Advances in Mergers and Acquisitions, Volume 7 (Studies in Mergers and Acquisitions)

ADVANCES IN MERGERS AND ACQUISITIONS Series Editors: Cary L. Cooper and Sydney Finkelstein Recent Volumes: Volume 1–2: E...

Author: Cary L. Cooper | Sydney Finklestein

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ADVANCES IN MERGERS AND ACQUISITIONS Series Editors: Cary L. Cooper and Sydney Finkelstein Recent Volumes: Volume 1–2: Edited By Cary L. Cooper and Alan Gregory Volume 3–6: Edited By Cary L. Cooper and Sydney Finkelstein

ADVANCES IN MERGERS AND ACQUISITIONS VOLUME 7

ADVANCES IN MERGERS AND ACQUISITIONS EDITED BY

CARY L. COOPER Lancaster University, UK

SYDNEY FINKELSTEIN Tuck School of Business, Dartmouth College, USA

United Kingdom – North America – Japan India – Malaysia – China

JAI Press is an imprint of Emerald Group Publishing Limited Howard House, Wagon Lane, Bingley BD16 1WA, UK First edition 2008 Copyright r 2008 Emerald Group Publishing Limited Reprints and permission service Contact: [email protected] No part of this book may be reproduced, stored in a retrieval system, transmitted in any form or by any means electronic, mechanical, photocopying, recording or otherwise without either the prior written permission of the publisher or a licence permitting restricted copying issued in the UK by The Copyright Licensing Agency and in the USA by The Copyright Clearance Center. No responsibility is accepted for the accuracy of information contained in the text, illustrations or advertisements. The opinions expressed in these chapters are not necessarily those of the Editor or the publisher. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library ISBN: 978-1-84855-100-8 ISSN: 1479-361X (Series)

Awarded in recognition of Emerald’s production department’s adherence to quality systems and processes when preparing scholarly journals for print

LIST OF CONTRIBUTORS Giovanni Battista Dagnino

School of Economics and Business, University of Catania, Catania, Italy

Cary L. Cooper

Lancaster University Management School, Lancaster University, England

Iain L. Densten

Lancaster University Management School, Lancaster University, Lancaster, UK

Israel Drori

School of Business Administration, College of Management, Rishon Letzion, Israel

Sydney Finkelstein

Tuck School of Business at Dartmouth, NH, USA

Vincenzo Pisano

School of Economics and Business, University of Catania, Catania, Italy

John E. Prescott

University of Pittsburgh, Katz Graduate School of Business, PA, USA

Vladimir Pucik

IMD, Lausanne, Switzerland

Weilei (Stone) Shi

City University of New York – Baruch College, Zicklin School of Business, NY, USA

M. V. Shyam Kumar

The Lally School of Management & Technology, Rensselaer Polytechnic Institute, NY, USA

Yaakov Weber

School of Business Administration, College of Management, Rishon Letzion, Israel

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INTRODUCTION Sydney Finkelstein and Cary L. Cooper Volume 7 of Advances in Mergers and Acquisitions brings together a terriﬁc set of articles on a broad spectrum of issues related to M&As. This year, the two papers that are most strategic in outlook both touch on alliances as a part of corporate strategy. In the ﬁrst, by Prescott and Shi, they explicitly take a temporal lens to M&A in what may be the early stages of an important research stream within the wider ﬁeld. A temporal perspective focuses on when and under what conditions ﬁrms should seek different types of growth, and the pattern of these strategic actions over time. The idea that patterns are important to understanding strategy is implicit in the most fundamental conceptualizations of the ﬁeld – Mintzberg’s view of strategy as a stream of decisions – yet it is seldom taken much further in other work. Prescott and Shi take up this challenge and identify seven different ‘‘sequence types.’’ Each of these types has a different ‘‘rhythm’’ and each presents different strategic challenges and requirements. This work is very exciting as it offers an opportunity to understand in a more dynamic framework the process of engaging in M&As, a topic that is likely to generate considerably more work to come. The second paper in the volume focuses more precisely on joint ventures. Kumar asks whether JVs are value creating, and adopts a ‘‘dyad’’ framework that elevates the two partnering ﬁrms to the relevant unit of analysis, and not just the ‘‘parent ﬁrm.’’ This article is clearly framed in the capabilities space (also see below Dagnino and Pisano for their use of capabilities as an organizing framework in a very different study). Kumar’s work also uses quantitative empirical methods to ﬁnd both the sources of

Advances in Mergers and Acquisitions, Volume 7, 1–3 Copyright r 2008 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1479-361X/doi:10.1016/S1479-361X(08)07001-4

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value creation and value destruction in joint ventures. Of particular note is Kumar’s ﬁnding that value creation decreases when there are big differences in the value of the resources each of the parents brings to the partnership. While there are strategic reasons why this is so, there may also be implications of this ﬁnding for integration and culture issues, which brings us to the next set of articles in this volume. In fact, a natural follow-up to a focus on strategy is to consider just how integration happens. In many acquisitions, the buyer designates a person (or small group of people) to take the lead in integrating the target. While this sounds sensible, much is not well understood about such roles. Acquisition champions are really change agents, with a critical goal of effectively leading the integration process. Dagnino and Pisano take on this issue in an important conceptual and practical analysis that will be of interest to both scholars and managers. These authors highlight ﬁve ‘‘distinctive features’’ of acquisition champions that build on a capabilities logic, yet they also do not underestimate the relevance of personality and power considerations. Of particular note is their attention to gaining commitment, building relationships across boundaries, and communication capabilities. This is an article that will be of interest to a wide audience because of its thoughtful, and practical, treatment of a key aspect of M&A integration. The following paper, by Pucik, looks at mergers and acquisitions in Japanese companies, a novel setting that adds greatly to our understanding of integration challenges. Pucik studied three types of Japanese acquisitions – turnaround M&As of Japanese ﬁrms by Japanese acquirers, ‘‘global leverage’’ deals whereby a foreign buyer uses M&A to gain a Japanese platform for growth, and consolidation acquisitions typically of Japanese ﬁrms by Japanese ﬁrms. Using a multiple case study design, Pucik relies on rich qualitative data to generate insights on speed of acquisitions, efﬁciency gains in Japanese deals, the role of diversity, and perhaps most importantly, the importance of credible leadership to drive change post-acquisition. While it is now well known that many acquisitions fail, and that the integration process bears signiﬁcant responsibility for such poor results, considerable research has tended to focus on cultural issues as the real source of the problem. In truth, culture is a critical component. After all, any two companies differ on so many dimensions, many of which are inﬂuenced by the underlying culture in place. For example, corporate strategy is heavily inﬂuenced by the culture and history of a ﬁrm, and while strategy may certainly have economic roots, our understanding would be incomplete without consideration of how a ﬁrm gets to be the ﬁrm that it is.

Introduction

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The challenge, then, is for scholars to analyze cultural issues in ways that move us forward, and beyond earlier work. In this volume of Advances in Mergers and Acquisitions, there are two such articles that meet the challenge. In the ﬁrst, Densten focuses speciﬁcally on climate, a construct that brings attention to organizational practices and activities that provide a context for individual action. Climate, in this view, is closely related to mergers and acquisitions, not only for the effects of climate on integration, but also for how M&As change the climate in an organization. The endogeneity of M&As to climate is a good reminder that the relationship is not only unidirectional, as is usually described. More importantly, Densten uses these insights to develop a set of propositions that enhance understanding of leader roles during M&A, as well as how such leader activities also inﬂuence climate during integration. These leader roles are closely tied to other aspects of knowledge management, creating a nice model of change after a deal is done. The ﬁnal article in this volume picks up on the theme of integration in a novel way. Weber and Drori make several important points. First, they bring the individual back into the analysis of cultural differences during post-merger integration. Second, they consider both national and corporate culture clashes as relevant sources of inefﬁciency in acquisition integration. And third, they build on theory in organizational behavior on the psychological contract to help explain why some culture clashes are more severe than others. The psychological contract affects the expectations of individuals going into a merger, consequentially affecting important outcomes like turnover and performance. This is in some ways the archetypical Advances in Mergers and Acquisitions article – multiple conceptual lenses brought to bear on M&As in a novel way. In sum, once again, this volume of Advances in Mergers and Acquisitions has brought together an exciting and eclectic range of work that offers new insight for scholars and potential areas of focus for practitioners. We are delighted to have these terriﬁc contributions from such a diverse set of authors brought together in this volume.

A TEMPORAL PERSPECTIVE OF CORPORATE M&A AND ALLIANCE PORTFOLIOS John E. Prescott and Weilei (Stone) Shi ABSTRACT How and whether the rhythm, synchronization and sequence of ﬁrms’ M&A and alliance activity over time impact ﬁrm performance is our core question. We seek to advance a temporal lens in the M&A and alliance discourse by explicitly incorporating time-associated theories, constructs and methods. A temporal view of M&A and alliance activity requires strategists to study fundamental questions related to when and under what conditions ﬁrms should accelerate, slow down and coordinate their M&A and alliance initiatives, whether ﬁrms’ trajectory of M&A and alliance have discernible and distinctive patterns over time, and whether these initiatives demonstrate a temporal pattern that becomes an integrated part within ﬁrms’ M&A and alliance routines that create a time-based source of competitive advantage. Using a sample of 57 small to mediumsize ﬁrms in the global specialized pharmaceutical industry and their M&A and alliance activities for 19 years we ﬁnd support for our temporal-based hypotheses.

Advances in Mergers and Acquisitions, Volume 7, 5–27 Copyright r 2008 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1479-361X/doi:10.1016/S1479-361X(08)07002-6

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INTRODUCTION How and whether the rhythm, synchronization and sequence of ﬁrms’ M&A and alliance activity over time impact ﬁrm performance is the core question of our on-going research agenda. Our objective is to advance a temporal lens (Ancona, Goodman, Lawrence, & Tushman, 2001) in the M&A and alliance discourse by explicitly incorporating time-associated theories, constructs and methods. A temporal view of M&A and alliance activity focuses our attention towards questions related to when and under what conditions ﬁrms should accelerate, slow down and coordinate their M&A and alliance initiatives, whether ﬁrms’ trajectory of M&A and alliance initiatives have discernable and distinctive patterns over time, and whether these initiatives demonstrate a temporal pattern that becomes an integrated part of ﬁrms’ M&A and alliance routines that create a time-based source of competitive advantage. While there are a variety of temporal theories constructs and approaches, we focus on rhythm, synchronization and sequence because they directly address the above-mentioned time-based questions that are central to the M&A and alliance literature. We deﬁne rhythm as the pattern of variability in the intensity and frequency of M&A and alliance activity (McGrath & Kelly, 1986; Vermeulen & Barkema, 2002). Synchronization or mutual entrainment is the adjustment of one activity to match with that of another (Ancona & Chong, 1996). We explore both internal synchronization of M&A and alliance initiatives and the external synchronization of these strategic initiatives with competitors. The sequence of a ﬁrm’s M&A and alliance activity is the trajectory of the incidence of these activities over a speciﬁc period of time, their timing and duration and the transition between the two activities. In this chapter, we ﬁrst articulate the value of adopting a temporal perspective in the M&A and alliance dialog. Next we present in narrative form the theory, methods and results for three research projects related to our research agenda. Finally, we speculate on fruitful M&A and alliance time-based initiatives.

THE VALUE OF INCORPORATING A TEMPORAL LENS IN THE M&A AND ALLIANCE DIALOG While the M&A and alliance literatures have a rich and diverse tradition, a temporal perspective focusing on the rhythm, synchronization and sequence

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of M&A and alliance initiatives has received scant attention. At this point, you might be asking yourself questions such as whether ﬁrms consciously and deliberately develop a rhythm for their M&A initiatives or whether ﬁrms synchronize their M&A and alliance activities with competitors. As we explored these assumptions, we ran across the following quote from Mike Tomlin, Head Coach of the Pittsburgh Steelers: ‘‘We’re thoughtfully non-rhythmic’’.1 While Coach Tomlin was not referring to M&A or alliances, his quote is consistent with our perspective that managers can intentionally conceptualize and implement time-based approaches for important decisions. A temporal dimension of strategy is embedded in a wide range of phenomenon, including, but not limited to ﬁrst mover advantage (Lieberman & Montgomery, 1988), resource-based view (Dierickx & Cool, 1989), dynamic capabilities (Teece, Pisano, & Shuen, 1997), decision making under uncertainty (Eisenhardt, 1989), change management (Huy, 2001) and the real option perspective (Kogut, 1991). While these research streams have provided signiﬁcant practice and process insights, their central focus has not addressed temporal constructs such as tempo, cycles, rhythm, synchronization and sequence (with some notable excepts such as time-based competition). A fundamental underpinning of strategic management logic lies in a prevailing focus on substance, i.e. what to do, over temporality, i.e. when, how fast, how often and how frequently to do. Thus, the temporality of strategy is relegated to a peripheral role (Ancona et al., 2001) in that time-associated constructs and assumptions are not explicitly developed but implicitly assumed (Butler, 1995) and often employed as methodological proxies for other constructs of interest. For example, in the top management team literature, tenure is a methodological proxy for ﬁrm or industry knowledge, group cohesion, inertia and harmonious working relationships (Mosakowski & Earley, 2000). In the alliance literature, repeated partnering with the same ﬁrm is a proxy for trust and positive working relationships (Gulati, 1995). There are some important exceptions with respect to our focus in the M&A and alliance streams, for example, questions related to accelerating or slowing down post-acquisition integration (Homburg & Bucerius, 2006), preemptive acquisition (Carow, Heron, & Saxton, 2004), M&A and alliance experience relationship with performance (Haleblian & Finkelstein, 1999) and M&A and alliances as learning tools and races (Hamel, 1991). While these different thrusts offer unique contributions for enhancing our temporal understanding of M&A and alliance initiatives, two important temporal issues remain under-developed. First, their focus typically centers

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on a single M&A or alliance and therefore does not incorporate the nature of multiple strategic initiatives and their interplay. In other words, they are not approached from a portfolio perspective (Hoffmann, 2007). Second, those scholars that have recognized the interdependent nature among multiple M&A and alliances (Haleblian & Finkelstein, 1999) have not addressed their periodicity and the fact that multiple initiatives can occur synchronously at the same level of analysis (e.g. ﬁrm) or across levels of analysis (ﬁrms and their competitive environment). In other words, M&A and alliance initiatives can demonstrate a discernable pattern in the timing of their occurrences conditioned by internal or external pacers. Thus, a temporal lens of M&As and alliances calls for theoretical development and empirical examination of temporal constructs. From our perspective, a temporal lens of M&As and alliance portfolio development can contribute to the enrichment of our understanding of these strategic initiatives in at least four ways. First, studying temporal constructs such as rhythm, synchronization and sequence addresses the fundamental concerns of strategy, i.e. how ﬁrms behave and why ﬁrms differ (Rumelt, Schendel, & Teece, 1994). In particular, a temporal view that emphasizes the role of rhythm, synchronization and sequence suggests a past–present–future link (when to do) and is in line with the conceptualization of strategy as emergent, dynamic, logically incremental, path dependent and patterns of interaction (Mintzberg, 1990; Ofori-Dankwa & Julian, 2001). Second, temporal constructs such as internal and external synchronization of M&As and alliance initiatives help us to better understand and model them as multi-level phenomenon which is consistently called for in strategy research (Pettigrew, 1992). Theoretical approaches such as the entrainment model (which is the core theory behind the concept of rhythm) provide a theoretical explanation for why ﬁrms coordinate rhythmic M&A and alliance processes within the boundaries of their ﬁrms as well as their interactions with their environment. As such, the entrainment model among others (Ancona & Chong, 1996) serves as theoretical foundation for studying multiple activities, multi-level phenomena and their interactions across time. Viewing M&As and alliances from multiple activities and multi-level phenomena is important since they can be viewed as two separate activities that have different momentums, rhythms and trajectories. Alternatively, viewing M&As and alliances as internally (within ﬁrm) embedded is consistent with the call for an explicit understanding of

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multiple activities at the same level of analysis. Alignment and coordination between activities, as Powell (1992) concluded, can become a competitive advantage. Third, a temporal view that focuses on theoretical concepts such as rhythm, synchronization and sequence of M&As and alliances complements the opportunity-driven perspective. In this regard, a temporal strategy is particularly important for small- and medium-sized ﬁrms since they typically have limited capabilities across their industry value chain and have not developed specialized corporate development ofﬁces. As we noted above, a rhythm-driven approach is based on an assumption that managers purposely plan and implement M&A and alliance activities. In large corporations, corporate development ofﬁces staffed with analysts often assume this role (Kale, Dyer, & Singh, 2002). In the context of small- and medium-sized ﬁrms, corporate development ofﬁces are not common or economically feasible, yet these ﬁrms often undertake multiple M&A and alliance initiatives. We propose that small- and medium-sized ﬁrms are likely to adopt a rhythm-driven M&A and alliance (and more generally a temporal) approach under two interrelated circumstances. For ﬁrms whose growth strategies are mostly driven by M&A and alliance initiatives, one would expect to see a rhythm-driven approach. In addition, ﬁrms who lack capabilities or resources for internally generated growth will adopt a rhythm-based approach to M&A and alliances. Either as a conscious choice or due to limited resources, many small- and mediumsized ﬁrms that lack capabilities to internally develop new products will proactively search for targets and allying partners rather than passively wait for M&A and allying opportunities to emerge. Later in this chapter, we share interesting ﬁnding regarding our rhythm example in the context of small- and medium-sized global specialty pharmaceutical ﬁrms. Lastly, a temporal perspective of M&A and alliances provides a fresh view for the static vs. dynamic strategic ﬁt debate (Zajac, Kraatz, & Bresser, 2000). For instance, the theoretical approach underlying our rhythm and synchronization studies asserts that M&A and alliance activities are embedded and interdependent, and that a ﬁt should be achieved by matching M&A and alliance activities across time. This serves two purposes in clarifying the ﬁt debate. On the one hand, incorporating time constructs explicitly (rather than as methodological proxies) helps to explain the dynamics of why and how outcomes are differentially shaped by multiple on-going activities. Second, we argue that ﬁt has an inherent temporal

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characteristic that inﬂuences and is inﬂuenced by multiple activities within and external to ﬁrms.

M&A AND ALLIANCE RESEARCH: A TEMPORAL LENS RESEARCH AGENDA While there are several temporal constructs, the selection of rhythm, synchronization and sequence builds on and complements the extant literature in several ways. First, the prevalence of active acquirers (Laamanen & Keil, 2008) and alliance portfolios (Lavie, 2007) indicates that companies, rather than executing isolated deals or alliances, often execute a serial of mutually interrelated acquisitions or alliances over time. Paradoxically, prevailing research centers on individual acquisition or alliance. There are few theoretical lenses that can accommodate multiple or a series of acquisitions and/or alliances. A temporal lens that focuses on rhythm, synchronization and sequence has the potential to offer a systematic theoretic foundation that directs our empirical examination. For instance, when ﬁrms engage in more than one acquisition, both its short- and long-term performances are not longer driven by an individual acquisition or alliance, but rather by the overall pattern and structure of the strategic portfolio over time (Koka & Prescott, 2002). Temporal constructs such as sequence provide a sociological foundation for why ﬁrms’ strategic initiatives do not occur in inﬁnite combinations but rather in a limited set of types or what is often referred as typologies or taxonomies. Typologies such as Miles and Snow (1978) have played an important role in the strategy ﬁeld and a temporal-based typology of M&A and alliance initiatives would be a valuable contribution to the ﬁeld. Second, our three constructs have been studied extensively in other ﬁelds such as sociology and organization behaviors, but have only recently attracted the interest of strategy scholars (Laamanen & Keil, 2008; Vermeulen & Barkema, 2002). Third, the constructs demonstrate one way to organize ﬁrms’ M&A and alliance initiatives along a time dimension which captures their historical and holistic M&A and alliance momentum. In the next section, we provide an overview of our sample and its appropriateness for our research questions. We then develop our theoretical reasoning and empirical support for a set of hypotheses linking rhythm, synchronization and sequence to performance. We use a narrative form to present our ﬁndings. Scholarly papers are available for each of the

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studies we present below as well as one on pacing and M&A and alliance initiatives.

INDUSTRY CONTEXT AND SAMPLE CHARACTERISTICS We used the global specialized pharmaceutical industry as the context to examine our temporal-based hypotheses. Our sample consisted of 57 small to medium-size ﬁrms (SME’s) and their M&A and alliance activities for 19 years beginning in 1985 and ending in 2003. We carefully selected our sample ﬁrms applying the following procedure. First, we identiﬁed ﬁrms that have value chain activities in the pharmaceutical industry (SIC 2834). We also identiﬁed key words such as special drug and specialty pharmacy, and searched company websites, annual reports and major industry journals for potential ﬁrms to include in our sample. We then narrowed the sample to ﬁrms that were listed on either the NYSE or NASDAQ because we explore performance implications. Finally, we had two pharmaceutical industry experts provide an assessment of our sample as a validity check. The global specialized pharmaceutical industry provides an excellent context for us to study ﬁrms’ M&A and alliance temporal behavior. Smalland medium-sized specialized pharmaceutical ﬁrms’ growth strategies are largely driven by M&A and alliances activities. As we mentioned above, ﬁrms utilizing M&A and alliance growth-driven strategies provide an ideal context to study temporal constructs such as rhythm, synchronization and sequence. Specialty pharmaceutical ﬁrms often do not possess the requisite complementary skill sets and knowledge for in-house development activities; they instead rely on partner ﬁrms for important resources. The lack of internal capabilities to develop therapeutic products suggests that these ﬁrms are more likely to search for targets or partners proactively. Their overall M&A and alliance initiatives are less likely to be driven opportunistically. In addition, small, young and specialized ﬁrms are regarded as a driving force for industrial renewal and innovation (Audretsch, 1995). Their survival environment is extremely dynamic and competitive advantage often accrues to those ﬁrms that can manage the temporality of their collaborative activities (Barkema, Baum, & Mannix, 2002). Finally, most of our SME’s were established around the mid-1980s, when the Securities Data Corporation (SDC) began to collect complete alliance and M&A data. This allowed us to collect a fairly complete history of ﬁrms’ M&A and alliance behaviors which is critical to understand ﬁrms’ temporal patterns over time.

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We obtained M&A and alliance data from SDC Platinum and veriﬁed them through company 10k reports, ﬁrm websites and interviews with industry experts. Firm level and performance data were collected from COMPUSTAT industry annual database and from interviews with industry experts. To measure and test the rhythm and synchronization of ﬁrms’ M&A and alliances, we employ Kurtosis measure as well as other variability measure. We test our hypothesis of rhythm using econometric models that deal with both autocorrelation and heteroskedasticity. We test our synchronization (ﬁt) hypothesis using traditional difference score analysis and cross-level polynomial regression (combined with hierarchical linear modeling) for internal synchronization and external synchronization, respectively. To empirically identify the sequence pattern of ﬁrms’ M&A and alliances behaviors, we transformed the raw data into sequence format, which provide sufﬁcient information on transitions and trajectories over ﬁrms’ historical courses on the number of M&As and alliances conducted each year, their timing and transitions between the dominant forms of strategy (M&As or alliances).

RHYTHM AND SYNCHRONIZATION IN M&A AND ALLIANCE PORTFOLIOS Rhythm is deﬁned as the pattern of variability in the intensity and frequency of organizational activities (McGrath & Kelly, 1986; Vermeulen & Barkema, 2002) and synchronization or mutual entrainment is deﬁned as the adjustment of one activity to match with that of another (Ancona & Chong, 1996). These temporal concepts are largely borrowed from the entrainment model in biologic sciences, in which the notion of entrainment refers to one cyclic process being captured by, and setting to oscillate in rhythm with, another process. McGrath and Kelly (1986) were among the ﬁrst to introduce the entrainment model in the social sciences. The social entrainment model speciﬁes that psychological and behavioral cycles can become entrained to other social or environmental processes. For example, in universities, the academic calendar and faculty teaching/meetings are entrained. As McGrath and Kelly (1986, p. 80) stated, ‘‘the social entrainment model provides a coherent framework for describing the operation of rhythmic process, their coupling to or synchronization with one another and potentially to outsider cues’’. For the social entrainment model employed here, we deﬁne the three temporal constructs in the

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following way: rhythm is the pattern of variability in the intensity and frequency of M&A and alliance initiatives, internal synchronization is the rhythm synchronization between alliances and M&As within ﬁrms, and external synchronization is the rhythm synchronization between M&A and alliance activities of focal ﬁrms and their competitors. In the M&A and alliance context, rhythm emphasizes the recurring nature of a frequency pattern, i.e. the pattern of variability in the frequency of M&A and alliance initiatives. To this end, our major focus in discussing the rhythm of M&A and alliance initiatives is the variability, consistence and regularity of the pattern across a speciﬁed time period. In biology, although there is no rigorous physicochemical explanation for rhythm, two conjectures of rhythmic activity have emerged (Oatley & Goodwin, 1971) and we will draw on them for our synchronization argument. The intrinsic (internal) view (cellular biochemical clock hypothesis) suggests that it is an essential dynamic feature of the observed process. The fundamental periodicities in living systems are the cycle of growth and division in cells, which need bear no relation to any environmental periodicity. The extrinsic perspective (hypothesis of environmental timing of the clock), on the other hand, maintains that such rhythms represent adaptive responses to a periodic environment such as solar, lunar and annual rhythms. Biologic scholars tend to agree that complicated periodic organisms can be understood as partly adaptive and partly of internal origin. The origins of rhythm in corporate strategic actions can be understood in a similar way since the physiological processes of biologic organisms can be applied reasonably well to psychological processes of individual decision makers or to social–psychological mechanisms at the interacting dyads, groups or even larger organized social units (McGrath & Kelly, 1986). Internally, a rhythmic M&A or alliance pattern can be formed through multiple means over time. It can be inﬂuenced and shaped consciously by a top management team whose members have some sort of rhythmic orientation intended to achieve economic efﬁciency. Individuals who are more rhythmic will be more likely to reﬂect such a mindset in their actions. For example, major PC manufacturers release upgraded products at Christmas time each year in order to take advantage of newly released versions of software (i.e. Microsoft: games) or hardware (i.e. Intel: memory chips). Events such as annual strategic planning create ‘‘repetitive momentum’’ providing a time-based routine for managers to reconsider or revise their M&A or alliance behaviors. In the case of small- to mediumsized specialized pharmaceutical ﬁrms in our empirical context, M&A and alliance activity is largely driven by sales gaps.2 As a result, the overall level

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of M&A and alliance is not stable over time, with periods of sped-up activity and slowed-down activity that is consciously driven. From an external perspective, rhythmic M&A and alliance behaviors may be captured or entrained by external cyclic phenomena often reﬂected in isomorphic (mimicking) behavior. For instance, Jansen and Kristof-Brown (2005) reported that an individual’s work rhythm matches their working environment’s rhythm. Souza, Bayus, and Wagner (2004) found that the optimal rhythm of new product introduction is primarily driven by external industry conditions. M&A and alliance initiatives can also be captured by external competitive dynamics such as competitor initiatives or regulatory change (Brown & Eisenhardt, 1997). Building on the internal and external drivers of rhythm, the main feature of rhythmic behavior is revealed in stability properties as opposed to duration, magnitude and frequency. The degree of stability or regularity differs across organizations. This can be understood in two extreme examples consistent with the resource-based view that resources and capabilities are distributed heterogeneously among ﬁrms (Barney, 1991). On one hand, ﬁrms may conduct M&As or alliances without deliberate planning, plotting along the temporal dimension and thus demonstrating a purely random or stochastic process. On the other hand, ﬁrms may perceive time as a variable that can be purposely designed and effectively managed, making M&A and alliance activity a temporal regularity within which the pattern persists over time. In other words, ﬁrms differ in their capability to design their corporate strategy with respect to time. Clearly, most ﬁrms will not fall at the extremes of pure random or pure regularity. The differentiated rhythmic pattern among ﬁrms reﬂects the underlying combination of ﬁrms’ distinctive capabilities including, but not limited to, top management team, strategic planning, environmental scanning systems, history and managerial intent. Like the concept of rhythm, the notion of synchronization is largely derived from biologic science. The intrinsic and extrinsic views of rhythm suggested that synchronization can occur both internally and externally. Within an organization, multiple processes are entrained with each other (i.e. synchronized) through conscious decision processes, coordination, repetitive momentum and isomorphic mechanisms (McGrath & Kelly, 1986). Social behavior can be entrained/synchronized to powerful external pacer event or cycles. However, external pacer events or cycles should be understood from an ontological assumption of co-evolution rather than an assumption of independence of the ﬁrm and its environment

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(Volberda & Lewin, 2003). We cannot understand these external zeitgebers by separating them on their own since these exogenous forces are often endogenized over time.

