Acquisitions of small high-tech firms as a mechanism for external knowledge sourcing: The integration-autonomy dilemma

https://doi.org/10.1016/j.techfore.2017.02.010Get rights and content

Highlights

  • Acquisitions of small high-tech firms, incumbents insource technological knowledge.

  • Integration level is critical in these acquisitions (integration-autonomy dilemma).

  • Interdependency due to a component technology leads to a higher integration level.

  • Interdependency due to high market relatedness leads to a higher integration level.

  • Common ground due to technological relatedness weakens the two aforementioned effects.

Abstract

Acquisitions of small high-tech firms by large incumbents are a prominent mechanism for external knowledge sourcing, whose success strictly depends on the choice of a wise post-acquisition implementation strategy. This paper theoretically discusses and empirically documents - on a sample of 458 deals in the 2001–2005 period - the antecedents of this choice by focusing on the integration-autonomy dilemma. Specifically, we jointly consider two main dimensions of the post-acquisition implementation: whether the acquiring firm absorbs the acquired one into its organization or keeps it separate as an autonomous subsidiary/business unit and whether the acquired CEO is replaced or retained. Separation with CEO retention corresponds to the minimum level of integration (and the maximum level of autonomy), whereas absorption with CEO replacement corresponds to the maximum level of integration (and the minimum level of autonomy.) We hypothesize that the acquiring firm chooses an implementation strategy with high level of integration when the acquired firm produces a component technology or operates in a related market. Indeed, in both cases, the interdependency between the two firms is high and thus the benefits of integration likely exceed the costs of the loss of autonomy. However, this positive association is weaker when the acquiring and acquired firms have common ground, originating from technological relatedness or prior alliances, which acts as a low-cost coordination mechanism. Results of econometric estimates largely confirm our hypotheses.

Introduction

Nowadays, many firms insource knowledge from external parties, thus adopting an open innovation strategy (Bogers et al., 2017). To this end, they resort to mechanisms like technology licensing (Arora et al., 2013), technological alliances (Das et al., 1998) and technological acquisitions (Ahuja and Katila, 2001, Hung and Tang, 2008, Ziedonis, 2004). Although technological acquisitions - through which acquiring firms insource technological artifacts and knowledge from acquired ones – are an everyday occurrence (McCarthy and Aalbers, 2016, p. 1818), studies on their contribution to firms' innovative performance report contrasting results.1 Independently, the acquisition literature largely attributes the post-acquisition performance to the post-acquisition implementation strategy2 (Larsson and Finkelstein, 1999, Pablo, 1994. See also Graebner et al., 2017 for a recent review). Specifically, scholars concur that an acquiring firm must choose wisely the level of integration, i.e., the degree of adjustment to impose on the acquired one so as the two firms can coordinate and work as a whole for realizing of the acquisition objectives (Bauer and Matzler, 2014, Haspeslagh and Jemison, 1991, Jemison and Sitkin, 1986). In making this choice, the acquiring firm faces the so-called integration-autonomy dilemma: a high level of integration enables coordination and control, but reduces acquired firm's autonomy, thus likely causing organizational disruption and acquired personnel's demotivation (Ranft and Lord, 2002).

This paper advances our knowledge on the integration-autonomy dilemma by examining the antecedents of the level of integration in acquisitions of small high tech firms by large firms, a peculiar type of technology acquisitions3 in which, the integration-autonomy dilemma is highly critical (Puranam and Srikanth, 2007, Puranam et al., 2006, Puranam et al., 2009). The acquisition of Autonomy by HP is a case in point. In October 2011, HP acquired Autonomy, a software company founded in 1996 and managed by its founder-CEO, for $10.1 billion. Only 8 months later, HP expelled the former founder-CEO and lost 100 of Autonomy's employees (Stanwick and Stanwick, 2014). The experts suggest that loss of autonomy caused internal conflicts between the acquired CEO and HP executives, which ultimately resulted in disappointing licensing revenues generated by the acquired technology, and departure of acquired personnel (Nutall, 2012).

