Advances in Mergers and Acquisitions, Volume 8

ADVANCES IN MERGERS AND ACQUISITIONS ADVANCES IN MERGERS AND ACQUISITIONS Series Editors: Sydney Finkelstein and Cary...

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ADVANCES IN MERGERS AND ACQUISITIONS

ADVANCES IN MERGERS AND ACQUISITIONS Series Editors: Sydney Finkelstein and Cary L. Cooper Recent Volumes: Volume 1–2: Edited by Cary L. Cooper and Alan Gregory Volume 3–7: Edited by Cary L. Cooper and Sydney Finkelstein

ADVANCES IN MERGERS AND ACQUISITIONS VOLUME 8

ADVANCES IN MERGERS AND ACQUISITIONS EDITED BY

CARY L. COOPER Lancaster University, UK

SYDNEY FINKELSTEIN Tuck School of Business, Dartmouth College, USA

United Kingdom – North America – Japan India – Malaysia – China

Emerald Group Publishing Limited Howard House, Wagon Lane, Bingley BD16 1WA, UK First edition 2009 Copyright r 2009 Emerald Group Publishing Limited Reprints and permission service Contact: [email protected] No part of this book may be reproduced, stored in a retrieval system, transmitted in any form or by any means electronic, mechanical, photocopying, recording or otherwise without either the prior written permission of the publisher or a licence permitting restricted copying issued in the UK by The Copyright Licensing Agency and in the USA by The Copyright Clearance Center. No responsibility is accepted for the accuracy of information contained in the text, illustrations or advertisements. The opinions expressed in these chapters are not necessarily those of the Editor or the publisher. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library ISBN: 978-1-84855-780-2 ISSN: 1479-361X (Series)

Awarded in recognition of Emerald’s production department’s adherence to quality systems and processes when preparing scholarly journals for print

CONTENTS LIST OF CONTRIBUTORS

vii

INTRODUCTION

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INTERNATIONAL MERGERS AND ACQUISITIONS PERFORMANCE REVISITED – THE ROLE OF CULTURAL DISTANCE AND POST-ACQUISITION INTEGRATION APPROACH Yaakov Weber, Shlomo Yedidia Tarba and Arie Reichel

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ORGANIZATIONAL IDENTIFICATION AND CULTURAL DIFFERENCES: EXPLAINING EMPLOYEE ATTITUDES AND BEHAVIORAL INTENTIONS DURING POSTMERGER INTEGRATION David Kroon, Niels Noorderhaven and Aukje Leufkens

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THE VALUE OF STORIES IN UNDERSTANDING THE PAST AND SHAPING THE FUTURE IN MERGED ORGANIZATIONS Susan Cartwright and Luca Magni

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TRANSITIONAL GOVERNANCE: A CRITICAL REVIEW OF IMPLICIT PROCESS ASSUMPTIONS Dries Faems and Anoop Madhok

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COMPUTATIONALLY MODELING THE EFFECT OF ORGANIZATIONAL COMPLEXITY ON POST-MERGER INTEGRATION Terrill L. Frantz and Kathleen M. Carley

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CONTENTS

MEASURING PERFORMANCE IN TECHNOLOGY-DRIVEN M&As: INSIGHTS FROM A LITERATURE REVIEW Olimpia Meglio

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ACQUISITIONS IN THE CHINESE REAL ESTATE INDUSTRY AND THE TWO-STAGE PRIVATIZATION PROCESS Nitin Pangarkar, Jie Wu and Long Wai (Rico) Lam

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SUBSIDIARY BRANDS AS A RESOURCE AND THE REDISTRIBUTION OF DECISION-MAKING AUTHORITY FOLLOWING ACQUISITIONS Sebastian Dieng, Christoph Do¨rrenba¨cher and Jens Gammelgaard

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LIST OF CONTRIBUTORS Kathleen M. Carley

Center for Computational Analysis of Social and Organizational Systems, Carnegie Mellon University, Pittsburgh, PA, USA

Susan Cartwright

Centre for Organizational Health and Well-Being School of Health and Medicine Lancaster University, UK

Cary L. Cooper

Lancaster Unviersity Management School, Lancaster University, UK

Sebastian Dieng

School of Management, University of Surrey, Guildford, UK

Christoph Do¨rrenba¨cher

Department of International Business & Management, University of Groningen, Landleven, The Netherlands

Dries Faems

University of Twente, The Netherlands and Katholieke Universiteit Leuven, Belgium

Sydney Finkelstein

Tuck School of Business, Dartmouth, NH, USA

Terrill L. Frantz

Center for Computational Analysis of Social and Organizational Systems, Carnegie Mellon University, Pittsburgh, PA, USA

Jens Gammelgaard

Copenhagen Business School, Porcelænshaven Frederiksberg, Denmark

David Kroon

Department of Organization and Strategy, Tilburg University, The Netherlands vii

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LIST OF CONTRIBUTORS

Aukje Leufkens

Tilburg University, The Netherlands

Anoop Madhok

Schulich School of Business, York University, Canada and Vrije Universiteit Amsterdam, The Netherlands

Luca Magni

Fondazione ISTUD, Stresa (VB), Italy

Niels Noorderhaven

Tilburg University, The Netherlands

Meglio Olimpia

School of Economics and Business Administration, University of Sannio, Italy

Nitin Pangarkar

NUS Business School, National University of Singapore, Singapore

Arie Reichel

School of Management, Ben-Gurion University, Beer-Sheva, Israel

Shlomo Yedidia Tarba

School of Management, Ben-Gurion University, Beer-Sheva and Department of Economics and Management, Open University, Raanana, Israel

Long Wai (Rico) Lam

Faculty of Business Administration, University of Macau, China

Yaakov Weber

School of Business Administration, College of Management, Rishon Lezion, Israel

Jie Wu

Faculty of Business Administration, University of Macau, China

INTRODUCTION Volume 8 of Advances in Mergers and Acquisitions brings together an international set of articles on topics to do with international mergers, the role of cultural distance and post-acquisition integration, employee attitudes and behavioural intentions during post-merger integration, culture ﬁt and post-merger success, transitional governance and its link to implicit process assumptions, the effect of organizational complexity and post-merger integration and industry speciﬁc examples of the impact of merger and acquisitions (M&A). The contributors come from across the world: Denmark, Germany, Israel, Italy, The Netherlands, Singapore, United Kingdom and United States. Chapter 1 by Weber, Tarba and Reichel provides ‘a framework that addresses the effects of cultural distance on various integration approaches, and thereby explain international M&A performance’. By exploring the various aspects of corporate and national cultures of the partners, it should help in the planning and implementing an integration strategy. Chapter 2 continues the theme of culture, by exploring both organizational identity and organizational culture in terms of explaining employee attitudes and behaviours during the post-merger integration phase. Kroon, Noorderhaven and Leufkens have found in their work that ‘perceived organizational culture differences are negatively related to attitudinal variables’ postmerger, with behavioural intentions mediated by organizational identiﬁcation. In Chapter 3, Cartwright and Magni explore the issue of cultural compatibility or culture ﬁt and its impact on post-merger performance and integration. They attempt to highlight the issues of shared perceptions through narrative, language and story telling, as a means of understanding employee involvement and engagement in the M&A process. In Chapter 4, Faems and Madhok assesses the recent trend of an established company involved in equity collaboration with an entrepreneurial ﬁrm and subsequently acquiring that ﬁrm. They term this ‘transitional governance trajectories’, which are increasing as more established companies are trying to gain access to new state of the art technologies. They highlight some assumptions that exist in the ﬁeld and suggest where future research should go, in terms of theory, focus and methodology. Frantz and Carley ix

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INTRODUCTION

take a slightly different approach by exploring the issue of organizational complexity (that is its structural complexity) and its impact on ‘the dynamics of organization performance during the post-merger integration period’. This chapter provided a novel ‘virtual’ experiment, by computer modelling these various aspects of complexity. They found for example that ‘the organizations’ size was found to be only a marginally relevant factor, instead, the number of work groups had a great consequence’. Basically, they put forward an argument that computer modelling is an important methodology for M&A research. Olimpia’s chapter on measuring performance in technology-driven M&As is a literature review speciﬁcally focussed in high-tech environments, given the recent trend for more and more M&As to take place in those sectors given the downturn and recession of recent years. The issues of how we measure post-acquisition or merger performance has been confusing and made it difﬁcult in the context of high-tech companies to measure the added value of performance post-merger. Suggestions are made about how this might be measured in the future. Pangarkar, Wu and Lam’s chapter on a two-stage privatization process in the real estate industry, where there was state and private involvement is a unique model. This mixed model approach has had success in the context of the Far East and may be more wide-spread given the role of government intervention during the recession. Chapter 8 by Kieng, Dorrenbacher and Gammelgaard on the distribution of decision-making authority following acquisition is an approach to post-acquisition activity that is fairly unique. This approach was used in the brewing industry and interestingly implemented across three European countries, Switzerland, Slovakia and France. It is about the process of redistribution of decision-making authority but also about how a well-known brand can be a critical resource for acquired subsidiaries. Although many of these contributions to this volume are idiosyncratic and eclectic, they represent some of the latest work in the ﬁeld in a growing literature that is seeing more and more M&As, state–private sector partnerships, transitional governance arrangements and the like in an economic downturn which is likely to have consequences for years to come. We are delighted with the quality and innovative nature of the science in the ﬁeld and would like to congratulate our contributors for extending the knowledge base in the M&A arena. Cary L. Cooper Sydney Finkelstein Editors

INTERNATIONAL MERGERS AND ACQUISITIONS PERFORMANCE REVISITED – THE ROLE OF CULTURAL DISTANCE AND POST-ACQUISITION INTEGRATION APPROACH Yaakov Weber, Shlomo Yedidia Tarba and Arie Reichel ABSTRACT Empirical ﬁndings from the past 15 years suggest that the inﬂuence of culture on the integration process is critical. However, the interrelationships between corporate and national cultures and their inﬂuence on merger success are not clear, and the results of empirical studies are contradictory. The major objective of this chapter is to provide a framework that addresses the effects of cultural distance on various integration approaches, and thereby explain international merger and acquisition performance. The framework can assist managers of international mergers in analyzing, evaluating, and planning before the merger and in implementing the chosen integration approach after the merger. Advances in Mergers and Acquisitions, Volume 8, 1–17 Copyright r 2009 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1479-361X/doi:10.1108/S1479-361X(2009)0000008003

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Most management researchers and practitioners point out that cultural differences and integration efforts during the post-merger integration period are critical to performance (e.g., Stahl & Voight, 2008; Stahl, Mendenhall & Weber, 2005; Schoenberg, 2000; Schweiger & Goulet, 2000; Shimuzu, Hitt, Vaidyanath, & Pisano, 2004; Uhlenbruck & De Castro, 1998, 2000). However, the interrelationships among corporate culture, national culture, and integration approaches, as well as their inﬂuence on the success of international mergers are not clear (e.g., Stahl et al., 2005). Moreover, the results of empirical studies are often contradictory (Schoenberg, 2006; Teerikangas & Very, 2006). For example, while some ﬁndings point on negative relationship between merger and acquisition (M&A) performance and organizational cultural differences (Chatterjee, Lubatkin, Schweiger, & Weber, 1992) as well as national cultural differences (Datta and Puia, 1995; Slangen, 2006), others point on such positive relationship (e.g., Morosini, Shane, & Singh, 1998). The conclusions reached by Very, Lubatkin, and Calori (1996) that ‘‘cross-national mergers are a complex phenomenon, sometimes inﬂuenced by national cultural differences, sometimes by organizational inﬂuences, sometimes by both and sometimes by neither’’ are apparently still valid. Some authors point out the importance of acculturation to the implementation of M&A (e.g., Nahavandi & Malekzadeh, 1988), others focus on the importance of the choice and differences between integration approaches (Haspeslagh & Jemison, 1991; Ellis, 2004; Ellis, Weber, & Raveh, 1993) and others focus their attention on the level of integration (e.g., Child, Faulkner, & Pitkethly, 2000). Yet, none focus on the relationship between organizational and national cultural differences, characteristics of culture and integration approaches. The research about M&A is still fragmented, leaving gaps that need to be addressed (Shimizu et al., 2004). More speciﬁcally, Schweiger and Goulet (2000, p. 84) conclude, after their literature review about studies on M&A integration, ‘‘most of this research, with the exception of culture and acquired TMT turnover, has not been systematic and linked to any other comprehensive theory.’’ This seems to be true for other important factors affecting M&A performance, such as cultural differences. This lack of theory may be the main reason for the conﬂicting ﬁndings on M&A performance. This chapter seeks to ﬁll the gap noted earlier. It aims to develop a theoretical framework that better explains international M&A performance. The ﬁrst section presents brief reviews of the ﬁndings about the effects of cultural differences and level of integration on performance. The following section reviews the relationship between cultural distance and level of

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integration in general. Thereafter, the proposed theoretical framework that focuses on integration approaches is presented. The next section refers to implications of this framework for M&A performance. The chapter concludes with suggestion for future research and managerial implications.

INCONSISTENT EFFECTS ON M&A PERFORMANCE The theoretical literature on M&A suggest that both national and organizational culture (e.g., Nahavandi & Malekzadeh, 1988), the integration process, and integration decisions (e.g., Jemison & Sitkin, 1986; Weber & Schweiger, 1992) play an important role in inﬂuencing M&A performance. However, the empirical evidence on the effects of cultural compatibility and level of integration on performance are mixed and confusing. The following brief review on the effects of each factor presents some of these conﬂicting ﬁndings.

Post-Acquisition Integration Effects on M&A Performance All value creation in M&A takes place after the acquisition, and it hinges on the combined ﬁrms’ ability to effectively integrate their operations. The term integration is used rather loosely in the literature, and few studies attempt to deﬁne it directly (Schweiger & Goulet, 2000). Yet, it is generally agreed that merging ﬁrms transfer capabilities, cut costs, and achieve synergy by integrating management decision making as well as departments and functions such as marketing, inventory, and others. The integration may yield positive M&A performance (Larsson & Finkelstein, 1999; Weber, 1996; Uhlenbruck & De Castro, 2000). However, integration is an interactive and gradual process in which individuals from two organizations must learn to work together and cooperate. ‘‘Creating an atmosphere that can support it [the integration] is the real challenge’’ (Haspeslagh & Jemison, 1991, p. 107). To achieve effective post-merger integration, the acquiring top management typically intervenes in the decision-making process of the acquired management team and imposes standards, rules, and expectations on it. The intended integration may affect the acquired top management commitment to, and cooperation with, the acquiring team (Weber & Schweiger, 1992; Weber, Shenkar, & Rave, 1996). The intervention of the acquiring top management

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team in the acquired management decision making results in a loss of autonomy that elicits tensions and negative attitudes toward the merger. The dilemma of post-acquisition integration level vs. expected synergy potential exploitation might be especially salient in the acquisition of hightech ﬁrms. Mergers in this industry are often motivated by the desire to obtain and transfer tacit and socially complex knowledge-based resources (Ranft & Lord, 2002; Ranft, 2006). Since these forms of knowledge are difﬁcult to transfer, a high degree of post-acquisition integration may be required to realize the anticipated beneﬁts of these acquisitions (Puranam Singh, & Zollo, 2003, 2006; Puranam & Srikanth, 2007). Yet integration may ultimately lead to the destruction of the acquired ﬁrms’ knowledgebased resources through employee turnover and disruption of organization routines (Puranam et al., 2003; Ranft & Lord, 2002). Thus, there is an explicit trade-off between high and low levels of integration. High levels of integration may be needed to exploit high levels of synergy, but a high level of integration may cause human resource problems that can destroy the value of the acquired ﬁrm and increase costs to an extent that offsets the beneﬁts expected from the merger. This may explain the conﬂicting ﬁndings about the relationships between integration (or autonomy removal) and merger performance. For example, some studies found that integration is positively associated with performance (Larsson and Finkelstein, 1999; Weber, 1996), whereas others found integration to be non-signiﬁcant in domestic (Datta, 1991) and international M&A (Morosini et al., 1998). And, in other study (Calori, Lubatkin, & Very, 1994), it was found that performance was negatively related to integration (formal control over operational procedures) in international M&A. Furthermore, Lubatkin, Schweiger, and Weber (1999) found that the greater the level of integration (autonomy removal through the interventions of the acquiring top management in the decision process of the acquired top management) the greater the turnover of the acquired top managers. The loss of these executives viewed as a serious reduction in valuable resources, thereby decreasing the value of the ﬁrm acquired. Indeed, it was found that the greater the rate of turnover of top executives, the lower is the performance of the acquiring ﬁrm (Hambrick & Cannella, 1993).

National and Corporate Cultural Differences Effects There are contradictory ﬁndings about the role of cultural difference in the success of international and domestic M&A. Research on domestic M&A

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consistently shows that corporate culture clash is detrimental to post-merger integration (e.g., Lubatkin et al., 1999) and to merger success (Datta, 1991; Weber, 1996). There is no reason to believe that the impact of national culture’s clash will not be equal, if not greater than the one produced by a clash of corporate cultures. The problem of integrating cultures at a double level is referred by Barkema, Bell, and Pennings (1996) as ‘‘double-layered acculturation.’’ If we accept the premise that national culture represents a deeper layer of consciousness, it should be even more resistant to change than corporate culture. Hence, one should expect national culture to be a crucial factor in M&A conﬂict, as well as in the quest for successful integration. Nevertheless, unlike the consistent ﬁndings in studies investigating the effect of organizational culture on M&A performance, the empirical ﬁndings on the effect of national culture on M&A performance are contradictory. Although some studies point out the negative effect of national culture on the success of international M&A (Datta & Puia, 1995), other ﬁndings show that the level of culture conﬂict can vary in different international combinations (Very, Lubatkin, Calori, & Veiga, 1997), and greater national culture distances may be positively related to performance (Morosini et al., 1998). In addition, a recent meta-analysis of the existing body of research (Stahl & Voight, 2005) suggests that the relationship between cultural differences and post-acquisition performance is complex and that unidentiﬁed moderator variables might be obscuring the effect of cultural differences on acquiring ﬁrm’s performance. In sum, the extent of the culture difference and level of integration are not sufﬁcient to explain M&A performance. Post-merger integration process is a complex phenomenon that need probably a better conceptualization than the simple linear relationship suggest by the studies reviewed earlier. The following sections suggest additional factors and conﬁgurational ﬁt for the post-merger integration.

The Relationship between Cultural Distance and Post-Acquisition Integration The contact, through integration, between the two ﬁrms results in a culture clash because it exposes the belief systems of the two teams to each other and makes the differences salient (Weber & Schweiger, 1992). At higher levels of integration, the acquiring management team imposes more of the features of its culture on the acquired management team, which elicit further

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conﬂict because it underscores the cultural differences and lowers commitment and cooperation. The culture clash, level of integration, and the ensuing human resource problems may adversely affect the realization of value creation from an acquisition (Chatterjee et al., 1992; Weber et al., 1996). Empirical research especially aimed on the relationships between national and/or organizational culture and level of integration is rare. Although the above-reviewed studies provide no clear resolution about the relationships between culture differences and level of integration to M&A performance, they have provided important insights for further research. For example, when read carefully, many studies that investigated the main, and moderated, effects on M&A performance report some ﬁndings on the relationships between these independent variables. These studies used various samples, different deﬁnitions for culture and cultural differences, and integration and yielded all possible relationships between cultural differences and integration. For example, with respect to the effect of organizational cultures, Weber (1996) and Lubatkin et al. (1999) report that organizational cultural differences were positively related to autonomy removal (as degree of integration), whereas van Oudenhoven and de Boer (1995), in a laboratory experiment, found that cultural similarity is positively related to the degree of integration. National culture distance adds to the complexity of the earlier ﬁndings. It is not clear how national culture interacts with organizational culture and what may be the effect of this interaction to M&A performance. Laurent (1986) proposes that corporate culture is not capable of affecting the deeper level of underlying assumptions, which is derived from one’s national culture. Earlier, Laurent (1983) found that national differences in beliefs regarding organizational practices were considerably greater in a single multinational ﬁrm than in multi-company samples, leading Schneider (1988) to suggest: A paradox that national culture may play a stronger role in the fact of a strong corporate culture. The pressures to conﬁrm may create the need to reassert autonomy and identity, creating a national mosaic rather than a melting pot.

Hofstede, Neuijen, Ohavy, and Sanders (1990) suggested that although national culture forms one’s values through early socialization, corporate culture involves the subsequent acquisition of organizational practices and symbols in the ﬁrm. Thus, the authors found considerable differences in practices among people holding similar values and proposed that national and corporate cultures are distinctive, if related, constructs.

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Lubatkin, Calori, Very, and Veiga (1998) found that a greater need for uncertainty avoidance and greater acceptance of power distance (French vs. British acquirers) was associated with higher level of integration (more centralized control). Similarly, Morosini et al. (1998) report that national cultural distance is positively related to the degree of integration (postacquisition strategy), but although cultural distance was positively related to performance, integration did not show any signiﬁcant relationship to performance. However, the relationship between the degree of integration and the cooperation of the acquired top management team with the acquiring top managers was negative in international mergers (Weber et al., 1996). Cooperation is an important factor, together with top management commitment to the integration process, to M&A performance (Weber & Schweiger, 1992; Weber, 1996). Finally, Child et al. (2000)) and Pitkethly, Faulkner, and Child (2003) found, based on interviews with directors of acquired UK companies, that national differences, rather than national culture distance, are associated with level of integration. For example, American acquirers tended to high level of integration of subsidiaries, whereas Japanese and German companies preferred low levels of integration. French companies inclined to an average level of integration. Other studies did not ﬁnd relationship between cultural differences and level of integration (Datta, 1991; Larsson & Finkelstein, 1999). Recently, Bjorkman, Stahl, & Vaara (2007) proposed an integrative model of the impact of cultural differences on capability transfer in cross-border acquisitions. Speciﬁcally, they suggested that the use of social integration mechanisms and the degree of operational integration of the acquired unit moderates the effects of cultural differences on social integration and potential absorptive capacity. Thus, the use of social and operational integration mechanisms is conducive to the post-acquisition transfer of capabilities between amalgamating companies. In sum, cultural differences, whether organizational or national, show different relationship to level of integration. The directions of these relationships are not clear, and the inﬂuence on performance is vague. The review of the literature points out that most studies investigated two independent variables as critical to M&A performance, namely, cultural differences (organizational in domestic M&A and national in cross-border M&A) and level of integration. Yet, ﬁndings are not consistent and sometimes are contradictory. This lead to the conclusion that the relationships between these important variables and M&A performance is more complex and need a better framework than the existing frameworks. The review also raises some important issues and questions. First, there is

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relationship between level of integration and cultural differences, whether national or organizational. This relationship may inﬂuence the performance of M&A. Second, it is not clear if only the amount of differences between cultures is important, or also the direction of difference. For instance, does higher uncertainty avoidance of the acquirer vs. the acquired company have the same effects as lower uncertainty avoidance relative to the acquired company? Third, given that different national cultures use different level of integration, what are the features of culture that inﬂuence the level of integration? Finally, given the earlier ﬁndings and questions, does the need of autonomy the right factor that should determine the choice of integration approaches (Haspeslagh and Jemison, 1991) given the importance of culture to the integration process?

POST-ACQUISITION INTEGRATION APPROACHES – A REVISITED FRAMEWORK The combined ﬁrm’s choice of integration approach is one of the most critical factors inﬂuencing merger success (e.g., Haspeslagh & Jemison, 1991; Marks & Mirvis, 1998). Integration approaches differ mainly in the emphasis placed on two critical factors: synergy potential and implementation efforts necessary to realize potential synergies (e.g., Nahavandi & Malekzadeh, 1988). Yet, the contention here is that these implementation efforts depend largely also on the amount of cultural differences between the two ﬁrms engaged in M&A and the features of culture to be integrated as well as on the choice of the level of integration (greater effort is required in higher levels of integration). Indeed, recent studies point on the differences of management practices (Ellis, 2004; Ellis et al., 2003, 2004) and culture features such as uncertainty (Hartog, 2004) between the integration approaches. Given the aforementioned literature reviews, and the importance of cultural differences and speciﬁc cultural features to the success of M&A and to integration, we propose a revisited framework for integration approaches. Fig. 1 presents the integration approach choices as the dependent variable inﬂuenced by synergy potential, cultural differences, and cultural-speciﬁc dimensions either national or organizational. Although the synergy potential dimension in this cube is straight forward, it parallels the dimension in other frameworks such as relatedness (Nahavandi & Malekzadeh, 1988) and need for strategic interdependence (Haspeslagh & Jemison, 1991).

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Symbiosis

Degree of Synergy

Low

Holding

Preservation

Low High Culture Differences

Fig. 1.

Full Preservation

Absorption

Partial Preservation

High

Full symbiosis

Full Absorption

Partial symbiosis

Partial Absorption

High Uncertainty Avoidance

Low Uncertainty Avoidance Culture Dimensions

Integration Approaches, Cultural Differences, and Cultural Dimensions.

Although culture attractiveness and multiculturalism are essential in Nahavandi and Malekzadeh’s framework, culture effects are not part of Haspeslagh and Jemsion’s framework. The proposed framework, uses the terminology of Haspeslagh and Jemison for integration approaches because: (a) they describe clearly the differences between these approaches, (b) they received some recent empirical support (Ellis, 2004; Ellis et al., 2003), and (c) they are conceivable concept that are widely used (e.g., Chatterjee et al., 1992; Child et al., 2000; Graebner, 2004). Thus, the integration approach – absorption, which implies a high level of integration and, as such, the lowest autonomy for the acquired management – is recommended for achieving a high level of synergy when the level of cultural differences is low. Preservation, which implies the lowest level of integration, and thus, the highest autonomy for the acquired management, is recommended for low synergy potential and high cultural differences. Symbiosis, with moderate levels of synergy and cultural differences, implies a moderate level of integration. Yet, the suggested framework here uses ‘‘cultural differences’’ and ‘‘cultural dimensions’’ variables as its dimensions instead of the ‘‘need of autonomy’’ as the inﬂuence on the choice of integration approach. There are several reasons based on the aforementioned literature review that lead to this application. First, since Haspeslagh and Jemison (1991) suggested this

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framework, empirical ﬁndings have clearly indicated the criticality of the effects of culture clash and its dimensions to M&A success in domestic M&A (e.g., Cartwright & Cooper, 1992, 1993; Datta, 1991; Chatterjee et al., 1992; Weber, 1996; Weber & Pliskin, 1996) and in international M&A (e.g., Datta & Puia, 1995; Morosini et al., 1998; Lubatkin et al., 1998) and also in both (e.g., Weber et al., 1996). Second, the aforementioned review reveals that cultural differences and national culture inﬂuence the level of integration (Calori et al., 1994; Child et al., 2000; Lubatkin et al., 1998; Morosini & Singh, 1994; Weber et al., 1996) and as such inﬂuence the choice of integration approach. Third, need of autonomy of the acquired managers has not been measured directly. Instead, other measures were used that may imply on the importance of it to M&A performance. Yet, the empirical ﬁndings are not clear. For example, Larsson and Finkelstein hypothesize positive relationship between level of integration and employee resistance. This hypothesis was not supported. And, although there are studies that show that autonomy removal is positively related to performance (e.g., Weber, 1996), other studies point on the opposite direction (Calori et al., 1994; Weber et al., 1996) or no relationship (Datta, 1991). Fourth, the amount of cultural differences reﬂect, to some extent, the need of autonomy. According to Nahavandi and Malekzadeh (1988), when considering the acquired managers’ preferences, the question is how much do members of the acquired ﬁrm want to preserve their own culture and organizational practices? The answer may rely on the degree of differences. It is hard to believe that in a very high degree of cultural differences situations, acquired members willingly relinquish their culture and most of their organizational practices and systems, namely, completely give up their autonomy. In fact, the rational of culture clash and employee resistance emerge from the need to keep autonomy in front of very different culture. Weber et al. (1996) suggest that in international M&A, where cultural differences are clear, senior managers may see themselves and be perceived by others, as champions of the national culture they represent, and which may be posited against the national culture of the other party in the merger. In this case of clear cultural differences, the need of autonomy is evident. Thus, the dimension of cultural differences may serve in certain cases as a proxy to the need of autonomy dimension. Yet, it is much richer and represents a wider spectrum of situations even if the need of autonomy is not a problem at all. Finally, Haspeslagh and Jemison (1991, p. 145) acknowledge the importance of cultural differences when choosing an integration approach.

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We suggest an early focus on which strategic capabilities need to be preserved, to what extent they depend on maintaining a cultural difference, and to what extent they can be contained in a subpart of the organization focus will be of critical importance in choosing an integration approach. In other words, because cultural differences may be of critical importance, depends on synergy potential, it should be considered in the decision process on integration approach choice. This is exactly what the proposed framework suggests – to include both synergy potential and cultural differences as major determinants of integration approach. The proposed framework suggests that cultural dimensions should serve as a third determinant of integration approach. By cultural dimensions, we refer to national culture dimensions (Hofstede, 1980) and organizational culture dimensions (e.g., Chatterjee et al., 1992; Weber et al., 1996) that are widely used and appear as may have different impact on integration and M&A performance. Although the aforementioned review leads to the need to incorporate this third factor in this framework, it is worth ﬁrst to explore one of the relevant assumptions used in M&A research as well as the entire international management literature. Shenkar (2001) points out that the assumption of cultural distance symmetry has no empirical support. According to this assumption, a British ﬁrm acquiring a French ﬁrm is faced with the same cultural distance as a French ﬁrm acquiring British one, so that the effects of CD on the level of integration and on performance will be the same. However, no studies have demonstrated such symmetry. On the contrary, Calori et al. (1994), consistent with Hofstede’s (1980) national culture dimensions, found that French acquirers (high power distance and uncertainty avoidance) exerted greater centralized formal control, which is higher levels of integration, over the strategy and operations of their acquired businesses than British acquirers (lower uncertainty avoidance), who leaned toward informal communication and cooperation that required lower levels of formal integration. The differential exercise of control mechanisms was found to correlate with acquisition performance. Similarly, Morosini and Singh (1994) found that, in highly individualistic societies, a lower level of post-acquisition integration appeared to result in higher productivity growth one year after completion of the deal. Moreover, other recent ﬁndings point out that it is not only cultural differences that inﬂuence decision on level of integration but also the differences among national cultures. Put differently, Child et al. (2000) found that acquirers of UK companies from different nations used different level of integration, control, and practices after the acquisition.

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Similarly, Morosini (2001) suggest that dimensions of national culture, such as individualism and uncertainty avoidance, will be considered when choosing the level of integration. Finally, given recent evidence that different national managerial groups have dissimilar attitudinal preferences toward M&A with foreign partners (Cartwright & Price, 2003), the different national culture dimensions maybe important for managerial preferences for integration approaches based on cultural differences and cultural dimensions. These ﬁndings suggest that above and beyond cultural distance, the culture dimensions of the acquirer do have a bearing on the choice of the acquirer for the level of integration and eventually on merger success. We turn now speciﬁcally to these relationships.

