Transferring strategic capabilities

Transferring strategic capabilities

The role of post-merger integration in technology-driven M&A

Bachelor Thesis Organization & Strategy

Academic year: 2009-2010

Name: L. te Grotenhuis

ANR: s50.90.04

Supervisor: E. Golovko

Number of words: 6.506

ANR: s50.90.04

Name: Te Grotenhuis, L. (Luuk)

Topic: Knowledge and learning within and across organisations

Subtopic: Managing the post-merger integration process to improve performance

Study programme: Business Administration (Bedrijfseconomie) BSc.

Bachelor’s thesis Organisation & Strategy | 3

Management summary

This literature review tries to find adequate managerial actions for improving the post-

merger integration process in technology-driven mergers and acquisitions. An overview of

the integration process is assembled and subsequently factors that yield improved post-

integration performance, denominated by value creation, are explained.

Value creation in business stems from continuously renewing the firms’ strategic

capabilities. Compared to internal development, external acquisitions might be a less costly

and less risky means to renew capabilities. The essential capabilities wanted in technology-

driven M&A consist of knowledge and technological know-how, which are mostly tacit and

embedded in activities, persons, or routines.

In traditional views on acquisition integration, the decision-making process and

diligence are decisive. Before the transaction, the potential for value creation is assessed

through a strategic fit and organizational fit. A more recent process perspective expects

changes to occur after this decision- and justification stage, and therefore addresses great

importance to the management of the post-acquisition integration.

Concerning technology-driven intentions, the method mainly used for the capability

transfer in the integration phase, is the transfer of functional skills. The post-merger

integration phase can be best managed by optimizing this source of capability transfer, since

it conveys preserving, transferring and applying tacit knowledge across the boundaries that

might exist between merging firms.

Creating a positive atmosphere and solid interactions for transmitting capabilities are

actions that will enhance the chances of improved performance after integration.

Determinism, value destruction, and leadership vacuum are problems which are likely to

occur in any acquisition integration and therefore managerial actions have to be undertaken

to stop them from impeding capability transfer and value creation. General integration

strategies that can be undertaken when dealing with technology-driven M&A are

‘preservation’, in case of domain exploring with a low need for interdependence, and

‘symbiosis’ in case of domain strengthening with a high need for interdependence.


Table of contents

1. INTRODUCTION ........................................................................................................ 5

1.1 PROBLEM INDICATION ................................................................................................. 5

1.2 PROBLEM STATEMENT ................................................................................................. 6

1.3 RESEARCH QUESTIONS................................................................................................. 6

1.4 RESEARCH DESIGN ...................................................................................................... 6

1.5 OVERVIEW OF THE THESIS ........................................................................................... 6

2. THE ROLE OF POST-ACQUISITION INTEGRATION IN M&A ...................... 7

2.1 SYNERGY POTENTIAL AND THE CREATION OF VALUE ................................................... 7

2.2 CONVENTIONAL VIEW ON INTEGRATION ...................................................................... 8

2.2.1 STRATEGIC FIT ......................................................................................................... 8

2.2.2 ORGANIZATIONAL FIT.............................................................................................. 9

2.2.3 MANAGERIAL ACTIONS ......................................................................................... 10

2.2.4 VALUE CREATION .................................................................................................. 10

2.3 PROCESS VIEW ON INTEGRATION ............................................................................... 10

2.3.1 RESOURCE SHARING .............................................................................................. 11

2.3.2 FUNCTIONAL SKILL TRANSFER ............................................................................... 12

2.3.3 GENERAL MANAGEMENT SKILL TRANSFER ............................................................ 12

2.3.4 COMBINATION BENEFITS ....................................................................................... 12

2.4 TECHNOLOGY-DRIVEN INTEGRATION ........................................................................ 13

3. MANAGING THE TRANSFER OF CAPABILITIES ........................................... 14

3.1 POSITIVE CONTRIBUTIONS TO MANAGING THE INTEGRATION PROCESS ...................... 14

3.1.1 INTERACTIONS ....................................................................................................... 14

3.1.2 ATMOSPHERE ........................................................................................................ 15

3.2 IMPEDIMENTS IN MANAGING THE INTEGRATION PROCESS .......................................... 17

3.2.1 DETERMINISM ....................................................................................................... 17

3.2.2 VALUE DESTRUCTION ............................................................................................ 17

3.2.3 LEADERSHIP VACUUM ........................................................................................... 17

3.3 PROPOSED METHOD OF INTEGRATION ........................................................................ 18

3.3.1 STRATEGIC INTERDEPENDENCE NEED .................................................................... 18

3.3.2 ORGANIZATIONAL AUTONOMY NEED ..................................................................... 18

3.3.3 TYPES OF INTEGRATION APPROACHES ................................................................... 19

4. CONCLUSION, LIMITATIONS, AND RECOMMENDATIONS ....................... 20

4.1 CONCLUSION ............................................................................................................. 20

4.2 LIMITATIONS ............................................................................................................. 21

4.3 RECOMMENDATIONS ................................................................................................. 21

5. REFERENCES ........................................................................................................... 22


1. Introduction

1.1 Problem indication

The success or failure of mergers and acquisitions (M&A) is often based on financial

parameters that measure wealth creation for shareholders, like share price performance. The

literature shows, despite the popularity of M&A throughout history, that the benefits are often

short-lived and shareholders of the acquiring firm repeatedly do not benefit financially in the

long run (Cartwright & Schoenberg, 2006).

