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Transferring strategic capabilities
The role of post-merger integration in technology-driven M&A
Bachelor Thesis Organization & Strategy
Academic year: 2009-2010
Name: L. te Grotenhuis
ANR: s50.90.04
Supervisor: E. Golovko
Number of words: 6.506
ANR: s50.90.04
Name: Te Grotenhuis, L. (Luuk)
Topic: Knowledge and learning within and across organisations
Subtopic: Managing the post-merger integration process to improve performance
Study programme: Business Administration (Bedrijfseconomie) BSc.
Bachelor’s thesis Organisation & Strategy | 3
Management summary
This literature review tries to find adequate managerial actions for improving the post-
merger integration process in technology-driven mergers and acquisitions. An overview of
the integration process is assembled and subsequently factors that yield improved post-
integration performance, denominated by value creation, are explained.
Value creation in business stems from continuously renewing the firms’ strategic
capabilities. Compared to internal development, external acquisitions might be a less costly
and less risky means to renew capabilities. The essential capabilities wanted in technology-
driven M&A consist of knowledge and technological know-how, which are mostly tacit and
embedded in activities, persons, or routines.
In traditional views on acquisition integration, the decision-making process and
diligence are decisive. Before the transaction, the potential for value creation is assessed
through a strategic fit and organizational fit. A more recent process perspective expects
changes to occur after this decision- and justification stage, and therefore addresses great
importance to the management of the post-acquisition integration.
Concerning technology-driven intentions, the method mainly used for the capability
transfer in the integration phase, is the transfer of functional skills. The post-merger
integration phase can be best managed by optimizing this source of capability transfer, since
it conveys preserving, transferring and applying tacit knowledge across the boundaries that
might exist between merging firms.
Creating a positive atmosphere and solid interactions for transmitting capabilities are
actions that will enhance the chances of improved performance after integration.
Determinism, value destruction, and leadership vacuum are problems which are likely to
occur in any acquisition integration and therefore managerial actions have to be undertaken
to stop them from impeding capability transfer and value creation. General integration
strategies that can be undertaken when dealing with technology-driven M&A are
‘preservation’, in case of domain exploring with a low need for interdependence, and
‘symbiosis’ in case of domain strengthening with a high need for interdependence.
Bachelor’s thesis Organisation & Strategy | 4
Table of contents
1. INTRODUCTION ........................................................................................................ 5
1.1 PROBLEM INDICATION ................................................................................................. 5
1.2 PROBLEM STATEMENT ................................................................................................. 6
1.3 RESEARCH QUESTIONS................................................................................................. 6
1.4 RESEARCH DESIGN ...................................................................................................... 6
1.5 OVERVIEW OF THE THESIS ........................................................................................... 6
2. THE ROLE OF POST-ACQUISITION INTEGRATION IN M&A ...................... 7
2.1 SYNERGY POTENTIAL AND THE CREATION OF VALUE ................................................... 7
2.2 CONVENTIONAL VIEW ON INTEGRATION ...................................................................... 8
2.2.1 STRATEGIC FIT ......................................................................................................... 8
2.2.2 ORGANIZATIONAL FIT.............................................................................................. 9
2.2.3 MANAGERIAL ACTIONS ......................................................................................... 10
2.2.4 VALUE CREATION .................................................................................................. 10
2.3 PROCESS VIEW ON INTEGRATION ............................................................................... 10
2.3.1 RESOURCE SHARING .............................................................................................. 11
2.3.2 FUNCTIONAL SKILL TRANSFER ............................................................................... 12
2.3.3 GENERAL MANAGEMENT SKILL TRANSFER ............................................................ 12
2.3.4 COMBINATION BENEFITS ....................................................................................... 12
2.4 TECHNOLOGY-DRIVEN INTEGRATION ........................................................................ 13
3. MANAGING THE TRANSFER OF CAPABILITIES ........................................... 14
3.1 POSITIVE CONTRIBUTIONS TO MANAGING THE INTEGRATION PROCESS ...................... 14
3.1.1 INTERACTIONS ....................................................................................................... 14
3.1.2 ATMOSPHERE ........................................................................................................ 15
3.2 IMPEDIMENTS IN MANAGING THE INTEGRATION PROCESS .......................................... 17
3.2.1 DETERMINISM ....................................................................................................... 17
3.2.2 VALUE DESTRUCTION ............................................................................................ 17
3.2.3 LEADERSHIP VACUUM ........................................................................................... 17
3.3 PROPOSED METHOD OF INTEGRATION ........................................................................ 18
3.3.1 STRATEGIC INTERDEPENDENCE NEED .................................................................... 18
3.3.2 ORGANIZATIONAL AUTONOMY NEED ..................................................................... 18
3.3.3 TYPES OF INTEGRATION APPROACHES ................................................................... 19
4. CONCLUSION, LIMITATIONS, AND RECOMMENDATIONS ....................... 20
4.1 CONCLUSION ............................................................................................................. 20
4.2 LIMITATIONS ............................................................................................................. 21
4.3 RECOMMENDATIONS ................................................................................................. 21
5. REFERENCES ........................................................................................................... 22
Bachelor’s thesis Organisation & Strategy | 5
1. Introduction
1.1 Problem indication
The success or failure of mergers and acquisitions (M&A) is often based on financial
parameters that measure wealth creation for shareholders, like share price performance. The
literature shows, despite the popularity of M&A throughout history, that the benefits are often
short-lived and shareholders of the acquiring firm repeatedly do not benefit financially in the
long run (Cartwright & Schoenberg, 2006).
