work with customers to create new understandings (Lane & Maxﬁeld, 1996). Where new products change fundamentally the agent–artifact space, generative relationships are the vehicle for creating and communicating new understandings about the possible and desirable attributes of new products, and the roles and interrelationships of the people involved. These new understandings are emergent, and are unavailable to those not involved in the generative relationships from which they emerge (Lane & Maxﬁeld, 1996). The importance of the technology-based ﬁrm’s relationships with its customers extends beyond new product development to testing and sales. Many technology-intensive products undergo extensive trials at customer premises and such trials require the investment of customer resources. To persuade the customer to participate in the testing process requires a substantive relationship with them. The ﬁrm’s ability to generate revenues is also clearly linked to the quality of its relationships with its customers. In many technology-intensive industries, the customers of new technologybased ﬁrms are other technology-intensive ﬁrms. This is particularly true in industries such as the communications equipment industry where products

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are systemic in nature and component suppliers sell products to system integrators (Baldwin & Clark, 2000). In these circumstances, relationships between buyers and sellers are not purely transactional, but are long term and involve knowledge sharing, trust, and reciprocity. This is true regardless of whether or not the ﬁrm sells its product directly to customers, or indirectly using channel partners such as resellers and distributors. Such relationships are valuable and difﬁcult to replace.

Why Acquirers Neglect Target Firm Customers If it is important to retain relationships with the target ﬁrm’s customers subsequent to the acquisition, then presumably acquirers try to attend to this. But many forces conspire to divert the acquirer’s attention. First, if the acquirer is of the view that they acquired the ﬁrm for its technology, then their attention may be on the retention and sustained productivity of the target ﬁrm’s engineers and scientists, at the expense of other target ﬁrm employees such as sales and marketing people (Mayer & Kenney, 2004; Kapoor & Lim, 2005). Second, the target may have only a few customers relative to the many customers of the acquirer and so they may be regarded as insufﬁciently numerous to merit attention. Technology-based ﬁrms commonly have difﬁculty developing global sales and marketing channels, and access to the acquirer’s complementary assets (Teece, 1986) is among the primary motivations that selling entrepreneurs have for selling their ﬁrms (Graebner & Eisenhardt, 2004). In such a case the acquirer may conclude that it is better to focus on introducing the target’s product to its customers, than to invest in maintaining the target ﬁrm’s existing customer relations. Furthermore, if the target ﬁrm’s offering is disruptive (Christensen, 1997), the target ﬁrm’s customers may offer lower revenues and proﬁt margins than those to which the acquirer is accustomed. The acquirer may be of the view that the technology can be repackaged or bundled into a higher-priced offering, and sold to customers that are less cost-sensitive. Third, the primary advocates of the target ﬁrm’s customers, the target ﬁrm’s sales people, may not join the acquiring ﬁrm. They may not be offered positions, or they may turn down the positions they are offered. The remuneration of technical employees may be less affected by the acquisition than the remuneration of sales and marketing people; in particular, the commission structure of the target ﬁrm’s sales people will likely change, and this may discourage the target ﬁrm’s sales people from joining the acquirer’s

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operations. Even in acquisitions where the focus is not on the technology, the marketing and sales resources of the target ﬁrm are unlikely to be redeployed in the combined ﬁrm to a large extent (Capron & Hulland, 1999). Furthermore, the manner in which the target ﬁrm’s employees are integrated into the acquirer’s operations may also have an impact on the target ﬁrm’s customers. Interviewees reported that while the target ﬁrm’s technical employees that join the acquirer’s operations are likely to be integrated as a group, the sales people who join the acquirer’s operations are more likely to be assigned instructional roles where they are responsible for educating the acquirer’s sales people on the target ﬁrm’s products. This staff role is unlikely to be of interest to the type of people who undertake the high-risk, high-return pursuit of selling the products of a new technologybased ﬁrm. Once the education process is complete, the target ﬁrm’s sales people may or may not be offered sales positions with their own accounts in the acquirer’s operations. In any event, their relationships with customers of the target ﬁrm are likely to have been compromised. The oversight of the target ﬁrm’s non-technical contributors may extend beyond its sales people to its channel partners, the resellers and distributors who act as intermediaries between the target ﬁrm and its customers. They may be abandoned or may get less attention in the interests exploiting the synergies between the target ﬁrm’s technological capabilities and the acquirer’s sales and marketing capabilities. One interviewee attributed the failure of the acquisition to the acquirer’s neglect of the target’s channel partners: We had a single-tier channel focus, selling only to tier one accounts, and were acquired for our channel strength. In contrast, Largeco sold to second and third tier accounts and would sell to any man that breathes. At Largeco the mentality was numbers oriented – how many boxes you are going to move. With that kind of an attitude, tier one accounts will abandon you. As a result all the ﬁeld organization left and all the channel left – the relationship with the channel was destroyed.

The fourth reason for which the acquirer may neglect the target ﬁrm’s customers during the post-acquisition integration process is that the target ﬁrm’s customers may be so different from its own that it does not understand their needs and behaviors. This may be the case if the acquisition is motivated by a diversiﬁcation strategy. Cisco anticipated this problem when it acquired Linksys in 2003, its ﬁrst acquisition of a ﬁrm that sold products directly to consumers. While all previous acquisitions have been integrated into Cisco’s operations and have lost their independent identities, Linksys continues to operate autonomously under its own name (Interview with Cisco executive, October 12, 2004; Cisco, 2007).

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Finally, if the target ﬁrm is addressing an emerging market that is poorly understood, then the coordination and control systems of the large ﬁrm acquirer may make it difﬁcult for the acquirer to address the uncertain opportunity (Bhide´, 2000). Research has shown that large ﬁrm acquirers of technology-based ﬁrms are much better at integrating target ﬁrms whose activities exhibit a high degree of complexity, than they are at integrating target ﬁrms whose activities exhibit a high degree of uncertainty (Chaudhuri et al., 2005). Similarly, the preservation of target autonomy is more important if the target’s activities are exploratory, than if the target ﬁrm’s activities consist of the exploitation of past discoveries (Puranam et al., 2006). If the target ﬁrm’s market is emerging and highly uncertain, then a large ﬁrm acquirer may ﬁnd it difﬁcult to accommodate the target ﬁrm’s exploratory activities. Hypothesis While the customers of technology-based ﬁrms are essential to new product development and revenue generation, forces conspire to focus the acquirer’s attention on the target ﬁrm’s technology and its technical employees. No acquirer of a technology-based ﬁrm will overlook the technology or the technical employees and so those acquirers who manage to ensure that the target ﬁrm’s customers beneﬁt from the acquisition will distinguish themselves by attending to issues that are commonly given little attention. Even though sales and marketing resources are more frequently transferred from the acquirer to the target than in the reverse direction, where it does occur, the latter has a stronger and more signiﬁcant impact on the performance of the combined ﬁrm than the former (Capron & Hulland, 1999). As a consequence of the importance of the target ﬁrm’s engagement with its customers to its ability to develop and deploy new products, I expect the value captured by the target ﬁrm’s customers to be positively associated with acquisition success. Hypothesis 1. The value captured by target ﬁrm customers will be positively associated with acquisition success.

