The Routledge Companion to Mergers and Acquisitions

Annette Risberg, David R. King, Olimpia Meglio, Annette Risberg, David R. King, Olimpia Meglio

• Publisher: Routledge
• Year: 2015
• ISBN:
  9781134497720
• Edition: 1
• Topic: Business
• Subtopic: Mergers & Acquisitions
• Index: Business

Mergers and acquisitions (M&As) are events that attract considerable interest from academics and practitioners, and much research has been conducted into their impact on individuals, organizations and societies. Yet, despite all the existing research and the varied theoretical and methodological approaches employed, there remains more to learn about M&As.

The Routledge Companion to Mergers and Acquisitions takes a detailed look at this multifacted subject using a novel framework of four domains – substantive issues, contextual issues, methodological issues and conceptual issues. Drawing on the expertise of its international team of contributors, the volume surveys the state of the field, including emerging and cutting-edge areas such as social network analysis and corporate branding.

This Companion will be a rich resource for students, researchers and practitioners involved in the study of M&As, and organizational and strategic studies more widely.

Part I

Substantive domain of M&A research

The first section of the book focuses on substantive or important considerations in merger and acquisition (M&A) research. M&A research is analogous to the story of blind men feeling an elephant. Although the larger animal is the same, M&A also has distinct parts that contribute to the difficulty of understanding the whole. This has been recognized previously by Bower (2001); however, he largely distinguishes between industry consolidation within an industry or region, extension to new products or markets, and technology acquisitions. In considering observed M&As and developing how to explain or improve their performance, additional similarities and differences need to be considered. Using a variety of approaches and topics, this section begins to develop differences in M&A that researchers and managers need to consider.

A similarity across acquisitions is that they involve strategic change for the firms involved. This is the focus of the first two chapters. The first chapter by Jennifer Sexton expands on recognition that technology M&As are often unique. In her chapter, she develops theory to outline how learning from acquisitions can help organizations adapt to technological change. However, she also identifies the risk that organizations may simply reinforce existing tendencies with acquisitions that hinder adaptation. Conditions associated with each outcome are developed. In the second chapter, the theme of adaptation is also explored by Christina Öberg. She conducts case studies revealing that novel motives for acquisitions involve responding to changes in a firm’s customer, supplier, and competitor network. As a result, firms may use acquisitions to mirror the strategies of others or to cope with competitive challenges. The cases also highlight conditions that impacted the resulting performance. The chapters suggest that the viewing of M&As from either technology or competitive dynamics perspectives can shift what is viewed, similar to viewing an elephant from different angles.

Beyond different views and perspectives, differences are also important, as M&As can serve alternate purposes or depend on different aspects of an organization or its experience. The other three chapters in this section explore these themes, beginning with the third chapter by Mahima Thakur and Anjali Bansal. They focus on the role of Human Resources (HR) in successful M&A integration. While integration is recognized as playing an important role in creating value from acquisitions (Cording et al. 2008), research needs to develop a more systematic approach to the human side of integration (Seo and Hill 2005). This chapter begins this process by pulling lessons from case studies to develop the importance of involving HR and providing tailored training during M&As. Meanwhile, the fourth chapter by Pankaj Patel and David King theoretically develops and then empirically tests how family ownership may influence acquisition behavior. The chapter outlines how maintaining a family’s socio-emotional wealth as an acquisition motive may not be aimed at creating financial wealth. Additionally, this motive likely depends on the size of a family firm, with the middle-sized firm being more likely to use acquisitions. Considering a motive beyond financial performance in acquisitions by family firms has the potential to explain why not all M&As lead to improved financial performance. In the final chapter of the this section, Niina Nummela and Mélanie Hassett use a case study of Finnish firms to explore acquisition capability microfoundations. The chapter builds on one of the most studied acquisition variables—acquisition experience—to develop the idea that research considering this variable alone is not sufficient for creating and maintaining an acquisition capability. The overall M&A process is considered in identifying the four categories of acquisition capability: microfoundations of managerial capability, organizational structure, experiential learning, and knowledge transfer.