In developing our hypotheses, we extend the literature on post-acquisition implementation of small high-tech firms in two main directions. First, this literature has to date focused on the choice of the acquired firm's structural form (Paruchuri et al., 2006, Puranam and Srikanth, 2007, Puranam et al., 2006, Puranam et al., 2009, Schweitzer, 2005), studying whether the acquiring firm absorbs the acquired one into its organization or keeps it separate as an autonomous subsidiary/business unit. However, the broad acquisition research acknowledges that acquisition implementation includes adjustments in variety of dimensions, which go beyond the separation versus absorption dichotomy (Angwin and Meadows, 2015, Datta and Grant, 1990, Haspeslagh and Jemison, 1991, Jemison and Sitkin, 1986, Pablo, 1994, Shrivastava, 1986). In particular, a crucial dimension of the post-acquisition implementation is the acquired CEO's replacement versus retention (Bergh, 2001, Buchholtz et al., 2003, Cannella and Hambrick, 1993, Hambrick and Cannella, 1993, Wulf and Singh, 2011). Therefore, in this paper, by acknowledging the prominence role of the CEO in small high-tech firms (Graebner, 2004, Ranft and Lord, 2002), we assess the level of integration by combining two post-acquisition implementation dimensions: absorption versus separation and replacement versus retention of the acquired CEO. This combination results in four post-acquisition implementation strategies characterized by an increasing level of integration (and a decreasing level of autonomy). Specifically, we argue that when the acquiring firm keeps the acquired one separate, the retention of the acquired CEO ensures the maximum level of autonomy. Conversely, the appointment of a new CEO signals that, despite structural separation, the acquiring firm wants a close control over the acquired firm (Datta and Grant, 1990, Zaheer et al., 2013). Similarly, when the acquiring firm absorbs the acquired one, the maximum level of integration (and the minimum level of autonomy) arises with the replacement of the acquired CEO. On the contrary, when the acquiring firm retains the acquired CEO, this latter can mitigate organizational turmoil and preserve some level of autonomy (Graebner, 2004).

Second, the literature has analyzed two main antecedents of the level of integration in acquisitions of small high-tech firms (Puranam et al., 2009): interdependency and common ground (i.e., knowledge that is shared and known to be shared, Clark, 1996) between the acquiring and the acquired firms. Interdependency increases the benefits of a higher level of integration, while common ground reduces the need for integration as it acts as a low cost coordination mechanism. To date, scholars have attributed interdependency to the fact that the acquired firm produces a component technology, which the acquiring one must integrate in its products/technologies. We contend that interdependency arises also when the acquiring and the acquired firms operate in highly related product-market domains (i.e., market relatedness is high). Thus, we claim that the presence of component technology and high market relatedness bring about post-acquisition implementation strategies with a high-level of integration. Likewise, whilst prior works have associated common ground to the technological relatedness between the two firms (namely the overlap in their knowledge bases), we attribute common ground also to the presence of prior alliaces between the acquiring and the acquired firms. Accordingly, we argue that the positive association between interdependency – resulting from component technology and market relatedness - and the level of integration is weaker when the acquiring and the acquired firms have common ground, resulting from high technological relatedness and prior alliances.

Econometric estimations on a sample of 458 acquisitions of small high-tech firms show that an acquiring firm chooses a higher level of integration when the acquired one produces a component technology. However, this holds true only when the two firms do not have formed prior alliances and their technological relatedness is low. Similarly, a higher level of market relatedness results in a higher level of integration, but only if technological relatedness is low.

The paper proceeds as follows. Section 2 illustrates the integration-autonomy dilemma in acquisitions of small high-tech firms, describes the four post-acquisition strategies under investigation, and develops the research hypotheses. Section 3 describes the data and the methodology. Section 4 reports the results. Finally, Section 5 concludes the paper.