From a strategic management perspective M&A should gain a competitive advantage

by optimizing the use of their resources. Yet, when those resources are not present, or

cannot be developed internally, M&A could be a preferred tool to acquire, transfer, and

redeploy resources (Grant, 1996; Capron, Dussauge & Mitchell, 1998). The goal of such an

acquisition can be twofold, either creating value by combining firms, or simply by capturing

value, similar to an investment. Since the latter does not involve any further management

practice, this thesis will focus on M&A that hope to achieve creation of value: synergies

(Haspeslagh & Jemison, 1991).

The facts suggest that a large proportion of M&A fail after careful pre-merger planning

and diligence. On beforehand value-adding acquisitions seem to lose their synergy potential

somewhere in the integration process. This thesis will focus on the post-merger integration

process and provides an overview of the factors and processes that influence, or inhibit

successful combinations. Since a complete overview will be beyond the scope of this thesis,

the problem statement will be confined to technology-driven M&A.

In technology-driven M&A, firms aim at gaining knowledge and technological know-

how from the assets of the target firm, for instance by acquiring and integrating research and

development (R&D) functions. Motives for externally acquiring technology are fast

technological changes and growing complexity, which make internal development more

complex (Gerpott, 1995; Ahuja & Katila, 2001; Bannert & Tschirky, 2004).

In order to define the quality of the post-merger integration process in these

technology-driven M&A, the influence on performance will be examined. Ultimately the

managerial actions in the integration phase that positively contribute to the performance of

merged firms should be recognised.

Finally, due to varying opinions in the literature about the (in-) existence of equal

mergers, this thesis will neglect possible differences between the mergers and acquisitions

idiom and use the words ‘acquisition’ and ‘merger’ interchangeably to describe a similar

event (Lynch & Lind, 2002; Epstein, 2004).


1.2 Problem statement

The focus of this thesis, as introduced in the problem indication, will be confined to

the following problem statement:

How can the post-merger integration in technology-driven M&A be managed to

improve performance?

1.3 Research questions

� What is the role of the post-merger integration in mergers and acquisitions?

The first research question should answer what the literature describes as the post-merger

integration process, specified towards technology-driven M&A.

� Which manageable factors in the post-merger integration process influence

performance?

The second research question inquires which manageable factors in the integration process

influence performance, and whether they do this in a positive or negative manner.

1.4 Research design

The conclusions in this thesis will be drawn upon a literature review. Using the

available literature to date, this thesis tries to establish which factors in the post-merger

integration process positively influence the performance of merged firms. Main sources of

review will be the relevant strategic management journals, but given the nature of the topic,

journals that bridge gaps between strategic management, technology and organisational

learning might also be considered. Predominantly used for this thesis are: the ‘Strategic

Management Journal’, ‘R&D Management’, ‘The Academy of Management Journal’, and the

‘British Journal of Management’.

1.5 Overview of the thesis

The next chapter will focus on the post-merger integration process. It will discuss

which aspects, according the literature, have to be taken into account, and it will outline the

specific relevance for technology-driven M&A. In explaining the factors of influence, the

emphasis will lie on effects that are to be influenced by management practice.

The third chapter will then relate the important concepts in post-merger integration to

the performance of the merged firms, and tries to establish an overview of factors that, if

managed correct, positively influence the performance.

Finally, all relevant findings will be addressed in the conclusions, limitations and

recommendations in order to get a thorough insight in the problem statement.


2. The role of post-acquisition integration in M&A

2.1 Synergy potential and the creation of value

In the competitive business environment, mergers and acquisitions (M&A) are tools to

add value to companies. Haspeslagh and Jemison (1991) recognize two distinct forms in this

act of wealth generation: value capture and value creation. The first involves a onetime

transaction, transferring capital from shareholder to shareholder, merely resembling an

investment. The second is the result of so-called synergy potential between merging firms,

and requires an interactive managerial approach. Combined with its long-term focus the latter

asks for a more strategic view of M&A, which will be applied in this chapter.

Following Haspeslagh and Jemison (1991) a firm should be seen as a package of

capabilities, which enables it to compete in the marketplace. This capabilities-based

approach resembles the resource-based view, in which existing as well as possible future

resources should be managed optimally to reach a sustainable competitive advantage

(Grant, 1996). Haspeslagh and Jemison (1991, p. 23) state that central to competitive

advantage are a set of capabilities that: “1) incorporate an integrated set of managerial and

technological skills, 2) are hard to acquire other than through experience, 3) contribute

significantly to perceived customer benefits, and 4) can be widely applied within the

company’s business domain.” The capabilities-based perspective is advocated, because in

contrast to the conventional, financially-orientated view it allows for reasoning why and how

companies create value.