METHODS Empirical evidence is drawn from the global communications equipment industry. The communications equipment industry provides communications

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systems to communications service providers and large organizations. During the late 1990s it experienced tremendous growth, as voice networks were replaced with broadband networks that provide for voice, video, and data communication. Global 2003 revenues for the industry are estimated to be $300 billion (International Telecommunication Union, 2004). The strong growth in the industry prompted the entry of many technology-based ﬁrms that capitalized on the strong demand and the readiness of venture capital investors to invest in internet technologies. Many of these small ﬁrms were acquired by their large-ﬁrm competitors; between 1995 and 2000, the 10 leading large ﬁrms in the networking equipment industry acquired over 160 small ﬁrms. During that time period Cisco acquired 54 small ﬁrms, Lucent acquired 34, Nortel acquired 16, and Nokia acquired 10. At the time, several of these large ﬁrms, most notably Cisco, declared that the acquisition of small technology-based ﬁrms was central to their corporate strategy. The sample consists of 33 acquisitions of small, technology-based ﬁrm. Eleven different large ﬁrms are represented in the sample, including 3Com, Alcatel, Cisco, Ericsson, Lucent, Nokia, and Nortel. When the acquisitions took place, the mean target ﬁrm age was 5.2 years. Mean target ﬁrm revenues were $24 million, the mean number of employees was 180, and the mean price paid for the acquisition was $250 million. The geographic locations of the target ﬁrms reﬂected both the areas in which the communications equipment industry was concentrated and the regions targeted for interviews. Seventeen of the target ﬁrms were located in the San Francisco Bay area, nine in Ottawa, Canada, four in the Boston area, and the remainder were distributed across North America. The data collection interviews comprised open-ended questions regarding the acquirer and target ﬁrms, the acquisition, and the context in which the two ﬁrms operated, as well as a closed-form questionnaire that was administered at the end of the interview. In all cases, interviewees were highly knowledgeable individuals who were personally involved in the acquisition.

Measures I use single-informant perceptual measures of acquisition success and value captured by target ﬁrm stakeholders. While such measures are susceptible to common methods bias, they have the beneﬁt of being an informed assessment on salient measures for which data is otherwise unattainable. For this reason similar techniques have been employed in several important studies on acquisitions (e.g. Capron & Hulland, 1999; Zollo & Meier, 2006).

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Acquisition Success Interviewees were asked to rate acquisition success as being not successful, neutral, successful, or very successful. The vast majority of acquisitions were appraised as being successful or very successful (25/33). The unusually high proportion of successful acquisitions may have been due to the period of high growth the industry was experiencing at the time. Value Captured by Target Firm Customers, Investors, and Employees The degree to which the acquisition created or destroyed value for the target ﬁrm’s customers, investors, and employees was measured using four possible responses: negative, negligible, positive, and extremely high. As shown in Table 1, in cases where the level of value captured by the target ﬁrm’s customers was extremely high, interviewees reported improved access to sales and marketing resources and customers. At the other end of the spectrum, where the level of value captured by customers was negative, interviewees reported on the neglect of sales and marketing resources previously established by the target. Positive or extremely high levels of value were captured by 17/29 customers, 33/33 investors, and 28/33 employees. In four cases interviewees felt that the value captured by customers was either not applicable (in two of these cases the target ﬁrm had zero revenues at the time of acquisition) or they felt that they could not assess the value captured by customers. In 10 cases the target ﬁrm had no revenues at the time of acquisition. Table 2 gives the descriptive statistics.

RESULTS Because the dependent variable, acquisition success, can take on one of four ordinal values, polytomous regression was used to conduct the analysis. For a c=4 category ordinal response, the adjacent categories logit model speciﬁes c–1=3 logistic regression equations of the form j ¼ 0; 1; 2 log pi;jþ1 =pi;j ¼ aj þ b0 xi where log(pi,j+1/pi,j) is the odds that the dependent variable will take on a value of c=1, 2, or 3, versus the probability that it will take on the adjacent lower value of c–1=0, 1, or 2, respectively; the a j are the model-speciﬁc constants; b is a homogenous vector of regression coefﬁcients; and xi is a

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Table 1.

Value Captured by Target Firm Customers.

Rating

Example Interview Comments

Extremely high 7 cases

Within a month of the acquisition, the Smallco product was redone in a Largeco format with Largeco packaging, pricing, and service. Smallco had its own sales force and their main job was to educate the Largeco sales force. Later they moved into different functions. Smallco CEO was concerned about the upside/de-risking tradeoff of selling. Now he will say that he wishes he did the acquisition earlier. It would have been easier to get it right, to get the customers lined up. What Largeco contributes is access to the customer. The customer still wants one-stop shopping. Smallco views the acquisition as a success because it got a new customer and new technologies. Smallco had about 10 sales and marketing people at the time of the acquisition and now has only two. A lot of sales and marketing people left because they wanted to work for a small company. The Largeco sales force likes to sell our product. We had comarketed with Largeco prior to the acquisition. Largeco had embedded our technology in its product but they wanted to own the technology. Largeco gives its sales staff extra incentives to sell the hard stuff such as new products created by acquired ﬁrms. The overlay sales staff (formerly the sales staff of the acquired ﬁrm) are driven by the new products. The goals of the partnership, in terms of shipping levels, were not met. The acquisition will be positive for customers in the future. We had a single-tier channel focus, selling only to tier one accounts, and were acquired for our channel strength. In contrast, Largeco sold to second- and third-tier accounts and would sell to any man that breathes. At Largeco the mentality was number oriented – how many boxes you are going to move. With that kind of an attitude, tier one accounts will abandon you. As a result all the ﬁeld organizations left and all the channels left – the relationship with the channel was destroyed. The Smallco product had been sold through data distributors, a very technical channel. The Largeco champion promoting the acquisition had two motivations (1) control of the technology and (2) the valuable sales channel. Unfortunately, things changed a great deal after the deal was made. The champion of the acquisition was pushed out of Largeco. The new people responsible for the acquisition had a different vision of it and did not see any value in the Smallco sales channel, they only wanted the technology.