PERFORMANCE IMPLICATION OF RHYTHM Rhythm can affect performance through its impact on the ability to coordinate internal events (Goodwin, 1970) or increase the predictability and hence the control of human behaviors. Essentially, rhythm creates a dominant temporal order and reﬂects ‘‘the underlying dynamic equilibrium processes by which the many aspects of complex social systems’’ (McGrath & Kelly, 1986, p. 89) or a series of repeated activities are coordinated. We argue that neither regular/consistent nor irregular/random patterns of M&A and alliance activity will inﬂuence performance positively. An effective rhythmic pattern requires organizations to alternate between regularity and irregularity. This suggests that organizations can experience a regular rhythm for a period of time and then adjust their learning speed thereafter. This can be understood from three interrelated theoretical mechanisms. From learning mechanism point of view, regularity can allow companies to absorb knowledge in a habitual temporal order and over time can facilitate the formation of a routine that is an essential element to managing uncertainty. However, regularity seldom allows companies to modify or revise their existing rhythm strategy and is prone to generate inertia (Carroll & Hannan, 1990). Minor adjustments can serve as a benchmark against which an existing rhythm can be compared, revised and modiﬁed. A second mechanism is based in a resource availability perspective. A consistent rhythm allows companies to coordinate resource allocation processes in line with M&A and alliance activities. It also makes the resource allocation process more predictable and hence alleviates pressure from unexpected capital investment needs. However, a regular path reduces the diversity of absorptive capability. Regular repetition of similar activities with a ﬁxed variation implies a logic of linearity (Geibler, 2002) and continuity, neither of which is essential building block for creativity. Creative resource allocation processes require freedom, ﬂexibility and diverse forms of absorptive capability Lastly, unlike many internal initiatives which can be shielded from competitors’ attention, M&A and alliances are corporate actions easily caught by competitors’ radars. M&A and alliances can be interpreted by

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JOHN E. PRESCOTT AND WEILEI (STONE) SHI

competitors as a preemptive strategy to occupy a market or to acquire valuable resources. From an action and reaction or competition mechanism point of view (Grimm & Smith, 1997), a regular pattern of M&A and alliances reduces within-ﬁrm variability (unpredictability) and hence the complexity of a ﬁrm’s sequence of competitive actions over time. In contrast, regular patterns coupled or alternated with adjustment and modiﬁcation can increase the possibility of surprise actions, therefore limiting a competitor’s ability to map action and reaction cycles in an accurate or predictable way. Simply put, semi-predictability (or inverted U relationship) generates the highest level of performance. In our empirical investigation, we ﬁnd an inverted U-shape relationship between the combined rhythm of M&A and alliance initiatives and performance as measured by ﬁrm’s Tobin’s Q, i.e. a rhythmic pattern that is characterized by a mixture of regularity and irregularity achieves the highest level of performance. Interestingly, we also ﬁnd that the curvilinear relationship between rhythm and performance is largely driven by M&As rather than alliances when we de-couple the two types of initiatives.

PERFORMANCE IMPLICATION OF INTERNAL AND EXTERNAL RHYTHM SYNCHRONIZATION While internal rhythm synchronization helps to coordinate internal events (Goodwin, 1970), external rhythm synchronization can create a coordination interface between focal ﬁrms and their environment. Such congruence is more likely to be ‘‘satisfying’’ to ﬁrms since it creates order and coordinated interaction patterns out of chaos. These effects are transformed into a sense of control with respect to the external environment. Therefore, external synchronous rhythm reduces uncertainty and increases predictability. Rhythm compatibility between ﬁrms and the external environment also validates behaviors in a mutually reinforcing manner through which ﬁrms feel comfortable due to a ‘‘social norms’’ mechanism (Jansen & Kristof-Brown, 2005). In particular, the alignment of a ﬁrm’s rhythms of M&As and alliances with competitors can inﬂuence performance through its impact on the perception of other stakeholders. While external rhythm compatibility allows ﬁrms to better control their environment and increases the accuracy of predicting the future, internal rhythm synchronization can achieve a similar goal, i.e. more control over

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and predictability of the internal environment. These can be achieved in at least two ways in the cases of M&A and alliance initiatives. First, when M&As and alliance initiatives proceed simultaneously within a ﬁrm, it can establish a minimum levels of overlap between each activity. Such an overlap establishes a foundation for a knowledge-sharing mechanism between M&As and alliances. For instance, knowledge acquired from experiential learning in M&As can be shared and utilized in experiential learning of alliances if the underlying knowledge structure (such as target/ partner selection) of M&As and alliances is similar. Second, synchronization of multiple activities can strengthen their cumulative effect. It creates a heightened sense of beginning or of ending for organization members. We suggest that such a heightened sense of time can create an institutionalized temporal map mechanism for members to adhere to and coordinate with. Internal rhythm compatibility smoothes the resource allocation process through deploying resources to the ‘‘right activities at the right time’’. In our empirical testing, we ﬁnd support for our internal synchronization hypothesis, i.e. when ﬁrms synchronize their acquisition and alliance activities, their performance is enhanced. However, as for external synchronization, we only ﬁnd performance improvements for external synchronization of alliance but not for acquisitions.

SEQUENCE IN M&A AND ALLIANCE RESEARCH Sequence is conceptualized as an ordered list of elements (Abbott, 1995), and has been employed extensively by sociologists (Abbott & Hrycak, 1990; Han & Moen, 1999) and discussed widely in the social sciences including political science (Carmines & Stimson, 1986), linguistics (Gisiner & Schusterman, 1992), archeology (Tolstoy & Deboer, 1989), economics (Chand & Chhajed, 1992) and psychology (Pak & Tennyson, 1986), to name a few. The sociological conceptualization of sequence embraces several distinctive features. First, unlike economists, sociologists make no stochastic assumptions, which suggests that sequences need not be generated step by step, as depicted in the psychology and economics literature. The step by step sequence has been widely applied to study the track of occupational professionalization, the development of organizations, the life cycles of individuals or families and the unfolding of revolutions (Edwards, 1927), or any other ‘‘history’’ that can be expressed as a sequential list of events (Abbott & Hrycak, 1990, p. 145).

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JOHN E. PRESCOTT AND WEILEI (STONE) SHI

Second, the central focus of a sociological view of sequence is nearly always to ﬁsh for patterns in the sequences (Abbott, 2000) rather than to seek dependence between sequence states as adopted by many nonsociological works. For instance, sociologists are interested in identifying different trajectory patterns in individual career progression (Abbott & Hrycak, 1990; Halpin & Chan, 1998; Han & Moen, 1999), and in locating different daily routines in time-use analysis (Lesnard, 2004). Such a view explicitly acknowledges that there can be varying degrees of interdependence between various ‘‘whole’’ sequences in addition to the dependence between different states in a single sequence. In other words, sequences are often subject to inﬂuence by other sequences. In our study of sequence, the elements of a sequence are ‘‘events’’ (Abbott, 1995, p. 95), which speciﬁcally refer to M&A’s and alliances. Of particular interest are ﬁrms’ M&A and alliance histories, which provide detailed information on trajectories over a speciﬁc period of time in the incidence of M&As or alliances, their timing, duration and the transition between different dominant modes of corporate strategy (M&A and alliance). We explore the issue of sequences by asking three related questions, namely the substantive question, the pattern question, and the generation and outcome question, which are all embedded in the following three goals. The substantive question mainly deals with the rationale of adopting a temporal lens. We argue that understanding the sequence of strategic actions along ﬁrms’ trajectories or paths is a central research endeavor in the ﬁeld of strategy (Mintzberg & Waters, 1985; Van de Ven, 1992). Comparing past histories for a phenomenon to identify patterns is a very natural activity for human beings (Levinson, 1978). Our second goal deals with the search and identiﬁcation of commonality and dissimilarity among ﬁrms in terms of their sequences of M&A and alliance behaviors (the pattern question). In particular, we are interested in constructing gestalts (Miller & Friesen, 1980), or taxonomy3 of ﬁrms’ sequences under the assumption that the strategic phenomena of interest do not occur in inﬁnite combinations, at least not with equal likelihood (Hambrick, 1983, p. 214). Lastly, using multivariate analysis, we expect to ﬁnd differences across pathways or patterns of sequences in terms of ﬁrms’ resources, capabilities and performance outcomes (the generation and outcome question) although we embrace the concept of equiﬁnality. In order to explore the sequence patterns in ﬁrms’ M&A and alliance histories, we used a sequence analysis technique known as ‘‘optimal matching’’ (Abbott, 1995). The fundamental rationale underlying the use of this dynamic programming technique is to measure sequence resemblance

A Temporal Perspective of Corporate M&A and Alliance Portfolios

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when sequences consist of strings of well-deﬁned elements. It is based on an algorithm to measure the distance between each pair of sequences in terms of the insertions, deletions and substitutions required to transform one sequence into another. Essentially, the optimal matching algorithm will generate a dissimilarity matrix, indicating how distant/dissimilar each pair of sequences is. This matrix is then used as an input matrix to the network software UCINET. Hierarchical clustering is performed on this matrix to identify a set of clusters that share similar trajectory patterns. This identiﬁcation process is analogous to that of using ‘‘structural equivalence’’ (occupying similar positions in a network) to cluster actors in network analysis (Krackhardt, 1990). Put differently, two sequences are temporally equivalent or sequentially equivalent (Han & Moen, 1999) when they share similar patterns of trajectory along the time line. We discerned seven types of distinct clusters based on the clustering analysis (see Table 1). We labeled them ‘‘focused strategy periodic sequence’’ (cluster 1), ‘‘focused strategy irregular sequence’’ (cluster 2), ‘‘synchronized dual strategy periodic sequence’’ (cluster 3), ‘‘single strategy periodic sequence’’ (cluster 4), ‘‘single strategy irregular sequence’’ (cluster 5), ‘‘unitary sequence’’ (cluster 6) and ‘‘cipher sequence’’ (cluster 7). Firms in different clusters tend to develop their M&A (alliance) strategy differently. For instance, ﬁrms in cluster 2 (focused strategy irregular sequence) tend to roll out their predominant strategy in a very irregular rhythm, while, in cluster 3, ﬁrms conduct alliance and M&A activities simultaneously. Interestingly, these activities are coordinated in a synchronized fashion and are conducted in a well-developed rhythm, i.e. they develop these strategies either periodically or progressively. We also examine characteristics of ﬁrms categorized into these seven sequence types and ﬁnd some distinctive features. For instance, ﬁrms following different sequences of M&A and alliance activities differ signiﬁcantly in terms of asset, proﬁtability and market performance as showed by Tobin’s Q, while different sequence types do not differ signiﬁcantly on growth or ﬁnancial leverage. Firms following a synchronized dual strategy periodic sequence (cluster 3) have the highest level of assets, while ﬁrms without any acquisitions or alliances (cipher sequence) have the lowest level of asset. Given the nature of SME, most ﬁrms have negative proﬁtability, while only ﬁrms in focused strategy periodic sequence and synchronized dual strategy periodic sequence have positive return on asset. Our analysis also reveals that investors perceive distinctive sequence types differently. It seems that ﬁrms adopting a unitary sequence type (i.e. ﬁrms conduct either

39% 25% 21% 64% 40% 55% 19% 32% 6.712 1.697

366.46

1085.66

828.21

191.02

151.18 545.58 547.30 15.998

11.925

Asset Growth

917.82

Asset ($million)

13.571

24% 20% 13% 10.629

31%

20%

1%

2%

6%

Proﬁtability

0.378

41% 12% 26% 2.566

96%

54%

4%

2%

22%

Financial Leverage

6.572

6.35 3.06 4.10 16.881

6.03

3.38

3.45

3.80

3.56

Tobin’s Q

9.707

6.50 2.87 4.14 25.491

6.40

3.50

3.39

3.78

3.66

71% 65% 52%

86%

25%

20%

43%

0%

Tobin’s Q (3-year Stage moving average) 1

Seven Sequence Types and their Characteristics.

29% 18% 33%

0%

75%

40%

29%

100%

Stage 2

0% 18% 15%

14%

0%

40%

29%

0%

Stage 3

Cluster 1: Adopts predominantly a M&A (alliance) strategy over the alliance (M&A) strategy with a periodic rhythm. Cluster 2: Rolls out their predominant strategy in a very irregular rhythm. Cluster 3: Conducts alliance and M&A activities simultaneously and these activities are coordinated in a synchronized fashion with a well-developed rhythm. Cluster 4: Similar to cluster 1, with the exception that ﬁrms in cluster 4 adopt one type of strategy, i.e. either M&A or alliance. Cluster 5: Similar to cluster 1, with the exception that ﬁrms in cluster 5 adopt one type of strategy but in an irregular sequence. Cluster 6: Conducted either one alliance or one M&A during that time period. Cluster 7: Never conducted any M&As or alliances during the study period. po0.05; po0.01; po0.001. a Since test of homogeneity of variances was rejected, we therefore use Dunnett’s C procedure to conduce multiple comparison test.

Focused strategy periodic sequence (1) Focused strategy irregular sequence (2) Synchronized dual strategy periodic sequence (3) Single strategy periodic sequence (4) Single strategy irregular sequence (5) Unitary sequence (6) Cipher sequence (7) Total Test of homogeneity of variances F-Testa

Cluster

Table 1.

20 JOHN E. PRESCOTT AND WEILEI (STONE) SHI

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21

one alliance or one M&A during the study’s time period) receive signiﬁcant rewards from investors compared to others (as demonstrated by their Tobin’s Q). More interestingly, our study reveals that ﬁrms’ life cycle stage is a crucial factor that shapes ﬁrms’ strategic choices of certain sequences over others. Firms adopting a focused strategy periodic sequence type (cluster 1) are found only in a developmental stage. Single strategy periodic sequence (cluster 4) and unitary sequence types (cluster 6) consist exclusively of ﬁrms in either the emerging or developmental stages. In general, we observe two patterns in the data. First, on average, there seems to be distinctive M&A and alliance sequences for ﬁrms in different life cycle stages. Second, ﬁrms in both emerging and developmental stages seem to have quite diverse sequences, whereas established ﬁrms’ sequences tend to be much more normalized, and can be categorized primarily into a couple of sequence types. Given that we found that ﬁrms’ life cycle stage plays a critical role in their temporal strategy, it is important to study the contingent context under which different sequences impact performance differentially. From a theory building perspective, establishing the relationship between sequence and performance also corresponds to the notion that testing for predictive validity is often an important yet under-developed element in social science research (Dubin, 1978). Speciﬁcally, we propose that ﬁrms’ life cycle stage will moderate the relationship between sequences types and performance. We ﬁnd in our results that focused strategy periodic sequence and synchronized dual strategy periodic sequence show positive effects on performance controlling for other important factors. These results provide support for our proposition that sequence types do have an effect on performance, thus establishing predictive validity through validating the sequence variables with a particular criterion (Carimines & Zeller, 1979). However, a close examination of the contingency effect reveals a more complex picture. We ﬁnd that life cycle stage has a positive moderating effect on the relationship between synchronized dual strategy periodic sequence type and performance, indicating that ﬁrms in an established stage will have higher performance when adopting synchronized dual strategy periodic sequence type than ﬁrms following the same temporal sequence strategy in either emerging or developmental stages. We think that our tentative results demonstrate that sequence analysis has much to offer to the M&A and alliance ﬁeld and should be a priority area for future research.

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CONCLUSION AND DISCUSSION Adopting a temporal lens requires that we explicitly incorporate time theories, assumptions, constructs and methods into the phenomenon we study (e.g. M&A). One of our goals is to make a modest contribution to the M&A and alliance literature by demonstrating how a temporal lens allows us to conceptualize questions that complement and sometimes challenge conventional modes of thinking. For example, during presentations of our work, many scholars have challenged our suggestion that ﬁrms develop M&A rhythms or synchronize their M&A and alliance initiatives with competitors. Yet, unless one can demonstrate that the results are statistical artifacts, we provide evidence that some ﬁrms do use a temporal lens and there are important performance consequences to the type of rhythm, synchronization and sequence ﬁrms pursue. While we acknowledge a variety of theoretical and methodological limitations in our work, our results suggest that adopting a temporal lens is a rich and rewarding direction for M&A and alliance research. Below, we brieﬂy explore some of our contributions as well as areas for future research. In examining the rhythm, synchronization and sequence of ﬁrms’ M&A and alliance initiatives, we placed time at the center stage of our both theoretical and empirical inquiry. This is consistent with strategy researchers’ call for an examination of time as an important issue on its own right rather than as part of the general background (Albert, 1995; Ancona et al., 2001), which limits our ability to fully realize the potential of a temporal lens in strategy ﬁeld. Drawing on Mosakowski and Earley (2000), our conceptualization and methods assume the nature of time as real (has direct consequences on performance), objective, cyclical and discrete (time consists of equal and comparable units and a temporal reference point incorporating the past, present and future (Tobin’s Q)). While our approach is internally consistent, other approaches are equally viable. For example, research exploring a subjective view of time and international differences in managers’ temporal perspectives would provide valuable contributions to the M&A and alliance literature. The temporal constructs of rhythm, synchronization and sequence are characterized by complex forms of temporal repetition and as such differ signiﬁcantly from temporal concepts such as speed or duration. These complex forms of repetition create unique challenges and opportunities for understanding the dynamics of building M&A and alliance portfolios. The current emphasis on studying multiple processes and multi-level phenomena

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over time (Pettigrew, 1992; Powell, 1992; Van de Ven, 1992) requires theory and methods that accommodate complex interactions. In this respect, our research complements the focus on a single M&A or alliance in that we are interested in how and why the temporal pattern of a ﬁrm’s overall M&A and alliance history impacts its performance rather than how a single initiative impacts performance. In our theory, we described a few mechanisms which help explain our statistical ﬁndings. A fruitful area would be to identify and catalog a set of mechanisms (Hedstrom & Swedberg, 1998) that explain why and how ﬁrms develop rhythms, synchronization and sequences in their M&A and alliance initiatives. Theoretically, we suggest several theoretical lenses from other disciplines that can be leveraged to better understand M&A and alliance temporal patterns. The social entrainment model and the sociological view of sequence used in our studies have the potential to shed new light on a variety of important M&A and alliance questions. For instance, the sociological perspective provides theoretical underpins of why ﬁrms’ sequences of strategic initiatives along their trajectories or path do not occur in inﬁnite combination and therefore can be empirically identiﬁed as gestalts (Miller & Friesen, 1980). The social entrainment model also allows researchers to incorporate temporal constructs in a systematic way and explore the rationale underlying the rhythmic behaviors of companies’ strategic initiatives. Alternatively, leveraging some of our strategy theoretical frameworks such as the resource-based view, the knowledge-based ﬁrm and industrial organization economics by integrating a temporal perspective, its associated constructs and relevant research questions would be valuable. Given the limited attention to a temporal lens, our ability to conduct evidence-based research in this emerging and rewarding ﬁeld has been greatly restricted. The most exciting aspect of our core research question: ‘‘How and if the rhythm, synchronization and sequence of ﬁrms’ M&A and alliance activity over time impacts ﬁrm performance?’’, centers on the practicing manager. If our results are robust, managers have another tool, a temporal lens, as they conceptualize, build, negotiate, implement and restructure their M&A and alliance portfolios. The adoption of a temporal lens focusing on the rhythm, synchronization and sequence of M&A and alliance initiatives can help achieve corporate goals and possibly create another form of competitive advantage. Hopefully, we have stimulated some thought regarding how your ﬁrm can incorporate a temporal lens to complement your others lens.

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NOTES 1. According to Collier (2007), ‘‘His (Tomlin’s) thoughtfully non-rhythmic remark was crafted to explain that (training) camp schedule is designed to make players uncomfortable and unable to anticipate any pattern to the tasks, the better to sharpen their cognition and adaptability y’’. In our context, we extend his meaning to reﬂect a desire to be semi-predictable not only to the players but also to the other teams and coaches in the NFL. 2. We thank George Lasezkay, a former Corporate Vice President, Business Development at Allergan, for identifying this rationale during our interview. 3. The distinction between ‘‘typology’’ and ‘‘taxonomy’’ is sometimes taken as the difference between conceptually derived and empirically derived schemes (Hambrick, 1983; Sneath & Sokal, 1973). The two words are often used interchangeably in the previous organizational literature (Hawes & Crittenden, 1984; Miles & Snow, 1978; Miller & Friesen, 1980; Slater & Olson, 2001). We used taxonomy to speciﬁcally refer to empirically derived classiﬁcation schemes (Harrigan, 1985; Hawes & Crittenden, 1984; Slater & Olson, 2001).

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VALUE CREATION IN JOINT VENTURE DYADS M. V. Shyam Kumar ABSTRACT In this research, we address the following questions: (1) Do joint ventures (JVs) create value for both parent ﬁrms in the dyad? (2) How is the total value created in the venture inﬂuenced by resources and capabilities of the two parent ﬁrms? In addressing these questions, our objective is to provide added insight into the performance of JVs by shifting the level of analysis to the dyad from the individual parent ﬁrm. Our results indicate that a signiﬁcant proportion of JVs created value for both parents. However, there was also considerable evidence of value destruction with a large proportion of JVs resulting in positive returns to one parent and negative returns to the other. In terms of the second question, we ﬁnd that the total value created in a JV increases as the value of resources in the dyad increases and decreases with the differential in the value of resources between parents. We argue that the latter effect occurs because when there is a wide differential in capabilities, incentives are shifted away from joint value creation and cooperative behavior toward non-cooperative behavior and appropriating private beneﬁts. Our ﬁndings broadly highlight the important role of private beneﬁts in JVs and provide evidence that these beneﬁts signiﬁcantly inﬂuence the performance and dynamics of inter-ﬁrm collaboration in various ways.

Advances in Mergers and Acquisitions, Volume 7, 29–50 Copyright r 2008 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1479-361X/doi:10.1016/S1479-361X(08)07003-8

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Over the last two decades, an extensive body of research has demonstrated that joint ventures (JVs) create value for parent ﬁrms. Using an event study approach (e.g. Anand & Khanna, 2000; Balakrishnan & Koza, 1993; Chan, Kensinger, Keown, & Martin, 1997; Das, Sen, & Sengupta, 1998; Kale, Dyer, & Singh, 2002; Koh & Venkatraman, 1991; Madhavan & Prescott, 1995; McConnell & Nantell, 1985; Merchant & Schendel, 2000; Woolridge & Snow, 1990), this literature has documented the extent of wealth gains accompanying JV announcements and the relationship between these gains and various characteristics such as ﬁrm size, the degree of relatedness of the JV with the parent and the effect of a parent’s JV capabilities. But while this literature has provided important insights, with some exceptions (e.g. Gulati & Wang, 2003; Johnson & Houston, 2000; Kalaignanam, Shankar, & Varadarajan, 2007; Kumar, 2007), it has mainly examined wealth gains accruing to individual partners in a JV. As a result, it does not examine how wealth gains are distributed between partners in the JV dyad, and the factors that impact value creation at the dyadic level.1 This constitutes an important gap in the literature for two reasons. First, in order to assess the performance consequences of JVs, it is necessary to gauge not only how individual ﬁrms are impacted in terms of value creation, but also how both ﬁrms in the dyad are affected. While this approach has been adopted in the mergers and acquisitions literature where research has looked at wealth gains to acquirers and targets, similar studies examining wealth gains to both ﬁrms in JV dyads have not been undertaken. Second, since JVs inherently involve the sharing of resources by multiple ﬁrms, by focusing on a single ﬁrm’s wealth gains and characteristics we may be overlooking some of the important inter-ﬁrm dynamics that are likely to have an impact on value creation in this particular organizational form (Dyer & Singh, 1998; Zajac & Olsen, 1993). Hence, it is critical that we shift the level of analysis to the dyadic level (Gulati & Wang, 2003; Kumar, 2007) to gain a better understanding of these inter-ﬁrm dynamics and how they are likely to inﬂuence performance. In this research, we address the above gaps in the literature. Our objectives are twofold. The ﬁrst objective is to take a fresh look at the performance of JVs and provide insight into the following questions: Do JVs create value for both partners? If so, to what extent? Conversely, to what extent do JVs destroy value for both partners? By addressing these questions, our purpose is to highlight that it is necessary to consider wealth gains at the dyadic level when assessing the performance consequences of JVs, apart from the wealth gains of individual parent ﬁrms. Building on this point, the second objective of our research is to address the following

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questions: How is the total value created in a JV inﬂuenced by characteristics of ﬁrms in the dyad? Speciﬁcally, what types of resources and capabilities do partners need to possess, and how does the distribution of capabilities in the dyad inﬂuence total value creation? The aim in addressing these latter questions is to show that value creation in JVs is inﬂuenced not only by the resources and capabilities of a focal ﬁrm, but also by the partner’s resources. In doing so, we show that apart from synergies and common beneﬁts (Khanna, 1998; Khanna, Gulati, & Nohria, 1998), the potential for noncooperative behavior (such as learning races) and private beneﬁts that stems from the distribution of capabilities across partners also has an impact on the performance of inter-organizational arrangements. The chapter proceeds as follows. The next section outlines the broader theoretical considerations underlying value creation at the dyadic level in JVs. Section 2 outlines the methods used to address our research questions. Section 3 presents results pertaining to the patterns of gains in JV dyads and tests how the total value created in a JV is inﬂuenced by the resources and capabilities of partner ﬁrms. Section 4 concludes with a discussion.

1. THEORETICAL BACKGROUND JVs facilitate the combination of complementary inputs possessed by two or more parent ﬁrms. These complementary inputs may include different types of know how, such as marketing know how and technical know how (Buckley & Casson, 1988; Hennart, 1988). When the transfer of these inputs across market contracts is subject to various frictions, including potential hold up problems and high transfer costs due to tacitness, then JVs become an optimal solution. Further, JVs also offer distinct advantages when compared to acquisitions as a mode of entry. Acquisitions are relatively irreversible and entail a substantial commitment of resources from the outset of entry into a market (Balakrishnan & Koza, 1993). In contrast, JVs provide more ﬂexibility and allow parent ﬁrms to gradually increase commitment as they learn from each other and scan the environment (Folta, 1998; Kogut, 1991). Over time if a parent ﬁrm feels that the target market is not conducive for further expansion, it can reverse its commitment at relatively low costs by selling its stake to the partner and exiting the target market (Chi, 2000; Kumar, 2005). Thus, compared to acquisitions, JVs act as real options by providing a ﬁrm with the ﬂexibility to increase or decrease investment depending on how conditions develop.

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But while JVs offer these advantages, they also involve various costs that are unique to them as an organizational form. Partly these costs arise from added coordination difﬁculties as ﬁrms with different cultures and routines attempt to jointly govern activities. Apart from coordination costs, another type of cost that arises is that since JVs involve partial ownership and control, there is a risk that a partner may appropriate the resources and capabilities of a focal ﬁrm and exploit these resources outside the JV for its own beneﬁt. Why are JVs particularly prone to hazards of appropriation? An important reason is because when compared to market contracts and arms length arrangements such as licensing, JVs facilitate closer contact between ﬁrms due to their shared ownership structure (Hennart, 1988). The closer contact in turn lowers causal ambiguity and barriers to imitation, which creates opportunities for a partner to appropriate a wide variety of resources including different types of know how and dynamic capabilities (Inkpen, 2005; Oxley & Sampson, 2004). What is noteworthy is that the opportunities for appropriation may extend to domains far beyond the scope of the cooperation as the close contact creates various ‘spillovers’ or unintended transfers of knowledge (Ahuja, 2000; Kale, Singh, & Perlmutter, 2000). The threat of appropriation and spillovers could be minimized if JV contracts could be designed such that they completely speciﬁed how a partner utilizes a focal ﬁrm’s resources. But as Transaction Costs Economics highlights, such contracts are too costly if not impossible to write in the face of environmental contingencies (Williamson, 1975). The result is an unavoidable threat of appropriation of resources by a partner when a ﬁrm enters into a JV. A critical implication of the risks of appropriation and the presence of spillovers is that a JV may have a differential impact in terms of value creation on the two partners involved. Thus, if a focal ﬁrm is likely to be exposed to signiﬁcant hazards of appropriation by the partner over the course of a cooperation, a JV may create less value for the focal ﬁrm and may create relatively greater value for the partner. To formalize this argument further, following Hamel (1991), Khanna (1998), Khanna et al. (1998) and other scholars (e.g. Inkpen & Beamish, 1997), we may partition the beneﬁts from a JV into two components: private beneﬁts and common beneﬁts. As Khanna et al. (1998, p. 195) note: ‘Private beneﬁts are those that a ﬁrm can earn unilaterally by picking up skills from its partner and applying them to its own operations in areas unrelated to the alliance activities. Common beneﬁts are those that accrue to each partner in an alliance from the collective application of the learning that both ﬁrms go through as

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33

a consequence of being part of the alliance; these are obtained from operations in areas of the ﬁrm that are related to the alliance’. Previous literature examining wealth gains in JVs has mainly focused on potential synergies and common beneﬁts. As a result, attention has been on the wealth gains of individual ﬁrms, and comparatively little research has examined the existence of private beneﬁts and how these beneﬁts drive a wedge between the wealth gains of individual partners. Given these two types of beneﬁts, when a partner has the potential to engage in signiﬁcant resource appropriation and derive private beneﬁts, it may adversely impact the value of a focal ﬁrm. This may occur as the focal ﬁrm experiences value attrition due to the accompanying loss in rents and competitive position. In the extreme, this may lead to positive value creation for the partner and negative value creation for the focal ﬁrm as the common beneﬁts created through the venture are outweighed by the negative wealth effects of resource appropriation for the ﬁrm. Thus, the existence of private beneﬁts implies that there may be signiﬁcant differentials in wealth gains between partners, and in some instances it may reach a point where value may be created for one parent and destroyed for the other. Hence, from a theoretical standpoint, it is important to consider wealth gains of both partners in the dyad when assessing the performance of JVs, rather than focusing on the gains of any single parent given the existence of private beneﬁts. Apart from leading to differentials in wealth gains between partners, as Khanna et al. (1998) note, the ratio of private beneﬁts to common beneﬁts has a fundamental impact on the behavior of a ﬁrm over the course of the JV. The higher the ratio, ceteris paribus, the greater the ﬁrm’s incentives to appropriate the partner’s knowledge and engage in non-cooperative behavior as opposed to cooperative behavior. A high private to common beneﬁts ratio may also lead to a learning race (Hamel, 1991) and may seriously destabilize a cooperation (Khanna, 1998). One dimension that may inﬂuence a ﬁrm’s potential for earning private beneﬁts is the value of the resources and capabilities possessed by the partner relative to its own resources. The greater the value of the resources and capabilities of the partner when compared to the resources of a focal ﬁrm, the greater the opportunities for the ﬁrm to appropriate resources and earn rents outside the JV.2 The argument here is that if two ﬁrms with differential levels of knowledge and capabilities enter into a JV, then ceteris paribus, the ﬁrm that is less competent has more opportunities to appropriate resources and earn private beneﬁts. Hence, as the differential in capabilities between the two partners in a JV increases, the ratio of private beneﬁts to common beneﬁts

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for the ﬁrm with weaker capabilities increases, thereby increasing its propensity to engage in non-cooperative behavior. But while a high differential in capabilities may lead to increased opportunities for appropriating resources and earning private beneﬁts for the weaker ﬁrm in the cooperation, another potential effect it could have is that it may also lead to a decrease in the overall common beneﬁts that both partners derive from the JV. This may occur as ﬁrms dynamically adjust their resource allocation patterns to each other’s actions and behavior over the course of the venture. To highlight this point further, following Khanna et al. (1998), consider a model with two ﬁrms involved in a multiperiod JV where each ﬁrm has a pre-determined level of managerial resources available for the cooperation. When there is a high differential in capabilities, the ﬁrm with capabilities of lower value has greater incentives to allocate a larger proportion of its managerial resources to appropriation, and a smaller proportion to creating common beneﬁts and deriving synergies. In response to such actions (assuming that the ﬁrm with lower valued capabilities does indeed allocate more resources to appropriation), initially a partner may allocate its managerial resources with the objective of maximizing common beneﬁts in the cooperation. But once it observes the ﬁrm’s resource allocation patterns, in the beginning of the next period it too may shift its resources and allocate greater resources toward deriving private beneﬁts rather than toward joint value creation (Kale & Anand, 2006). Alternatively it may take various steps to protect itself, such as cutting down the personnel allocated to the JV or limiting the scope of the cooperation. As a result of these actions, the mutual learning process in the JV is likely to be hindered leading to an overall decrease in the common beneﬁts for both ﬁrms in the JV.3 The above simpliﬁed model implies that there is likely to be a tradeoff between common beneﬁts and joint value creation on the one hand, and the extent of private beneﬁts on the other. When more resources are allocated by any one ﬁrm in the cooperation toward deriving private beneﬁts, then there is likely to be a concomitant decrease in the common beneﬁts derived by both ﬁrms through the JV. This basic tradeoff has been noted by various authors in previous research. Hamel (1991, p. 91) notes that many Western ﬁrms adopted defensive attitudes on discovering their Japanese partner’s intent to appropriate resources, which led to overall lower learning and unsatisfactory performance of their ventures. Parkhe (1993) makes a similar point when he notes that when there is a potential for high private beneﬁts, value will be eroded in the JV as partners set up various contractual safeguards which increases coordination costs (cf. Reuer & Arino, 2007).