According to Haspeslagh and Jemison (1991), understanding of the value creation

process helps companies continuously renew their set of key capabilities and therefore

sustain their competitive advantage. This is important, since fierce competition and other

external factors degenerate the firms’ competitive advantage over time. Constantly renewing

your capabilities can be defined as innovative behaviour: putting resources into new use

(Rogers, 1983). Several studies in different fields, amongst others finance, economics and

management, have shown evidence that relates innovation positively to firm performance.

Keeping companies flexible asks for continuous renewal of their capabilities, that

compromises innovative action and is the foremost need in the creation of value, and

ultimately in the survival of the firm (Hitt, Harrison & Ireland, 2001).

In general, two pathways for innovation can be discussed, each with their own

benefits. Firms can innovate either by developing or renewing capabilities inside the firm, or

by buying them outside the firm. Hitt et al. (2001) suggest that an internal development

approach tries to reap the benefits of first-mover advantages through the constant


supporting, nurturing and upgrading of internal innovation capabilities. A method that

demands high dedication in resource allocation, and is not free of risk with failed innovation

attempts as no exception. Consequently, they assert that these impediments persuade some

firms to acquire innovation externally. Firms belief acquisitions to be a quick, low-cost, lower

risk and above all success proven method of tapping into innovativeness. Previous research

by Chakrabarti, Hauschildt and Süverkrüp (1994) denotes that acquisitions have become an

approved corporate growth strategy, and especially for technology-driven motivations

acquisitions are often viewed as a good substitute to in-house research and development

(R&D).

Haspeslagh and Jemison (1991) categorize acquisitions contributing to corporate

renewal into 1) domain strengthening acquisitions, which fortify a firms’ position in existing

business segments, 2) domain extending, in which the segment is broadened, and 3) domain

exploring, when new segments are opened through acquisitions.

Although the outcomes of acquisitions can be estimated with more certainty than the

internal development of innovation, Hitt et al. (2001) contest that this does not mean that

acquisitions are without risk. Firstly, due to limited capital most firms cannot both perform

costly internal development and buy innovation externally. This implies a trade-off between

commitment to their internal innovation ability and acquisitions. When an acquisition strategy

is chosen, this can have a negative effect on their internal innovativeness. Secondly,

acquisitions only offer a potential for transfer of capabilities, and therefore the actual creation

of value is uncertain. To make sure that value creation will be established an appropriate

integration of acquisitions, and especially the strategic capabilities involved, is essential to

unlock the synergy potential.

2.2 Conventional view on integration

First examined is a conventional view, which according to Haspeslagh and Jemison

(1991) employs a chronological, stepwise approach and sees the integration phase as a

natural result of the pre-acquisition decision-making. The decisive goal is determining the

creation of value before the transaction takes place. Hitt et al. (2001) introduce four basics

that, if all present, could on beforehand predict successful realisation of synergies.

2.2.1 Strategic fit

The strategic fit between companies explains the similarity of the strategic capabilities

and resources present in the merging firms, and can be subdivided into four sources: 1)

operations synergy, which benefits of economies of scale and/or scope as a result of the

integration of activities, 2) R&D/technology synergy, linking crucial - and sometimes private -


technologies, 3) marketing-based synergy, sharing promotion and distribution channels, and

4) managerial synergy, gaining better general management skills (Hitt et al., 2001).

The effect of this relatedness, the degree of similarity in resource allocation, on

acquisition performance has been researched extensively. Previous research concluded that,

due to a lack of evidence, relatedness or strategic fit is nothing more than a hint of synergy

potential (Datta, 1991). Although they were unable to support the hypothesis, Zollo and Singh

(2004) reason that, in theory, relatedness should yield economies of scale and therefore

improve performance. Birkinshaw, Bresman and Håkanson (2000) reviewed the different

streams of research on acquisitions and recognize the industrial organization economics

view that links economies of scale and scope to performance. But they also signal that this

stream of research has been underpinned by the resource-based view, which considers that

only unexpected synergies, not incorporated in the predetermined premium, can positively

contribute to acquirers’ performance.

Specifically the second source of strategic fit, R&D/technology synergy, relates to the

post-merger integration process of technology-driven M&A. A technological fit or

technological relatedness is researched by Hagedoorn and Duysters (2002). They explain

technological relatedness as the level in which acquisition partners are active in identical

fields of technology development, for instance delineated by patent-classes. Contradicting

the findings of previous studies, their conclusion does attribute crucial importance to a

strategic fit and encourages the search for equivalent research-intensive companies when

considering acquisitions. Although this challenges earlier statements, it does build on

suggestions of Cartwright and Cooper (1996) who propose that a relatedness in product

markets is advantageous for the transfer of knowledge and expertise – which are strategic

capabilities in technology-driven M&A (Gerpott, 1995).

2.2.2 Organizational fit

The second prerequisite for predicting successful synergy realisation, organizational

fit, “occurs when two organizations or business units have similar management processes,

cultures, systems and structures” (Hitt et al, 2001, p. 94). Datta (1991) signals the importance

of organizational fit, being a determinant of post-acquisition performance. It influences the

ease with which two organizations can be assimilated after an acquisition. It can be assessed

along a number of dimensions, but two factors are often mentioned as being particularly

good predictors for the ease of post-acquisition integration: 1) small differences in

management styles and 2) small differences in organizational systems, particularly the

reward- and evaluation systems.

