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High-tech acquisitions: How acquisition pace, venture maturity, and founder retention influence firm innovation
Abstract
Technology acquisitions are one of the most popular, yet difficult means of responding to competitors new technologies. However, decades of acquisition research cautions against an overly acquisitive strategy. To understand this, we build on organizational renewal research and organizational learning theory to examine whether and when firms benefit from the acquisition of entrepreneurial technology ventures in response to technological change. We theorize that heterogeneity among firm’s acquisition activities (i.e., pace, venture maturity, and retention of the ventures’ founders) plays an important and nuanced role in new knowledge creation. Using data on US mobile operating systems following the introduction of the iPhone (2006–2015), we find that, all else being equal, firms with a higher acquisition pace benefitted and those that acquired mid-maturity ventures in response to technological change were more likely to have positive outcomes relative to firms that acquire nascent or older ventures. Further, our findings suggest that founder retention is not equally beneficial for all ventures—founder retention is most beneficial for mid-maturity ventures.
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Theory suggests that an earlier age at international entry results in improved growth but also decreased survival chances. Empirical studies tell a different story, providing mixed and equivocal results that challenge the tenets of extant theory. To begin to bridge the gap between theory and results, we develop theoretical explanations for curvilinear (inverted U-shaped) relationships between age at entry and both firm growth and firm survival as well as the moderating impact of resource-providing initial public offering (IPO) on the resource-intensive internationalization process. Our findings support the inverted U-shaped relationships and that IPO performance steepens the growth curve and flattens the survival curve. Taken together, our study enhances understanding of the effects of age at entry, bridges the IPO and international entrepreneurship literatures, and offers avenues for extending the micro-foundations of the development of capabilities for new foreign market entry. In doing so, we advance knowledge about the conditions under which earlier or later internationalization leads some firms to thrive while others fail.
We examine, in hypercompetitive environments, why some firms fail to benefit from competitive aggressiveness while others experience superior profits. We explore the relationship between competitive aggressiveness and performance in a sample of 141 firms from three hypercompetitive industries—personal computers, computer-aided software engineering, and semiconductors—from 1995 to 2006. Contrary to the predominant view within competitive dynamics research, we find that competitive aggressiveness is not a universally effective strategy. For some firms, excessive competitive aggressiveness can escalate costs and diminish performance. Using polynomial regression analysis and response surface methodology, we identify the conditions under which competitive aggressiveness enhances firm performance. Our findings reveal that firms benefit from competitive aggressiveness when they have specialized technological resources and support from a dense network of alliance partners.
Central to research in innovation and entrepreneurship is the argument that new ventures are influenced by the prior experiences of their founders. This study investigates how differences in founders' work experiences and prior career positions affect a new venture's technological choices at the time of founding.We argue that individual founders use their influence to guide the venture toward adopting their parent firms' technologies, and that founders with more valuable expertise will have a greater influence on the venture's technological choices. Our results illustrate that the structural and social influence of individual founders affect the degree to which founding teams of new ventures mimic the technologies of their parents.
Differing perspectives exist regarding the importance of acquired managers in an acquired firm. The market for corporate control perspective suggests the need to "prune managerial deadwood" in an acquired firm to improve financial health (Walsh and Ellwood, 1991). Other research from the resource-based view highlights that acquired managers may be important to retain, especially during the integration of an acquired firm to ensure positive performance outcomes (Ranft and Lord, 2002). This study employs metaanalytic techniques to review and synthesize empirical research that has examined the link between management turnover in an acquired firm and subsequent performance. Based on a sample of 22 studies investigating 5,394 firms, a negative relationship between turnover and performance is found in support of the resource-based view. Implications for research and practice are discussed.