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35

Larsson, Bengtsson, Henriksson, and Sparks (1998, p. 288) are explicit about the tradeoffs inherent between creating common beneﬁts and attempts to derive private beneﬁts (also see Gulati & Wang, 2003). Thus, they note: However, pies need to be made, so most socio-economic interaction involves the individual trade-off decisions of each actor regarding how much of his/her limited efforts are to be spent on collaborating and internally competing, respectively. While the collective focus on integrative collaboration would produce a plus-sum game where all actors can win, the focus on distributive competition actually results in a minus-sum game due to the diversion of productive efforts to distributive inﬁghting.

In sum, the above arguments imply that the potential for resource appropriation and the presence of private beneﬁts makes it necessary to examine the wealth gains of both partners in the dyad to gauge the performance impact of JVs. Further, the arguments also suggest that the total value created in a JV is likely to be enhanced under two conditions. First, when both ﬁrms in the dyad possess relatively valuable resources and capabilities, value creation will be enhanced because under these conditions the opportunities for combining resources and deriving synergies are likely to be higher. When both ﬁrms possess relatively valuable resources, JVs may also provide a more efﬁcient means for combining these resources when compared to market contracts (Hennart, 1988) while obviating the need for making irreversible commitments. Second, value creation will also be enhanced when there is a lower differential in capabilities between partners. Under these conditions, there will be fewer incentives to divert effort toward appropriating resources and non-cooperative behavior, and efforts are likely to be focused toward joint value creation and cooperative behavior. Thus, value creation will be enhanced (1) when both ﬁrms possess relatively valuable resources and (2) when there is a low differential in the capabilities between the two ﬁrms in the dyad. We now turn to the task of providing empirical evidence pertaining to these various propositions.

2. METHODS 2.1. Sample and Event Study Methods Given the research questions and propositions outlined above, our analysis is organized into two main parts. In the ﬁrst part, we examine the distribution of wealth gains and assess the performance of JVs from a

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dyadic perspective. In the second part, we examine how the total value created in JVs is inﬂuenced by the nature of resources and capabilities of partners. The ﬁrst step in our analysis was to conduct an event study of a suitable sample of JV announcements. Our data source in identifying this sample was the Securities Data Company (SDC) database on mergers, acquisitions and alliances. Using this database, we retrieved information on all two partner JVs where both partners were US based beginning with 1985 up to the year 2003. We also retrieved other details from SDC such as the date of the announcement, partner names, equity shares held by each partner and the primary SIC code assigned to the JV. Next, for these JVs, we obtained stock price data for both partners on and around the announcement date from the CRSP database. After retrieving the stock price data, we were left with an initial sample of 597 JVs. For these 597 JVs, we then obtained ﬁrm level data from Compustat on independent variables such as size and Tobin’s q (described further below). After combining these latter data items, there were 344 JVs remaining in our sample. We conducted the event study by estimating the market model over the period –250 to –50 with the announcement date serving as day 0. We used the software EVENTUS with the CRSP equally weighted index serving as the market return. Prediction errors were calculated across varying event windows including [2, 0], [1, 0] and [0, 0]. To minimize the effects of sample attrition, we initially used the sample of 597 JVs to examine how wealth gains are distributed at the dyadic level. As a next step, we used the smaller sample of 344 JVs to examine how the resources and capabilities of ﬁrms in the dyad inﬂuence total value creation. Our results are presented in the next section accordingly.

2.2. Dependent Variable, Independent Variables and Model The second part of our analysis involves testing how the total value created in a JV is inﬂuenced by the resources and capabilities of ﬁrms in the dyad. For this part of the analysis, the dependent variable we used was the total value created in the JV, which was calculated as the sum of the absolute dollar value of the gains of the two ﬁrms at the time of JV announcement. The absolute dollar value of gains was obtained by multiplying the cumulative abnormal return over the [1, 0] period and the market value of the ﬁrm at the end of the ﬁscal year prior to the formation of the JV.4

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37

In the previous section, the propositions we developed were that total value is likely to increase with the sum of the value of resources in the dyad, and decrease as the differential in the value of resources in the dyad increases as incentives are shifted away from cooperative behavior to noncooperative behavior. To test these propositions, the measure we used to capture the value of resources and capabilities possessed by a ﬁrm was Tobin’s q. The rationale behind using this measure was as follows. The total market value of a ﬁrm V can be written as the sum of two components: V ¼T þI where T is the value of tangible assets and I the value of intangible assets. Dividing throughout by T, we get: V I ¼1þ T T The left-hand side is Tobin’s q while the right-hand side is an indication of the value of intangible resources possessed by the ﬁrm including its knowledge, resources and skills, and capabilities (Lev, 2001; Villalonga, 2004). The higher the Tobin’s q, the more valuable the intangible resources possessed by a ﬁrm. Tobin’s q is a relevant measure in the context of the present study given that intangible resources are particularly prone to appropriation hazards in JVs. We calculated Tobin’s q as the sum of market value of equity, short- and long-term debt, preferred stock at liquidating value and book value of convertible debt normalized by book value of total assets (Perfect & Wiles, 1994). These data items were retrieved for each parent from the Compustat database for the year end preceding the formation of the JV. Once having decided on Tobin’s q as the measure of valuable resources and capabilities, we speciﬁed the following regression model: TOTVAL½1; 0 ¼ a0 þ a1 SUMQ þ a2 DIFFQ þ a3 SUMSIZE þ a4 SUMEXP þ a5 SUMDIST þ a6 RELSHARE þ

ð1Þ

The dependent variable, TOTVAL, is the total dollar value of gains derived by both partners in the JV over the [1, 0] window. In terms of independent variables, SUMQ represents the sum of Tobin’s q of the two partners. Correspondingly, DIFQ is the absolute value of the difference in the Tobin’s q of the two ﬁrms in the JV. Our expectation is that SUMQ will have a positive impact on the total value created in the JV as the potential for creating synergies in the dyad increases. Conversely, we expected

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DIFFQ to have a negative impact on TOTVAL as incentives are shifted away toward non-cooperative behavior. Additional variables were included in the model to control for the effects of size (McConnell & Nantell, 1985), relatedness of each partner with the JV’s business (Balakrishnan & Koza, 1993; Koh & Venkatraman, 1991) and the JV capabilities present in the dyad (Anand & Khanna, 2000). SUMSIZE represents the sum of sales of the two partners in the year end preceding the formation of the venture. JVs where both partners are large may enjoy an advantage in terms of market power. SUMSIZE is used to control for this possibility. SUMDIST is used to control for the degree of relatedness of the two partners with the JV’s business. SUMDIST was calculated as the sum of the absolute value of the difference between the SIC code of the JV (retrieved from SDC) and the SIC code of each parent (Balakrishnan & Koza, 1993). SUMEXP is the sum of the number of JVs formed by each parent prior to the focal JV as reported in the SDC database. SUMEXP controls for the possibility that dyads with greater JV experience may create more joint value than dyads with lesser combined experience. Finally, we also included the ratio of equity shares (RELSHARE) to control for any value-destructive effects that may arise in JVs with high asymmetries in ownership.

3. RESULTS 3.1. Event Study Results Table 1 presents the event study results for the 1,194 parents in the 597 JVs. This analysis is based on pooling all ﬁrms together without differentiating between parents belonging to the same JV. As shown in Table 1, overall Table 1.

Event Study Results for All Parent Firms (n ¼ 1194). Event Window

Cumulative abnormal return (%) t statistic pW|t| No of þ/ Binomial p Wilcoxon z pW|z|

[0, 0]

[1, 0]

[2, 0]

0.68 6.554 0.000 603/591 0.7502 2.820 0.003

1.00 5.243 0.000 643:551 0.0084 3.547 0.0004

1.32 6.336 0.000 644:550 0.0071 4.624 0.000

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1,194 ﬁrms experienced a [1, 0] cumulative abnormal return of 1%. This compares well with previous studies. McConnell and Nantell (1985) ﬁnd a corresponding cumulative abnormal return of 0.73% while Koh and Venkatraman (1991) ﬁnd a return of 0.87%. Both the binomial and Wilcoxon sign tests were also signiﬁcant indicating that there were no inﬂuential outliers driving the results. The average wealth created by the JV announcement over the [1, 0] window was USD 19.54 Mn. The proportion of negative returns was 46% (551 ﬁrms), which once again compares well with previous studies. Koh and Venkatraman (1991) ﬁnd 42% of ﬁrms experienced negative returns during the [1, 0] window while Gulati and Wang (2003) ﬁnd a corresponding ﬁgure of 46%. Overall the results in Table 1 are consistent with previous studies and the notion that JVs create value on average for individual parent ﬁrms. Next, to understand whether JVs create value at the dyadic level, we divided the 1,194 parents into two groups: ﬁrms that experienced higher wealth gains in each JV dyad and correspondingly ﬁrms that experienced lower wealth gains in each JV dyad. Thus, the two groups contained 597 parents each, and were formed on the basis of whether a ﬁrm gained relatively more than its partner or relatively less than its partner. After creating these two groups, we then examined to what extent the following three patterns of gains were observed across the sample of JVs: (1) cases where both partners earned positive returns (what we term as þ/þ JVs), (2) cases where the partner that gained more experienced positive returns, and the partner that gained less experienced negative returns (þ/ JVs), and (3) cases where both partners experienced negative returns on announcing the JV (/ JVs). Table 2a presents the results. As shown in the table, in our sample, þ/þ ventures constituted 32% of the sample. In contrast, þ/ ventures constituted 44% of the sample and / ventures constituted the remaining 24%. Thus, the highest proportion in the sample Table 2a.

Extent of Three Patterns of Gains compared with Expected Proportion. [1, 0]

Proportion Expected p-Value of Ratio of of Full Proportion Difference (V) Observed to Returns of ﬁrms Returns of ﬁrms Sample (III) under Null (IV) Expected (VI) that gained less that gained more (I) (%) (II) (%) þ/þ ventures /þ ventures / ventures

1.7 2.6 3.8

6.8 3.9 1.5

0.32 0.44 0.24

0.25 0.5 0.25

0.000 0.002 0.70

1.28 0.88 0.96

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was cases where one partner gained in value and the other lost in value when the JV was announced. To understand the implications of these results for value creation at the dyadic level, it is necessary to examine the expected proportions of these three patterns of gains. Under the null hypothesis that JVs neither create nor destroy value, there is a probability of 0.5 (or a 50% chance) that an individual ﬁrm would experience positive returns on announcing a venture. Accordingly, under the null hypothesis of zero value creation, there is a probability of 0.5 0.5 ¼ 0.25 that when a JV is announced, both ﬁrms would earn positive returns. Correspondingly, there is a probability of 0.25 that both ﬁrms would experience negative returns on announcing the JV. The remaining probability of 0.5 is associated with the likelihood that one partner would gain in value and the other would lose value (i.e. þ/ JVs). Thus, the benchmark for testing whether JVs create value for both partners in the dyad is to examine whether more than 25% of the JVs in the sample were instances where both partners experienced positive wealth gains. Following this logic, Table 2a presents the expected ratios of the three patterns of gains (column IV) and compares them with the observed patterns (column III). Assuming a binomial distribution, we examined whether the proportion of þ/þ gains in the dyad was equal to 0.25, and whether the proportion of þ/ gains was equal to 0.5. p-Values of the difference in proportions are reported in the second column from the right. As shown, the proportion of þ/þ ventures was signiﬁcantly higher than 0.25 with a p-valueo0.000. Correspondingly, the proportion of ventures with þ/ gains was signiﬁcantly lower than 0.5. In contrast, the proportion of / ventures was not signiﬁcantly different from what was expected under the null. These ﬁndings suggest that the three patterns of gains observed are consistent with the alternate hypothesis that JVs create value for both parents. Thus, even though þ/ gains constituted the highest proportion of JVs in the sample, this does not necessarily imply that JVs are not value creating at the dyadic level. The above analysis assumes that ﬁrms are randomly assigned to dyads and that there is no systematic value creation effect at the JV level. If JVs do indeed create value at the dyadic level, then this increases the probability that two ﬁrms with positive gains would be observed within the same venture. Put differently, if common beneﬁts are signiﬁcant and positive, then rather than being random, this increases the probability that two ﬁrms with positive abnormal returns would fall in the same JV. However, if common beneﬁts are insigniﬁcant, and the positive wealth gains experienced by ﬁrms in the sample are mainly the result of private beneﬁts, then the incidence

41

Value Creation in Joint Venture Dyads

of þ/þ ventures would not be signiﬁcantly different from random assignment. Hence, an alternative way to examine whether JVs create value at the dyadic level is to test that given the observed proportion of positive gains in the overall sample, to what extent does the proportion of þ/þ and / ventures differ from random assignment?5 This would provide evidence of whether there is indeed a signiﬁcant ‘JV effect’, and that the three patterns of gains do not occur purely due to individual ﬁrms’ private beneﬁts. As shown in Table 1, the observed proportion of ﬁrms with positive returns in the sample is 643/1,194 ¼ 0.538. If these ﬁrms were randomly assigned and there was no JV effect and common beneﬁts, the expected proportion of þ/þ ventures would be 0.538 0.538 ¼ 0.29. The expected proportion of / ventures would be (10.538) (10.538) ¼ 0.21. The remaining 10.290.21 ¼ 0.5 would be the expected proportion of þ/ JVs. Table 2b provides a formal test of a comparison of these proportions with observed proportions using a binomial distribution. The second column shows the observed proportions, the third column shows the expected proportions given that the observed proportion of positive gains in the overall sample was 0.538, the fourth column provides the p-value of the difference and the ﬁfth column provides the ratio of observed to expected proportions. As shown, all three proportions are signiﬁcantly different than what was expected if there were random assignment. Thus, while the proportion of þ/þ gains was signiﬁcantly greater than 0.29, the proportion of / gains was also signiﬁcantly greater than the expected value of 0.21. The expected value of þ/ JVs was once again signiﬁcantly lower than the expected value of 0.5. These results suggest that there appear to be distinct JV effects operating, with some JVs systematically creating positive value and others systematically destroying value. If this were not the case, then we would not see signiﬁcant differences between observed proportions and expected proportions under random assignment. Thus, the three patterns of gains show some evidence of systematic value creation at the dyadic level. Table 2b.

Extent of Three Patterns of Gains compared with Expected Proportion. N (I)

þ/þ ventures /þ ventures / ventures

191 261 145

Proportion of Expected under Full Sample (II) Observed Proportion of Positives (III) 0.32 0.44 0.24

0.29 0.5 0.21

p-Value of Difference (IV)

Ratio of Observed to Expected (V)

0.10 0.003 0.08

1.10 0.88 1.14

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The results and tests presented in Tables 2a and 2b are non-parametric in nature and are concerned mainly with the signs of the wealth gains in the dyad rather than the values. To develop insight into the extent of wealth gains of ﬁrms in the dyad, next we examined the abnormal returns of ﬁrms that gained more than the partner in each JV and ﬁrms that gained less than the partner, respectively. Table 3 presents the results. The upper panel presents the event study results of ﬁrms that gained more in the JV, and the lower panel presents the results of ﬁrms that gained less. The results show that ﬁrms that gained more on average earned [1, 0] returns of þ3.5%. In contrast, ﬁrms that gained less on average earned negative returns of 1.5%. These results call for a qualiﬁed view of the performance of JVs at the dyadic level. If on average JVs create value at the dyadic level, then we may expect ﬁrms that gain more from forming the JV would enjoy positive abnormal returns. But the ﬁnding that ﬁrms that gain less earn negative returns suggests that there is also signiﬁcant value destruction in JVs. In absolute dollar terms, the value destruction for ﬁrms that gained less was USD 54.2 Mn. Had the value-destructive effects of JVs been comparatively moderate, we would have observed ﬁrms that gain less either breaking even or earning positive abnormal returns. However, this does not

Table 3.

Abnormal Returns of Parents within a JV. Event Window [0, 0]

[1, 0]

[2, 0]

Firms that gained more from announcing the JV (n ¼ 597) Cumulative abnormal return (%) 2.5 T 10.18 pW|t| 0.000 No of þ/ 437:160 Binomial p 0.000 Wilcoxon z 13.92 pW|z| 0.000

3.5 11.21 0.000 452:145 0.000 14.19 0.000

4.25 12.72 0.000 455:142 0.000 14.83 0.000

Firms that gained less from announcing the JV (n ¼ 597) Cumulative abnormal return (%) 1.14 T 9.42 pW|t| 0.000 No of þ/ 166:431 Binomial p 0.000 Wilcoxon z 11.43 pW|z| 0.000

1.52 9.48 0.000 191:406 0.000 10.52 0.000

1.6 8.59 0.000 189:408 0.000 9.668 0.000

Value Creation in Joint Venture Dyads

43

seem to be the case indicating that negative value creation plays a signiﬁcant role in JVs. Overall the evidence in Table 3 also seems to suggest that the pattern of þ/gains plays an important and inﬂuential role in JVs, given that on average one ﬁrm appears to be experiencing positive abnormal returns and the other negative abnormal returns. In sum, the event study results suggest that JVs create value at the dyadic level for both partners, as evidenced by the higher than expected proportion of þ/þ ventures in the sample. Further there is also an indication that there is a systematic ‘JV effect’ in inﬂuencing the returns to the two partners due to the presence of common beneﬁts, and that the observed patterns are not purely due to private beneﬁts. But the evidence also suggests that there is substantial negative value creation in JVs as evidenced by the overall negative returns to ﬁrms that gain less than their partners in the dyad. With this backdrop, we now turn toward understanding the total value created in the JV.

3.2. Total Value Creation in the Dyad In this second part of our analysis, we present OLS estimates of Eq. (1) with TOTVAL [1, 0] as the dependent variable. As noted earlier, the essence of our argument is that total value is likely to increase with the value of resources in the dyad and decrease as the differential in the value of resources in the dyad increases since incentives are shifted away from joint value creation to non-cooperative behavior. Eq. (1) provides a test of these arguments. As a ﬁrst step in estimating Eq. (1) using OLS, we examined the correlations between the dependent and various independent variables (not reported). The data showed that there was a high degree of correlation between the two independent variables of interest, SUMQ and DIFQ. This is not surprising considering the ﬁrst variable is the sum of two random variables (Tobin’s q of the two partners) and the second variable is the difference between the same two random variables. The correlation was above 0.9 indicating the presence of substantial multicollinearity. Multicollinearity may not only inﬂate standard errors, but may also reverse the signs of independent variables (Neter, Kutner, Nachtsheim, & Wasserman, 1996). To prevent any potential biases, we replaced the DIFQ variable with three separate variables. First, we took the log of DIFQ to produce a transformed variable LOGDIF which had a lower correlation with SUMQ (0.83) but a high correlation with DIFQ (0.88). Next, we also performed a median split based on the median value of DIFQ and coded a binary variable DIFFMDN ¼ 1 if the difference in Tobin’s q for a

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particular dyad was above the median value, and 0 otherwise. As a third step, we also performed a mean split on DIFQ and coded a binary variable DIFFMEAN ¼ 1 if the difference in Tobin’s q was above the mean, and 0 otherwise. We report results with these three independent variables added separately in the model. Table 4 presents the results after replacing DIFQ with the three separate variables. As shown, SUMQ had a consistently positive and signiﬁcant

Table 4.

OLS Results, Total Value Creation.

Coefﬁcient

Standard Error

t

pW|t|

SUMQ LOGDIF SUMSIZE SUMEXP SUMDIST RESHARE CONS R2 F

224.75 551.07 0.01 14.87 0.01 13.59 581.15 0.12 7.87

46.25 261.59 0.00 16.01 0.03 93.74 178.20

4.86 2.11 2.28 0.93 0.36 0.15 3.26

0 0.036 0.023 0.353 0.719 0.885 0.001

SUMQ DIFFMDN SUMSIZE SUMEXP SUMDIST RESHARE CONS R2 F

164.89 321.88þ 0.01 14.56 0.01 19.11 519.91 0.12 7.63

28.42 181.58 0.00 16.04 0.03 93.83 183.02

5.8 1.77 2.06 0.91 0.25 0.2 2.84

0 0.077 0.04 0.364 0.805 0.839 0.005

SUMQ DIFFMEAN SUMSIZE SUMEXP SUMDIST RESHARE CONS R2 F

197.27 707.42 0.01 14.59 0.01 5.51 623.38 0.14 8.89

30.71 225.11 0.00 15.86 0.03 93.06 177.01

6.42 3.14 2.2 0.92 0.45 0.06 3.52

0 0.002 0.028 0.358 0.656 0.953 0

þ

po0.10, two tailed;

po0.05, two tailed; p o0.01, two tailed; po0.001, two tailed.

Value Creation in Joint Venture Dyads

45

coefﬁcient in all three sets of regressions. This indicates that as the value of resources in the dyad increased, total value created in the JV increased because of greater synergies. In line with expectations, all three variables capturing the differential in capabilities between partners had a signiﬁcant negative impact on total value created. Thus, as the differential in capabilities between partners increased, the total value decreased perhaps because of the increased likelihood for non-cooperative behavior and shifting of incentives from joint value creation. In terms of the control variables, the SUMSIZE variable was consistently positive and signiﬁcant indicating that JVs involving larger partners created more value, possibly because of market power effects. The SUMEXP and SUMDIST variables were insigniﬁcant likely because the variables used in this study are relatively crude measure of JV capabilities and the degree of relatedness. Finally, RELSHARE was also insigniﬁcant indicating that JVs with asymmetries in ownership did not necessarily create less value. In sum, the results presented in Table 4 suggest that value creation in JVs depends not just on the characteristics of any single ﬁrm, but also on the resources and capabilities in the dyad. This occurs because the distribution of capabilities in the dyad inﬂuences the dynamics of the JV in terms of the potential for cooperative and non-cooperative behavior. We now turn to a discussion of these various results.

4. DISCUSSION AND CONCLUSION This chapter set out with two main objectives: (1) to examine to what extent JVs create value at the dyadic level, rather than the individual parent level, and (2) to explain the total value created in the JV as a function of the resources and capabilities of partners in the dyad. In terms of the ﬁrst research objective, the study ﬁnds that JVs create value on average for both parents. This was evidenced by the ﬁnding that the proportion of JVs where both parents experienced positive gains was signiﬁcantly greater than what was expected under the null hypothesis of no value creation. In addition, the proportion was also greater than what would be observed if positive gains were distributed randomly across JVs and there were no ‘JV effect’ per se in creating value. These results together suggest that there is systematic value creation at the dyadic level in JVs. Previous research has mainly focused on the wealth gains accruing to individual parent ﬁrms. As a result, one question that has remained unaddressed is whether JVs like acquisitions create value for one ﬁrm while destroying value for the other. The present

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research has sought to address this important question. In doing so, it reinforces the ﬁndings of previous research that JVs are on average a value-creating organizational form. However, the results also suggest that value creation is far from a forgone conclusion. As in the case of acquisitions, there were a signiﬁcant proportion of JVs where one partner gained and the other lost in terms of value. This trend was also evident in the overall sample with ﬁrms that gained less than their partners experiencing on average negative abnormal returns. This ﬁnding in particular highlights that there are also signiﬁcant costs attached to JVs which can be borne asymmetrically between partners. In terms of the second research objective, the study ﬁnds that total value created is systematically related to the resources and capabilities present in the dyad. This ﬁnding also constitutes a departure from previous research where the focus has been on a single ﬁrm’s characteristics and their impact on wealth gains. Thus, the results indicate that when both partners bring valuable resources to the JV, total value creation is enhanced since the potential for deriving synergies under these conditions increases. In contrast, as the differential in the value of resources across partners increases, total value created decreases as incentives are shifted away from cooperative behavior toward non-cooperative behavior and appropriation of private beneﬁts (Khanna et al., 1998). The implications of these latter results are that value creation in JVs is not just an outcome of common beneﬁts, but also private beneﬁts. Previous research has mainly focused on potential synergies when trying to understand the performance of JVs. Yet common beneﬁts constitute only part of the picture and it is also necessary to understand how private beneﬁts factor into the dynamics of the JV. In this regard, the ﬁndings of this study highlight that common beneﬁts and private beneﬁts may themselves not be independent of each other. To the extent that ﬁrms have limited managerial resources to allocate to a particular JV, a greater potential for earning private beneﬁts for one partner may shift incentives and resources away from joint value creation leading to an overall decrease in the total value created in the JV. Thus, there may be a tradeoff operating between private beneﬁts and common beneﬁts, an aspect that has not been highlighted by previous research. The second implication of these results is that they also highlight some fundamental differences between JVs and acquisitions. In the case of acquisitions (e.g. Lang, Stulz, & Walking, 1989; Servaes, 1991), it has been consistently found that value creation is enhanced when ﬁrms with high Tobin’s q acquire ﬁrms with low Tobin’s q. But the results of this study suggest that value creation decreases as the differential in Tobin’s q increases

Value Creation in Joint Venture Dyads

47

between partners in a JV. Thus, unlike acquisitions in the case of JVs, the capital market seems to prefer a ‘marriage of equals’. Fundamentally speaking, this difference arises due to the incomplete control and the presence of private beneﬁts in JVs. Since in the case of acquisitions these beneﬁts do not arise and there is complete control over resources, there are fewer hazards involved when a high Tobin’s q ﬁrm joins forces with a low Tobin’s q ﬁrm. From a normative standpoint, this suggests that managers may need to be particularly careful when partnering with ﬁrms with relatively lower valued capabilities. As the results presented here suggest, it may be better to acquire such ﬁrms in order to access their complementary resources rather than to partner with them given the hazards of appropriation in JVs. Future research could build on this study in various ways. First, this study uses an event study methodology to examine the performance of JVs at the dyadic level. Future research could corroborate the ﬁndings of this study by using direct assessments obtained from managers of both partners, and comparing them to see if similar patterns are observed as reported in Tables 2a and b. Second, there is also a need to examine the validity of these ﬁndings in alternative samples and settings. For example, do international JVs similarly show positive value creation for both partners? To what extent do private beneﬁts/common beneﬁts and the value of resources in the dyad explain total value creation in these JVs? Third, greater attention needs to be paid to the value-destructive consequences of JVs. In particular, good theoretical explanations need to be developed for why some ﬁrms may be entering into JVs despite seemingly losing in value. Fourth, other potential factors affecting the total gains can also be examined. For example, what is the role of the JV contract in inﬂuencing these gains? How does the structure and governance of the JV and the allocation of decision rights affect dyadic level returns? Addressing these various questions and shifting the focus to the dyadic level holds considerable potential for enhancing our understanding of JVs.