Although organizational fit involves many of these different administrative routines

and company-specific characteristics, Hagedoorn and Duysters (2002) found size ratio,


which shows similarities or dissimilarities in company size, to be a proficient tool in catching a

large extent of the degree of organizational fit in technological acquisitions. It proved useful

for understanding the likelihood of success in technological combinations, showing that large

size differences, implying a lack in organizational fit, would predict difficulties in integration.

2.2.3 Managerial actions

Haspeslagh and Jemison (1987) denote that the chances of positive value creation

are not purely a result of relatedness, or ‘fit’. Therefore they would like to attribute importance

to how acquisitions are managed. This is further specified by Pablo (1994), who as well

recognizes that not only strategic factors, but also the management processes through which

those theoretical synergistic benefits come to be realized should be taken into consideration.

“Thus, various managerial actions must be initiated to effectively match the strategic

capabilities that are demonstrated by the ‘strategic fit’ foundation of synergy and to gain the

competitive benefits that are permitted by the similarities in managerial process, cultures,

systems, and structures that are represented by the ‘organizational fit’ foundation of synergy”

(Hitt et al., 2001, p. 98).

For example, the level of integration is a manageable tool. Later on will be shown that

high levels of integration enhance the potential of interdependence-based synergies, but if

misapplied it also is a source for inter-organizational conflict (Zollo & Singh, 2004).

However, according to a large part of the literature, inequalities between merging

firms should not involve a lot of managerial actions at all. Integrating production, marketing

and distribution do not require much management attention and coordination, since simple

operational resource sharing should deliver the strategic benefits. Yet, technology-driven

M&A is a far more complex, specialized, and non-routine process, compared to relatively

standard manufacturing acquisition procedures. When assessing the acquisition, specifically

merging technological capabilities should be considered to be a managerial challenge

(Nelson & Winter, 1982).

2.2.4 Value creation

The last pillar deducted by Hitt et al. (2001) constitutes the simple fact that for M&A to

add value, the joint benefits should outweigh the costs. For instance, if the level of integration

is too high, the cost of coordination could outweigh the benefits. For the three above

mentioned constructs to be valid, they should yield a positive contribution to value creation.

2.3 Process view on integration

Concerning the integration of acquisitions, Stahl and Mendenhall (2005) conclude that

a paradigm shift has taken place. Traditional parameters for M&A success, like the ‘strategic


fit’, are no longer sole indicators for success, but mere predictors. Although they are good

determinants for the potential value resulting from an acquisition, the process unlocking

these synergies is significantly more influenced by intangible factors, instead of ‘hard’

strategic and financial parameters. This idea is the basis for a process perspective, which

highlights the importance of managerial activities and influences after the transaction.

Haspeslagh and Jemison (1991) argue that the conventional view especially lacks

reality by presuming that the outcome of an acquisition can be fully recognized at the time of

the agreement, they refer to this moment as the ‘justification’ or decision-making phase (see

figure 3.1). The terms strategic fit, organizational fit, and managerial actions are used upfront

to give an indication of value-creation and expected implementation difficulties. But it forgoes

the fact that the seemingly separate decision-making and integration phase are actually

intertwined, and should be considered collectively. Misapplication in practice can be

highlighted by the fact that the supervision of the post-acquisition process is often delegated

towards inferior managers who were not involved in the secrecy of the decision-making

stage, and as a result are unaware of deal-making and -breaking strategic considerations.

This, according to Cartwright and Cooper (1996), leads to an unorganized, ad hoc, and

reactive way of managing the integration stage.

Following Haspeslagh and Jemisons’ process perspective, particularly the drivers

behind the results should be considered and understood in the integration process. These

drivers are the actual sources of strategic capability transfer establishing the competitive

advantage, and can be influenced and managed. Haspeslagh and Jemison (1991) distilled

four of these opportunities for transferring strategic capabilities: 1) operational resource

sharing, 2) functional skill transfer, 3) general management transfer, and 4) combination

benefits, which respectively can be seen as the drivers behind the four conventional value

pillars mentioned by Hitt et al. (2001).

2.3.1 Resource sharing

Operational resource sharing transfers capabilities by combining and rationalizing the

operational asset of the firms. This delivers cost reductions in a relative short-term, by

establishing economies of scale. Another method for value creation through resource sharing

can be the cross-selling of partners’ products in the firm’s own main markets. The concept of

combining and sharing operational resources seems uncomplicated, but when applied in

practice companies incur a hidden ‘cost of compromise’. Main integration challenges

constitute weighing the benefits of sharing, against losses in efficiency. These losses surface

by a trading-off sharing and integrating operational resources versus preferring the transfer of

functional skills, a second source of capability transfer (Haspeslagh & Jemison, 1991).


2.3.2 Functional skill transfer

This second source of capability transfer can be reached by bringing in functional

skills from the target firm. Through this transfer, that is a learning process, the acquirers’

capabilities and competitive advantage will be strengthened, which can result in value

creation. The fact that these capabilities are ‘strategic’ also makes them difficult to transmit.