From a strategic management perspective M&A should gain a competitive advantage
by optimizing the use of their resources. Yet, when those resources are not present, or
cannot be developed internally, M&A could be a preferred tool to acquire, transfer, and
redeploy resources (Grant, 1996; Capron, Dussauge & Mitchell, 1998). The goal of such an
acquisition can be twofold, either creating value by combining firms, or simply by capturing
value, similar to an investment. Since the latter does not involve any further management
practice, this thesis will focus on M&A that hope to achieve creation of value: synergies
(Haspeslagh & Jemison, 1991).
The facts suggest that a large proportion of M&A fail after careful pre-merger planning
and diligence. On beforehand value-adding acquisitions seem to lose their synergy potential
somewhere in the integration process. This thesis will focus on the post-merger integration
process and provides an overview of the factors and processes that influence, or inhibit
successful combinations. Since a complete overview will be beyond the scope of this thesis,
the problem statement will be confined to technology-driven M&A.
In technology-driven M&A, firms aim at gaining knowledge and technological know-
how from the assets of the target firm, for instance by acquiring and integrating research and
development (R&D) functions. Motives for externally acquiring technology are fast
technological changes and growing complexity, which make internal development more
complex (Gerpott, 1995; Ahuja & Katila, 2001; Bannert & Tschirky, 2004).
In order to define the quality of the post-merger integration process in these
technology-driven M&A, the influence on performance will be examined. Ultimately the
managerial actions in the integration phase that positively contribute to the performance of
merged firms should be recognised.
Finally, due to varying opinions in the literature about the (in-) existence of equal
mergers, this thesis will neglect possible differences between the mergers and acquisitions
idiom and use the words ‘acquisition’ and ‘merger’ interchangeably to describe a similar
event (Lynch & Lind, 2002; Epstein, 2004).
Bachelor’s thesis Organisation & Strategy | 6
1.2 Problem statement
The focus of this thesis, as introduced in the problem indication, will be confined to
the following problem statement:
How can the post-merger integration in technology-driven M&A be managed to
improve performance?
1.3 Research questions
� What is the role of the post-merger integration in mergers and acquisitions?
The first research question should answer what the literature describes as the post-merger
integration process, specified towards technology-driven M&A.
� Which manageable factors in the post-merger integration process influence
performance?
The second research question inquires which manageable factors in the integration process
influence performance, and whether they do this in a positive or negative manner.
1.4 Research design
The conclusions in this thesis will be drawn upon a literature review. Using the
available literature to date, this thesis tries to establish which factors in the post-merger
integration process positively influence the performance of merged firms. Main sources of
review will be the relevant strategic management journals, but given the nature of the topic,
journals that bridge gaps between strategic management, technology and organisational
learning might also be considered. Predominantly used for this thesis are: the ‘Strategic
Management Journal’, ‘R&D Management’, ‘The Academy of Management Journal’, and the
‘British Journal of Management’.
1.5 Overview of the thesis
The next chapter will focus on the post-merger integration process. It will discuss
which aspects, according the literature, have to be taken into account, and it will outline the
specific relevance for technology-driven M&A. In explaining the factors of influence, the
emphasis will lie on effects that are to be influenced by management practice.
The third chapter will then relate the important concepts in post-merger integration to
the performance of the merged firms, and tries to establish an overview of factors that, if
managed correct, positively influence the performance.
Finally, all relevant findings will be addressed in the conclusions, limitations and
recommendations in order to get a thorough insight in the problem statement.
Bachelor’s thesis Organisation & Strategy | 7
2. The role of post-acquisition integration in M&A
2.1 Synergy potential and the creation of value
In the competitive business environment, mergers and acquisitions (M&A) are tools to
add value to companies. Haspeslagh and Jemison (1991) recognize two distinct forms in this
act of wealth generation: value capture and value creation. The first involves a onetime
transaction, transferring capital from shareholder to shareholder, merely resembling an
investment. The second is the result of so-called synergy potential between merging firms,
and requires an interactive managerial approach. Combined with its long-term focus the latter
asks for a more strategic view of M&A, which will be applied in this chapter.
Following Haspeslagh and Jemison (1991) a firm should be seen as a package of
capabilities, which enables it to compete in the marketplace. This capabilities-based
approach resembles the resource-based view, in which existing as well as possible future
resources should be managed optimally to reach a sustainable competitive advantage
(Grant, 1996). Haspeslagh and Jemison (1991, p. 23) state that central to competitive
advantage are a set of capabilities that: “1) incorporate an integrated set of managerial and
technological skills, 2) are hard to acquire other than through experience, 3) contribute
significantly to perceived customer benefits, and 4) can be widely applied within the
company’s business domain.” The capabilities-based perspective is advocated, because in
contrast to the conventional, financially-orientated view it allows for reasoning why and how
companies create value.