Section snippets

Theoretical background

In acquisitions of small high-tech firms, acquiring firms aims to leverage the technological artifacts (products, patents, or prototypes) and the knowledge of acquired inventors and key employees (Coff, 1999, Grimpe and Hussinger, 2014, Kapoor and Lim, 2007, Makri et al., 2010, Ranft and Lord, 2002, Sears and Hoetker, 2014). However, the acquired technologies typically have much uncertainty and complexity in applicability (Coff, 1999, Saxton and Dollinger, 2004, Schweitzer, 2005), while

Data and methodology

In this work, to test the hypotheses (illustrated in Fig. 1), we focus on acquisitions of small high-tech firms by large listed firms over the 2001–2005 period. To build the acquisition sample, we relied on Thompson SDC Platinum and Zephyr (Bureau Van Dijk). Specifically, we selected all complete acquisitions that meet the following criteria. First, the acquired firms operated in one of the high-tech industries (US SIC codes): Drugs (283), Computer and office equipment (357), Electronic and

Results

Table 1b shows the descriptive statistics and correlation matrix of the variables.

From the mean of the dependent variable, we infer that, in most acquisitions, the level of integration is very low, in accordance with the view that the integration of acquired operations is a costly and challenging process, especially in the case of acquisitions of small high-tech firms. Indeed, the acquiring firms mostly prefer to keep acquired firms as separate subsidiaries and keep their CEOs in charge. In the

Discussion and conclusion

This paper looks beyond the surface of the integration-autonomy dilemma in acquisitions of small high-tech firms, moving from the premise that effective acquisition implementation is fundamental for these acquisitions (Graebner et al., 2010). To this end, we have identified four post-acquisition strategies by jointly considering two fundamental implementation dimensions: the organizational structure that the acquiring firm chooses for the acquired firm (separation versus absorption) and the

Acknowledgments

The authors acknowledges the financial support of Politecnico di Milano through the FARB (Fondo Ateneo Ricerca di Base) Project: “Micro-foundations for research in cross-border acquisitions: the role of individuals in bridging cultural distance” and of EMJD Programme European Doctorate in Industrial Management (EDIM) funded by the European Commission, Erasmus Mundus Action 1.

Keivan Aghasi has just completed his post-doc grant at the Politecnico di Milano School of Management, where he received his PhD in December 2015 (joint program with KTH and UCM within the Erasmus Program of the European Commission). His area of expertise is M&A, with a particular focus on post-acquisition implementation.

References (83)

  • K. McCarthy et al.

    Technological acquisitions: the impact of geography on post-acquisition innovative performance

    Res. Policy

    (2016)
  • P. Porrini

    Can a previous alliance between an acquirer and a target affect acquisition performance?

    J. Manag.

    (2004)
  • A. Ranft et al.

    Acquiring new knowledge: the role of retaining human capital in acquisitions of high-tech firms

    J. High Technol. Managem. Res.

    (2000)
  • J. Reuer et al.

    Adverse selection and M&A design: the roles of alliances and IPOs

    J. Econ. Behav. Organ.

    (2008)
  • T. Saxton et al.

    Target reputation and appropriability: picking and deploying resources in acquisitions

    J. Manag.

    (2004)
  • R. Agarwal et al.

    Spillovers across organizational architectures: the role of prior resource allocation and communication in post-acquisition coordination games

    Strateg. Manag. J.

    (2012)
  • G. Ahuja et al.

    Technological acquisitions and the innovation performance of acquiring firms: a longitudinal study

    Strateg. Manag. J.

    (2001)
  • B. Anand et al.

    Do firms learn to create value? The case of alliances

    Strateg. Manag. J.

    (2000)
  • A. Arora et al.

    Managing licensing in a market for technology

    Manag. Sci.

    (2013)
  • J. Barney

    Returns to bidding firms in mergers and acquisitions: reconsidering the relatedness hypothesis

    Strateg. Manag. J.

    (1988)
  • F. Bauer et al.

    Antecedents of M&a success: the role of strategic complementarity, cultural fit, and degree and speed of integration

    Strateg. Manag. J.

    (2014)
  • M. Bogers et al.

    The open innovation research landscape: established perspective and emerging themes across different levels of analysis

    Ind. Innov.

    (2017)
  • A. Buchholtz et al.

    The role of human capital in post-acquisition CEO departure

    Acad. Manag. J.

    (2003)
  • A. Cannella et al.

    Effects of executive departures on the performance of acquired firms

    Strateg. Manag. J.

    (1993)
  • L. Capron

    The long term performance of horizontal acquisitions

    Strateg. Manag. J.

    (1999)
  • L. Capron et al.