Positive 13 cases

Negligible 4 cases

Negative 5 cases

Importance of Target Firm Customers

Table 2.

1. Acquisition success 2. Value captured by investors 3. Value captured by employees 4. Value captured by customers

167

Descriptive Statistics.

n

Mean

SD

Minimum

Maximum

33

2.00

1.17

0

3

33

2.61

0.50

2

3

0.06

33

2.15

0.97

0

3

0.34

29

1.76

1.02

0

3

0.67 0.37

1

2

3

0.50 0.39

po.05. po.01. po.001.

vector of covariates. Exact statistical software (Cytel Studio) was used to perform the exact polytomous regression. Exact statistical methods are the only methods that yield reliable results on small or sparse datasets. Table 3 shows the results. The model of acquisition success is signiﬁcantly better than the null model with a likelihood ratio of 30.38 (po.001). Hypothesis 1, that predicted a positive relationship between the value captured by the target ﬁrm’s customers and acquisition success, was supported (po.001). Interestingly, neither the value captured by the target ﬁrm’s investors, nor the value captured by the target ﬁrm’s employees, were signiﬁcant predictors of acquisition success. The results are consistent with those of Zollo and Meier (2006) who found that customer retention is a signiﬁcant predictor of overall acquisition performance, but that employee retention is not.

DISCUSSION The argument and evidence provided in this paper point to the criticality of the customers of the target ﬁrm to successful post-acquisition integration of technology-based ﬁrms. My results show that the value captured by target ﬁrm customers is signiﬁcantly related to acquisition success, while the value captured by target ﬁrm investors and employees is not. While the evidence is based on acquisitions in a single industry, I expect the ﬁndings will generalize to any industry in which the knowledge held by customers, or where relationships with customers, are important.

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Table 3.

Results. Model 1 Acquirer success

Success=1 Success=2 Success=3 Control variables Value captured by investors Value captured by employees Independent variable Value captured by customers Model characteristics n Number of groups Likelihood ratio Degrees of freedoma 2 log likelihood Degrees of freedomb

1.88 (1.77) 1.51 (1.80) 0.99 (1.52) 0.56 (0.61) 0.35 (0.31) 0.82 (.32) 29 14 30.38 6 23.89 36

Note: The ﬁgures in parentheses are standard errors. In polytomous regression the number of degrees of freedom associated with the likelihood ratio test is equal to the number of outcome categories minus one times the degrees of freedom for the variable in each logit (Hosmer & Lemeshow, 1989, p. 224). In this case this is (4– 1) 2=6. b In polytomous regression, the number of degrees of freedom associated with the 2 log likelihood test is equal to the number of outcome categories minus one times the number of groups, minus the dimensionality of the likelihood ratio test (Cytel, 2004). In this case this is (4– 1) 14–6=36. po.001. a

The implications for managers are clear. Acquirers of technology-based ﬁrms need to ensure that the acquisition integration process is sensitive to the target ﬁrm’s relationship with its customers, even if the target ﬁrm has yet to earn revenues. The target ﬁrm’s relationship with its customers is essential to its ability to develop new products. If acquirers commonly overlook the target ﬁrm’s customers, especially when the target ﬁrm has yet to earn revenues, then this might explain why the integration of target ﬁrms into the acquirer’s operations has a negative impact on the target ﬁrm’s

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ability to innovate if the target ﬁrm has yet to introduce a new product to market (Puranam et al., 2006), or if its activities exhibit a high level of technological and market uncertainty (Chaudhuri et al., 2005). Cisco’s decision to forgo acquiring early stage companies (Mayer & Kenney, 2004) may be a consequence of its inability to accommodate the fragile generative relationships between early stage, technology-based ﬁrms and their customers. More generally, acquirers and those who study acquisitions need to be sensitive to the fact that a ﬁrm is a social entity with a range of important internal and external relationships that may be important to the exploitation of existing capabilities, and the development of new ones. Future research on the post-acquisition performance of target ﬁrms may beneﬁt from a consideration of the degree to which the target ﬁrm’s value creation network is destroyed, preserved, or enhanced by the acquisition.

REFERENCES Ahuja, G., & Katila, R. (2001). Technological acquisitions and the innovation performance of acquiring ﬁrms: A longitudinal study. Strategic Management Journal, 22(3), 197–220. Alexander, C. (1964). Notes on the synthesis of form. Cambridge, MA: Harvard University Press. Baldwin, C. Y., & Clark, K. B. (2000). Design rules: The power of modularity (Vol. 1). Cambridge, MA: MIT Press. Barley, S. (1986). Technology as an occasion for structuring: Evidence from observations of CT scanners and the social order of radiology departments. Administrative Science Quarterly, 31(1), 78–108. Bekier, M. M., & Shelton, M. J. (2002). Keeping your sales force after the merger. The McKinsey Quarterly(4), 106–115. Bhide´, A. (2000). The origin and evolution of new businesses. Oxford, UK: Oxford University Press. Brusoni, S. A., Prencipe, A., & Pavitt, K. (2001). Knowledge specialization, organisational coupling, and the boundaries of the ﬁrm: Why do ﬁrms know more than they make? Administrative Science Quarterly, 46, 597–621. Capron, L., & Hulland, J. (1999). Redeployment of brands, sales forces, and general marketing management expertise following horizontal acquisitions: A resource-based view. Journal of Marketing, 63(2), 41–54. Chaudhuri, S., Iansiti, M., & Tabrizi, B. N. (2005). The multilevel impact of complexity and uncertainty on the performance of innovation-motivated acquisitions. Wharton Management Department Working Paper. Available from the ﬁrst author at [email protected] Christensen, C. (1997). The innovator’s dilemma: When new technologies cause great firms to fail. Boston, MA: Harvard Business School Press.