According to Haspeslagh and Jemison (1991), understanding of the value creation
process helps companies continuously renew their set of key capabilities and therefore
sustain their competitive advantage. This is important, since fierce competition and other
external factors degenerate the firms’ competitive advantage over time. Constantly renewing
your capabilities can be defined as innovative behaviour: putting resources into new use
(Rogers, 1983). Several studies in different fields, amongst others finance, economics and
management, have shown evidence that relates innovation positively to firm performance.
Keeping companies flexible asks for continuous renewal of their capabilities, that
compromises innovative action and is the foremost need in the creation of value, and
ultimately in the survival of the firm (Hitt, Harrison & Ireland, 2001).
In general, two pathways for innovation can be discussed, each with their own
benefits. Firms can innovate either by developing or renewing capabilities inside the firm, or
by buying them outside the firm. Hitt et al. (2001) suggest that an internal development
approach tries to reap the benefits of first-mover advantages through the constant
Bachelor’s thesis Organisation & Strategy | 8
supporting, nurturing and upgrading of internal innovation capabilities. A method that
demands high dedication in resource allocation, and is not free of risk with failed innovation
attempts as no exception. Consequently, they assert that these impediments persuade some
firms to acquire innovation externally. Firms belief acquisitions to be a quick, low-cost, lower
risk and above all success proven method of tapping into innovativeness. Previous research
by Chakrabarti, Hauschildt and Süverkrüp (1994) denotes that acquisitions have become an
approved corporate growth strategy, and especially for technology-driven motivations
acquisitions are often viewed as a good substitute to in-house research and development
(R&D).
Haspeslagh and Jemison (1991) categorize acquisitions contributing to corporate
renewal into 1) domain strengthening acquisitions, which fortify a firms’ position in existing
business segments, 2) domain extending, in which the segment is broadened, and 3) domain
exploring, when new segments are opened through acquisitions.
Although the outcomes of acquisitions can be estimated with more certainty than the
internal development of innovation, Hitt et al. (2001) contest that this does not mean that
acquisitions are without risk. Firstly, due to limited capital most firms cannot both perform
costly internal development and buy innovation externally. This implies a trade-off between
commitment to their internal innovation ability and acquisitions. When an acquisition strategy
is chosen, this can have a negative effect on their internal innovativeness. Secondly,
acquisitions only offer a potential for transfer of capabilities, and therefore the actual creation
of value is uncertain. To make sure that value creation will be established an appropriate
integration of acquisitions, and especially the strategic capabilities involved, is essential to
unlock the synergy potential.
2.2 Conventional view on integration
First examined is a conventional view, which according to Haspeslagh and Jemison
(1991) employs a chronological, stepwise approach and sees the integration phase as a
natural result of the pre-acquisition decision-making. The decisive goal is determining the
creation of value before the transaction takes place. Hitt et al. (2001) introduce four basics
that, if all present, could on beforehand predict successful realisation of synergies.
2.2.1 Strategic fit
The strategic fit between companies explains the similarity of the strategic capabilities
and resources present in the merging firms, and can be subdivided into four sources: 1)
operations synergy, which benefits of economies of scale and/or scope as a result of the
integration of activities, 2) R&D/technology synergy, linking crucial - and sometimes private -
Bachelor’s thesis Organisation & Strategy | 9
technologies, 3) marketing-based synergy, sharing promotion and distribution channels, and
4) managerial synergy, gaining better general management skills (Hitt et al., 2001).
The effect of this relatedness, the degree of similarity in resource allocation, on
acquisition performance has been researched extensively. Previous research concluded that,
due to a lack of evidence, relatedness or strategic fit is nothing more than a hint of synergy
potential (Datta, 1991). Although they were unable to support the hypothesis, Zollo and Singh
(2004) reason that, in theory, relatedness should yield economies of scale and therefore
improve performance. Birkinshaw, Bresman and Håkanson (2000) reviewed the different
streams of research on acquisitions and recognize the industrial organization economics
view that links economies of scale and scope to performance. But they also signal that this
stream of research has been underpinned by the resource-based view, which considers that
only unexpected synergies, not incorporated in the predetermined premium, can positively
contribute to acquirers’ performance.
Specifically the second source of strategic fit, R&D/technology synergy, relates to the
post-merger integration process of technology-driven M&A. A technological fit or
technological relatedness is researched by Hagedoorn and Duysters (2002). They explain
technological relatedness as the level in which acquisition partners are active in identical
fields of technology development, for instance delineated by patent-classes. Contradicting
the findings of previous studies, their conclusion does attribute crucial importance to a
strategic fit and encourages the search for equivalent research-intensive companies when
considering acquisitions. Although this challenges earlier statements, it does build on
suggestions of Cartwright and Cooper (1996) who propose that a relatedness in product
markets is advantageous for the transfer of knowledge and expertise – which are strategic
capabilities in technology-driven M&A (Gerpott, 1995).
2.2.2 Organizational fit
The second prerequisite for predicting successful synergy realisation, organizational
fit, “occurs when two organizations or business units have similar management processes,
cultures, systems and structures” (Hitt et al, 2001, p. 94). Datta (1991) signals the importance
of organizational fit, being a determinant of post-acquisition performance. It influences the
ease with which two organizations can be assimilated after an acquisition. It can be assessed
along a number of dimensions, but two factors are often mentioned as being particularly
good predictors for the ease of post-acquisition integration: 1) small differences in
management styles and 2) small differences in organizational systems, particularly the
reward- and evaluation systems.