CULTURAL DIMENSIONS, POST-ACQUISITION INTEGRATION APPROACHES AND M&A PERFORMANCE The previous matrix that proposed integration approaches (Haspeslagh & Jemison, 1991) and mode of acculturation (Nahavandi & Malekzadeh, 1988) was implicit about the relationship of each chosen approach to M&A performance. On the contrary, the integration approaches presented here, based on different factors and considerations are ideal types to be applied in speciﬁc situations. As such, the chosen integration approach, based on its speciﬁc conﬁgurational ﬁt that is congruent with the three characteristics of each M&A, namely synergy potential, cultural differences, and cultural dimensions, can lead the acquirer to a superior performance. This framework suggest that each acquirer should consider not only the synergy potential and the implementation difﬁculties due to cultural differences but also his preferences for level of integration based on his cultural dimensions and traits, within the integration approach that was chosen for the M&A. By doing so, the managers of the acquirer will have the highest chance to do best what they prefer, and know, to do. Thus, each acquirer will choose the right level of integration within his integration approach. For example, although two acquirers, each from different country, choose absorption, they may differ with their ideal type (i.e., ‘‘partial’’ absorption), and their level of integration depends on their national culture dimensions. Each acquirer will achieve its optimum M&A performance with different level of integration. Thus, according to previous matrix (e.g., Haspeslagh & Jemison, 1991), a US acquiring a French

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company may use the same integration approach as a French ﬁrm acquiring a US company based on the same degree of cultural differences and same synergy potential. However, following the revised framework presented in this chapter, each company will act according to their own national dimensions and preferences. Thus, while one will take the full level of integration according to his chosen integration approach, for instance full absorption, the other acquirer may use different level of integration even if choosing the same integration approach, for instance absorption, but it will be, in term of level of integration, a partial absorption. The choices to be made are both integration approach and level of integration to be adopted for the chosen integration approach. This is because an inappropriate level of integration, over or under, for each preferred integration approach, may be detrimental to performance. An M&A that approximates its ideal types of integration approach and level of integration is hypothesized to be more effective than other M&A. Put differently, the closest an acquirer comes to its ideal type, that is, to the right level of integration for the chosen integration approach, for a speciﬁc synergy potential, cultural differences, and cultural dimensions, the higher the performance of the merger will be.

CONCLUSION This chapter provides a theoretical model that makes three important contributions: (1) it explain how the speciﬁc cultural traits of the acquirer ﬁrm should be related to its choice of integration approaches, (2) it emphasize the role of cultural differences for the choice of integration approaches, and (3) it suggests a solution for the conﬂicting results of empirical studies about the effect of culture clash and integration approaches on the success of international and domestic M&A. The proposed framework is different from other matrix (e.g., Haspeslagh & Jemison, 1991), or integration suggestions (Child et al., 2000; Morosini, 2001) in that it included additional factors such cultural differences and organizational and national dimensions, and it suggests two choices to integration approach and level of integration, based on these additional factors. Thus, it also points on the need to ﬁt an ideal type of integration for each M&A. The framework provides ample opportunity for systematic research on the relationship between cultural dimensions and the way in which integration approaches ﬁt cultural differences. First, it is worth testing this

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conﬁgurational ﬁt types and their relationship to M&A performance as was done with other conﬁgurational theories (e.g., Doty, Glick, & Huber, 1993). Second, the framework suggests the formulation of multiple hypotheses based on each national and organizational culture dimensions. For example, Calori et al. (1994) found that French acquirers exercise higher level of formal control relative to US and UK acquirers. This ﬁts their higher level of uncertainty avoidance. Thus, it is reasonable to hypothesize that acquirers with higher level of uncertainty avoidance will use higher level of integration. Therefore, such acquirers will tend to use the highest level of integration in their integration approaches, for instance, full absorption or partial preservation. Following this reasoning, additional hypotheses can be made on effect on M&A performance. For example, acquirers with higher level of uncertainty avoidance, which use higher level of integrations, expect to perform better than acquirers with higher level of uncertainty avoidance, which use relatively low level of integration. Similar set of hypotheses can be formulated for the effect of organizational culture dimensions. Finally, the theoretical model suggests that executives of the acquiring ﬁrm should pay as much attention to the choice of level of integration and cultural dimensions during both the pre-merger search process and the postmerger integration as they do to the effects of national and corporate cultural differences. The challenges that are associated with the idea type, and the ability to approximate the intended integration approach, should be considered during all stages of M&A, such as screening, planning, negotiation, and interventions that will take place during post-merger integration period.

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ORGANIZATIONAL IDENTIFICATION AND CULTURAL DIFFERENCES: EXPLAINING EMPLOYEE ATTITUDES AND BEHAVIORAL INTENTIONS DURING POSTMERGER INTEGRATION David Kroon, Niels Noorderhaven and Aukje Leufkens ABSTRACT Postmerger integration processes have been studied from the perspectives of organizational identity and organizational culture, but these two perspectives have rarely been integrated. We argue that organizational identiﬁcation and organizational culture differences give rise to two different sets of individual responses that are both important, but for different types of outcomes. An empirical analysis of a large-scale merger between two service sector companies shows that identiﬁcation with the postmerger organization positively relates to both behavioral intentions and key attitudinal variables. In contrast, our results show that perceived Advances in Mergers and Acquisitions, Volume 8, 19–42 Copyright r 2009 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1479-361X/doi:10.1108/S1479-361X(2009)0000008004

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organizational culture differences are negatively related to attitudinal variables. The effect of perceptions of cultural differences on behavioral intentions is mediated by organizational identiﬁcation.

INTRODUCTION Merger and acquisition (M&A) activity over the past decade has run at unprecedented levels. M&As require signiﬁcant resource commitments and can dictate the fortunes of the companies involved for years to come. In other words, they are essential to the performance and survival of organizations. However, as several scholars have indicated, most M&As fail, at least to some extent (Dyer, Kale, & Singh, 2004; Goold & Campbell, 1998; Mottola, Bachman, Gaertner, & Dovidio, 1997). Traditional ﬁnancial and strategic perspectives focusing on structural factors while the M&A takes place fall short in explaining these disappointing outcomes (King, Dalton, Daily, & Covin, 2004). Therefore, scholars increasingly focus on the crucially important postmerger integration process (Pablo, 1994), and speciﬁcally on less tangible factors related to the integration of merged and acquired ﬁrms (Cartwright & Cooper, 1993). Over the past decades, the literature steers toward investigating human factors during postmerger integration processes (Cartwright & Cooper, 1993; Cartwright & McCarthy, 2005). Birkinshaw, Bresman, and Ha˚kanson (2000), for example, conclude that ‘‘human integration,’’ concerned primarily with generating employee acceptance of and cooperation with the merger or acquisition, is an important determinant of overall success. Two important foci in studies of human factors in M&As are the effects of cultural differences and the effects of identiﬁcation with the premerger and postmerger entities on integration outcomes (Cartwright, 2005; Cartwright & Cooper, 1993; Zaheer, Schomaker, & Genc, 2003). Issues of organizational identity (Ullrich & Van Dick, 2007) and organizational culture (Teerikangas, 2007) are important in the postmerger integration phase of organizations. Both researchers and practitioners frequently refer to cultural differences as causes of disappointing outcomes in domestic and international cooperation. In particular differences in organizational cultures are indicated to be the root cause of many problems in M&A integration (Zaheer et al., 2003). On the contrary, Very, Lubatkin, and Calori (1996) ﬁnd that cultural differences may also create perceptions of attraction in international M&As. Teerikangas (2007) concludes that the

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evidence for the effects of cultural differences on M&A performance remains inconclusive. Identity is viewed by Pratt (2000) as an end result of identiﬁcation. Identiﬁcation with an organization has been demonstrated to have positive effects on a multitude of organizational outcomes (Ashforth & Mael, 1989; Bartels, Douwes, De Jong, & Pruyn, 2006; Dutton, Dukerich, & Harquail, 1994; Elsbach, 1999; Haslam, 2004; Haslam, Postmes, & Ellemers, 2003). However, a merger or acquisition can threaten employees’ identiﬁcation with the ‘‘old’’ (premerger) organization, and consequently loyalty, commitment and willingness to cooperate in the M&A may suffer (Ullrich & Van Dick, 2007). To increase our understanding of postmerger integration processes, and ultimately M&A outcomes, it is important to look at the effects of both cultural differences and organizational identiﬁcation. Unfortunately, cultural differences and organizational identiﬁcation have so far been mostly studied in isolation of each other, or at the other extreme, the concepts have been used interchangeably. Therefore, the ﬁrst aim of this chapter is to stand back and consider the similarities, differences and relationships between both concepts, in an M&A context. Second, we will empirically gauge the effects of cultural differences and organizational identiﬁcation on human aspects of postmerger integration. Our empirical results suggest that organizational culture and organizational identiﬁcation differentially relate to three key aspects of postmerger human integration: employee satisfaction with the merger, perceived fairness of the merger and the willingness to cooperate in the merger.

ORGANIZATIONAL CULTURE AND ORGANIZATIONAL IDENTITY Comparisons of organizational culture and organizational identity have so far mainly focused at the conceptual level (Ravasi & Schultz, 2006): what are organizational culture and identity, and to what extent can they be considered as different concepts? Organizational culture is deﬁned by Schein (1992, p. 12) as ‘‘a pattern of shared basic assumptions that the group learned as it solved its problems of external adaptation and internal integration, that has worked well enough to be considered valid and, therefore, to be taught to new members as the correct way to perceive, think, and feel in relation to those problems.’’ The most cited deﬁnition of

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organizational identity is that of Albert and Whetten (1985, p. 256): ‘‘Organizational identity involves those aspects of the organization that meet the criteria of self-referentially claimed central character, distinctiveness, and temporal continuity.’’ Hence, organizational identity in its deﬁnition is linked to organizational characteristics that are central, distinctive and enduring. In the context of M&As, both organizational culture and organizational identity are interesting because an M&A is likely to disrupt the way in which employees relate to both the identities and the cultures of the organizations involved. Both organizational culture and organizational identity can be examined from different perspectives. Scholars adopting a core essence/social actor perspective view cultures as relatively stable entities in which differences are often major sources of incompatibilities and conﬂicts (Stahl & Mendenhall, 2005) In a similar way, an organization’s identity can be seen as a feature or property that somehow resides in, and is attached to, the focal organization (Corley et al., 2006). According to this perspective, the relationship between identity and culture is clear: a particular culture may or may not be part of the identity of an organization (Albert, 1998; Ravasi & Schultz, 2006). However, this view has been criticized by scholars who claim that cultures, cultural differences and identities are above all social constructions (Gertsen, Søderberg, & Torp, 1998; Søderberg & Vaara, 2003). From this perspective, one should focus attention on the processes through which notions of ‘‘us’’ and ‘‘them’’ are developed to better understand the sources of conﬂicts in postmerger integration (Hogg & Terry, 2000). Corley et al. (2006) argue that organizational culture and organizational identity should be treated as ongoing social constructions that take place among organizational members. According to Ravasi and Schultz (2006), both perspectives have converged in advancing the idea that organizational culture supplies organizational members with cues for making sense what the identity of the organization is about. In prior research, the constructs’ organizational culture and organizational identity have sometimes been used interchangeably, as if they are conceptually and empirically similar. Elsbach and Kramer (1996, p. 442, italics added), for example, deﬁne an organization’s identity as reﬂecting ‘‘its central and distinguishing attributes, including its core values, organizational culture, modes of performance, and products.’’ In Brown and Gioia’s (2002, p. 405, italics added) in-depth case study, a dotcom president discussed organizational identity tensions as follows: ‘‘We’re managing this business within a business and it’s difﬁcult. The leaders of the ofﬂine

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business y resent our freedom to create our own culturey. They don’t understand us.’’ However, although organizational culture and organizational identity are closely related (Dutton & Dukerich, 1991), there are important differences between both constructs. Whereas organizational culture refers to ‘‘how we do things,’’ organizational identity refers to ‘‘who we are’’ (Brown & Gioia, 2002; Zaheer et al., 2003). Perceptions of an organization’s identity are formed by employees on a more conscious level than those of an organization’s culture (Hatch & Schultz, 2000); therefore, according to Cartwright and Cooper (1993), organizational identity is more explicit. In a similar way, Fiol, Hatch, and Golden-Biddle (1998) state that identity is more conscious and reﬂexive. In contrast, cultural values are more deeply ingrained into the self and are often situated at an unconscious level. In addition, the identity of the organization reﬂects the relationship between the employee and the organization and can therefore be characterized as relational. Organizational culture, on the other hand, tends to be more tacit and autonomous in comparison with organizational identity (Ravasi & Schultz, 2006). Organizational culture encompasses the beliefs, values and practices that the employee uses to deﬁne the organization (Cartwright, 2005). These beliefs, values and practices are taken-for-granted cultural assumptions that require less self-reﬂection than an organizational identity (Hatch & Schultz, 2000; Ravasi & Schultz, 2006). According to Hatch and Schultz (1997, p. 357), culture needs to be seen ‘‘as a context within which interpretations of organizational identity are formed.’’ Hence, organizational identity can be seen as grounded in and justiﬁed by cultural values and assumptions. In a similar way, Ravasi and Schultz (2006) argue that organizational members draw on organizational culture for making sense of their organizational identity. Reicher (2004) argues that identity targets (e.g., organizational identity) are intensely personal and important for an individual. At the same time, they cannot be completely reduced to the individual psyche but incorporate cultural and historical components. Moingeon and Ramanantsoa (1997) go one step further by positing that identity is a conceptual advance over culture since it allows scholars to move past a level of description to arrive at a level of explanation. Later we will build on these contributions in linking organizational culture and identity to M&A-related employee attitudes and behavioral intentions.

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ORGANIZATIONAL CULTURE AND IDENTIFICATION IN AN M&A CONTEXT In the context of M&As, both organizational culture and organizational identity are interesting in their effects on perceptions of cultural differences between the organizations involved in a merger, and on the identiﬁcation of employees with the merged organization. As stated earlier, an M&A is likely to disrupt organizational members’ identiﬁcation with the ‘‘old’’ premerger organization and substitutes the postmerger organization as an alternative target for identiﬁcation (Bartels et al., 2006; Van Dick, Wagner, & Lemmer, 2004; Van Knippenberg & Van Leeuwen, 2001; Van Leeuwen, Van Knippenberg, & Ellemers, 2003). Moreover, employees are likely to perceive cultural differences between the companies engaged in the M&A. In our study, we focus on the consequences of identiﬁcation with the postmerger entity and perceptions of organizational cultural differences on employee satisfaction with the M&A, perceived fairness of the M&A and willingness to cooperate in the M&A. These constructs are important factors in achieving postmerger success. Covin, Sightler, Kolenko, and Tudor (1996) found that the level of individual satisfaction with a merger is strongly associated with several other key attitudinal variables, as well as with M&A-related factors such as satisfaction with supervision, communication with top management and turnover intention. Ring and Van de Ven (1994) argue that justice plays a central role in interorganizational relationships such as mergers and acquisitions. They state that justice is as important as to be the ultimate lower-bound criterion of judgment in all kinds of inter-organizational cooperative relationships, including M&As. In inefﬁcient cooperative relationships, partners consider at least whether the relation is fair, and the answer to that question determines the fate of the relationship. Tyler and De Cremer (2005) and Ullrich and Van Dick (2007) also highlight the importance of ‘‘fairness’’ during organizational change. Finally, as Birkinshaw et al. (2000) argue, employee cooperation is a major factor inﬂuencing the success of an M&A. Actual cooperative behaviors are difﬁcult to measure in a large-scale study. But intentions have been shown to be good predictors of actual behavior (Ajzen, 1991; De Cannie`re, De Pelsmacker, & Geuens, 2009). Therefore, we regard selfexpressed willingness to cooperate in the merger to be a good proxy for M&A-related employee behaviors. Thus, we focus on three aspects of human postmerger integration processes: satisfaction with the merger, perceived fairness of the merger and

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willingness to cooperate in the merger. The ﬁrst two of these can be characterized as attitudes or general dispositions with regard to the merger. The third clearly is a behavioral intention. Both attitudes and behavioral intentions are related to actual behavior, but behavioral intentions more closely than attitudes (Kim & Hunter, 1993). Earlier we have reasoned that identiﬁcation with an organization is more conscious and reﬂexive than perceptions of organizational cultural differences. Building on that, we think it is likely that organizational identiﬁcation, having less of a taken-for-granted nature, is primarily linked to behavioral intentions, and perceived cultural differences to attitudes toward the merger (satisfaction and perceived fairness). Reicher (2004) emphasizes that a key tenet in social identity theory is that individuals have a range of different social identities, and they behave in terms of a particular social identity. Dutton and Dukerich (1991, p. 546, italics added) also state that ‘‘identity provides a set of skills and a way of using and evaluating those skills that produce characteristic ways of doing things.’’ Whereas the set of basic assumptions and values that constitute an organization’s culture may govern the behaviors of organizational members subconsciously, an organizational identity is more self-focused and allows employees to act in a speciﬁc way (Fiol et al., 1998). Given the positive effects of organizational identity discussed in the literature (Riketta, 2005; Terry, 2001, 2003; Van Dick, 2004; Van Dick, Ullrich, & Tissington, 2006; Van Knippenberg, Van Knippenberg, Monden, & de Lima, 2002), we also hypothesize a positive effect on M&A-related behavioral intentions of identiﬁcation with the merged entity: Hypothesis 1. Identiﬁcation with the postmerger organization is positively related to the willingness to cooperate in the merger. As Cartwright and Cooper (1995) argue, different types of organizational cultures nurture particular values and attitudes. Along the same line of reasoning, perceived cultural differences should be expected to be negatively related to positive attitudes toward the merger, like satisfaction with and perceived fairness of the M&A. Hence, we formulate the following hypothesis: Hypothesis 2. Perceived organizational culture differences are negatively related to satisfaction with and perceived fairness of the merger. In our discussion of organizational culture and organizational identity, we related that several authors see organizational culture as the context within which organizational identity interpretations are formed (Hatch & Schultz, 1997). This link between organizational culture and identity

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constructions was empirically explored by Ravasi and Schultz (2006). They show how at key junctures in the history of the company Bang & Olufsen, management and employees draw on the organizational culture to construct new interpretations of organizational identity. These dynamics suggest that although we do not expect a direct effect of perceived organizational cultural differences on behavioral intentions, these cultural differences may very well inﬂuence organizational identiﬁcation, and thus, indirectly, behavioral intentions. This leads us to our third hypothesis: Hypothesis 3. Perceived organizational culture differences negatively inﬂuence willingness to cooperate in the merger, mediated by identiﬁcation with the postmerger organization.

DATA AND METHODS Research Setting To examine the differential effects that organizational culture differences and organizational identiﬁcation have on key attitudinal and behavioral variables in the postmerger integration phase of organizations, we conducted a study at two merged ﬁrms from different European countries. Both companies operate in the same service sector, and one company is approximately twice the size of the other. The merger was announced at the end of 2003 and both companies ofﬁcially merged in May 2004.1 The present study started shortly after the completion of the merger and covers a period of approximately four years. Data were collected at Time 1 (November 2004) and then every six months ending at Time 5 (February 2007). The unit of analysis in this study is the individual employee’s perception. The main interest of the part of the study we report on here is to examine the different contributions of organizational identiﬁcation and organizational culture differences on employees’ satisfaction with the merger, perceived fairness of the merger and willingness to cooperate in the merger.

Sample and Data Collection Procedure To avoid problems of subject attrition and panel conditioning, a repeated cross-sectional survey design was chosen (rather than a panel study).

Organizational Identiﬁcation and Cultural Differences

27

The stratiﬁed samples represent employees from various hierarchical levels and functional departments. Each employee received a seven-page questionnaire, accompanied with a cover letter from the CEO of its company of origin and with a letter from the research team. These letters outlined the nature of the study, asked employees to cooperate with the study and ensured conﬁdentiality of the survey responses. In total, 5340 questionnaires have been collected. Response rates are around 30% for both companies throughout the ﬁve periods.

Variables The Appendix reports the multi-item survey constructs used in this study together with their factor loadings and Cronbach’s alpha for scale reliability. Organizational (postmerger) identiﬁcation is measured with ﬁve items derived from Mael and Ashforth’s (1992) organizational identiﬁcation scale. These items were rated on a 1 (completely disagree) to 5 (completely agree) Likert-type scale. As can be seen from the Appendix, Cronbach’s alpha for the organizational identiﬁcation scale equals 0.85, which indicates good scale reliability. Organizational culture difference is measured by taking the sum of absolute differences between seven items related to working practices of both companies. Cronbach’s a (0.69) for the organizational culture difference scale can be considered satisfactory. However, we can also argue that this is a formative, rather than a reﬂective scale, in which case Cronbach’s alpha is not a relevant measure (Diamantopoulos & Siguaw, 2006). The attitudinal dependent variables in this study, employee satisfaction with the merger and perceived fairness of the merger, are measured by three items. For both of these constructs, scale reliability is high (Cronbach’s a equals 0.81 and 0.75, respectively). Willingness to cooperate is also measured by three items. As can be seen from the Appendix, scale reliability is reasonable (Cronbach’s a equals 0.64). The lower reliability of this scale could be caused by the fact that one of the items was reversely formulated. Finally, several control variables are included in the model. Company is a dummy variable for distinguishing the two merged organizations (0 ¼ ‘‘acquiring’’ company and 1 ¼ ‘‘acquired’’ company). Gender is included as a dummy variable (0 ¼ male and 1 ¼ female) because the gender composition of some of the occupational groups varied considerably, and we wanted to avoid spurious effects. Age and tenure, both expressed in years, are two variables that control for individual effects. To operationalize the

28

DAVID KROON ET AL.

control variable impact on the job, employees were asked to rate the following statement on a 1–5 Likert-type scale: ‘‘My work has changed since the (company A-B) combination.’’ The hierarchical level within the organization is measured by one question. Respondents were asked whether they have any subordinates, resulting in the variable manager. The variable round (expressed in dummy variables) controls for the different time periods in which the data was collected (the ﬁrst round being the reference category). To assess the occupational group in which an employee works, a single question was asked: ‘‘Please indicate your occupational group.’’ Respondents could choose between different alternatives that were provided based on consultation with both companies. ‘‘Corporate staff’’ is used as a base category against which the other occupational groups are assessed.

Analyses Since our dependent and independent variables were measured with the same questionnaire, we ﬁrst conduct a conﬁrmatory factor analysis using AMOS 6.0 (Byrne, 2001) to check for convergent and discriminant validity of the different constructs. Subsequently, we perform hierarchical multiple regressions to examine employee satisfaction with the merger, perceived fairness of the merger and willingness to cooperate in the merger. Unfortunately, many of our cases had missing values, in particular on the questions regarding the culture of the ‘‘acquiring’’ and of the ‘‘acquired’’ ﬁrm. We deleted all cases that had more than three values missing on a set of 21 variables: seven culture items, ﬁve identity items and nine items measuring employee satisfaction with the merger, perceived fairness of the merger and willingness to cooperate. We also deleted cases with more than one value missing on the items measuring organizational identiﬁcation, satisfaction with the merger, perceived fairness of the merger and willingness to cooperate. This left us with 4394 cases, 2344 from the ‘‘acquiring’’ company and 2050 from the ‘‘acquired’’ company. In the next step, we substituted expectation maximization (EM) estimations for any remaining missing values on these 21 variables. With the resulting dataset, we ran all our analyses.

FINDINGS All multi-item constructs display satisfactory levels of reliability as can be seen from the Cronbach’s alphas in the Appendix, ranging from

Organizational Identiﬁcation and Cultural Differences

29

0.64 to 0.85. Convergent validity is examined by looking at the item factor loadings (Appendix). Most of the standardized item loadings (l) for the multi-item constructs are well above the cut-off value of 0.50 (Hildebrandt, 1987), supporting convergent validity.2 To assess discriminant validity, we performed a series of chi-square difference tests on the factor correlations. We constrained the correlation between pairs of constructs to 1.0 and then performed a chi-square difference test on the values obtained for the unconstrained and constrained model. The signiﬁcant differences in chisquare indicate that discriminant validity is achieved in all cases. Moreover, the differences in goodness-of-ﬁt and comparative ﬁt indexes between the constrained and unconstrained models are moderately large, again providing evidence for sufﬁcient discriminant validity. Means, standard deviations and construct correlations are presented in Table 1. Employee satisfaction with the merger and perceived fairness of the merger are slightly above the midpoint of a 5-point scale (mean ¼ 3.23 and mean ¼ 3.17, respectively). Employees in both companies are highly willing to cooperate with the merger (mean ¼ 4.20). Organizational (postmerger) identiﬁcation has a positive mean score of 3.32. First of all, we examined the relationship between merger satisfaction, perceived fairness, willingness to cooperate and the control variables. From the results in Tables 2–4, we can conclude that male employees are more satisﬁed with the merger than female employees, holding all the other variables constant. Furthermore, the longer the tenure of employees, the less satisﬁed they are with the merger and the less fair they perceive the merger. The variable company has a negative sign, which means that employees from the acquiring company are more satisﬁed with the merger, perceive the merger as more fair and are more willing to cooperate in the merger compared with employees from the acquired company. In Table 3 we can see that the older employees are the more they perceive the merger as being fair, holding all the other variables constant. We also observe that the higher the hierarchical level of employees, the more satisﬁed they are with the merger, the more they perceive the merger as being fair and the more willing they are to cooperate in the merger. Interestingly, we ﬁnd a signiﬁcant positive direct effect of the impact on the job that the merger brings about on employee satisfaction with the merger. Apparently, employees from both companies value an impact on their job through the merger. One reason for this ﬁnding could be that employees tend to feel more engaged through this impact and are therefore more satisﬁed with the merger. On the contrary, we can see in Table 3 that employees experiencing a high impact on their job as

Employee satisfaction with the merger Fairness of the merger Willingness to cooperate Organizational identiﬁcation Cultural difference Company Age Gender Tenure Managers Impact on the job Occupational group ¼ engineering Occupational group ¼ peripheral service agents Occupational group ¼ in-house service agents Occupational group ¼ sales ofﬁces Occupational group ¼ peripheral operations Occupational group ¼ secondary business unit Occupational group ¼ engineering Round

N ¼ 4394.

po0.05; po0.01.

19.

18.

17.

16.

15.

14.

13.

5. 6. 7. 8. 9. 10. 11. 12.

2. 3. 4.

1.

Variables

3.22

1.30

0.29

0.30

0.10

0.09

0.45

0.37

0.29

0.16

0.26

0.30

0.10

0.07

0.52 0.50 9.06 0.49 9.66 0.48 1.41 0.35

0.84 0.67 0.88

0.93

S.D.

0.86 1.47 40.21 0.40 14.12 0.36 2.84 0.15

3.17 4.20 3.32

3.23

Mean

.16 .08 .06 .02 .03 .10 .00 .06

.11 .05 .03 .04 .06 .09 .20 .08

.00

.04

.05

.06

.02

.04

.07

.02

.05

.06

.00

.02

.03

.03

.10

.03

.02

.03

.02

.10

.07

7

8

9

10

.09

.02

.04

.02

.03

.07 .00

.00

12

.04

.12 .10

14

15

.07 .27 .22 .18 .28

.24 .18 .15 .12

.02

13

16

.03

17

.11 .10

.09 .06 .04

.00

18

.15 .15

.13 .13 .11 .09 .14 .20 .11

.14 .21 .14 .11 .09 .15 .21

.06 .01

.04

.11 .03

.02 .18 .01

.16 .13 .03

.08 .24

.03

.14

11

.17 .15 .04 .78 .14

.13 .01

.11

.07 .15

.18

.10 .07 .24 .11 .83 .23 .03 .20 .15 .17 .12 .03 .03 .07 .03 .04 .11 .26 .18 .00

6

.07 .04

.09 .04

.02

.11 .03

.03

5

.13 .19 .04 .11 .09 .05 .07 .11 .07 .09 .07 .07 .03 .02 .05

4

.11 .03

.02 .10 .05 .02 .03 .09 .05 .01

.29

3

Descriptive Statistics and Correlations Matrix.

.07 .06 .03

.06 .02

.35 .34

2

.54 .43 .36

1

Table 1.

31

Organizational Identiﬁcation and Cultural Differences

Table 2.

Results of Regression Analysis for Employee Satisfaction with the Mergera.

Variables

Model 1

Model 2

Model 3

Model 4

Intercept Company Age Gender Tenure Manager Impact on the job Occupational group ¼ engineering Occupational group ¼ peripheral service agents Occupational group ¼ in-house service agents Occupational group ¼ sales ofﬁces Occupational group ¼ peripheral operations Occupational group ¼ secondary business unit Round 2 Round 3 Round 4 Round 5

3.35 0.14 0.00 0.13 0.01 0.18 0.12 0.21 0.17 0.32 0.04 0.13 0.01 0.01 0.09 0.02 0.07

2.12 0.02 0.00 0.09 0.01 0.14 0.10 0.20 0.20 0.34 0.14 0.11 0.05 0.01 0.09 0.03 0.01

3.48 0.13 0.00 0.14 0.01 0.19 0.12 0.23 0.19 0.33 0.06 0.11 0.02 0.01 0.10 0.02 0.07

2.24 0.02 0.00 0.09 0.01 0.15 0.10 0.22 0.21 0.34 0.15 0.10 0.05 0.02 0.10 0.03 0.02

0.22

0.35 0.13

0.09 0.02 67.11

0.19 0.12 314.94

Main effects Organizational (postmerger) identiﬁcation Cultural differences R2 DR2 Hierarchical F

0.36 0.07

0.18 0.11 596.92

Notes: The changes in R2 in models 2, 3 and 4 are in comparison with the value in model 1. The coefﬁcients reported are unstandardized estimates. po0.05; po0.01; po0.10. a N ¼ 4394.

a result of the merger perceive the merger as less fair. Finally, we see that employees from almost all occupational groups react more negatively to the merger compared to corporate staff members. To examine the effect of organizational (postmerger) identiﬁcation on employee satisfaction with the merger, perceived fairness of the merger and willingness to cooperate, we can look at Model 2 in Tables 2–4. First of all, the additional variance accounted for by the organizational identiﬁcation variable is signiﬁcant. Since we observe a strong positive and signiﬁcant effect for the organizational (postmerger) identiﬁcation variable, we can argue that employees identifying more strongly with the postmerger

32

DAVID KROON ET AL.

Table 3.

Results of Regression Analysis for Fairness of the Mergera.

Variables

Model 1

Model 2

Model 3

Model 4

Intercept Company Age Gender Tenure Manager Impact on the job Occupational group ¼ engineering Occupational group ¼ peripheral service agents Occupational group ¼ in-house service agents Occupational group ¼ sales ofﬁces Occupational group ¼ peripheral operations Occupational group ¼ secondary business unit Round 2 Round 3 Round 4 Round 5

3.16 0.12 0.01 0.05 0.01 0.15 0.02 0.17 0.07 0.19 0.07 0.07 0.03 0.02 0.00 0.04 0.05

2.10 0.02 0.01 0.01 0.01 0.12 0.03 0.17 0.09 0.20 0.02 0.06 0.06 0.02 0.00 0.00 0.00

3.34 0.11 0.01 0.05 0.01 0.16 0.01 0.20 0.10 0.20 0.05 0.05 0.04 0.02 0.01 0.04 0.05

2.29 0.01 0.01 0.02 0.01 0.13 0.03 0.19 0.11 0.21 0.03 0.04 0.07 0.01 0.01 0.00 0.00

0.28

0.30 0.21

0.06 0.03 130.22

0.15 0.12 300.31

Main effects Organizational (postmerger) identiﬁcation Cultural differences R2 DR2 Hierarchical F

0.32 0.03

0.13 0.10 511.11

Notes: The changes in R2 in models 2, 3 and 4 are in comparison with the value in model 1. The coefﬁcients reported are unstandardized estimates. po0.05; po0.01; po0.10. a N ¼ 4394.

organization are more satisﬁed with the merger, perceive the merger as more fair and are more willing to cooperate in the merger. Thus, Hypothesis 1 is conﬁrmed. However, we also see that organizational identiﬁcation is positively associated with attitudes toward the merger (satisfaction with the merger and perceived fairness of the merger), a ﬁnding that we did not expect. Taken together, our results provide support for our conjecture that organizational identiﬁcation is an important determinant of postmerger M&A success, in terms of both attitudes and behavioral intentions. To examine the effect of organizational culture differences on employee satisfaction with the merger, perceived fairness of the merger and willingness to cooperate, we can look at Model 3 in Tables 2–4. We observe that the

33

Organizational Identiﬁcation and Cultural Differences

Table 4.