NOTES 1. The studies that are mentioned as exceptions do not speciﬁcally examine how wealth gains are distributed between partners in JV dyads. In addition, while they examine how factors such as relative size impact an individual parent ﬁrm’s wealth gains, apart from Gulati and Wang (2003), they also do not examine total value creation in the dyad. 2. Khanna et al. (1998) highlight various asymmetries such as relative scope and size as determinants of the ratio of private beneﬁts to common beneﬁts. In line with these arguments, here we highlight another asymmetry that we believe is basic in

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affecting this ratio, which is the value of resources possessed by the partner relative to a ﬁrm’s resources. 3. The dynamics of how ﬁrms adjust their resource allocation patterns in the JV to their partner’s behavior is a complicated issue and is not the focus of this paper. Khanna et al. (1998) discuss many of the nuances. For the present, we would mainly like to note that there would be a tendency to allocate lesser resources to joint value creation as the potential for earning privates beneﬁts increases. However, ﬁrms interested in maximizing their private beneﬁts may continue to allocate some amount of resources to joint value creation to ensure the JV is sustained and that they are able to extract resources from the partner. This would ensure that the cooperation does not break down entirely before private beneﬁts are realized. 4. We obtained similar results when we used cumulative returns over the [2, 0] window to calculate total value created. 5. Put differently, the question that we are addressing here is: are the positive gains observed in the sample purely the result of private beneﬁts? Or are they the result of positive common beneﬁts in some JVs? If the answer to the ﬁrst question is afﬁrmative, then we would observe positive gains occurring randomly, rather than systematically to both partners in some JVs.

ACKNOWLEDGMENTS I would like to thank Micki Eisenman for extensive comments on an earlier version. This research has also beneﬁted from informal conversations with Dean John Elliot.

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UNPACKING THE CHAMPION OF ACQUISITIONS: THE KEY FIGURE IN THE EXECUTION OF THE POST-ACQUISITION INTEGRATION PROCESS Giovanni Battista Dagnino and Vincenzo Pisano ABSTRACT This chapter focuses on the human side of the integration phase between the acquiring and the acquired ﬁrms. We contribute to the M&A literature by sketching an analytical framework that unveils the main features of the champion of acquisitions and his/her strategic role as the individual (or group of individuals) accountable to lead the integration process between the two ﬁrms. To discern the champion of acquisitions, we propose the coexistence of a set of distinctive features such as: (1) the capability to achieve the full commitment of the integration teams; (2) a leader’s personality able to guide change in the acquiring ﬁrm’s desired direction; (3) networking capabilities to facilitate or reduce the two ﬁrms’ boundaries permeability; (4) communication skills and relational capabilities necessary to facilitate the interface activity between individuals who are critical to the integration phase; and (5) the knowledge of (and the access to) the power centers necessary to obtain the indispensable legitimacy of his/her roles and actions. Advances in Mergers and Acquisitions, Volume 7, 51–69 Copyright r 2008 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1479-361X/doi:10.1016/S1479-361X(08)07004-X

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1. INTRODUCTION Management studies keep showing the high failure rate of acquisitions. Their empirical results seem to prove that most of the failures are due to integration problems occurring between the acquiring and the acquired team members, and their conﬂicting individual objectives, attitudes, and national and corporate cultures, particularly whether required to exchange knowledge in order to achieve superior capabilities. For the reasons above, this chapter focuses on the human side of the crucial phase of the integration between the acquiring and the acquired ﬁrms. We contribute to the M&A literature by sketching an analytical framework that unveils the main features of the champion of acquisitions and his/her strategic role as the individual (or group of individuals) accountable to lead the integration process between the two ﬁrms. Prior studies have shown how speciﬁc teams are usually formed to ﬁnalize the due diligence process and how the same teams are temporary and usually dismantled after the deal is closed. On the other hand, we are aware of no theoretical contribution that concerns who (or which team) should be in charge of the integration of the two ﬁrms afterwards or once the deal is closed. While only lately consulting ﬁrms have started to suggest the use of integration teams to merging companies, empirical investigation and theoretical modeling regarding the teams at hand are still scant. By doing so, in the study of the champion of acquisitions we intentionally adopt a line of investigation that is germane to the one that has been traditionally labeled as methodological individualism. On the basis of a methodological individualist approach, we eventually show how, in deﬁnite contexts such as the acquisition process, individuals may in fact assume the strategic role of agents of change. Consequently, by contributing with a critical discussion list of the required features he/she needs to possess in order to thrive in his/her role, our intent is to propose a conceptual skeleton able to unpack the role the champion of acquisitions plays in the execution of the postacquisition integration process. We refer to a set of distinctive features such as: (1) the capability to achieve the full commitment of the integration teams; (2) a leader’s personality able to guide change in the acquiring ﬁrm’s desired direction; (3) networking capabilities to facilitate or reduce the two ﬁrms’ boundaries permeability;

Unpacking the Champion of Acquisitions

53

(4) communication skills and relational capabilities necessary to facilitate the interface activity between individuals who are critical to the integration phase; and eventually (5) the knowledge of (and the access to) the centers of power needed to receive the indispensable legitimacy of his/her roles and actions. Subsequent to the elucidation of the main features of an ideal champion of acquisitions, we shall proceed towards drafting a more dynamic view of the post-acquisition integration phase, classifying four distinctive stages, each one of which depends on the activity being implemented and on the corresponding role that the champion is required to cover in that very stage. During the ﬁrst stage in which the teams’ goal is to understand the communication of the acquisition’s objectives, the champion will be the organizational maverick. During the second stage, when the two teams work cooperatively in order to exchange their reciprocal knowledge, the champion will operate as the transformational leader. In the third stage, the one in which the two ﬁrms should achieve the desired synergies, the champion will cover the role of the organizational buffer. In the last stage, the one in which the new knowledge should be diffused within the new uniﬁed organization, the champion will help such knowledge diffusion operating as the network facilitator. Starting from the motivating blocks of the chapter, a ﬁnal section that gathers the most signiﬁcant questions spreading out from the study proposes a few compelling managerial advices to make the functions of the champions of acquisitions effective, and suggests an agenda for future research on the matter will wrap up the work.

2. CHANGE IN M&AS: THE POST-ACQUISITION IMPLEMENTATION PROCESS We move on from a fundamental question: What kind of change does occur following M&As? It is our opinion that the entity of change (and its shape) determines the chances of failure or success of dual interﬁrm integration. In this chapter, we claim the need of a leading ﬁgure (i.e. labeled ‘‘the champion of acquisitions’’) heading the integration process so as to create a standard modality (or operating procedure) that ﬁrms should follow in order to fulﬁll the objectives set by the acquiring ﬁrm’s top management. Accordingly, both empirical evidence and conceptual literature on M&As have largely witnessed the impact of the determinants that come into play

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once a new owner company ‘‘steps in’’ and starts to dictate its ‘‘way of doing things’’. Recalling Shanley’s (1994) integration process framework, the major changes occurring once the deal is closed regard the organizational structure and the personnel of the acquired ﬁrm. The former are driven by the necessity to intervene onto the acquired ﬁrm’s cost structure trying to reduce redundancies with the buyer and to achieve economies of scale and/ or scope. Personnel changes are strictly connected to the positions to cover inside the new forming organization and to the level/kind of authority the acquired ﬁrm and its management are invested of. (This means: how centralized is the power in the new organization? And what kind of decisions the acquired ﬁrm’s managers can autonomously take?) The immediate consequence of such preliminary actions is a sense of panic and uncertainty in the people that stay and sudden turnover regarding those others that leave (Hayes, 1979). An additional typology of change relates to the administrative issues regarding the acquired entity (e.g. re-organization of budgets, control and reward systems, performance indicators and so on). Interestingly, to re-organize the features of a ﬁrm mentioned above can be arduous, because everyone in that ﬁrm has always been accustomed to certain procedures and evaluation standards that, all of a sudden, are not considered good anymore and have to be altered. The M&A re-organizing problem is also connected to the imposition of a different management style, i.e. the style of the acquiring ﬁrm. In order to properly manage the implementation of the integration process, the M&A literature refers to the importance of post-acquisition management (PAM). In particular, PAM’s main objective is ﬁnding the right balance between the so-called ‘‘hard’’ and ‘‘soft’’ issues of integration. M&A literature considers as hard issues those relating to the strategic analysis and restructuring actions that have an impact on the acquired ﬁrm, whereas it deems as soft issues those relating to cultural integration and the learning procedures that should be adopted (Deiser, 1994). As evidence shows, a large share of M&As fails because of the lack of care for the soft issues that may eventually reveal to be lethal. This means that, even if the due diligence process has been fulﬁlled in the most thorough manner and there are high expectations of strategic synergies with the target ﬁrm, the possibilities of failure are still high if the acquiring ﬁrm does not devote as much attention to the integration process and to its human facets. In this perspective, Jemison and Sitkin (1986) have been among the ﬁrst ones to stress the theme of failure in M&As due to a wrong approach in managing the integration process.

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3. INDIVIDUALS AS AGENTS OF CHANGE: THE USE OF A METHODOLOGICAL INDIVIDUALIST APPROACH IN ADVANCING THE NOTION OF THE CHAMPION OF ACQUISITIONS Coherently with the human-based approach we take, in the study of the champion of acquisitions we adopt a research perspective that is closely related to the one that has been named as ‘‘methodological individualism’’. In a few words, methodological individualism is a philosophical method aimed at explaining and understanding broad society-wide developments as the aggregation of decisions by individuals. Although there are different meanings of the term, they generally insist on the relative importance of individuals and their purposeful behavior. The term ‘‘methodological individualism’’ was invented by a prominent twentieth century economist, Joseph Alois Schumpeter (1909), and subsequently exported from economics into other disciplines through the ‘‘Austrian trinity’’ of Schumpeter himself, Frederick Hayek and Ludwig von Mises (Hodgson, 2007). Methodological individualism is today pioneered in management and strategy analysis by Felin and Foss (2005). As Elster (1989) argues, a methodological individualist purports that: ‘‘the elementary unit of social life is the individual human action’’, and ‘‘to explain social institutions and social change is to show how they arise as the result of the actions and interaction of individuals’’. Consequently, a methodological individualist approach postulates that nothing else but the single individuals (and their purposeful actions) are the basic agents of change. This perspective is succinctly epitomized by the popular saying that ‘‘institutions march on the legs of human beings’’ as it is in fact individualist behavior which is at the heart of the production of social knowledge (Arrow, 1994). In this perspective, all individuals are regarded as potential agents of change in speciﬁc contexts or ecosystems. The idea underlying the champion of acquisitions concept is in fact closely associated to the methodological individualist approach in that it embraces the possibility for the champion to be the decisive and dominant in the context of an acquisition process. In other terms, the champion of acquisitions is represented by the individual (or group of individuals) who is (are) able to take on the role of the critical success factor in shaping the relationships between the acquiring and acquired team members, their conﬂicting individual objectives, attitudes, and national and corporate cultures.

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Far from being a Nietschean superhuman entity, the champion of acquisitions’ key task is however to provide the setting appropriate to ensure the possibility of exchanging knowledge between the acquirer and the acquired ﬁrms. On the one hand, the champion has to have the capability to assume multiple roles as to achieve superior capabilities in an M&A integration process. On the other hand, the champion is expected to guide and moderate cooperation between the two teams of the acquirer and acquired ﬁrms and to have a role in fostering innovation. Accordingly, the champion of acquisitions is primarily a context shaper and promoter and the creator of a productive atmosphere, an individual (or group of individuals) who is (are) able to take on his/her (their) shoulders the role of the change agent by applying purposeful human action and leading by example.

4. THE CHAMPION OF ACQUISITIONS: SKETCHING AN ANALYTICAL FRAMEWORK TO EPITOMIZE THE MULTIPLE FACETS OF THE KEY FIGURE OF THE INTEGRATION PROCESS Despite the lack of comprehensive image resulting from the vast amount of studies on M&As – due to various methodological pitfalls surrounding such complex phenomenon – it is nonetheless amenable to identify a negative redundancy that we can connect to each case. In fact, if, after reviewing the substantial literature on M&As, our aim was to summarize the main reasons of the deals’ failures, we could easily focus our attention on the human side of acquisitions. Independently from the ﬁnancial or strategic objectives of each deal, it is frequently personal controversies between acquiring and acquired ﬁrms’ individuals that trigger insufﬁcient results and, eventually, loss of value to the buyer’s stakeholders. While we acknowledge that the literature on M&As stresses various reasons illustrative of acquisitions’ failures (i.e. ﬂawed evaluation of the target ﬁrm’s ﬁnancial value, synergies or strengths), in this study we focus on a speciﬁc area – the human side of acquisitions – that clearly calls for much deeper scrutiny. Acquisitions are inherently complex phenomena in the ﬁrms’ existence because – compared to other economic opportunities – several components come into play that make them somewhat unique. Conscious of this peculiarity, scholars have heretofore analyzed the M&A phenomenon focusing especially on a few idiosyncratic aspects. Consequently, if we look at the research results

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of M&As in a general way (which means without distinguishing among different theoretical approaches), we need to discern between studies focusing on the pre-acquisition and the post-acquisition phases (Hitt, Harrison, & Ireland, 2001; Jemison & Sitkin, 1986; Sirower, 1997). Subsequent to this preliminary distinction, it is also essential to distinguish between studies that, albeit attentive to post-acquisition integration, primarily focus on the strategic aspects of integration (such as the strategic ﬁt between the merged ﬁrms) (Bettis, 1981; Lubatkin, 1983; Rumelt, 1974; Shelton, 1988; Singh & Montgomery, 1987) and on the organizational aspects of integration (such as the organizational ﬁt between the merged ﬁrms) (Buono & Bowditch, 1989; Chatterje, Lubatkin, Schweiger, & Weber, 1992; Datta, 1991; Harrison, Hitt, Hoskisson, & Ireland, 1991; Prahalad & Bettis, 1986). As concerns the latter group of studies, previous research has singled out three main reasons of M&As’ failure: (a) the cultural clash between acquiring and acquired ﬁrms both at the corporate and national level (Barkema, Bell, & Pennings, 1996; Chatterje et al., 1992; Datta & Puia, 1995; Nahavandi & Malekzadeh, 1994; Weber, Shenkar, & Raveh, 1996); (b) the operational difﬁculties generated by different management styles (Hayes, 1979); (c) the workforce resistance to implement decisions taken by managers that reside outside their ﬁrm (Larsson & Finkelstein, 1999). Consequently, if we take into account the share of M&A failures attributable to personal conﬂicts, how could we champion management practices useful to overcome the human discrepancies that happen to disclose during the integration phase? As we maintained at the onset of this study, this chapter aims to propose an analytical framework that unveils the main features of the champion of acquisitions, which we regard as the leading ﬁgure in the integration process between the acquiring and the acquired ﬁrms. To be sure, the decision to focus on the human side of M&As is not the pioneering one in management literature. We recognize that prior studies have shown how speciﬁc teams are usually formed to ﬁnalize the due diligence process and how these same teams are temporary and usually dismantled after the deal is closed (Ashkenas, DeMonaco, & Francis, 1998; Ashkenas & Francis, 2000; Shelton, 2003). Notwithstanding that, we are aware of no conceptual or empirical approach pointing at who (or which team) should be in charge of the integration of the two ﬁrms (i.e. the acquired and the acquirer) afterwards or once the deal is closed. Whereas only lately consulting ﬁrms have started to suggest the use of

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integration teams to merging companies, empirical investigation and theoretical modeling regarding these teams are still scant and scarce. As Howell and Higgins (1990) have unveiled, the lack of thorough empirical research in this direction is essentially due to four fundamental reasons. First, previous research has shown to be vague as concerns the systematic measurement of the champion’s attributes, such as personality and leading traits. The most of what we know regarding the champion is connected to business anecdotes and scholars’ impressions rather than to the careful application of the scientiﬁc method (Dean, 1987; Delbecq & Mills, 1985; Fernelius & Waldo, 1980). A further intricacy is due to the problems researchers face when they seek to identify the champion. In fact, it is tough to distinguish between the champion of acquisitions and other relevant ﬁgures in the business organization, such as the executives. Likewise, thanks to the wide recognition of the leading role of the champion, most of the individuals that are interviewed, while performing in-depth ﬁeld analysis, tend to identify with this individual biasing the results of the analysis. Third, there is confusion in the correct methodology that should be used in order to identify the champion. For instance, Howell and Higgins (1990) reported about 15 case studies in which scholars do not discuss the methodology they applied. Fourth and ﬁnally, there is a lack of speciﬁcity in identifying the roles of individuals in the innovation process (Katz & Tushman, 1983; Maidique, 1980; Tushman & Scanlan, 1981). Our intention is to stress the leadership characteristics that each champion should possess, in order to be able to naturally exert his/her power/inﬂuence inside the ﬁrm and successfully drive the post-acquisition integration process. More speciﬁcally, by doing so, we assess the necessity of an individual (or group of individuals) able to guide the integration process (as much as the innovation process) by means of secure leadership, a kind of leadership able to overcome the risk of cultural clash, the risk of possible clashes between different management styles and the risk of personnel turnover. Accordingly, the quality of such complex individual involves both of the two crucial sides: the technical side and the human side. Within the context of innovation, Howell and Higgins (1990) have identiﬁed three main variables that inﬂuence the rise of a champion within a ﬁrm: (a) his/her personality; (b) the leader’s behavior; (c) the tactics he/she can use in order to exert his/her inﬂuence.

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While scholars have investigated upon these variables, we are aware of no research that has tried to integrate the results obtained.1 Therefore, the literature on the champion actually lacks a systematic assessment of the empirical contributions. Conversely, as regards the champion’s leadership traits, Howell and Higgins paid tribute to the literature on leadership and, in particular, to the one on transformational leader (Van de Ven, 1986) and on charismatic leader (Conger and Kanungo, 1987). A transformational leader is an individual whose main traits are creativity, boldness, craving to succeed and strong determination (Bass, 1985). More speciﬁcally, according to the authors, a transformational leader usually possesses: (1) a strong charisma, through which he/she is able to create an ideal vision in his/her followers and to install a sense of trust and loyalty towards him/her; (2) an emotional appeal (or empathy), by way of which he/she is able to communicate his/her vision motivating followers; (3) a sense of creativity at intellectual level, through which he/she is able to make people focus on new ideas and problem solution; and (4) high consideration for individuals, which means that he/she tends to be always disposed to listen to his/her people’s problems and ideas in order to motivate them and to receive continuous feedback on his/her choices. Because of the characteristics listed above, it is likely that the champion of acquisitions we are trying to typify will possess the features that are germane to those of the transformational leader. Even though the literature on innovation has never systematically explored the features of a champion’s personality, entrepreneurial theory offers correspondence between the champion and the entrepreneur. In fact, personality traits (such as risk propensity, orientation to result, craving to succeed, innovativeness and persistence) represent characteristics that are common to the champion, to the entrepreneur and to the transformational leader and charismatic leader. The behavior of such individuals will thus be strictly related with the tactics they adopt (i.e. information sharing with team members). Tactics will differ depending on the typology of individuals (Schilit & Locke, 1982) the champion wants to exert his/her inﬂuence on (i.e. the stakeholders, the managers and the workforce) and on the timing of the post-acquisition process he/she is experiencing. However, tactics will be clearer once we dig out into the dynamic analysis of the integration process.

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In this section, we have exempliﬁed the champion of acquisitions’ main features in the light of the characteristics that Howell and Higgins (1990) have carved out for the champion of innovation. Our successive step is to apply these features in a highly idiosyncratic context: the M&As integration process.

5. A DYNAMIC VIEW OF THE INTEGRATION PROCESS: THE MULTIPLE ROLES OF THE CHAMPION IN THE IMPLEMENTATION OF THE REQUIRED ACTIVITIES A dynamic view of the M&A integration seems to be helpful to understand the peculiarities of the integration process and the various factors that are likely to affect implementation problems or failures. When we talk of ‘‘dynamic view’’ of the integration process, we refer to a sequence of snapshots that starts immediately after the deal’s closure (T1) and ends with the dissemination of knowledge throughout the entire merged organization (T4). The snapshots that constitute the ingredients to sketch our analytical framework are essentially four as they correspond to the four different roles of the champion. Accordingly, the logical framework we propose has dynamic ﬂavor since it allows to detect the subsequent temporal steps in the champion’s conduct and of his/her ability to adapt and change his/her roles on the basis of the peculiarities of the speciﬁc integration phase and of the consequent required activities. Consequently, when we introduce the features of the champion of acquisitions, we analogically focus on the tactics that have been purported for the champion of innovation (Schon, 1963; Shane, 1995). More speciﬁcally, we will describe four main roles the champion will cover during the integration process that may prove to be essential in order to implement a knowledge exchange between the acquired and the acquiring ﬁrms. To better understand our interpretive portrait of the integration process, let us imagine that the two ﬁrms (the acquired and the acquiring) are required to cooperate in order to exchange their knowledge. Therefore, there will be two teams – supposedly coming from the R&D units of the acquiring and acquired ﬁrms – whose cooperation should be guided and moderated by the champion. What we analyze in this section are the four different roles the champion of acquisitions is required to embrace to harmonize the integration work and overcome possible threats to the success of dual interﬁrm cooperation. The ﬁrst role the champion will cover is the one of the ‘‘organizational maverick’’. In taking on this role, the champion’s main goal will be to

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promote cooperative atmosphere between the integration teams. In order to induce cooperation, the champion will use his/her traits of charismatic leader and, thus, those characters’ components through which he/she will communicate a shared vision to the two previously separate ﬁrms. However, to succeed in this phase, not only he/she will need to ﬁgure out a shared vision, but he/she will also need to prove his/her competence, thus captivating the two teams’ esteem for his/her technical competence besides his/her leadership qualities. Accordingly, the organizational maverick will also promote the spread of creativity, new ideas and knowledge. To succeed in this endeavor, he/she is likely to use the traits of the transformational leader that we have singled out in the previous section. Closely related to the ﬁrst is the second role the champion will cover or the one of the ‘‘transformational leader’’, the individual (or group of individuals) who will use all his/her inﬂuence and charisma inside the two ﬁrms to achieve global commitment at all (and across the) organizational levels. In this phase of the integration process, the champion’s second role seems to be really crucial. In fact, evidence proves that the integration’s success is strictly associated with the institutional support and the resources that the acquiring ﬁrm is keen to dedicate to the success of the deal. In order to achieve this goal, the champion will need to use all his/her relational network within the two organizations. In particular, as concerns his/her relationships within the acquiring ﬁrm, he/she will need to be empowered by the highest hierarchical level of full decisional capability with regard to the integration process. This means independent power to decide on how to use the human and ﬁnancial resources in the integration process. As regards the champion’s relationships within the acquired ﬁrm, he/she will need to use his/her charisma inspiring individuals, achieving their commitment and conquering their trust. This is a critical aspect of the integration process that evidence proves to be necessary to prevent loss of motivation and immediate consequential people’s turnover. This state of affairs is possible only if the champion is seen as an individual (or group of individuals) with a clear integration plan in mind, trustable, competent and seriously interested in the acquired ﬁrm’s fortune. The third role the champion will typically cover is the one of the ‘‘organizational buffer’’, whose main goal is to alleviate the pressure on the integration teams. This is a role that we can describe as both practical and psychological. In fact, while at the beginning the major intricacy for the champion is represented by the likelihood of cultural clash between the two teams – which the champion will be instead in charge to mitigate, subsequently the risk of clash could be inﬂuenced by the pressure to achieve

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results originating from the top echelons of the acquiring ﬁrm. This is typically due to the necessity of the acquisition promoters to validate their choices in front of the investing stakeholders. The need to have their approval and legitimization typically drives to the request of ‘‘immediate’’ results (short-termism) that, from a strategic point of view (and sometimes also from a ﬁnancial viewpoint), seems to be unattainable. As a buffer, the champion will need to make appeal to his/her relational network in order to reduce the risk of inconvenient requirements coming from the integration teams that could compromise the whole integration process success. The fourth and last role the champion will cover is the one of the ‘‘network facilitator’’. This role appears absolutely crucial for the success of the integration process since, by means of it, the champion will act as forceful glue among various individuals, who operate in different parts of the organization and, therefore, do not know each other (even though they would need to). As a network facilitator, the champion of acquisitions will be able to widespread the result of the teams’ cooperation promoting new knowledge and creativity through the entire organization. The dual effect of this activity will be, on the one hand, (1) the contribution of new knowledge within the ﬁrm obtained by starting a selfsustained learning process and, on the other, (2) the distribution of new knowledge among the individuals of the newly created entity that will lead to embed the knowledge necessary to safeguard the ﬁrm against the turnover of its key members. The four championing roles that we have dissected heretofore are represented in the illustrative framework reported in Fig. 1, in which new knowledge production can be conformed to the fulﬁllment of innovation. In our opinion, this idea plays a crucial role in supporting our intention to adapt a few features of the champion of innovation to the notion of the champion of acquisitions. By observing the explanatory skeleton in Fig. 1, we can see how, in the ﬁrst phase, the champion of acquisitions operates as a moderator of the interactions between the two teams, respectively, of the acquired and the acquiring ﬁrms. This moderating role should favor the exchange of tacit knowledge and the production of new ideas. Later, through cooperation and mutual exchange of potential ideas, the process is expected to end up with the production of new knowledge. The use of such knowledge should be at the root of the strategic motive of the acquiring ﬁrm, ﬁnally able to exploit synergies through the implementation of new products/services to test in the market. The feedback from the market will generate precious information that the ﬁrm could use as new input in the production of additional knowledge.

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T1

T2

Team A

Maverick

Communication of objectives

Team B

T3

Transformational Leader

Organizational Buffer

Team A

Team A

Exchange of strategic capabilities

Team B

Transformational Leader

Fig. 1.

T4

Synergy achievement

Network Facilitator

Diffusion of knowledge and competitive advantage

Team B

Organizational Buffer

Network Facilitator

A Dynamic View of the Integration Process and the Multiple Roles of the Champion of Acquisitions.

The ﬁrst phase, which we have named T1, refers to the objectives’ communication. Evidence proves the importance of a precise and intense communication towards the acquired ﬁrm in order to render its members conscious of the acquiring ﬁrm’s strategic intent and the future direction it intends to give to the acquired ﬁrm. This will also imply a sense of clarity regarding who will be kept inside the organization and who will not. Such clarity will eliminate/reduce individuals’ uncertainty about their future position inside the acquired organization. Therefore, in this phase, the champion will be the organizational maverick pushing for cooperation and creativity in order to motivate the two integrating teams to exchange their knowledge. Therefore, the maverick is the ﬁrst element that, moving from the left to the right of the ﬁgure, is located at the beginning of the process. This is because he/she should be the

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individual in charge of selecting the two cooperating team members and of communicating the main organization’s objectives. He/she will need his/her best communication qualities in order to make sure the two teams about the value of the work they are going to do and their importance as essential human resources inside the new forming organization. The second phase, which we named T2, refers to the exchange of mutual competences. Following the analysis performed during the due diligence, this is the time period in which the acquiring ﬁrm is able to appreciate what are the acquired ﬁrm’s capabilities, competences and skills and, therefore, if there is any room to purposefully exploit complementarities. In phase T2, the acquiring ﬁrm’s team has the opportunity to realize and appropriate the value of the acquired ﬁrm’s people in action, trying to ignite the process of learning tacit knowledge whose characteristics by deﬁnition cannot be taught (we refer to the kind of learning which has been called vicarious learning) (Baum, Li, & Usher, 2000; Manz & Sims, 1981; Polanyi, 1962). In this phase, the champion will be a transformational leader. He/she will use all his/her power in order to guarantee the maximum amount of resources to the individuals involved in the knowledge integration. If the cooperation is fruitful, it will be in the third phase (which we named T3) that synergies will be visible and the two teams will start to co-work for a unique goal as they ﬁnally ‘‘speak’’ the same technical language. It is the phase in which the learning process is complete as the two groups ﬁnally start working together. In phase T3, the champion will take the role of the organizational buffer. Actually, cooperation success could drive to excess of enthusiasm, thereby causing new pressures from the top managers to achieve immediate performance. As we previously noticed, the organizational buffer needs to protect dual interﬁrm cooperation from any dangerous external inﬂuence. The last phase, which we named T4, will be critical for the ﬁnal success of the M&A integration process and the new organization’s future survival. In fact, in order to maintain for the future the new knowledge heretofore developed, the champion needs to act as network facilitator, which is the individual in charge to spread the results of the cooperation.

6. CONCLUSION By taking a methodological individualist approach, in this chapter we have depicted the ﬁgure of the champion of acquisitions as the focal agent of the integration post-acquisition process. In this line, by adopting

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a human-based dynamic view of the post-acquisition integration process, we have observed the championing roles through a four-phase analytical framework in which we represent the two integrating teams and the farreaching champion’s activities. In this ﬁnal section, we gather a couple of signiﬁcant queries emerging from the study, propose managerial advices to make the functions of the champions of acquisitions effective and suggest an agenda for future research. One of the most important questions concerning the champion of acquisitions is related to his/her legitimacy source or the champion’s foundations of organization power and the widespread consensus that may (or may not) coagulate on this strategic issue across the two ﬁrms. Understandably, in most cases, the champion obtains authority and legitimacy from the top executives of the most powerful of the two ﬁrms, hence from the acquirer’s top management. Is this state of affairs always easily and immediately recognized by the individuals working in the two ﬁrms and in particular in the acquired ﬁrm? A second question is concerned more speciﬁcally with the relationship the champion has to have with the top executives of the two ﬁrms that are involved in the integration process and, in particular, with the top managers of the acquiring ﬁrm from which in most cases he/she derives authority, power and inﬂuence. Is that true that the champion could run the risk to superpose his/her action with the top management of (one or both of) the two ﬁrms and therefore to collide with them? As regards managerial suggestions, we have discussed the reasons why the integration process should be guided by an individual (or group of individuals) who possesses the champion’s qualities. At this point, it appears helpful to advance a suggestion that ﬁrms’ managers should bear in mind when selecting the individual (or group of individuals) that is expected to cover the role of the champion of acquisition to facilitate the implementation of the whole integration process successfully. One of the most crucial thrusts regards the organizational origin of the champion, or the question about where exactly should the top management select him/ her from? In this regard, there are in fact three possibilities that we can pinpoint as follows: (1) the champion could be an individual (or a group of individuals) who was previously working in the acquired ﬁrm. In this case, it seems necessary to consider if such individual possesses the motivation and appropriate capabilities to lead the integration process, especially taking into

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account the fact that the acquiring ﬁrm he/she should be relating with could result unfamiliar or too complex to him/her; (2) alternatively, the champion could be an individual (or a group of individuals) previously working in the acquiring ﬁrm. In this case, it would be advisable to ensure that such individual (or a group of individuals) has sufﬁcient experience in general management and possesses certain degree of empathy so as to render him/herself ‘‘well accepted’’ by the acquired ﬁrm; (3) third, the champion could be a person (or a group of people) external to both organizations (i.e. an outsider). In this case, even if he/she has suitable background and experience, he/she could be unable to solve the integration problems. While an outsider coming from the same industry of the acquiring/acquired ﬁrms, but actually new to both ﬁrms, could in principle represent a viable solution, nonetheless his/her skill and competence should in this case come to counterbalance his/her lack of substantial personal relationships (and legitimacy) within both organizations. As ﬁnally concerns the exploration of avenues for future research on the champion of acquisitions, we recall that in this chapter we have focused our attention on the champion of acquisitions as a professional management character that is usually required in a single post-acquisition integration process at a time. Actually, with the current intensiﬁcation in the frequency and importance of M&As, the champion of acquisitions (whether an individual or a team) could be possibly called to become a serial professional management character. The champion of acquisitions could turn out into ‘‘the champion of acquisitions’ portfolios’’ either in the same ﬁrm (and at the same time) or in different ﬁrms in different times. Additional investigation is required in this vein to show whether the champion of acquisitions is fated to transform him/herself in the strategic agent of multiple integration processes.