Functional skills are usually interwoven in the activities, routines and personnel of the target

organization. The tacit nature of these skills will be further explained at the end of this

chapter, but one of the consequences is that the more competitive a skill is, the harder is to

replicate or transmit. This embeddedness of skills plays a major role in technology-driven

M&A and the biggest challenge will be the transfer of these functional skills. “Such transfer of

skills is neither immediate nor easy because it involves a process of both teaching and

learning before the skills can be transferred” (Haspeslagh & Jemison, 1991, p. 109). The

greater the barrier for imitation of the capability is, the more time it will take to learn and apply

it in an acquisition.

2.3.3 General management skill transfer

Firms can also become more competitive, and thus create value, by improving the

quality of their general management skills. The acquirer can deepen and improve its

management systems by acquiring these capabilities. Acquisitions are sometimes solely

used to capture a manager of another firm.

There is an important difference between the transfer of functional skills and general

management skills. The interactions of the former are mostly horizontal without a hierarchical

relationship. The lack of such a relationship further impedes efficient functional skill transfer.

Yet, general management transfer happens through vertical relations and this formal

atmosphere of a manager-subordinate relationship, increases the willingness to participate in

learning and transfer.

2.3.4 Combination benefits

Whereas the first three methods deal with actually transferring strategic capabilities,

combination benefits can exist in acquisition, but without actual transfer taking place.

According to Haspeslagh and Jemison (1991) the sheer size of a combination delivers profit

because of more muscle power in buyer-supplier relations, financial possibilities, or even

reputation. The common trait is that it does not require managerial interactions to transfer

any of the benefits, since size-related benefits do not demand a lot of coordination to be put

into practice.


Each of these four sources in capability transfer experiences its own difficulties and

challenges. Particularly the learning which occurs in some of the processes makes the

transfer a complex matter, an issue crucial in technology intended acquisitions.

2.4 Technology-driven integration

Every value-creating acquisition presents a mixture of the forgoing types of capability

transfer. In addressing the specific field of interest in this thesis, the prior explained post-

acquisition theories will be narrowed down towards technology-driven acquisitions. As

defined earlier, reaching the goal of value creation is determined by the successful transfer of

strategic capabilities. In technology acquisitions companies hope to gain new technologies

and specific skills helping them to develop and strengthen their existing business domains

(Stahl & Mendenhall, 2005).

Ahuja and Katila (2001) assert that an effective integration of technology, in this case

high-technology “characterized by short product life cycles and high degrees of uncertainty”

(Stahl & Mendenhall, 2005, p.278), entails blending the knowledge and know-how of both the

acquirer and target. This analysis suggests an initial need for preservation of knowledge,

followed by transfer, and finally application.

Yet, according to Stahl and Mendenhall (2005) the transfer of knowledge is complex,

and far more challenging than it may appear on first sight, because the transfer not only

comprises transmitting explicit, but also tacit knowledge capabilities. Explicit knowledge is

accessible through verbal and written communication and resides in physical assets and

formal structures, which should make it rather easy to transfer. Difficulties start to arise when

transferring tacit knowledge. Tacit, non overt, knowledge is defined as technological

expertise and skills accrued in the minds of the employees. The person specific nature of

these innovation skills makes it an embedded strategic capability and difficult to pass on to

an acquirer (Hitt et al., 2001).

Carefully basing their conclusion on an extensive literature review, Stahl and

Mendenhall (2005) find that in technology-driven acquisitions, the key value creation issue is

effectively integrating employees - and therefore tacit, functional skill knowledge-, to capture

all the cherished technology competences. As addressed earlier in this chapter conventional

pillars like the strategic - or technological – fit and organizational fit can give a sound

estimation of the value potential, but creating the value demands active management. In

case of technology-driven acquisitions unlocking tacit knowledge, a functional skill transfer

route, hinges predominantly on how the implementation approach is managed. The next

chapter will shed light on methods to overcome integration difficulties concerning the

functional skill transfer in technology-driven mergers and acquisitions.


3. Managing the transfer of capabilities

3.1 Positive contributions to managing the integration process

Cartwright and Cooper (1996) demonstrate that each acquisition will react uniquely in

integration due to cultural and organization differences. As these dynamics heavily influence

the transfer of tacit, functional skills, management cannot assume that an identical approach

suits each acquisition. For this reason the remainder of this thesis adopts the process

perspective on acquisition integration that, after a surge of innovation-oriented deals in the

1990s, has become a predominant theory. The important characteristics of this process

perspective are introduced in figure 3.1, and will be elaborated upon in this chapter. The

focus will lie on the “softer, less tangible social, cultural, and psychological aspects of M&A

management” (Stahl & Mendenhall, 2005, p xiv). These will help understanding that

transferring capabilities asks for difficult learning processes by both firms through intensive

two-way interactions, a process that is reliant on an adequate atmosphere that supports it


3.1.1 Interactions

Haspeslagh and Jemison (1991) find interactions between the firms to be central to

the integration process, and in the heart of the functional skill transfer. Where the decision-

making contacts are often formal, a need exists to increase the number of informal and

unpressured exchanges between employees of both companies in the integration stage. With

a focus on functional skill transfer that involves transmitting valuable person-specific

technologies and knowledge, exchanges will mostly be of a horizontal nature. Three distinct

types of interactions are introduced: 1) substantive interactions, concerning actual transfer of

capabilities, 2) administrative interaction, that develop information systems, and 3) symbolic

interactions that build beliefs.