Results of Regression Analysis for Willingness to Cooperatea.

Variables

Model 1

Model 2

Model 3

Model 4

Intercept Company Age Gender Tenure Manager Impact on the job Occupational group ¼ engineering Occupational group ¼ peripheral service agents Occupational group ¼ in-house service agents Occupational group ¼ sales ofﬁces Occupational group ¼ peripheral operations Occupational group ¼ secondary business unit Round 2 Round 3 Round 4 Round 5

4.45 0.15 0.00 0.02 0.00 0.13 0.01 0.11 0.30 0.19 0.05 0.18 0.14 0.04 0.03 0.05 0.04

3.74 0.08 0.00 0.00 0.00 0.11 0.00 0.10 0.32 0.19 0.11 0.17 0.16 0.03 0.03 0.08 0.07

4.47 0.15 0.00 0.03 0.00 0.13 0.01 0.11 0.31 0.19 0.05 0.17 0.14 0.04 0.03 0.05 0.04

3.73 0.08 0.00 0.00 0.00 0.11 0.00 0.11 0.32 0.19 0.11 0.17 0.16 0.03 0.03 0.08 0.07

0.04

0.21 0.01

Main effects Organizational (postmerger) identiﬁcation Cultural differences R2 DR2 Hierarchical F

0.21 0.04

0.11 0.07 349.96

0.04 0.00 3.67

0.11 0.07 175.11

Notes: The changes in R2 n models 2, 3 and 4 are in comparison to the value in model 1. The coefﬁcients reported are unstandardized estimates. po0.05; po0.01; po0.10. a N ¼ 4394.

coefﬁcient of organizational culture difference is signiﬁcantly negative for both attitudinal dependent variables, employee satisfaction with the merger and perceived fairness of the merger. Hence, the more employees perceive that differences exist between their ‘‘own’’ organization’s culture and the ‘‘other’’ organization’s culture, the less satisﬁed they are with the merger and the less fair they perceive the merger, conﬁrming Hypothesis 2. These ﬁndings are in line with the theory of acculturation (Berry, 1980). This theory argues that cultural compatibility will reduce acculturative stress at an individual level. Hence, employees will react positively when organizational cultures are reconcilable in an M&A. Our results are also in line with Buono, Bowditch, and Lewis (1985) who found a ‘‘culture shock’’ occurring

34

DAVID KROON ET AL.

Table 5.

Results of Regression Analyses for Testing Hypothesis 3a. Dependent Variable ¼ Willingness to Cooperate

Step 1 Cultural differences Step 2 Cultural differences Steps 3 and 4 Cultural differences Organizational identiﬁcation

Dependent Variable ¼ Organizational Identiﬁcation

0.04

R2

0.04 0.23

0.01 0.21

0.09 0.11

Note: The coefﬁcients reported are unstandardized estimates. po0.05; po0.01; po0.10. a N ¼ 4394.

when two organizations merge. This cultural shock affects organizational members’ feelings of discomfort. When we look at behavioral intentions, we see that the variable organizational culture difference has only a weakly signiﬁcant effect on willingness to cooperate in the merger. This effect disappears if the variable for postmerger organizational identiﬁcation is entered into the model (Model 3 in Table 4). This suggests that the effect of cultural differences on willingness to cooperate is mediated by organizational identiﬁcation, as stated in Hypothesis 3. We checked for this effect following the procedure recommended by Baron and Kenny (1986) and found that cultural differences (controlling for the same factors as in the regressions reported in Tables 2–4) relate negatively to both willingness to cooperate and postmerger identiﬁcation. As the effect on willingness to cooperate disappears when the variable for postmerger identiﬁcation is entered into the regression, we may say that postmerger identiﬁcation fully mediates the effect of organizational culture differences on willingness to cooperate, conﬁrming Hypothesis 3 (see Table 5 for a summary of the results). As our theoretical analysis suggests, organizational identiﬁcation is more directly related to behavior (intentions) than perceived cultural differences.

DISCUSSION AND CONCLUSIONS Organizational culture and organizational identity are important phenomena in the postmerger integration phase of organizations. Our theoretical

Organizational Identiﬁcation and Cultural Differences

35

analysis suggests that although the two concepts show similarities, they are signiﬁcantly different. Moreover, our empirical exploration suggests that these phenomena differentially impact on human integration after an M&A. Organizational identiﬁcation, related to the social construction of organizational identity, is directly related to behavioral intentions in the postmerger integration phase of organizations. The inﬂuence of perceived cultural differences on behavioral intentions is fully mediated by organizational identiﬁcation. Both organizational identiﬁcation and perceived cultural differences are related to attitudes toward the M&A (satisfaction and perceived fairness). Taken together, our ﬁndings shed more light on the culture/identity–human behavior relationship in postmerger integration processes. Looking at our results, it becomes clear that occupational group membership is strongly related to both attitudes and behavioral intentions. Future research should further examine to what extent this intraorganizational differentiation impacts on the effects of identiﬁcation and culture. Moreover, departments within an organization may perceive the organizational postmerger identity differently. In addition, employees can identify with multiple identities (Ashforth & Johnson, 2001; George & Chattopadhyay, 2005; Hornsey & Hogg, 2000; Pratt & Foreman, 2000). Organizational culture, at ﬁrst sight, is more common among the members of an organization. However, Van Maanen and Barley (1984) show that different groups within an organization can create their own professional or functional sub-cultures. From both a practical and a theoretical point of view, it would be interesting to examine changes over time in the effects of identiﬁcation and perceived cultural differences. Since Albert and Whetten’s (1985) conceptualization of organizational identity, organizational scholars have challenged this view by arguing that organizational identities are less central, less distinctive and more ﬂexible than originally thought (Corley, 2004; Corley et al., 2006; Gioia, Schultz, & Corley, 2000; Gioia & Thomas, 1996; Hatch & Schultz, 2002; Pratt & Foreman, 2000; Ravasi & Schultz, 2006). Organizational culture, on the other hand, reﬂects the central beliefs of a group, which could take more time to change, implying that perceptions of cultural differences could have a more enduring character than organizational identiﬁcation. Some scholars would even argue that it is not possible to change or manage an organizational culture (Fiol et al., 1998). As Jameson (2007) argues, an organizational culture involves a historical perspective, whereas a social identity is usually embedded in a particular moment in time. This makes organizational culture more rigid than

36

DAVID KROON ET AL.

organizational identity, which, in turn, has important consequences for the implementation phase of mergers and acquisitions. When two companies are merged into one organization, the organizational cultures need time to adapt to the change, whereas employees can identify with and adapt to a new identity more easily. Our study provides new insights into how organizational identity distinguishes itself from organizational culture through the factors that are inﬂuenced by the two concepts. It would also be interesting to examine how organizational identity distinguishes itself from organizational culture through the factors that cause both constructs. Moreover, we could examine the dynamic relationship between organizational identity and culture more closely (Ravasi & Schultz, 2006). As Albert and Whetten (1985) already argued, the relation of culture to identity is both an empirical question and a theoretical one. Finally, more research examining the relationship between attitudes, behavioral intentions and actual behaviors during postmerger integration processes is needed. Several studies, for example, suggest that behavioral intentions mediate the impact of attitudinal antecedents on actual behavior (De Cannie`re et al., 2009). However, other studies (e.g., Schoﬁeld, Pattison, Hill, & Borland, 2003), as well as our results, suggest that social identiﬁcation with a group impacts on individual’s attitudes, but also directly inﬂuences behavioral intentions.

NOTES 1. Legally, it was a friendly acquisition of the smaller company by the larger company. However, the ‘‘Combination’’ (ofﬁcial indication of the organization) has been managed as a merger. 2. We performed robustness checks by deleting items with item loadings below 0.50. Since our regression results did not change, we only report results based on all items.

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APPENDIX. MULTI-ITEM SURVEY CONSTRUCTS Factor Loadings (l) Employee Satisfaction with the Merger (a ¼ .81) 1. The company A–B combination offers me an opportunity to fulﬁll my aspirations 2. Overall, I am satisﬁed with the company A–B combination 3. The company A–B combination offers me the opportunity for further development in my job Willingness to Cooperate (a ¼ .64) 1. If the cooperation with company A–company B combination has an inﬂuence on my work, I will do my best to succeed 2. I am open to cooperate with my colleagues from company A–company B combination when necessary 3. I’m not willing to put myself out just to help the company A–company B combination (reverse-coded) Perceived Fairness (a ¼ .75) 1. The decisions related to the combination harm neither of the two companies 2. On the whole, the decisions related to the combination that affect your department are fair 3. On the whole, the company A–company B agreement is fair Organizational (Postmerger) Identiﬁcation (a ¼ .85) 1. When someone criticizes the company A–company B combination, it feels like a personal insult 2. I am very interested in what others think about the company A–company B combination 3. When I talk about the company A–company B combination, I usually say ‘‘we’’ rather than ‘‘they’’ 4. When someone praises the company A–company B combination, it feels like a personal compliment 5. Company A–company B combination successes are my successes Perceived Organizational Culture Differences (a ¼ .69) 1. At company A/company B, employees are responsible for the results of their work 2. At company A/company B, there is a good communication between employees and their managers 3. At company A/company B, respecting prescribed procedures is as important as achieving the desired results in one’s job

.73 .81 .72

.83 .74 .41

.65 .64 .85 .63 .69 .69 .82 .80

.47 .51 .44

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APPENDIX. (Continued ) Factor Loadings (l) 4. At company A/company B taking initiative is not encouraged 5. At company A/company B, conﬂicts are frequently ignored instead of openly discussed 6. At company A/company B, if you want something done you need to address the right people personally 7. At company A/company B, it is important to try to convince everyone with a stake in a given issue before a ﬁnal decision is taken

.60 .51 .43 .45

THE VALUE OF STORIES IN UNDERSTANDING THE PAST AND SHAPING THE FUTURE IN MERGED ORGANIZATIONS Susan Cartwright and Luca Magni ABSTRACT An increasingly dominant theme of recent M&A research has been the issue of cultural compatibility and the notion of ‘‘culture ﬁt’’ and its contribution to post-combination performance and integration (Cartwright, 2005). Hence, various methodologies, both qualitative and quantitative, have been applied to the M&A context to analyze the cultures of combining employee groups and the extent to which they share the same reality. In the last few decades, narratives and stories have attracted the interest of organizational researchers and practitioners both as analytic tools and as a subject for study. This chapter explores the value of stories as a means of understanding culture, communicating values and ideals, promoting adaptive change, and developing cooperation and identiﬁcation with the new merged organization. It illustrates the application of narrative methodologies within the context of a recent merger within the banking industry.

Advances in Mergers and Acquisitions, Volume 8, 43–60 Copyright r 2009 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1479-361X/doi:10.1108/S1479-361X(2009)0000008005

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INTRODUCTION Surveys of senior executives suggest that one of the most frequently cited reasons for acquisition failure or merger underperformance is due to cultural differences between the combining organizations (Cartwright, 2005; Cartwright & Price, 2003; Coopers & Lybrand, 1992; Schweiger & Goulet, 2000; Sudarsanam, 2003). Such differences are believed to result in tension, a lack of co-operation and potential conﬂict between the merging organizational groups. Consequently, an increasingly dominant theme of recent merger and acquisition (M&A) research has been the issue of cultural compatibility, the notion of ‘‘culture ﬁt’’ and its contribution to post combination performance and integration processes (Cartwright & Cooper, 1997; Daly, Pounder, & Kabanoff, 2004; Jemison & Sitkin, 1986). The question as to what constitutes a good cultural ﬁt has been the subject of much debate and is considered to be linked to corporate strategy (Larsson & Lubatkin, 2001; Nahavandi & Malekzadeh, 1988; Schoenberg, 2000, 2003). According to Napier (1989), M&A integration strategies fall into three types, namely extension, re-design and collaborative. When organizations acquire a business to extend their activities into a different area, as in vertical M&As, cultural differences are not necessarily important as the acquired company, at least in the short term, will continue to operate as a separate and relatively independent entity. However, if a re-design strategy is adopted, then the intention of the acquirer or dominant merger partner will be to absorb and assimilate both the activities and the culture of the acquired or less powerful, and usually smaller, merger partner into its own. In these circumstances, cultural differences may be problematic and become an obstacle to the cloning process. Acquired employees may be unwilling to abandon their pre-existing culture and become highly resistant to any change. Similarly, a collaborative strategy intended to take advantage of collective knowledge and resources and the creation of a new ‘‘best of both worlds’’ culture is dependent on some degree of cultural consensus and the preservation of certain critical values of importance to both organizations (Graves, 1981). Therefore, from the perspective of deal makers, cultural compatibility refers to a situation where there is (i) agreement as to the proposed integration strategy and mode of acculturation and (ii) acquired cultures are easily displaced or blend together well. Therefore, an awareness and understanding of both cultural differences and similarities has a potentially useful and informative role to play in guiding and inﬂuencing integration strategies and processes. In this chapter, we discuss the importance of cultural analysis as a means of enhancing

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M&A outcomes and the advantages of narrative approaches (Collinson & McKenzie, 1998). In particular, we focus on the value of stories as a means of understanding culture, communicating values and ideals, promoting adaptive change and developing co-operation and identiﬁcation with the new merged organization.

THE ROLE OF CULTURE Culture has been variously deﬁned within the literature (Cooper, Cartwright, & Earley, 2001; Gagliardi, 1990; Schein, 1985; Walter, 1985). Central to most deﬁnitions is the notion that culture concerns the integration of shared symbols, values, beliefs and behaviours that operate, often in an unconscious way, to guide and inﬂuence the cognitions and actions of a group. Culture also plays a role in maintaining stability, order and group cohesion as well as deﬁning identity. Furthermore, culture determines the type and sources of information that its members selectively attend to and the way in which information is evaluated (Schneider, 1989). Typically, culture becomes more salient in time of change or threat, and groups can become extremely cohesive, ethnocentric and resistant to change. Morgan (1986) focuses on the metaphor of culture as a shared sense of reality. He highlights that those who do not possess a culture which is similar or compatible, in terms of its values and cognitions, do not share the same reality and as such therefore cannot enact reality with each other. Consequently, M&As represent a major change event to employees as they threaten and disturb organizational and group cultures and often force the integration of people who do not share the same reality. When the merger or acquisition is international, then there is an additional level of cultural complexity or what has been described as the ‘‘double acculturation problem’’ (Nahavandi & Malekzadeh, 1988). In a study of 30 US acquisitions, Chatterjee, Lubatkin, Schweiger, and Weber (1992) found that ﬁnancial performance was highly correlated with perceived cultural similarity. A more recent study (Daly et al., 2004) of 59 M&As in Australia also found that similarity in espoused values explained 11% of the variance in post-combination performance. Other studies attest to the difﬁculties in sharing and transferring knowledge between organizations with different cultures and value systems post-merger (Empson, 2001; Larsson, 1993). Changes in culture and practice have also been shown to result in high levels of stress and increased staff turnover (Cartwright & Cooper, 1993; Very, Lubatkin, & Veiga 1997).

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It has generally been observed that from the outset employees involved in M&As tend to focus on perceived cultural differences between the combining organizations and fail to recognize the similarities (Altendorf, 1986; Cartwright & Cooper, 1992). Kleppesto (1998) suggests that such a tendency in behaviours is consistent with Social Identity Theory (Tajfel & Turner, 1979). In M&A situations, the tendency to emphasize cultural differences is regarded as part of the natural process of asserting, protecting and maintaining social identities and boundaries (Dackert, Jackson, Brenner, & Johanson, 2003). At the same time, as well as emphasizing their distinctiveness, employees formulate ideas about the nature of the culture of the other organization. These ideas are often based on minimal information and, in the case of international M&As, tend to draw on popular national culture stereotypes. The longer the period between announcement and integration, the less contact between the organizations, the more ﬁrmly cultural entrenched both groups are likely to become. Therefore, the challenge for M&A management is to seek to highlight to employees the areas of shared values and cultural consensus and how these are aligned with future strategy. Furthermore, recognition and respect of differences is necessary if these are to be managed and dealt with effectively.

ASSESSING CULTURAL DIFFERENCES AND SIMILARITIES It is widely accepted that both interpersonal and interorganizational relationships are often problematic because of the limited awareness and insight each party has of the other. Positive relationships are built on shared understanding, values in common and a respect for areas of difference. Among others, Schoenberg (2003) has suggested that some form of cultural assessment should form part of the due diligence process before any M&A bid is formalized. However, in practice, this is often extremely difﬁcult and the process of cultural proﬁling can invariably only begin in the early days post-merger. More popularist management literature has tended to reduce the concept of culture to its behavioural elements that is ‘‘how things are done around here’’ (Bright & Cooper, 1993). This pragmatic view of culture conceptualizes culture as something an organization ‘‘has,’’ which can be broken down into measureable dimensions or attributes. There are various quantitative measures available to elicit a cultural proﬁle. However, although such measures can highlight the domains where cultures are similar or differ,

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questionnaires provide little enlightenment as to the underlying cognitions, which cause organizations to perceive reality (and so act) in different ways. In contrast, cultural purists, in emphasizing that culture is a socially constructed phenomenon, regard culture as something an organization ‘‘is.’’ Hence, it is not amenable to be broken down into individual constituent parts. According to this viewpoint, there is greater value in understanding culture in its own unique terms and so requires a more qualitative ethnographic investigative approach. Theorists such as Hamada (1995) highlight the importance of uncovering the shared schema or norms, which result from and create shared behaviour. Organization stories are a powerful inﬂuence in transmitting culture and articulating schema (Jordan, 1986). Consequently, as an ethnographic method, stories present an insightful means of data collection to understand how cultures have evolved. According to Jordan (1986), as a data-gathering technique, storytelling is particularly advantageous in situations such as organizational change when ‘‘it is impossible to know what questions to ask or even whether informants would understand the questions’’ put by the interviewer or survey item in the way intended.

Narrative Approaches in Organizational Culture Analysis In the past few decades, narratives and stories have attracted the interest of organizational researchers and practitioners both as analytic tools (Bauer, 1996) and as a subject of study (Boje, 1991, 2002; Czarniawska, 1998). Numerous researchers have used literary and discourse analysis techniques to examine oral and written organizational narratives. Various stories have been collected, categorized and analyzed for insights into organizational life. Narratives have appealed to organizational researchers for their ability to capture the richness and complexity of organizational life, for their capacity to go beyond what can be accessed through more traditional sources of data, such as surveys or structured interviews (Denning, 2008). As an analytic tool, narratives offer the opportunity to overcome many of the difﬁculties associated with studying cultures in the workplace: access to research sites, the effect of the investigator and separation of inner values from their displays. As the subject of research, both oral and written stories incorporate organizational values, language and emotions that are the three explicatory and potentially predictive elements of the difﬁculties that organizations may encounter when changes occur in their external environment or internal reality, as in the case of mergers and acquisition.

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With regard to M&As, despite the evident research opportunity that they offer, there have been very few studies that have used narratives as tools of analysis, and there seems to be even less experience of their use as an agent of cultural transformation. It appears that the storyspace of organizations, during M&As, has been mostly if not entirely unmanaged. We refer here to the realm of organizational stories where organization members can ‘‘afﬁrm themselves as independent agents, heroes, survivors, victims, and objects of love rather than identifying with the scripts the organizations put in their mouths’’ (Gabriel, 2000, p. 129). Narratives capture social context and relationships and facilitate the understanding of the complex patterns of interaction in which emotional performances take place. Moreover, the personal and speciﬁc nature of narratives makes them particularly important for the expression of highly emotional issues (Riesmann, 1993). This appears to be especially true for extreme emotional contexts – like M&As – when narratives may provide a milieu that connects and reconciles emotions with the broader organizational picture and makes them rational and understandable to all. Learning how to inﬂuence and develop this storyspace is in our view crucial since most researchers seem to agree that narratives and particularly narratives of past events reﬂect and shape people’s experience and emotional interpretation of reality (Bruner, 1991). A shared view on this narrative realm appears therefore decisive, in M&As, since the narrated past inﬂuences how sensible present and future experiences will appear to both the old and the new members of the organization. Narratives of the past, contextualization and sharing of people’s emotions seem to produce the level of empathy that is required by the newly formed organization to satisfy desires of inclusion and to overcome fears of alienation.

INCREASING EMPLOYEE INVOLVEMENT Research has consistently demonstrated that acquired employees respond negatively to M&A events. Some researchers (McManus & Hergert, 1988; Mirvis, 1985) liken the response with the experience of bereavement in that employees grieve the loss of their pre-existing organization and its identity. Others highlight the disruption and high levels of stress and anxiety (Cartwright & Cooper, 1997; Kasstucher, 2004), increased labour turnover (Krug & Hegarty, 2001) and low morale (Gutknecht & Keys, 1993) associated with M&As.

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In contrast, research has also highlighted that the use of transition teams, personnel exchanges and a coordinated effort to increase levels of employee involvement and to provide opportunities to participate in joint social activities, reduces negativity and so achieves more positive outcomes (Larsson & Lubatkin, 2001). Consequently, Marks and Mirvis (2001) conclude that successful integration and merger outcomes are only possible when employees put aside a ‘‘them and us’’ mentality and assume a shared organizational identity. Many years ago, Sherif, Harvey, White, Hood, and Sherif (1961) identiﬁed that intergroup conﬂict occurs when one group perceives the other to be in some way a threat to attaining its goal. This may happen in organizational circumstances when groups perceive themselves to be in competition for resources or continued employment. According to Sherif et al. (1961), such conﬂict can be resolved by creating a super-ordinate goal, which is important and has meaning to both groups and requires both groups to work together to achieve that goal. It is suggested that both the motivating aspects of goal setting and goal attainment, together with increased social contact between the groups, are effective in breaking down old boundaries and creating a new united group identity. In the intervening years, there has been signiﬁcant and substantive support for goal setting theory, making it one of ‘‘the most valid and practical theories of employee motivation’’ (Locke & Latham, 2002, p. 714).

THE ENTERPRISE AUTOBIOGRAPHY The enterprise autobiography (Magni, 2008) is a methodology developed to use both the analytical and the transformational power of narratives as a technique for cultural analysis in acquisition situations. In its essence, it may be described as an organizational quest to uncover dominant cognitive categories and affective polarizations. It is realized in three main steps: (a) through the collection and the qualitative analysis of employees anecdotes and stories; (b) the confrontation of step a ﬁndings with the enterprise strategy; (c) the collective convergence, framing and return of outcomes to the entire organization in the form of a participated autobiographical writing. In the past, both individual and organizational autobiographies had mainly a celebrative function. This has drastically changed in the past century with the advent and development of what is presently indicated as the new autobiography and presented as distinct form of narrative (Rainer, 1998). Distinctive because it is being written by new voices, not only by

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those who represent the ofﬁcial and dominant view from the top; new because it is written with the main intent of self-discovery rather than selfpromotion. It is this speciﬁcity and the transformational vocation of the new autobiography that we tried to conceptualize and translate into the enterprise autobiography. The objective of the enterprise autobiography is in fact to go beyond the use of narratives as instruments to interpret and to describe the organizational reality; there the history of the enterprise and the stories concerning the enterprise ﬁnd their reason of being in the opportunity they offer to reﬂect strategically on how the organization orients towards itself and the external. Aligned with Barney’s (1986) and with most recent resource-based-view (RBV) theories on strategy, the enterprise autobiography focuses on the internalized modus operandi of the organization, and it highlights those elements of organizational culture – dominant metaphors, cognitive categories, values and emotional constructs – that determine the manner in which potentialities internally available are perceived. A matter of great impact and importance particularly in M&As, where experience and market data clearly indicate that M&As frequently reduce, rather than increase, value. A loss that clearly reﬂects the waste of core competences, resources and talents that has occurred in underperforming acquisitions. Preventing such waste and leveraging on the potential added value, deriving from the combination of intangibles of merging organizations, can be seen as the ultimate goal of the enterprise autobiography: an approach that is unconventional and apparently complex, but that offers very promising insights into M&As and also has a number of interesting applications in other areas. Some authors (Chia, MacKay, & Masrani, 2005) have recently suggested that companies need to identify a set of strategically distinctive core competences by searching into their own origins and cultural roots and, furthermore, into the cultural roots of the society within which they are embedded. Like these authors, we also believe that a set of habituated predispositions of the organization may assume strategic relevance, or at least prompt the development of a wider and more distinctive one. The narrative description becomes in this perspective an interesting tool, both from the epistemological point of view – since it allows to address and untangle various levels of signiﬁcant research complexity – and from a pragmatic viewpoint as it opens the way to involve large numbers of employees in the discovery/construction of meaningful strategic frameworks and goals. As far as the facilitation of post-acquisition activities is concerned, the enterprise autobiography presents a means of engaging large sections of

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the combining employee groups. In addition, the methodology has in such contexts the following immediate organizational beneﬁts: (i)

It supports the combining organizations in the construction and sharing of a new story-dimension. (ii) It stimulates an internal dialogue between management and employees. (iii) It reduces ambiguities in the organizational lexicon. (iv) It presents a super-ordinate goal and sets an example of how management and employees can listen to each other and work together beyond formal organizational boundaries.

THE APPLICATION AND PROCESS – THE BSI CASE On March 7, 2008, BSI, a long-established Swiss bank, particularly active in the private banking sector, acquired another Swiss bank, Banca del Gottardo, an organization of similar size. Combined the two banks had 1,843 people, of whom 1,032 emanate from BSI and 811 from the BdG. For many years, the two banks had been direct competitors operating in the same sector and markets. Both banks originated and were head-quartered in Swiss canton of Ticino and had an international presence with ofﬁces in Europe and Asia. The authors were approached to facilitate the merger integration process by helping in the production of the enterprise autobiography. The enterprise autobiography was developed as a multi-method autobiographical path (Bagnoli, 2004) to support the newly formed organization not only in the representation of its past (i.e. the histories of both merging organizations) but also in the generation of a consistent semantic framework and a set of values that could sustain its present and inspire its future. From March 2008 to December 2008, during the symbolic period of 9 months, as researchers and facilitators we have guided the new BSI, through the application of methods derived from ethnography, organizational development and creative writing. This path leads to the participative writing of the enterprise autobiography of the new BSI that is currently being published. Cultural analysis, strategic exploration and collective writing (Fig. 1) are the three fundamental components around which the enterprise autobiography – a multi-method autobiographical approach – has been designed and applied. During the cultural analysis, phase investigators have integrated the analysis of archival documents, in-depth interviews, the collection of

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Fig. 1.

Key Phases of Enterprise Autobiography in BSI.

individual narratives from questionnaires and focus group activities as well as participant observations. These methods enabled us to identify beliefs and the values collectively shared and those accepted as valid categories through which to interpret reality and give meaning to organizational experiences. The cultural analysis has been a particularly intensive phase as it emerges from the gannt (Fig. 2) that summarizes the activities as they have been planned and executed.

Fig. 2.

Phase 1: Cultural Analysis–Gannt of Enterprise Autobiography in BSI.

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Given their strategic importance and the non-disclosure agreement that was signed with BSI, at the beginning of the intervention, we cannot detail the ﬁndings deriving from this phase and those emerged from the strategic exploration with BSI top management, which followed immediately after. We can nevertheless quote the main insights that this work produced and the areas that this initiative clariﬁed. A number of ruling myth/metaphors were identiﬁed and analyzed in their inﬂuence on representation/perception of reality: the organization as a family. a ruling myth/metaphor that both organizations appeared to have in common, but that narratives revealed as associated to two profoundly different repertoires. the meaning of being a Swiss Italian Bank. how this translates into services, and how this impacts strategic positioning. The rest of the intervention was built on most recent studies and researches, on the use of narratives and autobiographies in different contexts. We focused particularly on the potential of stories in the emancipation of individuals and groups from their deepest cultural constraints, and we used a participative autobiographical collective writing process to develop and emotionally reorient organizational views on the merger and its possible outcomes. This particular use of narrative refers to the area that practitioners have begun to explore where narratives transform dominant meaning systems in constructive ways (Denning, 2008; Simmons 2000, 2007; McKee, 2003; Mathews & Wacker, 2007; Snowden & Boone, 2007; Guber, 2007). In its last phase, the enterprise autobiography was presented and articulated in its most tangible objective – the book publication (planned for March 2009). This led to the creation of an internal editorial board and to the activation of feedback systems (questionnaires, forums, etc.) that involved the entire company. The enterprise autobiography was positioned to become a super-ordinate goal, towards which old and newly acquired employees were invited to direct their attention, and it became a participative activity where they could address their energies. This seemed to lower the level of stress and frustration that severe changes such as acquisitions inevitably produce. Given its narrative form and the focus that this unavoidably put on lexicon, the enterprise autobiography also stimulated and accelerated the elucidation and development of key concepts (quality service, delegation, acceptable risk, etc.). By doing this, it may have prevented some future conﬂicts. In fact

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experience suggests that clariﬁcations of key concepts, vocabulary and meanings, when promptly addressed not only improve communication but also reduce the likelihood of misunderstandings and clashes. The overall and most tangible output of this phase is the ‘‘Beyond Code’’ – a short novel that a team of creative writers have composed on the basis of requests, suggestions and stimuli that employees of the new BSI have offered. In line with the most recent literary trends, this autobiography is not a faithful description of a historical event, but rather the construction of an emotional experience. The value of the narrative developed, by and for the new BSI, is not in the truthfulness of the details it describes, but in the evocative power that people in the organization who have co-authored the book recognize in it. We will judge its value in the level of integration it will generate. Certainly, this approach has already been credited with the capability of replacing the silences that generally dominate the moments of great organizational change with the voice of internal dialogues, sought for and activated as the sole true agents of personal and organizational change. Given that emotion is an aspect of ﬁction that must be constructed realistically and in rich detail, the preparation and writing of an autobiographic ﬁction of the new BSI necessitated direct observation of relevant places and active listening to the stories from both merging companies. The choice to promote the writing of an autobiographical ﬁction rely in the conviction that such activity could guide authors and co-authors through a journey of deep reﬂection and empathy. The writing team had to address their critics (BSI editing board, management and employees) and encouraged them to wear the ‘‘readers’ shoes’’ and verbalize perspectives and feelings, often linking such feelings to personal experiences that made emotions understandable to others. The most tangible result of the above activity is a 50-page-long thriller, with a 41-year-old Swiss woman as the main character. A woman with a name that emerged from focus group discussions: ‘‘If the bank were a book, its title would be the following: Lights, Shadows and Aurora.’’ Aurora like the dawn, aurora like the birth of the new BSI, ‘‘the birth of a new star’’, as was pointed out by the same employee. The choice of the thriller as a literary genre also originated from focus group members’ suggestions: a story with ‘‘an interwoven plot, often with moments of deadlock where it is unclear what the author is leading to’’ and where the mystery is revealed only at the end. As for the choice of the title, ‘‘Beyond Code,’’ this came from the online questionnaire, which was administered at the early stages of the process.