NOTE 1. Howell and Higgins’ (1990) primary intent was to represent a model able to offer this integration. In order to identify the main features of a champion’s personality, they referred to the literature on entrepreneurship since previous authors had made a comparison between the champion (intrapreneur) and the entrepreneur (Collins & Moore, 1970; Maidique, 1980; Pinchot, 1985).

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POST-MERGER INTEGRATION PROCESS IN JAPANESE M&A: THE VOICES FROM THE FRONT-LINE Vladimir Pucik INTRODUCTION While the average level of M&A activity in Japan as a proportion of GDP is still much lower than in the US or in EU countries such as Britain, the number of M&A transactions in Japan nearly doubled from just over 1,500 in 2001 to nearly 3,000 in 2006 (The Economist, 2007) – a more than ﬁve-fold increase in the last 10 years. A similar rising trend can be observed with respect to transaction value – although with some ﬂuctuation due to the size of some of the deals. As M&As in Japan are becoming more common, one could assume that foreign ﬁrms with more experience with this type of expansion strategy will be the main beneﬁciary of broader market acceptance of corporate takeovers (at least of the friendly or semi-friendly kind) – but this does not seem to be the case. The number of announced inward M&As remained essentially stagnant during this period, while the transaction value per deal actually declined. Takeovers of domestic ﬁrms by foreign entities are still only about 5% of total M&A activity in Japan (McCurry, 2007). Several explanations are usually given for why the share of foreign M&A is not increasing. First of all, barriers to entry and resistance to foreign investors – while less visible – may still be high (EIU, 2005, pp. 52–55), and Advances in Mergers and Acquisitions, Volume 7, 71–92 Copyright r 2008 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1479-361X/doi:10.1016/S1479-361X(08)07005-1

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the environment facing foreign investors may still be remarkably similar to what was observed nearly 20 years ago (Business International, 1990). Second, Japanese top management is known to actively oppose foreign acquisitions, and such an investment is welcome only in the most dire of circumstances, and only when a Japanese buyer is not available (Pudelko & Mendenhall, 2007). Third, for foreign companies, investment opportunities in other markets around the world – and in China and India in particular – may be simply more promising, so why bother about Japan with its economy in the doldrums for more than a decade? And there is yet another explanation – executing M&A strategies in Japan may simply be difﬁcult – beyond the competence of most foreign investors. Many recent M&As attempted by foreign companies in Japan are not generating any meaningful returns for their shareholders. Already, several well-known global ﬁrms such as Daimler-Benz, Vodafone, and Merrill Lynch were forced to withdraw from Japan (Abegglen, 2006) – not because they could not invest in the country, but because they did not know how to manage what they bought. If these ‘‘high-reputation’’ ﬁrms failed in their Japanese ventures, others may not be too keen in following in their footsteps – at least not without a better understanding of how to make a Japanese M&A strategy work. The importance of managing a post-merger integration well is now widely recognized (Child, Faulkner, & Pitkethly, 2001; Haspeslagh & Jemison, 1991; Schweiger and Lippert, 2005). However, empirical research with respect to post-merger integration in Japan is still rather limited (e.g., Froese & Goeritz, 2007), with much of the literature and cases focusing mainly on one particular deal – Renault’s partial acquisition of Nissan (e.g., Ghosn & Rie`s, 2005; Korine, Asakawa, & Gomez, 2005). In this study, we will attempt to take a wider perspective across a number of business sectors, but at the same time focus only on what happens after the deal is done.

STRATEGIC CONTEXT OF JAPANESE M&A In this study, we use the term M&A in a broad sense, as the speciﬁc transactions – and their consequences – we examined involved a full range of investment strategies from simple acquisitions and equity partnerships in existing enterprises (but not joint ventures) to spin-offs, full mergers, and equity infusion or recapitalization by new investors. In all cases, there was a signiﬁcant change in control of the existing organization, such as appointment of a new CEO, creation of a new entity

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after the merger, or absorption of the previously independent company by another ﬁrm. However, we also believe that the strategic context surrounding a transaction has more impact on post-merger integration than its formal legal framework. From this perspective, building on the strategic ﬁt literature on M&A integration (Aguilera & Dencker, 2004; Hitt, Harrison, & Ireland, 2001), we placed the deals that were covered in this study into one of the following categories, each with its own strategic logic1: M&A transactions that were aimed at turning around performance of an ailing domestic Japanese ﬁrm; M&A transactions that were aimed at increasing the global leverage of a foreign acquirer by acquiring a local platform; M&A transactions aimed at driving ﬁrm-level consolidation in response to competition in the Japanese market. Turnaround M&A: During the last decade, a number of Japanese companies experienced major difﬁculties in maintaining competitiveness. Some went bankrupt and then were ‘‘rehabilitated’’ under new ownership, some were fully or partially recapitalized by infusion of new capital including investments by private-equity (PE) ﬁrms, and some were simply acquired and integrated into other Japanese- or foreign-owned ﬁrms. In all cases, the emphasis was on improving business performance by radical restructuring and/or by implementing a new business model. Global leverage M&A: In these transactions, the major objective is to create or expand a competitive platform for growing in Japan or globally. This can be done by acquiring or investing in a local competitor with established technology or production base, companies with distribution channels, or market access, and increasingly, also those with hard to get talent. The deals can range from a simple expansion of the business portfolio to more complex attempts in global integration and leveraging opportunities for value creation through cross-selling of existing products or services. Consolidation M&A: A typical ‘‘synergy’’ deal is aimed at improving competitiveness by achieving sufﬁcient economies of scale, through rationalization of the value chain, reduction of overcapacity, leveraging investment and technology, and increased market bargaining power. Most of these kinds of deals were executed by Japanese ﬁrms, usually by merging business units (or entire companies) of direct competitors. Foreign ﬁrms

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have not so far been very visible in this kind of M&A – however, avoiding acquisition by a foreign-owned competitor is an important factor behind some of the recent consolidation deals. A recent element of the Japanese M&A environment is the emergence of PE ﬁrms as a new type of investor (EIU, 2005). However, in contrast to many other markets, many PE transactions are concentrated on distressed assets – the turnaround M&A. As observed by an executive with a PE fund participating in our study: ‘‘I think that our business here has been driven as much by the willingness of people to sell to a foreign buyer as it has been by what we would like to purchase.’’ And because PE ﬁrms are among the few market players who can execute large-scale transactions, the activities of PE ﬁrms in Japan attracted a lot of attention. We have therefore included several of these ventures in the sample of ﬁrms we interviewed.

Research Questions Our study aims to clarify three sets of issues of particular interest to both academics and practitioners. A number of observers have commented that M&As in Japan generally do not ‘‘make companies more efﬁcient’’ (The Economist, 2007), either in terms of cost savings from headcount reductions or by rationalization of the business model. Therefore, the ﬁrst area of inquiry is focused on the extent to which implementation of M&A strategies aims to drive operational effectiveness – usually through organizational restructuring, which may result in reduction of headcount, or at least signiﬁcantly impact the efﬁciency of the business model. Are foreign owners, and in particular PE ﬁrms, more likely to engage in radical restructuring? And we will also look at similarities and differences in approaches to restructuring in relation to the business drivers behind the M&A transaction. Another area of inquiry is focused on the question of to what degree the post-merger integration in the ﬁrms we studied included attempts to drive through a fundamental organizational transformation – such as introducing new management policies and practices aimed at creating (or enhancing) a stronger performance orientation (Killing, 2003). Here, we will look primarily at attempts to redesign management compensation systems with a focus on pay-for-performance and career progression rules side-stepping seniority. Another issue of interest is the integration impact of the M&A on the culture of the ﬁrm arising from an increase in workforce diversity.

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The third area of inquiry is focused on some of the critical dimensions of the post-merger integration process. The ﬁrst is the issue of the speed of the integration (Bragado, 1992; Homburg & Bucerius, 2006) – a topic of particular relevance in Japan where organizational transformation is typically a relatively slow affair (The Economist, 2007). The second dimension is the communication style and intensity that many observers consider key to a successful integration; clear, direct and open communication is critical in post-merger integration especially when the new management comes from abroad (Goulet & Schweiger, 2006; Pucik & Evans, 2004). Finally, we will look at the role of senior leaders and leadership teams in implementing the integration (Fubini, Price, & Zollo, 2006; Sitkin & Pablo, 2005).

Research Methodology The research design method selected was a ‘‘multiple case study’’ design, (Pauwels & Matthyssens, 2004; Yin, 1994) focusing on tapping into rich information about post-merger integration from senior executives closely involved with this process – it is their ‘‘voices’’ that provide most of the research material. The data was collected in two rounds of interviews. During the ﬁrst round, in-depth semi-structured conﬁdential interviews were held with 23 executives from 19 companies – including both foreign and Japanese ﬁrms – covering most of the signiﬁcant M&A deals that took place in Japan during the last ﬁve years. Then, in the process of analyzing the data, several of the original interviewees were asked to elaborate on and clarify their earlier remarks in a free-ﬂowing discussion, usually over the phone. Six other executives with extensive M&A experience from companies not formally taking part in the study were also interviewed in order to gain additional perspectives. The selection of companies that were asked to participate in the study was guided by two criteria. The ﬁrst aimed to include as many of the ‘‘critical’’ deals as possible – this would involve M&A transactions which received high visibility or which industry sources identiﬁed as highly relevant. The second objective was to create a relatively balanced sample of ﬁrms with respect to the strategic context described above – the ﬁnal count included six companies involved in the business turnaround situation, seven companies (all now foreign-owned) acquired to increase the global leverage and six companies (all but one Japanese-owned) involved in consolidation M&As.

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The ﬁnal sample of companies who agreed to participate included about one-half of the ﬁrms that were contacted and included ﬁrms such as Aozora Bank, Astellas Pharma, Citigroup, GE, JFE Steel, Konica Minolta, Nissan Motor, Nikko Asset Management, and Shinsei Bank. Senior executives from 10 other foreign and Japanese companies and leading PE funds also extended their cooperation, but for a number of reasons preferred to remain completely anonymous. Most interviews were conducted face-to-face (in English or in Japanese, based on the preference of the interviewee) and were recorded and transcribed. Several core and follow-up interviews were conducted over the phone. A typical face-to-face interview lasted on average 90 minutes and to encourage candor among interviewees, it was agreed not to disclose anyone’s identity with respect to any speciﬁc comments. Accordingly, the description of the data sources is limited to the industry sectors and the business driver behind the M&A.

POST-MERGER RESTRUCTURING In order to gain the expected synergies from an M&A deal, elimination of duplicate functions and departments is often seen as an essential step to be implemented quickly and resolutely immediately after the merger takes effect. However, we observed that the perceptions of the necessity and beneﬁts of restructuring varied considerably in our sample based on the business drivers of the transaction and also on the overall approach to the integration process. Turnaround The necessity of restructuring and downsizing was rather obvious in most of the turnaround acquisitions. However, survival of the ﬁrm rather than shareholder value or acquisition synergies was seen as the key objective and the actual scope of any measures taken was determined less by business model requirements, and more by how critical the business situation was at the time of the deal. In some cases, such as in the well-publicized entry of Renault into Nissan, the new leadership faced the necessity of quickly putting in place the restructuring program that the previous management was hesitant to implement (Ghosn & Rie`s, 2005). In other cases, the most painful changes were executed even before the deal took place, and the purpose of

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the restructuring was as much about cultural change as about cost reduction. After the foreign investor took over, we initiated a voluntary retirement program. But in fact, there had been two such programs before – so this was the third one. And, that really just allowed some more senior people, typically over 40 years old, to exit the organization for whatever reason including reasons such as they didn’t feel like this was the organization that they’d signed up to work for or that they didn’t feel comfortable working here. There was quite a generous separation package to allow them to separate from the company. (ﬁnancial sector)

Often, the crisis provided new management with opportunities to implement a radical overhaul of the whole organization: When we looked at our employee base, we had something of an inverted pyramid and y a lot of people in the senior grades. And because of number of higher positions has been reduced in the more recent years, we had a big layer of management blocking some really talented and energetic young people. So, our approach was to make a very strong statement about the philosophy of the company, the goals and objectives, and the culture that we’re trying to establish. y But, we had to thin out that management layer somehow to provide opportunities to the young employees. We had to create some gaps so we could get some movement going. And then, we could move away from seniority based advancement to more of a meritocracy, or performance-based remuneration and promotion based on ability rather than age.

Consolidation The difference between the amount of change visible in the turnaround situation and in consolidation deals was striking. In the US, and increasingly in Europe, the pursuit of synergies embedded in consolidation deals drives rapid restructuring and headcount reductions. Not so in Japan. In most cases, any restructuring has been gradual, relying on natural attrition and voluntary early retirement (targeted mostly on employees already close to the retirement age), even when the business imperatives of staff reduction were visibly compelling. A CEO of a holding company created through a merger of two large Japanese competitors was clear in this respect: Of course, there was no point in having two sales companies serving the same region. However, redundancies were dealt with through relocation of staff to new, growing areas, i.e. solution business and any personnel reductions were achieved through natural attrition and hiring cuts. So far, the full-time employees at the holding company and operating companies remain intact.

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It is important to note that, at the same time, the contracts of many temporary employees who formed the majority of the blue-collar workforce were not renewed and large-scale employment reductions were implemented in foreign operations – the protected jobs of white-collar personnel were paid for by sacriﬁces elsewhere. Another strategy popular with ‘‘in–in’’ mergers faced with surplus of white-collar personnel was to shift employees from core operations into afﬁliated companies (Nakata & Miyazaki, 2007) – some pursuing new and potentially promising avenues of business, but most simply serving as dead-end parking locations for employees with limited futures, but not yet ready for early retirement. But of course, this only shifts the challenge of restructuring to the next round, which could bring about a major conﬂict. There are perhaps people who feel they lost out in the merger process. Since we slimmed down the size of the (parent) company, the (other) group companies were made to take the brunt of the negative effects y when and if something bad happens, the grievances will burst forth from there.

In contrast, a foreign ﬁnancial institution consolidating three Japanese afﬁliates took an entirely different approach. As explained by the Chief HR Ofﬁcer (Japanese): It was extremely difﬁcult and painful, but we reduced the headcount from 7,500 to 3,000 in three years. This was inevitable not only because of the merger, but also because of the shift in technology and the business model. As you know, unlike in the US, we cannot just release people, unless the company is facing some extreme situation, such as bankruptcy. Therefore, we carried on the discussion with each employee given his or her performance evaluation, until he/she was convinced. But the most difﬁcult was releasing the senior executives of the merged ﬁrms. I personally had to have a face-to-face meeting with each and convince them (to leave).

Global Leverage Contrary to the wide-spread image of foreign investors (and in particular PE funds) coming to Japan, taking over companies and ﬁring people indiscriminately, with the exception of several difﬁcult turnaround situations described above, the emphasis was to proceed with caution especially when the ultimate focus was on growing the business. The following two responses from Western executives dispatched to direct the integration process summarize the preferred approach well: What’s important is that we didn’t try to rush the process. We tried to evaluate each person as they were, whether they had the right job or not. We always tried to give them

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a chance to see whether they could cope with the change. When we saw that certain things wouldn’t work out, we worked with them to see whether they could ﬁt in other positions in the group – ﬁrst in the positions they were already in, if not, inside the company, and if that didn’t work, in the overall group. And if all failed, we proactively worked with them to see what other ﬁrms they could work for.

Even if targets were set on required synergy savings, the emphasis was on working with individuals: Some left on their own will, but with the others, we worked very hard to ﬁnd them other positions they could work in. Our attitude was on a very individual basis – let’s take each person, work with them, give them time. Sometimes when it didn’t work out, we saw that it didn’t work out and so did they. Indeed some were slow to recognize this. Still, we would work with them. You may think, ‘‘My God, this is going to take forever.’’ But, in reality, it didn’t. If you use a little more patience and a little more time on individual cares, you can pretty much, from a ﬁnancial standpoint, do what you need to get done. y One expression to describe this might be, ‘‘You go slowly to go fast.’’

In several cases, there was an implicit understanding of ‘‘no change’’ between the foreign acquirer and the local executive team – seen as an essential element in getting support for a friendly deal. For some companies, this was the natural pattern of their international expansion, slow, steady, and careful; for others, it was more out of fear of making a mistake and recognizing that the acquiring company has no experience in running a business in Japan. This has created the difﬁcult challenge of how to move the newly acquired operations forward. The reason why there was a deal in the ﬁrst place was simple – a Japanese company was usually forced to sell as it was too weak to survive on its own – and from the local management point of view, it was better to have a foreign owner than to be acquired by a rival across town. At the same time, when the new owner was reluctant (or unable) to implement the changes necessary to restore the company’s competitiveness, the business continued to under-perform.

DRIVING TRANSFORMATION Nearly all ﬁrms in our survey used the occasion of the merger to put in place a new organizational strategy for the merged or acquired entity. The transformation usually affected a number of elements in all aspects of human resource policies and practices, from very operational, such as harmonization of travel expense accounting, to strategic, such as differentiating HR policies according to business sectors. In some cases, the transformation was fundamental, impacting every aspect of human

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resource management, but there were also a few cases in the pharmaceutical sector where a decision was taken to leave people systems and practices essentially intact. In terms of the desired direction of change, nearly all cases would fall under the ‘‘best of both’’ or ‘‘transformational’’ category (Mirvis & Marks, 1994), with performance orientation and entrepreneurship often mentioned as the outcomes most desired from the new culture. It is therefore not surprising that nearly all interviewees reported at least some changes in the compensation system intended to drive and reward performance on individual and company levels. In addition to stronger performance orientation and corresponding changes in the compensation systems, post-merger transformation also often impacted stafﬁng and career development processes.

Building the New Performance Culture ‘‘What I like about X is that there is no difference whatsoever whether you’re from X proper, or a company that X bought, whether you’re Japanese or foreign. All that matters is performance.’’

Probably, not all executives in our sample would fully endorse these words of a Japanese CEO brought in to manage a foreign PE acquisition, but creating performance culture was high on the post-merger agenda for nearly all of them. While speciﬁc ﬁrms approached this in variety of ways, from the top-down revolution of Nissan to a very gradual step-by-step approach, in all cases, creating a sustainable focus on organizational performance was seen as a major objective – and a challenge – for the postmerger integration process. In all-Japanese mergers, the main tools for the creation of a performance culture were generally focused on the top of the organizational pyramid, such as shortening the term of board directors and operating ofﬁcers (usually to one year only) and/or ‘‘up-or-out’’ regulations for appointments of section and division heads – ‘‘they will be asked to step down no matter the reason, because there is nowhere to go above.’’ However, pushing radical changes throughout the whole ﬁrm was considered difﬁcult: Understanding of the employees was the key to our success, and we needed to create a system that is acceptable to all. We did not want a situation in which employees feel that changes were being imposed that were unfavorable to them. (steel)

Several foreign-owned companies took a more assertive approach. In particular, companies with a strong and successful global culture of driving

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performance saw their business success as originating from their culture and the practices it supported, so they seemed to have no hesitation in bringing them to a Japanese acquisition. As explained by Japanese HR executive with a major international high-technology ﬁrm: When we acquire your company, this means you become our employee and you will not be at a disadvantage no matter if you’re originally from an acquired company, you will be treated the same as all other people y We treat our people equally and fairly, and we will make use of you and promote you under the same scheme as everyone else. This is what we believe in, and this is non-negotiable. So there is no alternative. This may be hard for senior Japanese employees who had been with the old company a long time to accept, but that is shoganai (cannot be helped).

Can this really work in Japanese environment? From the perspective of senior Japanese executive with experience in several turnaround M&As, it is not about what you do, but how you do it: ‘‘I think, this depends entirely upon how much we, from the acquiring company, can respect our counterparts. In some ways, we are a very rude company. We buy and order another company: ‘Do this!’ But on a person-to-person level, we are all equal, and there is none of that ‘we bought – you were bought’ mentality. Those who had been with us long enough have seen the company fail and accept that they were part of the problem.’’

However, not all of our respondents agreed with ‘‘the take it or leave it approach.’’ A senior US banker commented: You have a vision, but you keep it open to adapt it to what the local people are coming up with, to see if you can adjust to that accordingly. We’ve seen foreign ﬁrms come into the market and try to do it exactly like the book, in the US. Little changes could have made a big difference, but they didn’t make them. If those little things aren’t done, they are dead. We’ve been careful to respect that y

Fundamentally, the critical challenge is to create a balance between the new performance requirements and the climate of fairness, appreciating a job well done at every level: We have created a demanding culture. Everybody knows the targets we have to hit and we don’t make too many compromises in reaching that performance level. It’s often a tough-love environment. But, there are also elements of truth in what the union says – it’s important that every employee is treated fairly and equally with respect if they are getting the work done, even though they don’t receive big bonuses for outstanding performance. (banking)

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Redesigning the Compensation System In line with current trends in Japanese ﬁrms (Abe, 2007; Miyamoto and Higuchi, 2007), when the traditional systems of qualiﬁcation pay, annual pay increases and bonuses paid in relationship to base salary were still in place in the time of the merger – they were abolished and replaced by pay-for-performance salaries and variable bonuses. In addition, several companies also discontinued two-tier career tracks with two different salary curves for career professionals and clerical staff, moved to market-based compensation, and folded many of the cash beneﬁts and allowances into the core salary structure. While the pay-for-performance concept seems to have gained wide acceptance, there were large differences in the speed and depth of the transition. On one side, the change in a ﬁnancial company acquired and assimilated by a US-based multinational was extensive and immediate, as reported by a Japanese HR executive: The most important agenda was the pay-for-performance rule, so if something was allocated based on some criteria other than performance, (such as) salary differences pegged onto gender, age, for example, then we removed that. We discarded whatever speciﬁc factors inﬂuencing the salary that the person can’t change, because this was totally contrary to our way of thinking y We had no problem keeping things that were typically and uniquely Japanese but did not run counter to the principle of pay-forperformance – for example, company-owned housing for people transferring to a different location, or the company paying your commuting fees, which is common sense in Japan but not in other countries. We kept that too. But we didn’t keep the Japanese custom of giving a raise for every new baby. We took it away, despite some resistance.

However, even where the new foreign parent practices were emulated in Japan, this could not be done without careful consideration of local circumstances. Pay systems around the world tend to be ﬂavored with a local taste, and the following was one of the typical comments highlighting the complexity of making the change: American companies like to insert sales and marketing incentives into the salary structure, and the Americans would argue that as long as they keep the variable proportion of the salary relatively large, this would be a great positive inﬂuence on improving sales performance. But in Japan, many employees do not like the idea that their salary base was reduced, together with a bigger variable proportion, so those people may leave.

Interestingly, the most cautious in transitioning to performance pay were not Japanese acquirers, but several European ﬁrms where changes in the compensation philosophy of their newly acquired afﬁliates were considered a ‘‘no-go’’ area. This was partly in line with a world-wide hands-off policy

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toward integrating HR with the parent ﬁrm, and partly because of the concerns that the any change without a deep understanding of the local environment would be too risky.

Realigning Workforce Strategies In a number of companies we observed, an important part of the transformation process was a shift from the traditional system of ‘‘lifetime’’ generalist careers (Pudelko & Mendenhall, 2007) to an emphasis on hiring and promoting specialists. From an employee point of view, the opening of career opportunities for mid-career hires and women was usually the most important change. Sometimes, new ownership enabled the recruitment of senior management and top-class professionals who may otherwise not be attracted to a poorly performing local ﬁrm. ‘‘(After the acquisition), I needed to pull in all different kinds of expertise. I can’t wait for lifetime employment to catch up with that. I need to do a lot of mid-level recruiting to get that expertise in. That means I can’t grow them. Now, right off the bat, there is a totally different philosophy.’’

This comment by a senior international banker was echoed by many others: ‘‘When you’re running a baseball team, and the management rotated in from basketball, football, while you’re playing against a team with coaches and management all from baseball, we know what happens. The one with experience tends to win.’’

Another major impact on employee careers following some of the acquisitions involving international ﬁrms came from the ‘‘radical step’’ of abolishing separate career tracks for women and graduates from junior colleges – a system which is still quite common in many traditional Japanese organizations. Immediately after the merger, professional and the clerical lines were merged into the same single career track; whereas before, the two were completely separated. What it means is not that those in clerical positions will suddenly be able to do the same jobs as those in the professional career tracks – administrative work still ranks lower than the type of work that professionals do, but since the two career tracks are no longer parallel but linear, and those hired in the clerical track can move up.

In addition to increased hiring of mid-career professionals and opening career opportunities for women, a number of ﬁrms reported introducing job posting systems that provided the employees with broader choices for their

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development, including enhancement of international mobility. And many of the new career development initiatives that crossed traditional organizational boundaries provided learning beneﬁts not only to the individual, but also to the organization. However, probably the most profound impact on the organizational culture came from the increase in workforce and management diversity. I’m often asked, what changed the most. And I always answer – the level of diversity. That means we had all these mid-career people with different backgrounds and different corporate cultures even if they were Japanese, and also because we had a policy of choosing the right person for the right job, we had all these foreign staff, including our top management. Also, utilizing our female staff is another issue that we are working on. It was a major change that we now have all these people from different cultures and backgrounds. This is something that none of our domestic competitors have.

This point of view regarding beneﬁts gained from enhancing diversity resonated with many others among our respondents: We always emphasize that we need to become a hybrid organization – a Japanese company with American shareholders. [As a result, we are able to get] a new ﬂavor and taste. We now have one thousand employees that have joined us after the acquisition. This means that people are bringing in new ideas y and the mixture of these new talents with the ‘‘old boys’’ creates a new culture, which is quite different from the other ones. That is one of the biggest strengths of our company.

LEADING THE INTEGRATION PROCESS In general, the issues of concern with respect to implementing the postmerger integration were not that different from what was observed in other M&A research: the challenges of deciding how fast to move and how best to communicate with employees were mentioned again and again. However, the importance of ﬁnding an appropriate leadership style and getting the chemistry within the top management team right was also very close to the top of the implementation agenda.

Moving with Speed? Among our respondents, the direction of organizational change following the merger or the acquisition – toward a stronger focus on performance – was seen as less controversial than the speed of implementation. Finding the

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right balance of how fast to go was a key issue of contention. According to a senior Western executive in a ﬁnancial ﬁrm: Japanese management tends to be favorable to change, but in a very gradual, careful, and managed manner. The Westerner tends to make change very rapidly and then tries to settle down as quickly as possible. Thus, there is a constant tension between these two concepts. Sometimes quick change is appropriate and sometimes slow change is appropriate, but y people aren’t always [asking] whether change is appropriate or not, they are [asking] whether it should happen now, quickly or slowly. This is an important discussion to have.

The survey respondents varied to a great extent in their attitude toward the need for speed in integrating with a new entity – reﬂecting the differences in the strategic intent behind the deal, the market power, the M&A experiences of the parent company, and the sense of urgency given by the competitive conditions in the market. With some exceptions, companies focusing on turnaround or pursuing global leverage, those with signiﬁcant M&A experience, and those where the size differences between the parties were large tended to favor a faster approach. In contrast, companies implementing consolidation strategies, those without much M&A experience, and those with strong union presence generally moved with more deliberation and caution. Which approach works better? Most deals we studied were relatively recent, so it may be too early to comment on results, but in some cases our respondents were able to draw comparison across several different M&A experiences – with a strong bias toward the beneﬁts of speed. A local HR executive with extensive M&A experience was unambiguous in her assessment: When you’re changing something, you must do it all in one go, as quickly as possible. It becomes much harder to make small changes later on, where you would have to re-negotiate every small detail, and when you do that, the staff starts feeling ‘oh, they’re making everything worse.’ So it’s better to show them at the outset, these are new rules. It’s not something you should negotiate, but rather, you should be straightforward and show the employees at the start, this is how it is. And you have to do it in the ﬁrst three months, maximum. If you don’t compromise at ﬁrst, it will be better in the long run.

In one of the foreign-controlled companies, implementation of some of the new ‘‘sharper’’ performance-based HR policies was suspended for a two-year period to give the employees a chance to adopt. Looking back, the Japanese CEO (appointed by the acquirer) observed: I think I was a bit too easy, too gentle, too reserved because we’re a foreign company. Because foreign companies are always criticized for being too harsh, for being vultures,

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Especially when business survival was dependent on radical restructuring, speed was seen as essential. And the key enabler of moving with speed was open and frank communication starting at the top of the organization.