In summary, progress in M&A research likely requires understanding both underlying similarities and differences among acquisitions. A commonality is that acquisitions involve change, but the type and motivation of adaptations can differ. This drives the consideration that acquisitions can achieve different goals, for example, technology change, competitive pressures, or maintaining family socio-emotional wealth. Further, conditions within an acquirer, such as HR and experience with past acquisitions, can either hinder or facilitate reaching desired outcomes. An additional area where acquisitions may hinder goals is whether they reinforce existing approaches or create inertia. Achieving acquisition goals may be facilitated by developing an acquisition capability that requires going beyond simply completing the M&A.

In total, the chapters included in this section begin to explore similarities and differences in the substantive domain of M&A research and offer insights for management practice and future research.

References

Bower, J. (2001) ‘Not all M&As are alike—and that matters,’ Harvard Business Review, 79(3): 93–101.

Cording, M., Christmann, P., and King, D. (2008) ‘Reducing causal ambiguity in acquisition integration: intermediate goals as mediators of integration decisions and acquisition performance,’ Academy of Management Journal, 51: 744–67.

Seo, M. and Hill, S. (2005) ‘Understanding the human side of merger and acquisition,’ Journal of Applied Behavioral Science, 41: 422–43.

1

Acquisitions as an instrument of organizational adaptation through innovation

Jennifer C. Sexton

Introduction

Mergers and acquisitions (hereafter referred to as acquisitions) continue to be an important firm strategy and have received a significant degree of attention in the management field. Firms are motivated to acquire other firms for a variety of reasons; acquisitions can be used to increase market power, overcome barriers to entry, enter new markets quickly, and acquire new knowledge and resources (Vermeulen and Barkema 2001). Acquisitions have been examined in terms of their ability to both create and destroy firm value (Haleblian et al. 2009). At their most basic, acquisitions allow firms to grow larger in size, complementing or duplicating existing resources and capabilities. At the other end of this spectrum, acquisitions allow firms to add knowledge, increase their capabilities, enter into entirely new industries and markets, and serve an entirely new group of customers.

By their very definition, acquisitions have great potential to alter firms. Acquisitions, even those considered small or routine in nature, can have a large impact on the acquiring firm. Many studies on the impact of acquisitions on the firm have focused on value creation and performance, and the results are not rosy. These studies—focused on the “dark side” of acquisitions—highlight the negative impact on value creation (Seth et al. 2002), emphasize managerial hubris that leads to overvaluation of the acquired firm (Jensen 1993; Zhu 2013), and reveal the negative effects on firm innovation (Hitt et al. 1996; Lei and Hitt 1995).

While the outcomes of acquisitions are potentially negative, firms pursue acquisitions because the benefits may outweigh the risks. Acquisitions can expose firms to new knowledge, routines, and capabilities; the introduction of knowledge into the firm through acquisitions can be a source of innovation within the firm (Ahuja and Katila 2001) and lead to organizational learning (Ghoshal 1987; Hitt et al. 1996; Vermeulen and Barkema 2001). Exposure to new knowledge may stave off competency traps (Leonard 1995) and allow firms to adapt to rapidly changing competitive environments (Brown and Eisenhardt 1998; Vermeulen and Barkema 2001). Research has shown that firms learn from acquisitions (Vermeulen and Barkema 2001). In their study of 25 large Dutch firms, Vermeulen and Barkema (2001) found that acquisitions may improve the realization of a firm’s later expansions. This improvement stems from both the procurement of the target firm’s knowledge base and the recombination of new and existing knowledge within the acquiring firm. Although organizational learning may not be the primary motivation for the acquisition, the introduction of new knowledge may break inertia and subsequently revitalize the firm (Vermeulen and Barkema 2001). Firms can also learn from the process of pursuing an acquisition (Muehlfeld et al. 2012). Experience-based learning can affect both knowledge creation and transfer, subsequently inducing changes to organizational practices, strategies, and structures (Cyert and March 1963; Levitt and March 1988). Muehlfeld et al. (2012) examined whether firms were able to learn from success and failure experiences in different acquisition contexts. Their study of 4,973 acquisition attempts in the newspaper industry revealed that context moderates the effects of success and failure on subsequent acquisition performance. Both success and failure may shape the firm’s organizational routines, resulting in adaptation.