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It is easy to identify in this title a reference to Dan Brown’s famous novel, The Da Vinci Code – a complex thriller whose plot is based on the search for and interpretation of numerous mysterious clues. Retrospectively, it must be recognized that there is an underlying belief sustaining the enterprise autobiography approach: it is that organizations – the originators of symbols, values and models of social life – can be fruitfully involved in the analysis of their own culture through a participated representation of a period in their life. Through this collective narrative experience, organizations are stimulated to reﬂect, to communicate and to gain higher effectiveness, on reading their past, their present and also their future. With this methodology, each organization is involved in the dialectic development of a meaningful value system, crucial for deﬁning their own new distinctive business and leadership models, consistent with the history and the ambitions of the enterprise. Moreover, in the story resulting from the above intervention, we can trace clear symbolic references to the experiences and identities of the two banks: for example, Aurora’s cat, a pet that the BSI collaborators frequently indicate as a representative of their bank, or the images on the medallion which the protagonist inherited from her mother, who was an employee of the Banca del Gottardo. There are also other recurrent elements, those which refer to the interest and commitment on the part of both the BSI and the Banca del Gottardo towards the arts and culture. It was indeed this commitment that emerged in the focus groups as one of the principal reasons for satisfaction among staff from both banks: I’m satisﬁed with the bank’s image, it is always attentive towards art and culture. It’s a bank that is concerned with art and music.

Aurora herself is moreover the daughter of a performing artist: an orchestra conductor, who ﬁrst concerned himself with his daughter’s musical education (he explains to her that ‘‘the music emanating from a violin, even before being produced by the instrument itself, comes from the wood it is made of ’’). This now helps her, although she is unaware of it, to untangle herself from the threads of the enigma just as the plot thickens. The artistic references – ﬁgurative, literary and musical – have the purpose of showing Aurora what path to follow, so that she will reach the place where the mystery will be solved: the vault. Aurora will have the possibility to see the vaults of both banks and will be able to ascertain that inside both there are ‘‘treasures’’ that will go to the ‘‘other’’ bank.

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The enterprise autobiography of BSI, which was developed and realized during the early stages of a relatively important acquisition, has become a professionally useful and intellectually rich route for understanding the past and for writing the future of the enterprise. It has certainly increased the capacity and the interest, within the newly formed BSI organization, to share, comprehend, develop and manage their own key values. The experience in BSI is obviously stimulating further applications and progresses of this methodology to make it applicable in many other contexts where collective exploration, representation and shaping of organizational cultures are required. A number of questions remain open, among the group of researchers that worked with us in the project at BSI. A key area of concern is whether this approach can be extended to different organizations and to different contexts. Would a company less sensitive to art respond or even consider the possibility of preparing and/or accompanying an M&A with a process like the one we followed in BSI? Would an endeavour in a different sector, with higher number of blue-collar workers, accept and/or get equally involved in a process with such a level of sophistication? It is difﬁcult to answer these questions, since no evidence has been speciﬁcally collected in this respect. We have nevertheless gathered some relevant data, during the 9 months of the project in BSI, that range from the clustering employees’ feedback to the records of their level of participation to the different stages of the process. These clearly indicate that while early phases were marked by high participation and active involvement from all employees (who enthusiastically responded to questionnaire, interviews, stories collection), the ﬁnal phase came as signiﬁcantly less engaging for employees with weaker academic background. In other words, when we moved from story collection and storytelling to story composition and writing, differences in background became somehow more evident. Most people in BSI, during interviews and focus groups activities, demonstrated a remarkable level of openness and willingness to tell their stories, but their engagement decreased when invited to read and write in the later stages of the activity. We referred such change in attitude to the fact that reading and particularly writing are still discriminating skills in our society and therefore they negatively impact on the participation of employees with poorer academic backgrounds. People who do not feel particularly at ease with reading and writing reasonably feel less capable and therefore participate less in situations where such skills become dominant. The above ﬁndings and considerations have stimulated the identiﬁcation of more immediate forms of communication to share the results of BSI autobiography with the entire organization. Among the very many hypotheses,

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the one that is presently under discussion and appears as the most likely to be implemented consists in the creation of an audio book: the ‘‘Beyond Code’’ voiced by a number of BSI employees volunteering to the task. This audio version – although initially not even planned – would bring the BSI autobiography back to storytelling, not only in its structure and its objectives, but also in its more immediate and accessible oral form. A latest addition to the methodology – although marginal – could in our view strengthen the overall approach and increase its extendibility to more variegated and possibly wider organizational contexts.

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TRANSITIONAL GOVERNANCE: A CRITICAL REVIEW OF IMPLICIT PROCESS ASSUMPTIONS Dries Faems and Anoop Madhok ABSTRACT Transitional governance trajectories – i.e. trajectories in which an established ﬁrm ﬁrst engages in equity collaboration with an entrepreneurial ﬁrm and subsequently acquires the entrepreneurial ﬁrm – are becoming an increasingly popular strategy for established ﬁrms to get access to novel and pioneering technologies. In this chapter, we critically assess the existing literature on transitional governance trajectories. In particular, we rely on insights from the existing alliance and acquisition literature to question three implicit assumptions (i.e. established partner is the dominant partner in transitional governance trajectories; established partner behaves as a passive ﬁnancial investor during preacquisition collaboration and post-acquisition integration is likely to proceed smoothly) that are applied by existing studies on transitional governance. On the basis of this critical assessment, we identify theoretical, methodological and managerial challenges for future research on transitional governance.

Advances in Mergers and Acquisitions, Volume 8, 61–78 Copyright r 2009 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1479-361X/doi:10.1108/S1479-361X(2009)0000008006

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INTRODUCTION In high-tech settings, technological innovation is seen as crucial for the longterm survival and growth of established ﬁrms (Baumol, 2002). At the same time, these ﬁrms increasingly realize that ‘not all of the smart people work for us, so we must ﬁnd and tap into the knowledge and expertise of bright individuals outside our company’ (Chesbrough, 2003, p. 38). Therefore, established ﬁrms rely more and more on entrepreneurial ﬁrms (i.e. high-tech SMEs, university spin-offs) to get access to novel and pioneering technologies. In line with this evolution, scholars (e.g. Hagedoorn & Duysters, 2002; Pisano, 1990; Williamson, 1991) have examined whether established ﬁrms should source technologies from entrepreneurial ﬁrms through collaboration or acquisition. Whereas these scholars traditionally framed collaboration and acquisition as two alternative governance strategies, Folta (1998) emphasized that these two governance strategies can also be combined in a more complementary way. He proposed the implementation of transitional governance trajectories where the established ﬁrm ﬁrst engages in collaboration (i.e. contractual collaboration, minority equity investment or joint venture) with the entrepreneurial ﬁrm before moving towards acquisition (Fig. 1). Within such transitional governance trajectories, the collaborative arrangement is used as a call-option to (1) postpone irreversible investments (i.e. acquisition of a technology) in case of extensive exogenous and endogenous uncertainty and (2) facilitate future growth in a particular technological domain after uncertainty has been reduced to acceptable levels. Building on the seminal paper of Folta (1998), other scholars (e.g. Chi, 2000; Folta & Miller, 2002; Leiblein & Miller, 2003; Santoro & McGill, 2005; Vassolo, Anand, & Folta, 2004) have further examined the transitional governance phenomenon. In this chapter, we conduct a critical review of these transitional governance studies. In the next section, we summarize the main ﬁndings of these studies, illuminating the structural emphasis of previous transitional governance research. Subsequently, we critically assess the implicit process assumptions of these existing transitional governance studies. In particular, we argue that existing transitional governance studies underestimate (1) the importance of the entrepreneurial ﬁrm in the negotiation processes that precede the transitional governance trajectory, (2) the importance of the established ﬁrm during the preacquisition collaboration stage of transitional governance trajectory and (3) the complexity of the post-acquisition integration stage of the transitional governance trajectory. Finally, we discuss the main theoretical, methodological and managerial implications of our critical literature review.

Negotiation stage

Fig. 1.

Pre-acquisition collaboration stage

Collaborative governance mode (i.e. contractual alliance, minority equity alliance, joint venture)

Post-acquisition integration stage

Integrative governance mode (i.e. acquisition)

Exercise Decision Point

Transitional Governance Trajectories.

Initiation Decision Point

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TRANSITIONAL GOVERNANCE: A STATE OF THE ART Real Options Theory and Transitional Governance Inspired by the work on ﬁnancial options (e.g. Black & Scholes, 1973; Merton, 1973), real options theory has emerged as an alternative approach for evaluating investment opportunities in uncertain environments (Li, James, Madhaven, & Mahoney, 2007). Real options represent a ﬁrm’s investment in physical or human assets, which provide the ﬁrm the opportunity to respond to future events in a contingent fashion (Reuer & Tong, 2005, p. 405). They provide the ﬁrm the right, but not the obligation, to undertake some future speciﬁed action, enabling it to defer irreversible investments while claiming upside growth opportunities (Kogut, 1991; McGrath, 1997; Tong & Reuer, 2007). The appeal of real options theory lies in its dynamic perspective on investment decisions. In contrast with traditional investment theories, it recognizes the value of being able to ﬂexibly adapt investment plans conditional upon the arrival of new information (Leiblein, 2003; Trigeorgis, 1998). In the strategy and management literature, scholars have started to apply real options theory to better understand phenomenon such as managing human assets (Bhattacharya & Wright, 2005; Foote & Folta, 2002), technology positioning investments (Coldrick, Longhurst, Ivey, & Hannis, 2005; McGrath, 1997; Perlitz, Peske, & Schrank, 2002; Wu & Ong, 2008), market entry decisions (O’Brien, Folta & Johnson, 2003; Kulatilaka & Perotti, 1998; Miller & Folta, 2002) and the design of international joint ventures (Chi & McGuire, 1996; Kogut, 1991; Reuer & Tong, 2005; Tong, Reuer, & Peng, 2008). Folta (1998) ﬁrst extended real options theory to the external technology sourcing domain. In his paper, Folta (1998) argued that established ﬁrms face a signiﬁcant trade-off between administrative control and commitment when making governance decisions regarding the external sourcing of technologies from entrepreneurial ﬁrms. In particular, ‘while integration may provide superior administrative control of R&D activities, there may be conditions where the beneﬁts associated with acquisition are offset by the opportunity cost of committing aggressively to a technology with an uncertain future value’ (Folta, 1998, p. 1010). To address this trade-off, Folta (1998) proposed the implementation of transitional governance trajectories. In such a trajectory, the established and entrepreneurial ﬁrm ﬁrst engages in a collaborative agreement such as a contractual alliance, minority equity

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investment and joint venture.1 Within this kind of collaborative agreements, contractual clauses (i.e. right to buy equity; right of ﬁrst refusal) can be negotiated, providing a right, but not an obligation to the established ﬁrm to purchase the entrepreneurial ﬁrm and its technology (Folta & Leiblein, 1994).This allows established ﬁrms to postpone making irreversible commitments (i.e. acquire the entrepreneurial ﬁrm and its technology) until the technology’s value is more certain and positive. In sum, transitional governance is an external technology sourcing strategy that allows addressing the control commitment trade-off in a dynamic way. Within transitional governance trajectories, collaborative arrangements are applied as call-options to postpone irreversible commitments in case of extensive exogenous and endogenous uncertainty and facilitate further growth after uncertainty has been reduced to acceptable levels.

Initiation and Exercise Decision Points in Transitional Governance Trajectories Integrating insights from transaction-cost theory, resource-based theory and game theory into the real options framework, several scholars identiﬁed a number of structural conditions on ﬁrm, relationship and industry level that inﬂuence the level of exogenous and/or endogenous uncertainty, which inturn determine the willingness to initiate transitional governance trajectories. Relying on a sample of 402 transactions in the biotechnology sector, Folta (1998) found strong support that established ﬁrms are likely to prefer such a transitional governance trajectory above outright acquisition of an entrepreneurial ﬁrm when (1) the primary business operations of the involved partners are dissimilar, (2) the technical subﬁeld is characterized by extensive growth opportunities, (3) technological uncertainty is high and (4) the number of technological rivals is low. Other scholars (Santoro & McGill, 2005; van de Vrande, Lemmens, & Vanhaverbeke, 2006) have come to similar ﬁndings, showing that, in case of extensive exogenous and/or endogenous uncertainty, established ﬁrms prefer to engage in transitional governance modes. Other studies have examined when established ﬁrms are likely to exercise the option (i.e. acquire the other partner) in transitional governance trajectories. Folta and Miller (2002) provided evidence that, in transitional governance trajectories, the timing of exercising the option is inﬂuenced by (1) the valuation of the partner, (2) technological uncertainty, (3) the

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number of equity partners associated with the target ﬁrm and (4) the number of technological rivals. Other scholars (i.e. Kumar, 2005; Warner, Fairbank, & Steensma, 2006) have come to similar ﬁndings. In addition, Vassolo et al. (2004) showed that the timing or likelihood of exercising one single option is inﬂuenced by the presence of correlated options in the ﬁrm’s technological options portfolio. In sum, existing studies on transitional governance have provided valuable insights in the structural conditions that inﬂuence two particular decision moments in the transitional governance trajectory: (1) the decision to initiate an equity collaboration (i.e. initiation decision) and (2) the decision to shift towards acquisition (i.e. exercising decision). However, because of the focus on these two particular decision moments, they largely ignore the negotiation processes before the initiation decision point, the collaboration processes between the initiation and exercise decision points and the integration processes after the exercise decision point. In the next section, we focus on these processes, critically assessing the implicit process assumptions of existing transitional governance studies.

TRANSITIONAL GOVERNANCE PROCESSES Negotiation Processes before the Initiation of Transitional Governance Existing transitional governance studies provide valuable insights into the motivations of the established partner to engage in transitional governance. At the same time, though, they remain relatively silent on why the entrepreneurial partner is willing to adopt this particular governance mode. Actually, these studies seem to assume that the established ﬁrm is the powerful, resource-rich partner that can impose its preferred governance structure on the resource poor and passive entrepreneurial ﬁrm. However, recent studies on governance phenomena such as corporate investment relationships and technology acquisitions seem to question this assumption. Katila, Rosenberger, and Eisenhardt (2008, p. 325), for instance, argue that ‘highly desirable new ﬁrms may actually be the more powerful partner and dominant decision maker in corporate investment relationships’. In the setting of technology acquisitions, Graebner and Eisenhardt (2004) conclude that entrepreneurial ﬁrms can often choose when and to whom to sell and may actively pursue potential buyers (i.e. established ﬁrms), rather than passively wait. In other words, indications are present that entrepreneurial partners sometimes have a dominant

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bargaining power position during negotiation processes with established ﬁrms. Several alliance studies (Faems, Janssens, Madhok, & Van Looy, 2008; Klein Woolthuis, Hillebrand, & Nooteboom, 2005; Makhija & Ganesh, 1997) indicate that such dominant bargaining power position might substantially inﬂuence governance decisions such as (1) the choice between equity and non-equity structures and (2) the complexity and content of the alliance contract. In a similar vein, we expect that, in the setting of transitional governance trajectories, the relative bargaining power position of the entrepreneurial partner might inﬂuence substantially the decision to initiate a transitional governance trajectory. Focusing on the established partner, existing studies also seem to assume that the established partner is the main initiator of transitional governance trajectories. In particular, they argue that established ﬁrms rely on transitional governance to postpone irreversible commitments until uncertainty has substantially decreased. Faems’ (2006) recent multiple case study on R&D alliances between established and entrepreneurial ﬁrms in the advanced manufacturing industry, however, suggests that entrepreneurial ﬁrms might be the driving force behind transitional governance trajectories. In this study, Faems (2006) describes a case where the established ﬁrm immediately wanted to acquire the entrepreneurial ﬁrm because the technology of the entrepreneurial ﬁrm was of high strategic relevance for the established ﬁrm. The management of the entrepreneurial ﬁrm, however, turned out to be unwilling to immediately sell their company. Instead, they insisted on engaging in a pre-acquisition collaboration agreement to evaluate the good intentions of the established partner. In particular, the entrepreneurial partner wanted to use pre-acquisition collaboration as a stage to ﬁnd out whether the established partner was really committed to further apply and develop the technology of the entrepreneurial ﬁrm. In the end, the established and entrepreneurial ﬁrm agreed to ﬁrst engage in a collaborative agreement (i.e. minority equity alliance). In addition, it was agreed that, after two years, the entrepreneurial partner had the right, but not the obligation, to sell its remaining shares to the established partners. In other words, whereas existing transitional governance studies refer to pre-acquisition collaboration as a call-option to postpone buying the entrepreneurial ﬁrm until the established ﬁrm has received sufﬁcient evidence of the value of the entrepreneurial partner’s technology, we argue that pre-acquisition collaboration can also function as a putoption to postpone selling the entrepreneurial ﬁrm until the entrepreneurial ﬁrm has received sufﬁcient evidence of the established partner’s good intentions.

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Pre-Acquisition Collaboration Processes With a focus on the initiation and exercise decision points in transitional governance trajectories, existing transitional governance studies have largely ignored the collaboration processes between these two decision points. Adopting insights from real options theory (e.g. McGrath, 1997), these studies seem to assume that, during the pre-acquisition collaboration stage, the established ﬁrm mainly behaves as a passive ﬁnancial investor that limits its active involvement to monitor the ongoing activities at the entrepreneurial ﬁrm. On the basis of these monitoring activities, the established ﬁrm can reduce information asymmetries, update its investments plans and make an informed decision on whether or not to acquire the entrepreneurial ﬁrm (Leiblein, 2003; Reuer & Ragozzino, 2008). Existing studies on interﬁrm relationships, however, suggest that, within collaborative governance modes, the established ﬁrm might actually be more actively involved. Relying on transaction value theory (e.g. Zajac & Olsen, 1993), these studies provide evidence that established ﬁrms can make ‘relational investments’ such as initiating boundary spanning activities (Ireland, Hitt, & Vaidyanath, 2002), investing in partner-speciﬁc equipment or production capacities (Dyer, 1997; Faems, Janssens, & Van Looy, 2007) and/or broadening the alliance interface (Doz, 1996). Moreover, such relational investment can substantially inﬂuence value realization processes within interﬁrm relationships. Exploring automotive transaction relationships in the United States and Japan, Dyer (1997), for instance, comes to the conclusion that relational investments such as site-speciﬁc plants and customized equipment allow for positive trust dynamics, which reduce transaction costs in the long term. In a similar vein, Faems et al. (2007) show that investing in a joint technological platform increases the ability to absorb knowledge in R&D alliances, which stimulates bilateral knowledge transfer. In sum, whereas existing transitional governance studies allot a quite passive role to the established ﬁrm during the pre-acquisition collaboration stage, transaction value scholars promote a more active role for the established ﬁrm. At the same time, though, it needs to be noticed that transaction value scholars have mainly examined interﬁrm settings (i.e. buyer–supplier relationships, joint development alliances) where partners aimed to achieve long-term collaboration instead of moving towards acquisition as in transitional governance trajectories. Because of this different time horizon, the incentives of the established partner to initiate relational investments might be substantially different in transitional governance trajectories. A systematic assessment of the inducement of

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established partners to conduct relational investments during the preacquisition collaboration stage of transitional governance trajectories therefore seems to be necessary.

Post-Acquisition Integration Processes Whereas existing studies on transitional governance pay a lot of attention to when a shift is made from pre-acquisition collaboration to post-acquisition integration, they seem less interested in what happens after the entrepreneurial ﬁrm is acquired. In line with transaction-cost theorists (e.g. Pisano, 1990; Williamson, 1991), these studies seem to assume that the post-acquisition integration process will proceed ﬂuently because the established ﬁrm can then rely on additional hierarchical governance mechanisms, minimizing the risk of opportunistic behavior and maximizing unity of command. In contrast, numerous studies on technology acquisitions (e.g. Birkinshaw, Bresman, & Hakanson, 2000; Chakrabarti & Souder, 1987; Haspeslagh & Jemison, 1991; Puranam, Singh, & Zollo, 2006; Ranft & Lord, 2002) suggest that, when an established ﬁrm acquires a high-tech entrepreneurial ﬁrm, the post-acquisition integration process is likely to be problematic as it triggers a fundamental organizational dilemma between coordination and autonomy. After the acquisition, the established partner needs to ensure that integration efforts are made that allow exploiting the potential synergies between both partners. In particular, new coordination mechanisms need to be implemented that allow linking the technological capabilities of the acquired ﬁrm to its own complementary manufacturing, marketing and distribution capabilities (Puranam et al., 2006). At the same time, though, such additional integration efforts may create resentment and dissatisfaction among the acquired ﬁrms’ core employees (Ranft & Lord, 2002). This may ﬁnally result in core employees leaving the ﬁrm, causing a huge loss of fundamental knowledge (Chaudhuri & Tabrizi, 1999). According to several scholars (e.g. Haspeslagh & Jemison, 1991; Ranft & Lord, 2002), such loss of knowledge can only be avoided by giving the acquired ﬁrm substantial autonomy after the acquisition. In other words, whereas the realization of synergies asks for substantial coordination among the acquired and acquiring ﬁrm, the preservation of knowledge demands substantial autonomy for the acquired ﬁrm. In sum, although transitional governance scholars assume that the postacquisition integration process is likely to proceed smoothly, studies on technology acquisitions emphasize that the integration of the entrepreneurial

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ﬁrm into the established ﬁrm is a fragile and time-consuming process. At the same time, it needs to be stressed that existing studies on technology acquisitions apply a quite atomistic perspective (Granovetter, 1985), ignoring the possibility that acquired ﬁrm and acquiring ﬁrm share a history of prior collaboration. Relying on insights from social exchange theory, alliance scholars (e.g. Gulati, 1995; Faems et al., 2008; Mayer & Argyres, 2004) have shown that relational processes (i.e. trust-building dynamics, behavioral learning processes) during previous alliance transactions can substantially inﬂuence the governance of subsequent alliance transactions. Gulati (1995), for instance, argued that positive trust dynamics in previous transactions reduces the need for formal control mechanisms in subsequent alliance transactions. In a case study of two sequential R&D alliances between the same pair of partners, Faems et al. (2008) observed that behavioral learning processes during a ﬁrst alliance transaction gave rise to a substantially different interface structure in a second alliance transaction between the same pair of ﬁrms. Subsequently, this alternative interface structure signiﬁcantly improved the intensity and quality of interaction between the two partners. In a similar vein, we expect that the presence of pre-acquisition collaboration might substantially inﬂuence the ability to address the control–autonomy tension during the post-acquisition integration stage in transitional governance trajectories.

TRANSITIONAL GOVERNANCE: A FUTURE RESEARCH AGENDA In this section, we formulate a future research agenda for transitional governance scholars. In particular, we point to the theoretical, methodological and managerial challenges that need to be addressed in order to come to a more ﬁne-grained understanding of this phenomenon. Theoretical Challenges Examining the existing studies on transitional governance, we argue that this literature has been dominated by a structural perspective. Relying on insights from real options theory (e.g. McGrath, 1997) and transaction cost theory (e.g. Williamson, 1985), this perspective has focused on identifying structural conditions on the industry (e.g. technological uncertainty), ﬁrm (e.g. valuation of the entrepreneurial ﬁrm) and/or relationship level (e.g.

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knowledge overlap between target and established ﬁrm) that inﬂuence two particular decision moments in the transitional governance trajectory: (1) the decision to initiate an equity collaboration (i.e. initiation decision) and (2) the decision to shift towards acquisition (i.e. exercising decision). We, however, emphasize the need to complement this structural perspective with a process perspective on transitional governance. Relying on insights from transaction value theory (e.g. Zajac & Olsen, 1993) and social exchange theory (e.g. Blau, 1964), this process perspective should focus on (1) the negotiation processes before the initiation decision, (2) the collaboration processes between the initiation and exercise decision point and (3) the integration processes after the exercise decision point. On the basis of our critical assessment of the implicit process assumptions of the structural perspective, we formulate the following research questions as potential starting points to contribute to building such a process perspective on transitional governance: Research Question 1: How do bargaining power dynamics during the negotiation process inﬂuence the initiation decision of transitional governance trajectories? Research Question 2: To what extent are established ﬁrms motivated to initiate relational investments during the pre-acquisition collaboration stage and how do these investments inﬂuence value realization processes during this stage? Research Question 3: How do relational processes (i.e. trust building dynamics, behavior learning processes) during the pre-acquisition collaboration stage inﬂuence the governance of the coordination– autonomy dilemma during the post-acquisition integration stage? We not only stress the need for building a process perspective on transitional governance, we also point to the need to combine and/or confront the structural and process perspectives on transitional governance. Folta (1998), for instance, provides evidence that, as the number of potential industry rivals increases, established ﬁrms have a greater tendency to prefer straightforward acquisition above a transitional governance mode. However, adopting a process perspective, we expect that, as the number of potential rivals increases, the bargaining power of the entrepreneurial ﬁrm strengthens as this ﬁrm faces multiple partnering opportunities. In these circumstances, it might be the case that the management of the entrepreneurial partner uses its increased bargaining power to impose the initiation of a pre-acquisition

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collaboration stage that allows them to postpone the full acquisition of their ﬁrm until they have received ﬁrst-hand evidence of the established partner’s good intentions. In sum, although the structural perspective argues that greater number of potential rivals increases the motivation of established partners to immediately acquire an entrepreneurial company, the process perspective seems to suggest that, in these circumstances, the entrepreneurial partner might use its increased bargaining power to impose a transitional governance trajectory. We therefore stress the need for future research that empirically assesses the opposing theoretical expectations of different perspectives on transitional governance.

Methodological Challenges Previous transitional governance studies are dominated by cross-sectional studies that exclusively collected responses from the established ﬁrm. We argue that, to build a process perspective on transitional governance, future research should deviate from this particular design in two fundamental ways. First, we emphasize the need for longitudinal case study research on transitional governance, as it allows to (1) answer ‘how’ questions about a contemporary set of events over which the investigator has little or no control (Parkhe, 1993; Yin, 1984) and (2) mobilize multiple observations on complex processes (Eisenhardt & Graebner, 2007; Parkhe, 1993). The process approach of the Minnesota Innovation Research Program (Van de Ven & Poole, 1990; Poole, Van de Ven, Dooley, & Holmes, 2000), which has been developed to systematically assess organizational change processes in innovation trajectories, might be a relevant methodological framework in this respect. This approach provides a structured framework to transform raw data into incidents and event sequences, which subsequently can be analysed to identify temporal relationships and patterns within and across different stages of transitional governance trajectories. Second, whereas previous transitional governance studies have conducted a unilateral assessment that focused on the established ﬁrm, we emphasize the need to conduct a bilateral assessment of transitional governance trajectories, collecting data from both the established and entrepreneurial ﬁrm. In this way, it should become possible to assess how the interaction between the intentions and motivations of the established and entrepreneurial partners drives the evolution of transitional governance trajectories.

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Managerial Challenges Applying a structural perspective, existing transitional governance studies seem to argue that the main challenge for managers is to collect information on industry, ﬁrm and relationship level conditions to make an adequate assessment of the level of exogenous and endogenous uncertainty. Subsequently, they need to make initiation and exercise decisions that correspond with these uncertainty levels. Adopting a process perspective, we point to a number of additional managerial challenges. Relying on insights from transaction value theory (e.g. Zajac & Olsen, 1993; Madhok & Tallman, 1998), we expect that established ﬁrms can make active interventions (i.e. initiating relational investments) during the pre-acquisition collaboration stage. However, the question remains how managers of established ﬁrms can successfully introduce such relational investments. During the pre-acquisition collaboration stage, the established ﬁrm does not have the necessary power to impose such relational investments on the entrepreneurial partner. In addition, it might be the case that the entrepreneurial partner is not really willing to allow for the introduction of such relational investments. After all, such investments might increase the ability of the established partner to swiftly learn about the core technological capabilities of the entrepreneurial partner, which in-turn increases the risk of learning races within the partnership (Alvarez & Barney, 2001, Faems et al., 2007). In other words, even when the established partner is willing to initiate relational investments during the pre-acquisition collaboration stage, its ability to do so might be restricted. Future research into how and under which conditions relational investments can be introduced during the pre-acquisition collaboration stage of transitional governance trajectories therefore seems to be necessary. A second important managerial challenge concerns the post-acquisition integration of the entrepreneurial ﬁrm. In the acquisition literature, several solutions have been provided to address the autonomy–control dilemma in post-acquisition integration processes. Conducting a multiple case study on biotech acquisitions, Schweizer (2005) suggests the relevance of a hybrid integration strategy that fully integrates the commercial activities of the acquired ﬁrm, whereas the technological activities of the acquired ﬁrm remain quite autonomous. Other scholars (i.e. Birkinshaw et al., 2000; Haspeslagh & Jemison, 1991) point to the relevance of implementing a sequential post-acquisition integration strategy to address the coordination– autonomy dilemma. In particular, they suggest that the acquiring ﬁrm should initially focus on human integration or ‘creation of positive attitudes

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towards the integration among employees on both sides’ (Birkinshaw et al., 2000, p. 400). During this ﬁrst stage, task integration or ‘the identiﬁcation and realization of operational synergies’ (Birkinshaw et al., 2000, p. 400) should remain limited to initiating efforts to achieve acceptable performance in the individual operating units. When human integration is achieved and the performance of the individual operating units has reached an acceptable level, the second stage of the post-acquisition integration trajectory can be initiated. At this stage, more substantial task integration efforts are initiated to allow for achieving operational synergies across the individual operating units. The shared identity and mutual respect that have emerged during the ﬁrst stage provide the relational foundation for such closer task integration. It needs to be stressed that these previous acquisition studies have focused on acquisitions in which a history of previous collaboration was absent. We expect that, in transitional governance trajectories, where partners share a history of pre-acquisition collaboration, the post-acquisition integration process might trigger particular managerial challenges. On the one hand, we think that the pre-acquisition collaboration stage actually provides the opportunity to already start human integration before the actual acquisition. In this way, substantial task integration could be initiated quickly after the acquisition. In other words, the presence of pre-acquisition collaboration might substantially speed up the post-acquisition integration process. On the other hand, we also see some potential problems with respect to postacquisition integration in the presence of pre-acquisition collaboration. During the pre-acquisition collaboration stage, interﬁrm routines or ‘stable patterns of behavior aimed at interaction and collaboration across organizations’ (Zollo, Reuer, & Singh, 2002, p. 709) are likely to emerge. Examples of such routines are knowledge-sharing routines (Dyer & Singh, 1998) and joint problem-solving routines (Uzzi, 1997). After the acquisition, however, these interﬁrm routines will be confronted with the intraﬁrm routines of the established ﬁrm. We expect that this confrontation might trigger additional problems that might substantially complicate the postacquisition integration process. These issues again point to the need for future research on how post-acquisition integration processes evolve when a history of prior collaboration is present.

CONCLUSIONS In this chapter, we have provided a critical literature review of the existing research on transitional governance. On the basis of this review, we

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emphasize the need to complement the existing structural perspective with a process perspective that focuses attention on the negotiation, collaboration and integration processes in transitional governance processes. To do so, alternative methodological designs need to be applied that allow for a longitudinal and bilateral assessment of transitional governance. Such research can provide valuable insights in managerial challenges such as (1) how to introduce relational investments during the pre-acquisition collaboration stage and (2) how to manage the post-acquisition integration stage when partners share a history of prior collaboration. We hope that our insights and suggestions for future research might stimulate other scholars to examine the transitional governance phenomenon in a wide variety of organizational settings.

NOTE 1. Folta and Leiblein (1994) argued that equity collaboration (i.e. minority equity investments and joint ventures) should be preferred above non-equity collaboration (i.e. contractual alliances) as equity collaboration is likely to show signiﬁcantly stronger option characteristics. As a result, existing transitional governance studies have mainly focused on equity collaboration.