Communication Our respondents all agreed that communication about the integration strategy has to start on the day the deal is announced. Top management has to clearly express the rationale for the acquisition, the synergies sought, the degree of integration required, and a clear vision of how the acquisition or merger will create value. In the early stages of our acquisition, after due diligence, on the ﬁrst day we announced that we will spend a fortnight talking with employees and doing more research, and that in two weeks time we’ll release our plan. The staff, at that time, probably realized that there was going to be certain bit of restructuring, and they were braced for that. But what actually happened was that we told them their factory was going to be closed in six months. We said, those of you who can move to our factory, we ask you to stay on, and for those of you who are going to leave, we’ll offer you this and that severance package.

Consistent and coherent communication helps to build morale and reassure those unsettled by the changes. It also gives people something constructive to talk about, rather than focusing on rumors and worst-case scenarios. When an American company acquired failing local competitor, the decision was taken to be fully open and transparent. We assumed everybody was intelligent and that they were aware of what was going on around us, so we started with a lot of communication – a more direct kind of honne (true feelings) as opposed tatemae (public stance) communication. It begins with a complete review of all our ﬁnancials. So that even contract employees, like clerks, are seeing how much revenue we make, where we make it, our cost, proﬁt, where we are going, lines of businesses that make the money, products etc. In effect, everybody gets to see what we’re trying to do.

Effective communication during the integration is a two-way process, from the company to the employees and also from the employees back to the top management to provide input for critical decisions. One feedback tool which worked very well for one ﬁnancial company – recapitalized with

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infusion of foreign capital – was the creation of employee advisory teams. As a newly appointed (Western) CEO observed: (For the teams) we carefully selected people throughout the company that could help us as the sounding board representing the employees. To do this, we asked people in the company to identify the inﬂuential people whom others listened to. Then these teams (each 8–10 members) put the (transformation) plans together. Now, for the ﬁrst round of personnel changes, I needed to do make my own decisions, but it was all after having discussions with them, so there were no surprises. However, the second round of changes (regarding who do we move out, who do we put in charge), that actually came from the teams. What was amazing is that I would have my own list, but they would identify the same names in their list y .

Straightforwardness was seen as a guiding principle. Hard truth may not go down well, but the consequences are easier to handle than the alienation and mistrust stemming from lack of credibility of what is being communicated – starting with the messages coming down from the leadership team. In this process, the ability of top management to create and maintain focus and the sense of urgency was critical – ‘‘Our target was clearly deﬁned, and yet we were ﬂexible about how to approach that target. But we were quite ﬁrm about the target itself.’’

Integration Leadership When Renault considered acquiring a 37% stake in Nissan, a big factor in the decision-making process was the conﬁdence that it had a team of seasoned managers who could be dispatched to Japan to guide the restructuring efforts. In words of Renault’s Chairman Louis Schweitzer: ‘‘If I didn’t have Mr. Ghosn [who was sent by Renault to Tokyo to become president of Nissan], I would not have done the deal with Nissan. That means I sent him in because I had the absolute conﬁdence in his ability’’ (Wall Street Journal Europe, 2001). Similarly, as observed by former GE executive: The major challenge for GE acquisitions in Japan was talent. Jack Welch said – ﬁrst you have to have the right people, only after you have the right people should you go and buy a company. And in one of our acquisitions at one point Jack Welch got in touch and told us, ‘‘Don’t buy.’’ GE’s top management was saying, who is going to look after the company, after you buy it. If you don’t know who is going to take it on, you shouldn’t buy it.

Renault and GE concerns are well founded. With only a few exceptions of several stand-alone acquisitions, the signing of the deal was followed by the appointment of new leadership. However, for most companies, assembling

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a new leadership team was not an easy step, as not many have the bench strength of GE. Who should head the acquired organization? Ideally, it should be someone familiar with both sides in the deal, for example, a Japanese executive already in a leadership position with the acquirer or another foreign company, but these executives are still in a very short supply. Several of our respondents commented on the positive effect of close collaboration among the leaders of the merged organizations. ‘‘Synergies, complementarities, and sense of trust, particularly at the top level, were really the keys to success. I believe that the good relationship between the two top executives helped drive the whole project and (inﬂuenced) employees’ attitudes. Conﬁdence in each other at the top level of management created smooth synergy in the rest of the organization.’’ At the same time, trust among the respective CEO’s is not enough. M&A implementation is essentially a change process, having a shared vision is important, but it is only the very ﬁrst step. We have seen examples where a close personal relationship and trust at the top created a false sense of complacency about the operational obstacles facing the merger. Signals indicating that all was not well were ignored, and hard decisions postponed because pointing out the difﬁculties was seen as rocking the boat. All our respondents agreed that strong leadership and commitment to a strategy by the top management of an acquired organization was the foundation for the successful execution of integration initiatives. Where we looked at the examples of deals that failed, or did not deliver the expected value, the vision and leadership style of top management were consistently on the top of the list of the factors reported as contributing to the failure. Three capabilities were seen as fundamental to the effectiveness of the top leadership: credibility of the new vision, sense of urgency, and effective communication. Again and again, the respondents in our survey indicated that creating a sense of urgency around implementing a vision and maintaining momentum in driving change is the key to success. And ﬁnally, an ability to articulate vision must be accompanied by an openness to solicit feedback and engage in open two-way communication. Nationality of the leaders was not considered important. Linguistic competence was seen as helpful, but only in a very limited way. Although as in any cross-border M&A, multi-language capability within the leadership team is beneﬁcial, executives – Japanese or foreign – who are perceived by employees as ‘‘interpreters’’ at best, but do not have deep understanding of the business and the operating model, were not seen as effective when the going got tough – which usually happens fairly quickly after a deal is done.

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Finally, another critical factor that seemed to matter was getting the leadership selection right at the outset – stability in the top management team seems to be highly correlated with the reported success of the transaction. In one of the companies that we studied, the top position in the acquired company was occupied by four executives in three years. While the business strategy remained nominally the same, as the company moved from expatriate to local leadership and back with each appointment, the ‘‘rules of engagement’’ had changed – contributing to the confusion and instability within the organization. Differences in leadership and communication styles between each generation of executives further enhanced tensions in the organization. At the end of three years, the company – by now deeply in the red – was sold to a local ﬁrm which brought it back to proﬁtability within six months.

IMPLICATIONS AND CONCLUSIONS With respect to the controversy about M&As in Japan as harbingers of massive restructuring, the evidence is ambiguous. On the one hand, restructuring is possible, even fast and drastic (in a Japanese context) – but this is usually limited to turnaround situations. In the case of consolidation deals (usually all-Japanese) or global leverage transactions (when the acquirer is a foreign ﬁrm), any restructuring tends to be incremental. Even in the absence of large-scale restructuring, many companies (foreign-owned as well as Japanese) look at M&As as opportunities to embark on large-scale cultural change – aiming to increase performance at all levels. However, moving from well-intentioned rhetoric to reality may still be a problem – usually because companies do not always have the internal capability and strength to drive major organizational transformation. In this respect, foreign companies with a strong history of highperformance culture do not seem to hesitate to bring their culture to Japan – with reasonable success when linked together with a climate of fairness and respect. Here, the implications for management practice are simple: do not underestimate the importance of cross-cultural differences, but do not accept this as an excuse for poor performance. Another important driver of organizational change is an increase in workforce diversity – more women and mid-career hires in management positions, and more ﬂexibility in career planning and job rotation. Again,

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the most visible impact of increased diversity can be observed in M&A deals involving turnaround situations and foreign acquirers. With respect to the speed of integration, those companies focusing on turnaround or pursuing global leverage, those with signiﬁcant M&A experience, and those where the size differences between the parties were large tended to favor a faster approach to post-merger integration, while companies implementing consolidation strategies, with strong union presence, or those without much M&A experience generally moved with much more deliberation and caution. When moving with speed, a well-articulated communication campaign seems to be the essential ingredient in conveying the logic and desired outcome for the integration to the workforce – with being openness and straightforwardness as guiding principles. Hard truth may not go down well, but the consequences are easier to handle than the alienation and anxiety stemming from lack of trust and confusion about the way forward – here the ﬁndings from Japan are consistent with those from previous research in other parts of the world. However, what is emerging from our data is that the credibility of senior management is perhaps the most critical factor in creating value in Japanese M&As. While only strong leadership may not be enough, without a coherent leadership team able to articulate and carry out a vision for the business, the M&A strategy is not likely to be successful – especially if the acquiring company is from outside Japan. For future research, this is probably the most promising direction.

NOTE 1. In some cases, there was an overlap, as successful turnarounds could in the future become a growth platform.

ACKNOWLEDGMENTS The support for this study was provided by Ernst &Young Transaction Advisory Services in collaboration with the Economist Intelligence Unit. Shinji Takeuchi provided invaluable assistance with data collection.

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REFERENCES Abe, M. (2007). Why companies in Japan are introducing performance-based treatment and reward system – The background, merits and demerits. Japan Labour Review, 4(2), 7–36. Abegglen, J. (2006). 21st century Japanese management: New systems, lasting values. New York: Palgrave. Aguilera, R. V., & Dencker, J. C. (2004). The role of human resources management in crossborder mergers and acquisitions. International Journal of Human Resource Management, 15(8), 1355–1370. Bragado, J. F. (1992). Setting the correct speed for postmerger integration. M&A Europe, 5, 24–31. Business International. (1990). Japan: The mergers & acquisitions challenge. Hong Kong: Business International Asia/Paciﬁc Ltd. Child, J., Faulkner, D., & Pitkethly, R. (2001). The management of international acquisitions. Oxford: Oxford University Press. Economist Intelligence Unit (EIU). (2005). The battle for corporate control: The outlook for M&A in Japan. London: Economist Intelligence Unit. Froese, J. F., & Goeritz, L. E. (2007). Integration management of western acquisitions in Japan. Asian Business & Management, 6, 95–114. Fubini, D. G., Price, C., & Zollo, M. (2006). The elusive art of postmerger leadership. McKinsey Quarterly, 4, 29–37. Ghosn, C., & Rie`s, P. (2005). Shift: Inside Nissan’s historic revival. New York: Random House, Doubleday. Goulet, P. K., & Schweiger, D. M. (2006). Managing culture and human resources in mergers and acquisitions. In: G. K. Stahl & I. Bjo¨rkman (Eds), Handbook of research in international human resources management. Cheltenham: Edward Elgar. Haspeslagh, P. S., & Jemison, D. B. (1991). Managing acquisitions: Creating value through corporate renewal. New York: Free Press. Hitt, M. A., Harrison, J. S., & Ireland, D. (2001). Mergers & acquisitions. A guide to creating value for shareholders. Oxford: Oxford University Press. Homburg, C., & Bucerius, M. (2006). Is speed of integration really a success factor of mergers and acquisitions? An analysis of the role of internal and external relatedness. Strategic Management Journal, 27, 347–367. Killing, P. (2003). Improving acquisition integration. In: Perspective for managers (p. 97). Lausanne, Switzerland: IMD. Korine, H., Asakawa, K., & Gomez, P. Y. (2005). The importance of the agreement formation process in partnering with the unfamiliar: The case of Renault and Nissan. In: M. E. Mendenhall & G. Stahl (Eds), Mergers and acquisitions: Managing culture and human resources. Stanford: Stanford University Press. McCurry, J. (2007). M&A conference. ACCJ Journal, 44, 24–33. Mirvis, P. M., & Marks, M. L. (1994). Managing the merger: Making it work. Englewood Cliffs, NJ: Prentice Hall. Miyamoto, D., & Higuchi, J. (2007). Paying for success. Performance-related pay systems and its effects on ﬁrm performance in Japan. Asian Business & Management, 6(Supplement 1), S9–S31. Nakata, Y., & Miyazaki, S. (2007). Has lifetime employment become extinct in Japanese enterprise? An empirical analysis of employment adjustment practices in Japanese companies. Asian Business & Management, 6(Supplement 1), S33–S56.

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Pauwels, P., & Matthyssens, P. (2004). The architecture of multiple case study research in international business. In: R. Marschan-Piekkari & C. Welch (Eds), Handbook of qualitative research methods in international business. Cheltenham: Edward Elgar. Pucik, V., & Evans, P. (2004). The human factor in mergers and acquisitions. In: P. Morosini & U. Steger (Eds), Managing complex mergers. London: Prentice Hall. Pudelko, M., & Mendenhall, M. E. (2007). What western executives need to know about current Japanese management practices. Organizational Dynamics, 36(3), 274–287. Schweiger, D. M., & Lippert, R. L. (2005). Integration: The critical link in M&A value creation. In: M. E. Mendenhall & G. Stahl (Eds), Mergers and acquisitions: Managing culture and human resources. Stanford: Stanford University Press. Sitkin, S. B., & Pablo, A. L. (2005). The neglected importance of leadership in M&As. In: M. E. Mendenhall & G. Stahl (Eds), Mergers and acquisitions: Managing culture and human resources. Stanford: Stanford University Press. The Economist. (2007). Going hybrid: A special report on business in Japan. London: The Economist. Wall Street Journal Europe. (2001, February 15). Renault steers forward, p. 31. Yin, R. K. (1994). Case study research design and methods. Thousand Oaks, CA: Sage.

HOW CLIMATE AND LEADERSHIP CAN BE USED TO CREATE ACTIONABLE KNOWLEDGE DURING STAGES OF MERGERS AND ACQUISITIONS Iain L. Densten ABSTRACT This chapter attempts to overcome the lack of theory development in the human side of mergers and acquisitions by synthesising key climate, knowledge generation and leadership frameworks. The chapter aims to identify the key roles that climate plays during M&A and how leadership can positively inﬂuence climate in order to improve M&A organisational outcomes. The chapter establishes that climate could be a key ‘systems variable’ during different M&A stages and inﬂuences the generation and transfer of actionable integration knowledge among individuals. The role of leadership and its relationship to climate’s impact on M&A are developed. The chapter uses the concept or vision of ‘making ﬁre’ or ‘kindling the ﬂame of ﬁre’ to assist leaders to conceptualise their role and the underlying processes at play. Finally, propositions have been developed to assist future research.

Advances in Mergers and Acquisitions, Volume 7, 93–117 Copyright r 2008 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1479-361X/doi:10.1016/S1479-361X(08)07006-3

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INTRODUCTION M&A are commonly used strategies that aim to increase proﬁtability and sustainability (Cartwright & Schoenberg, 2006). The implementation of such strategies is, however, difﬁcult and frequently exacerbates a number of stafﬁng problems, such as resignation (Van Knippenberg, Van Knippenberg, Monden, & de Lima, 2002), lower self-esteem (Terry, Carey, & Callan, 2001), higher stress (Terry, Callan, & Sartori, 1996), illness (Cartwright & Cooper, 1993) and loss of identity (Bartels, Douwes, de Jong, & Pruyn, 2006). In fact, more than half of all organisational mergers eventually fail to some extent (Bartels et al., 2006; Cartwright & Cooper, 1992). Knowledge about avoiding these outcomes is limited and not theoretically driven (Hogan & Overmyer-Day, 1994), and even the impact of leadership on the acquisitions’ processes and outcomes is not well developed or widely recognised (Sitkin & Pablo, 2005). It is, however, logical to suggest that the implementation of M&A strategies fundamentally changes the ‘interplay structure’ between organisations and their people within a speciﬁc context (i.e. ‘coal face’), and alters the cognitive and affective processes that drive individuals’ behaviours. Furthermore, the roles leaders play during M&A could be strategically used to enhance the capacity of the ‘coal face’ to generate knowledge critical to organisational integration.

Coal Face Ultimately, to survive and prosper, every organisation must conquer the ‘coal face’ challenges that confront it. DiGeorgio (2002) highlights the importance of understanding how any integration process fundamentally changes the ‘coal face’ in a systematic way that guides the process and ensures issues are effectively addressed. According to Field and Abelson (1982), climate is a key ‘systems variable’ in understanding the interface between organisations and their people within the context of each unique ‘coal face’. Several researchers support this assertion and have argued that climate provides an important variable in the investigation of the integration of the employees, their group and the organisation (e.g. Schneider & Reichers, 1983). Climate is most useful when conceptualised in a strategic mode that focuses on service, management and innovation (Sparrow & Gaston, 1996), and can be ‘regarded as an attribute of the organization, a conglomerate of attitudes, feelings, and behaviours which characterizes life in the organization, and exists independently of the perceptions and

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understandings of the members of the organization’ (Ekvall, 1996, p. 105). Climate can be viewed as (a) the ‘character’, ‘personality’ or ‘psychological atmosphere’ of the internal working environment (Ashforth, 1985), (b) an objective description of organisational functioning (e.g. innovation and safety), (c) a property of the organisation itself (Abbey & Dickson, 1983) and (d) an appropriate indicator for the implementation of executive management policies (Ruppel & Harrington, 2000). These views suggest that climate could provide important insights into how the process of M&A can be positively inﬂuenced. The analysis of critical elements of climate can range from formal to informal organisational policies, practices and procedures, and the goals and means of attainment that produce shared or learned perceptions among groups of individuals. These collective perceptions enable a group or pocket of individuals to understand their organisation and their place within it. In simple terms, climate taps into a conscious subset of learned responses and acquired meaning (Sparrow & Gaston, 1996) and inﬂuences understanding about how individuals should respond to the internal working environment (Payne & Pugh, 1976; Schneider & Reichers, 1983). Organisational climate represents a ‘broad class of organizational, rather than psychological, variables that describe the organizational context for individuals’ action’ (Glick, 1985, p. 613) and can be deﬁned in terms of formal and informal personal practices (Glick, 1985; Schneider, 1985; Schneider & Reichers, 1983). Deﬁning climate as practices (or activities) that produce visible and tangible outcomes represents a key difference between climate and the related concept of culture. Such practices are ultimately the surface-level manifestation of culture (Schein, 1990) and culture itself and are more accurately understood at a higher level of abstraction and meaning (Baer & Frese, 2003; Schneider & Reichers, 1983). While research continues to conﬁrm the importance and relevance of culture during the M&A process (e.g. Bligh, 2006), constant ﬁndings have eluded many researchers because of the complex nature of organisational and national culture and the strong impact of other non-culture variables (Stahl & Voigt, 2005; Teerikangas & Very, 2006). The speciﬁc nature of climate within a particular referent, e.g. politics, change, quality, innovation, etc. (Rousseau, 1988; Schneider & Reichers, 1983), may, however, not be so inhibiting for climate research during M&A. Climate can also be seen as an intervening variable within the context of organisational process that affects the outcomes of operations (Ekvall, 1996). While the idea that climate represents a collective view or perception within groups cannot be taken for granted, shared perceptions do develop among employees at

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different organisational levels as they become exposed to common experiences that ultimately result in shared perceptions of climate (Anderson & West, 1998) which are socially constructed (Ashforth, 1985; Campion, Medsker, & Higgs, 1993). Interestingly, climate and other organisational factors have contributed approximately twice as much variance in proﬁt rates as economic factors (Hansen & Wernerfelt, 1989), and according to Cartwright and Schoenberg (2006), understanding the variance of antecedents lies at the heart of much M&A research.

What are the Links between Climate and M&A? Unfortunately, research on the links between climate and M&A is sparse (Bartels et al., 2006; Nemanich & Keller, 2007) but the process of innovation and the ‘climates for innovation’ have many similarities. For example, the M&A and innovation processes involve value creation and enabling of knowledge transfer (Ahuja & Katila, 2001; Capron & Pistre, 2002; Scheider, Gunnarson, & Niles-Jolly, 1994) at various stages (Ivancevich, Schweiger, & Power, 1987; Klein & Sorra, 1996; Kusunoki, 2004; Rogers, 1995; Seo & Hill, 2005), and involve the management of attention to issues, which is critical to success (Van de Ven, 1986; Yadav, Prabhu, & Chandy, 2007). Further, acceptance and commitment to change are reliant upon the ‘interpret activities’ of individuals (Grint & Woolgar, 1997; Ivancevich et al., 1987) which management can inﬂuence but not control (Meek, 1988). Support for the development and maintenance of an appropriate climate as a major determinant of innovation is well established (Abbey & Dickson, 1983; Burgleman & Sayles, 1986; Ekvall, 1996; Judge & Cable, 1997; Jung, Chow, & Wu, 2003; Nystrom, Ramamurthy, & Wilson, 2002) and therefore it is reasonable to hypothesise that similar relationships between climate and M&A may also be evident. After all, climate determines how much attention, and the subsequent activities that produce or hinder innovation (Ambile, 1988; Kanter, 1988), and a comparable process should also be evident in M&A. Managing individuals’ attention is one of the central problems in the management of innovation (Van de Ven, 1986) and it is also reasonable to argue that a similar relationship exists within the management of M&A. The innovation process has a variety of phases (Klein & Sorra, 1996; Kusunoki, 2004; Rogers, 1995) which can be broadly grouped into three general phases, namely pre-adoption (i.e. initiation), adoption and implementation (Damanpour & Schneider, 2006), and these are consistent with constructs from the theory of innovation implementation (Klein & Sorra,

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1996). A three-phase approach does not, however, recognise the signiﬁcant link between innovation and the values of individuals. After all, individuals judge the importance and signiﬁcance of innovation from their socially constructed understanding rather than an objective view (Barley, 1986; Brown & Eisenhardt, 1997; Hattrup & Kozlowski, 1993). Such judgements determine the acceptance of inﬂuence and subsequent commitment to innovation (Sussman & Vecchio, 1991). Klein and Sorra (1996, p. 1063) suggest a climate that supports innovation, encourages individuals to become more committed to innovation and occurs when individuals ‘perceive that use of the innovation will foster (or conversely, inhibit) the fulﬁlment of their values’. The concept of ‘conformity’ represents the level of commitment resulting from this innovation–values linkage (Klein & Sorra, 1996).

How does Climate Inﬂuence M&A? M&A processes fundamentally change the climate (i.e. coal faces) between organisations and their employees by altering which speciﬁc stimuli get noticed and thus inﬂuence subsequent activities. Changing what gets noticed inﬂuences the social and individual processes involved in the sharing of tacit knowledge, concept creation and justiﬁcation, prototype development, and knowledge transference. In practical terms, climate highlights which stimulus is personally important to individuals by providing the context in which they interpret all stimuli. During the M&A process, formerly accepted stimuli are challenged, as individuals are confronted by unfamiliar and confusing stimuli. These stimuli are created by the need to achieve new combined organisational outcomes and knowing how to function when a working group changes. Individuals coming from different organisations have to learn to work together and cooperate in the transfer of strategic capacity (Quah & Young, 2005). While different integration strategies (e.g. preservation and absorption) can be implemented by organisations, considerable value can be generated by exploiting and creating explicit and tacit knowledge. The integration of such embedded knowledge from merged or acquired organisations can lead to superior organisational and individual learning (Kogut & Zander, 1996). While knowledge systems are important to organisational practices (Patriotta, 2004), our understanding is based more on anecdotal evidence rather than the solid information of rigorous empirical studies (Davenport & Volpel, 2001; Reiter-Palmon & Illies, 2004; Swan, Newell, Scarbrough, & Hislop, 1999; Van Beveren, 2002) and most knowledge practices are not well informed by theory (Edwards, Handzic, Carlsson, & Nissen, 2003). Nonaka

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and Takeuchi (1995) attempt to overcome this void through their development of the socialisation–externalisation–combination–internalisation (SECI) model of knowledge creation and conversion. This model suggests that knowledge creation is a process in which various contradictions are combined through the active interactions among individuals, their organisation and the environment. Knowledge is created in a spiral that integrates opposing concepts ‘such as order and chaos, micro and macro, part and whole, mind and body, tacit and explicit, self and other deduction and induction, and creativity and efﬁciency’ (Nonaka & Toyama, 2003, p. 2). The approach centres on the ﬂow of knowledge particularly as it relates to the conversion of tacit into explicit knowledge and is consistent with the view that ‘knowledge is a phenomenon in motion’ (Patriotta, 2004, p. 10). Byosiere and Luethge (2004) reﬁned the SECI process model which has four modes of knowledge conversion, namely externalisation (i.e. tacit to explicit knowledge), combination (i.e. explicit to explicit knowledge), internalisation (i.e. explicit to tacit knowledge) and socialisation (i.e. tacit to tacit knowledge). Nonaka and Takeuchi (1995) suggest that this knowledge exists in ‘communities of practice’ and the SECI model helps to explain how various contexts can promote different types of dialectical thinking, and involves synthesising opposites (e.g. tacit/explicit, body/mind, individual/organisation and top-down/bottom-up) by transforming and uniting them to transcend the existing reality, which results in the creation of new knowledge. The SECI model identiﬁes two key concepts: (a) ‘communities of practice’, which are places where individuals ‘learn knowledge that is embedded in the community’, and (b) ‘Ba’ which is ‘a living place where new knowledge is created’ (Nonaka, Toyama, & Konno, 2000, p. 15). Interestingly, a ‘community of practice’ appears to be similar to culture, as both represent how an organisation inﬂuences or changes the behaviours of individuals, while ‘Ba’ is similar to climate for innovation and M&A, as both represent how the behaviour of individuals is inﬂuenced by the embedding of new knowledge. Several fundamental similarities exist between the SECI model and climate for innovation: both (a) identify how different phases or contexts can generate new ideas, (b) focus on how the organisational and individual interface can create ideas and (c) highlight how critical to success are the active commitment and engagement of all individuals (Densten, 2007). The credibility of the SECI model has been challenged in three areas: (a) the embeddedness within non-Japanese organisations, (b) empirical validation of the four contexts and (c) lack of integration with other literature (Glisby & Holden, 2003; Gourlay,

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2006). Tsoukas (2005) also challenges the idea that tacit knowledge can be converted or transformed into explicit knowledge and argues that knowledge conversion occurs when the focus of individuals is directed. He suggests that an attention-drawing process more effectively explains how knowledge is created, particularly knowledge from experience. Consequently, the bedrock of reality can be structured by inﬂuencing what gets focused on which and then shapes and constrains the atmosphere (or climate) of the workplace (Schneider & Reichers, 1983).

How does Leadership Inﬂuence M&A Climate? In most environments, leaders can fundamentally inﬂuence the focus of their followers’ attention. A recent longitudinal study of the US retail banking industry demonstrated this relationship by showing how CEO attention was a critical driver of innovation (Yadav et al., 2007). Allix and Gronn (2005, p. 189) argue that ‘leadership acts are those which most inﬂuence what information is used, and how it is used [which has] a major and consistent impact on the creation of social knowledge’. According to Swan and Scarborough (2001), leaders have the ability to enable organisations to manage knowledge and sustain learning. Leaders are unable, however, to control the focus of their followers and can merely inﬂuence the interpretative activities among the individuals. Nonaka and Toyama (2003) suggest that leaders can furnish the necessary conditions and energy (e.g. autonomy, creative chaos, redundancy, requisite variety, love, care, trust and commitment) for the creation of new ideas, but the very nature of knowledge creation is self-organising. Leaders inﬂuence the focus of followers through their own attitudes and behaviours. For example, how executives set their organisational priorities for competitiveness creates the climate for innovation (Scheider et al., 1994). Recently, Bligh (2006, p. 397) concluded that leadership can facilitate post-merger integration through leadership processes that create, change, integrate and embody culture manifestations. Leaders should therefore be fundamentally responsible for deliberate and conscious climate creation which is based on an appreciation of how knowledge is processed. Such an advance would overcome a major deﬁciency in the literature highlighted by Sitkin and Pablo (2005). According to Cameron, Quinn, DeGraff, and Thakor (2006), leaders can use the Competing Values Framework (i.e. CVF) to understand the organising mechanisms, learning systems and sense-making strategies within organisations. This framework originates from work by Quinn and Rohrbaugh (1983)

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and examines the dimensions and values that underpin organisational effectiveness. The CVF synthesises key bodies of knowledge within the management literature and has been used to investigate leadership roles and effectiveness, organisational culture, change, development and human resource development (Cameron & Freeman, 1991; DiPadova & Faerman, 1993; Quinn & Kimberly, 1984; Zammuto & Krakower, 1991). Quinn (1988) identiﬁed the eight roles in terms of the CVF, which visually presents the tensions and paradoxes that contemporary leaders face. The CVF clariﬁes the complex nature of organisational leadership according to two dimensions: internal/external focus and stability/ﬂexibility structure. Taken together, the two dimensions create four quadrants and the model groups two of the managerial roles within each of the four quadrants. The ‘Open Systems’ quadrant focuses on organisational adaptation and is characterised by a ﬂexible orientation and a focus on the external environment achieved through the leadership roles of innovator and broker. The ‘Rational Goal’ quadrant focuses on determining and accomplishing the organisation’s tasks and is representative of a control orientation and a focus on the external environment achieved through the leadership roles of director and producer. The ‘Internal Process’ quadrant focuses on maintaining the stability of the organisation and is representative of a control orientation and a focus on the internal functioning achieved through the leadership roles of coordinator and monitor. The ‘Human Relations’ quadrant focuses on the people issues of the organisation and is representative of a ﬂexible orientation and a focus on the internal functioning through the leadership roles of mentor and facilitator. Highly effective leaders have the capacity and skills to succeed in each of the four quadrants. There is strong support for the quadrant structure’s distinction of leadership roles (Hooijberg, 1996). Recently, Cameron et al. (2006, p. 63) suggested that the CVF can assist all leaders and individuals to ‘consciously increase their cognitive complexity, to make them more Janusian (i.e. able simultaneously to integrate opposing ideas), and to make them aware of the liabilities of either/or thinking’.