Idea Justification Integration Results

Problems in the Integration Process:

• Determinism

• Value Destruction

• Leadership vacuum

Atmosphere for Capability Transfer:

• Reciprocal Understanding

• Willingness to Work Together

• Capacity to Transfer and Receive

• Discretionary Resources

• Cause-effect Understand Benefits

Transfer of Strategic Capabilities:

• Operational Resource Sharing

• Functional Skill Transfer

• General Management Skill Transfer

• Combination Benefits

Improved

Competitive Advantage

(value created)

Acquirer

Target

Interactions:

Figure 3.1: ‘The Acquisition Integration Process’ (Haspeslagh & Jemison, 1991)


Substantive interactions serve the immediate purpose of the acquisition, bringing

about transmission of the knowledge needed for value creation. Secondly, administrative

interactions are triggered by the fact that the acquiring company likes to incorporate the new

knowledge as quickly as possible, and therefore shapes formal procedures to monitor and

control the target firm. Last, symbolic interactions should reduce uncertainty caused by the

acquisition. By signalling the idea and purpose behind the acquisition the employees should

gain positive attitudes towards working together (Haspeslagh & Jemison, 1991). The analysis

of Ahuja and Katila (2001) that attributes decisive importance to the preservation, transfer

and application of high-technology knowledge, overlaps with respectively symbolic,

substantive and administrative interactions.

Stahl and Mendenhall (2005) further add that this preferably should be a two-way

pattern of interaction, enabling a learning process. In this sense managers should raise

attention to reduce barriers and strengthen bonds. Specifically, during the process of merging

companies double barriers and bonds may exist and hinder the flow of information between

the firms. By actively monitoring and managing the ease of interactions, the planned transfer

and value creation can be reached. While these interactions set the stage for functional skill

transfer, it will be the overall atmosphere that influences the effectiveness of the connections


3.1.2 Atmosphere

Although transfer through interaction forms the basic need when integrating, a

positive atmosphere has to be present to make it successful. Hitt et al. (2001) recommend a

focus on maintaining innovation activity after the acquisition, by developing a supportive

culture. The research of Haspeslagh and Jemison (1991) sums up five key components to

facilitate this atmosphere factor: 1) reciprocal understanding, 2) willingness to cooperate, 3)

capacity to transfer, 4) discretionary resources, and 5) understanding of the cause-effect

relation of the acquisition benefits.

In the case of technology, knowledge is embedded in the context of the organization

and culture, thus transmitting the capabilities requires a thorough understanding of these

contextual influences. A reciprocal understanding of each others organization and culture

demands managers and employees to learn how and why the capability worked in the pre-

acquisition situation. In order for this to work, the partners first have to learn about each

other, and consequently they can learn how the knowledge could be best transferred. It is

understood that this learning effort is the highest with tacit knowledge, since tacit knowledge

is very person specific. Earlier comments by Hagedoorn and Duysters (2002) and Cartwright


and Cooper (1996) attributing value to a technological fit in estimating the ease of transfer,

are nuanced: “being in the same business does not guarantee either a common language or

an understanding of the other organization” (Haspeslagh & Jemison, 1991, p. 112).

A reciprocal understanding cannot be reached when the integration process lacks

willingness to work together after the acquisition. Haspeslagh and Jemison (1991) found that

managers as well as employees saw working together as a ‘zero-sum game’. In stead of

trying to reap the benefits of the combination potential, they were scared that contributing to

the partner would harm their own situation. Examples are fear of losing their job or having to

give up power and control. Manageable factors that could improve willingness to work

together are equal size ratio’s, as discussed earlier by Hagedoorn and Duysters (2002), and

reward systems. The latter gives management a tool that can directly incentivize the

personnel’s cooperative attitude.

Setting a capacity to transfer and receive the capability concerns mainly that both

firms should have the right people in the right positions. This can sometimes be a scarcity,

especially when small innovative companies are acquired by larger partners. Due to the

small size of the target, there might be a lack of time and dedication, caused by an

undersized management team, impeding an effective transfer atmosphere. Another important

prerequisite is that the capability being transferred must truly exist. This seems obvious, but

the pre-acquisition deal-making does not always allow a perfect insight in the existing

capabilities, which afterwards can turn out to be smaller than expected or even inexistent.

Discretionary resources are another way of creating a positive atmosphere for

capabilities transfer. Haspeslagh and Jemison (1991) found that a certain amount of ‘slack’

resources and time would not harm the integration process. Moreover, the extra room for

manoeuvring would be beneficial to the transfer of capabilities. This is especially true for

technology intensive acquisitions, since the results of the combination often only surface in

the long-term (Meglio, 2009).

In creating an atmosphere it is important that the purpose of the acquisition becomes

common knowledge. Lower level managers must have a cause-effect understanding of the

benefits, since they will have to guide the unlocking and transfer of tacit knowledge. Key

factors of which they should be aware are: “the nature, the source, the timing, and the

predictability of the benefits they expect from an acquisition” (Haspeslagh & Jemison, 1991,

p. 116).