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COMPUTATIONALLY MODELING THE EFFECT OF ORGANIZATIONAL COMPLEXITY ON POST-MERGER INTEGRATION$ Terrill L. Frantz and Kathleen M. Carley ABSTRACT We apply a contemporary approach to study the effect of organizational complexity on post-merger integration. A computational, virtual experiment was carried out to determine how the level of structural complexity, a characteristic of all formal organizations, impacts the dynamics of organization performance during the post-merger integration period. We found that performance during this period is affected by the preexisting complexities of the two merging organizations; surprisingly, the organizations’ size was found to be only a marginally relevant factor, $

This work is part of the Dynamics Networks project at the center for Computational Analysis of Social and Organizational Systems (CASOS) of the School of Computer Science (SCS) at Carnegie Mellon University (CMU). The views and proposal contained in this document are those of the authors and should not be interpreted as representing the ofﬁcial policies, either expressed or implied, of the Ofﬁce of Naval Research, the Air Force Ofﬁce of Scientiﬁc Research, the Army Research Institute, the Army Research Lab, the Army Research Ofﬁce, the National Science Foundation, or the U.S. Government.

Advances in Mergers and Acquisitions, Volume 8, 79–101 Copyright r 2009 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1479-361X/doi:10.1108/S1479-361X(2009)0000008007

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instead, the number of work groups had a greater consequence. Moreover, we found that the homogeneity tendencies of the actors may be the source of an upper constraint on the merged organization’s performance. Consistent to these ﬁndings, we develop hypotheses for later empirical study. Broadly, this chapter puts forth computational modeling as a vital methodology for advancing mergers and acquisitions research; in addition, this chapter uncovers previously unpronounced, phenomenological discoveries that were found using this promising approach. Throughout this chapter, we endeavor to advance the broad use of computational modeling into the fore of leading-edge post-merger integration and related research and practice.

INTRODUCTION We advance merger and acquisition scholarship and, speciﬁcally, post-merger integration from the organizational behavior perspective, by presenting a chapter that is intended to be both somewhat educational about computational modeling and simultaneously contributing to scholarly knowledge. First, we present computational modeling as a contemporary approach for research into post-merger integration dynamics. We then show, through an example, how computational modeling can lead to the discovery of rich, innovative and nascent theory on post-merger dynamics and performance, by reporting on an experiment that we conducted using this methodology. This chapter is presented within the broad context of addressing a perennial question pondered by integration managers: ‘‘how will the organization’s performance be impacted, now that two organizations must operate as one?’’ In managers’ contemplation of this basic question, we posit that managers are at ﬁrst focused on the organizational preconditions of the merger as a baseline scenario, before considering the design and evaluation of possible integration strategies. Moreover, managers often have minimal information about one organization, and sometimes both, which can be severely limited to knowing only the number organizational actors and perhaps some indication of the organizational, work-unit structure. These are basic and immediate questions, with highly complex underpinnings, that are too often constrained by the managers having only minimal information. In the text that follows, we give explanation to computational modeling, and we elucidate an inﬂuential model of organization behavior that is currently used in our research; then, we present how this model can be

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applied speciﬁcally to post-merger integration research. Next, we describe a simple experiment designed to explore post-merger integration, which is derived from the baseline question described earlier. After which, we present and discuss the thought-provoking results of the experiment. We end this chapter by offering general limitations, future directions, and ﬁnal comments.

COMPUTATIONAL MODELING Computational modeling, coupled with its adjunct, computer simulation, has made tremendous progress in recent years toward becoming a recognized, established, and valued approach to organization science research. This advance has been facilitated by inexpensive computing power and its adoption in numerous other ﬁelds, for example, biology and economics. Notably, the sub-ﬁeld of Computation Organization Theory has been established by organizational researchers to label this quantitatively rich perspective. There have been several specialized books published, which center on computationally modeling organizations (e.g., Carley & Prietula, 1994; Ilgen & Hulin, 2000; Prietula, Carley, & Gasser, 1998). Recently, articles have even appeared in the established organization research publications, such as those of The Academy of Management and INFORMS. The recent advances in generalized computing technology have made possible computationally oriented researchers’ long yearning to bring their ideas alive in the form of simulating the dynamics of human and organization behavior to a degree not possible before; today, we have full-featured computational laboratories (cf., Burton, 2003) within easy reach of any researcher. In the 1950s, mathematical models were certainly being developed; however, the problems that were explored were limited to those that were tractable with a slide rule. Today, software platforms and tools are freely available and are often easy to use. This has made computational modeling a feasible option for many researchers, even those with a minimal amount of technology familiarity. Moreover, advances in technology have provided computational organization theorists with the tools to enable them to operationalize and combine the framework of agent-based modeling with the methods from network science. The combination of these two powerful approaches is expected to take hold with an even broader group of organization researchers as the technology further simpliﬁes and its power increases. Computational modeling involves representing a model of a dynamic phenomenon as a collection of mathematical equations or algorithms.

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Attempts to computationally model human and organizational behavior can be made to gain richer and deeper insight and to provide forecasts of future dynamics or outcomes of a real organization. Models of this type are essential to represent complex systems that are omnipresent in the social and organizational world. We can represent and explore these nonlinear behaviors in virtual worlds, instead of putting at risk human and organizational subjects. The ability to represent the various dimensions of a phenomenon in mathematical or algorithmic terms provides researchers with both a deeper understanding of the phenomenon, the underpinnings of the mechanics, and an opportunity to use the computational model as a stand-in proxy for the real thing. Computational modeling allows the researcher to systematically design and minutely control experiments, whereas in the human laboratory and case studies, the researcher usually has little control over important variables. These beneﬁts are compounded in the course of post-merger integration research. It is an extremely lucky integration researcher to happen to conduct a merger-speciﬁc survey in an organization prior to any such announcement of a merger (if not illegal to act in this manner on insider information). Many computational models are cross-bread; they employ multiple modeling techniques to get the virtual agents in the multi-agent system to better represent real organizational agents (Ashworth & Carley, 2007). These models are used to study learning curves (Fioretti, 2007), design (Carley, 1991a), mass communication (Kaufer & Carley, 1993), adaptation and performance (Carley & Lin, 1997), collaboration (Saoud & Mark, 2007), and organizational culture (Canessa & Riolo, 2003). Several computational models of organization have been developed and encoded into software, including well-known models such as the Garbage Can Model, Plural-Soar, Team-Soar, DYCORP, and ORGAHEAD. The number and richness of these models has steadily increased (Ashworth & Carley, 2004, 2007). Herein, we describe and use Construct to look at post-merger behavior. Construct is a multi-agent dynamic network model that has been used extensively for theory generation and testing, particularly in realms looking at the impact of communications among a social network within an organization.

The Construct Model of Social Behavior Construct (Carley, 1991b) is a description of an agent-based computational model of human social behavior. It is grounded on established social theory,

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and it models individual human–agents interacting and operating within a task-performing organization. The purpose of Construct is to simulate the social dynamics of individuals within a goal-seeking organization, so that organization-level outcomes can be studied (Schreiber & Carley, 2004a). Construct reﬂects the notion that human–agent’s behavior is inﬂuenced by external factors (other agents and their environment) and that the external factors are, in-turn, affected by the agent. Agents repeatedly interact with the environment and socialize with other agents; subsequently, they integrate feedback resulting from their decisions and the actions taken by the other agents. Construct models human groups and organizations as agent-based complex systems. The independent, individual interactions result in considerable non-linearity in the distribution of knowledge, group action, overall adaptability, and other organization-level outcomes. Construct provides a robust representation of agent behavior within a group that has its roots in symbolic interactionism (Blumer, 1969), structural differentiation theory (Blau, 1970), and structural interactionism (Stryker, 1980). These theories are combined into a social modeling theory called Constructuralism (Carley, 1991b), which is embodied in the Construct model. It incorporates a model of decentralized information processing (Van Zandt, 1997, 1999). Among its many uses, for example, Construct can be used to simulate the diffusion of beliefs and ideas through groups as constrained and enabled by the social structure of the group and the communications technology available. The model has been used extensively for analysis in industry, non-proﬁts, emergency response, higher education, military, and government. The model has been scientiﬁcally validated numerous times (Carley & Hill, 2001; Schreiber & Carley, 2004b, 2007) and also been compared and validated against empirical datasets such as Kapferer’s Zambia Tailor Shop data (Carley, 1990). The Construct model that has been used extensively for social theory generation and testing over the past decade continues to evolve and be reﬁned. Agents in Construct are modeled as information processors. The Carnegie School of Organizational Theory (Simon, 1957; March & Simon, 1958; Cyert & March, 1963) proposed an information-processing perspective in which individual decisions, thus behavior, could be explained in terms of what information was available to whom, the cognitive limits to information processing abilities, organizational (social and cultural) limits to access to information, the quality of the information, and so forth. Simon (1945), March and Simon (1958), and Cyert and March (1963) examined the decision-making components of group action. According to the information-processing perspective of organization theory (March & Simon, 1958;

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Cyert & March, 1963; Galbraith, 1973, 1977), individual behavior and organizational decisions can be explained in terms of what information is available to whom, who holds speciﬁc information, and what the person’s cognitive limits are, which can ultimately result in complex, collective decisions (Iwanaga & Namatame, 2002). In a group, agents interact as a matter of routine, and in the course of their interaction, they exchange information; that is to say that they exchange knowledge among one another as they interact, either through person-to-person communications or through various forms of broadcast media (Dooley & Corman, 2004) (Figs. 1–3). This information-processing perspective is coupled with that of the socialinformation-processing theorists (Salancik & Pfeffer, 1978; Rice & Aydin, 1991). What knowledge a person has is dependent on what information they have access to through their social network. Construct recognizes that people interact within a dynamic, social-based organizational network and are information-seeking agents. They interact through complex discourse

Fig. 1.

Fig. 2.

Before the Social Interaction Taking Place.

Social Interaction Involves Providing Knowledge to Another: Person Ab Provides Fact K3 to Person Aa.

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After the Social Interaction Taking Place.

(Dooley, Corman, McPhee, & Kuhn, 2003) to exchange information and seek out others who have knowledge similar to the knowledge they hold.

Merging Virtual Organizations In our model of merging organizations, we represent each organization separately as a multi-layered, interconnected network consisting of actors, tasks, and knowledge. Actors are assigned to tasks; these assignments are represented as an actor–task network. A network link is present in between the actor and task nodes if the actor is assigned to work on the task. No link is present if there is no actor–task assignment. Moreover, tasks have knowledge requirements. Each task has knowledge requirements that are represented in a separate task–knowledge network form. Finally, actors have knowledge contained in their mental models of how to navigate in a speciﬁc work environment and perform tasks (see McGrath, 1986). This attainment of new knowledge is represented by the addition as a network link between actor and a knowledge concept node. Actors have knowledge. Fig. 4 shows a node-link diagram if this intertwined and multilayered meta-network of relationships between actor, task, and knowledge reduced for illustrating the perspective of a single actor. If an actor is assigned to a speciﬁc task, they will perform that task only to the extent that the knowledge they have coincides with the knowledge speciﬁcally required for that task. To merge two of these organizations (Fig. 5), we pair the same tasks from each organization so that each, single task now has workers from both organizations assigned to that task (Fig. 6). This results in at least two actors performing a task, and they are from previously different organizations. However, in the post-merger situation, the knowledge necessary to perform

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Task Knowledge powered by ORA, CASOS Center @ CMU

Fig. 4. Pre-Merger Agent–Task–Knowledge Meta-Network Representation for a Single Actor in an Organization. Legend: Squares Are Tasks, Circles Are Knowledge.

gPo01_aPtA02_aPtB0.5

powered by ORA, CASOS Center @ CMU

Task

Knowledge

Fig. 5. Pre-Merger Agent–Task–Knowledge Meta-Network Representation for a Two Actors in an Organization. Legend: Squares Are Tasks, Circles Are Knowledge.

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gPo01_aPtA02_aPtB0.5

Task Knowledge

powered by ORA, CASOS Center @ CMU

Fig. 6. Post-Merger Agent–Task–Knowledge Meta-Network Representation for the Combined Organization at the Point of the Consummation of the Merger (One Work Unit Formed from Two Previously Separate Organizations: One with One Worker, the Other with Two Workers. The Worker in the Middle is the Worker from the Previous 1-Worker Organization. Legend: Squares Are Tasks, Circles Are Knowledge.

the task has been changed to reﬂect the changes in the working mental models and tactical skills necessary to perform a task in the post-merger organization. At the consummation of the merger, we combine, for the same merged task, the knowledge concepts that were necessary from each of the two organizations and make the combined set of knowledge the new knowledge requirement for that task. This will result in any worker assigned to that task, instantly being handicapped, knowledge-wise, for performing that task. This occurs for all tasks and all workers. This models the changes and adjustments to workers’ mental models that are necessary to function and perform jointly in the new organization. This situates actors into collectively working on a task where each actor begins with only the knowledge they carry forward from their original host organization. For the team to perform well, all the actors in the merged organization team must exchange information with one another to adjust their knowledge and mental models. The simulation begins at the point of the merger

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being consummated; thus, it starts at the point in which the teams are ﬁrst combined.

ORGANIZATIONAL COMPLEXITY The complexity of any social system can be roughly evaluated by counting the number of parts making up the system and determining the number of relationships among those parts necessary for the system to function (Luhmann, 1995). Speciﬁc to organizations, complexity has been studied in various aspects of the organizational literature (e.g., Ashby, 1956; Bushman, Chen, Engel, & Smith, 2004; Hazy, 2008; Herbsleb & Grinter, 1998; Simon, 1962; Thompson, 1967). Complexity in the context of an organization encompasses several related and ever more speciﬁc constructs (cf. Henrickson, 2008). Of immediate consequence to this chapter are the constructs of organizational complexity and team complexity (TC), which we consider simply as the number of sub-entities encompassed by the host structure, that is, the number of sub-units, or more practically, the number of work teams in an organization, and the number of actors in each of these sub-units (cf. Dooley, 2002). For an organization, the number of elements such as actors, tasks, and knowledge is indicative of a greater connective capacity and thus an expectation of a greater number of interconnected parts (Luhmann, 1995) and therefore increases the complexity in the basic operational aspects of the organization. This set of relationship among the entities can be conceived as social network, or more completely a dynamic network, consisting of interconnected socio-technical parts arising from the numerous types of relationships. We loosely adopt the idea of Dooley’s (2002) quantitative measure of organization complexity (OC), that is, count the number of different job categories, but instead we count the number of work groups, or teams; we associate a work group as representing a job category, speciﬁcally a team focus on completing work task(s) that are unique to itself. No other team in the organization works on a same task. This is similar in kind to the notion of functional differentiation (Luhmann, 1995) or the division of labor (Menes, 2008). We combine organizational and team complexity into a broader term, structural complexity, as has been done in other organizational complexity research (e.g., Damanpour, 1996). Moreover, each work unit also have its own characteristically complexity. Small-group researchers have converged on a view of teams as being complex, adaptive, dynamic systems (McGrath, Arrow, & Bardahl, 2000). They interact internally

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among their members and with members of other teams; moreover, they do so in a probabilistic manner.

THE EFFECT OF ORGANIZATIONAL COMPLEXITY ON POST-MERGER INTEGRATION In this section,1 we report on a virtual experiment that implements the Construct model. We deﬁne OC as a construct that can be partially manifested by the number of sub-parts of an organization, which implies the amount of complex interactions that are designed into the organizational structure. The number of sub-parts in the organization is manifest as the number of work groups in each organization. Unlike most other variables in this experiment, the teams/organization variable is the same for Alpha and Beta; structural similarity has been found to be relevant in intra-ﬁrm knowledge transfer (Mowery, Oxley, & Silverman, 1996), and this identity feature is necessary because the integration of NewCo is consummated at the team level. This is to say that at the time of the merger event, the teams in Alpha are paired 1-to-1 with teams in Beta, resulting in the same teams in NewCo, just with more members. This approach of matching teams is consistent with a horizontal-type merger. Moreover, we assume that Alpha and Beta will be structured somewhat similarly as organization design theory suggests that organizations are structured to best thrive in their environment and two competitors, therefore, compete within the same environment. The structural design of the organization, in this case, how many sub-units in the organization, is central to the performance of the organization (Burton & Obel, 1984, 2004). We delineate TC as a construct, as with OC, which is a function of the number team members and is indicative of the number of interactions within a team, for the team to function. This can indicate the amount of coordination and communications (among individuals) that must take place for the team to perform its assigned tasks. In a manner comparable to Axelrod’s (1986) metanorms virtual experiments, Beta’s team size varies relative to the ﬁxed Alpha’s team size; herein at a factor of 0.5 times, 1.0 times, or 2.0 times (cf. Cording, Christmann, & King, 2008). It therefore follows that the team size for NewCo will be Alpha’s team size plus Beta’s team size since the teams are combined at the time of the merger (as mentioned in the discussion on the OC construct). Furthermore, the total size of an organization – the number of workers in its workforce – is

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Table 1.

Dependent Variables for Organization Performance Experiment.

Input Parameter Organization complexity Teams/org Alpha & Beta Team complexity Actor/team, Alpha Team size ratio; Alpha-to-Beta Number of experimental cells Time periods Total number of independent runs (25 replications)

Domain Values

Number of Values

1,5,10

3

2,6,12 0.5,1.0,2.0

3 3

3 3 3 ¼ 27 500 27 25 ¼ 675

determined by multiplying the values for OC and TC for a given organization. The experiment is designed as a 3 3 2 factorial format with 18 cells and 25 replications, each cell (Table 1). We vary the number of work units in two organizations between one work unit making up the organization and ﬁve work units making up the organization. We also separately vary the number of workers in each work group in Alpha and in Beta. Alpha can have 3, 6, or 12 workers in each work group, whereas the number of workers in each Beta work group is determined as a value relative to the number in Alpha according to 50%, 100%, or 200% the size of Alpha’s work group value. Each actor has speciﬁc knowledge concepts related to them according to the task they are assigned. Variables for team performance are highly contextual (cf., Mathieu, Maynard, Rapp, & Gilson, 2008). We run each individual replication independent of the others, except for the starting condition, which is identical for each replication in a given cell. Each run continues for 500 time periods. The outcome variable for this experiment is organization performance, which has possible values lying from 0 to 1.0 for each time period. This measure is based on task accuracy. It is computed as the average value of the task scores for each actor in NewCo. The actors each perform their assigned tasks using the knowledge and mental model they currently hold. At each time period, the speciﬁc task to be done is characterized as a chore. The chore requires a subset of the mental model necessary to complete the higher-level task. The actor’s performance is a function of how many of the knowledge concepts that are required to perform the chore are actually held by the actor performing the chore. The percentage of speciﬁc knowledge concepts held by the actor, relative to the number of speciﬁc concepts

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required, is computed and reﬂected as the actor’s performance index for that time period. All of NewCo actors’ performance scores are averaged, giving the organization score for the time period, which we then label as organization performance. We utilize the most recent version of the Construct computer software program (Carley, 1990; Schreiber & Carley, 2004b) that fully implements the Construct model we described earlier. The relevant input parameters for the software were adjusted according to the speciﬁcations of each experiment, whereas parameters that are not experimentally controlled were set to identical values for every run.

Results In this section, we present a sampling of the plethora of detailed results available from the virtual experiment so as to stay centered on the articulated goals of this chapter. Consistent with the beneﬁts of computational modeling and simulation, there are dozens more ﬁgures and numerous tables that can be presented in the results section of any computational modeling study, and this study is no exception. Herein, we offer four attention-grabbing ﬁgures that are both indicative of the richness of the broader and deeper set of results and present engaging phenomenological results. We begin by taking a high-level look at how, in general, the relative performance of the post-merger organization evolves over the length of the study, that is over the 500 time periods. To get a sense of the trajectory, Fig. 7 is an overtime plot of the relative performance measure according to the largest post-merger organization in the entire experiment versus the smallest post-merger organization. Keep in mind this relative performance measure is an index of the post-merger performance relative to that of the theoretic pre-merger performance of the two organizations as if their performance was simply accumulated together. In Fig. 6, it can be readily seen that, as expected from the characteristics of the computational model on the outset of the merger, the relative performance is immediately reduced to 50% of the baseline performance level at the outset of the merger. This is an expected consequence of the knowledge setting in the simulation parameter set. The over-time relative performance is asymptotic; this is a consequence of the knowledge accumulation as there is no depreciation or loss of knowledge in this experiment. However, it is quite noticeable that the trajectory of the relative performance appears asymptotic at less than 80% level, which is a curiosity that will be discussed in the later Discussion

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1

Comparison of Post-merger Organization Size

0.9 Performance Index (Mean n = 25)

0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 5 25 45 65 85 105 125 145 165 185 205 225 245 265 285 305 325 345 365 385 405 425 445 465 485

0

Time Period Small Organization (n = 3)

Fig. 7.

Large Organization (n = 360)

Average Relative Performance According to Total Number of Actors in Post-Merger Organization (NewCo).

section. The plot also makes it quite clear that the smaller organization reaches its stabilization level at a point in time that is much earlier that for the larger organization. After approximately 100 time periods, the performance of the smaller organization is stable, whereas the larger organization stabilizes much later. Next, we direct our attention to the ﬁrst variable of interest, OC. Recall, we deﬁne organizational complexity as the number of work groups that make up the organization. Broadly, the greater the number of distinct work groups in the organization’s structure, it can be deduced that there is a greater number of group-level interactions necessary for the organization to perform. Fig. 8 documents the trajectory of the average, relative performance over time for mergers that involve organizations made up of a single work group versus mergers of those organizations that are made up of 10 work groups. First of all, the similarity of this plot with the plot in Fig. 7 cannot be overlooked. The trajectories illustrated in both ﬁgures are nearly identical. Both have same shapes, slopes throughout, and comparative levels of relative performance over each time step. This similarity makes it unclear, graphically, whether the relative organization sizes or the number of work groups explains the differing trajectories.

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Comparison of Organization Complexity 1 0.9 Performance Index (Mean n = 25)

0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1

5 25 45 65 85 105 125 145 165 185 205 225 245 265 285 305 325 345 365 385 405 425 445 465 485

0

Time Period 1 Work Group

10 Work Groups

Fig. 8. Average Relative Performance According to Total Number of Work Groups in the Organization (Same Parameter Settings in Alpha, Beta, and thus NewCo).

We present the plot in Fig. 8 to contribute information to resolve the overwhelming similarity between the total organization size (Fig. 7) and the OC (Fig. 8) plots. Fig. 3 shows the trajectory holding the number of work groups constant (n ¼ 10) and varying only the relative size of the work groups for Beta, which is a factor in total organization size. As this relative performance over-time plot indicates, there is little difference in performance across the differing relative number of actors in the work groups. Beta having one-half, the same, or twice as many actors in each work group relative to the number of actors in each Alpha work group has no bearing on the relative performance of NewCo, the post-merger organization. To further aid in understanding the similarity between the total organization size (Fig. 7) and the OC (Fig. 8) plots, we strengthen the information from the work group size analysis (Fig. 9) by presenting the dispersion of the relative performance measures for the work group size experiments across time. Fig. 10 shows the standard deviation values over time that correspond to the same data presented in Fig. 3 – which is the mean (n ¼ 25) statistic. Although there is indeed some differences in the standard deviations, these differences are very small. We point out that the standard deviation in each case over time is slightly downward sloping.

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TERRILL L. FRANTZ AND KATHLEEN M. CARLEY Comparison of Work Group Size

Performance Index (Mean n = 25)

0.7

0.65

0.6

0.55

0.5 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 Time Period Number of actors in Beta work groups (relative to number of actors in Alpha work groups) = Alpha × 0.5

= Alpha × 1.0

= Alpha × 2.0

Average Relative Performance According to Relative Number of Actors in a Workgroup (Beta-to-Alpha).

Fig. 9.

Comparison of Work Group Size

Performance Index (Standard Deviation n = 25)

0.018 0.016 0.014 0.012 0.01 0.008 0.006 0.004 0.002 0 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 Time Period Number of actors in Beta work groups (relative to number of actors in Alpha work groups) = Alpha × 0.5

Fig. 10.

= Alpha × 1.0

= Alpha × 2.0

Standard Deviation of Relative Performance According to Relative Number of Actors in a Workgroup (Beta-to-Alpha).

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Discussion The results of the virtual experiment suggests that (a) the post-merger performance does not exceed 80% of the pre-merger performance, and (b) the number of work groups, not the number of people in the work groups, affects the trajectory of the post-merger performance. These are unexpected, if not novel outcomes. In no scenario, across all experimental trials, did the post-merger relative performance surpass 86% in this experiment of 337,500 total time periods. Since there is no knowledge depreciation or knowledge loss designed into this implementation of the Construct model, we expected that every postmerger organization would ultimately reach 100% and thus return to the performance levels of the pre-merger organization, mathematically set as the baseline value of 100%. Delving deeper into the dynamics of the individual interactions, we discovered that actor’s preference for interacting with similar others, according to relative knowledge similarity, reached such high levels that other actors, those dissimilar others, were no longer probabilistically considered for interaction. The interaction sphere split into two groups – those one interacts with and those that one does not interact with. Subsequently, an actor never reached full knowledge because dissimilar others had dissimilar knowledge that the actor needed, but was not interacting enough to know about. From a homophily standpoint, an actor’s tendency to interact primarily with similar others restricts the ability to obtain new knowledge and causing the actor to never reach full knowledge; subsequently, they do not return to the full performance level. This suggests that integration mangers may want to introduce actors to dissimilar others early in the integration process so that knowledge from socially distant others can be obtained before the homophily tendencies take effect in the social interaction behaviors. Second, we found that the number of work groups, not the number of actors, affects the trajectory of the organization performance during the post-merger integration phase. This suggests that the OC (the number of work groups) affects the speed in which the post-merger organization reaches its potential. The organizational mergers involving fewer work groups will more rapidly reach their maximum relative performance level, whereas those organizations with more work groups designed into their organizational structure will ultimately reach the same relative performance level, albeit at a much slower pace. From these ﬁndings, we put forward two hypotheses for later empirical study: (a) homophily caps post-merger performance at a level lower than

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pre-merger performance, and (b) the higher the number of work groups, the longer it takes the organization to achieve its post-merger performance. Limitations There are undoubtedly limitations in both the broad methodology of computational modeling and the speciﬁc experiment with conducted herein. Although computational models are proving to be effective in the development of new organization theory, they are in no way a panacea. A key problem is that the validation of these models can be an overwhelming challenge (Burton, 1998; Keller-McNulty et al., 2006; Prietula & Carley, 1994; Robinson, 1997). The mere complexity of the human dimension, coupled with the difﬁculty in controlling real-world experiments and actual situations, makes the challenge of matching virtual results with the realworld practically insurmountable. Hence, most often, these computational models are used to provoke thought and discussion rather than be relied upon in a purely predictive capacity. When validation is possible, it is possible only in part, hence one must be very careful not to use a model outside of the scope to which it is intended or has been validated. Researchers must be very explicit about these boundaries as consumers of information derived from these methods typically consider the information from outside these bounds at everyone’s peril. For this experiment, the key limitation is that only relative knowledgesimilarity was used to determine who would interact with whom. Future work should consider other factors such as relative expertise, leadership styles, and resource availability. A second limitation is that the organizations simulated were small. Future work should explore whether there are scale effects for very large organizations. None of these limitation that we provided earlier (and there are many more) are problematic to the value-add of the methods and to this study, in particular. We consider these and the others, as simply caveats that must be made explicit in detail and ultimately understood by the end-consumers of the ﬁndings, before one attempts to take any deﬁnitive conclusions away from the study.

FUTURE DIRECTIONS The future of computational modeling in the context of mergers and acquisitions research appears boundless. Acceptance of this methodology in

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the organization sciences is on the rise: we see an increasing number of articles being published in the more traditional-based publications and the growing attendance at related academic conferences is apparent. The application of this methodology in the realm of mergers and acquisitions research, we sense, is extremely bright because of the inherent nonlinearities of the merger dynamic; studying this complex phenomenon may even necessitate using simulations. Moreover, the impracticability of obtaining the necessary, full and complete data from real-world and laboratory-based merger situations is self-evident; thus, research in this area calls for using delegate modeling techniques to enable such difﬁcult research. Using computational modeling for mergers and acquisitions research is presently in its infancy and, as the example experiment offered herein, presently consists of models that are chieﬂy simplistic. In the future, these models will include more extensive social networking dimension, as well as the more sophisticated and richer, dynamic network models: the meta-network features of dynamic network analysis allow researchers to incorporate the necessary socio-technical and socio-cultural aspects of an organization into the model, such as tasks, resources, beliefs, locations, etc. The phenomenon of Transactive Memory (Wegner, Giuliano, & Hertel, 1985) will necessarily be brought into future models of mergers and acquisitions, as will the complex notion of geographic culture.

FINAL COMMENTS Throughout this chapter, we advance post-merger integration research from the lens of the complex, both methodologically and phenomenologically. This chapter aims to be a somewhat pedagogical, yet also advance scholarly knowledge. Throughout, we aimed to explain and encourage the use of computational modeling speciﬁcally for post-merger integration research. Moreover, through the reporting of a simple computer-based experiment, we provided unanticipated ﬁndings that support new and unforeseen research questions. Although computational modeling has limits, these complex techniques are proving to be effective in advancing broad, organization theory and increasing our knowledge speciﬁc to mergers and acquisitions; we expect studies using these techniques to grow in terms of both their number and their promise and delivery of tangible, scholarly and practical impact. We see the future direction of computational modeling ultimately fulﬁlling the need for a fresh approach to advance merger and acquisition research. As future generations of researchers become

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increasingly savvy to computer technology and these computational methods, and apply themselves to ever more complex organizational problems, we see the future course of merger and acquisition research as being quite bright and promising.

ACKNOWLEDGMENTS This work is supported in part by the Ofﬁce of Naval Research (ONR), United States Navy, N00014-06-1-0104. Additional support was provided by National Science Foundation (NSF) Integrative Graduate Education and Research Traineeship (IGERT) program, NSF 045 2598, the Air Force Ofﬁce of Scientiﬁc Research, FA9550-05-1-0388 under a MURI on Computational Modeling of Cultural Dimensions in Adversary Organizations, the Army Research Institute W91WAW07C0063, the Army Research Lab DAAD19-01-2-0009, the Army Research Ofﬁce W911NF-07-1-0060, and CASOS.

NOTE 1. Throughout this chapter, we use the term ‘‘Alpha’’ that refers to one of the organizations being merged, and ‘‘Beta’’ that refers to the other, both in pre-merger status; furthermore, it can be considered that Alpha has acquired Beta – we do not accept as true the notion of a ‘‘merger of equals.’’ The term ‘‘NewCo’’ refers to the combined, post-merger organization collectively made up of all the pre-existing aspects of Alpha and Beta, only now, under one organizational umbrella.

REFERENCES Ashby, W. R. (1956). An introduction to cybernetics. London: Chapman & Hall. Ashworth, M., & Carley, K. M. (2004). Toward uniﬁed organization theory: Perspectives on the state of computational modeling. Proceedings of the NAACSOS 2004 Conference, Pittsburgh, PA. Ashworth, M., & Carley, K. M. (2007). Can tools help unify organization theory? Perspectives on the state of computational modeling. Computational and Mathematical Organization Theory, 13(1), 89–111. Axelrod, R. (1986). An evolutionary approach to norms. The American Political Science Review, 80(4), 1095–1111. Blau, P. M. (1970). A formal theory of differentiation in organizations. American Sociological Review, 35(2), 201–218.

