TOWARD UNLOCKING THE FULL POTENTIAL OF ACQUISITIONS: … · organizational restructuring.3 By...

TOWARD UNLOCKING THE FULL POTENTIAL OFACQUISITIONS: THE ROLE OF

ORGANIZATIONAL RESTRUCTURING

HARRY G. BARKEMARotterdam School of Management, London School of Economics, & Tilburg University

MARIO SCHIJVENTexas A&M University & Tilburg University

Building on behavioral theory, we study when and how firms unlock synergy fromacquisitions over extended periods of time. We argue that initial integration is inevi-tably suboptimal and that, as a result, acquisitive growth decreases an acquirer’sperformance, eventually forcing it to engage in organizational restructuring to morefully unlock the synergistic potential. Hence, we conceptualize organizational restruc-turing as a second stage in the integration process. Moreover, we theorize about howacquisition-restructuring cycles evolve as firms gain acquisition and restructuringexperience. We tested our theory using panel data on firms undertaking almost 1,600acquisitions over four decades.

In 2006, firms acquired at an all-time record levelof $3.79 trillion worldwide (Thomson Financial,2007). However, research has suggested that in amajority of cases anticipated synergies were leftunrealized (for meta-analyses, see Datta, Pinches,and Narayanan [1992] and King, Dalton, Daily, andCovin [2004]). Strategy scholars have, therefore,long been pursuing an answer to the question, Howcan acquisitions be undertaken more successfully?

Since the 1980s, researchers have been exploringthe preacquisition, or selection, stage of the acqui-sition process. They have argued that the synergis-tic opportunities inherent in an acquisition are con-tingent on the strategic fit that the acquisition offersin the form of resource similarity or complementa-rity. Many studies have confirmed this argument(Harrison, Hitt, Hoskisson, & Ireland, 1991; Kuse-witt, 1985; Lubatkin, 1987; Pennings, Barkema, &Douma, 1994; Ramaswamy, 1997; Shelton, 1988;Singh & Montgomery, 1987; Zaheer, Castaner, &Souder, 2004).

More recently, however, the bulk of the re-search attention has shifted toward a second con-tingency that arises in the postacquisition, or im-plementation, stage of the acquisition process:organizational fit. The argument is that, althoughstrategic fit is a necessary condition for synergyrealization, it merely creates synergistic potentialthat can only be realized through effective inte-gration of an acquired firm (Haspeslagh & Jemi-son, 1991; Jemison & Sitkin, 1986). In line withthis view, studies have shown that integrationenhances acquisition performance (Datta & Grant,1990; Shanley, 1994; Zollo & Singh, 2004). Infact, Larsson and Finkelstein (1999) found it to bethe single most important predictor of synergyrealization.

Hence, after an aquirer selects and acquires afirm with synergistic potential, it is up to theacquirer to unlock as much of this potential aspossible by building sufficient organizational fit(Pablo, 1994). However, this is a complex taskthat requires considerable management time andattention spent on “combining similar processes,coordinating business units that share commonresources, centralizing support activities that ap-ply to multiple units, and resolving conflictsamong business units” (Hitt, Harrison, & Ireland,2001: 86). Furthermore, it requires managing andgradually closing gaps with respect to, for in-stance, management style (Datta, 1991) and or-ganizational culture (Chatterjee, Lubatkin,Schweiger, & Weber, 1992), an effort that is oftenhampered by considerable inertia, or even out-

We are grateful to Amy Hillman and three anonymousreviewers for their outstanding feedback and guidance.We are also indebted to Jonghoon Bae, Laurence Capron,Paulo Cunha, Lorraine Eden, Javier Gimeno, Mike Hitt,Paul Ingram, Duane Ireland, Xavier Martin, Bertrand Me-lenberg, Aswin van Oijen, Jeroen Vermunt, FilippoWezel, Maurizio Zollo, and seminar participants atINSEAD and at McGill, Texas A&M, Tilburg, and TulaneUniversities for valuable comments and suggestions.Mark Boons, David Kroon, and Thijs Peeters providedexcellent research assistance.

� Academy of Management Journal2008, Vol. 51, No. 4, 696–722.

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right resistance, on the part of the acquired firm(Nahavandi & Malekzadeh, 1988; Walter, 1985;Weber & Camerer, 2003).1

Notwithstanding the many valuable insights thatprior research has provided, researchers have nearlyalways adopted the individual acquisition as the unitof analysis, implicitly assuming that a firm starts witha clean slate every time it acquires. In reality, how-ever, an acquisition is usually not an isolated event,but merely one part of an overarching sequence ofacquisitions collectively aimed at implementing acorporate strategy (Kusewitt, 1985; Salter & Wein-hold, 1979). The integration of each of these acquisi-tions requires considerable time and effort, thus oftencausing the burden on the acquirer’s management toincrease as its string of acquisitions grows (Gary,2005; Hill & Hoskisson, 1987; Penrose, 1959). Even-tually, according to Haspeslagh and Jemison, majororganizational change may be needed to combine allthe various pieces into an “integrated network ofoperations” (1991: 255)—suggesting that the role oforganizational fit extends far beyond the level ofthe individual acquisition.

Building on behavioral theory, we develop a newtheoretical framework through which we seek toexplain when and how firms unlock synergy asthey engage in acquisitive growth over long periodsof time. Adopting the acquirer as our unit of anal-ysis,2 we conceptualize strategy as a sequence ofdecisions and actions taken “one at a time, over aperiod of years” (Fredrickson & Mitchell, 1984:400), rather than as a preconceived, comprehensiveplan. First, we argue that, for each acquisition, afirm initially engages in “local search” (Cyert &March, 1963), which inevitably results in subopti-mal integration. As a result, a sequence of acqui-sitions leads to the accumulation of organization-al inefficiencies, which gradually increases theneed for more “distant search” in the form of majororganizational restructuring.3 By recombining itssubunits, such restructuring enables the firm to

unlock the synergistic potential of its acquisitionsmore fully. Hence, in essence, the first part of ourtheory implies that acquirers go through long-termcycles of acquisitive growth and organizational re-structuring and that such restructuring serves as animportant second stage in the postacquisition inte-gration process.

Subsequently, we theorize about how these ac-quisition-restructuring cycles evolve over time. Weargue that acquisition experience enables an ac-quirer to learn to implement its acquisitions moresuccessfully from the start, thereby postponing theneed for restructuring. Moreover, restructuring ex-perience fosters the acquirer’s ability to unlockmore synergy when the need for another restructur-ing does arise. We tested our theory using paneldata on firms engaging in almost 1,600 acquisitionsover four decades (1966–2005).

BACKGROUND

Although behavioral theory (Cyert & March,1963; March & Simon, 1958; Simon, 1945) initiallyfocused on decision making at the operating level,its broader applicability to strategic issues—that is,those that are “important, in terms of the actionstaken, the resources committed, or the precedentsset” (Mintzberg, Raisinghani, & Theoret, 1976:246)—was soon recognized (Carter, 1971). Two keyinterrelated themes within this literature are cen-tral to our theory development: search and organi-zational learning. Regarding the former, classic be-havioral theory suggests that a search for solutionsis initiated in the case of failure, or anticipation offailure, to meet a goal (Cyert & March, 1963; seealso Nutt, 1998). Although this characterizationmay accurately depict search at the operating level,at the strategic level it is not necessarily driven byproblems, as firms also initiate search proactivelyin an attempt to seize strategic opportunities(Carter, 1971).

However, the search process is subject to“bounded rationality,” meaning that a firm has“limited information, attention, and processingability” (Greve, 2003: 12; Simon, 1945). Hence,there are constraints on the cognitive demands thatthe firm’s management can effectively handle atany given time (Ocasio, 1997; Penrose, 1959).Faced with a complex strategic issue, it is typically“confronted with more stimuli than [it] can attendto or adequately process” (Hambrick, Finkelstein, &Mooney, 2005: 478; Mintzberg, 1973). As a result,the firm is forced to “satisfice”—that is, look fora course of action that is satisfactory rather thanoptimal (Simon, 1945)—by relying on cognitivesimplifications of reality that economize on in-

1 Acquirers often create integration teams and appointsenior managers as full-time integration leaders (Ashkenas,DeMonaco, & Francis, 1998; Daniel & Metcalf, 2001), illus-trating the complexity and the stakes that are involved.

2 Analyzing phenomena at a higher level of aggregationtypically implies examining processes, both conceptuallyand empirically, over lengthy periods of time (Freeman,1978). Unlike most prior work, which has examined peri-ods of days or weeks, or at most, of a few years followingacquisitions, our study examines four decades.

3 As we will explain later on, organizational restruc-turing is fundamentally different from portfolio restruc-turing, which is what the term “restructuring” has typi-cally referred to in the literature so far.

2008 697Barkema and Schijven

formation processing (Schwenk, 1984). This phe-nomenon has been corroborated in experimentalsettings (Bettman, Johnson, & Payne, 1990; Payne,Bettman, & Johnson, 1988).

By focusing attention on just a few aspects of asituation, such simplified models limit a firm’ssearch to a small, salient subset of the total set ofalternatives (March & Simon, 1958; Mintzberg etal., 1976). Specifically, they lead the firm to engagein local search, in which efforts to identify satisfac-tory courses of action are largely limited to theneighborhood of the problem symptom and solu-tions adopted in the past (Cyert & March, 1963;Levinthal & March, 1993). Although “there is norealistic alternative in the face of the limits onhuman knowledge and reasoning . . . [such] simpli-fication may lead to error” (Simon, 1945: 119; Tver-sky & Kahneman, 1974), compromising the qualityof decision making and preventing the firm fromfinding the global, as opposed to merely a local,optimum (Levinthal, 1997). Research has indeedshown that decisions tend to be less effective if thecomprehensiveness with which firms search forand evaluate alternative courses of action for agiven strategic move is relatively low (e.g., Dean &Sharfman, 1996; Fredrickson, 1984; Fredrickson &Iaquinto, 1989; Von Werder, 1999; Wong, 2004). Asa result, when local search fails to yield a course ofaction that is sufficiently effective, at some pointfirms will switch to more comprehensive, or dis-tant, search in order to find one that is (Cyert &March, 1963).