Our paper presents an empirical examination of the relationship betweenCEO duality and acquisition performance. Specifically, we address two relatedquestions involving CEO duality under the auspices of agency and stewardshiptheories. The first involves the extent to which CEO duality directly influencesthe profitability of acquisitions. The second involves the influence of duality andthe nature of outside board monitoring on acquisition performance. Our studytests competing hypotheses drawn from these two perspectives. We find thatCEO duality affects performance negatively and there is an important interactioneffect between outside board monitoring and CEO duality.
sResearch SummaryCorporate acquisition is a popular strategic option for firms seeking new resources. However, little research exists on the question of why one firm is chosen over another. We develop a model relating characteristics of similarity and complementarity between acquirers’ and target firms’ key resources, including products and R&D pipelines, to the likelihood of choosing a particular firm. We construct measures of similarity and complementarity between and across products and R&D pipelines, and test their effects using a novel application of the choice model. Findings reveal that acquirers view similarity and complementarity differently, based on the resource they are comparing. When making comparisons to their own R&D pipelines, acquirers prefer similarity over complementarity whereas when making comparisons to their product portfolios, they prefer complementarity over similarity.Managerial SummaryCorporate acquisition is a popular way for firms to grow and obtain innovative resources. However, we know little about why acquirers choose one firm over another. We capture the influence of similarity and complementarity between acquirers’ and target firms’ products (current innovative value) and R&D pipelines (future innovative value) on whether a particular target firm is acquired. Insights from the Pharmaceutical industry reveal that acquirers value similarity and complementarity in target firms differently, based on whether the comparison being made is with respect to their products or their R&D pipelines. Regarding their R&D pipelines, acquirers prefer that the target firm has similar, rather than complementarity, resources. However, the opposite is true concerning their own products: acquirers prefer that the target firm has complementarity, versus similar, resources.
A foothold is a small position that a firm intentionally establishes within a market in which it does not yet compete. We extend theory on competitive dynamics to examine relationships between competitor analysis and foothold moves. Whereas it seems logical that an antecedent that is negatively related to the likelihood of foothold attack would be positively related to the likelihood of foothold withdrawal, we theorize and find evidence to the contrary. In a sample of firms with footholds, market commonality, resource similarity, and their interaction are each related in the same direction to both foothold attack and withdrawal.
Research Summary: U- and inverted U-shaped relationships are increasingly explored in strategy research, with 11 percent of all articles published in Strategic Management Journal (SMJ) in 2008–2012 investigating such quadratic relationships. Moreover, a movement towards introducing moderation to quadratic relationships has emerged. By reviewing 110 articles published in SMJ from 1980 to 2012, we identify several critical issues in theorizing and testing of these relationships for which current practice falls short. These include insufficient causal argumentation, incorrect testing, mixing up two different types of moderation, and not realizing that the curve can flip completely. For these and other issues, a guideline is provided which, when followed, may bring clarity to theoretical motivation and rigor to empirical testing.
Managerial Summary: Too much can be as bad as too little. Many relationships in strategic management follow an inverted U-shaped pattern, where moderate levels of a strategy lead to optimal performance. To gain deeper insights into the conventional wisdom that too much of a good thing can be harmful to performance, we discuss how such relationships can be better theorized and tested based on a review of articles exploring U-shaped relationships in Strategic Management Journal during 1980–2012. We identify several critical issues that require close attention and provide a guideline to further develop and validate this important managerial intuition.
Do firms learn from their failed innovation attempts? Answering this question is important because failure is an integral part of exploratory learning. In this study, we consider whether and under what circumstances firms learn from their small failures in experimentation. Building on organizational learning literature, we examine the conditions under which prior failures influence firms' R&D output, in terms of amount and quality. Our empirical analysis of voluntary patent expirations (i.e., patents that firms give up by not paying renewal fees) in 97 pharmaceutical firms between 1980 and 2002 shows that the number, importance, and timing of small failures are associated with a decrease in R&D output (patent count) but an increase in the quality of the R&D output (forward citations to patents). Exploratory interviews further suggest that the results are driven by a multilevel learning process from failures in pharmaceutical R&D. Our findings contribute to the organizational learning literature by providing a nuanced view of learning from failures in experimentation.