Although organizational fit involves many of these different administrative routines
and company-specific characteristics, Hagedoorn and Duysters (2002) found size ratio,
Bachelor’s thesis Organisation & Strategy | 10
which shows similarities or dissimilarities in company size, to be a proficient tool in catching a
large extent of the degree of organizational fit in technological acquisitions. It proved useful
for understanding the likelihood of success in technological combinations, showing that large
size differences, implying a lack in organizational fit, would predict difficulties in integration.
2.2.3 Managerial actions
Haspeslagh and Jemison (1987) denote that the chances of positive value creation
are not purely a result of relatedness, or ‘fit’. Therefore they would like to attribute importance
to how acquisitions are managed. This is further specified by Pablo (1994), who as well
recognizes that not only strategic factors, but also the management processes through which
those theoretical synergistic benefits come to be realized should be taken into consideration.
“Thus, various managerial actions must be initiated to effectively match the strategic
capabilities that are demonstrated by the ‘strategic fit’ foundation of synergy and to gain the
competitive benefits that are permitted by the similarities in managerial process, cultures,
systems, and structures that are represented by the ‘organizational fit’ foundation of synergy”
(Hitt et al., 2001, p. 98).
For example, the level of integration is a manageable tool. Later on will be shown that
high levels of integration enhance the potential of interdependence-based synergies, but if
misapplied it also is a source for inter-organizational conflict (Zollo & Singh, 2004).
However, according to a large part of the literature, inequalities between merging
firms should not involve a lot of managerial actions at all. Integrating production, marketing
and distribution do not require much management attention and coordination, since simple
operational resource sharing should deliver the strategic benefits. Yet, technology-driven
M&A is a far more complex, specialized, and non-routine process, compared to relatively
standard manufacturing acquisition procedures. When assessing the acquisition, specifically
merging technological capabilities should be considered to be a managerial challenge
(Nelson & Winter, 1982).
2.2.4 Value creation
The last pillar deducted by Hitt et al. (2001) constitutes the simple fact that for M&A to
add value, the joint benefits should outweigh the costs. For instance, if the level of integration
is too high, the cost of coordination could outweigh the benefits. For the three above
mentioned constructs to be valid, they should yield a positive contribution to value creation.
2.3 Process view on integration
Concerning the integration of acquisitions, Stahl and Mendenhall (2005) conclude that
a paradigm shift has taken place. Traditional parameters for M&A success, like the ‘strategic
Bachelor’s thesis Organisation & Strategy | 11
fit’, are no longer sole indicators for success, but mere predictors. Although they are good
determinants for the potential value resulting from an acquisition, the process unlocking
these synergies is significantly more influenced by intangible factors, instead of ‘hard’
strategic and financial parameters. This idea is the basis for a process perspective, which
highlights the importance of managerial activities and influences after the transaction.
Haspeslagh and Jemison (1991) argue that the conventional view especially lacks
reality by presuming that the outcome of an acquisition can be fully recognized at the time of
the agreement, they refer to this moment as the ‘justification’ or decision-making phase (see
figure 3.1). The terms strategic fit, organizational fit, and managerial actions are used upfront
to give an indication of value-creation and expected implementation difficulties. But it forgoes
the fact that the seemingly separate decision-making and integration phase are actually
intertwined, and should be considered collectively. Misapplication in practice can be
highlighted by the fact that the supervision of the post-acquisition process is often delegated
towards inferior managers who were not involved in the secrecy of the decision-making
stage, and as a result are unaware of deal-making and -breaking strategic considerations.
This, according to Cartwright and Cooper (1996), leads to an unorganized, ad hoc, and
reactive way of managing the integration stage.
Following Haspeslagh and Jemisons’ process perspective, particularly the drivers
behind the results should be considered and understood in the integration process. These
drivers are the actual sources of strategic capability transfer establishing the competitive
advantage, and can be influenced and managed. Haspeslagh and Jemison (1991) distilled
four of these opportunities for transferring strategic capabilities: 1) operational resource
sharing, 2) functional skill transfer, 3) general management transfer, and 4) combination
benefits, which respectively can be seen as the drivers behind the four conventional value
pillars mentioned by Hitt et al. (2001).
2.3.1 Resource sharing
Operational resource sharing transfers capabilities by combining and rationalizing the
operational asset of the firms. This delivers cost reductions in a relative short-term, by
establishing economies of scale. Another method for value creation through resource sharing
can be the cross-selling of partners’ products in the firm’s own main markets. The concept of
combining and sharing operational resources seems uncomplicated, but when applied in
practice companies incur a hidden ‘cost of compromise’. Main integration challenges
constitute weighing the benefits of sharing, against losses in efficiency. These losses surface
by a trading-off sharing and integrating operational resources versus preferring the transfer of
functional skills, a second source of capability transfer (Haspeslagh & Jemison, 1991).
Bachelor’s thesis Organisation & Strategy | 12
2.3.2 Functional skill transfer
This second source of capability transfer can be reached by bringing in functional
skills from the target firm. Through this transfer, that is a learning process, the acquirers’
capabilities and competitive advantage will be strengthened, which can result in value
creation. The fact that these capabilities are ‘strategic’ also makes them difficult to transmit.