The second key theme of behavioral theory thatis of central importance to our paper—organization-al learning—follows naturally from the notion ofsearch. Over time, as a firm repeatedly performs agiven organizational task, the search process trig-gered by that task will become increasingly routin-ized and refined (Levitt & March, 1988). Although acomplex strategic move will likely always requiresubstantial cognitive effort in the form of consciousand deliberate information processing, the routini-zation and learning that experience entails willhelp the firm to decide on and implement a suitablecourse of action more automatically, thus dimin-ishing the need for cognitive effort (March & Si-mon, 1958; Nelson & Winter, 1982; Shiffrin &Schneider, 1977). Experience, therefore, lowers thedemands placed on bounded rationality. It leads afirm to consider fewer courses of action, not be-cause bounded rationality prevents it from beingmore comprehensive (as is the case in the absenceof experience), but because it has learned whichones are most effective for a given task (Levinthal &March, 1981).

THEORY AND HYPOTHESES

The hypotheses developed below all deal exclu-sively with acquisitions for which the primary ra-tionale is the creation of synergy, such as econo-mies of scale, economies of scope, or capabilitytransfer (Harrison et al., 1991; Haspeslagh & Jemi-son, 1991; Hitt et al., 2001; Larsson & Finkelstein,1999; Lubatkin, 1983), and that consequently re-quire relatively high levels of integration (Datta &Grant, 1990; Haspeslagh & Jemison, 1991). Wetherefore tested our hypotheses using only data onacquisitions that were likely to have such synergis-tic potential because their activities were related tothose of the acquirer; we included horizontal, ver-tical,4 and related-diversified acquisitions, whichwe jointly labeled “related acquisitions.”

The Long-Term Cycle of Acquisitive Growth andOrganizational Restructuring

Local search in the context of acquisition inte-gration. As mentioned earlier, search at the strate-gic level is triggered not only by problems, but alsoby opportunities (Carter, 1971). Acquisitions repre-sent such strategic opportunities. However, thecomplex task of integrating them and thus, estab-lishing the organizational fit required to unlocktheir synergistic potential (Haspeslagh & Jemison,1991; Hitt et al., 2001; Schweizer, 2005; Yu, En-gelman, & Van de Ven, 2005), usually prevents afirm from considering the full set of alternativecourses of action, forcing it instead to satisfice byrelying on cognitive simplifications of reality (Hitt& Tyler, 1991). Such local search economizes oninformation processing but increases the probabil-ity of making suboptimal decisions on acquisitions(Duhaime & Schwenk, 1985). In line with this idea,research has shown that anticipated synergies aretypically not fully realized (Datta et al., 1992; Kinget al., 2004).

Cyert and March’s (1963) “proximity rules” pro-vide deeper insight into the form that such localsearch is likely to take. These rules imply that afirm mainly searches for solutions to a problem (1)in the neighborhood of the symptom (that is, in thesubunit in which the problem manifested itselffirst) and (2) in the neighborhood of the firm’scurrent state (that is, avoiding solutions that breakwith established routines by favoring incremental

4 Vertical acquisitions usually possess resources thatare complementary, rather than similar, to those of theacquirer, which can be a source of synergy as well (Har-rison et al., 1991; Larsson & Finkelstein, 1999; Zaheer etal., 2004).

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over radical change). In the context of our study,the first proximity rule suggests that effective inte-gration solutions are likely to be sought within anacquired firm itself, where symptoms of inadequateorganizational fit are likely to emerge first in theform of, for instance, resistance on the part ofits employees (Nahavandi & Malekzadeh, 1988;Walter, 1985) or persistent weakening of its postac-quisition performance. The second rule suggeststhat an acquirer will mainly consider integrationapproaches that do not require major changes in itsorganization beyond those within the acquired firmitself. Hence, it will seek to integrate the acquisi-tion without changing its own existing organiza-tional structure.5

In sum, the above suggests that, in an attempt toestablish adequate organizational fit, an acquirerwill satisfice by mainly considering organizationalchanges within the acquired firm itself, regardingits own existing organizational structure as exoge-nous to the issue. In line with this argument,Haspeslagh and Jemison found that integration isoften characterized by a “make them like us” syn-drome on the part of acquirers (1991: 151), espe-cially in the case of relatively small acquisitions.Hebert, Very, and Beamish (2005) reported that ac-quirers often send integration teams into acquiredfirms to identify and evaluate synergistic opportu-nities. However, since these are usually smallteams of business-level managers (Haspeslagh &Jemison, 1991; Palter & Srinivasan, 2006), theirsearch activity is inevitably local. Furthermore, Yuand colleagues (2005) found that initial integrationefforts tend to be limited to changes within, ratherthan across, acquired subunits. Thus, at least ini-tially, an acquirer tends to disregard more radicalpossibilities for integration, such as recombiningspecific subunits from multiple existing divisionswith an acquired firm to form an entirely new di-vision. Taking these possibilities into consider-ation, however, would clearly increase the compre-

hensiveness of the search process. Although it willtypically be financially unjustifiable to engage insuch major organizational change for each individ-ual acquisition undertaken, the potential benefitsof doing so may often become very real after a firmhas undertaken a string of acquisitions over time, aswe will argue later on.

The performance effects of acquisitive growth.Since an acquisition is usually not an isolatedevent, but part of an overarching sequence of ac-quisitions collectively aimed at implementing acorporate strategy (Kusewitt, 1985; Salter & Wein-hold, 1979), an acquirer tends to face a sequence ofintegration decisions over time. Because, givenbounded rationality, “little attempt is made to in-tegrate consciously the individual decisions thatcould possibly affect one another” (Fredrickson &Mitchell, 1984: 402), they are typically handledindividually, rather than according to a precon-ceived, integrated strategy resulting from some for-mal planning system (Fredrickson, 1984; Fredrick-son & Mitchell, 1984; Mintzberg, 1978).

We argue that each consecutive acquisition adds“inefficiencies” (Lubatkin, 1983: 222) to an acquir-er’s organizational system. That is, given the sub-optimal organizational fit that results from localsearch in strategic decision making, each acquiredfirm, with its own culture, structure, systems, andprocesses, represents a subunit that adds to thetotal complexity of coordinating the acquiring firm(Argyres, 1996; Campbell, 1988; Gary, 2005; Hen-derson & Fredrickson, 1996; Hill & Hoskisson,1987; Thompson, 1967). This becomes all the moreapparent when one realizes that the type of acqui-sitions under consideration here—related acquisi-tions—typically require strategic controls, which,unlike financial controls, demand a thorough un-derstanding on the part of, as well as rich informa-tion exchange with, the acquirer’s senior manage-ment (Hitt, Hoskisson, Johnson, & Moesel, 1996).6

Wolters Kluwer, a major multinational publish-ing and information services firm included in oursample, illustrates the point. After a steady declinein profits, the firm was recently losing money forthe first time ever. Analysts said it showed signs of

5 Cyert and March (1963) argued that local search isoften governed by a third proximity rule: search in theneighborhood of vulnerable areas, with firms favoring“changes in organizational units that are unable to claimthat preservation of their current routines is essential tothe organizational functioning” (Greve, 2003: 15). As Cy-ert and March pointed out, “certain activities in the or-ganization are more easily attacked than others, simplybecause of their power position in the system” (1963:171). Once again, this suggests that, in its pursuit oforganizational fit, an acquirer is likely to primarily im-plement changes within the narrow confines of the ac-quired firm because of its relatively weak power positionin the overall organization (e.g., Jemison & Sitkin, 1986).

6 In fact, information-processing requirements couldincrease as much as exponentially with the number ofsubunits (N): N(N � 1)/2 (Hill & Hoskisson, 1987). Al-though lateral coordination mechanisms may partly alle-viate these complications by dividing the coordinationtask over a larger number of individuals (e.g., Tsai, 2002),some vertical coordination through financial controlswill remain necessary; thus, the burden on senior man-agement still increases with each acquisition to be inte-grated and coordinated.


burnout caused by a failure to integrate the hun-dred-plus acquisitions it had engaged in over theprevious decade. They strongly advised the CEO tobetter integrate the firm’s “archipelago” of subunitsin order to counter the decreasing trend in its fi-nancial performance (NRC Handelsblad, 2003).

In light of the above, we argue that the extent towhich anticipated synergies are realized from agiven acquisition depends on its position within asequence of acquisitions. Whereas early acquisi-tions in the sequence can draw on a relatively largepool of available managerial resources, which en-able comparatively high-quality integration, theseresources will become increasingly tied up in co-ordination as more acquisitions are added (Kanfer& Ackerman, 1989). That is, “the services availablefrom the existing managerial group limit theamount of expansion that can be planned [and im-plemented] at any time because all plans for expan-sion absorb some of the services available from thisgroup” (Penrose, 1959: 49), as corroborated by morerecent research (Hitt, Hoskisson, & Ireland, 1990;Yu et al., 2005).7

The more an acquirer’s managerial resources be-come overstretched as a result of undertaking ad-ditional acquisitions, the more it will be forced tosatisfice on their integration by engaging in evermore local search in which an ever smaller subsetof potential courses of action is considered. That is,“the greater the job demands . . . the more remotestrategic rationality becomes. Under high job de-mands, executives have so much performance pres-sure, so many decisions to make, in the face of somuch information, they simply cannot afford—interms of cognitive wherewithal, time, or other re-sources—to be comprehensive in their analyses orsearch for solutions” (Hambrick et al., 2005: 478).As a result, the odds of building the organizationalfit required for synergies to be unlocked becomeever smaller as a firm’s string of acquisitions grows.