    National corporate governance institutions and post-acquisition target reorganization

    Strateg. Manag. J.

    (2009)
  • Capron, L. & Mitchel, W., 2012. Build, borrow or buy: Solving the growth dilemma. s.l.: Harvard...
  • L. Capron et al.

    Asset divestiture following horizontal acquisitions: a dynamic view

    Strateg. Manag. J.

    (2001)
  • M. Carapeto et al.

    The good, the bad, and the ugly: A survival guide to M&A

    (2009)
  • H. Clark

    Using Language

    (1996)
  • R. Coff

    How buyers cope with uncertainty when acquiring firms in knowledge intensive industries: Caveat Emptor

    Organ. Sci.

    (1999)
  • M. Colombo

    Alliance form: A test of the contractual and competence perspectives

    Strateg. Manag. J.

    (2003)
  • S. Das et al.

    Impact of strategic alliances on firm valuation

    Acad. Manag. J.

    (1998)
  • D. Datta

    Organizational fit and acquisition performance: effects of post-acquisition integration

    Strateg. Manag. J.

    (1991)
  • D. Datta et al.

    Relationships between type of acquisition, the autonomy given to the acquired firm and acquisition success: an empirical analysis

    J. Manag.

    (1990)
  • H. Ernst et al.

    The influence of corporate acquisitions on the behaviour of key inventors

    R&D Manag.

    (2000)
  • J. Galbraith

    Organization Design

    (1977)
  • M. Graebner

    Momentum and serendipity: how acquired leaders create value in the integration of technology firms

    Strateg. Manag. J.

    (2004)
  • M. Graebner et al.

    Success and failure in technology acquisitions lessons for buyers and sellers

    Acad. Manag. Perspect.

    (2010)
  • M. Graebner et al.

    The process of postmerger integration: a reviewand agenda for future research

    Acad. Manag. Ann.

    (2017)
  • R. Grant

    Toward a knowledge-based theory of the firm

    Strateg. Manag. J.

    (1996)
  • Cited by (19)

    • The art of forming a partnership in an entrepreneurial world: the Brazilian case

      2023, Journal of Entrepreneurship in Emerging Economies
    View all citing articles on Scopus

    Keivan Aghasi has just completed his post-doc grant at the Politecnico di Milano School of Management, where he received his PhD in December 2015 (joint program with KTH and UCM within the Erasmus Program of the European Commission). His area of expertise is M&A, with a particular focus on post-acquisition implementation.

    Massimo G. Colombo is Full Professor of Economics of Technical Change at Politecnico di Milano, where he is the Deputy Dean for Research at Politecnico di Milano School of Management. The scientific activity of Massimo G. Colombo is mainly in Industrial Economics, Economics of Technical Change, and Strategic Management. His areas of research include: the determinants of the diffusion of advanced manufacturing technologies and associated organizational innovations, and their implications for the structure and strategies of firms; the analysis of the relation between new technologies and firm organization; strategic alliances: firm-, industry-, and country-specific determinants of the propensity of firms to establish cooperative agreements; choice of the organizational form of alliances; technological cooperation and R&D investments; ownership and financial structure of Italian business groups; high-tech entrepreneurship: founders' characteristics, external financing, and other determinants of the post-entry performances of new technology based firms; organization and dynamics of ICT industries

    Cristina Rossi-Lamastra holds a PhD in Economics of Innovation from Sant'Anna School of Advanced Studies in Pisa. She is currently Associate Professor at the Politecnico di Milano School of Management. Her research interests are in the area of Entrepreneurship, Organizational Economics, and Open Innovation. Cristina has published on these topics in Management Science, Entrepreneurship Theory and Practice, R&D Management, Research Policy, Economic Letters, Industry & Innovation, Long Range Planning, Small Business Economics, Managerial and Decision Economics, among others. She is Associate Editor of Journal of Small Business Management and of Journal of Industrial and Business Economics. She edited special issues on Industry & Innovation and Journal of Small Business Management. At the Politecnico di Milano School of Management, Cristina serves as director of the Executive MBA Part Time and she is member of the Steering Committee of the doctoral program. She is General Representative at Large of the Technology and Innovation Management Division (TIM) of the Academy of Management.

    View full text