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Cisco. (2007). The Linksys website http://www.linksys.com is still accessible from the Cisco website at http://www.cisco.com/en/US/netsol/ns411/networking_solutions_home_and_ home_ofﬁce_home.html. Accessed on January 31, 2007. Cytel. (2004). Cytel studio manual. Cytel Software. Graebner, M. E., & Eisenhardt, K. M. (2004). The seller’s side of the story: Acquisition as courtship and governance as syndicate in entrepreneurial ﬁrms. Administrative Science Quarterly, 49(3), 366–403. Hosmer, D. W., & Lemeshow, S. (1989). Applied logistic regression. New York: Wiley Interscience. Iansiti, M. (1998). Technology integration: Making critical choices in a dynamic world. Boston: Harvard Business School Press. International Telecommunication Union. (2004). Key global telecom indicators for the world telecommunications service sector. (Accessed on January 31, 2007 at http://www.itu.int/ ITU-D/ict/statistics/at_glance/KeyTelecom99.html) Kapoor, R., & Lim, K. (2005). The impact of acquisitions on the innovation performance of inventors at semiconductor companies. Best paper proceedings, Academy of Management Conference. Lane, D., & Maxﬁeld, R. (1996). Strategy under complexity: Fostering generative relationships. Long Range Planning, 29(2), 215–231. Mayer, D., & Kenney, M. (2004). Economic action does not take place in a vacuum: Understanding Cisco’s acquisition and development strategy. Industry and Innovation, 11(2), 299–325. Puranam, P., Singh, H., & Zollo, M. (2006). Organizing for innovation: Managing the coordination-autonomy dilemma in technology acquisitions. Academy of Management Journal, 49(2), 263–280. Teece, D. J. (1986). Proﬁting from technological innovation: Implications for integration, collaboration, licensing, and public policy. Research Policy, 15, 285–305. Von Hippel, E. (1994). ‘‘Sticky information’’ and the locus of problem solving: Implications for innovation. Management Science, 40, 429–439. Zollo, M., & Meier, D. (2006). Understanding the performance of corporate acquisitions. INSEAD working paper.

ACQUIRING BIOPHARMACEUTICAL RESEARCH: IS MARKET APPROVAL A DEAL BREAKER?$ Karen Ruckman ABSTRACT This paper empirically investigates the profit impact of externally sourcing technology through acquisition. Specifically, it questions whether biopharmaceutical acquirers benefit from taking over technologies which are pre-marketed more than those that have already been approved for market. This paper utilizes the resource-based view to determine that the decision depends on the relative value chains of the acquirer and target. We assert that companies with lower research and development (R&D) intensity than their targets benefit from acquisitions of pre-marketed drugs more than they would with marketed drugs because of a complementary combination of competitive assets. Estimations from the U.S. biopharmaceutical sector in the 1990s show that acquirers that take over pre-marketed drugs from targets with higher R&D intensity than themselves have post-acquisition returns between 2% and 11% higher than if they took over marketed drugs.

$

This work was funded by the President’s Research Grant established by Simon Fraser University.

Advances in Mergers and Acquisitions, Volume 6, 171–187 r 2007 Published by Elsevier Ltd. ISSN: 1479-361X/doi:10.1016/S1479-361X(07)06008-5

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1. INTRODUCTION It has been asserted that one of the predominant motivations for acquisitions is to access existing knowledge in lieu of in-house research and development (R&D) (Bower, 2001). An acquirer externally sources R&D to avoid exploration, which according to Levinthal and March (1993) is ‘‘the pursuit of knowledge, of things that might come to be known’’ and to leapfrog into exploitation (‘‘the use and development of things already known’’). This strategy is especially prevalent in high-technology industries such as the biopharmaceutical industry (pharmaceutical and biotechnology industries combined). Deloitte Consulting’s lead principal and pharmaceutical R&D practice leader recently described the phenomenon: The reality now is that most of the major companies sell about 50 percent of products discovered by companies or institutions other than themselves. And the existing business model of large pharmaceutical companies is such that they are almost forced to go outside and look at in-licensing and acquisition to bolster their development and commercial pipelines. (Deloitte Consulting, 2006)

Despite the growing acknowledgment of this strategy (Anand & Delios, 2002; Vanhaverbeke, Duysters, & Noorderhaven, 2002; Ranft & Lord, 2002; Schweizer, 2005), there are relatively few studies which examine the impact on proﬁtability. Using long-term time series data from the U.S. biopharmaceutical industry, this paper will determine whether externally sourcing R&D through acquisition contributes positively to acquirer proﬁts. When choosing a suitable target for acquisition, there is an important decision that the biopharmaceutical acquirer has to make. The acquirer has to determine if it wants to take over a pre-marketed or marketed technology. Pre-marketed drug candidates are not guaranteed to gain market approval but can be associated with a lower acquisition price. Whether the technology has been marketed yet is a critical aspect of the outsourcing strategy in the biopharmaceutical industry because the length of time between identiﬁcation of a molecule and market approval can last up to 15 years (Rothaermel & Deeds, 2004). This paper asserts that the dilemma can be solved by ascertaining the acquirer’s leverage over the target company when negotiating for the technology. The resource-based view suggests that the leverage an acquirer has in negotiations depends almost entirely on the competitive assets each party brings to the table. We determine their competitive assets by examining their value chains. We will answer the research question: when a biopharmaceutical company is externally acquiring technologies, will its performance beneﬁt more from targeting marketed or pre-marketed drugs?

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Mature biopharmaceutical companies that operate throughout the entire value chain from R&D to marketing have a competitive advantage in marketing/distribution (Rothaermel & Deeds, 2004) and arguably in the identiﬁcation of drug candidates from other ﬁrms. Youthful biopharmaceutical companies are usually heavily research-intensive, deﬁcient in funding to get through clinical trials and may have no established distribution channels post-approval (Rothaermel, 2001).1 The key difference in value chains between a mature and youthful biopharmaceutical company is the relative research-intensity. The life cycle of R&D intensity is highest when the company is youngest (Ernst & Young, 2006). Whether the drug candidate is pre-marketed or marketed gives additional information about the extent of the value chain of the target. It follows that when negotiating with more research-intensive companies, acquirers can beneﬁt more from negotiating for pre-marketed drugs than those already marketed ones because of a complementary combination of competitive assets. The hypothesis is tested on a dataset of 81 acquisitions in the U.S. biopharmaceutical sector between 1991 and 2000. The results indicate that when the difference between the target and acquirer’s relative research intensity is ignored, there is no signiﬁcant effect on acquirer performance from acquiring a pre-marketed drug candidate over a marketed one. However, when an acquirer takes over a target that researches more than itself, it is always better off acquiring a pre-marketed drug candidate over an already marketed drug. This may be explained in part by the different business models of each partner exposed by the relative research intensities. This paper contributes to the literature as it directly examines the performance impact of externally sourcing R&D through acquisition.2 There are only three papers which have addressed this issue, albeit indirectly. Two papers of those papers examine different types of postacquisition integration methods to determine success of capability-seeking acquisitions (Schweizer, 2005; Chaudhuri & Tabrizi, 1999). The measurement for success in both studies was when the subsidiary was not subsequently divested or when the respondents claim the acquisition was a success. This deﬁnition of success can be argued to be an indirect and dichotomous measure of post-acquisition performance. Another article (Harrison, Hitt, Hoskisson, & Ireland, 1991), although not overtly an R&D outsourcing through acquisition study, examines how resource differences between target and acquirer contribute to higher post-acquisition performance. They tested for the difference between target and acquirer R&D intensity. This is a common measure of technology sourcing ﬁrst used at the industry level by Kogut and Chang (1991). Harrison et al. (1991) ﬁnd that