Hence, we predict a vicious cycle will unfold asfollows: the addition of a suboptimally integratedacquisition will require more managerial resourcesfor effective coordination of the acquiring firm as awhole (for example, more resources will be needed toresolve conflicts and ensure effective resource shar-ing between subunits), thus leaving fewer resourcesfor the integration of the next acquisition. As a result,this next acquisition will be even more suboptimallyintegrated, which, in turn, will increase the coordi-

nation demands to an even greater extent, and so on(see Ellis, Hollenbeck, Ilgen, Porter, West, & Moon,2003). In light of bounded rationality, therefore, thispattern will increasingly result in missed synergisticopportunities in terms of, for example, joint R&D,exchanging “best practices” or people in the contextof job rotation, or sharing knowledge and other re-sources required for concerted action throughout afirm (Ghoshal & Gratton, 2002). In view of the above,we hypothesize:8

Hypothesis 1. The impact of an additional re-lated acquisition on a firm’s performance be-comes less positive (or more negative) as itsacquisition sequence grows.

The upper portion of Figure 1, which graphicallyrepresents our theoretical framework, depicts theeffect on a firm’s performance of its “number ofrelated acquisitions since last restructuring,”which corresponds to Hypothesis 1.

Acquisitions as drivers of organizational re-structuring: Distant search. As discussed earlier,behavioral scholars have argued and found that, inorder to economize on information processing,firms engage in local search for effective courses ofaction. If this fails to generate a satisfactory out-come, they tend to shift to more distant search so asto consider a wider range of alternatives (Cyert &March, 1963; Mintzberg et al., 1976). Initially,therefore, an acquirer will mainly consider changeswithin the acquired firm itself, regarding its ownbroader organizational structure as exogenous. Al-though such initial integration helps to realize syn-ergies (Larsson & Finkelstein, 1999; Zollo & Singh,2004), Hypothesis 1 suggests that these efforts grad-ually become blunted as a firm’s acquisition se-quence grows, the firm increasingly suffers fromintegration and coordination problems, and its per-formance declines. Hence, in line with behavioraltheory, we predict that at some point the firm willshift to more distant search for solutions.

We suggest that such distant search will lead tolarge-scale organizational restructuring, reflect-

7 Hiring more managers is no solution, at least not inthe short term, because their development and integra-tion require the services of incumbent managers as well(Penrose, 1959).

8 It should be noted that the precise shape of thisrelationship between the number of related acquisitionsundertaken and firm performance—that is, whether it isa monotonically decreasing function or an inverted U-shaped curve—is a separate empirical issue. Though, onaverage, acquisitions seem to fail in terms of synergyrealization or, more generally, in terms of their contribu-tions to the acquirers’ performance, most studies havereported considerable variance in findings (e.g., King etal., 2004), suggesting that not all acquisitions end infailure. A priori, therefore, we would expect the invertedU-shaped curve to materialize.


ing Miller and Friesen’s argument that “majorreorientations seem to take place because manyexcesses or deficiencies have developed duringperiods of pervasive momentum” (1980: 612).That is, an acquirer will at some point start toquestion its organizational structure and con-sider actions that go beyond incremental changewithin each individual acquisition. Again,Wolters Kluwer illustrates our theory. After adecade of highly acquisitive behavior, the firm’sCEO, Nancy McKinstry, reported on the companywebsite that “2003 was a year of transition for

Wolters Kluwer, during which we began a . . .realignment of the organization.”9

In general terms, organizational restructuring hasbeen defined as change aimed at “increasing the effi-

9 Another illustration of how a sequence of acquisi-tions can drive major restructuring can be found in apress release, “Acquisitions Trigger Reorganization atNorwood,” published on the homepage of Norwood Pro-motional Products. This release states that the firm “isrealigning itself to effectively integrate the newadditions.”

FIGURE 1Theoretic Framework


ciency and effectiveness of management teams throughsignificant changes in organizational structure” (Bow-man & Singh, 1993: 6). However, we need to be morespecific because, for our purposes, it is essential to un-derstand that organizational restructuring is fundamen-tally different from portfolio restructuring, which iswhat the term “restructuring” has usually referred to inthe literature (e.g., Bergh & Lawless, 1998; Markides,1995). Whereas portfolio restructuring refers to changesin the scope of a firm (through acquisitions, start-ups, ordivestments), organizational restructuring refers to re-combination of existing subunits (see Karim, 2005) thatleaves the scope of the firm unchanged (Bowman &Singh, 1993).

Although failure of local search to yield effectivecourses of action has indeed been found to inducea shift to more distant search (Mintzberg et al.,1976), such a shift can take quite some time to setin, particularly when major organizational changeis involved (Lant, Milliken, & Batra, 1992). Not onlydo firms have a tendency to escalate their commit-ment to key decisions made in the past (Staw,1981), including those made in the context of ac-quisitions (Duhaime & Schwenk, 1985), but also,organizational change in fact tends to be impededby interdependent routines that have becomedeeply ingrained over time in such organizationaldomains as structure, culture, and control systems(Cyert & March, 1963; Gersick, 1991; Greenwood &Hinings, 1993; Miller & Friesen, 1980; Romanelli &Tushman, 1994; Tushman & Romanelli, 1985).

As a result, an acquirer will tend to engage inmajor organizational restructuring only when a cri-sis has become sufficiently deep to break the stronggrip of such inertia, triggering a period of “sense-making” that allows it to change the prevailingbeliefs underlying its existing organizational struc-ture (Weick, 1995). Specifically, by redirecting at-tention within the firm away from other activities(Bourgeois, 1985), such as additional acquisitions,this process will usually involve many more organ-ization members than the small groups of managerswho initially integrated each acquisition individu-ally, thus allowing for a richer discussion and abroader range of alternative courses of action to beconsidered (March, Sproull, & Tamuz, 1991).

Hence, building on the argument underlying Hy-pothesis 1, we posit that acquisitive growth graduallyincreases the need for organizational restructuring,although it may take a substantial period of timebefore the acquirer’s inertia is broken and such re-structuring is actually undertaken. At this point, asHaspeslagh and Jemison wrote, “The firm hasreached a stage where further acquisitions are ruledout . . . because the organizational challenges havecaught up with them. [Now] a second, more profound

set of demands arise from the competitive realities ofthe newly acquired position” (1991: 263), requiringmajor organizational change to combine all the piecesinto “an integrated network of operations” (1991: 255).

Hypothesis 2. With firm performance con-trolled for, the probability of a firm’s restruc-turing increases with its number of relatedacquisitions.

The upper portion of Figure 1 graphically depictsthe relationship predicted in Hypothesis 2. Since Hy-pothesis 1 predicts that mounting organizational in-efficiencies eventually cause firm performance to de-crease, and since prior research has firmlyestablished weakening performance as a key predic-tor of organizational change (Greve, 2003; Romanelli& Tushman, 1994), organizational restructuring maybe a reaction to negative performance feedback. Ourtheory, however, suggests that acquisitive growth ren-ders a firm more difficult to coordinate and thuspossibly represents a driver of restructuring that op-erates independently of performance. To isolate thedirect effect of acquisitions, therefore, we controlledfor firm performance.

Unlocking synergistic potential through organi-zational restructuring. It is quite common for firmsto use organizational restructuring as a means of ex-perimenting with structure to find more promisingconfigurations (Capron, Dussauge, & Mitchell, 1998;Capron, Mitchell, & Swaminathan, 2001; Eisenhardt& Brown, 1999; Karim, 2006). Because of boundedrationality, acquirers are typically unable to opti-mally integrate acquisitions the first time around.Therefore, acquisitions can be thought of as “pieces ofclay that firms attempt to mold” (Karim, 2006: 804)repeatedly to unlock as much of their synergistic po-tential as possible over time.

For our purposes, recombination of organization-al divisions through organizational restructuringcan take four forms, singly or in combination: cre-ation, elimination, merger, or split-up (Brickley &Van Drunen, 1990; see also Eisenhardt & Brown,1999). “Creation” means that a new division, intowhich multiple subunits are placed, is created.“Elimination” refers to cancellation of a divisionand thus, allocation of its subunits to an organiza-tion’s remaining divisions.10 “Merger” means thattwo or more separate divisions are combined; and,finally, “split-up” refers to a division’s being bro-ken up into one or more separate divisions. Thus,

10 “Creation” and “elimination” do not refer to acqui-sition and divestment of a division, respectively. Rather,they signify administrative modifications of an organiza-tional chart, implying changes in reporting relationships.


organizational restructuring has major implicationsfor where subunits end up within an organization,thus representing a toolkit that it can use to inte-grate its acquisitions more effectively. By movingbeyond organizational change at the level of theindividual acquisition (Barki & Pinsonneault, 2005;Birkinshaw, Bresman, & Håkanson, 2000; Ghoshal& Bartlett, 1996; Ghoshal & Gratton, 2002), an ac-quirer can jump from a situation in which it canmerely optimize its overall organizational fit lo-cally— conditional on its existing organizationalstructure—to one in which it might reach “theglobal optimum” (Levinthal, 1997).

Hence, organizational restructuring enables anacquirer to more fully unlock the synergistic poten-tial of its acquisitions.11 Not only does it allow thefirm to identify, evaluate, and choose from among awider range of alternative approaches to realizeanticipated synergies, but also, it confers the ben-efit of hindsight, allowing the firm to evaluate all ofits acquisitions collectively, which may lead it touncover new synergistic opportunities as well (Ci-borra, 1996; Karim, 2006). Thus, such post hocevaluation is valuable because some of the syner-gistic potential of an acquisition may simply not beidentifiable beforehand, as it is conditional onother acquisitions not yet undertaken.12 For exam-ple, each of Cisco Systems’ acquisitions has tendedto increase the synergistic potential of its prior onesby enabling the company to build more fully inte-grated networking solutions (Harbor Research,2003).

In the words of March et al., “Great organization-al histories, like great novels, are written, not byfirst constructing interpretations of events and thenfilling in the details, but by first identifying thedetails and allowing the interpretations to emergefrom them. As a result, openness to a variety of . . .dimensions of experience and preference is oftenmore valuable than a clear prior model and unam-

biguous objectives” (1991: 8). Thus, it may onlybecome clear after recent acquisitions have beenundertaken that organizational fit and synergy re-alization call for combining some of the earlier onesin the acquisition sequence with others located indifferent divisions, or for creating a new division inwhich multiple acquisitions will be placed, or forsplitting a certain division into smaller, more ho-mogeneous units (Brickley & Van Drunen, 1990;Galunic & Eisenhardt, 1996).13 For instance, astudy of the Beatrice Company reported that, fol-lowing an extended period of acquisitive growth,management restructured the firm into six groupsin order to “achieve synergies among the opera-tions” (Baker, 1992: 1097).

