Pre-acq.
Post-acq. Strategies
Resources
+ ^ fc^ T ntegratioir^
Performance
I i C lR eplacem enT^j R e l a te d n e s s i *
^
Quality Codification ntegrauon ProcessC^Routinizatioir^)
Org. Knowledge
C
S cquIrm gx Firm JThe definition o f acquisition performance is discussed at length in Chapter 5.
which addresses methodological and operationalization issues. A working definition is
based on the degree to which the post-acquisition integration process generates the
expected levels of value creation in terms of cost rationalization and revenue
enhancement for the combined entity.
4.2.1 Performance Effects o f Pre-acquisition Resources
The strategy literature on corporate diversification and resource relatedness has
been unequivocally clear on the expected sign o f the impact o f relatedness on acquisition
performance. As reviewed in Chapter 2, the presence o f exploitable economies o f scale
and scope implies stronger performance in highly related acquisitions. Therefore,
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H9 Resource Relatedness: The higher the degree o f resource similarity between the acquired and the acquiring organizations, the higher the expected level o f
acquisition performance.
The M&A literature has been significantly less clear about the performance
implications o f resource quality. Value can in fact be created, via different mechanisms,
in instances o f both high quality and low quality resources within the acquired firm. In
the case o f high quality resources, the combined entity benefits from the transfer o f
superior routines or the sharing o f superior resources from within the acquired firm. That
mechanism has been labeled “inverse learning” (Haspesiagh & Jemison, 1991), and is
generally considered a strong challenge to the success o f the integration process, as it
requires a humble, realistic attitude on the part o f the acquirer to appreciate the benefits
o f its learning from the target firm. In the case o f low quality resources and routines
within the acquired firm, the mechanism for creating value is the opposite, consisting o f
both the redeployment o f internal resources and the replication o f routines present in the
acquiring organization within the acquired one. Recent work shows that the resource
redeployment effect is expected to be superior to the “inverse learning” one (Capron.
Dussauge, &Mitchell. 1997). Therefore:
HIO Resource Quality: The higher the level ofpre-acquisition performance o f the acquiredfirm, relative to its competitors, the lower the expected level o f acquisition performance.
Both H9 and HIO indicate potentialconditions for the creation o f value from acquisitions in that they rely on mechanisms (economies o f scale/scope and resource
redeployment) that are not triggered automatically by the completion o f the acquisition.
The potential for value creation to materialize from resource relatedness and resource
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quality is contingent upon a post-acquisition integration process that is (1) sufficiently
precise in the selection o f resources and routines to be acted on and (2) effective in the
implementation o f the transfer and replication processes. The former condition is based
on the characteristics o f the post-acquisition decision-making process (Jemison & Sitkin,
1986; Haspeslagh & Jemison, 1991), while the latter has to do with the development o f
the particular type o f organizational capability studied here.
4.2.2 Performance Effects of Post-Acquisition Decisions
The effects o f levels o f integration and replacement on acquisition performance
are also influenced by conflicting considerations. On the one hand, organizational inertia
arguments (Amburgey, Kelly, and Barnett, 1993; Haveman, 1992, 1993) imply that if
high levels o f integration and/or replacement create high levels o f short-term disruption
in the routines and structures o f the organizations involved, they should be associated
with low acquisition performance. In addition, high levels o f integration and replacement
may result in high levels o f complexity in the decision-making processes, as more parts
and functions o f the organizations become involved, additional data must be gathered and
processed, and more political maneuvering is necessary to develop the required set o f
decisions. Finally, a high integration decision may necessitate high resource
commitments (in financial and human terms) and high coordination costs during the
implementation phase.
On the other hand, strong arguments support positive performance implications
for both decisions. The level o f integration is the main channel through which economies
o f scale and scope can be manifested. Without alignm ent or concentration o f processes
across the two organizations, cost structures cannot be rationalized and revenue 47
enhancement goals, such as cross-selling activities o f the two merging sales forces and
distribution networks, cannot materialize.
Similarly, the degree o f replacement o f the top management team o f the acquired
firm is considered, according to agency theory (Manne, 1965; Jensen & Ruback, 1983),
to be a precondition for an acquisition event to deliver the expected performance. In an
extreme version o f the argument, acquisitions are defined and studied as a policing
mechanism for replacing the target’s top management team and for redesigning and
realigning the incentive structure to reduce the impact o f agency costs and to facilitate the
pursuit o f cost efficiencies. The conclusion is that the replacement o f the top
management team will facilitate the achievement o f the acquisition goals, or at least that
the team’s retention might lower the likelihood that the acquiring firm can implement its
integration plans with sufficient speed and effectiveness.
The preceding arguments suggest competing hypotheses:
HI la Level o f Integration: Ceteris paribus, the higher the level o f integration implemented, the lower the acquisition performance
HI lb Level o f Integration: Ceteris paribus, the higher the level o f integration implemented, the higher the acquisition performance
HI 2a Degree o f Replacement: Ceteris paribus, the higher the degree o f replacement o f the top management team, the lower the acquisition performance
HI 2b Degree o f Replacement: Ceteris paribus, the higher the degree o f replacement o f the top management team, the higher the acquisition performance
4.2.3 Performance Impact o f Knowledge Mechanisms
The degree to which the acquiring firm has developed a post-acquisition
integration capability should positively influence the performance outcome o f the
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acquisition process both directly and indirectly. The direct impact can be understood
with the use o f a simple microeconomic analysis that adapts a transformation curve
model to the problem o f maximizing overall acquisition performance through two value
creation mechanisms: the achievement o f cost efficiencies and the enhancement o f
revenue generation capacity. That stylized problem is assumed to be subject to the
constraint o f a capability building function (defined by the magnitude o f tacit and
codified experience accumulated by the acquiring firm) which determines the boundaries
to the effectiveness o f the two mechanisms, and the types o f trade-off between them. The
reason for expecting a trade-off between cost efficiency and revenue enhancement for a
given level o f integration is that during the downsizing process, the employees o f the
acquired firm will spend more time searching for new employment than they will
generating new business. In contrast, an approach based on creating value by achieving
strong sales growth (through cross-selling, new product generation, multiple distribution
channels, etc.) will require correspondingly strong investments in training, incentives,
morale building and other initiatives, which will hinder the achievement o f cost
efficiencies. One way to relax the constraint,5 and thus pursue a higher levels o f both
cost efficiency and revenue enhancement, is to develop a task-specific capability by
accumulating and rationalizing past acquisition integration experiences. Fig. 4.5 provides
a graphical representation o f that organizational learning process.
5 Under the stylized conditions defined above, organizational learning is actually the only way to relax the constraint imposed by the capability-building function.
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