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larger differences in R&D intensity yield higher post-acquisition performance. All told, the literature pertaining to the performance impact of externally sourcing R&D is deﬁcient for such a commonly pursued strategy. The following section will provide background information about the drug industry. Section 3 will summarize the hypotheses. Section 4 will discuss the data. Section 5 will examine the empirical results and the last section will conclude.

2. INDUSTRY BACKGROUND INFORMATION The biopharmaceutical sector during the 1990s is an ideal subject for the evaluation of externally sourcing R&D through acquisition. The era of blockbuster drugs which applied to multiple diseases was over (Schweizer, 2005) and biotechnology became the new paradigm for ﬁnding potential drug candidates (Penner-Hahn & Shaver, 2005). This necessitated an increased investment in R&D and added risk of failure at the pre-clinical research stage (Hartmann & Hassan, 2006; Jacob & Kwak, 2003). Compounding this situation, clinical trials were becoming longer and more expensive (Schweizer, 2005). The response by pharmaceutical companies was an increase in acquisitions of and alliances with biotechnology companies (Rothaermel & Deeds, 2004) to bolster their research pipeline while reducing the risk of clinical trial failures. The United States system of new drug approvals is the most rigorous in the world. It costs an average of $500 million and takes an average of almost 15 years from the discovery of a compound to bring a single new pharmaceutical to market. The odds of a discovered molecule succeeding in the development process are extremely low (Rothaermel & Deeds, 2004). For every 10,000 chemically synthesized molecules screened, only 250 are ever issued an Investigational New Drug Application which allows them to be tested in humans. Out of those lead candidates, ﬁve (2%) enter clinical testing, 80% pass phase I, 30% pass phase II, and 80% pass phase III of the clinical trials. Of those, the FDA will approve only one for commercialization according to the Pharmaceutical Research and Manufacturers of America (Giovannetti & Morrison, 2000). This implies that the ex ante probability for a molecule to develop into a commercialized drug is 0.01%. Another important aspect of the biopharmaceutical industry is the relationship and differences between pharmaceutical and biotechnology companies. Biotechnology was born in the mid-1970s partially in response to the horizon on blockbuster drugs but more speciﬁcally because of the

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emergence of DNA analysis that allowed the genetic targeting of speciﬁc diseases. Traditional pharmaceutical drugs are small chemical molecules that treat the symptoms of a disease or illness – one molecule directed at a single target. Biotechnology research involves large biological molecules known as proteins and this targets the underlying mechanisms and pathways of a malady (Ernst & Young, 2006). They can deal with targets in humans that are not accessible with traditional medicines. Although pharmaceutical and biotechnology companies are in the same industry, their business models are very different. Traditionally, pharmaceutical companies are usually associated with powerful balance sheets, strong cash ﬂow, development and marketing capabilities. They are also in constant need of replenishing their pipelines. Historically, biotechnology companies are associated with patented pre-clinical and in-clinical trial drug candidates and proprietary technological platforms. However, because of their youth, they lack cash ﬂows and are usually struggling to raise funds to follow through with clinical trials (Frank, 2006). Hence for pharmaceutical and biotechnology companies, strategic alliances and acquisitions have been a means to ﬁll critical gaps. Biotechnology companies offer research productivity while pharmaceutical companies offer immediate development funding and eventual marketing and distribution capabilities (Jaggi, 2006). That said, now that biotechnology as a ﬁeld is maturing, the traditional characteristics associated with biotechnology (high R&D intensity, low/no sales, no cash ﬂow) are less revealing. In 2005, the weighted average of revenue per employee for the top eight U.S. biotechnology companies was $666,000, whereas for the top ﬁve pharmaceuticals it was $421,000. For the same eight companies, the weighted average for the biotechnology’s R&D to revenue ratio was 21% while pharmaceutical’s was 15% (Ernst & Young, 2006). Even the lines drawn between which company does biotechnology vs. pharmaceutical research (large vs. small molecule) is becoming blurred. Many pharmaceutical companies perform biotechnology research and vice versa (Rhodes, 2006). It is becoming evident that as biotechnology matures, the pharmaceutical and biotechnology sectors are converging. Previously, in the context of acquisitions and determining the competitive assets the two parties brought to the table, it was simple to classify each as biotechnology or pharmaceutical using simple statistics based on R&D or sales. It is not valid or useful to do that anymore. In the following section, we argue that the best way to detect the particular competitive assets acquisition parties have is by examining their value chains.

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3. HYPOTHESIS The purpose of this paper is to examine the impact externally sourcing technology has on post-acquisition performance and more speciﬁcally, whether an externally sourcing biopharmaceutical company should target marketed or pre-marketed drugs. The length of clinical trials in the biopharmaceutical industry is long enough that this is an important decision. Pre-marketed drug candidates have the beneﬁt of being cheaper to acquire than they would when they are approved for market but they come with the added risk that they may never attain market approval. Marketed drug candidates come with no risk3 but may require a premium for purchase because their market value is well known to various suitors. With this type of uncertainty, it becomes necessary to use some other piece of information to solve the dilemma. Borrowing from the resource-based view, the needed information is the relative value chains of the acquisition partners. In the context of acquisitions, what is most important to distinguish is the degree to which the value chains of the parties involved differ. This will expose the leverage each party has during negotiations but will more importantly reveal the unique combination of competitive assets which can translate into higher post-acquisition proﬁts. A mature acquirer’s competitive advantages are twofold: identifying promising drug candidates already in development elsewhere and marketing post-approval. The youthful drug target’s competitive advantage is the basic research involved in identifying molecules (large or small) which can potentially enter the clinical trials process. Youthful targets are in need of funding to get through clinical trials and access to distribution channels post-approval. Therefore, a complementary combination of competitive assets between a mature acquirer and a youthful target will be most beneﬁcial from the acquirer’s perspective. The quest, then, becomes how to determine the maturity and youthfulness of a biopharmaceutical company. There is an important characteristic that detects the youthfulness of a biopharmaceutical company: the researchintensity. The typical life cycle of a biopharmaceutical company begins with relatively high research intensity in the beginning followed by some productrelated revenues coinciding with a decrease in research intensity (Ernst & Young, 2006). The relative research intensity of the target and acquirer would give an indication of the differences of the parties’ value chains. So the ideal combination of competitive assets would be a mature acquirer and a youthful target which would be reﬂected in a large difference between target and acquirer R&D intensity.