Although organizational restructuring may oftenenable an acquirer to unlock more of the synergisticpotential of its acquisitions—representing a secondstage in the postacquisition integration process—there are downsides to such radical change as well.Prior research has shown that the disruption thatradical change brings about subjects a firm to a“liability of newness” similar to that faced bynewly founded firms, which leads to less efficientinternal functioning and a significant short-termdrop in performance as new routines are estab-lished (Amburgey, Kelly, & Barnett, 1993; Greve,1999).14 Therefore, we expect the more fully un-locked synergistic potential of prior acquisitions tomaterialize some time after the acquirer’s restruc-turing, when its disruptive effect has subsided.Since, in light of our theory, this beneficial effect islikely to be greater if the restructuring involves alarger number of acquisitions, we hypothesize aperformance increase following restructuring thatis proportional to the number of acquisitions di-rectly preceding it:

Hypothesis 3. Following a restructuring, in-crease in a firm’s performance is amplified

11 Although organizational and portfolio restructuringare distinct in theory, they tend to correlate in practice(Bowman & Singh, 1993). Specifically, divestment activ-ity tends to be relatively intense during episodes of or-ganizational restructuring (Hoskisson, Johnson, & Moe-sel, 1994; Miller & Friesen, 1980; Shimizu & Hitt, 2005;Tushman & Romanelli, 1985); in Table 1 (below) a sig-nificant, positive correlation coefficient between vari-ables for these two activities supports this statement. Tobe able to factor out the effect of organizational restruc-turing in our models, therefore, we controlled fordivestments.

12 As one of the anonymous reviewers pointed out,this latter argument, unlike the former, does not requirethe assumption of bounded rationality.

13 An additional benefit that organizational restructur-ing has to offer over initial incremental efforts to inte-grate each acquisition individually is that it is consider-ably more likely to break the grip of the inertia withinacquired firms that often complicates integration, sinceorganizational restructuring jointly addresses several in-terdependent organizational domains over a short periodof time (Allen, 1979; Romanelli & Tushman, 1994; Tush-man & Romanelli, 1985). Thus, restructuring is usuallyable to achieve a momentum that individual subunitscannot undermine.

14 Empirically, therefore, we model this short-termdisruptive effect explicitly, since its omission wouldpaint an incomplete and misleading picture of the effectof organizational restructuring (Barnett & Carroll, 1995).


between the last two restructurings.the number of related acquisitions undertaken

by

In Figure 1, this increase in firm performance inthe period following restructuring (designated as“Period II”) is represented by the effect of “Restruc-turing” on “Firm Performance,” amplified by “To-tal Number of Related Acquisitions between LastTwo Restructurings.”

The Evolution of Acquisition-RestructuringCycles over Time

Having specified our basic model, we now theo-rize on how the acquisition-restructuring cycles de-scribed above evolve over time, as a firm gainsexperience with acquisitions and restructuring. Tothis end, we build on a theme within behavioraltheory that naturally extends the insights into thesearch process gained so far: organizational learn-ing. However, we first briefly discuss another factorthat, from a behavioral perspective, can be ex-pected to impact the dynamics of these acquisition-restructuring cycles—namely, the intensity ofacquisitive growth.

Acquisition intensity. Given bounded ration-ality, the postacquisition integration process is sub-ject to diseconomies of time compression (Dierickx& Cool, 1989). Thus, attempting to integrate a givennumber of acquisitions in a shorter period of time islikely to lower the degree and quality of integrationand thus, the amount of synergy realized (Kusewitt,1985; Vermeulen & Barkema, 2002).15 The nar-rower the time interval in which a sequence ofacquisitions is undertaken—that is, the higher theacquisition intensity—the less time an acquirerwill have to search for and implement an effectivecourse of action before engaging in the nextacquisition.

By extension, if acquisition intensity indeedhampers integration, then the need for more distantsearch through organizational restructuring shouldemerge sooner. In other words, we predict a differ-ence in the propensity to restructure between a firmengaging in ten acquisitions within a period of, say,ten years and one undertaking ten acquisitionswithin a single year, as the accumulated organiza-tional inefficiencies are likely to be greater in thelatter case.

Hypothesis 4a. Acquisition intensity moder-ates the relationship between a firm’s numberof related acquisitions and firm performance,as predicted by Hypothesis 1. The higher theacquisition intensity, the higher the rate atwhich the impact of an additional acquisitionbecomes less positive (or more negative) as theacquisition sequence grows.

Hypothesis 4b. Acquisition intensity moder-ates the relationship between a firm’s numberof related acquisitions and its probability ofrestructuring, as predicted by Hypothesis 2.The higher the acquisition intensity, the morepositive this relationship.

Acquisition experience. As a firm repeats a taskover time, the search process triggered by that taskbecomes increasingly routinized (Levitt & March,1988), allowing the firm to decide on and imple-ment a suitable course of action with less cognitiveeffort (March & Simon, 1958; Nelson & Winter,1982; Shiffrin & Schneider, 1977). As the firm gainsacquisition experience, therefore, routines partlyreplace detailed decision making about integration(Zollo, 1998), thus alleviating the information-pro-cessing demands that are placed on its managerialresources.

Although the routinization that results from suchexperience accumulation may indeed allow a firmto acquire more efficiently, there is little consensuson whether it also enables it to acquire more effec-tively, thus enhancing synergy realization. Scholarshave argued that it is difficult to learn from expe-rience with heterogeneous and causally ambiguoustasks (Zollo & Winter, 2002)—a category that acqui-sitions clearly belong to in light of the many inter-dependent subactivities that they encompass (Zollo& Singh, 2004), such as due diligence, negotiation,financing, and integration. However, although ac-quisitions show considerable heterogeneity andcausal ambiguity on the surface, many underlyingsubactivities may be quite similar across deals (cf.Grant, 1996), such as identifying, screening, anddeciding on an acquisition target, negotiating thepurchase, and managing the integration processthrough integration teams (Haspeslagh & Jemison,1991). Often, these subactivities are performed bythe same individuals or departments (Grant, 1996;Hebert et al., 2005), suggesting considerable scopefor gaining valuable knowledge that is generaliz-able across acquisitions, through learning that ispurely experiential or more deliberate, such as ex-perience codification (Palter & Srinivasan, 2006;Zollo & Singh, 2004). In line with this argument,Eisenhardt and Brown (1999) offered anecdotal ev-idence of routines for mobilizing integration teams,

15 Penrose’s outline of her theory of the receding man-agerial limit contains a compelling illustration of disec-onomies of time compression: “If a firm deliberately orinadvertently expands its organization more rapidly thanthe individuals in the expanding organization can obtainthe experience with each other and with the firm that isnecessary for the effective operation of the group, theefficiency of the firm will suffer” (1959: 47).


handling stock options, and tracking employee re-tention rates. General Electric, for instance, hasmanaged to routinize its acquisition process to thepoint that it is now able to effectively integratemost of its acquisitions within 100 days (Ashkenaset al., 1998). More generally, most prior work hasshown that acquisition experience increases acqui-sition performance (Bruton, Oviatt, & White, 1994;Haleblian & Finkelstein, 1999; Hayward, 2002).

Extending this line of reasoning, if acquisitionexperience indeed increases the efficiency and ef-fectiveness of integration, then the organizationalinefficiencies described earlier should accrue lessrapidly over a sequence of acquisitions. As a result,the need for more distant search through organiza-tional restructuring should emerge less quicklyas well.

Hypothesis 5a. Acquisition experience moder-ates the relationship between a firm’s numberof related acquisitions and firm performance,as predicted by Hypothesis 1. The greater theacquisition experience, the lower the rate atwhich the impact of an additional acquisitionbecomes less positive (or more negative) as anacquisition sequence grows.

Hypothesis 5b. Acquisition experience moder-ates the relationship between a firm’s numberof related acquisitions and the probability ofrestructuring, as predicted by Hypothesis 2.The greater the acquisition experience, the lesspositive this relationship.

Restructuring experience. If acquisition experi-ence fosters integration at the level of the individ-ual acquisition, experience with organizational re-structuring may benefit integration at the level ofan acquirer as a whole, enabling it to recombinesubunits and thus, unlock the previously untappedsynergistic potential of its acquisitions more effi-ciently and effectively. Interestingly, such experi-ence has received little research attention (Am-burgey et al., 1993; Delacroix & Swaminathan,1991; Greve, 1998; Kelly & Amburgey, 1991; King &Tucci, 2002).

It could be argued, perhaps even more than in thecase of acquisition experience, that it is difficult todevelop an experience-based restructuring capability,since restructurings occur infrequently and are highlyheterogeneous and causally ambiguous (Zollo & Win-ter, 2002). However, like integration, restructuringalso consists of distinct subactivities, such as aligningcontrol systems and balancing power distributions(Allen, 1979; Bowman & Singh, 1993). Some of thesesubactivities may be similar across restructurings,thus facilitating learning (Grant, 1996). In this vein,

Hitt et al. (2001) provided anecdotal evidence of thedevelopment of restructuring capability, and McKin-ley and Scherer (2000) argued that top managementlearns through experience to choose among a varietyof ways to restructure. As part of the sense-makingprocess surrounding complex events such as restruc-turings, individuals may sift their experience for aplausible explanation of what they now face and for aplausible course of action based on what has workedin similar circumstances in the past (Weick, 1995).Even in firms that restructure so infrequently thatsome of the experiential knowledge is washed awaywith personnel turnover, some of it may be retainedin the form of routines, documents, culture, or otherelements of organizational memory (Cyert & March,1963).