THE IMPACT OF CLIMATE, KNOWLEDGE GENERATION AND LEADERSHIP ON M&A M&As represent two very complex and difﬁcult-to-implement organisational development activities (Meschi & Metais, 2006; Schoenberg, 2006;

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Zollo & Singh, 2004) which shape a range of processes such as common coordinating mechanisms, knowledge-sharing routines and complementarities (Kogut & Zander, 1996), along with socialisation and mutual learning of employees (March, 1991). The process of M&A creates an imperative for the generation of new actionable and detailed knowledge by all involved individuals. This knowledge enables individuals to comprehend and subsequently respond to their internal work environment. A key resource during M&A implementation is knowledge workers, who can enable organisations to gain competitive and innovation advantages (Ernst & Vitt, 2000; Graebner, 2004; Ranft & Lord, 2000). Consequently, understanding the underlying causes of knowledge workers’ resistance during these M&A processes is an important area of research (Kavanagh & Ashkanasy, 2006). After all, the wealth of organisations exists ‘principally in the heads of its employees’ (Matthews & Candy, 1999, p. 48). The implementation of M&A can have many stages. Fugate, Kinicki, and Scheck (2002) suggest four stages, namely anticipatory, initial change, ﬁnal change and aftershock. These stages share similarities in how individuals could visualise how to ‘kindle the ﬂame and make ﬁre’ (i.e. sparking, igniting, forging and energising), and use of this metaphor could assist leaders to conceptualise their roles and inﬂuence the underlying M&A processes at work. Proposition 1. Distinctive climates are identiﬁable during the stages of M&A. First Stage: Sparking In the ﬁrst stage of M&A, anticipatory or foundation knowledge is developed about how integration could increase organisational ﬂexibility and improve external or marketing positioning. There is, however, no guarantee that developing such knowledge will realise the potential value creation or synergism (Quah & Young, 2005). Furthermore, knowledge about any integration will disrupt and cause ambiguities and tensions in the ‘coal face’ between organisations and their employees, and ultimately handicap any creative knowledge generation. Individuals will initially not understand how to respond to their internal working environment and potentially not innovatively engage in the process. In this situation, individuals will experience anxiety as they attempt to cope with uncertainty (Rentsch & Schneider, 1991). In response, leaders could articulate vision and attempt to arouse optimistic emotions about the M&A process. This approach aims to increase innovation and adaptation by creating growth,

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external support and resource acquisition. Quinn, Spreitzer, and Hart (1996) would classify this approach as ‘Open Systems’, which emphasises organisational adaptation and is characterised by a ﬂexible orientation and a focus on the environment external to the organisation. They view two leadership roles as essential during this process, i.e. the innovator and the broker. The innovator role requires leaders to pay attention to the changing environment, identify important trends, conceptualise and project needed changes, and tolerate uncertainty and risk. The broker role requires leaders to be politically astute, to acquire resources and to maintain the unit’s external legitimacy through the development, scanning and maintenance of a network of external contacts. Cameron et al. (2006) recently suggested that the ‘Open Systems’ approach should generate value by encouraging others to innovate and to generate new ideas, fostering an inclination towards improvement and bold initiatives, helping generate creativity both in oneself and in others, and increasing nimbleness and an ability to adjust quickly in the face of change. Densten and Gray (2005) suggest that during rapid changes, the sensemaking activities of individuals have a signiﬁcant inﬂuence on knowledge creation/transfer and organisational effectiveness. These activities require individuals to engage in sense-making activities that use ‘discursive consciousness’ and try to rationalise and articulate their thought world (Takeuchi & Nonaka, 2004). Tacit knowledge is created which can then be crystallised and shared with others to create new explicit knowledge (Byosiere & Luethge, 2004). This tacit to explicit knowledge translation process is classiﬁed as ‘externalisation’ within the SECI model, and involves sequential application of metaphors, analogies and models (Nonaka, Byosiere, & Toyama, 2001). Dougherty (1992) suggests that individuals can create new understanding or knowledge that is transferable to a wider audience when they engage in the ‘decontextualisation’ of knowledge. In summary, leaders could use the roles of innovator and broker to develop anticipatory or foundation knowledge that emerges from the conversion of tacit to explicit knowledge. Densten and Gray (2005) support this relationship between the ‘Open Systems’ approach and ‘externalisation’ and highlight the importance of providing opportunities for innovative reﬂection by individuals to support the generation of knowledge. Leaders can, however, use the roles of innovator and broker only to inﬂuence and not directly control whether individuals (i.e. their followers) actively engage in productive reﬂections that create innovative outcomes. In the anticipatory stage, the M&A climate must align the organisational–individual interface so that it is conducive to the identiﬁcation and promotion of new

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ideas. Kazuo (2004) highlights the fragility of knowledge creation and thus the importance of an enabling context which requires supporting space and relationships. This initiation process involves the (a) recognition of needs, (b) search for solutions and (c) identiﬁcation of suitable innovations and proposal of some for adoption (Duncan, 1976; Rogers, 1995). The individuals’ assessment of their internal work should stress the value, resources, space and recognition for new ideas (Amabile, Conti, Coon, Lazenby, & Herron, 1996; Ichijo, 2004; Kazuo, 2004) which would subsequently describe an effective M&A anticipatory climate. In conclusion, the investigation of M&A anticipatory change climate, tacit to explicit knowledge conversion or transfer, and leadership roles of producer and director enables the following propositions to be developed: Proposition 2. The M&A anticipatory climate inﬂuences the degree to which individuals engage in tacit to explicit knowledge conversion or transfer. Proposition 3. The leaders’ use of the innovator role will positively inﬂuence the M&A anticipatory climate and generate detailed and actionable knowledge that enhances the organisational outcomes. Proposition 4. The leaders’ use of the broker role will positively inﬂuence the M&A anticipatory climate and generate detailed and actionable knowledge that enhances the organisational outcomes. Leaders could use the metaphor of sparking, in terms of creating ﬁre, to draw up an image and communicate to their followers the necessity of providing the context where individuals feel motivated to generate dozens of bright, new and unique ideas. For example, multiple sparks are more likely to create a ﬁre; similarly, multiple ideas are more likely to make an organisation more innovative.

Second Stage: Igniting In the second stage of M&A, knowledge about how integration could improve the competitive position of the organisation is developed. Confusion about the most appropriate approaches to solve organisational integration challenges will, however, be created. Employees are faced with an increased diversity of systems and goals (Chakrabarti & Mitchell, 2005) and the difﬁculty of synthesising specialised production and technology

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knowledge (Yunker, 1983). In response, leaders could focus on planning, directing and clarifying goals to reduce confusion during the M&A process, and also try to position the organisation competitively in the market-place by increasing productivity, efﬁciency and accomplishment. This approach has been classiﬁed as ‘Rational Goal’ by Quinn et al. (1996) because it focuses on determining and accomplishing the tasks of the organisation, and is characterised by an external focus and control/predictability orientation. In this approach, they suggest that the roles of producer and director are the most prominent for leaders. The director role requires leaders to emphasise the setting and clarifying of goals by identifying problems, selecting alternatives, deﬁning roles and tasks, generating rules and policies, and providing instructions. The producer role requires leaders to demonstrate high levels of interest, motivation, energy and personal drive towards stated objectives. Cameron et al. (2006) recently suggested that this approach should generate value by: fostering an orientation towards beating the competition and winning the marketing place, a focus on relationships with and service of customers, driving for faster responses and timelier actions, creating a focus on intense hard work and achievement, and emphasising even higher performance levels and exceeding the competition. These activities create explicit knowledge (e.g. directions) as to how the organisations can compete and individuals then have to develop knowledge about how their effort will inﬂuence organisational performance. Individuals have to operationalise this knowledge into components and create complex and systematic sets of explicit knowledge. This process of ‘combination’ (see Takeuchi & Nonaka, 2004) involves the combining, editing and processing of knowledge components, clariﬁcation of goals, and use of rational analysis to solve contradictions logically. Knowledge is developed into a form (i.e. explicit) that can be articulated, shared and expounded (McIntyre, Gauvin, & Waruszynski, 2003). In summary, leaders could use the roles of director and producer to develop competitive positioning knowledge that emerges from the conversion of explicit to explicit knowledge. Densten and Gray (2005) support this relationship between the ‘Rational Goals’ approach and ‘combination’ and highlight the importance of having individuals reﬁne and operationalise knowledge to support the generation of knowledge. This relationship is illustrated in Fig. 1. Leaders can play the roles of director and producer only to inﬂuence and cannot directly control whether individuals actively engage in developing operational knowledge. In the initial change stage, the M&A climate must align the organisational–individual interface so it is conducive to the

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The Organisational Knowledge Management Model.

effective evaluation of new ideas. This legitimisation process involves evaluating the potential of new ideas (McAdam, 2005; Meyers & Goes, 1988). Kusunoki (2004) suggests that new ideas must be evaluated in terms of (a) ‘know-why’ causal relationships exist among the components of innovation, (b) ‘know-how’ components of innovation need to be integrated and (c) ‘know-what’ conﬁguration of innovation components will satisfy customer values. Further evaluation has to overcome the ‘innovator’s dilemma’, ‘competency traps’ and ‘core rigidities’ (Christensen, 1997; Leonard-Barton, 1992; Levitt & March, 1988). The individuals’ assessment of their internal work should stress the ﬂexibility to investigate, explore and modify new ideas to increase organisational effectiveness (Brown & Eisenhardt, 1997; Meyers & Goes, 1988). Leaders could use the metaphor of igniting, in terms of creating ﬁre, to produce an image and ultimately communicate to their followers the necessity of providing the context or space where individuals feel motivated to take new ideas and turn them into more usable knowledge. For example, to create ﬁre, sparks must be placed in a context where ignition can occur, and new ideas need to be placed in a context that can reveal their potential beneﬁt to be recognised as innovative. In conclusion, the investigation of M&A initial change climate, explicit to

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explicit knowledge conversion or transfer, and leadership roles of producer and director enables the following propositions to be developed: Proposition 5. The M&A initial change climate inﬂuences the degree to which individuals engage in explicit to explicit knowledge conversion or transfer. Proposition 6. The leaders’ use of the producer role will positively inﬂuence the M&A initial change climate and generate detailed and actionable knowledge that enhances the organisational outcomes. Proposition 7. The leaders’ use of the director role will positively inﬂuence the M&A initial change climate and generate detailed and actionable knowledge that enhances the organisational outcomes. Third Stage: Forging In the third stage of M&A, the ﬁnal change knowledge about how integration will enhance control and stability for the organisations is developed. Employees are, however, likely to be confused about how they should interface with their internal work. Furthermore, such confusion causes a clash of priorities and creates ambiguities that increase resistance to change (Pritchett, 1985; Yunker, 1983). In response, leaders could focus on bringing a sense of order into the organisation through control mechanisms and role deﬁnition that creates routinisation, centralisation and continuity. Quinn et al. (1996) would classify this approach as ‘Internal Process’ which emphasises organisational stability and is characterised by a stability/ predictability orientation and a focus on internal organisational aspects. In this approach, they suggest that the coordinator and monitor roles are most prominent for leaders. The coordinator role requires leaders to ensure that rules and standards are achieved by creating and maintaining structure, scheduling, coordinating and problem-solving. The monitor role requires leaders to examine performance and provide a sense of continuity and stability by collecting and distributing information. Cameron et al. (2006) recently suggested that the ‘Internal Process’ approach should generate value by: fostering systematic analysis of problems and relying on data for solving problems, helping others to be clear about expectations, goals and policies and their place in the enterprise, eliminating mistakes and ensuring accuracy and precision in work, ensuring smooth-ﬂowing processes and consistency of outputs, and measuring and

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keeping records of how the organisation is performing. These activities have the potential to develop work routines that enable individuals to tailor knowledge to solve operational problems that have signiﬁcant inﬂuence on knowledge creation and organisational effectiveness (Densten & Gray, 2005). According to Takeuchi and Nonaka (2004), communicating accepted work routines to other individuals involves a process of converting explicit into tacit knowledge which they term ‘internalisation’. Work routines knowledge involves deﬁning responsibilities, measurement, documentation and historical record. Zuboff (1998) has previously conﬁrmed this relationship between analysing production to produce operational knowledge that enhances organisational performance. In summary, leaders could use the roles of coordinator and monitor to develop ﬁnal change knowledge that emerges from the conversion of explicit to tacit knowledge. Densten and Gray (2005) support this relationship between the ‘Internal Process’ approach and ‘internalisation’ and highlight the importance of tailoring work routines for individuals to support the generation of knowledge. This relationship is illustrated in Fig. 1. Leaders can, however, use the roles of coordinator and monitor only to inﬂuence and not directly control whether individuals actively engage in customising routines at work. In the ﬁnal change stage, the M&A climate must align the organisational–individual interface so it is conducive to the modiﬁcation of ideas for enabling implementation. Rarely can innovative ideas be implemented without modiﬁcation (Duncan, 1976; Meyers & Goes, 1988; Rogers, 1995). The individuals’ assessment of their internal work should stress the assistance and resources needed to operationalise new ideas (Densten, 2007). Unfortunately, few studies provide any in-depth analysis of such innovation implementation (Dougherty & Hardy, 1996; Ford, 2000; Klein & Sorra, 1996; McAdam, 2000, 2005). Leaders could use the metaphor of forging, in terms of using ﬁre, to produce an image and communicate to their followers the necessity of providing the context where individuals feel motivated to take new ideas and modify them into usable ideas. Fire and ideas are easily extinguished when starved of oxygen or resources, and both can easily destroy existing resources when not properly managed. In conclusion, the investigation of M&A ﬁnal change climate, explicit to tacit knowledge conversion or transfer, and leadership roles of coordinator and monitor enables the following propositions to be developed: Proposition 8. The M&A ﬁnal change climate inﬂuences the degree to which individuals engage in explicit to tacit knowledge conversion or transfer.

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Proposition 9. The leaders’ use of the coordinator role will positively inﬂuence the M&A ﬁnal change climate and generate detailed and actionable knowledge that enhances the organisational outcomes. Proposition 10. The leaders’ use of the monitor role will positively inﬂuence the M&A ﬁnal change climate and generate detailed and actionable knowledge that enhances the organisational outcomes. Fourth Stage: Energising In the fourth stage of M&A, knowledge emerges about how the aftershock from integration is inﬂuencing the development of human capital. Yunker (1983) suggests that most adverse performance problems that emerge are internally generated. Such organisational difﬁculties are self-inﬂicted (Buono & Bowditch, 1989) and many arise from the direct or indirect mishandling of human resources (Fried, Tiegs, Naughton, & Ashford, 1996). During this M&A stage, leaders could focus on developing trust and sense of belonging among their people by creating cohesion, participation, openness, morale and commitment. This approach aims to focus on people issues in order to build human competencies and people development, and solidify climate and ultimately culture. Quinn et al. (1996) would classify this approach as ‘Human Relations’, which emphasises human development, empowerment and commitment, and is characterised by ﬂexible orientation and a focus on the internal environment of the organisation. They suggest that the leadership roles of mentor and facilitator would be predominant during this process. The mentor role requires leaders to be fair and aware of follower needs, to listen and to facilitate the development of individuals. The facilitator role requires leaders to encourage followers to express ideas, seek consensus, negotiate and compromise. Developing close social relations among individuals provides the mechanism for effective dialogue where detailed knowledge can be exchanged (Krug & Augilera, 2005). Cameron et al. (2006) suggested that the ‘Human Relations’ approach should generate value by building effective, cohesive, smooth-functioning teams, building effective relationships through communication and listening, helping others improve performance and develop competency, fostering a sense of unity through involvement and empowerment, and facilitating a climate of personal concern and support for others. These activities help mobilise collective networks of expertise among individuals within work

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communities which generate and transfer tacit knowledge (Barley & Kunda, 2001), and as individuals interact with each other they each accumulate informal context-speciﬁc knowledge (Byosiere & Luethge, 2004). Takeuchi and Nonaka (2004) term this process of individuals sharing experiences and their ‘mental models’ to reﬁne knowledge as ‘Socialisation’ within their SECI model. Recognition of the importance of informal interactions between individuals is well established and results from the need to overcome (a) documentation or training that is too abstract and lacking in context (Orr, 1997), (b) the problem of appreciating which bits of knowledge are relevant to a particular case (Lave & Wenger, 1990) and (c) the potential loss of what members of a community practice know (Bechky, 1998). In summary, leaders could use the roles of mentor and facilitator to develop aftershock knowledge that emerges from the conversion of tacit to tacit knowledge. Densten and Gray (2005) support this relationship between the ‘Human Relations’ approach and ‘socialisation’ and highlight the importance of sustaining relationships and informal exchanges among individuals to support the generation of knowledge. This relationship is illustrated in Fig. 1. As has been stated (see Densten & Gray, 2005), leaders can use the roles of mentor and facilitator only to inﬂuence and not control whether individuals (i.e. their followers) actively engage in productive interpersonal exchanges. In the aftershock stage, the M&A climate must align the organisational–individual interface so it is conducive for aligning the values of individuals that motivate them to become actively involved in the innovation process. The commitment of individuals to innovation is not solely determined by technological virtues (Goodman & Grifﬁth, 1991). Klein and Sorra (1996) suggest that individuals assess innovation according to whether it can foster or inhibit the fulﬁlment of their values and whether the boundary between themselves and others will be adversely affected. The individuals’ assessment of their internal work should stress how (a) rewards promote innovation, (b) involvement does not result in punishment and (c) social standing is not detrimental by being proactive. These aspects of climate could enable individuals to transcend their ‘existence selves’ and promote frank dialogue about new ideas. Nonaka and Toyama (2003) highlight the importance of individuals transcending their ‘existence selves’ and empathising with others to allow personal and direct experiences in the form of tacit knowledge to be shared. Leaders could use the metaphor of energising, in terms of maintaining ﬁre, to draw an image and ultimately communicate to followers the necessity of providing a context where individuals are encouraged to appreciate further the demands

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for innovation and how aligned such innovations are to their own values. For example, maintaining ‘ﬁre’ requires the constant accumulation of nonrenewable resources by many individuals who must recognise the signiﬁcant beneﬁt of operating collectively. In conclusion, the investigation of M&A aftershock climate, tacit to tacit knowledge conversion or transfer, and leadership roles of facilitator and mentor enables the following propositions to be developed: Proposition 11. The M&A aftershock climate inﬂuences the degree to which individuals engage in tacit to tacit knowledge conversion or transfer. Proposition 12. The leaders’ use of the role of facilitator will positively inﬂuence the M&A aftershock climate and generate detailed and actionable knowledge that enhances the organisational outcomes. Proposition 13. The leaders’ use of the role of mentor will positively inﬂuence the M&A ﬁnal change climate and generate detailed and actionable knowledge that enhances the organisational outcomes. In summary, the identiﬁcation of four climate types and how each inﬂuences the generation and transference of knowledge should enable leaders to understand better how their inﬂuence of the organisational– individual interface could enhance the M&A process. Thirteen propositions are developed to elucidate the capacity of climate to create and transfer knowledge among individuals, and to explore the use of leadership roles in creating climates that facilitate the development of speciﬁc knowledge required at different M&A stages. The developed M&A framework provides a systemic approach to improving productivity which Isaksen and Tidd (2006) assert is essential for successful change and transformation efforts.

DISCUSSION The chapter synthesises theory from ﬁve distinct bodies of knowledge (i.e. M&A, climate, innovation, knowledge generation and transference, and leadership) and identiﬁes the importance of understanding what inﬂuences the attention of individuals during various M&A stages. The chapter illustrates how inﬂuencing attention within the individual-organisation ‘coal face’ is conducive to the generation of new ideas (sparking), making the new ideas usable (igniting), implementing the new ideas (forging) and motivating

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individuals to support this transformation of new ideas (energising). Leaders could therefore be armed with greater knowledge about these speciﬁc ‘coal faces’ and how their inﬂuence can enhance the M&A stages. Unfortunately, the need to create an organisational climate that promotes innovation can be easily neglected by leaders (Baer & Frese, 2003) because such climates may challenge the wisdom espoused by the upper echelons of organisations (McAdam, 2005). Consequently, while forces are pressuring leaders to produce more knowledge about how integration can be achieved, opposing forces may be discouraging them from doing so. Furthermore, climate is not the only inﬂuence on M&A. The misalignment of incentives and recipients (Kapoor & Lim, 2007) and a lack of well-deﬁned knowledge transfer routines (Winter & Szulanski, 2001) are just two among many inﬂuences that impact on the M&A process. Consequently, the chapter does not attempt to solve all theoretical and empirical confusion about the M&A process, knowledge generation, leadership or the practicalities of transforming different knowledge types into new innovative knowledge. It does, however, integrate several independent theories and synthesises key related ideas into an overarching theoretical framework. In practical terms, the chapter provides a workable framework for leaders to understand how the interfaces between organisations and individuals can enhance or inhibit knowledge creation and transference during M&A. The chapter also elucidates how dependent leaders are on climate to produce actionable and detailed knowledge.

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THE LINKAGES BETWEEN CULTURAL DIFFERENCES, PSYCHOLOGICAL STATES, AND PERFORMANCE IN INTERNATIONAL MERGERS AND ACQUISITIONS Yaakov Weber and Israel Drori ABSTRACT A model focusing on the role of the individual in national and corporate culture clash situations, during post-merger integration, is presented. The theory of psychological contract is adapted to explain different individual expectations in domestic versus international mergers and acquisitions (M&As). It is proposed that expectations on the part of both parties to the merger can act to moderate the effects of culture clash in M&As on acquired management attitudes and behavior, and thereby inﬂuence postmerger turnover and integration success. Thus, the model explains the inconsistencies of empirical ﬁndings about the different effects of national versus corporate cultural differences on M&A performance. The implications of these ideas for research and practice are discussed.

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INTRODUCTION Mergers and acquisitions (M&As) represent a popular and pervasive model of organizational growth which essentially offers a complementary alternative to internal, organic growth. Despite their enormous popularity, with 30,000 M&As valued $1,900 billion in 2004 alone, their track record of success is rather mixed, with only 56% of M&As deﬁned as successful when the declared objectives of the acquisition are taken into account (Cartwright & Schoenberg, 2006). Among the many possible culprits of the mixed success of both domestic and international M&As, culture has recently taken center stage (e.g., Angwin & Vaara, 2005; Cartwright, 2005; Cartwright & Cooper, 1997; Schweiger & Goulet, 2000; Teerikangas & Very, 2006). Recent reviews of the academic literature suggest that the ﬁndings are fragmented across various disciplines, including strategic management, international business, and ﬁnance (Schweiger & Goulet, 2000; Shimizu, Hitt, Vaidyanath, & Pisano, 2004). For example, King, Dalton, Daily, and Covin (2004) employed meta-analytic techniques to empirically assess the impact of the four most commonly researched strategic and ﬁnancial variables on post-acquisition performance. They found none of these variables to be signiﬁcant in explaining variance in post-acquisition performance, and conclude that ‘‘[r]esearchers simply may not be looking at the ‘‘right’’ set of variables as predictors of post-acquisition performance’’ (p. 18). They recommend that future research pay more attention to nonﬁnancial variables that are currently underrepresented in theory and research attempting to explain M&A performance. Some research has dealt with the effect of corporate or national culture clashes on post-merger performance (e.g., Cartwright & Cooper, 1992, 1993; Chatterjee, Lubatkin, Schweiger, & Weber, 1992; Datta, 1991; Morosini, 1998). These studies, although essential to the understanding of mergers, leave important aspects relatively unexplored. It is only relatively recently that research attention has turned to the role and contribution of human factors to M&As performance (e.g., Cartwright & Cooper, 2000; DeNisi & Shin, 2004; Weber, Shenkar, & Raveh, 1996). Issues related to organizational ﬁt and post-merger integration have received some attention (e.g., Chatterjee et al., 1992; Datta, 1991; Nahavandi & Malekzadeh, 1988; Very, Lubatkin, Calori, & Veiga, 1997), but the role of the individual and his psychological state, especially in culture clash situations, was rarely investigated empirically (e.g., Weber et al., 1996). Most of the research about the human factor in M&As has been prescriptive and relatively

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atheoretical, and rarely have models been proposed that were applicable across different organizations. This chapter investigates the role of the individual and of his psychological state in national and corporate culture clash situations during post-merger integration and proposes a model of individual behavior and its effect on performance. It is proposed that expectations on the part of both parties to the merger can act to moderate the effects of culture clash in M&As on acquired management attitudes and behavior, and thereby inﬂuence post-merger turnover and integration success. The theory of psychological contract is adapted to explain the inconsistencies of empirical ﬁndings about the relationship between cultural differences and performance in M&As.

REVIEW OF EXISTING RESEARCH National versus Corporate Culture Culture has been deﬁned in numerous ways (Bhagat & McQuaid, 1982; Trice & Beyer, 1984). In a rare reference to both levels of the construct, Adler and Jelinek (1986, p. 74) suggest that ‘‘culture, whether organizational or national, is frequently deﬁned as a set of taken-for-granted assumptions, expectations or rules for being in the world’’ and that ‘‘the culture concept emphasizes the shared cognitive approaches to reality that distinguish a given group from others.’’ Most authors, however, deﬁne one level of culture. Thus, Hofstede (1980) deﬁnes national culture as the collective programming of the human mind, while students of corporate culture (e.g., Schein, 1985; Weber, 1988) deﬁne it as the assumptions, beliefs, and values shared by senior managers regarding appropriate business practices. These assumptions result from several important experiences shared by group of people. For example, top managers at a particular company have participated in the process of solving problems necessary to compete and survive in their ﬁrms’ social, political, technological, and economic environment. All the assumptions held by this top management team form the content of the culture that shapes their strategic decision-making processes and inﬂuences speciﬁc choices and behaviors. These interrelated sets of assumptions taken for granted act as a ﬁlter through which managers perceive the realities facing their organization and serve two essential functions: to reduce a world that can be overwhelmingly complex and ambiguous to comprehensible and familiar terms; and to provide continuity

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and stability when change threatens to undermine the lessons of experience. Finally, culture is not easily modiﬁed: its full potency can be seen when two autonomous cultures are brought into close contact with each other, as typically happens when two ﬁrm merge. Boyacigiller and Adler (1991) note that US cultural values have imbued organizational science with implicit but inappropriate universalism. Hence, the emergence of the concept of corporate culture in the US is not incidental but rather reﬂects American culture and a limited awareness of variations in national cultures (Adler & Jelinek, 1986). Yet it seems futile to discuss cultural variations among organizations without taking into consideration the national culture within which such variations develop. As Schneider (1988) points out, Hofstede’s (1980) ﬁndings show that even in a large multinational ﬁrm known for its strong corporate culture, national differences remain paramount. An approach that focuses on corporate culture alone leads at best to the development of uni-national theories, which are of little use beyond US borders. At worst, studying corporate culture outside the context of national culture leads to the same fault for which national culture schools are criticized, namely the treatment of culture as a residual variable, precluding a valid argument of causality. Separate bodies of literature on national and corporate culture exist in a state of splendid isolation from each other. Apparently, Roberts and Boyacigiller’s (1983) observation regarding international management, that ‘‘no investigation simultaneously embedded people into organizations and organizations into their environment,’’ is still valid. While sharing some deﬁnitions and terms, authors on national and corporate cultures by and large refrain from stepping onto each other’s turf, thereby missing obvious opportunities for cross-fertilization (Schneider, 1988). In an attempt to connect between the two levels, Laurent (1986) proposed that corporate culture could modify the ﬁrst two levels in Schein’s (1985) model, namely (a) behavior and artifacts and (b) beliefs and values, but was not capable of affecting the third, deeper level of underlying assumptions that derive from one’s national culture. Earlier, Laurent (1983) found that national differences in beliefs regarding organizational practices were greater in a single multinational ﬁrm than in multicompany samples, leading Schneider (1988) to suggest that the stronger the corporate culture, the greater the national culture’s efforts to reassert autonomy and identity, creating a national mosaic rather than a melting pot. Hofstede, Neuijen, Ohavy, and Sanders (1990) suggest that national and corporate cultures are distinctive, if related, constructs. While many authors have addressed the issue of culture clash in domestic M&As (Chatterjee et al., 1992; Nahavandi & Malekzadeh, 1988;

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Perry, 1986; Sales & Mirvis, 1984), rarely have they examined both national and corporate cultures in international M&As.

Culture Clash and Performance The relationships between corporate and national cultures and their inﬂuence on international merger success are not clear, and the results of empirical studies are contradictory. Research on domestic M&As consistently shows that corporate culture clash is detrimental to post-merger integration (e.g., Buono, Bowditch, & Lewis, 1985; Lubatkin, Schweiger, & Weber, 1999) and to merger success (Chatterjee et al., 1992; Datta, 1991; Weber, 1996). There is no reason to believe that the impact of a national culture clash would not be equal to the one produced by a clash of corporate cultures, if not greater. If national culture represents a deeper layer of consciousness than corporate culture (Laurent, 1986; Schneider, 1988), it should be even more resistant to change than the latter. While some ﬁndings indeed show that great national culture distances are associated with lower wealth effects for the acquiring ﬁrm’s shareholders (Datta & Puia, 1995), other ﬁndings show that the level of cultural conﬂict in international M&As varies in different international combinations in accordance with the expectations of the acquiring culture (Very et al., 1997), and greater national culture distances may even be positively related to performance (Morosini, Shane, & Singh, 1998). Apparently, Very, Calori, and Lubatkin’s (1993, p. 343) conclusion that ‘‘cross-national mergers are a complex phenomenon, sometimes inﬂuenced by national cultural differences, sometimes by organizational inﬂuences, sometimes by both and sometimes by neither’’ is still valid. In light of these contradictory ﬁndings, it may be useful to consider that the sort of holism that deﬁnes national and organizational culture leaves a great deal of ambivalence about the role of the individuals (Ashkanasy, Wilderom, & Peterson, 2000) and their expectations (Major, 2000). Ashkanasy et al. (2000) note that in culture research, the individual tends to be treated abstractly as a source of vision rather than as a whole person with a variety of motives and a life before, after, and outside his or her role as visionary. This is true with respect to both studies that address the effects of culture clash during post-merger integration and those that focus on merger performance. The choice of these topics of study may also reﬂect the view of academics and practitioners that the strategic and ﬁnancial aspects of the deal are typically the top priority, concerns about integrating the two

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cultures are a distant second, and the impact on the individual employee is at the bottom of the list. Nevertheless, understanding the likely effect of an international M&A on the people involved, and the expectations of these people, is necessary for the successful integration of management; it also suggests a means of reconciling the conﬂicting ﬁndings of empirical research. Furthermore, the issue of expectations and preferences in M&As has been mentioned in previous research (e.g., Nahavandi & Malekzadeh, 1988; Weber et al., 1996) but the role of the individual in the period of post-merger integration has rarely been investigated.