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Although relative research intensities is a useful tool, it is not a sufﬁcient condition for determining relative value chains because occasionally youthful targets can still have high research intensities while developing their own marketing and distribution. More information about the value chain of the target is revealed by whether the targeted drug is pre-marketed or not. Combining this piece of information with the relative research intensities will solve the dilemma. If the targeted drug was marketed, it would reveal that, although the target’s R&D intensity is higher than acquirer, it has distribution capabilities of its own. On the other hand, if the targeted drug is pre-marketed, it does not reveal that the target does not have access to distribution facilities but it does not preclude the possibility either. This on its own would not be enough to determine the value chain of the target company but combining the state of the targeted drug with the relative research intensities reveals a large amount of information that allows us to make the following Hypothesis. An acquirer will increase post-acquisition returns when it targets pre-marketed technologies from a company with higher R&D intensity than itself more than it would if it targeted a marketed technology.

4. DATA The dataset is comprised of 81 acquisitions of publicly traded companies in the U.S. biopharmaceutical industry between 1991 and 2000 (inclusive). The listing of the acquirers and targets were obtained from Thompson Financial’s SDC Platinum Mergers and Acquisitions database. The drug industry is comprised of ﬁrms in SICs 2833, 2834, 2835, or 2836. In an effort to narrow the acquisition motivation, acquisitions in which just one party was in the biopharmaceutical industry while the other party was in another industry were omitted. The ﬁrm-level data associated with the acquirers and targets was attained from Research Insight’s Compustat database. If an acquirer merged with another company during the time series, the merged company took the place of the original company. All the acquirers in the dataset took over a pre-marketed or marketed drug from a target company and therefore, are all externally sourcing technology. For each acquisition, there are 3–5 years of data before the year of acquisition4 and at least 5 after. This minimum time period post-acquisition was chosen to reﬂect the years needed to pass all clinical trial and have any

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impact on the acquiring ﬁrm’s revenues.5 Successful drug candidates will increase acquirers’ revenue within the time period and unsuccessful candidates will decrease revenues due to acquisition costs. This unique data will allow us to determine whether technology sourcing is a successful strategy for the biopharmaceutical sector. According to the Center for Drug and Research Evaluation (CDER) Factbook (1997), it takes 18 months on average after discovering a viable compound to complete pre-clinical studies and apply for an investigational new drug (IND). Then after a successful IND application, it is expected to take 5 years to complete clinical trials and apply for a new drug (ND). The CDER claims an average of 15 months for processing ND approvals. Based on these estimates, it was assumed that 5 years of post-acquisition data were sufﬁcient to get acquired drugs which had successfully passed any phase within the clinical trials structure to get to market. (It is assumed that passing the ﬁrst clinical trial stage would require at least one year.) Because it is unclear how many years would be expected to get a pre-clinical drug candidate to market, acquisitions were deleted from the dataset if the acquired drug compound was pre-clinical. To keep the dataset consistent, if the acquiring company went bankrupt within 5 years post-acquisition, they were also deleted. Furthermore, the year of acquisition was not included in the dataset because of inconsistencies with R&D expenditure reports (some included in-process R&D, others did not) and with combined vs. only acquirer data reporting. On average, there is 9.6 years of data in the dataset with 81 acquisitions in total. Twenty-nine percent of the original acquisitions were omitted because of either incomplete ﬁrm-level data or insufﬁcient length of time series postacquisition. We also examine a subset of the data where acquirers have 8 years of post-acquisition data available. In this subset, there are 41 groups with an average of 12.5 years of data available. Table 1 displays the statistics of all the variables to be included in the estimations for the shorter data sample (5 years post-acquisition data). The following text will discuss each independent variable in detail. RDINT: R&D intensity (RDINT) reﬂects R&D inputs relative to the size of the company. R&D intensity is measured as a ratio of R&D expenditure over total assets. Contrary to Schumpeter (1961), who theorized that large ﬁrms are more innovative than small ﬁrms because they are more efﬁciently able to form and maintain R&D projects, there is expected to be a negative relationship between R&D activities and ROA due to managers becoming more risk-averse as their ﬁrms’ performance increases (Hitt, Hoskisson, Ireland, & Harrison, 1991; Fiegenbaum & Thomas, 1988). We expect to ﬁnd a negative correlation between R&D intensity and ROA.

Variable

Statistics of Variables and Correlation between Independent Variable. Measurement

Dependant variable Total acquirer income over total assets ROAat Control variables 1 RDINTta 2 ASSETSta 3 SALESDUMta 4 POSTACQt

Acquirer R&D expenditure over total assets Acquirer total assets, in logs 1 if SALES WR&D expenditure, 0 otherwise 1 if year is post-acquisition, 0 if pre-acquisition

Explanatory variables 5 PREMARKET 1 if target drug had not attained market approval at time of acquisition, 0 if it had 6 DIFF Average target R&D intensity minus average acquirer R&D intensity, pre-acquisition 7 HIGHDIFF 1 if DIFF in top 33 percentile, 0 otherwise

Standard Minimum Mean Maximum Deviation

27.812

195.21

0.09

104.09

0.166 2.360 0.318 0.499

0 0.06 0 0

0.13 7.37 0.89 0.52

1.84 11.73 1 1

0.492

0

0.41

0.277

0.69

0.466

0

1

2

3

4

5

6

1.00 0.38 1.00 0.59 0.39 0.05 0.23

1.00 0.07 1.00

1

0.06 0.11

0.05 0.004 1.00

0.2

0.99

0.12 0.14

0.06 0.01

0.37

1.00

0.32

1

0.02 0.09

0.03 0.02

0.34

0.77

7

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Table 1.