Hence, “to routinize the process of change . . . anorganization must gain experience in modifyingoperating routines. . . . In short, organizations learnto change by changing” (Amburgey et al., 1993: 54).Although restructuring should be delayed until it isabsolutely necessary and its benefits are likely toexceed its costs and disruptions, we expect that thesuccess with which a firm is able to resolve organ-izational inefficiencies through restructuring—andthus, to unlock previously unrealized synergiesfrom acquisitions—increases with restructuringexperience:

Hypothesis 6. Following restructuring, increasein a firm’s performance is amplified by restruc-turing experience.

DATA AND METHODS

Sample

We collected panel data on 25 large Dutch mul-tinational firms for the period 1966 to 2005. Theyear 1966 was chosen as our starting point becauseit represented a break in Dutch acquisition activity,which sharply increased after 1966 (De Jong, 1988).The data were obtained directly from annual re-ports. The firms operated in a wide variety of in-dustries, including brewing, publishing and print-ing, food products, chemicals, and so on. Theyrepresented all nonfinancial firms listed on theAmsterdam Stock Exchange in 1993, excluding thefour largest ones (Royal Dutch/Shell Group, Uni-lever, Philips, and Akzo), which were outliers interms of their age and the time they started toacquire.16 On average, our sample firms had 14,288employees, 1.48 billion euros in sales, assets with a

16 The inclusion of these firms would have led to serious“left-censoring” problems for our experience variables.


book value of 992.84 million euros, and a net profitof 43.25 million euros. Furthermore, they under-took an average of 1.87 related acquisitions peryear, collectively engaging in 1,585 acquisitionswithin our 40-year window of analysis.

Variables

Firm performance. In line with our theory andprior research on synergy realization from acquisi-tions (Kusewitt, 1985; Ramaswamy, 1997; Zollo &Singh, 2004), we measured firm performancethrough return on assets (ROA). Abnormal returns,although widely used in the acquisition literature,did not serve our purposes here, since we studiedwhen and how synergies were unlocked over time,rather than the total value that was created in termsof the net present value of all the cash flows thatacquisitions gave rise to, discounted to a singlepoint in time. As compared to other accountingmeasures of profitability, ROA has been shown tobe the least sensitive to biases due to changes inleverage or bargaining power caused by acquisi-tions (Meeks & Meeks, 1981). In addition to usingROA as the dependent variable in our performancemodels, we included it as a control in the restruc-turing models, as performance tends to affect afirm’s propensity to engage in radical organizationalchange (Greve, 2003; Romanelli & Tushman, 1994).

Organizational restructuring. This binary mea-sure equaled 1 if a firm’s annual report showed that itundertook organizational restructuring in a givenyear (Romanelli & Tushman, 1994). Sometimes re-structuring took several years, but we found no casesin which distinct restructuring programs overlappedin time. Organizational restructuring is fundamen-tally different from portfolio restructuring, which hastypically been what researchers have meant by re-structuring (e.g., Bergh & Lawless, 1998; Markides,1995). Portfolio restructuring refers to changes in thescope of a firm through acquisitions, start-ups, ordivestments (Bowman & Singh, 1993). Organizationalrestructuring, in contrast, implies the recombinationof existing subunits, leaving the scope of the firmunchanged (Bowman & Singh, 1993; Karim, 2006).We first identified all firm-year observations in whichrestructuring activity took place at the divisionallevel, as indicated in the annual reports. According toBrickley and Van Drunen (1990), such divisional re-structuring can take one of four forms: creation, elim-ination, merger, or split-up. Next, we created ourrestructuring dummy by assigning 1 to those cases inwhich (1) divisional restructuring spanned multipledivisions and/or (2) a firm transformed its formalstructure, switching between functional, product-di-visional, geographic area, or matrix structures. For

triangulation purposes, we examined published busi-ness histories for the seven firms for which thesewere available and observed no discrepancies. Thisdummy served as the dependent variable in the re-structuring models and as an independent variable inthe others.

Number of related acquisitions since last re-structuring. This variable represents a count of thenumber of horizontal, vertical, and related diversifiedacquisitions made since the year of a firm’s mostrecent restructuring. Thus, in the case of organization-al restructuring, the count variable was reset to 0.Following earlier research, an acquisition was codedas “horizontal” if it took place within the same three-digit SBI code17 as a firm’s core activities; as “related-diversified” if it occurred within the same two-digitSBI code (but not the same three-digit category); andas “vertical” if it took place within the firm’s value-added chain (see Pennings et al., 1994).18

Number of related acquisitions between lasttwo restructurings. This count variable was used totest Hypothesis 3 and, to this end, it reported thetotal number of related acquisitions a firm had un-dertaken between its most recent restructuring andthe one prior to that (i.e., between the last tworestructurings). Hence, this variable was differentfrom the previous one, which counted the numberof acquisitions that a focal firm had engaged insince its most recent restructuring.

Elapsed time since last restructuring. This wasa clock variable measuring the number of yearselapsed since a firm’s most recent restructuring. Inthe event of restructuring, the clock was reset to 0(e.g., Amburgey et al., 1993; Martin, Swaminathan,& Mitchell, 1998).

Acquisition experience. This variable was mea-sured as the natural logarithm of the total numberof acquisitions undertaken by a firm since 1966.The logarithm was used because doing so capturedthe decreasing marginal returns that experientiallearning is subject to (e.g., Pablo, 1994; Pennings etal., 1994). Similar results were obtained using thenontransformed measure.

Restructuring experience. This variable wasmeasured as the natural logarithm of the total num-

17 The SBI (Standaard Bedrijfsindeling) coding systemis the Dutch equivalent of the SIC system.

18 Although a more detailed operationalization of “se-quences” or “strings” of acquisitions could be obtainedby incorporating more properties of the underlying dis-tribution (e.g., skewness and kurtosis, which were in-cluded in Vermeulen and Barkema [2002]), our theoriz-ing in the present study focused simply on the number ofacquisitions that firms undertake between episodes oforganizational restructuring.


ber of restructurings since 1966, and again resultswere similar when the log was not used.

Control Variables

Firm size. We used the natural logarithm of afirm’s number of employees. We included it in theperformance models since it might influence bothfirm performance (Hitt, Hoskisson, & Kim, 1997)and acquisition behavior (Amburgey & Miner,1992). Its inclusion might, therefore, account forspurious correlation. Firm size and its square werealso included in the restructuring models, since thecomplexity of larger firms might require more fre-quent restructuring, although beyond a certain sizestructural inertia might offset this need (Hannan &Freeman, 1984; Penrose, 1959).

Debt-to-equity ratio. Following prior research(Hitt et al., 1997; Vermeulen & Barkema, 2002), wecontrolled for capital structure using a debt-to-equity ratio, which might affect both acquisitionbehavior (as a proxy for free cash flow) and firmperformance (Jensen, 1986). This variable was alsoincluded in the restructuring models as insolvencymight signal a need for change.

Product scope. Product scope affects firm perfor-mance (Hoskisson & Hitt, 1990; Palich, Cardinal, &Miller, 2000). We measured it using the number offour-digit SBI codes in which a firm operated in agiven year (Sharma, 1998). Using the number of three-digit SBI codes led to nearly identical results. Productscope was also included in the restructuring models,as diversified firms sometimes restructure in order tofocus more on their core businesses (Allen, 1979).

Geographic scope. Similarly, geographic scopetends to affect firm performance (Hitt et al., 1997). Wemeasured this variable through the number of differ-ent countries in which a firm operated in a particularyear. Geographic scope was also included in the re-structuring models for reasons similar to those sup-porting the inclusion of product scope.

Number of divestments. Although divestments area form of portfolio restructuring rather than organiza-tional restructuring, there does tend to be more di-vestment activity during periods of organizational re-structuring (Bowman & Singh, 1993) (see thecorrelation coefficient in Table 1). To factor out theirperformance effect, therefore, we included the natu-ral logarithm of the number of divested acquisitionsin a given year as a control in the performance modelsso that it would not be confounded with the perfor-mance effect of organizational restructuring itself.

Number of divisions. The natural logarithm ofthe number of divisions of a firm was included as acontrol variable in the restructuring models be-cause the modularity resulting from divisionaliza-

tion might allow the firm to solve problems locallythrough organizational restructuring within divi-sions, rather than through the larger-scale restruc-turing that we studied.

CEO change. CEO change has been found totrigger major organizational change (e.g., Lant, Mil-liken, & Batra, 1992; Romanelli & Tushman, 1994).In our restructuring models, therefore, we includeda dummy that indicated whether a CEO changeoccurred in any given year.

Number of “greenfields” since last restructur-ing. This was a count of the number of greenfieldinvestments undertaken by a firm since its last re-structuring. The variable was reset to 0 if restruc-turing occurred. We included number of green-fields in the restructuring models to compare theeffect of greenfields to that of acquisitions. We didnot expect greenfields to drive restructuring, sincethey are naturally integrated to begin with. In fact,prior research found that greenfields make firmssimple and inert (Vermeulen & Barkema, 2001),suggesting that they may have a negative effect onthe propensity to restructure.

Firm dummies. We accounted for firm-specificunobserved heterogeneity using firm dummies. In-cluding these dummies controlled for the depen-dence of observations nested within a single firmand alleviated concerns about potential endogene-ity bias (Hamilton & Nickerson, 2003). Inclusionalso captured potential effects of stable firm-spe-cific factors, such as organizational culture.

Year dummies. Year dummies were included tocontrol for potential influences of trends, such asacquisition waves, the state of the economy, andthe general aging of firms. Alternative specifica-tions with a calendar time variable and several ofits powers led to similar results.

Analyses

Given the panel structure of our data, we used Haus-man tests to select between fixed- and random-effectsmodels (Owusu-Gyapong, 1986). These tests showedthat the random-effects estimator was inconsistent andthus, that fixed effects should be employed. We testedHypotheses 1, 3, 4a, 5a, and 6 using ordinary leastsquare (OLS) fixed-effects regression models. To testHypotheses 2, 4b, and 5b, we used conditional fixed-effects logit models, as is the standard approach withpanel data and a binary dependent variable. Potentialmulticollinearity problems owing to the use ofsquared and interaction terms were mitigated by cen-tering the continuous independent variables (Aiken &West, 1991; Jaccard, Turrisi, & Wan, 1990). Further-more, robust Huber-White standard errors were usedin all models. Finally, in the interests of conserva-


tism, all significance tests in our models representedtwo-tailed tests, even though, in principle, one-tailedtests would have been statistically justified in light ofthe directionality of our hypotheses (Neter, Kutner,Nachtsheim, & Wasserman, 1996).