Functional skills are usually interwoven in the activities, routines and personnel of the target
organization. The tacit nature of these skills will be further explained at the end of this
chapter, but one of the consequences is that the more competitive a skill is, the harder is to
replicate or transmit. This embeddedness of skills plays a major role in technology-driven
M&A and the biggest challenge will be the transfer of these functional skills. “Such transfer of
skills is neither immediate nor easy because it involves a process of both teaching and
learning before the skills can be transferred” (Haspeslagh & Jemison, 1991, p. 109). The
greater the barrier for imitation of the capability is, the more time it will take to learn and apply
it in an acquisition.
2.3.3 General management skill transfer
Firms can also become more competitive, and thus create value, by improving the
quality of their general management skills. The acquirer can deepen and improve its
management systems by acquiring these capabilities. Acquisitions are sometimes solely
used to capture a manager of another firm.
There is an important difference between the transfer of functional skills and general
management skills. The interactions of the former are mostly horizontal without a hierarchical
relationship. The lack of such a relationship further impedes efficient functional skill transfer.
Yet, general management transfer happens through vertical relations and this formal
atmosphere of a manager-subordinate relationship, increases the willingness to participate in
learning and transfer.
2.3.4 Combination benefits
Whereas the first three methods deal with actually transferring strategic capabilities,
combination benefits can exist in acquisition, but without actual transfer taking place.
According to Haspeslagh and Jemison (1991) the sheer size of a combination delivers profit
because of more muscle power in buyer-supplier relations, financial possibilities, or even
reputation. The common trait is that it does not require managerial interactions to transfer
any of the benefits, since size-related benefits do not demand a lot of coordination to be put
into practice.
Bachelor’s thesis Organisation & Strategy | 13
Each of these four sources in capability transfer experiences its own difficulties and
challenges. Particularly the learning which occurs in some of the processes makes the
transfer a complex matter, an issue crucial in technology intended acquisitions.
2.4 Technology-driven integration
Every value-creating acquisition presents a mixture of the forgoing types of capability
transfer. In addressing the specific field of interest in this thesis, the prior explained post-
acquisition theories will be narrowed down towards technology-driven acquisitions. As
defined earlier, reaching the goal of value creation is determined by the successful transfer of
strategic capabilities. In technology acquisitions companies hope to gain new technologies
and specific skills helping them to develop and strengthen their existing business domains
(Stahl & Mendenhall, 2005).
Ahuja and Katila (2001) assert that an effective integration of technology, in this case
high-technology “characterized by short product life cycles and high degrees of uncertainty”
(Stahl & Mendenhall, 2005, p.278), entails blending the knowledge and know-how of both the
acquirer and target. This analysis suggests an initial need for preservation of knowledge,
followed by transfer, and finally application.
Yet, according to Stahl and Mendenhall (2005) the transfer of knowledge is complex,
and far more challenging than it may appear on first sight, because the transfer not only
comprises transmitting explicit, but also tacit knowledge capabilities. Explicit knowledge is
accessible through verbal and written communication and resides in physical assets and
formal structures, which should make it rather easy to transfer. Difficulties start to arise when
transferring tacit knowledge. Tacit, non overt, knowledge is defined as technological
expertise and skills accrued in the minds of the employees. The person specific nature of
these innovation skills makes it an embedded strategic capability and difficult to pass on to
an acquirer (Hitt et al., 2001).
Carefully basing their conclusion on an extensive literature review, Stahl and
Mendenhall (2005) find that in technology-driven acquisitions, the key value creation issue is
effectively integrating employees - and therefore tacit, functional skill knowledge-, to capture
all the cherished technology competences. As addressed earlier in this chapter conventional
pillars like the strategic - or technological – fit and organizational fit can give a sound
estimation of the value potential, but creating the value demands active management. In
case of technology-driven acquisitions unlocking tacit knowledge, a functional skill transfer
route, hinges predominantly on how the implementation approach is managed. The next
chapter will shed light on methods to overcome integration difficulties concerning the
functional skill transfer in technology-driven mergers and acquisitions.
Bachelor’s thesis Organisation & Strategy | 14
3. Managing the transfer of capabilities
3.1 Positive contributions to managing the integration process
Cartwright and Cooper (1996) demonstrate that each acquisition will react uniquely in
integration due to cultural and organization differences. As these dynamics heavily influence
the transfer of tacit, functional skills, management cannot assume that an identical approach
suits each acquisition. For this reason the remainder of this thesis adopts the process
perspective on acquisition integration that, after a surge of innovation-oriented deals in the
1990s, has become a predominant theory. The important characteristics of this process
perspective are introduced in figure 3.1, and will be elaborated upon in this chapter. The
focus will lie on the “softer, less tangible social, cultural, and psychological aspects of M&A
management” (Stahl & Mendenhall, 2005, p xiv). These will help understanding that
transferring capabilities asks for difficult learning processes by both firms through intensive
two-way interactions, a process that is reliant on an adequate atmosphere that supports it
(Haspeslagh & Jemison, 1991).
3.1.1 Interactions
Haspeslagh and Jemison (1991) find interactions between the firms to be central to
the integration process, and in the heart of the functional skill transfer. Where the decision-
making contacts are often formal, a need exists to increase the number of informal and
unpressured exchanges between employees of both companies in the integration stage. With
a focus on functional skill transfer that involves transmitting valuable person-specific
technologies and knowledge, exchanges will mostly be of a horizontal nature. Three distinct
types of interactions are introduced: 1) substantive interactions, concerning actual transfer of
capabilities, 2) administrative interaction, that develop information systems, and 3) symbolic
interactions that build beliefs.