1.00

179

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ASSETS: It is important to control for company size in performance impact studies, as size can affect long-term proﬁts. ASSETS is measured as the total assets in logs of the acquiring ﬁrm. It is expected that assets are negatively correlated with ROA, as larger companies in the biopharmaceutical sector are usually mature and further along their revenue life cycle. SALESDUM: Marketing intensity can have an effect on ROA and, therefore, should be used as a control variable. Marketing expenditure was gathered but was found to be extremely deﬁcient, as only about one-third of the company-years had recorded information. A peculiarity of the biopharmaceutical industry allows us to proxy this control variable. Young biopharmaceutical companies are usually heavily weighted toward R&D and less (if any) toward sales. If a company has relatively higher R&D to sales, then it will be expected that it will perform no marketing. Therefore, it is possible to create a dummy variable with 1 indicating that the ﬁrm is assumed to do marketing and 0 if it is not. SALESDUM is measured as 1 if sales are greater than R&D expenditure and 0 otherwise. This variable is expected to be positively related to ROA as it reﬂects the number of marketable product lines available in a company’s portfolio of drugs. POSTACQ: This variable measured as 1 if the year is in the post-acquisition time period and 0 if pre-acquisition. As the dependant variable is ROA, the POSTACQ variable reﬂects the change in acquirer ROA post-acquisition after accounting for the control variables. The technique is similar to that used by Rothaermel and Hill (2005) where they had a pre- and postdiscontinuity time period in their panel dataset. The data for the year of acquisition itself were not used because ‘‘R&D in-process’’ is sometimes claimed in R&D expenditures during the year of acquisition. This is not done consistently and is often difﬁcult to even detect in ﬁrm-level data. PREMARKET: This variable is measured as 1 if the target’s drug candidate had passed either phase 1, 2, or 3 clinical trials at the time of acquisition and 0 if it was a drug which had already been approved for market by the FDA. This target drug candidate was determined by scanning 10k forms from both acquirer and target at the time of acquisition. In the case where the target drug candidate was not speciﬁed, this was measured as 1 if the target had any drugs which had been approved for market at the time of acquisition and 0 otherwise. This is an explanatory variable which will be interacted with the POSTACQ variable (and one of the following technology sourcing variables) to test the hypothesis. DIFF: The variable DIFF is an acquisition-speciﬁc, ﬁrm-level variable which reﬂects the relative research intensity of the acquisition partners. This

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variable (or the next one) when combined with PREMARKET will reveal the relative value chains of the target and acquirer. It is measured as the difference between average pre-acquisition target and acquirer R&D intensity. This variable was averaged over the entire pre-acquisition time period because R&D intensity for some companies vary year-to-year, especially for small target companies. HIGHDIFF: As a robustness check, HIGHDIFF will be used as an alternate measure for differences in research intensity. It is a dummy variable measured as 1 when DIFF is in the top 33rd percentiles of all DIFF and 0 if otherwise. This variable is a non-ordinal measurement of DIFF.

5. RESULTS Table 2 displays the estimations which will test the hypothesis for the shorter data sample (5 years post-acquisition data). Table 3 displays the same regressions for the longer data sample (8 years post-acquisition data). All the regressions are ﬁxed effects panel estimations where acquirer ROA is regressed on the control and explanatory variables described in the preceding section. The within transformation of the data associated with ﬁxed effects estimations is intended to address the ‘‘unobserved’’ or ﬁrmspeciﬁc error (Wooldridge, 2000; Hsiao, 1986). A Hausman test strongly rejects the hypothesis that a random effects speciﬁcation adequately models the ﬁrm-speciﬁc effects (X2(7)=52.11 for the estimation in Column 4 and X2(7)=47.01 for Column 6 of Table 2). Column 1 (in both Tables 2 and 3) shows the estimation including only the control variables. Columns 2 and 3 individually add the explanatory variables PREMARKET and DIFF to the model and Column 4 includes them collectively. The explanatory variables are always interacted with the POSTACQ variable to determine the effect the pre-acquisition characteristics have on the post-acquisition proﬁts. Columns 5 and 6 replicate Columns 3 and 4 with HIGHDIFF instead of DIFF, as a robustness check. The estimated coefﬁcients on the control variables show strong signiﬁcance and robustness across all estimations. The exception is SALESDUM for the longer time period (Table 3). The estimated coefﬁcients show the expected sign (positive: higher sales relative to R&D leads to higher proﬁts) and are estimated robustly but they are consistently insigniﬁcant. Perhaps this reﬂects that most companies still existing after 8 years post-acquisition likely have higher sales than R&D making this variable less important.

182

Table 2.

Panel Estimation (Dependant Variable=Acquirer ROA).

Sample with 8 years post-acquisition data Column 1 RDINT

a t

ASSETSat SALESDUMat POSTACQt

Column 2

Column 3

Column 4

Column 5

100.07

100.03

100.22

98.67

100.01

(4.685) 1.67 (0.787) 7.16 (2.492) 1.85 (1.339)

(4.683) 1.48 (0.799) 7.38 (2.496) 3.19 (1.655) 2.68 (1.968)

(4.727) 1.68 (0.788) 7.21 (2.501) 2.03 (1.522)

(4.674) 1.44 (0.790) 7.24 (2.467) 1.47 (1.715) 5.00 (2.730) 15.07 (4.808) 33.19 (7.353)

(4.689) 1.71 (0.792) 7.07 (2.504) 1.56 (1.541)

POSTACQt*PREMARKET POSTACQt*DIFF

0.83 (3.461)

POSTACQt*PREMARKET*DIFF POSTACQt*HIGHDIFF

0.80 (2.056)

POSTACQt*PREMARKET*HIGHDIFF CONSTANT

18.70 (6.311) F(5, 689)=115.79 F(80, 689)=4.93

Note: # obs.=775, # groups=81, average # obs. per group=9.6. signiﬁcance below 1%. signiﬁcance below 5%. signiﬁcance below 10%.

20.17 (6.224) F(5, 689)=115.13 F(80, 689)=4.94

18.36 (6.237) F(7, 687)=87.85 F(80, 687)=5.14

20.48 (6.264) F(5, 689)=115.17 F(80, 689)=4.95

100.53 (4.652) 1.68 (0.796) 7.55 (2.487) 1.17 (1.776) 1.63 (2.550)

9.45 (3.139) 14.28 (4.325) 20.01 (6.286) F(7, 687)=85.54 F(80, 687)=5.05

KAREN RUCKMAN

F-test for overall ﬁt F-test that all mi=0

20.20 (6.219) F(4, 690)=144.1 F(80, 690)=4.98

Column 6

Panel Estimation (Dependant Variable=Acquirer ROA).