RESULTS

Hypothesis Tests

Table 1 presents descriptive statistics and corre-lations. Overall, the magnitudes of the correlationssuggest that multicollinearity is not a problem inour models, as confirmed by the variance inflationfactors of our variables, which are all below 10(Neter et al., 1996).19

Table 2 presents the results of the OLS fixed-effects regression models testing Hypotheses 1, 3,4a, 5a, and 6. All models are highly significant (p �.001) and have considerable explanatory power,with our full models (8 and 9) explaining well over40 percent of the variance in firm performance. To

facilitate causal inference, we primarily tested ourhypotheses using both models 8 and 9, the latter ofwhich was estimated with one-year lagged inde-pendent variables. Regarding Hypothesis 1, ourmodels report the main effect of a firm’s number ofrelated acquisitions since its last restructuring andits square. Note that, since we centered our vari-ables, it was only necessary that the coefficient ofthe squared term be significantly negative for thereto be evidence of an inverted U-shaped relationship(as long as the coefficient of the linear term was nottoo large and significantly negative). This coeffi-cient is indeed strongly significant in almost allmodels (p � .001), including both full models. Thisfinding corroborates Hypothesis 1 and, more spe-cifically, reveals an inverted U-shaped curve (seethe figures below): following restructuring, acqui-sitions first tend to contribute to, but eventuallyhurt, firm performance. Moreover, the partial de-rivatives indicate that the inflection points of theestimated inverted U-curves are all well within therange of our data.

With respect to testing Hypotheses 4a and 5a, it isimportant to note that our theory does not implydifferent shapes of the inverted U-shaped curve atdifferent values of the moderators, but only differ-ent locations of the optimum. Aiken and West(1991: 68–69) showed that, in a case such as this,correct testing requires one to interact the modera-tors only with the linear term of the independentvariable. As a formal check, we estimated modelsthat also included interactions with the squaredterm, but their coefficients were highly insignifi-cant (see models 2 and 3). Hypotheses 4a and 5a aresupported in both full models: the coefficient of the

19 The strongest correlation is that between geographicscope and acquisition experience (r � .68). Since thesomewhat inflated standard errors that could result biasagainst finding support for those hypotheses that pertainto acquisition experience, this merely renders our testsmore conservative. Moreover, excluding geographicscope led to similar results for these hypotheses, imply-ing the absence of serious multicollinearity. More gener-ally, formal testing for spurious correlation by includingthe squares of the components of all our interaction termsrevealed that any multicollinearity that may be presentdoes not materially affect our hypothesized effects (Cor-tina, 1993).

TABLE 1Descriptive Statistics and Correlations

Variable Mean s.d. 1 2 3 4 5 6 7 8 9 10 11 12 13 14

1. Return on assets 5.12 5.222. Organizational restructuring 0.13 0.34 �.063. Number of related acquisitions

since last restructuring12.88 16.06 .22* .07

4. Number of Greenfields sincelast restructuring

4.22 6.29 .04 �.001 .59*

5. Elapsed time since lastrestructuring

6.64 6.89 .12* �.38* .60* .54*

6. Acquisition experiencea 3.01 1.23 .14* .19* .52* .27* .18*7. Restructuring experiencea 0.78 0.64 .00 .33* .14* .08* �.22* .66*8. Total number of related

acquisitions between last tworestructuring

12.63 14.71 �.001 .25* .09* �.09* �.28* .45* .19*

9. Number of employeesa 9.06 0.96 �.10* .18* .35* .12* �.01 .54* .53* .15*10. Debt-to-equity ratio 1.90 1.52 �.25* .08* .07* .06 �.05 .13* .21* �.08 .14*11. Product scope 16.07 10.65 �.24* .06 �.03 .01 �.11* .22* .07* .03 .32* .12*12. Geographic scope 11.29 9.01 .13* .17* .56* .47* .23* .68* .52* .23* .46* .07* �.0313. Number of divisionsa 1.30 0.82 �.02 .09* .19* .16* �.05 .54* .54* .06 .21* .20* .15* .25*14. CEO change 0.12 0.33 �.02 .03 .02 �.04 �.01 .03 �.01 .09* .04 �.03 .00 .02 .0115. Number of divestments 0.26 0.47 .06 .10* .14* .12* .05 .33* .27* .15* .12* .02 .13* .20* .25* .05*

a Logarithm.* p � .05


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interaction of related acquisitions with elapsedtime is positive and significant (model 8: p � .05;model 9: p � .001), as is that of the interactionwith acquisition experience (model 8: p �. 05;model 9: p � .01). Thus, both acquisition inten-sity and acquisition experience moderate the in-verted U-shaped relationship between the num-ber of related acquisitions a firm has undertakensince its last organizational restructuring andfirm performance.

The graphs in Figures 2a and 2b, which are based

on the estimates in model 9, are neatly in line withHypotheses 4a and 5a. We see, for instance, thatacquisition experience one standard deviation be-low the mean (i.e., experience with about six ac-quisitions) does not imply any optimal number ofrelated acquisitions at all, as even the first acquisi-tion tends to hurt firm performance. In contrast,acquisition experience one standard deviationabove the mean (i.e., experience with about 69 ac-quisitions) reveals an optimum of about 36 acqui-sitions, allowing ROA to rise up to 14 percent be-

FIGURE 2aEstimated Relationship, Hypothesis 4a: Acquisition Intensity

FIGURE 2bEstimated Relationship Hypothesis 5a: Acquisition Experience


fore additional acquisitions start to decrease firmperformance.

In line with prior research (Amburgey et al.,1993; Greve, 1999), in our findings restructuringhas a short-term disruptive effect, as can be inferredfrom the significantly negative coefficient of therestructuring dummy in all the models withoutone-year lagged independent variables (this effectindeed seems to be short-lived, since it is no longersignificant one year after restructuring, as can beseen in model 9). In support of our theory, how-ever, the performance increase following this short-term disruptive effect is greater (1) if a larger num-ber of acquisitions preceded the restructuring and(2) if a firm had more restructuring experience, asthe associated interaction terms have significantlypositive effects in both full models (model 8: p �.01 and p � .05, respectively; model 9: p � .001 andp � .05, respectively). Hence, both Hypotheses 3and 6 find support.

Briefly elaborating on Hypothesis 3, we note thatthe results indeed suggest that organizational re-structuring allows for more synergy to be unlocked,

especially if such recombination activity follows alonger sequence of acquisitions. Illustrating theeconomic significance of these results, the esti-mates of model 9 suggest that the difference inadditional gains within the first three years after arestructuring between two scenarios—one inwhich 5 acquisitions preceded the restructuringand one in which 25 acquisitions preceded it—amounts to no less than 8 million euros. For theaverage sample firm with annual net profits of alittle over 40 million euros, this is clearly a consid-erable amount of money.

Table 3 reports the logit models that test Hypoth-eses 2, 4b, and 5b. Like the OLS models, they arehighly significant (p � .001) and have substantialexplanatory power. Again, to facilitate causal infer-ence, we lagged the independent variables by oneyear. In the full model (model 5), Hypothesis 2 isstrongly supported: we found that the effect of re-lated acquisitions on the likelihood of restructuringis positive and significant (p � .01), even aftercontrolling for firm performance, which has a neg-ative effect, as expected. Thus, acquisitions indeed

TABLE 3Results of Conditional Fixed-Effects Logit Models

for Organizational Restructuring t � 1a

Variables Hypothesis Model 1 Model 2 Model 3 Model 4 Model 5

Intercept �3.15*** �2.77*** �2.75*** �2.63*** �2.68***Number of employeesb 0.52† 0.44 0.46 0.54† 0.58*Number of employees squaredb �0.31** �0.42** �0.43** �0.42** �0.44**Debt-to-equity ratio 0.39*** 0.41*** 0.45*** 0.42*** 0.47***Product scope �0.01 �0.01 �0.01 �0.01 �0.01Geographic scope 0.03 0.03 0.03 0.05 0.05Elapsed time �0.03 �0.09 0.08 �0.14 0.08Number of divisionsb �0.53† �0.57† �0.53† �0.57† �0.55†

CEO change 0.61† 0.65* 0.62† 0.66* 0.62†

Restructuring experienceb �1.33** �1.21* �1.15* �1.15* �1.08*Acquisition experienceb 0.70 0.44 0.38 �0.17 �0.16Return on assets �0.10*** �0.10*** �0.09*** �0.11*** �0.11***Number of greenfields since last restructuring �0.05† �0.09* �0.09* �0.10* �0.10*Number of related acquisitions since last

restructuring2 0.03* 0.03† 0.08** 0.08**

Number of related acquisitions since lastrestructuring � elapsed time

4b �0.01* �0.01*

Number of related acquisitions since lastrestructuring � acquisition experience

5b �0.03* �0.03*

McFadden’s pseudo-R2 0.19 0.19 0.20 0.20 0.21Model chi-square 78.87*** 80.50*** 79.41*** 83.70*** 84.22***Bayesian information criterion (BIC) �4,354.12 �4,356.28 �4,352.90 �4,340.32 �4,337.81

a n � 759. Firm and year dummies are not reported.b Logarithm.

† p � .10* p � .05

** p � .01*** p � .001Conservative two-tailed tests.


seem to drive restructuring independently of per-formance. The associated odds ratio is 1.08, imply-ing that, on average, each acquisition increases theodds of restructuring by about 8 percent. Green-fields, in contrast, tend to decrease the propensityto restructure, in line with prior work (Vermeulen& Barkema, 2001).

Support is also found for Hypotheses 4b and 5b,as the coefficients of the interactions between re-lated acquisitions and elapsed time and acquisitionexperience, respectively, are significantly negativein the full model (both p � .05). Thus, the wider thetime interval over which a firm undertakes acqui-sitions (i.e., the lower the acquisition intensity) andthe higher the firm’s acquisition experience, theless each additional acquisition increases the prob-ability of restructuring.