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MEASURING PERFORMANCE IN TECHNOLOGY-DRIVEN M&As: INSIGHTS FROM A LITERATURE REVIEW$ Olimpia Meglio ABSTRACT What is the academic community’s contribution to the understanding of merger and acquisition (M&A) performance to date? Although there exists already a vast amount of theoretical as well as empirical studies aiming at explaining, predicting or understanding post-acquisition performance, there seems to be a growing dissatisfaction among scholars with the fragmented ﬁndings that have emerged to date. A possible explanation is that M&A scholars have mainly dealt with explaining the variance in M&A performance and have generally overlooked that contradictory ﬁndings are due to different measures of performance. This state of affairs is even more marked in the realm of technology-driven acquisitions, in that we ﬁnd measures of both overall post-acquisition performance and post-acquisition innovative performance. Academics are therefore called upon to investigate what M&A scholars measure as postacquisition performance in high-technology industries. $

This chapter is part of a larger project the author is currently undertaking along with Annette Risberg from Copenhagen Business School.

Advances in Mergers and Acquisitions, Volume 8, 103–118 Copyright r 2009 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1479-361X/doi:10.1108/S1479-361X(2009)0000008008

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This chapter points toward a better understanding of M&A performance construct in high-tech settings through a review of existing empirical research of technology-based M&As within a broad range of scholarly journals. Findings present a fragmented state of affairs with a proliferation of operational deﬁnitions of post acquisition performance and a wide array of indicators. Moreover, different perspectives and time lags are accounted for.

1. INTRODUCTION What is the academic community’s contribution to the understanding of merger and acquisition (M&A) performance to date? Although there exists already a vast amount of theoretical as well as empirical studies aiming at explaining, predicting or understanding post-acquisitions performance, there seems to be a growing dissatisfaction among academic scholars with the fragmented ﬁndings that have emerged to date. Consequently, we still know very little about what makes an acquisition succeed/fail, since results are, at best, contradictory (Bower, 2001). A possible explanation for such confusing and misleading results is that M&A scholars have mainly dealt with explaining the variance in M&A performance and have generally overlooked that contradictory ﬁndings are due to different measures of performance (Cartwright & Schoenberg, 2006; King, Dalton, Daily, & Covin, 2004). Despite the sheer amount of empirical research on M&As, there is little or no consensus across and within different ﬁelds on how to measure acquisition performance (Zollo & Meier, 2008). This is not new in management studies where the substantive streams have been relatively overemphasized without a corresponding concern for measurement (Venkatraman & Grant, 1986). This state of affairs is even more marked in the realm of technologydriven acquisitions, in that we ﬁnd measures of both overall post-acquisition performance and post-acquisition innovative performance. Although they are strictly linked, they differ in their temporal orientations. Innovative performance of M&As reﬂects the long-term gains through the invention of new process- and product-related technologies. These new technologies can eventually lead to improved proﬁtability of companies if they are transformed into actual innovations. These aspects tend to be underestimated by traditional ﬁnancial measures that usually focus on the shortterm economic effects of M&As. This is a key point for making sense of

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existing conﬂicting views on the relationship between technological activity and M&As (Cassiman, Colombo, Garrone, & Veuglers, 2005). Academics are therefore called upon to investigate what M&A scholars measure as post-acquisition performance in high-technology industries. This is the void this chapter intends to ﬁll. To achieve this end, I carry out a literature review, unravelling what, where, how and how long after the deal scholars measure performance in technology-driven transactions. This chapter is methodological in nature as it presents an analysis of different measures. Yet, its main focus is neither to assess construct validity and reliability nor to outline a theory or a model analyzing and explaining variance in M&A performance; rather, to provide a detailed and comprehensive account of performance measures in technology-based M&As. The remainder of this chapter is organized as follows: in Section 2, I outline the method for the study; in Section 3, I present review ﬁndings and provide a roadmap to understand different measures of post-acquisition performance in technology-based M&As. In Section 4, I address limitations and future research directions.

2. METHODOLOGY To address my research question, I carry out a literature review in a narrative form (Huff, 2008). I decided to look into top-tier management journals as well as those focused on knowledge-related topics (Linton, 2006), accounting for both American and European perspectives. The resulting list of outlets is the following: Academy of Management Journal, Administrative Science Quarterly, British Journal of Management, Journal of Engineering and Technology Management, Journal of High Technology Management Research, Journal of Management, Journal of Management Studies, Journal of Product Innovation Management, Organization Science, Organization Studies, R&D Management, Research Policy, Scandinavian Journal of Management, Strategic Management Journal, Technology Analysis and Strategic Management, and Technovation. The keywords for the search were merger or acquisition and innovation. The time span ranges from 1990 to 2008, as the number of M&As in hightech industries has been growing dramatically since the beginning of 1990s. The search produced an initial list of 135 articles. The design choice of this study is underwritten by the following criteria. This work leaves out theoretical articles and studies that focus on non-technological innovations such as administrative and organizational

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ones and includes empirical research dealing with measuring either postacquisition performance or innovative performance in technology-driven M&As. As for the identiﬁcation of technology acquisitions, I mainly relied on the classiﬁcation provided by the Securities Data Corporations (SDC) Worldwide Mergers and Acquisitions Database (Ranft & Lord, 2002). These industries include biotechnology, computer equipment, computer software, computer services, electronics and telecommunications that are extremely active in acquisitions aimed at accessing the technological expertise of smaller companies and are characterized by appropriability regimes that encourage signiﬁcant patenting activity (Puranam & Srikanth, 2007). After a closer scrutiny to select articles ﬁtting in the scope of the review, I obtained a ﬁnal list of 39 studies from 11 of the 16 journals taken into account (Table 1). From each article, I collected information according to a reading note, organized around different sections that can be understood as following. In the research focus section, I describe the research questions authors intend to answer, while in the research setting, the kind of M&As under scrutiny in the study. I classify them in terms of acquisition typologies, industries, countries and time span, to display where scholars measure innovative performance. In the research method section, I categorize studies as quantitative, qualitative or mixed and as relying on secondary and/or primary data. By perspective, I describe whether the performance refers to the acquiring, acquired or the combination of the two ﬁrms. In the time lag section, I account for the temporal orientation of the performance measure.

Table 1.

Composition of the Sample and Distribution across Decades.

Journal Academy of Management Journal (7) Journal of Engineering and Technology Management (3) Journal of High Technology Management Research (3) Journal of Product Innovation Management (1) Journal of Management Studies (1) Organization Science (2) Research Policy (6) R&D Management (5) Scandinavian Journal of Management (1) Strategic Management Journal (7) Technology Analysis and Strategic Management (3) Total (39)

1990–1999

2000–2008

3

4 3 3 1 1 2 3 2 1 7 3 30

3 3

9

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In the operational deﬁnition of the performance construct section, I provide the research operations that specify the value or category of a variable on each case (Singleton & Straits, 2005); while by indicator(s), the single or multiple observable measure(s) employed in the study. I also sort the operational deﬁnition and indicators (a) as subjective or objective, whether the source of appraisal is perceptual or not, as well as (b) internal or external, whether the indicator come directly from the organization (for instance, R&D expenditure) or from sources external to the organization (patents). It is worth noting that I try to use the authors’ words as much as possible to avoid any misinterpretation of their contribution. I gathered review notes in an excel ﬁle with as many sheets as journals included in the sample to see patterns and differences for trends in innovative performance measures within and across journals over time.

3. FINDINGS Findings conﬁrm that M&A literature is as fragmented as it is frequently referred to as (Larsson & Finkelstein, 1999). This is particularly evident when examining different research focuses within articles (Table 2). For sake of clarity, I arranged them into three macro areas of investigation that recall the linear ﬂow from the strategic decision-making process to the performance measurement. Although in most articles more than a single focus is present, I classify them according to the prevailing one. As such a coarse-grained classiﬁcation would not capture the variety of issues addressed, in each of them I identify sub-themes that offer a more ﬁne-grained view of the topics investigated. In the strategic decision-making process category, for instance, I distinguish among mode of entry in international or diversiﬁcation context, target selection and the transition from alliances to acquisitions. In the integration process, I differentiate among integration approaches, knowledge transfer and the human-related factors. In the performance section, I arrange studies as measuring overall acquisition performance, innovative performance or acquisition success. Table 2 shows that M&A scholars devote much effort to analyze the integration process in its multifaceted aspects. Among human-related topics, a great emphasis is placed on inventors’ (Kapoor & Li, 2007) and key inventors’ productivity (Ernst & Vitt, 2000).

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Table 2.

Research Focus in M&A Research.

Strategic Decision Making

Integration Process

Acquisition Performance

Diversiﬁcation Miller (2004) Target selection Benou & Madura (2005); Chakrabarti et al. (1994); Kennedy et al. (2002) Technology sourcing in international contexts Belderbos (2001/2003); Granstrand (1999); Ha˚kanson & Nobel (1993/1993a) Transition from alliance to acquisition Carr (1999); Porrini (2004)

Integration approaches Birkinshaw et al. (2000); Grimpe (2007); Lindholm (2000); Gerpott (1995); James (2002); King et al (2008); Miller (2004); Paruchuri et al. (2006); Puranam & Srikanth (2007) Human factor Ernst & Vitt (2000); Graebner (2004); Kapoor & Li (2007) Knowledge transfer Cummings & Teng (2003); Schweizer (2005/2005a)

Acquisition performance Laamanen & Keil (2008); Ragozzino (2006); Steensma & Corley (2000) Innovative performance Ahuja & Katila 2001; Cassiman et al. (2005); Cloodt et al. (2006); Hagedoorn & Duysters (2002); Hitt et al. (1991/1996/1997); Keil et al. (2008) Success/failure Bannert & Tschirsky (2004); Dalziel (2008)

The fragmentation becomes even more striking when analyzing research settings. In some articles, authors were silent about sectors or SIC codes. In most cases, industries are simply referred to as ‘high technology’ and, among them, pharmaceutical and Information and Communication Technologies (ICT) are prevailing. US large public companies continue to be frequently investigated, as secondary data about them are easily accessible. Among ﬁeld research, Swedish, German and Japanese multinationals play a prominent role. As for the research methods, I witness a polarization around quantitative studies (30 articles), based on small and large samples as well. Only eight of them involve a survey, whereas in the remaining 22, secondary data are used. Moreover, seven qualitative studies discuss ﬁndings from within and cross-case analysis. They rely mainly on primary data except for Carr (1999) and James (2002). Mixed method research remains rare in this ﬁeld (Birkinshaw, Bresman, & Ha˚kanson, 2000; Lindholm, 2000). The analysis of the perspectives investigated (acquiring, target and the like) reveals that acquiring ﬁrm’s point of view play a prominent role (Table 3). Acquiring ﬁrm’s perspective is, in fact, the most frequently accounted for (22 articles), whereas the target ﬁrm’s perspective is under-represented

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Table 3. Perspective Acquiring ﬁrm

Target ﬁrm

Both companies The new entity Acquiring, target and the new entity

109

Perspectives in Performance Measures. Authors Ahuja & Katila (2001); Benou & Madura (2005); Chakrabarti et al. (1994); Cloodt et al. (2006); Cummings & Teng (2003); King et al. (2008); Gerpott (1995); Granstrand (1999); Grimpe (2007); Hagedoorn & Duysters (2002); Kennedy et al. (2002); Keil et al. (2008); King et al. (2008); Hitt et al. (1996/1997); Laamanen & Keil (2008); Miller (2004); Paruchuri et al. (2006); Porrini (2004); Puranam et al. (2006); Ragozzino (2006); Schweizer (2005a); Steensma & Corley (2000) Belderbos (2001/2003); Dalziel (2008); Ha˚kanson & Nobel (1993, 1993a); Ernst & Vitt (2000); Lindholm (2000); Kapoor &Li (2007) Bannert & Tschirsky (2004); Carr (1999); Graebner (2004); Puranam & Srikanth (2007); Hitt et al. (1991) Cassiman et al. (2005); James (2002); Schweizer (2005) Birkinshaw et al. (2000)

(eight articles). In some cases (ﬁve articles), performance is measured for both acquiring and target, whereas in three articles authors claim to measure the performance of the new entity. In Birkinshaw et al. (2000), given the longitudinal nature of their ﬁeld study, all these perspectives are represented over time. As for the time lag (Table 4), interestingly to note in 11 articles of 39, authors are ambiguous, if not silent, about how long after the deal the performance is measured. In four articles, the performance is measured a few days around the announcement of the deal, in that they adopt an event study approach. Other two studies employing market-based measures extend the time lag from 3 years (King, Slotegraaf, & Kesner, 2008) to 13 years (Laamanen & Kiel, 2008) after the transaction, rising concerns about intervening confounding effects (McWilliams & Siegel, 1997). Although Graebner (2004) assesses performance after six months, most of the studies under scrutiny rely on pretty longer time period, from one to seven years after the deal. Just a few articles (three) measure performance over longer time horizons. Discussing the performance measures, I have to account for a huge variety of operational deﬁnitions. As said earlier, I show up the exact words authors used, to offer a detailed picture of such variety. To help the reader grasp it, I classify them into a three macro areas labeled as ﬁnancial, innovative and subjective assessment of performance (Table 5). The ﬁrst two

Bannert & Tschirsky (2004); Belderbos (2003); Carr (1999); Cassiman et al. (2005); Dalziel (2008); Ha˚kanson & Nobel (1993, 1993a); Hitt et al. (1997); James (2002); Lindholm (2000); Schweizer (2005a)

Not Available/Not Clear

Benou & Madura (2005); Kennedy et al. (2002); Porrini (2004); Ragozzino (2006)

Graebner (2004);

Till One Year Ahuja & Katila (2001); Belderbos (2001); Birkinshaw et al. (2000); Cloodt et al. (2006); Cummings & Teng (2003); Ernst & Vitt (2000); Gerpott (1995); Granstrand (1999); Grimpe (2007); Hagedoorn & Duysters (2002); Hitt et al. (1991 and 1996); Kapoor & Li (2007); Keil et al. (2008); King et al (2008); Miller (2004); Paruchuri et al. (2006); Puranam & Srikanth (2007); Schweizer (2005); Steensma & Corley (2000);

From One to Seven Years

Temporal Horizons in Performance Measures.

Till One Month

Table 4.

Chakrabarti et al. (1994); Laamanen & Kiel (2008); Puranam et al. (2006)

More than Seven Years

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Table 5.

Operational Deﬁnitions of Performance.

Financial (Accounting and Market Based) Performance

Innovative Performance

Subjective Appraisal of Acquisition/Innovative Performance

Abnormal returns/ cumulative abnormal returns/excess market returns Divestiture Financial performance Growth Immediate perceived beneﬁt Success/failure

Acquired success at knowledge and capability leverage Change in individual performance Number of products launched R&D intensity Innovative performance/ innovativeness Internal innovation R&D performance Technological performance Productivity of inventors/ key inventors Success/failure

Expected and serendipitous value Perceived success R&D integration success Know how transfer Knowledge transfer success Seller appraisal of overall success Subjective assessment of economic and technological success The extent to which the combined R&D operations achieved the intended outcomes

include objective operational deﬁnitions, whereas the latter, perceptual appraisals. Moreover, I offer a more detailed analysis of innovative performance measures in Table 6. Before analyzing each section, it is noteworthy that success and failure are widespread across all sections, as M&A scholars used them as operational deﬁnitions for ﬁnancial, innovative and subjective assessment of performance as well, therefore relying on different kind of indicators, being them perceptual or not. This greatly contributes to inconsistency and confusion when comparing empirical ﬁndings. The ﬁnancial performance section includes accounting and market-based measures of performance as well as divestiture. M&A scholars have relied extensively on these measures (Zollo & Meier, 2008), lumping together transactions that represent strategically heterogeneous events (Lubatkin,1987; Bower, 2001). Performance measures should reﬂect different motives and typologies: high-tech M&As revolve around people and technologies, not product (Chaudhuri & Tabrizi, 1999), and this matters in terms of both the depth and the length of the integration process. Therefore, it is questionable either measuring performance a few

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Table 6. Operational Deﬁnitions of Innovative Performance, Indicators and Time Lags. R&D Input

Innovation (Hitt et al., 1991) R&D expenditure R&D intensity: R&D expenditure/number of employees after three years

Knowledge Exploration and Exploitation Success/failure (James, 2002) R&D function rationalization New product in the pipeline/launched R&D project portfolio Personnel turnover and morale troubles retrospective account

R&D Output

Innovative performance (Ahuja & Katila, 2001) Patenting frequency from one to four years after the deal Technological performance (Hagedoorn & Duysters (2002) Number of patents after an average of six years Number of innovation outcomes (Puranam et al., 2006) New products launches between three and 13 years after the deal Acquirer success at knowledge and capability leverage (Puranam & Srikanth, 2007) Patent count, patent citation, patent authorship data after three years Post acquisition productivity of inventors (Paruchuri et al., 2006) Number of patents; Number of patent citation after ﬁve years Productivity of key inventors (Ernst & Vitt, 2000 ; Kapoor & Li, 2007) Change in patenting activity after three years Number of successful patent application per year after ﬁve years

days around the announcement date or using indicators that are ill-suited to evaluate intangible assets. As for divestiture, dating back to Porter (1987), it is conceived as a proxy for failure. Only two studies employ it, along with other indicators (Hitt, Hoskisson, & Kim, 1997; Schweizer, 2005). Yet, the equation divestment–failure has been challenged by Montgomery & Thomas (1988)

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who identiﬁed large signiﬁcant gains for divestments taking place within a strategic context. The subjective performance appraisal section comprises different forms of subjective assessment: top management’s assessment of overall success: Dalziel (2008), for instance, measures the overall success on a three-level scale (from not successful to very successful); moreover, this assessment takes into account the seller’s perspective. top management’s assessment of success along different items (composite measures), as in Graebner’s study, where she investigates the attainment of goals into three different domains (revenues from technologies, retention of key people and overall success). senior or R&D managers’ assessment about knowledge transfer success as in Cummings & Teng’s (2003) study, where the assessment is related to 22 items, seven of which aiming at capturing satisfaction for cost improvements, nine for knowledge commitment and six for knowledge ownership. top management’s assessment of competitive performance and knowledge transfer success as in Birkinshaw et al.’s (2000) work that includes change in R&D output, knowledge transfer success and market position after the acquisition as well. Although these measures offer a ﬁrst-hand view of how the merger process unfolds over time, they can be inherently ﬂawed by managerial as well as retrospective biases. The former arise from the tendency to describe the acquisition process from a unitary view where the managers’ interests and goals represent those of the whole organization (Risberg, 1999). Retrospective biases are due to memory decay and ex post rationalization that challenges the validity of these measures (Golden,1992; Isabella, 1990). This outlines the importance of offering detailed information about the time lag between the deal and the performance measurement. In the section I label as innovative performance, I witness the greatest variety of operational deﬁnitions. I use the label innovative performance in its broader deﬁnition, as it encompasses outcomes from the conception of an idea till the introduction of an invention into the market (Hagedoorn & Cloodt, 2003). This deﬁnition overarches the measurement of all stages, from R&D expenditure to patenting and new product launches. This section is further enriched by Table 6 that disentangles the variety of operational deﬁnitions of innovative performance, indicators and time lags.

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For sake of clarity, I arrange them all into three different domains that recall the overall R&D process. In the R&D input domain, I ﬁnd two measures of R&D efforts: R&D expenditure and R&D intensity (R&D expenditure per employee). Of course, these indicators aim at capturing the effort and not the actual result of R&D activity. In the knowledge exploitation and exploration domain, James (2002) offers a composite measure of the quality of the inventive process I label as knowledge exploration and exploitation. He relies on different indicators to assess retrospectively, the success/failure in the R&D function integration process. Therefore, this measure incurs the retrospective biases discussed earlier. From the analysis of R&D output indicators, it surfaces that M&A scholars extensively borrowed indicators from knowledge-related literature, in that I ﬁnd raw patent counts, patent citations and new product announcements as well (Hagedoorn & Cloodt, 2003). Patent counts provide a purely quantitative measure, while patent citation accounts for the quality of patents. New product announcements generally replace them in industries/ countries where patenting activity is not fully developed. They point out at the level of product innovation. As they are based on the press releases of the marketing departments of companies, careful screening of the data is necessary to address validity concerns. Most studies employ all measures discussed earlier. In most cases, multiple indicators are used while few articles rely on single one (Ahuja & Katila, 2001; Hagedoorn & Duysters, 2002; Puranam, Singh, & Zollo, 2006). The advantage of using multiple indicators is that they offer a more nuanced and more informative measure. This does not imply that multiple indicators are superior to single one tout court. Hagedoorn & Cloodt (2003) contend that the more R&D, patents and new products overlap in a given industry, the less useful multiple indicators are. When the overlap is small, the use of multiple indicators might provide a better understanding of the actual post-acquisition innovative performance. Interestingly, patent counts are related to the whole organization (Hagedoorn & Duysters, 2002), to inventors (Paruchuri, Nerkar, & Hambrick, 2006), and key inventors (Kapoor & Li, 2007) as well; this brings about an inevitable confusion in the analysis of empirical ﬁndings. Moreover, different operational deﬁnitions are linked to the same indicator: in the case of patent counts, Hagedoorn & Duysters (2002) refer to ‘technological performance’ while Puranam et al. (2006) to ‘acquired success at knowledge and capability leverage’. As for the time lag, no consensus emerges across studies, since the raw patent count ranges between 3 and 13 years after the deal.

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4. DISCUSSION This chapter points toward a better understanding of M&A performance construct in high-tech settings through a review of existing empirical research of technology-based M&As within a broad range of scholarly journals. Findings present a fragmented state of affairs with a proliferation of operational deﬁnitions of post-acquisition performance and a wide array of indicators. Moreover, different perspectives and time lags are accounted for. This is a partial explanation for inconsistent and contradictory ﬁndings about M&A performance. This analysis can be extended and improved in several ways. A ﬁrst option is to enlarge the scope and the time span of the review. Although the realm of technology-driven M&As play a prominent role in changing the landscape of several industries, M&A performance in low-tech and service industries deserves further attention. As for the time span, it should be enlarged, from 1970s to date, to account for trends over a longer period of time. Findings provide evidence that a serious reﬂection on construct measurement is needed. Although construct measurement matters, as the variables of interest in management studies tend to be complex or unobservable (Boyd, Gove, & Hitt, 2005), it has historically been a low-priority topic among scholars. As a result, complex constructs have often been represented with simple measures with limited concern for reliability and validity testing (Venkatraman & Ramanujam, 1986). And the M&A performance construct is a case in point.

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ACQUISITIONS IN THE CHINESE REAL ESTATE INDUSTRY AND THE TWO-STAGE PRIVATIZATION PROCESS Nitin Pangarkar, Jie Wu and Long Wai (Rico) Lam ABSTRACT This chapter examines the acquisition of assets (real estate) and companies in the Chinese real estate industry. We propose a nuanced view of state ownership (beyond state being the largest shareholder) and argue that ﬁrms with a combination of state and private ownership may be in a unique position to acquire real assets. We conduct an analysis of the growth and funding of the industry for the period and also analyze the successful acquisitions in the industry over 2004–2007. Our analysis is supportive of the nuanced view about state-owned enterprises (SOEs) and their advantageous position for acquiring real estate assets from the government. Our analysis also sheds light on the two-stage marketization process in the Chinese real estate industry where SOEs endowed with real estate assets are sold to non-SOEs.

Advances in Mergers and Acquisitions, Volume 8, 119–140 Copyright r 2009 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1479-361X/doi:10.1108/S1479-361X(2009)0000008009

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INTRODUCTION What role do acquisitions of assets and companies play in the transition of a state-dominated industry, such as the Chinese real estate industry, to a market-oriented one? Does state ownership of the acquirer help or hurt the likelihood of undertaking a successful acquisition in the Chinese real estate industry? These questions are the focus of our study. We build on the prior literature about the implications of state ownership in China to argue that, under some circumstances, state ownership may, in fact, be beneﬁcial for undertaking acquisitions of assets in this regulated industry. Our empirical analysis is based on data about acquisitions of real estate as well as equity stakes in the Chinese real estate industry over the period 2004–2007. We examine the industry’s development in terms of various aspects of the industry including the number of enterprises, funding sources and asset as well as equity acquisitions. Our ﬁndings are consistent with recent literature that has tried to explain the rapid growth in hybrid ﬁrms (private and state ownership) within China by arguing that these ﬁrms may enjoy the best of both worlds – the privileges associated with state ownership and the superior governance and incentive structure of private ownership (Jing & Tylecote, 2005). We believe that our study makes an important contribution to the literature for several reasons. First, much of acquisitions literature has been focused on the developed country contexts (e.g., Bradley, Desai, & Kim, 1988; Singh & Montgomery, 1987; Sirower, 1997) with empirical research mostly focusing on acquisitions among publicly listed non-governmentowned enterprises. The developing country context, however, tends to be rather different (Tian & Fan, 2008). In developing countries, a number of ﬁrms may be either state-owned (partially or fully) or privately held (e.g., small- and medium-sized enterprises) (Ke & Issac, 2007). Ke (2008) observed that, in 2005, a majority of Chinese-listed companies had mixed ownership structures with the state retaining a controlling interest. Furthermore, there may be differences among state-owned enterprises (SOEs) themselves (e.g., minority versus majority owned by the state), which might have implications for their strategies (e.g., goals and objectives behind undertaking acquisitions) and performance due to differences in organizational factors such as governance as well as managerial incentives (Jing & Tylecote, 2005). Our empirical context, the real estate industry in China, serves as another distinguishing feature of the study. To our knowledge, few prior merger and acquisition studies have focused on evolving highly regulated industries such

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as real estate. Within the Chinese context, the industry has witnessed explosive growth due to rapid growth of the country as well as increasing urbanization – from 2000 to 2005 investment in ﬁxed assets in China increased 20% p.a. and real estate investment increased 25% p.a., representing 17% of total ﬁxed asset investment (Ke, 2008). It has also witnessed a gradual change in the ownership pattern – starting with 100% ownership of land by government communities (in the communist era). One interesting aspect of this industry is that two different types of acquisitions can be identiﬁed in this industry – acquisitions of assets (real estate) and acquisitions of companies or their equity. Unlike other industries where asset acquisitions may not be consistently reported, posing data limitations, this industry offers us a rich source of data on both types of acquisitions and will enable comparison and contrast of the two types. Hence, we believe that analysis of this industry will yield interesting and unique insights about the acquisition process in developing countries. We also agree with Ke and Issac (2007) and Kang and Sorensen (1999) that real estate industry might have a contingent effect on some of the frequently examined relationships in strategy research. For instance, although it is commonly believed that SOEs are less efﬁcient than private ﬁrms due to various reasons and several studies have demonstrated the inefﬁciency of SOEs (e.g., Chen, Lee & Rui, 2001: Bai, Liu, Lu, Frank, & Zhang, 2004; Megginson & Netter, 2001), some studies have observed that SOE underperformance may not be applicable to the Chinese real estate industry. Chen, Firth, and Xu (2009), for instance, observed that, in this industry, the SOEs exhibited the best efﬁciency, whereas private enterprises exhibited the worst, and Tian (2001) found that corporate performance actually increases with state shareholding. On the other hand, Ke and Issac (2007) and Xu and Wang (1997) found a negative but insigniﬁcant effect of state ownership on performance. While noting the peculiarities of the Chinese real estate industry, Ke and Issac (2007, p. 9) made the following comment: ‘‘China’s property industry is subjected to the inﬂuence of government’s preferential policy and macro economic adjustments. The land market is not completely transparent and is controlled by the government. Although the property industry is not monopolized by the government, the government has signiﬁcant inﬂuence on the property industry.’’ Building on the theme of peculiarities of the Chinese real estate industry, we can also point toward its lower technological intensity, higher capital intensity (often based on greater leverage) and generally high degree of regulation [e.g., restrictions on foreigners for buying property, which may be

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even stronger in developing countries; Ke (2008)], which might explain why the results from other industry contexts may not be applicable and thus providing an interesting contrast to the focus of prior research. Political ties with the government (providing access to valuable land) and capital (through either state-owned banks or preferential treatment from even the non-state-owned banks) are particularly important for acquisitions in China’s real estate industry and hence provide an appropriate context to examine the advantageous position of SOEs. This chapter is organized as follows. We begin by summarizing the existing literature about the implications of state ownership (advantages as well as drawbacks) and then develop the conceptual arguments of the study. Next, we go on to brieﬂy summarize the evolution of the real estate industry in China and discuss the methodological aspects next, followed by the results of our analyses. In the concluding section, we identify the implications of the study, limitations of our analysis and directions for future research.

SOEs IN CHINA’S REAL ESTATE INDUSTRY In 1980, Chinese SOEs accounted for as much as 77.6% of the total industrial output (Perotti, Sun, & Zou, 1999). Over the next two decades, the Chinese government progressively reduced the inﬂuence of SOEs and, by 1999, SOEs accounted for 28% of the national output (Jing & Tylecote, 2005). The ﬁnancial performance of the SOEs, however, continued to lag, and according to a World Bank report, about half of the SOEs made a loss in 1996, up from one-third just two years earlier (World Bank, 1997). Many observers and analysts argue that poor ﬁnancial performance among SOEs is not surprising since they have never been purely economic actors and serve various other purposes including political support to the government, expansion of employment and provision of social services including health and education, among others. Perotti et al. (1999) argue that an SOE manager is more like a mayor or a tribal chief who has to take care of the people in his/her charge. A key factor driving the weakening performance of SOE includes the erosion of their traditional advantages in the form of easy access to key materials, credit and captive markets. Simultaneously, their competitive disadvantages have intensiﬁed. One school of thought argues that SOEs cannot avoid taxes but non-SOEs (especially small- and mediumsized enterprises) can. In fact, by 1995, although SOEs accounted for only

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44% of China’s GDP, they contributed 71% of the ﬁscal revenue. Scholars (Perotti et al., 1999) have also pointed out that SOEs face controls in terms of prices since many of them are engaged in providing essential products/ services such as energy. Zou and Sun (1996) and Sun (1998) argue that decision makers in SOEs pursue inefﬁcient projects due to lifetime employment for managers and employees hired before 1989, political considerations in the appointment of managers, and managers’ desire to expand their political power base (Qian, 1995). Notwithstanding the several rounds of SOE reforms launched by the Chinese government, SOEs have indulged in extensive duplication where each SOE pursues projects that may be simultaneously pursued by other SOEs (lack of coordination), resulting in excess capacity, price pressure and under-utilization. Other factors for poor performance by SOEs include diversion of assets (including proﬁtable technologies and products) and proﬁts to daughter companies [often township and village enterprises (TVEs)]. SOEs also suffer from agency problems (they are collectively owned by a large body of people; the large SOEs are administered by the state-owned assets and supervision and administration commission (SASAC), Jing & Tylecote, 2005) but managed by a few people who can pursue their own agendas with little accountability), poor hiring/labor practices (career may be less related to the performance of the SOE but more related to political or other actions), and perverse managerial incentives (e.g., managers are quasi-bureaucrats and hence may be more concerned with pleasing their superiors by acceding to unreasonable demands). In summary, measured by traditional metrics, SOEs’ performance has been lagging, possibly due to governance and management problems (e.g., expansion without consideration of feasibility; over employment). Previous arguments about the drawbacks of SOEs were made in the context of a market-oriented economy. But some studies (e.g., Ke, 2008) have argued that such negative views of SOEs may not be applicable to China’s real estate industry. In China’s real estate industry, political factors play a signiﬁcant role and importantly inﬂuence performance – e.g., land may be available to SOEs at below market prices. Some of the tasks performed by the SOEs in this industry, such as urban regeneration and housing development, imply that they will receive preferential treatment (e.g., in terms of access to capital as well as the cost of capital) compared with privately owned enterprises. Thus, it is less clear whether the ﬁndings drawn from developed countries will be applicable to China’s real estate industry.