Idea Justification Integration Results
Problems in the Integration Process:
• Determinism
• Value Destruction
• Leadership vacuum
Atmosphere for Capability Transfer:
• Reciprocal Understanding
• Willingness to Work Together
• Capacity to Transfer and Receive
• Discretionary Resources
• Cause-effect Understand Benefits
Transfer of Strategic Capabilities:
• Operational Resource Sharing
• Functional Skill Transfer
• General Management Skill Transfer
• Combination Benefits
Improved
Competitive Advantage
(value created)
Acquirer
Target
Interactions:
Figure 3.1: ‘The Acquisition Integration Process’ (Haspeslagh & Jemison, 1991)
Bachelor’s thesis Organisation & Strategy | 15
Substantive interactions serve the immediate purpose of the acquisition, bringing
about transmission of the knowledge needed for value creation. Secondly, administrative
interactions are triggered by the fact that the acquiring company likes to incorporate the new
knowledge as quickly as possible, and therefore shapes formal procedures to monitor and
control the target firm. Last, symbolic interactions should reduce uncertainty caused by the
acquisition. By signalling the idea and purpose behind the acquisition the employees should
gain positive attitudes towards working together (Haspeslagh & Jemison, 1991). The analysis
of Ahuja and Katila (2001) that attributes decisive importance to the preservation, transfer
and application of high-technology knowledge, overlaps with respectively symbolic,
substantive and administrative interactions.
Stahl and Mendenhall (2005) further add that this preferably should be a two-way
pattern of interaction, enabling a learning process. In this sense managers should raise
attention to reduce barriers and strengthen bonds. Specifically, during the process of merging
companies double barriers and bonds may exist and hinder the flow of information between
the firms. By actively monitoring and managing the ease of interactions, the planned transfer
and value creation can be reached. While these interactions set the stage for functional skill
transfer, it will be the overall atmosphere that influences the effectiveness of the connections
(Haspeslagh & Jemison, 1991).
3.1.2 Atmosphere
Although transfer through interaction forms the basic need when integrating, a
positive atmosphere has to be present to make it successful. Hitt et al. (2001) recommend a
focus on maintaining innovation activity after the acquisition, by developing a supportive
culture. The research of Haspeslagh and Jemison (1991) sums up five key components to
facilitate this atmosphere factor: 1) reciprocal understanding, 2) willingness to cooperate, 3)
capacity to transfer, 4) discretionary resources, and 5) understanding of the cause-effect
relation of the acquisition benefits.
In the case of technology, knowledge is embedded in the context of the organization
and culture, thus transmitting the capabilities requires a thorough understanding of these
contextual influences. A reciprocal understanding of each others organization and culture
demands managers and employees to learn how and why the capability worked in the pre-
acquisition situation. In order for this to work, the partners first have to learn about each
other, and consequently they can learn how the knowledge could be best transferred. It is
understood that this learning effort is the highest with tacit knowledge, since tacit knowledge
is very person specific. Earlier comments by Hagedoorn and Duysters (2002) and Cartwright
Bachelor’s thesis Organisation & Strategy | 16
and Cooper (1996) attributing value to a technological fit in estimating the ease of transfer,
are nuanced: “being in the same business does not guarantee either a common language or
an understanding of the other organization” (Haspeslagh & Jemison, 1991, p. 112).
A reciprocal understanding cannot be reached when the integration process lacks
willingness to work together after the acquisition. Haspeslagh and Jemison (1991) found that
managers as well as employees saw working together as a ‘zero-sum game’. In stead of
trying to reap the benefits of the combination potential, they were scared that contributing to
the partner would harm their own situation. Examples are fear of losing their job or having to
give up power and control. Manageable factors that could improve willingness to work
together are equal size ratio’s, as discussed earlier by Hagedoorn and Duysters (2002), and
reward systems. The latter gives management a tool that can directly incentivize the
personnel’s cooperative attitude.
Setting a capacity to transfer and receive the capability concerns mainly that both
firms should have the right people in the right positions. This can sometimes be a scarcity,
especially when small innovative companies are acquired by larger partners. Due to the
small size of the target, there might be a lack of time and dedication, caused by an
undersized management team, impeding an effective transfer atmosphere. Another important
prerequisite is that the capability being transferred must truly exist. This seems obvious, but
the pre-acquisition deal-making does not always allow a perfect insight in the existing
capabilities, which afterwards can turn out to be smaller than expected or even inexistent.
Discretionary resources are another way of creating a positive atmosphere for
capabilities transfer. Haspeslagh and Jemison (1991) found that a certain amount of ‘slack’
resources and time would not harm the integration process. Moreover, the extra room for
manoeuvring would be beneficial to the transfer of capabilities. This is especially true for
technology intensive acquisitions, since the results of the combination often only surface in
the long-term (Meglio, 2009).