The important role of atmosphere is fortified by Stahl and Mendenhall (2005), who

refer to it as building ‘social capital’. This can be primarily achieved by deploying ‘boundary-

spanning managers’ who become responsible for connecting the separate groups engaged

in knowledge transfer. Although these managers cannot bridge all barriers, in accordance


with the above mentioned five facilitators of a positive atmosphere, they represent a tool to

facilitate a positive atmosphere.

3.2 Impediments in managing the integration process

Integrations of acquisitions fail for very different reasons, yet in their study

Haspeslagh and Jemison (1991) deduced three returning problems that affect the process

perspective on integration.

3.2.1 Determinism

Determinism constitutes a too static point of view in the integration process. This view

remains based on the initial agreements in the acquisition transaction. Yet, the over time

important aspects of the integration process are often influenced by externalities. A range of

determinism problems start to arise when the integration approach is not adapted to these

new circumstances.

When managers create a positive atmosphere and overly try to motivate employees,

a false sense of security can arise. In making all partners enthusiastic, the vision of the

manager may get clouded. When this implies that certain events are blocked out, because

they do not fit in their original view, the potential for value creation can be seriously

diminished. The latter can also happen with unexpected events arising in the integration

process. This may lead to a cycle of confusion and frustration. General managers face

problems that question their original predetermined plan, and they become confused. Lower

managers consequently get frustrated with the inability of general management to deal with

these new externalities. A negative cycle, that is harmful for a positive integration and

transfer atmosphere, is created (Haspeslagh & Jemison, 1991).

3.2.2 Value destruction

This second problem exists when there is no willingness or capacity to work together

and transfer capabilities. Combining two firms means a lot of uncertainty for the people

involved. Normal routines are undermined and this instigates people to start acting in their

own interest, instead of serving a common goal. As a result the prospect for transfer and

value creation is reduced (Haspeslagh & Jemison, 1991). Stahl and Mendenhall (2005) add

to this that lack of motivation fuels value destruction. Important enablers of motivation, or

willingness to share, are a culture of trust and a feeling of social belonging, hence the

atmosphere discussed before.

3.2.3 Leadership vacuum

In the light of the previous problem solid leadership becomes even more important to

reduce the process of value destruction, and work on an atmosphere of capability transfer.


To avoid a limited amount of sharing, Haspeslagh and Jemison (1991) require both

institutional leadership, providing a broad acquisition vision, and interpersonal leadership, to

stimulate functional skill transfer. Yet, as discussed earlier, the responsibility for the

integration phase is often delegated downwards directly after the transaction. Subsequently it

becomes unclear who should provide the institutional, broader envisioned, leadership. This

vacuum of leadership and ambiguity fuels the process of value destruction.

3.3 Proposed method of integration

The process perspective eventually distills all peculiarities into a framework that gives

three typologies for integration approaches concerning strategic capability transfer (see

figure 3.2). Haspeslagh and Jemison (1991) do this along two axes: first the level of

interdependence needed to establish transfer, and secondly the need for the target company

to stay relatively autonomous.

3.3.1 Strategic interdependence need

Creating interdependencies breaks the boundaries between the companies to start

effective capability transfer. Haspeslagh and Jemison (1991) note that the level of

interdependence is different for each method of capability transfer. Transfer of functional

skills, which consists of tacit knowledge and is the most interesting process in the light of

technology-driven M&A, can only succeed when personnel will be moved across

intercompany boundaries or when they start sharing information and knowledge. However, if

the interdependence is carried out too far, it can negatively influence the targets’ feeling of

autonomy. That will negatively impinge the preservation goal of the acquisition, as mentioned

earlier by Stahl and Mendenhall (2005).

3.3.2 Organizational autonomy need

The paradox of interdependence versus autonomy of the target is specifically present

with capabilities that are tacit and person specific. Thus, “dealing with the perceived need for

autonomy after an acquisition is one of the most important challenges a manager will face”.

(Haspeslagh & Jemison, 1991, p. 143) It is one thing to promise an entrepreneurial

atmosphere in which R&D employees can keep their independence, but maintaining this

agreement and trying to transfer capabilities will not prove to be easy. Lastly, Stahl and

Mendenhall (2005) attribute that autonomy might form a lesser obstacle with the existence of

a ‘culture fit’ - a high degree of shared values and beliefs.


3.3.3 Types of integration approaches

Along the two axis of interdependence versus autonomy, Haspeslagh and Jemison

(1991) formed a framework consisting of four acquisition approaches: 1) holding, 2)

absorption, 3) preservation, and 4) symbiosis (as shown in figure 3.2 below).

Need for Strategic Interdependence

Low High

Preservation Symbiosis

High

Need for

Organizational

Autonomy

[ Holding ] Absorption

Low

Figure 3.2: ‘Types of Acquisition Integration Approaches’ (Haspeslagh & Jemison, 1991)

A holding merely captures the value and will not be considered as a strategic

capabilities transfer process, as discussed in chapter two. The absorption approach is

applied when high interdependence is demanded, with no need for autonomy of the target.