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CONCEPTUAL BACKGROUND Firms undertake mergers with various motives. Trautwein’s (1990) study offered a useful grouping of merger theories that included efﬁciency, monopoly, raider valuation, empire-building, process and disturbance theory. Berkovitch and Narayanan (1993) suggested three major motives for takeovers: synergy, agency and hubris. Both Trautewein’s (1990) theories and Berkovitch and Narayanan’s (1993) motives have two broad assumptions about why mergers are undertaken with one set of theories assuming that ﬁrms act like unitary rational actors (Allison, 1971) and pursue strategies that enhance the value for the ultimate owners of the ﬁrm. This perspective does not consider factors such as the divergence between owners’ and managers’ interests (the agency problem), non-value-enhancing motives of the managers (e.g., empire building) and the possibility that a ﬁrm’s decision might be an outcome of a political bargaining process among the various factions within the ﬁrm (e.g., Hayward & Hambrick, 1997; Roll, 1986; Pangarkar, 2000). A large body of literature in ﬁnance and strategy has approached mergers and acquisitions from this rationalist perspective. In this perspective, mergers are undertaken to exploit synergy. Several studies have found support for the synergy explanation in various contexts (Bradley et al., 1988; Berkovitch & Narayanan, 1993; Maquieira, Megginson, & Nail, 1998; Eun, Kolodny, & Scheraga, 1996; Kiymaz & Mukherjee, 2000). In Mukherjee, Kiymaz, & Baker (2004) survey of merger motivations, an overwhelming 89% of the respondents indicated synergy to be a primary motive for undertaking mergers. Synergy itself may be attributed to one or more of the following factors: shared know-how, shared tangible resources, pooled negotiation power, coordinated strategies, vertical integration, and combined business creation (Goold & Campbell, 1998). Although there is general agreement about synergy as a motive and some empirical evidence about the existence of synergy (e.g., related acquisitions perform better than unrelated acquisitions, Singh & Montgomery, 1987), the evidence about the division of synergistic gains across the acquirer and target is less clear. Many studies have found that most gains accrue to targets and acquirers enjoy zero (or sometimes even negative) gains (Barney, 1988; Sirower, 1997). To address this issue, Barney (1988) has argued that synergy may be speciﬁc to a combination of the acquirer and the target (unique synergies). Acquirers that have the ability to generate greater synergies (e.g., due to a superior ﬁt with the target’s resources and capabilities) may be in a

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better position to acquire assets due to two reasons: they may be able to outbid the other acquirers (in the event of multiple bidders), or recognizing the existence of unique synergies, targets may choose to be acquired by the particular acquirer. The acquisitions literature has often looked at three types of resources for driving synergies – marketing, manufacturing and R&D. Scholars argue that superior skills possessed by either of the parties in one or more of these areas can be shared across the two ﬁrms (Singh & Montgomery, 1987). Given the intangible nature of these skills (e.g., marketing or technological expertise), the marginal costs of sharing are low but the incremental beneﬁts may be substantial. Within the context of the Chinese real estate industry, the earlier discussion raises two issues. First, in this highly regulated and state-dominated industry, are there additional industry-speciﬁc resources and capabilities that may drive the generation of synergies? We argue that the hybrid ownership pattern may form an underlying resource in successfully acquiring ﬁrms within this industry. By hybrid ownership, we mean the state as an investor (though not the key investor) and other private investors who would have larger stakes. The government ownership, albeit minority, may be valuable in this industry because this industry has been heavily dominated by the government (Ke, 2008). Since land is considered a valuable resource, the Chinese government has often favored state-owned companies for land acquisition. Hybrid ownership also facilitates organizational learning through access to advanced management skills and complementary capabilities held by other partners (Ireland, Hitt, & Vaidyanath, 2002). Majority state ownership, on the other hand, comes with lower access to capabilities and managerial skills in other companies, and might also cause low efﬁciency due to the managerial and other issues including weaker incentives for managers to perform, appropriation of the company’s proﬁts by politicians as well as managers, wasteful investment and/or diversiﬁcation, among other factors (Perotti et al., 1999). A large private ownership addresses the issue of inefﬁciency and wasteful behavior since the private owner bears the risk and is also a residual claimant. A hybrid structure, thus, would facilitate acquisitions (especially of real estate) because of superior connections, on the one hand, and also access to capital, on the other hand. Since hybrid ownership might also reduce the negative impact of state ownership due to the signiﬁcant private ownership, we advance the following proposition: Proposition 1. Firms with some degree of state ownership are more likely to be successful in acquiring real assets from the government.

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Although China has not adopted the big bang approach to privatization adopted by many other former planned economies, it has, nevertheless, tried to slowly reduce the role of SOEs in the economy. As other types of ﬁrms such as TVEs and multinational companies (MNCs) have ﬂourished, their superior growth has automatically reduced the importance of SOEs to the Chinese economy. Divestment of SOEs, however, has proved trickier due to the inefﬁciency of the SOEs – the problems seem to be less salient in the real estate industry, however, since Ke (2008) noted that between 2000 and 2005, the state ownership of property companies’ shares went down from 41% to 31%. We submit that the Chinese government strategically increases the value of SOEs by granting them preferential access to valuable resources in the form of land, thus making them attractive targets for MNCs or other non-SOEs who covet these valuable resources. While developing Proposition 1, we discussed the several disadvantages and drawbacks suffered by SOEs. Non-SOEs, on the other hand, might be able to appoint appropriate managers, provide them strong incentives to managers and also avoid political meddling, putting them in a better position to acquire SOEs and leverage on the valuable assets acquired earlier by the latter. This leads us to our second proposition. Proposition 2. Non-SOE acquirers are more likely to make equity acquisitions of SOEs in the Chinese real estate industry than SOE acquirers. Our two propositions suggest a two-stage process of privatization/ marketization in China. During the course of the economic reform, China like other transition economies needs to privatize her state assets to move into the market economy. However, a direct transfer of state assets from the government to privately owned enterprises potentially raises a number of political concerns. In our two-stage marketization process, hybrid enterprises serve as critical intermediaries in transforming state assets from planed to market economy. Hybrid ownership not only resolves the political concerns of privatizing state assets in China but also provides access to advanced managerial skills and higher capabilities held by the private owners, paving the way for identifying suitable acquires at the second stage of equity acquisition (Fig. 1). In the second stage, non-SOEs acquire equity stakes in these hybrid enterprises. We believe that the two-stage process is a function of the peculiar institutional infrastructure within China and has been overlooked by prior literature on acquisitions.

Fig. 1.

Two-Stage Model of Privatization in Chinese Real Estate Industry.

Acquirers: SOEs. vs. Non–SOEs. (23:81) ( c.f. Table 5)

Non–SOEs (particularly private enterprises)

Acquirers: SOEs. vs. Non – SOEs. (60:9) (c.f. Table 3)

SOEs as intermediary

Privatized

Target: State-owned Enterprises

Internalized

Stage 2: equity acquisition

Target: State-owned assets

Land owned by the state

Stage 1: asset acquisition

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EMPIRICAL CONTEXT: CHINA’S REAL ESTATE INDUSTRY As noted earlier, the Chinese real estate industry has witnessed explosive growth, especially over the past decade. For instance, from 2000 to 2005, investment in ﬁxed assets increased 20% p.a. and real estate investment increased 25% p.a., representing 17% of total ﬁxed asset investment (Ke, 2008). Within the real estate industry, residential property investment accounted for 68% of total real estate investment, ofﬁce buildings, 4.7%, and retail, industrial and others, 27.3%. The real estate industry in China should, hence, be viewed as primarily a residential market. Unlike other sectors of the Chinese economy, the growth of the real estate industry has been achieved without foreign investment – which accounted for less than 3% of the total investment in 2005 (Ke, 2008). Changes in government policies and a stringent regulatory environment have probably contributed to this low ﬁgure (Jones Lang Lasalle, 2007; Ke, 2008). Property companies, which initially sprang up in the eastern coastal cities such as Shenzhen, Shanghai and Guangzhou, were among the early listings in China’s stock market – many were listed by early 1990s. Subsequently, the government imposed stricter control on the Initial Public Offerings (IPOs), and by 2002, there were 50 listed companies that could be classiﬁed into the real estate/property industry (China Securities Regulation Commission (CSRC) classiﬁcation). Broadly, the Chinese real estate companies can be classiﬁed into two categories: property companies that develop and then trade (rather than hold) property. The second type of companies, often linked to local governments, provides a wide range of services (e.g., utilities construction, management and renting of properties) to clients in Special Economic Development Zones (SEDZ) (Ke and Issac, 2007) In contrast to the highly concentrated real estate industries in smaller Asian countries such as Hong Kong and Singapore, the real estate industry in China is characterized by a large number of small ﬁrms (average assets of US$20 million and revenues of US$30 million) (Newell Chau, Wong, & McKinnell, 2005). In 2005, there were 59,242 real estate companies registered with the government’s Industrial and Commercial Administration Department – an even split across private-owned enterprises and stateowned enterprises. The listed companies, which tend to be larger in terms of assets also are more proﬁtable and have lower gearing. Segmentation of China’s shares is well known with some shares being non-tradable (held by the government and by legal persons) (Ke, 2008).

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Real estate companies have a higher level of tradable shares (i.e., excluding shares held by the state and legal persons) at 37% than all other sectors including manufacturing (35%), mining (10%) and utilities (26%). The higher volume of tradable shares implies higher liquidity of the real estate companies (86%) versus the overall Chinese stock markets (73%) (Newell et al., 2005). Some studies have argued that, at least in the short run, state involvement (or mixed ownership) is beneﬁcial since government can slowly reduce the extent of its ownership (sending a signal about its intent to privatize) if the development path of the industry is positive but also be the bearer of residual risk, should the response from the private sector be less enthusiastic (Perotti, 1994, 2003). State ownership may also be necessary until the regulatory and institutional frameworks are in place (Ke, 2008). Comparing the listed with the unlisted real estate companies, analysts have observed that listed real estate companies are larger in size as measured by sales and total assets, are more proﬁtable, have lower gearing ratio and outperform the property sector as a whole. About a third of the listed real estate companies (19 of 51 in 2005) are owned by private institutions (domestic and Hong Kong); while 32 are owned by the state – clearly it is a mixed ownership pattern for the industry without dominance by either private ownership or state ownership. In 2005, the real estate companies listed on the Shanghai and Shenzhen exchanges accounted for 5.1% of the total market capitalization of listed companies (US$6.6 billion of US$128.4 billion) – a slightly greater proportion than the number of companies at 3.1% (51 of 1380). Among the two exchanges, the real estate companies on the Shanghai stock exchange tend to be larger. Finally, individual investors are not prominent in Chinese real estate ﬁrms (Ke and Issac, 2007).

METHODOLOGY Data To investigate the aforementioned propositions, we constructed a comprehensive dataset based on three key sources (1) China Real Estate Industry Research Database, (2) China-Listed Firm’s Merger & Acquisition Dataset, (3) China-Listed Firm’s Asset Restructuring Research Database, constructed by ShenZhen GTA Information Technology Company Limited. Data about the listed China real estate industrial proﬁles were collected from China Real Estate Industry Research Database, which comprises two

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sub-datasets: (a) real estate development statistics dataset (annual and monthly) and (b) land transactions information dataset. The ﬁrst subdataset covers national and provincial real estate development statistical data such as number of enterprises, number of employees, land development and acquisition of enterprises, general scale and actual investment in real estate development, actual investment of real estate enterprise by use, fund sources of enterprises etc. for the period 1986–2005. The second sub-dataset provides the latest transaction information on listed land in 25 cities from March 2001 to April 2007, covering details such as location, land area, ﬂoor area ratio, green space ratio, building density, transaction price, etc. Information on merger and acquisition activities, including asset acquisition and equity acquisition, was obtained from China-Listed Firm’s Merger & Acquisition and the Asset Restructuring Research Database which includes all the M&A events, asset restructuring and relevant data available of companies listed on the Shanghai Stock Exchange and the Shenzhen Stock Exchange from 1998 to 2008. The raw data needed much cleaning up before it became usable. We carried out the following steps to extract the relevant information for further analysis. To obtain asset acquisition information in China Real Estate industry, we ﬁrst used China-Listed Firm’s Merger & Acquisition Dataset and Asset Restructuring Research Database that have a complete listing of all acquisitions between 1986 and 2007, from which we selected those cases involving real property rights transfers. To identify the nature of assets being acquired, we then examined information relating to each of the asset acquisitions and deleted those cases that neither provided information on the nature of assets in transition nor offered the information on the nature of acquirers (e.g., ownership structure). To test our nuanced view of state ownership for asset acquisitions, we examined the share ownership, and on the basis of that, we arrived at the exact categorization of the acquirer ﬁrm – SOEs as the largest shareholder, SOEs as the second largest shareholder, SOEs as the third largest shareholder.

Operational Measures and Estimation Methods We operationalized the dependent variable, whether the asset was acquired from state or not as a binary variable. An important feature of our data is that some of the ﬁrms in our sample have multiple acquisitions. This data structure requires that we adopt models that can deal with clustered observations. For this reason, we use the generalized estimation of equation (GEE)

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approach (Diggle, Liang, & Zeger, 1994) to model the binary dependent variable. The GEE approach allows for covariance among clustered observations and has the advantage of not requiring parametric assumptions about the form of the covariance structures among multiple acquisitions within a ﬁrm, and the estimated variance is robust for clustered observations (Zhou, Zhao, Li, & Cai, 2003). We estimated the following model: X @mi 0 ½V t ðaÞ1 ðyi mi Þ UðbÞ ¼ @b Where mi is the expectation of yi , which is linked to a linear combination of the covariates and the corresponding estimates through the logit function. Our key independent variable was the extent of state ownership (% of equity) of the acquiring company. In addition, we employed various control variables including the following: (1) political capital was measured by whether focal company was based on Beijing or not (takes a value of 1; 0 otherwise)1 – accounting for the possibility that a company in Beijing could leverage its proximity to the central governmental ofﬁcers, increasing its likelihood of acquiring state-controlled assets; (2) if a company was listed on the Shanghai or Shenzhen Stock Exchange, the ‘‘listed’’ variable assumed a value of 1. As we discussed earlier, public-listed companies tend to be larger than non-listed companies and possibly have more resources to acquire land; (3) the binary business group variable was based on whether the focal company belonged to a business group. Since acquisitions occurring in real estate industry often involve signiﬁcant amounts of capital, being a member of business group might put a ﬁrm in an advantageous position.

ANALYSIS We will perform some descriptive analysis to examine the growth, funding and acquisition patterns in the Chinese real estate industry before going on to discuss the results for our key propositions. Table 1 shows the growth in the industry in terms of number of enterprises. It is clear that the proliferation in private enterprises is the key driver of growth. Interestingly, the number of SOEs and TVEs actually declined, whereas the number of foreign enterprises (including those from Taiwan and Hong Kong) showed a modest increase. Table 2 illustrates the funding sources of China’s real estate industry from 1997 to 2005. China’s real estate industry is a very attractive industry since it has attracted

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Table 1. Year

Number of Real Estate Enterprises in Chinaa.

Number of Enterprises

Domestic Enterprises

ForeignþOverseas Enterprises

Number of Number Number of Number of Number of Number of domestic- of SOEs collective domestic foreign-funded enterprises funded enterprises private enterprises (HK, Macao, enterprises enterprises Taiwan) 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 a

23.19 21.27 21.29 24.38 25.76 27.30 29.55 32.62 37.12 59.24 56.29

18.39 16.93 17.20 19.96 21.42 23.28 25.51 28.66 33.11 53.50 50.96

9.87 8.68 8.16 7.96 7.37 6.64 5.86 5.02 4.56 4.78 4.15

5.59 4.76 4.75 4.54 4.13 3.49 2.99 2.49 2.21 2.39 1.80

2.94 3.50 4.28 7.46 9.93 13.14 16.66 21.15 26.34 46.33 45.02

2.54 2.20 2.10 1.20 1.17 1.13 1.08 1.08 1.18 2.11 3.44

2.26 2.14 1.99 3.21 3.17 2.90 2.96 2.88 2.84 3.64 1.89

All numbers in thousands.

Funding Sources of Real Estate Enterprise in Chinaa.

Table 2. Year

1997 1998 1999 2000 2001 2002 2003 2004 2005

State Source State budgetary appropriation

Domestic loans

Bonds

0 0 0 0 0 0 0 0 0

23.86 23.85 23.18 23.09 21.98 22.76 23.77 18.39 18.31

0 0 0 0 0 0 0 0 0

Foreign Source Domestic Private Source (Foreign Fundraising Other fund Investment) source 12.07 8.19 5.35 2.81 1.76 1.61 1.28 1.32 1.20

25.49 26.43 28.04 26.90 28.38 28.08 28.57 30.33 32.71

38.11 41.04 43.01 46.99 47.70 47.38 46.26 49.87 47.77

a

All numbers are percentages, which may not add up to 100% (row-wise for each year) due to rounding; zero ﬁgures imply a very small proportions.

astronomical sum of capital. Interestingly, domestic private funds have accounted for the additional funding between 1997 and 2005 – its share increasing dramatically from 63.6% in 1997 to 80.5% in 2005. Unlike many other sectors of the Chinese economy, foreign direct investment (excluding

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Hong Kong) in China’s real estate market plays a less prominent role, representing less than 2% of total real estate investment, largely due to the volatility of governmental policy regarding foreign direct investment in real estate, the complexity of practical operation and the daunting regulatory regime (Ke, 2008). Interestingly, the importance of the foreign direct investment has also gone down over time. In sum, China’s real estate industry has been undergoing the privatization process, through which competition has become much ﬁerce (as evidenced by the rising number of ﬁrms in the industry). More signiﬁcantly, private enterprises have been the most important market force, and the non-market inﬂuences (e.g., state funds) are waning, and unlike many other industries in China, this reduced inﬂuence is not attributable to foreign investment. Table 3 shows the ﬁgures for asset acquisitions by SOEs versus non-SOEs. By comparing the second column ‘‘SOEs acquire state assets’’ with the last column ‘‘non-SOEs acquire state assets’’ in the table, we can conclude that SOEs enjoy signiﬁcant advantages over non-SOEs for acquiring statecontrolled assets. Also, SOEs deﬁned as the largest shareholder do not exhibit clear advantage for acquiring assets from government and agencies over SOEs as the second largest shareholder, lending support to our nuanced view of state ownership – having some state ownership ensures preferential treatment but the ownership need not be in the form of being the largest shareholder. This result suggests that hybrid ownership in the form of simultaneous state and private ownership might lead to competitive advantage in terms of acquiring critical resources (for instance, land) in transition economies like China.

Table 3. Year

2004 2005 2006 2007 Total a

SOEs Acquired State Assets (Target)

8 1 1 50 60

Acquisition of Real Estate assetsa.

Among: SOEs as the Largest Shareholder to Acquire State Assets (Target)

Among: SOEs as the Second Largest Shareholder to Acquires State Assets (Target)

Among: SOEs as the Third Largest Shareholder or Less Than to Acquires State Assets (Target)

2 1 0 18 21

0 0 0 25 25

6 0 1 7 14

Numbers refer to the number of transactions.

Non-SOEs Acquired State Assets (Target)

4 1 0 4 9

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Next, we ran GEE for the 152 successful asset acquisitions occurring in the Chinese real estate industry from 2004 to 2007 (Table 4). The dependent variable is whether the assets are controlled by the state (takes the value of 1) or not (takes the value of 0). We controlled for alternative explanations such as political capital, member of business group, whether the company is a listed company. The regression results show that the higher the state owned equity in the acquirer, the greater its chances for acquiring assets from the governments and their agencies, providing empirical support to Proposition 1. Interestingly, political capital has a negative impact on the likelihood of acquiring assets controlled by government and agencies – possibly because control over land is stricter in Beijing than elsewhere. Among SOEs as acquirers, we also compared SOEs deﬁned as government being the ﬁrst largest shareholder versus government being either the second largest shareholders or the third largest shareholder. The analysis reveals an interesting pattern – when state ownership is stringently deﬁned (as state being the largest shareholder), a large proportion of assets seem to be going to non-SOE ﬁrms. When the deﬁnition of SOE is less

Table 4.

Results of GEE Regression Estimations.

Variables Political capital(1 ¼ Beijing, 0 otherwise) Business group Listed company

Model 1

Model 2

1.49 (0.41) 0.16 (0.61) 0.63 (0.45)

1.76 (0.42) 0.25 (0.63) 0.35 (0.47) 0.42 (0.13) 1.48 (1.20) 83.88 177.76 192.88 152

State ownership Constant Log likelihood AIC BIC Number of observations

1.36 (1.16) 92.24 192.49 204.58 152

Notes: SEs are given in parentheses. Dependent variable assumes a value of 1 if the assets are being acquired from the governments and their agencies. All models use the method of robust estimate of variance to account for the effects of the sampling design case (clustering effects). Two-tailed tests for hypothesized variables and controls. Variables signiﬁciant at .001 level or better. None of the other variables were signiﬁcant at 0.1 level or better.

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Table 5.

Equity Acquisition of Real Estate ﬁrms In Chinaa.

Year

State Companies Being Acquired

State Companies Being Acquired by SOEs

State Companies Being Acquired by Non-SOEs

2004 2005 2006 2007 2008 Total

13 4 16 39 32 104

4 0 6 13 0 23

9 4 10 26 32 81

a

Numbers relate to the number of transactions.

stringent (state being the second or the third largest shareholder), the assets seem to be acquired by SOEs. We now turn our attention to equity acquisitions. In Table 5, we employed the less stringent deﬁnition of SOEs – a company in which some of the shares owned by the state and examined acquisition of equity stakes. Interestingly, the result for equity acquisition seems to be the opposite of asset acquisition. We observe that in a majority of cases (35 of 58), non-SOEs are acquiring equity stakes in SOEs. This ﬁnding suggests the existence of a two-stage acquisition process (consistent with Proposition 2). In the ﬁrst stage, SOEs acquire state-controlled assets from government agents. In the second stage, many of the SOEs (with valuable assets in the form of real estate) are being privatized by allowing non-SOEs to buy equity stakes in them.

CONCLUDING REMARKS So why are SOEs able to successfully acquire state assets? An obvious explanation is that the SOEs possess resources (e.g., government connections) that might help them in successfully doing these acquisitions. Prior literature has identiﬁed some of these resources. Jing and Tylecote (2005) argue that, in the early stage of China’s transition, scarce resources included bank loans, land procurements, various licences (e.g., equipment producers need production and sales licences for their products; telecom carriers need the service licences to operate their networks) and raw materials such as oil and coal, etc. Over time, some of these resources became less valuable – e.g., raw materials could be sourced by any ﬁrm – SOE or otherwise. SOEs, however, retained an inside track for access to licenses/government approval

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even over private enterprises that tried to establish linkages with the SOEs and acquire a SOE type of identity; Red hat enterprises that paid a fee to the local government, or Guahu, which attach themselves to a state or collective enterprise. Access to ﬁnance is another key advantage for SOEs since a large number of Chinese banks are themselves SOEs and would prefer to lend to other SOEs. Jing and Tylecote (2005) argue that many private enterprises have to depend on informal source of ﬁnance and even the new private sources of ﬁnance (which have been allowed by the government and have proliferated) tend to discriminate against non-SOE either in granting loans or in raising bureaucratic hurdles. There may be an industry-speciﬁc factor at work also. The real estate industry employs little technology – an area of weakness for SOEs due to their inferior absorptive capacity (Jing & Tylecote, 2005). The industry also needs capital (especially debt capital) in large amounts and hence access to capital is a critical resource. Our results also, however, point to a more nuanced picture about state ownership. Although many prior studies have focused on the distinction between SOEs and non-SOEs and the implications of this categorization for performance (sometimes with inconclusive results), we submit that identifying whether a ﬁrm is an SOE or not may itself be a critical issue. State-ownership, as deﬁned in a stringent way (state as the largest shareholder), matters less than whether state holds some share. Enterprises that are classiﬁed as SOEs under our broader deﬁnition may, in fact, be hybrid enterprises in Jing and Tylecote’s (2005) categorization. These enterprises might derive some beneﬁts from their government ownership and also suffer less form bureaucratic meddling. The hybrid enterprises might suffer disadvantages in terms of access to the research done by governmentrelated research institutes, which is not a salient issue in the real estate industry. We found Jing and Tylecote’s (2005) comment in this regard to be particularly relevant: ‘‘It is possible in principle (but uncertain) that minority SOEs have the best of worlds’’ (p. 274). Our argument is that the extent of uncertainty mentioned earlier varies according to industries, and the real estate may be one where the uncertainty is low. Our analysis and results are also consistent with a number of studies which suggest that although privatization might improve some organizational aspects, especially efﬁciency, governance etc., it may or may not lead to a clear improvement in performance. Xu and Wang (1999) ﬁnd that while state ownership is negatively related to performance, private ownership is insigniﬁcantly related to performance. Similarly, Qi, Wu and Zhang (2000) fail to ﬁnd any association between performance and tradable shares owned

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either by domestic or by foreign investors. We believe that instead of comparing performance differences and their antecedents across broader categories such as SOEs versus non-SOEs, future studies need to examine ﬁner categorizations since there are many variations of SOEs themselves. A small stake by the state, rather than complete privatization, may in fact be useful in getting preferential treatment without suffering the disadvantage of poor governance (including political meddling) and inappropriate managerial incentives. Our analysis also sheds light on the complex process of privatization in the Chinese real estate industry. Given China’s rapid development and the demand for real assets (such as land), real estate is likely to be a valuable asset (possibly earning Ricardian rents). Our analysis suggests that the Chinese government sells the real assets to ﬁrms that have at least some state ownership. In the process, these ﬁrms might become valuable and attractive acquisition targets. Some of these ﬁrms may be acquired at a later stage. Greater state ownership increases the chances of buying state-owned company, but non-SOEs may also be able to buy these SOEs with valuable assets. In this regard, our study provides some concrete evidence for Perotti et al’s (1999, p. 165) assertion: ‘‘It is widely acknowledged that China’s enterprise reform is a progressive process of reassigning property rights among ofﬁcials, managers within the ﬁrm, and outside entrepreneurs and ﬁrms in search of sales and mergers and acquisitions.’’ We acknowledge several limitations of our analysis. We focus on whether acquisitions were completed successfully or not and ignore post-acquisition performance. While in this industry, a successful acquisition might provide the acquirer a sound foundation for achieving superior performance in the future (e.g., due to access to a valuable resource in the form of land), in other industries, it may be important to look at either the market reaction to the acquisition (as done by the event studies in the ﬁnance and strategy areas) or post-acquisition performance. Given the somewhat complex objective function of many of the SOEs (social, economic etc.), this analysis may be somewhat incomplete, however! We also implicitly assume that real assets are valuable given China’s scarce land resources and rapid economic development. This assumption may not hold, at least at speciﬁc points in time and in the short run (e.g., if the real estate values are falling), which would put in doubt our assertion about stateowned ﬁrms becoming more valuable due to acquisition of real estate. Our chapter suggests several directions for future research. Future studies might examine whether the two-stage process for privatization observed in the real estate industry is applicable to other sectors. In other industries,

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it may be more difﬁcult to infuse SOEs with value since the markets for key resources (unlike land in the present analysis) are less encumbered. It may also be worthwhile to examine whether ﬁrms with small state ownership perform better at least in some respects versus other ﬁrms. In this regard, we believe that a broader deﬁnition of performance may be appropriate – e.g., variability of proﬁts rather than proﬁtability. These measures also seem appropriate in view of the current turbulence in the global markets.

NOTE 1. We also employed different geographic classiﬁcation such as southern cities companies versus northern cities companies, or coastal companies versus inland companies. The results were similar.

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SUBSIDIARY BRANDS AS A RESOURCE AND THE REDISTRIBUTION OF DECISION-MAKING AUTHORITY FOLLOWING ACQUISITIONS Sebastian Dieng, Christoph Do¨rrenba¨cher and Jens Gammelgaard ABSTRACT This chapter analyses the moves global brewery companies undertake towards the distribution of decision-making authority in their multinational organization and the likelihood of newly acquired subsidiaries to inﬂuence these moves. In this consumer goods industry, brands are suggested to be the primary subsidiary-speciﬁc resource to inﬂuence these distribution processes. Empirically, this chapter explores three European acquisitions of the Dutch brewery corporation Heineken in Switzerland, Slovakia, and France. We explore whether differing brand value (regional/international, standard/premium) has had an impact on the subsidiaries’ ability to maintain a certain degree of decision-making authority after the take-over. The results of our case studies show, however, that the ownership of valuable brands may not be considered as a critical resource for subsidiaries here. Advances in Mergers and Acquisitions, Volume 8, 141–160 Copyright r 2009 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1479-361X/doi:10.1108/S1479-361X(2009)0000008010

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INTRODUCTION The world beer industry is in great ﬂux. Stagnation of traditional beer markets in Western Europe and North America on the one hand and a strong and growing demand in the emerging markets of the Eastern Europe and China on the other hand puts among others an emphasis on the distribution of strategic decision-making authority in multinational breweries. The management of global brands speaks for centralization, whereas the manifold local beer brands call for a decentralization of decision-making authority regarding marketing and sales activities. Furthermore, mergers and acquisitions play a dominant role in the global beer industry. They lead to a quick access to markets and especially to the brands owned by the target ﬁrms. Simultaneously, they enlarge the possibility of global brand utilization. Thereby an important question to be investigated in this chapter is whether acquired ﬁrms in the brewery sector keep their decision-making authority regarding their brand and marketing activities, or whether headquarters of the acquiring multinational corporation (MNC) centralizes such strategic decisions. Hence, the chapter investigates the relationship between subsidiary resources and the strategic developments of subsidiaries in the context of an MNC – an important but still rather neglected topic, following a recent overview of the MNC literature by Eunni and Post (2006, p. 7). Given the overall importance of the acquisition – integration dichotomy in the brewery industry, this chapter is of high practical relevance to managers in the ﬁeld. Its practical relevance is driven by a research question that addresses the effective functioning of an MNC. Hereby we depart our investigation from a phenomenon, as suggested by Cheng (2007), rather than testing one ‘theory of the ﬁrm’ in the context of the brewery sector. Instead, we discuss the concept of decision-making authority in relation to decentralization on the one hand and acquisition–integration on the other. Investigating the distribution of decision-making authority in the MNC, further, makes it possible to discuss relevance of global versus local leadership. In its empirical part, the chapter concentrates on Heineken of the Netherlands and some of its subsidiaries acquired in Europe throughout the 1990s. Heineken, one of the largest brewery companies of the world today, has a long tradition in internationalizing its business. Founded in 1863, Heineken ﬁrst concentrated on gaining a strong foothold in overseas markets, mainly by featuring its premium brand ‘Heineken’. However starting in the 1970s, Heineken strongly internationalized in Europe by an unprecedented wave of acquisitions.

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In the remainder, the chapter ﬁrst provides a brief discussion of the literature dealing with the distribution of decision-making authority in MNCs and put this concept into the perspectives of centralization and acquisition strategy. Following some methodological annotations, the chapter then turns to its empirical part. First, Heinekens overall integration strategy that aims at a strong centralization is studied. This is followed by a detailed investigation into the integration process of three recently acquired European subsidiaries of Heineken that vary considerably with regard to brand ownership. The chapter ends with some assumptions as to what extent decision-making authority in newly acquired subsidiaries remains decentralized and in how far brands form a basis for resisting headquarters’ centralization attempts.