In creating an atmosphere it is important that the purpose of the acquisition becomes
common knowledge. Lower level managers must have a cause-effect understanding of the
benefits, since they will have to guide the unlocking and transfer of tacit knowledge. Key
factors of which they should be aware are: “the nature, the source, the timing, and the
predictability of the benefits they expect from an acquisition” (Haspeslagh & Jemison, 1991,
p. 116).
The important role of atmosphere is fortified by Stahl and Mendenhall (2005), who
refer to it as building ‘social capital’. This can be primarily achieved by deploying ‘boundary-
spanning managers’ who become responsible for connecting the separate groups engaged
in knowledge transfer. Although these managers cannot bridge all barriers, in accordance
Bachelor’s thesis Organisation & Strategy | 17
with the above mentioned five facilitators of a positive atmosphere, they represent a tool to
facilitate a positive atmosphere.
3.2 Impediments in managing the integration process
Integrations of acquisitions fail for very different reasons, yet in their study
Haspeslagh and Jemison (1991) deduced three returning problems that affect the process
perspective on integration.
3.2.1 Determinism
Determinism constitutes a too static point of view in the integration process. This view
remains based on the initial agreements in the acquisition transaction. Yet, the over time
important aspects of the integration process are often influenced by externalities. A range of
determinism problems start to arise when the integration approach is not adapted to these
new circumstances.
When managers create a positive atmosphere and overly try to motivate employees,
a false sense of security can arise. In making all partners enthusiastic, the vision of the
manager may get clouded. When this implies that certain events are blocked out, because
they do not fit in their original view, the potential for value creation can be seriously
diminished. The latter can also happen with unexpected events arising in the integration
process. This may lead to a cycle of confusion and frustration. General managers face
problems that question their original predetermined plan, and they become confused. Lower
managers consequently get frustrated with the inability of general management to deal with
these new externalities. A negative cycle, that is harmful for a positive integration and
transfer atmosphere, is created (Haspeslagh & Jemison, 1991).
3.2.2 Value destruction
This second problem exists when there is no willingness or capacity to work together
and transfer capabilities. Combining two firms means a lot of uncertainty for the people
involved. Normal routines are undermined and this instigates people to start acting in their
own interest, instead of serving a common goal. As a result the prospect for transfer and
value creation is reduced (Haspeslagh & Jemison, 1991). Stahl and Mendenhall (2005) add
to this that lack of motivation fuels value destruction. Important enablers of motivation, or
willingness to share, are a culture of trust and a feeling of social belonging, hence the
atmosphere discussed before.
3.2.3 Leadership vacuum
In the light of the previous problem solid leadership becomes even more important to
reduce the process of value destruction, and work on an atmosphere of capability transfer.
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To avoid a limited amount of sharing, Haspeslagh and Jemison (1991) require both
institutional leadership, providing a broad acquisition vision, and interpersonal leadership, to
stimulate functional skill transfer. Yet, as discussed earlier, the responsibility for the
integration phase is often delegated downwards directly after the transaction. Subsequently it
becomes unclear who should provide the institutional, broader envisioned, leadership. This
vacuum of leadership and ambiguity fuels the process of value destruction.
3.3 Proposed method of integration
The process perspective eventually distills all peculiarities into a framework that gives
three typologies for integration approaches concerning strategic capability transfer (see
figure 3.2). Haspeslagh and Jemison (1991) do this along two axes: first the level of
interdependence needed to establish transfer, and secondly the need for the target company
to stay relatively autonomous.
3.3.1 Strategic interdependence need
Creating interdependencies breaks the boundaries between the companies to start
effective capability transfer. Haspeslagh and Jemison (1991) note that the level of
interdependence is different for each method of capability transfer. Transfer of functional
skills, which consists of tacit knowledge and is the most interesting process in the light of
technology-driven M&A, can only succeed when personnel will be moved across
intercompany boundaries or when they start sharing information and knowledge. However, if
the interdependence is carried out too far, it can negatively influence the targets’ feeling of
autonomy. That will negatively impinge the preservation goal of the acquisition, as mentioned
earlier by Stahl and Mendenhall (2005).
3.3.2 Organizational autonomy need
The paradox of interdependence versus autonomy of the target is specifically present
with capabilities that are tacit and person specific. Thus, “dealing with the perceived need for
autonomy after an acquisition is one of the most important challenges a manager will face”.
(Haspeslagh & Jemison, 1991, p. 143) It is one thing to promise an entrepreneurial
atmosphere in which R&D employees can keep their independence, but maintaining this
agreement and trying to transfer capabilities will not prove to be easy. Lastly, Stahl and
Mendenhall (2005) attribute that autonomy might form a lesser obstacle with the existence of
a ‘culture fit’ - a high degree of shared values and beliefs.
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3.3.3 Types of integration approaches
Along the two axis of interdependence versus autonomy, Haspeslagh and Jemison
(1991) formed a framework consisting of four acquisition approaches: 1) holding, 2)
absorption, 3) preservation, and 4) symbiosis (as shown in figure 3.2 below).
Need for Strategic Interdependence
Low High
Preservation Symbiosis
High
Need for
Organizational
Autonomy
[ Holding ] Absorption
Low
Figure 3.2: ‘Types of Acquisition Integration Approaches’ (Haspeslagh & Jemison, 1991)
A holding merely captures the value and will not be considered as a strategic
capabilities transfer process, as discussed in chapter two. The absorption approach is
applied when high interdependence is demanded, with no need for autonomy of the target.