To improve our understanding of how our re-sults might play out over time as an acquirergains acquisition and restructuring experience,we conducted a simulation based jointly on thefull performance and restructuring models, inwhich performance fed into the restructuringmodel and restructuring events, in turn, fed intothe performance model (we used model 8 to makesure that we also captured the short-term disrup-tive effect of organizational restructuring). Fig-ures 3a and 3b present the outcomes. In line withour theory, these figures show that acquirers gothrough long-term cycles of acquisitions and re-structuring, enabling them to become more prof-itable over time. What is more, the simulationadds an important insight into the dynamics ofour theory: although we expected firms to learnto restructure more closely to the optimal perfor-mance levels of each cycle as they gained acqui-sition and restructuring experience, it turned outthat, with each cycle, they tended to acquire fur-ther, going beyond this optimum, before they re-structured. Upon closer inspection, however, thismakes sense, as performance levels that go aboveand beyond the optimal ones in their currentcycles are more likely to be attained if firms firstaccumulate a larger number of acquisitions fromwhich to unlock synergies through restructuring.Thus, experienced acquirers seem to sacrificesome of their profitability in the present to bemore profitable in the future.

Causality

Do acquisitions and restructuring indeed affectperformance, as hypothesized, or does perfor-mance, in fact, drive acquisition and restructuring?In nonexperimental research, causal inference re-quires (1) correlation between cause and effect, (2)

temporal precedence of the cause, and (3) exclu-sion of alternative explanations (Cook & Campbell,1979). Although we took the conventional steps toestablish causality (i.e., fixed effects and laggedindependent variables), we sought to pursue thisissue further through lagged dependent variable(LDV) models, which, in econometric terms, test forso-called Granger causality (Greene, 2003).

Using a lagged dependent variable implies con-ditioning on the history of all the independent vari-ables, allowing past realizations of the dependentvariable to affect its current level (Greene, 2003).Apart from explicitly modeling autocorrelation,this can greatly reduce the threat of spuriousnessdue to unobserved heterogeneity (Allison, 1990),thus alleviating concerns about reverse causality.The downside is that a lagged dependent variableusually absorbs a great deal of variance, leaving lessfor other variables to explain even though theymay, in fact, be theoretically relevant. Furthermore,OLS estimation of a fixed-effects model with alagged dependent variable leads to downwardlybiased estimates of the coefficients of the othervariables (Nickell, 1981), which can be resolved byusing an estimator based on instrumental variables.

We drew on relatively recent developments ineconometrics by using the Arellano-Bond estima-tor, which, after eliminating fixed effects via firstdifferencing, applies instrumental variables estima-tion to the differenced equation (Arellano & Bond,1991). Based on a generalized method of moments(GMM) approach, this estimator greatly improvesthe efficiency of estimates by not only using laggedvalues of the dependent variable as instruments,but also allowing consideration of all other poten-tial instruments in the model. Model 10 of Table 2presents the results for an LDV model estimated bymeans of the Arellano-Bond estimator.20 As can beseen, all our hypotheses remain supported—insome cases even more firmly than in our primarymodels—providing strong evidence that at leastpart of the causality indeed runs as specified by ourhypotheses: from acquisitions and restructuring tofirm performance.

Robustness Checks and Additional Analyses

First of all, responding to King et al. (2004), weused return on sales and return on equity as alter-

20 A Sargan test of overidentifying restrictions pro-vided strong evidence of the validity of the availableinstruments (p � 1.00). Furthermore, an Arellano-Bondtest provided evidence that autocorrelation of order 2 isabsent (p � .47), implying that there was no need to adda two-year lagged dependent variable.


native performance measures; these substitutionsled to very similar results. Second, we added acount of the total number of related acquisitionsundertaken since 1966 and its square to checkwhether the inverted U-shaped relationship thatwe picked up between restructurings was not sim-ply part of a more general inverted U-shaped curve(cf. Conn, Cosh, Guest, & Hughes, 2004). The orig-inal effects remained significant (p � .001), andthose of the additional variable and its square, infact, indicated the presence of a U-shaped curve

(p � .001), in line with Haleblian and Finkelstein’s(1999) findings. We did the same for several ran-domly chosen acquisition sequences (i.e., not in-between restructurings) and found no evidence ofperformance effects. Furthermore, adding thecubed term of our original variable led to insignif-icant results.

Third, we conducted four additional analysesto gain a better understanding of the invertedU-shaped curve found for related acquisitions andto rule out potential alternative explanations. First,

FIGURE 3aSimulation Based on the Performance Model

FIGURE 3bSimulation Based on the Restructuring Model


we reran the models to see whether the relationshiphad a similar shape for unrelated diversified acqui-sitions. Consistently with our theory, we did notfind an inverted U-shaped effect. Second, we didthe same for international related acquisitions: inaddition to finding an inverted U-shaped curve, wefound, in line with the idea that cross-border ac-quisitions are particularly difficult to integrate(Brock, 2005), that the inflection point corre-sponded to about two to four fewer acquisitions, ascompared to the one for related acquisitions ingeneral. Third, we obtained data from the Dutchgovernment that enabled us to operationalize in-dustry-specific business cycles using gross produc-tion and employment. We found that our restruc-turing measure was not correlated with suchbusiness cycles (p � .50) and thus ruled out busi-ness cycle effects as drivers of organizational re-structuring. Furthermore, although we did find (p� .01) that acquisitions contributed more to firmperformance when overall industry productionand/or employment were higher, suggesting thatfirms pick higher-quality acquisitions in times ofeconomic prosperity within an industry (see Connet al., 2004), these effects did not change the signif-icance of our hypothesized results in either theperformance or the restructuring models. Finally,we obtained data from SDC Platinum on the num-ber of acquisitions undertaken in a focal firm’sindustry, enabling us to measure industry-specificmerger waves from 1985 onwards. Our findingswere similar to those on business cycles: mergerwaves were not correlated with our organizationalrestructuring measure (p � .10) and, although wefound some evidence (p � .05) that firms were ableto pick relatively high-quality targets during timesof high acquisition intensity within an industry,this result did not render our hypothesized effectsin the performance and restructuring models statis-tically insignificant.

Fourth, upon having gathered acquisition-spe-cific data from SDC Platinum, we found evidence(p � .05) that the greater the extent to which anacquisition sequence consists of multibusiness tar-gets (i.e., those active in multiple SIC codes), whichare typically more difficult to integrate (e.g., Hitt etal., 2001), the faster the acquirer reaches the inflec-tion point of the inverted U-shaped curve that wefound for Hypothesis 1, suggesting that it is indeedintegration issues that drive our results.

Fifth, whereas the logarithmic specification ofexperience in our analyses is common, implyingthat the learning benefits of additional experienceincrease at a decreasing rate and thus, that recentexperience is less important than earlier experience(see Yelle, 1979), some have contended that recent

experience may, in fact, be more decisive becauseearlier experience is forgotten and becomes anti-quated (e.g., Argote, Beckman, & Epple, 1990). Toexplore this issue further, we incorporated threedifferent discount factors proposed by Baum andIngram (1998) into our original (nontransformed)acquisition and restructuring experience variables:the square root of the age of the experience, the ageof the experience, and the age of the experiencesquared (in increasing order of speed of experiencedepreciation). We found for both the restructuringand the performance models that none of thesespecifications fitted the data as well as our initiallogarithmic specifications, suggesting that acquisi-tion and restructuring experience accumulatedearly on is crucial and not readily forgotten orantiquated.

Sixth, we gathered data on the top managementteams (TMTs) of all our firms over our entire win-dow of analysis from chambers of commerce andthe firms’ annual reports to assess the extent towhich the learning effects that we found were spe-cific to TMT members rather than organizational.For both acquisition and restructuring experience,we found that when we jointly included the organ-izational experience variable and a variable thatmeasured the experience accumulated by the in-cumbent TMT member with the longest tenure,both were significant (at least p � .10), although thecoefficient of the latter was about half the size ofthat of the former, thus providing some evidence ofthe existence of organizational memory.

Seventh, inclusion of CEO change and the num-ber of greenfields a firm has pursued since its lastrestructuring in our performance models had littleeffect on the significance levels of the hypothesizedeffects, apart from having insignificant effects intheir own right. Finally, inclusion of an interactionbetween the number of related acquisitions and afirm’s debt-to-equity ratio (as a proxy for free cashflow; e.g., Gibbs [1993]), which should capture theeffects of free cash flow driving low-quality acqui-sitions (Harford, 1999), did not change our resultseither.21

DISCUSSION

In extant work, researchers have almost invari-ably treated acquisitions as isolated events, implic-itly assuming that an acquirer can start with a cleanslate every time it acquires. In reality, however, anacquisition usually represents merely one element

21 We would like to thank our anonymous reviewersfor suggesting several of these additional analyses.


in a broader sequence of acquisitions collectivelyintended to implement some corporate strategy(Kusewitt, 1985; Salter & Weinhold, 1979). Build-ing on behavioral theory of search and organiza-tional learning, we have developed a theoreticalframework that adopts the acquirer, rather than theacquisition, as the unit of analysis and throughwhich we seek to explain when and how acquirersunlock synergy over time.

Based on a sample of firms that engaged inalmost 1,600 acquisitions over four decades, ourresults reveal that acquirers tend to go throughlong-term cycles of acquisitive growth and organi-zational restructuring. Specifically, we found thatthe contribution of a given acquisition to an acquir-er’s performance depends on the acquisition’s po-sition within the sequence, that such a sequence ofacquisitions gradually increases the need for majororganizational restructuring (independently of per-formance feedback), and that such restructuringplays an important role in more fully realizing thepotential of the firm’s acquisitions. Moreover, wefind that the balance that the firm needs to strikebetween acquisitive growth and organizationalrestructuring depends on its acquisition intensityas well as on its acquisition and restructuringexperience.