This constitutes a full consolidation of the two companies with a focus on resource sharing,

instead of the for knowledge interesting functional skill transfer.

Preservation and symbiosis have a high need for autonomy, overlapping with the

tacit, person specific, technology-driven focus adapted in this thesis. The preservation

approach, earlier stressed by Stahl and Mendenhall (2005) does not ask for high

interdependencies, but wants to keep the source of the knowledge capabilities intact.

Haspeslagh and Jemison (1991) describe it as ‘nurturing’ the target until the actual learning

can take place. Thus, it can be seen as a learning experiment, for instance used within

domain exploring acquisitions that hope to gain new segments of knowledge capabilities.

Symbiosis requires both a high interdependence and high need for autonomy, and

therefore constitutes the biggest managerial challenge. In this approach the knowledge

capability is primarily used to deepen or strengthen the domain and it requires a full

integration of the knowledge. Following Haspeslagh and Jemison (1991) it calls for an initial

coexistence, which gradually has to dissolve its boundaries and form one organization. A

careful balance between preserving and dissolving boundaries has to be managed, with the

process factors mentioned – interactions, atmosphere, determinism, value destruction, and

leadership vacuum - likely to play an important role.


4. Conclusion, limitations, and recommendations

4.1 Conclusion

The capabilities-based approach used in this thesis demands firms to constantly

renew their strategic capabilities in order to maintain a sustainable competitive advantage.

Besides internal development, renewing can be accomplished externally through

acquisitions. The viability of acquisitions is judged before the transaction takes place, mainly

by assessing a strategic and organizational fit. These will give a proxy for the synergy

potential when combining the two firms, but is a mere prediction and no guarantee. The

subsequent goal of the post-merger integration process in mergers and acquisitions is

unlocking these potential synergies to establish the value creation. This can be done by fully

transferring the strategic capabilities between the involved firms.

Technology-driven M&A are based on intentions to gather knowledge and

technological know-how from the target firm. Unfortunately, these strategic capabilities often

reside in the minds of the employees and are therefore person-specific. Value is created by

transferring this tacit knowledge, which can be done through functional skill transfer. It is

important that knowledge is preserved, transferred, and eventually applied, which is hard

given the covert nature of tacit knowledge.

Interactions, that should facilitate the transfer, can be supported by managerial

actions. Shaping a positive atmosphere is a necessity to optimize the functional skill transfer.

Yet, prohibiting determinism, value destruction, and a leadership vacuum are also important

tasks when managing a post-acquisition process.

In general, the needs for the integration of an acquisition vary for each combination,

but two main concepts give a guideline for the management approach. Integration processes

are dependent of the need for strategic interdependence and the need for autonomy. For our

technology-driven focus it can be concluded that a high need for autonomy is required, since

the strategic capability that needs to be transferred consists of person-specific tacit

knowledge. If the need for autonomy is not respected, there is a great chance that the

personnel that is carrying this knowledge walks away from the newly formed combination,

diminishing the creation of value.

Then the need for interdependence determines which managerial approach should be

undertaken in the functional skill transfer, either a preservation approach when the

interdependence need is low as seen with domain exploring acquisitions, or a symbiosis

approach when the need for interdependence in high as with domain strengthening

acquisitions. The latter will require the most intensive monitoring and usage of all

manageable factors mentioned in this thesis, to correctly integrate, transfer and unlock the

value, of the technology acquisition.


4.2 Limitations

Given the technology-driven focus of this thesis, a rather confined part of the

integration phase is investigated. Because the transfer of tacit knowledge is an important

aspect in technology acquisitions, most findings are only based on what drives the transfer of

functional skills – which transmits the knowledge capabilities. Therefore managerial actions

improving the other sources of capability transfer are not revealed in this thesis.

Subsequently, the process perspective advocated by Haspeslagh and Jemison

(1991) is used to explain the managerial actions that can be undertaken in managing a

technological post-merger integration process. As a result, a global outlook on the factors

influencing the integration process is given, without thoroughly getting to the root of the

specific organizational causes. The thesis gives a quick glance at the overall situation,

including the foremost interactions and factors, but does not explain every detail.

In addition, relying on the Haspeslagh and Jemison (1991) framework limited the

extent in which views of other scholars could be incorporated in the thesis. This could imply

that valuable insights are not included in this thesis.

Finally, in this thesis the outcome of the technology integration is related to

performance in general terms. Because successful technology-driven acquisition integration

is likely to spur R&D intensity and patent outputs, a link could be established with the

technical performance of firms. Yet, a lot of the literature in that field is based on case

studies, and no extensive, longitudinal studies were found.

4.3 Recommendations

A clearer relationship between technology-driven intentions and eventual

technological performance is still open for research. General frameworks are present to

understand the factors influencing the integration process, but specific literature linking

intentions to actions, and subsequently technological performance, remains scarce, or at

least scattered. Several case studies into sub domains exist, but a comprehensive study

relating these individual studies for a universal application was not found.

Also the terminology concerning technology was open for interpretation and therefore

vague. The different scholars use broad and different definitions, which do not give a solid

basis to go into detail. Again, a complete and universally applicable study might give way for

better understanding the processes playing a role in the success or failure of technology-

driven post-merger integration.


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