This constitutes a full consolidation of the two companies with a focus on resource sharing,
instead of the for knowledge interesting functional skill transfer.
Preservation and symbiosis have a high need for autonomy, overlapping with the
tacit, person specific, technology-driven focus adapted in this thesis. The preservation
approach, earlier stressed by Stahl and Mendenhall (2005) does not ask for high
interdependencies, but wants to keep the source of the knowledge capabilities intact.
Haspeslagh and Jemison (1991) describe it as ‘nurturing’ the target until the actual learning
can take place. Thus, it can be seen as a learning experiment, for instance used within
domain exploring acquisitions that hope to gain new segments of knowledge capabilities.
Symbiosis requires both a high interdependence and high need for autonomy, and
therefore constitutes the biggest managerial challenge. In this approach the knowledge
capability is primarily used to deepen or strengthen the domain and it requires a full
integration of the knowledge. Following Haspeslagh and Jemison (1991) it calls for an initial
coexistence, which gradually has to dissolve its boundaries and form one organization. A
careful balance between preserving and dissolving boundaries has to be managed, with the
process factors mentioned – interactions, atmosphere, determinism, value destruction, and
leadership vacuum - likely to play an important role.
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4. Conclusion, limitations, and recommendations
4.1 Conclusion
The capabilities-based approach used in this thesis demands firms to constantly
renew their strategic capabilities in order to maintain a sustainable competitive advantage.
Besides internal development, renewing can be accomplished externally through
acquisitions. The viability of acquisitions is judged before the transaction takes place, mainly
by assessing a strategic and organizational fit. These will give a proxy for the synergy
potential when combining the two firms, but is a mere prediction and no guarantee. The
subsequent goal of the post-merger integration process in mergers and acquisitions is
unlocking these potential synergies to establish the value creation. This can be done by fully
transferring the strategic capabilities between the involved firms.
Technology-driven M&A are based on intentions to gather knowledge and
technological know-how from the target firm. Unfortunately, these strategic capabilities often
reside in the minds of the employees and are therefore person-specific. Value is created by
transferring this tacit knowledge, which can be done through functional skill transfer. It is
important that knowledge is preserved, transferred, and eventually applied, which is hard
given the covert nature of tacit knowledge.
Interactions, that should facilitate the transfer, can be supported by managerial
actions. Shaping a positive atmosphere is a necessity to optimize the functional skill transfer.
Yet, prohibiting determinism, value destruction, and a leadership vacuum are also important
tasks when managing a post-acquisition process.
In general, the needs for the integration of an acquisition vary for each combination,
but two main concepts give a guideline for the management approach. Integration processes
are dependent of the need for strategic interdependence and the need for autonomy. For our
technology-driven focus it can be concluded that a high need for autonomy is required, since
the strategic capability that needs to be transferred consists of person-specific tacit
knowledge. If the need for autonomy is not respected, there is a great chance that the
personnel that is carrying this knowledge walks away from the newly formed combination,
diminishing the creation of value.
Then the need for interdependence determines which managerial approach should be
undertaken in the functional skill transfer, either a preservation approach when the
interdependence need is low as seen with domain exploring acquisitions, or a symbiosis
approach when the need for interdependence in high as with domain strengthening
acquisitions. The latter will require the most intensive monitoring and usage of all
manageable factors mentioned in this thesis, to correctly integrate, transfer and unlock the
value, of the technology acquisition.
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4.2 Limitations
Given the technology-driven focus of this thesis, a rather confined part of the
integration phase is investigated. Because the transfer of tacit knowledge is an important
aspect in technology acquisitions, most findings are only based on what drives the transfer of
functional skills – which transmits the knowledge capabilities. Therefore managerial actions
improving the other sources of capability transfer are not revealed in this thesis.
Subsequently, the process perspective advocated by Haspeslagh and Jemison
(1991) is used to explain the managerial actions that can be undertaken in managing a
technological post-merger integration process. As a result, a global outlook on the factors
influencing the integration process is given, without thoroughly getting to the root of the
specific organizational causes. The thesis gives a quick glance at the overall situation,
including the foremost interactions and factors, but does not explain every detail.
In addition, relying on the Haspeslagh and Jemison (1991) framework limited the
extent in which views of other scholars could be incorporated in the thesis. This could imply
that valuable insights are not included in this thesis.
Finally, in this thesis the outcome of the technology integration is related to
performance in general terms. Because successful technology-driven acquisition integration
is likely to spur R&D intensity and patent outputs, a link could be established with the
technical performance of firms. Yet, a lot of the literature in that field is based on case
studies, and no extensive, longitudinal studies were found.
4.3 Recommendations
A clearer relationship between technology-driven intentions and eventual
technological performance is still open for research. General frameworks are present to
understand the factors influencing the integration process, but specific literature linking
intentions to actions, and subsequently technological performance, remains scarce, or at
least scattered. Several case studies into sub domains exist, but a comprehensive study
relating these individual studies for a universal application was not found.
Also the terminology concerning technology was open for interpretation and therefore
vague. The different scholars use broad and different definitions, which do not give a solid
basis to go into detail. Again, a complete and universally applicable study might give way for
better understanding the processes playing a role in the success or failure of technology-
driven post-merger integration.
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