Sample with 8 years post-acquisition data Column 1 RDINT

a t

ASSETSat SALESDUMat POSTACQt

Column 2

Column 3

Column 4

Column 5

105.85

105.45

105.86

106.03

105.75

(7.080) 3.56 (0.879) 3.40 (2.932) 1.73 (1.552)

(7.071) 3.25 (0.897) 3.87 (2.940) 0.64 (2.118) 3.47 (2.117)

(7.084) 3.53 (0.881) 3.59 (2.947) 1.07 (1.830)

(7.050) 3.43 (0.898) 4.29 (2.940) 1.58 (2.348) 0.41 (2.823) 19.28 (9.309) 25.14 (10.624)

(7.084) 3.51 (0.882) 3.61 (2.946) 1.13 (1.744)

POSTACQt*PREMARKET POSTACQt*DIFF

2.77 (4.065)

POSTACQt*PREMARKET*DIFF POSTACQt*HIGHDIFF

1.68 (2.242)

POSTACQt*PREMARKET*HIGHDIFF CONSTANT F-test for overall ﬁt F-test that all mi=0

39.34 (7.544) F(4, 469)=67.1 F(40, 469)=6.13

36.73 (7.696) F(5, 468)=54.42 F(40, 468)=5.52

38.99 (7.565) F(5, 468)=53.72 F(40, 468)=6.12

37.69 (7.679) F(7, 466)=39.97 F(40, 466)=5.52

38.79 (7.582) F(5, 568) =53.75 F(40, 468) =6.02

Column 6 105.67 (7.086) 3.20 (0.901) 3.40 (3.010) 1.10 (2.199) 4.28 (2.552)

Acquiring Biopharmaceutical Research

Table 3.

4.14 (5.205) 4.94 (7.708) 36.75 (7.708) F(7, 466)=38.86 F(40, 466)=5.36

Note: # obs.=514, # groups=41, average # obs. per group=12.5. signiﬁcance below 1%. signiﬁcance below 5%. signiﬁcance below 10%.

183

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The most relevant estimation to discuss in the context of this investigation is found in Column 4 of Table 2. This regression includes all the explanatory variables and has the ability to test the competing hypotheses. Column 6 provides a robustness check on the DIFF variable and Table 3 provides an over-all robustness check with a longer time frame. Column 4 of Table 2 shows that acquirers that take over pre-marketed drugs from target companies with higher R&D intensity than themselves have a positive and signiﬁcant impact on proﬁts. This is conﬁrmed for the longer dataset found in Table 3 and for the HIGHDIFF variable found in Column 6 of Table 2. The results are not robust for the HIGHDIFF variable in the longer dataset. The estimated coefﬁcient on HIGHDIFF in Table 3 is negative but not signiﬁcant. Although the estimated coefﬁcient is negative, it is important to analyze marginal effects to determine the true impact. Our hypothesis compares this outcome to targeting a marketed drug and the only way to conﬁrm this is to examine the marginal effects. Marginal effects indicate the percentage change in the dependant variable due to different levels of the explanatory variables. When discussing marginal effects, it is important to look at the explanatory variables over their entire range (Ruckman, 2005). In 5-year sample, the acquisitions with the highest DIFF values that targeted pre-marketed drugs did 11.5% better than marketed ones but those with the mean value for DIFF did 2.8% worse. The marginal effects in the 8-year sample conﬁrm our hypothesis over a longer range of the DIFF variable. The acquisitions with the highest DIFF value that targeted pre-marketed drugs did 7.0% better than marketed ones and those with the mean value did 2.3% better. The marginal effects for the HIGHDIFF variable are somewhat simpler to analyze as there is no range in the dummy variable. In the 5-year sample, the acquisitions with DIFF above the 33rd percentile (i.e. HIGHDIFF=1) that targeted pre-marketed drugs did 2.0% better than marketed ones. In the 8-year sample, those acquisitions with HIGHDIFF=1 that targeted premarketed drugs did 2.4% better than marketed ones even though estimated coefﬁcient on the interaction term is negative.

6. CONCLUSIONS This paper examines the proﬁt impact of externally sourcing technology through acquisition. Although Bower (2001) conﬁrms technology sourcing as one of the ﬁve predominant motivations for acquisition, he stops short of deeming it to be a successful strategy in the biotechnology sector as it takes

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years for the evidence to show up. This paper addresses this issue by offering long-term data and the ability to directly compare pre- and post-acquisition values. This paper uses the research-based view to assert that companies with lower R&D intensity than their targets beneﬁt from acquisitions of premarketed drugs more than they would with marketed drugs because of a complementary combination of competitive assets. The hypothesis is tested on acquisitions from the U.S. biopharmaceutical sector in the 1990s with between 5 and 8 years of post-acquisition data. The results show that acquirers that take over pre-marketed drugs from targets with higher R&D intensity than themselves have post-acquisition returns between 2% and 11% higher over the 5-year post-acquisition period than if they took over marketed drugs. These results really should not be surprising. There are many reasons why mature biopharmaceutical ﬁrms following this strategy would be successful. First, this is a proven business model for pharmaceutical ﬁrms, so they have many years of experience identifying and choosing technologies from other companies. Second, they often have whole divisions devoted to this task. And, third, they are not bogged down by expensive and time-consuming basic research. There is also something to be said about how they are better able to absorb drug–candidate failures because of their massive asset size and cash ﬂow base. In reference to the title, yes, a marketed drug is a dealbreaker for externally sourcing ﬁrms.

NOTES 1. This description sounds like a biotechnology company but, as described in the industry background section, the distinction between biotechnology and pharmaceutical companies are becoming increasingly muddied. 2. Externally sourcing R&D is encompassed by the capability-seeking literature. It is sometimes referred to as technology sourcing or knowledge sourcing. 3. No more risk, that is, than any other marketed drug. Drugs once they receive market approval still are subject to other types of risks such as recalls and litigation which could result in market exit. 4. In fact, there are nine companies with only 3 or 4 years of pre-acquisition data. The varying length of pre-acquisition data is assumed to be random and, therefore, causes no biasness of the results (Wooldridge, 2000, p. 448). Attrition of companies post-acquisition, however, would cause problems. This is why the estimations are run with either a full 5 or 8 years post-acquisition. Those companies that exited the market before the end of those time periods were not included in the regressions as the reason for their exit may be correlated with the idiosyncratic error.

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5. The clinical trial data were collected for another study focusing on the impact on performance from acquiring a drug candidate which had passed particular stages of clinical trials. The actual clinical trial stages do not ﬁgure into this paper’s discussion or hypotheses other than to determine length of time series for each individual acquisition.

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