Acquisitions whose explicit purpose is to gain access to new knowledge and new technologies have become an important and accepted strategic occurrence (Makri et al. 2010; Uhlenbruck et al. 2006). Previous scholars have asserted that technology acquisitions represent a way for firms to successfully innovate in dynamic changing environments. Technological resources of the potential target increase the likelihood that a firm would choose acquisitions over other forms of collaboration (Villalonga and McGahan 2005). In a study of 9,276 acquisitions, alliances, and divestitures between 1990 and 2000, a target firm’s technological resources were significantly associated with the choice of acquisitions over alliances and divestitures (Villalonga and McGahan 2005). In their study of acquisition targets, Heeley et al. (2006) found that a target firm’s investments in R&D led to a higher likelihood of being acquired under conditions of high environmental munificence and dynamism. Additionally, acquisitions can be used by firms to effectively access technological resources (King et al. 2008). These technological resources can be seen as an embodiment of organizational knowledge, and the acquisition of technologically rich targets may provide opportunities for organizational learning by exposing acquirers to new and diverse knowledge (Hitt et al. 1996). Thus, acquisitions represent a method used by firms to manage their resource profiles, and in the case of technological resources, their knowledge domains (Ahuja and Katila 2001; Capron, 1999; Capron and Pistre 2002; Sirmon et al. 2007).

Organizational innovation results from the combination of existing and new knowledge (Kogut and Zander 1992), and acquisitions represent a way for firms to both source and integrate knowledge (Almeida et al. 2011). Through the acquisition of knowledge, firms can further develop and enhance their innovative performance (Ahuja and Katila 2001), ultimately leading to organizational adaptation.

Studies have also focused on how the type of knowledge acquired can impact innovation. Characteristics such as knowledge complementarities, knowledge similarities, and the absolute versus relative size of the acquired knowledge base have been examined and found to impact innovation within firms (e.g. Ahuja and Katila 2001; Cassiman et al. 2005; Cloodt et al. 2006; Makri et al. 2010; Vermeulen and Barkema 2001). While the type of knowledge acquired has become a staple in studies examining the impact of acquisitions on innovation performance, additional work is needed to more deeply examine innovation in this context. Two aspects likely to play a role in how this area develops are relatedness of knowledge and absorptive capacity, as research recognizes that organization innovation is dependent upon both the relatedness of the knowledge acquired and the firm’s ability to transfer, assimilate, and exploit it (Cohen and Levinthal 1990).

The impact of related knowledge is revealed in the type of resulting innovation. Related knowledge may lead to incremental innovations that reinforce existing practices, technologies, and capabilities (Chandy and Tellis 1998; Dewar and Dutton 1986; Henderson and Clark 1990). In this case, overall innovation has increased due to acquired knowledge, but the opportunity for organizational adaptation is limited but not negative. On the other hand, if newly acquired knowledge is distant from established knowledge domains within the firm, the opportunity for radical innovation increases. Innovation benefits from search in areas distinct from what firms already know. Li and co-authors (2013) found that unfamiliar, distant, and diverse search leads to an increase in new product introductions. Radical innovation pushes the firm towards new markets, new technologies, and new capabilities, aiding in organizational adaptation (Chandy and Tellis 1998; Dewar and Dutton 1986; Henderson and Clark 1990; Schumpeter 1934). Although both of these cases result in increased innovation, the type of innovation impacts the ability of the firm to adapt to changing circumstances. This distinction becomes important when applied to the context of acquisitions and organizational adaptation.

The purpose of this book chapter is to examine the role of acquisitions as both a strategy for organizational adaptation and a potential hindrance to organizational adaptation. First, this chapter examines in detail how innovation facilitates the process of organizational adaptation. Second, literature is reviewed that examines how the relatedness of knowledge can both enhance t...