LITERATURE REVIEW Subsidiary decision-making authority is often associated with the concept of autonomy, and researchers such as O’Donnell (2000) deﬁne autonomy as the degree of decision-making a subsidiary maintains. However, as Young and Tavares (2004) have shown, subsidiary autonomy can be conceptualized rather broadly as it might be associated with among others: subsidiary role, network position, entrepreneurship, procedural justice, and control. To keep our analysis focused, this chapter investigates only whether acquired ﬁrms keep their right to make decisions regarding their brands and related marketing strategies following their take-over. Thus, decision-making authority, deﬁned by Goehle (1980, p. 20) as the ‘zone of discretion in making programmed or basic decisions as well as non-programmed or routine decisions’, is the concept being investigated. Traditionally, MNCs have been viewed as hierarchical entities where decision-making authority resided strongly within headquarters (Dunning, 1958). Later, Franko (1976) demonstrated that European MNCs to a higher degree decentralized decision-making than American MNCs. This empirical evidence paved the way for approaches in which decision-making authority was considered to be more evenly distributed between headquarters and subsidiaries. For instance, Hedlund (1986) argued that MNCs need to be seen as ‘heterarchies’ which have more than one centre and in which individual subsidiaries might be given strategic decision-making authority not only for their own subsidiary but for the whole MNCs. However, other researchers such as Kotthoff (2001) show a (re)centralization of strategic decision-making occurring in (German) MNCs.

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The fuzziness of the results should not come as a surprise, given fact that there are many simultaneously valid reasons for centralization and decentralization of authority. Reasons in favour of a decentralization of decision making encompass the information overload at the top management in the headquarters, the need for local responsiveness at foreign operations, the desire to tap into local knowledge, and the wish to motivate and reward subsidiaries (Baliga & Jaeger, 1984). Reasons that limit the decentralization of decision-making authority comprise headquarters’ desire to keep ﬁnancial control, overall strategic authority and a ﬁnal say in the shape of products, processes, and corporate values. Furthermore, the discussion of centralization versus decentralization has been associated to country-of-origin effects (Gates & Egelhoff, 1986), industry (Bartlett & Ghoshal, 1989), and function (McKern & Naman, 2003). With regard to the latter, Vachani (1999) has demonstrated that subsidiary decision-making authority was greater for marketing than for R&D or ﬁnance. Finally, the issue of control is associated with this question (O’Donnell, 2000), as decision-making rights might be decentralized, but in practice decisions are often made by expatriates that monitor and align activities to headquarters’ preferences (Doz & Prahalad, 1981). What is most likely to impact decision-making authority is, though, the control of resources upon which other MNC entities depend since they are critical to the overall performance of the company (Pfeffer & Salancik, 1978). On the basis of the distinctiveness of its resources, a subsidiary can gain different levels of power and independency from headquarters (Bouquet & Birkinshaw, 2008). Following Rugman and Verbeke (2001), such critical resources have some basic features: They incorporate knowledge that is tacit and fundamentally context speciﬁc, i.e., locally embedded and path dependent on the subsidiaries technological and organizational trajectory. Extant research has proven that speciﬁc technologies and product portfolios (Egelhoff, Gorman, & McCormick, 1998), learning capabilities (Mu, Gnyawali, & Hatﬁeld, 2007), entrepreneurial and managerial expertise (Birkinshaw & Hood, 1997), and internal R&D processes (Papanastassiou & Pearce, 2005) might turn out as critical resources that strongly empower subsidiaries vis-a-vis their headquarters. Remarkably little, however, is known about marketing resources and in particular about the role of brands as a critical resource. This is a major shortcoming of the literature since brands play a particular important role in consumer-driven industries such as the beer industry. Brands are the key to the customers, and initial market access through established brands is a key driver of the acquisition merry-go-around in the global brewery industry (Marinov & Marinova, 1999; Meyer & Tran, 2006; Meyer, 2007). The key

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question here is: how far brands might turn out as critical resources that empower acquired subsidiaries vis-a-vis their new headquarters. The context of an acquisition adds another dimension, as the subsidiary brand value has been developed before the take-over. A literature review by Young and Tavares (2004) shows that acquired subsidiaries are likely to have greater decision-making authority because of these path-dependent historical conditions. Haspeslagh and Jemison (1991) here suggest different integration strategies, where the level of decision-making authority is emphasized. High level of decision-making authority is recommended in the situation of subsidiary-speciﬁc resources that are likely to be destroyed if integrated too roughly, and e.g., key people are likely to leave the ﬁrm (Paruchuri, Nerkar, & Hambrick, 2006). In other situations, the acquiring ﬁrm is recommended to absorb the target ﬁrm to reveal synergy and leave the new subsidiary with little decision-making authority. Although, recently, Schweizer (2005) has shown that different integration strategies can be associated to different value chain activities, by which the subsidiary might keep its decision-making authority in respect to marketing, and loose them in relation to, e.g., ﬁnancial management. The question of whether acquired subsidiaries will keep their decision-making authority based on brand ownership must consequently dependent on whether brands are location-bound (Rugman & Verbeke, 2001), or brand-related value will be destroyed if centralization is emphasized by the acquiring MNC (Haspeslagh & Jemison, 1991).

METHODOLOGY Given the limited amount of knowledge on the role of brands as a critical resource subsidiaries might draw on, an exploratory case study approach was chosen to gather more data on the subject (Yin, 2003). Furthermore, this approach also supports the analysis of process phenomena (Pettigrew, 1990; Langley, 1999) such as the integration of subsidiaries over time. By adopting a process perspective, we are able to identify the conﬂict-ridden and non-linear phenomena of centralization and decentralization of decision-making authority, which are made up by a series of events. To avoid ‘death by data asphyxiation’ (Pettigrew, 1990, p. 281), we followed a focused approach (George & Bennett, 2005), i.e., integration issues and the role speciﬁc brands played were of interest only, even though we attempted to maintain the richness of data serving as background information. We chose a very speciﬁc empirical setting to isolate brand ownership effects on integration by studying three breweries Heineken acquired in Europe during the 1990s that differ with

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high

Premium/national and export: ‘Zláty Bazănt’

Q U A L I T Y low

International Specialty Beer: ‘Desperados’

Regional/ Mainstream: ‘Calanda’ and ‘Haldengut’ Increase of value regional

national

international

GEOGRAPHIC REACH

Fig. 1.

Different Types of Brands and Their ‘Value’.

regard to their brands’ reach (regional, national, or international brands) and quality (mainstream or premium/speciality brands). Given the fact that there is a trend towards premium/specialty brands in the market, these brands turn out to be more valuable than mainstream brands (Fig. 1). Even though we are analysing only one company, our analysis of three subsidiary integration processes allows for thorough within case comparison. Data were collected from company sources (of Heineken and the three acquired companies), encompassing annual reports, press releases, company newspapers, periodicals etc. In addition multiple secondary sources were used including the Zephyr database, national company handbooks as well as the Lexis-Nexis database and the HWWA (Hamburg Institute of International Economics) press archive for an extensive news coverage. Some more specialized secondary sources such as company biographies and case studies (retrieved from the European Case Clearing house and Business Source Premier) were used too. The multiple sources accessed provided a dense and overlapping information base, which minimized typical problems tied to the use of secondary data such as measurement error, source bias, low reliability, and, probably most important, missing match with the needs of the study (Emory & Cooper, 1991). With regard to the latter, it turned out that national and regional newspapers showed a particular great interest as to what happened

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to ‘their’ breweries and brands after being taken over. For these companies were often seen as part of a national or regional everyday culture. Data were gathered for an extended period starting in the years before the take-over up until 10 or more years after the acquisition, to cope with longterm integration effects. To enhance reliability of data analysis, author triangulation was applied (Houman-Andersen & Skaates, 2004). Even though interviews are often considered as a very important data source for case studies (Yin 2003, p. 89), we refrained from interviewing subsidiary managers as the period analysed (10–17 years) was very long, and interviewees’ responses might be prone to ex-post rationalization. Validity of the overall argument, however, was checked in an interview with a subsidiary manager of Heineken.

HEINEKEN’S OVERALL (DE)CENTRALIZATION POLICY In the late 1980s, Heineken was considered as a decentralized company (Lawrence, 1991), basically conﬁrming extant theory, which assumes that a European company active in the food and beverage industry should be rather decentralized (cf. Franko 1976; Bartlett & Ghoshal, 1989). Heineken has, though, changed its strategy tremendously since the 1980s. A recent study comes to the conclusion that over the past decades, a strong ‘Heinekenisation’ has taken place in foreign operations (Elshof, 2005, p. 12). This includes a strong centralization of decision-making authority with regard to marketing issues (ibid.). Although Heineken owns a large portfolio of 170 regional, national, and speciality brands, the globally distributed brands ‘Heineken’ and ‘Amstel’ are still the most important revenue base for Heineken. They alone account for about 30 per cent of beer produced (in terms of volume), and they are highly proﬁtable (Heineken, 2007). Thus ‘keeping the Heineken brand healthy and growing’ is seen as vital (Heineken, 2007, p. 10). On this behalf, all marketing policy (including guidelines and standards for brand style, brand value, and brand development) for the two global brands (‘Heineken’ and ‘Amstel’) is made at the headquarters. Headquarters, further, strongly controls and supports the local marketing of these brands (Elshof, 2005). In addition, a particular emphasis is put on so-called top-line growth (Heineken, 2007, p. 7), i.e., the marketing of higher priced premium and speciality beers with a high-proﬁt margin in expense of lower proﬁtable beer types (standard, low-price, trademarks). Therefore, Heineken motivates foreign subsidiaries to put strong emphasis on selling the global brands of Heineken.

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Conformity to headquarters standards is secured by a huge army of expatriates. In 2002, a total of 260 expatriates mainly of Dutch nationality were employed in 62 countries (Heineken, 2002), with these managers switching their positions almost every ﬁve years (Fiedler, 2004). Therefore, decision-making authority at Heineken seemingly is highly centralized. The implementation of headquarters decisions in foreign subsidiaries are tightly monitored by direct personal control through expatriates. The question, however, remains to what extent overall centralization policy of Heineken is feasible in newly acquired subsidiaries that might own critical marketing resources. This will be looked at in more detail later, studying the integration process of three recently acquired subsidiaries that differ in ownership of more or less valuable brands.

THREE CASE STUDIES An overlooked aspect in the literature so far is subsidiary brands and its relationship to subsidiary decision-making authority. The basic question to be looked at throughout the cases is, therefore, what effects do different kinds of brands (global, local, or specialty brands) have on the ability of subsidiaries to maintain decision-making authority after being acquired? Heineken deliberately prefers to acquire small- or medium-sized companies (Table 1). Consequently, target ﬁrms only slightly differ with regard to size, volume, and sales of the acquired companies. The three cases analysed later represent such small- and medium-sized acquisitions. There is little difference among those three companies with regard to size, volume, and sales, but there are notable differences with regard to their brand portfolio. The selected cases were: – Calanda-Haldengut, a Swiss brewery company, acquired in 1993. This company operated two brands (‘Calanda’ and ‘Haldengut’) that are regional in scope and standard in quality. – Zlaty´ Bazˇant of Slovakia, acquired in 1996. This company maintained a national premium brand (‘Zlaty´ Bazˇant’) that even was exported to neighbouring countries. – Brasserie Fischer of France, also acquired in 1996. This company operated a specialty beer brand named ‘Desperados’, which gained strong popularity in many European countries in the acquisition year. These three companies strongly represent the different types of companies Heineken has taken over in past decades (altogether Heineken has taken

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Table 1.

Heineken’s Acquistions in Europe 1990–2008 (June) According to Sales Volume.

Company

Large Scottish & Newcastle (various country businesses) BBAG/Brau Union Brau Holding International AG Cruzcampo SA Karlsberg International Brand GmbH Small and medium sized Bravo International Grupa Zywiec Central European Brewing Group (CEBCO) Brasserie Fischer Saint Arnould Stepan Razin Birra Moretti SpA Bere Mures Calanda-Haldengut Zagorka-Brauerei Patra Brewery Fu¨rstlich Fu¨rstenbergische Brauerei KG Krusˇ ovice Baikal Brewery JSC Karsay Rodic Zlaty´ Bazant Wu¨rzburger Hofbra¨u Komaromi Sorgyar RT Martiner Pivovarni Ivana Taranova Rechitsa Gemer Hoepfner SOBOL Beer LLC Afﬂigem Brouwerij BDS NV Le Cave de Chalet

Country

Year

First Stake in Per Cent

Sales Volume (in mil hl) in Year before Acquisition

UK

2008

100.0

29.7 (excl. BBH)

Austria Germany Spain Germany

2004 2001 2000 2002

MAJ 49.9 88.2 40.0

16.0 10.5 6.0 4.9

Russia Poland Russia

2002 1994 2004

100.0 24.9 100.0

2.9 2,0 1.8

France France Russia Italy Romania Switzerland Bulgaria Russia Germany

1996 1996 2006 1996 2008 1993 1994 2005 2004

54.4 66.0 100.0 100.0 N.A. 52.3 80.0 100.0 100.0

1.7 1.4 1.4 1.5 1.2 1.2 0.97 0.77 0.70

Czech Republic Russia Slovakia Serbia Slovakia Germany Hungary Slovakia Russia Belarus Slovakia Germany Russia Belgium France

2007

100.0

0.70

2005 1998 2007 1995 2005 1991 2000 2005 2008 2000 2004 2004 2000 1993

100.0 49.0 N.A. 66.0 90.7 50.3 51.0 100.0 N.A. 52.8 100.0 100.0 50.0 83.0

0.58 0.50 0.50 0.45 0.36 0.35 0.32 0.29 0.29 0.25 0.20 0.20 0.07 N.A.

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Table 1. (Continued ) Company

Interbrew Italia Ariana VINAP Eichhof

Table 2.

Country

Year

First Stake in Per Cent

Sales Volume (in mil hl) in Year before Acquisition

Italy Bulgaria Russia Switzerland

1995 1997 2004 2008

100.0 64.5 100.0 96.5

N.A. N.A. N.A. N.A.

Characteristics of Case Study Companies in the Year before Acquisition. Size

Calanda Haldengut

Zla´ty Baza˘nt Brasserie Fischer

Brands

Volume in million hl

Sales in million $US

Number of employees

1.20 (of which 0.6 are beer) 0.45

165.8

N.A.

Regional mainstream brands: Calanda and Haldengut

20.6

600

1.70

222.7

950

National/intern. premium brand: Zla´ty Baza˘nt International specialty brand: Desperados

over 37 brewery companies in Europe from 1990–2008, Table 1). They are also quite representative for the different kinds of brewery companies at sale on the European market. Table 2 gives an overview on some characteristics of the three newly acquired subsidiaries studied.

Case 1: Calanda Haldengut, Switzerland – Regional/Standard Brands as a Critical Resource? Heineken’s take-over of Calanda Haldengut, a holding of two regional breweries in Switzerland, in 1993, was the ﬁrst large foreign incursion into the Swiss beer market. Heineken had already acquired 10 per cent in the holding a few years before, presumably to achieve some control over its

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Swiss distributor of the Heineken brand. Calanda Haldengut was an important player on the Swiss beer market. It held a 12.5 per cent market share (600,000 hl in 1992) in the beer market of which 420,000 hl were own brands. Additionally, it distributed and produced 600,000 hl soft drinks (e.g., by a licence production of Coca-Cola). The two brands ‘Calanda’ and ‘Haldengut’ appeared to be problematic being regional in scope and standard in quality. Second, the company struggled with a sluggish Swiss beer market. Furthermore, the Haldengut Holding, one of the holding partners and majority stakeholder in Calanda Haldengut, did not voluntarily search for an international partner, but was forced to do so, due to permanent liquidity problems. Therefore, some voices immediately urged that Heineken would be less interested in the development of the regional brands, but rather in the distribution network to channel Heineken beer to the Swiss market (Neue Zu¨rcher Zeitung, December 24, 1993). Subsequent to the take-over, Heineken management took control. First, Heineken Veteran Willem Hosang led the corporation followed in 2002 by Boudewijn van Rompu, former CEO of Heineken Vietnam. Then the typical Heineken acquisition–integration strategy was implemented including the sale of real estate property and unrelated businesses such as soft drink production. Consolidation also affected the conﬁguration of breweries. A focused investment policy towards the Calanda site in Chur led to the closure of the incumbent Haldengut brewery in Wintherthur in the realm of a Heineken-wide cost-cutting program. Two years before, Heineken had acquired the rest of the outstanding shares and renamed the company to Heineken Switzerland AG. The strategic alignment of the subsidiary’s brand portfolio turned out to be a headquarters matter. It was Heineken’s CEO, Karel Vursteen, who announced that Calanda and Haldengut would become national ﬂagship brands and that this would be accompanied by an aggressive marketing campaign and improved service in gastronomy. Vursteen utterances, however, turned out to be rather non-binding for the decade to come. On the contrary, the subsidiary’s brand portfolio suffered in that period of time from competition by genuine Heineken brands. In the following years, Heineken introduced an international premium brand (‘Heineken’), an international standard brand (‘Amstel’) and various specialty brands. ‘Amstel’ was introduced accompanied by a massive marketing effort and had been brewed in Chur from 1996. From a Calanda Haldengut point of view, this move was conﬂicting, as ‘Amstel’ belonged to the same segment as the ‘Calanda’ and ‘Haldengut’ brands. As several annual reports indicate,

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‘Heineken’ and ‘Amstel’ gained market share signiﬁcantly in absolute and relative terms, whereas ‘Calanda’ and ‘Haldengut’ lost. Without additional support, ‘Calanda’ and ‘Haldengut’ sales decreased with the overall demand for standard beer. The growth of ‘Heineken’ justiﬁed its local production from 1998 onwards. From 1997, further specialty brands such as ‘Ittinger Klosterbra¨u’, ‘Erdinger Weissbier’, and alcohol-free ‘Buckler’ were imported. The promise to launch either ‘Calanda’ or ‘Haldengut’ nationwide was only fulﬁlled in 2005, 12 years after the acquisition, but with meagre success only. Today, ‘Calanda’ and ‘Haldengut’ account for only about 2.7 per cent of the Swiss beer market each, whereas ‘Heineken’ has 9 per cent. Summing up, the ownership of regional and standard beers did not impede the loss of subsidiary decision-making authority. Heineken supervises its Swiss business through expatriates and has merged various Swiss companies. The massive introduction of global brands such as ‘Heineken’ and ‘Amstel’, whose marketing strategy is deﬁned at the headquarters, at the expense of regional brands, shows that the subsidiary lost decision-making authority not only in deciding on important strategy-related areas but also in matters related to the compilation of the subsidiary’s brand portfolio.

Case 2: Heineken’s Slovakian Breweries – Premium Brands as a Critical Resource? The acquisition of a 66 per cent stake at the Slovakian corporation Zlaty´ Bazˇant was similar to the case of Calanda Haldengut with regard to the following features: Heineken was the ﬁrst international player that invested into the country; Zla´ty Baza˘nt, like Calanda Haldengut, accounted for about 10 per cent of the market; and the output volume of Zlaty´ Bazˇant was only slightly higher than at Calanda Haldengut (450,000 hl) in the acquisition year. Furthermore, both companies had to struggle with problems: Whereas Haldengut suffered from a liquidation crisis, Zlaty´ Bazˇant lost a 9 per cent market share between 1994 and 1995 due to a re-organization measure. Beside these similarities, there were also some differences: First, Calanda Haldengut was located in a developed country with a mature market, whereas Zlaty´ Baz˘ant was located in a transition economy with a growing market for beer (at least until 2003). Second, Zla´ty Baza˘nt owned a national premium brand (‘Zlaty´ Bazˇant’), which had even been exported (e.g., to the Czech Republic). Additionally, Zlatv Bazˇant ran its own malt house beside the brewery.

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As in the Swiss case, a manager with a strong Heineken background (Marc Bolland) became general director of Zlaty´ Bazˇant just after the takeover. Other Heineken managers followed (Jean Paul van Hollebeke and Dimitar Aleksiev). Financial management of the subsidiary has remained in Dutch hands until today. Next to modernizing Zlaty´ Bazˇant and upgrading one of its brands, Heineken bought three other breweries (Corgon, Martin, Gemer) in Slovakia between 1997 and 2000. In 1999, marketing activities of Corgon and Zlaty´ Bazˇant were combined into a new company called Heineken Slovensko. Martin and Gemer were also integrated into that company following their acquisition. When beer consumption went down due to an increase of alcohol taxes in 2003, the breweries at Corgon, Martin, Gemer were closed down and production was transferred to Hurbanovo, which remained the single Heineken production site in Slovakia. Until 2001, Heineken Slovensko delivered no proﬁts, due to the large investments into the brewing and malting facilities. Today, Heineken Slovensko produces about 2 million hl of beer per year and has a 37 per cent market share. Since 2003, the subsidiary is directly controlled by Austrian Brau Union, Heineken’s regional Central and Eastern European headquarters. Even though the introduction of global brands has been negligible compared to the Swiss case, the strategic alignment of Zla´ty Baza˘nt’s endogenous brands was in this case also a headquarters’ matter. In 1999, the subsidiary was forced by the headquarters to give up its successful license production of Gambrinus, a traditional Czech Pilsner. Today, Zla´ty Baza˘nt’, now renamed Heineken Slovensko, sells similar brands from other Heineken Czech subsidiaries such as ‘Krusˇ ovice’ or ‘Starobrno’. Furthermore, ‘Desperados’ ﬁlls the gap left by a lack of indigenous Zla´ty Baza˘nt’ specialty brands. Second, the headquarters took control over the repositioning of ‘Zla´ty Baza˘nt’. It was introduced in other Central European countries, even though it was not well known until then. Following Marc Bolland, general director of Zlaty´ Bazˇant at that time, ‘an ‘‘exotic brand from somewhere’’ [is] a good place to start’ (Bolland cited in Boland 1996). Thereby, headquarters decided on a re-launch of the familiar logo of ‘Zla´ty Baza˘nt’ (the pheasant, king of farmland birds) to make it more prominent and a little less mechanic. It is fair to say, therefore, that ‘Zla´ty Baza˘nt’ has become the ‘Heineken’ for Slovakia and neighbouring countries. Even though consumers may buy ‘Heineken’ and ‘Amstel’ in Slovakia, these brands do not belong to the top 20 beer brands in Slovakia. The Zlaty´ Bazˇant brands, however, account for 10.4 per cent of the Slovakian market. They are exported to the United

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States, Canada, the Ukraine, Hungary, Lithuania, Latvia, Estonia, Moldavia, or Kazakhstan (export) and produced under license in Poland, Czech Republic, and Russia (Heineken Slovensko Homepage). Coincidently, cans of ‘Zla´ty Baza˘nt’ were upgraded in 2004 in regard to design and are now shining in new elegant green, the colour of Heineken. The restructuring and integration process at the various Slovakian brewers acquired by Heineken was as ﬁerce as in the Swiss case. Heineken personnel ﬁlled in CEO and ﬁnancial management positions, quickly closed down production sites and transferred brands to one single site. The Hurbanova site (‘Zla´ty Baza˘nt’) was spared from being closed down and has been even extended through new brewing and malting facilities. In marketing affairs, Heineken headquarters took control over the strategic realignment of ‘Zla´ty Baza˘nt’. ‘Zlaty´ Bazˇant’ was successfully integrated into Heineken’s Central and Eastern European brand portfolio and plays a ‘Heineken’-like role there, albeit at a regional level. However, the subsidiary itself had only little impact on these strategic decisions; they were assigned by the headquarters.

Case 3: Brasserie Fischer, France – Specialty Brands as a Critical Resource? Heineken was well established in France holding about 23 per cent market share and employing 3,700 people, when it acquired Brasserie Fischer and its subsidiary Societe´ Adelshoffen in 1996. At that time, Heineken, further, owned a brewery located in Schiltigheim, Brasserie Fischer’s home base. The take-over was 1.3 billion FF worth and added 950 employees to the Heineken payroll in France. Together with a further acquisition in Northern France, Heineken’s share in the French beer market rose to 30 per cent, securing its number two position behind market leader Danone (43 per cent). Brasserie Fischer was a pro-active company. For instance, Brasserie Fischer had developed a range of speciality beers of which ‘Desperados’ – an aromatized Tex-Mex beer introduced in 1995 – gained strong popularity in the acquisition year. This was exactly what lacked Heineken for quite some time: successful speciality brands that give access to young beer drinkers. At ﬁrst sight, the typical Heineken consolidation strategy was applied. Thus, the brewery at Brasserie Fischer’s subsidiary Adelshoffen was closed, and its brands (e.g., ‘Adelsscott‘) were transferred to the production site of Brasserie Fischer in Schiltigheim in 2000, which had already been upgraded

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in 1998. Moreover, the majority of the 250 distributors that were bound to Brasserie Fischer were taken over in the wake of the acquisition and used to channel more Heineken Brands to the French customers (Kahlen, 2002). Brasserie Fischers’ breweries, though, have never produced ‘Heineken’, for this brand has been produced in other French sites of the corporation. Moreover, Brasserie Fischer has maintained relatively long its decisionmaking authority, as Heineken allowed this subsidiary a ‘spe´cialiste des spe´cialites’ status (La Tribune, November 13, 2001, p. 24). Thus, Heineken for some time acknowledged Fischer’s innovativeness and refrained from integrating the company into its regional holding in France, Sogebra. Fischer maintained its own R&D centre and was planning two product innovations per year. By doing so, Heineken France developed Brasserie Fischer into a centre for beer mix drinks. The production of ‘Desperados’ that was now sold by the whole Heineken distribution network grew in importance in the Schiltigheim site at the expense of other beers (basically beers that belong to the Brasserie Fischer product portfolio). Although this at ﬁrst allowed for economies of scale, it later-on created massive problems, when the beer mix drinks faced an increasing competition by numerous types of Alco-pops (Agence France Press, April 7, 2005). This led to a downturn in sales (50 per cent in the years 2003 and 2004) and to re-organizations, redundancies and ﬁnally to the integration of Brasserie Fischer into Sogebra and its loss of its own R&D centre in 2005. This move went hand in hand with the creation of a marketing unit for speciality brands in the regional headquarters. Recently (in 2008), the production site of Brasserie Fischer was closed down and the personnel partly transferred to Heineken’s second subsidiary in Schiltigheim and its other French sites. Summing up this case, with a time lag, Brasserie Fischer was, like in the two other cases, fully absorbed into Heineken’s company network. Heineken’s acknowledgment of Brasserie Fischer’s innovativeness made the latter temporarily an exception to the rule, but dependency on one type of beverages made the company vulnerable and prone to Heineken overall integration strategy.

DISCUSSION AND CONCLUSION Table 3 gives a summary of the three cases studied. In all cases, we can see a high degree of integration and centralization of decision-making authority following acquisition. In two of three cases, personal control was established

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Table 3.

Integration Processes and Decision-Making Authority.

Company

Calanda Haldengut Zla´ty Baza˘nt Brasserie Fischer

Overall Integration and Streamlining High High First: low; today: high

Centralization of Strategic Marketing Decision High High First: low; today: high

How Heineken Has Proceeded with the Brand Negligence Boost De- and re-centralization of responsibilities

right after the acquisition and has been maintained until today. In the third case (Brasserie Fischer), decision-making authority at the beginning was surprisingly high, but later-on, all production sites were closed down, and the brands were integrated into Heineken’s regional division in France. In regard to marketing decisions, it is clear that the strategic decision of the brand portfolio, i.e., the question which brands are supposed to be maintained or introduced or which brands are worth being boosted by the company-wide distribution network is a headquarters matter. In the Calanda-Haldengut case, it was clear that the introduction of the global brands, ‘Heineken’ and ‘Amstel’, was a top priority in expense of the regional standard brands. In the Slovakian case, Heineken decided over the brand portfolio in Slovakia, but also supported ‘Zlaty´ Bazˇant’ to become the ‘Heineken’ of Slovakia and its neighbouring countries. Brasserie Fischer had some decision-making authority in developing new beer mix beverages for the whole company network. However, decentralization happened rather as a consequence of acknowledging the subsidiary’s innovativeness rather than owning a speciﬁc valuable brand. Dependency on beer mix beverages only revealed to be fatal for Fischer. Even though the faith of the brands had been very different in our three cases, the centralization of decision making at Heineken headquarters was largely the same in the long run. Taken together, the case studies demonstrate that brand ownership can hardly be seen as a critical resource, which empower newly acquired subsidiaries in the brewery industry. In all three cases studied, Heineken’s strong overall centralization policy overruled subsidiary attempts to maintain autonomy. This extended to subsidiary management, which was replaced by Heineken personnel, to operations, which were streamlined by rationalization measures and plant closures, and in particular to brand ownership and brand-speciﬁc decision-making competencies. With regard to the latter subsidiaries in the long run lost all strategic competencies (e.g., the

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right to decide on the development of new and incumbent brands as well as the right to decide on the range and priority of brands distributed) with only a few operational competencies remaining at subsidiary level. Interestingly, the value of the brand did not make a difference here. More valuable brands such as ‘Zla´ty Baza˘nt’ that turned out to be international in reach and premium in quality did not allow for a greater subsidiary decisionmaking authority than, e.g., the regional/standard brand ‘Calanda’. A somewhat deviant case here is the case of Brasserie Fischer, where headquarters centralization policy only occurred with a certain time lag. According to our impression, however, it was not the availability of a successful speciality brand that initially blocked a centralization of decision-making authority but – as mentioned earlier – the innovation capability of the subsidiary that is less portable and needs a higher level of absorptive capacity to be developed over time by the headquarters. Looking into the reasons, why the brands studied here hardly turn out to serve as critical resources for newly acquired subsidiaries, the following points seem instructive. First, as many contributions from the global marketing literature have set out, the consumption of beer, as a culturally sensitive product, is highly subject to country-of-origin effects (Schaefer, 1997; Phau & Suntornnond, 2006; Dawes, 2008). In other words, the national origin of a product implies a strong preference of customers. Sometimes even the city-of-origin is playing an important role (Lentz, Holzmu¨ller, & Schirrmann, 2007). However taking into consideration the results from our case studies, national or local origin is clearly not associated with subsidiary ownership and only loosely associated with the spatial dimension of where the branded product is produced. Concentration of production, at least at national level, seems not to harm customers brand loyalty. Second, although more traditional consumers stick to incumbent national brands – or at least to brands that successfully carry this image – especially younger consumers feel more inclined to accept global brands such as ‘Heineken’ or ‘Amstel’ next to or as a substitute for national or regional brands. This trend of cross border sub-cultural consumer behaviour (Welge & Holtbru¨gge, 1999) is generally weakening the role of national and regional brands as a power resource for subsidiaries since it genuinely supports and justiﬁes the introduction of headquarters’ global brands. Third, the case studies also demonstrate that Heineken is following a very careful policy in changing and re-launching incumbent brand images. Moreover, ultimate ownership information is not indicated at all on the products or in a rather hidden way to avoid brand corrosion or the destruction of the national brand image (Jaworski & Fosher, 2003).

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Fourth, in line with overall ﬁndings on the transfer of marketing knowledge (Schlegelmilch & Chini, 2003), brand-related knowledge seem to be rather easy to transfer from the subsidiary to the headquarters. In terms of Rugman and Verbeke (2001) the brand and the brand image itself seem to codify the many tacit and fundamentally context-speciﬁc knowledge associated with selling a particular type of beer. Other knowledge associated with marketing beer – e.g., speciﬁc advertising, event marketing – is not specialized to the subsidiary, rather nationally (if at all).

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