Contributions to the Literature

First of all, our theory and results shed light ongains from acquisitions that so far seem to haveremained largely overlooked. Whereas nearly allprior research has examined performance effects ofacquisitions in the short to medium term (at mosttwo or three years following an acquisition), weargue that major organizational restructuring,through the recombination of subunits that it en-tails, can reduce the organizational inefficienciesthat inevitably accumulate over a string of acqui-sitions and, thus, can enable a firm to more fullyunlock their synergistic potential many years afterthey were undertaken. A key implication, there-fore, is that postacquisition integration, represent-ing the single most important determinant of syn-ergy realization (Larsson & Finkelstein, 1999), isoften not a one-shot game, but a process that ex-tends far beyond the integration efforts exerted foreach acquisition individually.

Our study also helps to better explain the find-ings of prior work. By disregarding the role of or-ganizational restructuring in establishing organiza-tional fit, prior research has ignored importantlong-term benefits gained from acquisitions. In-deed, early acquisition research showed that itcould take up to 12 years before the full perfor-

mance impact of a single acquisition could be reli-ably assessed (Biggadike, 1979)—an estimate that issurprisingly close to our sample average of the timelapse between organizational restructuring events.Although our study focused squarely on acquisi-tion performance over the long term, it may alsohave interesting implications for research on acqui-sition announcements using event studies. Underthe assumption of (semi)efficient capital markets,share prices are argued to capture the net presentvalue of all the cash flows that a given acquisitiongives rise to. However, if the focal acquisition is notthe first in a sequence of related moves designed toimplement a given strategy, then to what extentwill shareholders have, in fact, anticipated the syn-ergistic gains of this specific acquisition well aheadof its announcement (see Balakrishnan, 1988)?Even more intriguingly, are shareholders reallyable to foresee the gains unlocked through organi-zational restructuring many years into the future,especially since, as our theory suggests, these gainsare contingent on acquisitions that are undertakensubsequent to the focal one?

Third, we believe that our study adds richness tothe well-established, consistent finding that the av-erage acquisition fails to realize anticipated syner-gies in the short to medium term (see King et al.,2004). The inverted U-shaped curve regarding Hy-pothesis 1 shows that the optimum is typicallyreached relatively early on in an acquisition se-quence and thus, that the downward-sloping partof the curve is more protracted than the upward-sloping part (see Figures 2a and 2b). Although thisresult confirms that, on average, acquisitions de-crease firm performance, it offers the additionalinsight that the position of an acquisition in a se-quence is important for determining whether thatspecific acquisition will strengthen or weaken per-formance (prior to organizational restructuring).

Fourth, our study may shed light on the incon-sistent findings on capability development in thecontext of acquisitions: whereas some authors havefound a positive relationship (e.g., Bruton et al.,1994; Fowler & Schmidt, 1989), others have uncov-ered an insignificant one (e.g., Hayward, 2002; Lu-batkin, 1987; Zollo & Singh, 2004), and still othershave found a U-shaped relationship (Haleblian &Finkelstein, 1999; Zollo & Reuer, 2003). In light ofour finding that the performance of an acquisition(prior to restructuring) tends to be weaker if it oc-curs later on in a sequence of acquisitions, it maybe the case that performance improvements attrib-utable to learning cannot be accurately assessed bymodels that examine a firm’s entire acquisition his-tory at once without taking into account the coun-teracting force that we find between organizational


restructurings. That is, although acquisitive growthenables firms to learn to become more successfulacquirers, it also gives rise to other dynamics thatneed to be controlled for in order for the learningeffects to be estimated correctly. Moreover, ourstudy suggests that the benefits of acquisition ex-perience are, in fact, greater than has been recog-nized so far, since, apart from enabling an acquirerto increase its acquisition performance, it also al-lows it to decrease the frequency with which itneeds to engage in costly and disruptive bursts oforganizational restructuring.

Fifth, our theory and results suggest that firmscan develop a restructuring capability, althoughextant theory predicts that it is difficult for them todo so, since restructurings occur infrequently andare highly heterogeneous and causally ambiguous(Zollo & Winter, 2002). Perhaps developing a re-structuring capability is possible because organiza-tional restructuring activity, like acquisition activ-ity, is partitioned into subactivities that are similaracross restructuring events and, thus, may still offerconsiderable scope for learning (Grant, 1996).Hence, whereas acquisition experience allows afirm to learn to search locally for effective ap-proaches to integrating each acquisition individu-ally, restructuring experience may enable it to learnto engage in distant search for effective ways ofintegrating an acquiring firm as a whole. Althoughorganizational restructuring tends to be a traumaticevent that leads to a substantial dip in firm perfor-mance in the short term (Amburgey et al., 1993;Greve, 1999), in the long term it enables a firm tomore fully unlock the synergistic potential of itsacquisitions and thus, to increase its performanceto higher levels than before, especially if, as oursimulation shows, it has restructuring experience.

More generally, we suggest that there may bebenefits to placing acquisitions, as well as othertypes of strategic moves, within a larger frameworkof organizational change. In our case, by studyingacquisitions at the level of an acquiring firm as awhole and demonstrating that the acquirer goesthrough long-term acquisition-restructuring cycles,our work establishes interesting links between theacquisition literature and the theory of punctuatedequilibrium (Gersick, 1991; Tushman & Romanelli,1985). As such, our theoretical framework drawstogether two forms of corporate development—acquisition and organizational restructuring—thatoperate at different levels of aggregation and haverarely been studied in conjunction.

Finally, apart from these theoretical contribu-tions, our study may also offer an empirical contri-bution by formally checking the causality assump-tion underlying our performance models. The

lagged dependent variable model that we used, incombination with the highly efficient Arellano-Bond estimator, allowed us to establish Grangercausality. Although this is common practice amongeconometricians, it is considerably more reliablethan the techniques that prevail in our field today,such as fixed effects and lagged independent vari-ables used alone (Greene, 2003).

Managerial Implications

We believe that our theoretical framework andempirical results have important practical impli-cations as well. Most notably, managers shouldnot regard acquisition integration as a one-time,ad hoc event, but rather as a more iterative pro-cess that is unable to yield optimal performancein the short to medium term. Integration requiresadditional, post hoc efforts at the level of anacquiring firm as a whole if the firm is to unlocka greater portion of the synergistic potential of apast string of acquisitions than is possiblethrough integration efforts at the level of eachacquisition individually, because the synergisticpotential of a given acquisition may becomeclearer in hindsight, especially since it often de-pends on those that are engaged in later on. More-over, managers should be aware of the criticalrole that they play in striking a balance betweenacquiring and restructuring. Undertaking toomany acquisitions without major restructuringwill likely lead to increasingly suboptimal inte-gration. Restructuring too often, however, willalso weaken performance, because of the disrup-tion and costs that it entails.

Limitations and Suggestions for Further Research

Our study suggests that it is important for fu-ture research to move beyond the notion of ac-quisitions as isolated events toward recognizingtheir embeddedness in sequences intended to im-plement a corporate strategy, which allows for along-term and dynamic approach to studyingtheir performance effects. One suggestion wouldbe to refine our theory by studying acquisitionsequences in greater detail (e.g., using year-by-year trajectories rather than mere counts). An-other approach would be to complement thestrengths of archival data with those of surveydata. Although extensive time series of archivaldata were necessary to test our theory, since ac-quisition-restructuring cycles span long periodsof time, we inevitably missed out on the distinc-tive advantages that survey data offer. For in-stance, survey data, unlike our archival data,


would allow one to study acquisition integrationmore directly, create finer-grained operationaliza-tions of organizational restructuring, and measure ac-quisition size more accurately.

It also seems interesting to examine the boundaryconditions of our theory. On the one hand, firmsthat acquire only occasionally might not have toundertake major restructuring at all, as they canlargely avoid the accumulation of organizationalinefficiencies. On the other hand, however, thereare the highly acquisitive Ciscos and General Elec-trics that, somehow, also seem to be able to avoidthe discrete bursts of restructuring that we found tobe necessary for our sample firms to thrive. Anintriguing possibility is that, drawing on their vastexperience, these firms have learned to effectivelyabsorb each of their acquisitions from the start,making restructuring largely superfluous. Anotherinteresting possibility that future research mightexamine is that such firms have adopted modularorganizational designs (Karim, 2006; Schilling &Steensma, 2001) that enable them to recombinetheir subunits more or less continuously withouthaving to concentrate such activity in occasionalbursts of radical organizational change.

Furthermore, although weak performance is wellestablished as a key driver of organizational change(Greve, 2003; Romanelli & Tushman, 1994), wefound that acquisitive growth in and of itself tendsto trigger such change as well. This finding seemsto contest the somewhat simplistic notion in theorganizational change literature that top managersare so removed from the inner workings of theirfirms that they rely exclusively on performancefeedback to get a sense of how the firms are doing.Instead, there may often be more real-time signals,such as the organizational inefficiencies that accu-mulate over an acquisition sequence and that grad-ually render a firm more difficult to coordinate.Future research could make important contribu-tions by providing a better understanding of what itis exactly that drives major organizational change.

Finally, as already touched upon, future researchmay offer valuable insights into the efficiency ofcapital markets by exploring the extent to whichinvestors can really foresee gains from acquisitionsthat are realized far into the future, such as the oneswe found, especially since some of these may becontingent upon acquisitions undertaken subse-quent to a focal one.

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Harry G. Barkema ([email protected]) was a professor ofstrategy and international business at Tilburg Universityat the time of writing this article. He currently holds theDSM Distinguished Chair in Management of Innovationat the Rotterdam School of Management and is a profes-sor of management in the Department of Management atthe London School of Economics. He is also the directorof the Innovation Cocreation Lab, focusing on developingnew strategies and organizational forms for innovation.

Mario Schijven ([email protected]) was a doc-toral candidate at Tilburg University at the time of writ-ing this paper. He is currently an assistant professor ofmanagement at Mays Business School, Texas A&M Uni-versity. His current research focuses on corporate devel-opment activities, most notably acquisitions, alliances,and organizational restructuring, which he studies usingtheories of organizational learning, behavioral decisionmaking, and evolutionary economics.


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