The Role of the Individual – The Overlooked Factor in M&A While studies on culture ﬁt provide no clear answers regarding the culture– performance relationship, they have furnished important insights for further research. For example, when read carefully, most culture ﬁt studies acknowledged that ‘‘numerous people-related problems arising as a result of M&As have been widely recognized as being determinant to performance’’ (Morosini, 1998, p. 22). Based on data derived from a case survey method, Larsson and Finkelstein (1999) found that the greater the employee resistance, the less the synergy realization, and that some measure of management style similarities was negatively associated with employee resistance. Studies that have dealt with the psychological state of individuals in M&As have usually been based on observations by practitioners and consultants who provided little theoretical or empirical support for their ﬁndings (e.g., Blake & Mouton, 1985; Levinson, 1970; Marks & Mirvis, 1998). Others investigated culture clash through case studies, sometimes in only one merger or acquisition (e.g., Buono et al., 1985; Perry, 1986), and sometimes from the perspective of only one of the merging organizations (e.g., Sales & Mirvis, 1984). Recently, some studies have investigated the psychological state of employees in M&As more systematically (e.g., Schweiger & DeNisi, 1991; DeNisi & Shin, 2004). Rarely have studies included psychological state variables and their relationship to corporate cultural difference in domestic M&As (with the exception of Weber, 1996), or to both national and corporate cultural differences in international M&As (Weber et al., 1996). The literature on M&As does not provide a thorough theoretical explanation for (a) why and how cultural differences, whether national or corporate, may cause integration problems that eventually determine M&A

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performance; (b) what factors are important for the integration of the people in M&As, which may be affected by cultural differences; or (c) how possible relationships between cultural differences and other factors, such as the attitudes and behavior of acquired managers, affect M&A performance.

ANTECEDENTS AND EFFECTS OF PSYCHOLOGICAL STATES IN M&As Stress, Attitudes, and Behavior in M&As The key to managing the integration process is ‘‘to obtain the participation of the people,’’ and to recognize that ‘‘creating an atmosphere that can support [capability transfer] is the real challenge’’ (Haspeslagh & Jemison, 1991, pp. 106–107). Cultural differences between the merging organizations are a critical factor in creating such an atmosphere and obtaining the people’s participation during the integration process (Nahavandi & Malekzadeh, 1988; Weber, 1996). Scholars point out the presence of stress and tension during M&As (e.g., Cartwright & Cooper, 2000), especially due to cultural differences (e.g., Marks & Mirvis, 1998; Nahavandi & Malekzadeh, 1988). For example, Sales and Mirvis (1984), who investigated the contact between two top management groups in a merger case study, found that the cultural differences produced misunderstanding, fueled emotional reactions, and escalated conﬂicts. Other case study investigations found negative attitudes toward the acquiring organization (Blake & Mouton, 1985; Buono et al., 1985) and toward cooperating with the acquiring top management (Blake & Mouton, 1985; Sales & Mirvis, 1984). In an empirical investigation of two samples of domestic and international M&As, it was found that cultural differences are associated with stress and negative attitudes (Weber et al., 1996). Furthermore, cultural differences were found to be negatively associated with the acquired top management’s commitment to the success of M&As and to cooperation with the buying management (DeNisi & Shin, 2004; Weber, 1996; Weber et al., 1996). Weber et al. (1996) found that the interrelationship among the above variables is consistent across samples of domestic and international M&As. For example, in both samples, commitment and cooperation are negatively correlated with stress and negative attitudes toward the merger and the buying ﬁrm.

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Autonomy Removal To achieve effective post-merger integration, acquiring top management typically intervenes in the decision-making process of the acquired management team and imposes standards, rules, and expectations. While the integration process may ultimately lead to improved performance because of synergy realization (Larsson & Finkelstein, 1999), it may also lead to human resource problems at the top management level, which is the ﬁrst that may be subject to autonomy removal. The contact between the two top management teams not only reduces the autonomy of the acquired top executives but also exposes the diverse national and corporate cultures of the teams to each other and makes the differences salient (Weber, 1988). To the extent that cultural distance produces a ‘‘culture clash,’’ such a clash may be strongest where the contact between the adherents of the opposing cultures is the greatest, i.e., where the acquiring executives determine goals, strategic choices, and other operations for the acquired company. The loss of autonomy evokes stress and negative attitudes toward the merger among the acquired top managers, who feel threatened, and ultimately affects their commitment and cooperation. In an extensive review, Schweiger and Goulet (2000) show that both national and corporate cultures have been found to affect autonomy removal and the nature of integration practices. In general, in both domestic and international M&As, removal of autonomy from individuals caused performance to deteriorate. However, cultural differences can also have a moderating effect. For example, Weber and Pliskin (1996) found that the effectiveness of the integration process, which is what causes the removal of autonomy, was superior in ﬁrms that had similar cultures. Moreover, Morosini et al. (1998) found that the relationship between integration and proﬁtability may depend on aspects of the acquired national culture, such as its level of uncertainty avoidance. Based on interviews with directors of acquired UK companies, Child, Faulkner, and Pitkethly (2001) found that national differences, rather than national culture distance, were associated with the level of integration. For example, American acquirers tended to achieve a high level of integration of subsidiaries, while Japanese and German companies preferred low levels of integration. French companies inclined toward an average level of integration. Finally, industry type may also affect the direction of the impact. Weber (1996) found that autonomy removal was positively related to the performance of M&As involving manufacturing ﬁrms, but negatively related to the performance of M&As involving banks. The conclusion was

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that the negative effects of autonomy removal in less human-intensive industries may be more than offset by the synergy gains received from the higher level of integration.

Turnover, Industry Type, and Cultural Differences A growing body of research has documented abnormally high turnover rates among top US management teams following acquisition by another US ﬁrm (Walsh, 1988, 1989; Walsh & Ellwood, 1991). Further, turnover rates in ﬁrms acquired by non-US acquirers were signiﬁcantly higher than in ﬁrms acquired by other US ﬁrms or than in the control group (Krug & Hegarty, 1997). Executive turnover has an important effect on post-acquisition productivity and employee moral at the acquired ﬁrm (Buono & Bowditch, 1989; Schweiger & DeNisi, 1991; Schweiger & Walsh, 1990) and on its postacquisition performance (Cannella & Hambrick, 1993), although the determinants of this turnover remain hidden. Walsh (1988) was the ﬁrst to systematically investigate the phenomenon. Borrowing from the prevailing logic of economics and strategic management, he hypothesized about but failed to ﬁnd a relationship between turnover and the type of merger (whether related or unrelated). Walsh (1989) then hypothesized about but failed to ﬁnd a relationship between turnover and the relative size of the merging ﬁrms, the premium paid, the number of offers, the method of payment, and the assurance of retention. Finally, Walsh and Ellwood (1991) hypothesized about but again failed to ﬁnd a relationship between turnover and the acquired ﬁrm’s pre-acquisition stock performance history, the market evaluation of the acquisition, the interaction of the two, and the acquired ﬁrm’s pre-acquisition earnings. Lubatkin et al. (1999) show that perceptions of both cultural differences and autonomy removal can explain a signiﬁcant portion of the variance in turnover during the ﬁrst year after an M&A. However, in the fourth year, industry suddenly seems to matter, at least in its interaction with each of the two measures. The effect of autonomy removal on fourth-year turnover was signiﬁcantly greater in manufacturing ﬁrms than in banks, while the effect of cultural differences was signiﬁcantly greater in banks. Their analysis shows that industry effects may shed some new light on the subject. In reviewing post-merger integration literature, Schweiger and Goulet (2000) claim that theory development would have greatly beneﬁted from inclusion of the industrial sectors.

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Psychological Contracts It was found that cultural differences may affect negative attitudes toward the acquiring company, stress, and commitment to the merger’s success among acquired top managers in domestic M&As, but that this is less of a factor in international M&As (Weber et al., 1996). To understand the different effects of cultural difference in domestic versus international M&As, we resort to the theory of a psychological contract. Rousseau’s (1995) seminal work on psychological contract deﬁnes it as ‘‘the belief systems of individual workers and employers regarding their mutual obligations.’’ Thus, mutual obligations and expectations serve to guide both workers and employers in accordance with normative and voluntary arrangements at work. Eventual alignment of expectations regarding work arrangements and obligations leads to better odds for cooperation, commitment, and harmonization at the workplace (Kissler, 1994). An M&A presents a challenging situation, where the need to maintain competitive opportunities during post-merger integration requires effective psychological contracting for streamlining labor relations and the development of an organizational culture capable of supporting the new organization’s strategic course. Furthermore, the birth of a new organization creates a need for a new psychological contract that would meet the perceived expectations and obligations of members who must regain their rights and abilities to determine new terms of employment. The psychological contract, therefore, has the potential to serve as a stability facilitator in post-merger integration, enabling both the workers and the employer to verify and eventually gain conﬁdence in the other’s intentions and to plant the seed of norms and values conducive to trust and commitment. In particular, in international M&As, the potential for rift and differences makes it imperative to lay the groundwork for a new psychological contract. The contexts in which international M&A employment relationships are renegotiated encompass the key factor in the psychological contract, namely the role of local culture in guiding the members’ shared values and beliefs. This implies an implicit or explicit set of arrangements, understandings, and practices at the workplace, such as style of management, informal hierarchy, systems of beneﬁts, and various HR practices (Schein, 1985). Thus, the psychological contract serves as an assurance to members of the new postmerger organization that new terms of employment will be aligned with their expectations. In this way, the activation of a psychological contracting

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mechanism in an M&A signals to all employees that the post-merger integration provides a safety net that takes their various needs into account. Furthermore, employing psychological contracting processes signals sensitivity and consideration on behalf of the managers and goodwill on behalf of the employees, as both enter into mutual arrangements and obligations based on a shared belief system, on one hand, and the organization’s mission and goals on the other. Societal norms confer context and meaning on various employment terms, arrangements, and values (see Rousseau & Schalk, 2000), which may instigate against the ability of postmerger integration to build an effective psychological contract. Thus, entering into contracting arrangements in international M&As entails, for example, looking at factors such as zones of negotiability, and either formal or informal rules that reﬂect members’ legitimacy constraints, the partners’ standing, and the market (Rousseau & Schalk, 2000). International M&As that are committed to building new employer– employee arrangements, expectations, and obligations face the task of integrating generalized processes and underline the development of psychological contracting and multilateral negotiations within a setting containing noticeable cultural differences. The extent to which the postmerger integration serves the inherent interests of both parties while creating alignment with an agreed-upon belief system requires an understanding of the initial conditions of the M&A terms. Conveying goodwill and the spirit of building a new employee–employer relationship may work well if the creation of a psychological contracting process reﬂects commitment to a course of action that is consistent with the expectations of those affected by the M&A. In the global economy, M&As give rise to two interrelated effects inﬂuencing employee expectations and employment arrangements. The ﬁrst involves the formulation of a psychological contract within the corporate culture, which prevails in a domestic M&A. The second refers to the formulation of a psychological contract within the national culture, which dominates an international M&A. Although it is desirable that in both cases psychological contracting should facilitate the integration of the ﬁrm’s interests with the employees’ needs, this integration could have diverse meanings. It seems that psychological contracting based on a shared understanding of the meaning and consequences of the merger results in better alignment with corporate culture when one national culture is involved, but it may reﬂect different meanings and values for different national cultural groups within the context of an international M&A. However, in the latter situation, an agreement that leads to formulating

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a psychological contract can be a consequence of recognition of contextspeciﬁc meanings that, through recognition of differences, could enable management and employees to retain a consistent commitment and acceptance of the other’s rights and obligations. This argument supports the claim of Morosini et al. (1998), who suggest that national culture poses no hindrance to international M&As, assuming that local values and meaning play a minor role in the formation of a psychological contracting process in an international M&A. Thus, it seems that employees and managers in domestic M&As can better anticipate the consequences of the M&A and therefore enter into a new psychological contracting process based on mutual understanding of the merger’s meaning, although they may not necessarily reach an agreement. At the same time, in international M&As, which present wider cultural rifts, both sides prefer to enter into a psychological contracting process based on uncertainty and differences and to reach an agreement that reﬂects the separate meanings they attach to the new post-merger work environment. The above view should be tested on the backdrop of a uniﬁed model that integrates both psychological contracts and the key features characterizing the two modes of M&As: domestic and international. M&As present a unique context where attributes related to the mutual expectations of employees and employer should be altered as a consequence of post-merger integration. In addressing the impact of the post-merger period on individuals, we should examine factors such as loss of identity and belonging, perceptions of the new organization and of its management and culture, the meaning of the new work environment, and personal sacriﬁce or loss. These factors represent a relationship that constitutes those terms of employment that are closely associated with the psychological contract. Nahavandi and Malekzadeh (1988) suggest a model that focuses on the process of adaptation and acculturation in M&As. Their basic contention is that members of the two organizations may or may not have the same preferences and expectations regarding the mode of acculturation. Thus, congruence between the preferences and expectations of both sides – that is, the psychological contract – will lead to less acculturative stress and organizational resistance, smoothing the process of acculturation and the post-merger integration. The expectations for acculturation may be met by the acquired members in several ways. First, unlike in the case of domestic M&As, in international M&As one expects different cultures and therefore develops a psychological contract that assumes the need for adaptation to different practices, behaviors, and procedures even if the merger is within the same industry. Conversely, in domestic M&As, and especially when they

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take place within the same industry, acquired members expect minimal changes because the arena seems very familiar, for example, the same accounting systems, markets, laws, rules for employee retirement, etc., apply. Moreover, in many mergers, the acquirer announces that it will be a merger of equals and no changes are intended and as a result a psychological contract incorporating an expectation for little change develops on the side of the acquired members. But within a relatively short period of time, the acquired members observe the acquiring culture being imposed through new practices, and autonomy being removed from managers and employees, and realize that the contract has been broken (Weber, 1988). Weber et al. (1996) found that in international M&As, the relation of corporate culture to autonomy removal and attitudinal and behavioral variables is the reverse of the relationship in domestic M&As, with the sole exception of attitudes toward the merger. While in domestic M&As corporate culture differences exercise a negative effect in the post-merger period, in international M&As they have a positive effect. At the same time, the interrelationships among the attitudinal and behavioral variables are by and large consistent across the two samples. For example, in both groups, commitment and cooperation are negatively and sometimes signiﬁcantly correlated with negative attitudes toward the merger and the attitude toward the acquired company. Of particular importance are the results pertaining to the relationships between national measures and the other variables. Most of these relationships are also positive. This suggests that in international mergers, both national and corporate cultures play an important role. In these cases, people expect differences and changes related to the differences, and therefore are less likely to resist them. Black, Mendenhall, and Oddou (1991) suggest that ‘‘individuals make anticipatory adjustments before they actually encounter the new situation’’ (p. 310). Thus, executives in the acquired ﬁrm probably expect the buying ﬁrm to attempt to control their decision-making process. Furthermore, when there is a large cultural distance between the merger partners, they may expect tighter control. In other words, the top managers in the acquired ﬁrm will make anticipatory adjustment toward the restriction of their autonomy by the acquiring organization. Therefore, autonomy removal in the international sample is positively associated with attitudes and behavior. This ﬁts Black et al.’s (1991) proposition that ‘‘accurate expectations will be positively related to anticipatory adjustment and to the degree of international adjustment y’’ (p. 306). Similarly, executives in domestic M&As of related companies know that synergy is realized through the removal of autonomy, and expect it. As a result, in both samples autonomy

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removal is positively associated with other attitudinal and behavioral variables. The impact of unmet expectations in international M&As is consistent with Adler’s (1981) ﬁndings on expatriate reentry: returning executives often suffer greater stress and disorientation upon returning to their home organization from a foreign posting than they felt during the foreign posting itself because they do not expect their home organization to have changed. Second, some cultural differences may be perceived as attractive, when the international acquirer is a world leader or high-prestige ﬁrm that opens up new opportunities for the employees of the acquired ﬁrm (Very et al., 1997). In such cases, members of the acquired company willingly relinquish their culture together with most of their organizational practices and systems in an assimilative mode of acculturation (Nahavandi & Malekzadeh, 1988). Finally, it is reasonable to ﬁnd variation between acquirer’s perspectives and expectations due to different national cultures that may be developed from the pre-acquisition stage. In a large-scale exploratory survey of M&A across European borders, Angwin (2001) found that national cultural differences are present in the way ﬁrms view the importance of different areas for pre-acquisition phase, particularly the areas of value perceived in due diligence. For example, Germans did not think due diligence would help much with planning integration or assessing cultural ﬁt, while Dutch thought it important. He suggests that these national differences do play an important role in affecting acquirer’s perceptions of target companies and that this may have important consequences for the subsequent management of the post-acquisition phase. Such different perceptions of target companies may inﬂuence the expectations of the acquiring management from the acquired management. For example, the acquirer’s point of view can help meet the expectations of some of the acquired members of keeping their culture with minimal changes. Nahavandi and Malekzadeh (1988) suggest that cultural differences are less of a problem when the buying ﬁrm ‘‘y values cultural diversity and is willing to tolerate and encourage it’’ (p. 83). Put differently, the more the buyer tolerates multiculturalism, the less likely it is that the buyer will expect the acquired ﬁrm to conform to its own goals, strategies, and administrative practices. Thus, in cross-border combinations with a potential that is more complementary than that of domestic M&As with overlapping operations, the buyer may be more willing to tolerate the acquired culture despite its differences. Therefore, the acquired members’ perception of the psychological contract, which is based on the expectation that there will be few changes in their culture and practices, has a better chance of being

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vindicated in international M&As than in domestic ones. Moreover, the acquirer may see the culture of the acquired company as attractive and want to preserve it (Nahavandi & Malekzadeh, 1988), and thereby avoid the acquired members’ resistance by fulﬁlling the psychological contract, that is, by meeting their expectations for minimal change. In international M&As, acquirers were found to be positively motivated by the opportunity to acquire ‘‘organizational repertoires and routines’’ embedded in the target company’s national culture (Morosini et al., 1998). In this study, greater national differences were associated with higher performance on the part of the acquired post-merger company. Conversely, in domestic M&As, the buyer is faced with the same national culture rather than with speciﬁc national repertoires and routines, and looks to achieve synergy through a high degree of integration. In doing so, the buyer removes autonomy from the acquired managers and imposes its own corporate culture. In the process, it violates the psychological contract as perceived by the acquired top management, which has developed expectations of minimal change.

THE LINKAGES BETWEEN CULTURAL DIFFERENCES, PSYCHOLOGICAL STATE, AND PERFORMANCE IN M&AS The concepts and relationships among key variables presented in this chapter provide a new approach to increasing our understanding of the underlying elements that affect the success of the integration process during M&As. Accordingly, the performance of M&As depends not only on synergy potential available from the merger but also on whether the synergy can actually be realized. Given that relationships between the antecedent conditions (such as cultural differences and intended autonomy removal) on the one hand and the behavior of the acquired management and employees on the other may lead to high turnover and poor M&As performance, it is the fulﬁllment of the psychological contract and the expectations of both sides in any merger that determines these relationships and the ultimate outcome of a merger. In particular, when the psychological contract established in each merger between people of both sides is fulﬁlled, it results in lower stress, less negative attitudes, and higher managerial commitment and cooperation, making the integration of the two parties smoother. Fulﬁllment of the psychological contract can take place even if the cultures of the two organizations are considerably different, whether in domestic or international mergers.

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Extensive cultural differences, autonomy removal, and the breaking of the psychological contract are likely to lead to acquired management stress and negative attitudes which, in turn, will reduce their cooperation with the acquiring management and their commitment to the success of the integration. Meta-analysis studies found that the strongest and most predictable behavioral consequence of employee commitment to their organization is the turnover rate (e.g., Mathieu & Zajac, 1990). It is suggested that industry type is a moderator of this relationship, and the rate of turnover is expected to be higher in mergers of service organizations than those of manufacturing ﬁrms. Low commitment and high turnover were found to reduce the effectiveness of the integration process and to deteriorate ﬁnancial performance. Conversely, the fulﬁllment of the psychological contract helps negotiate broad cultural differences and facilitates the integration of the employees and the implementation of the merger. It should be noted that the psychological contract is easier to change than a written contract as the expectations of both sides change over time. For example, in a discussion on integration and expectation management, Haspeslagh and Jemison (1991) point out that in the absorption integration approach, for instance, although an acquiring ﬁrm may have only a limited need to preserve the original culture of the acquired organization, it may choose to move slowly and wait before any action is taken, a hesitation that can retard integration process. For the acquired management, which was originally willing to accept major changes in their original culture, such indecisiveness differs from their expectations and may lead them to create new expectations about preserving their own culture and keeping their autonomy. In another situation, the desire of the acquired management to preserve their culture may change following contact with a successful and attractive acquirer. The dynamic nature of both domestic and international mergers suggests that over time the expectations of each partner may change and therefore new psychological contracts may be created.

DISCUSSION AND CONCLUSIONS The high failure rate of mergers suggests that neither scholars nor practitioners have a thorough understanding of the variables involved in the post-merger integration process. This chapter provides a conceptual model that draws attention to behavioral issues, in addition to strategic and ﬁnancial factors, that affect the success of M&As. This model underscores the importance of the psychological contract and of national and corporate

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cultural differences in the conﬂict between the two top management teams during the post-merger period. Drawing mainly on previous case studies and empirical research of domestic and international M&As, each one focused on a speciﬁc problem or on speciﬁc variables, this model considers simultaneously all the behavioral variables important to the conﬂict during integration and suggests a relationship among them. As such, it is in a better position to explain behavioral problems associated with post-merger conﬂict than previous studies, can provide better guidelines for future research, and has important practical implications for top managers involved in the international merger process. In this chapter, we also draw attention to the concept of psychological contract that develops (or exists) with the acquired members during and after a merger. The concept of a psychological contract suggests that many of the problems associated with the post-merger integration of two ﬁrms can be avoided or managed if the expectations of both sides are analyzed and coordinated.

Future Research The theoretical framework presented here provides ample opportunities for systematic research on the similarities and differences between national and corporate cultures, their relationships, and their variable impacts on conﬂict in international M&As. There are several unanswered questions regarding the two levels of culture. For example, is corporate culture playing second ﬁddle to national culture, ﬁne tuning the more dominant national culture, as proposed by Laurent (1986)? He suggests that corporate culture can modify the more superﬁcial levels of employee behavior but is not capable of affecting their underlying assumptions, which derive from their national culture. Others have suggested that the two play distinct if related roles, with national culture determining one’s values and corporate culture setting organizational practices and symbols (Hofstede et al., 1990). If this is the case, does corporate culture mitigate the impact of national cultural differences or distances, for example, by introducing a measure of cultural sensitivity or by attempting to enforce a dominant corporate culture that conceals at least the superﬁcial levels of conﬂict among the various players in an international M&A? Or does it exacerbate cultural differences, consistent with Laurent’s (1983) ﬁnding that national differences in beliefs regarding organizational practices were greater in a single multinational ﬁrm than in multicompany samples?

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Answers to these questions are not yet available. The present review of the issues shows that the inﬂuences of national and corporate cultures are far from clear and that more research is needed before a conclusive direction becomes evident. Some similarities and differences between the two can be revealed by analyzing the effects of national and corporate cultures on stress, commitment, cooperation, turnover, and the performance of international M&As. These effects can be compared with those of corporate culture on conﬂict in domestic M&A samples that have the same characteristics as international M&As. Future research should incorporate the concept of psychological contract and investigate member expectations in international M&As. The degree of differences in expectations can predict behavioral variables such as stress and negative attitudes, commitment, cooperation and turnover, as well as the success of post-merger integration and the overall merger performance. Future research should also investigate the interaction between differences in expectations, national culture distance, corporate cultural differences, and removal of autonomy in international M&As. Research efforts should also be directed at investigating the effectiveness of different human resource practices (e.g., selection, training, appraisal, reward, and communication) in dealing with conﬂict situations in international M&As. For example, proper selection and training of managers who will be in contact with members of the foreign acquisition team may reduce the potential for conﬂict. Diplomatic skills, cultural sensitivity, and negotiation and conﬂict resolution abilities may all help in this regard. Effectively selected and well-trained managers can improve communication between the two management groups, reduce stress and uncertainty, and alleviate behavioral problems such as low commitment, poor cooperation, and high turnover. The effect of different control mechanisms should also be investigated. Among the means of coordination and control that have been studied are human resource management (Edstro¨m & Galbraith, 1977), corporate culture (Jaeger, 1983), delegation of decision making (Egelhoff, 1988), and ‘‘ﬁt’’ of governance structures (Ghoshal & Nohria, 1989). Each mechanism is designed to regulate activities of the foreign subsidiary in order to meet organizational objectives. However, some control mechanisms may have a greater or lesser effect on the conﬂict. Future research may reveal how different effects are associated with various situations, helping managers select the most appropriate control mechanism for their speciﬁc situation. The empirical pursuit of these various issues may encounter certain methodological difﬁculties. Ideally, cultural differences should be

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investigated before a merger takes place and compared with data collected after the merger. However, it is not only difﬁcult to gain access to such data in large samples during the negotiation period, but it is also expensive because many negotiations do not result in M&As. This problem is compounded by another difﬁculty associated with the measure of national and corporate cultures. Many elements of culture are unclear to its members because they are so much a part of people’s lives that people take them for granted (Schein, 1985). Dramatic events, however, such as M&As and the subsequent contact with other cultures make differences salient, especially in conﬂict situations (Sales & Mirvis, 1984). Retrospective data can thus be useful in studying the relationships between cultural differences and the attitudes and behavior of managers and employees. It has been observed that attitudinal and behavioral data do not become less accurate over time, even after periods of 10 years (Gutek, 1978; Pettigrew, 1979). Such a study should follow the recommendation of Huber and Power (1985) for the use of retrospective data. By anchoring the sample (i.e., the acquired companies) in one country, research into cultural differences in international M&As can avoid such methodological problems associated with international survey research as functional, conceptual, and metric equivalence, which, for instance, may be found in ‘‘safari,’’ adaptation, and decentralized-collective research efforts that are administered in several countries. For example, samples of companies acquired by international and domestic ﬁrms may be identiﬁed in one country. This would allow the comparison of the effects of corporate cultural differences in domestic M&As with the effects of national and corporate cultural differences in international M&As. In both cases, data may be collected by questionnaires and interviews from respondents working in the acquired companies, all of which belong to the same national culture (see, for example, Weber et al., 1996). But although such samples eliminate the aforementioned methodological problems, their results are limited, and generalization should be based on samples anchored in different countries.

MANAGERIAL IMPLICATIONS The conceptual framework presented in this chapter has important implications for executive and HR practices in the management of M&As. It suggests that executives of the buying ﬁrm should pay as much attention to the effects of national and corporate cultural differences during both the

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pre-merger search process and the post-merger integration as they do to ﬁnancial and strategic factors. Furthermore, executives often tend to focus on task integration activities immediately after the deal is consummated to quickly create value for their ﬁrm, while people issues receive less attention. This chapter suggests that executives may want to approach these tasks in reverse order. The concept of the psychological contract allows managers to focus on people issues not only from the top down, as a strategic component of the integration, but from the bottom up, understanding and considering the point of view of the acquired members. It may have implications for postmerger integration in critical issues that must be addressed in M&As, such as: clear communication and dissemination of information; display of fairness toward the weaker organization; manifestation of the intentions of the acquiring management toward the acquired members and their needs; and inﬂuencing and monitoring employee attitudes and expectations. One of the most basic and easy to implement interventions available to acquirers in dealing with the people issues is communication. Schweiger and DeNisi (1991) observed that communicating the organization’s intentions reduces uncertainty and increases employee perceptions that the company is trustworthy, honest, and caring. Such communication can also reduce the negative attitudes and behaviors of employees. Moreover, the model suggests that acquirers should measure the effectiveness of their communication by its effects not only on reducing stress, negative attitudes, and turnover, and on increasing such important factors as commitment and cooperation, but also on the creation of the psychological contract. Speciﬁcally, the expectations of the acquirer can be communicated to the target ﬁrm before the deal is consummated and during the integration process to create a realistic psychological contract and to minimize its violation. Similarly, using two-way communication can help the acquirer analyze the acquired employee’s expectations and shape the psychological contract in order to avoid or at least minimize its violation. Very and Schweiger (2001) describe several interventions that acquiring ﬁrms use to learn and bridge cultural differences, such as workshops to familiarize people with each other and visits of operational managers to the target ﬁrms, and vice versa. The model suggests that such interventions should focus also on understanding and bridging psychological contract issues. The conceptual framework presented here should help top executives plan and screen international M&As to avoid the critical problems that can be created by national and corporate cultural differences as well as by the

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psychological contract before the deal is completed. If cultural differences and the expected psychological contract threaten to be too much of a problem, the merger or acquisition may be avoided and other strategic alternatives explored.

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