This research examines an integrated theoretical model that explains how strategies for participating in the market for corporate control (acquisitions and divestitures) affect internal control mechanisms and, together, influence internal and external innovation. Nine out of ten hypotheses received support, with results showing that firms engaging in acquisitions and divestitures emphasize financial controls, de-emphasize strategic controls, and thereby produce less internal innovation. Furthermore, these firms are likely to seek external innovation to gain short-term benefits in competitive advantage. We conclude that engaging in the market for corporate control strongly affects the context in which innovation is framed, the control mechanisms employed, and the design and process of innovation.
Acquisitions often occur in waves within industries. We extend the theoretical understanding of such waves by drawing upon research on early mover advantage and bandwagon effects to develop arguments regarding the likely performance potential of participating at different points in an acquisition wave. In line with our theoretical model, we find acquisition performance is higher for early movers but lower for acquirers that participate at the height of the acquisition wave. Although we find this general performance trend, our findings suggest both industry and acquirer characteristics influence the degree to which firms seize early mover advantages or fall prey to bandwagon pressures.
Executives of 56 acquiring organizations participated in policy-capturing research that examined how the task, cultural, and political characteristics of acquisitions influence decisions about levels of integration. Although task-related characteristics entered most heavily into managers' decision models, cultural and political factors were also important. These results suggest that an understanding of acquisition integration is best achieved by viewing integration design decisions through multiple theoretical lenses. Furthermore, although industry and acquisition experience explained some variation in integration decision policies, results suggest that other individual or organization-level factors are also at work.
We examined how social capital and the power of venture capitalists and founder-CEOs affect IPO firm survival. Using data from 218 U.S. initial public offerings conducted in 1992, we found that average management team tenure and an IPO deal's network embeddedness decreased the likelihood of failure during a firm's first five years as a public entity. Founder-CEO presence at the time of an IPO interacted with CEO ownership to decrease the likelihood of failure, and CEO ownership and venture capitalist ownership concentration also decreased that likelihood.
Research Summary
As firms mature, their founders are often replaced with seasoned executives. When founders are retained, the surrounding TMT members are viewed as critical resources in helping compensate for the founder’s managerial deficiencies. Surprisingly, however, little is known about how TMT members affect a founder‐led firm’s performance later in a firm’s life. Using novel methods and a sample of over 2,000 firms, we address this gap. We find that although team structure has a significant impact on the performance of non‐founder‐led firms (consistent with past literature), it has little to no effect on the operating performance of founder‐led firms, suggesting that founder CEOs may exert too much control. Thus, the irony is that founders are retained to propel progress but their very retention may prevent progress. Taken together, our findings add to the entrepreneurship, team, and research methods literatures.
Managerial Summary
Although founders may have the entrepreneurial skills to successfully grow a startup, they often do not have the managerial skills required to lead a large, public firm. As a result, many founder CEOs are replaced before a firm goes public. When founders do stay as CEO, they often require a strong top management team that can help compensate for the founder’s managerial deficiencies. However, given founders’ desire to retain control, there is a question of whether they will actually rely on that team, or if they will simply continue to listen to their own intuition. We find evidence that founder CEOs are much less likely to listen to and benefit from their teams relative to non‐founder CEOs.
The literature highlights the importance of top management teams (TMTs) for technology-based new ventures' success in achieving growth, which is often achieved through product introductions. The human capital theory suggests that TMT members' skills, which are typically derived from their education and experience, can facilitate the transformation of new product introductions into growth. We also propose that multiple products that must be managed and brought to the marketplace smoothly and flexibly benefit from the lower coordination needs and conflicts that are typical of functionally homogeneous teams. Using a unique, multi-source dataset on 374 US technology-based new ventures during the period from 2005 to 2014, we find that new product introductions help technology-based new ventures grow only when the TMT has startup experience and is not functionally diverse. Our findings lead us to echo calls in the TMT literature to move away from simple direct-effect models to more situation-dependent analyses of TMT diversity.
https://authors.elsevier.com/c/1Y2xe38~UTXJRa
We use signaling theory to explain how new ventures effectively signal future prospects to acquire external resources. Based on a sample of 235 new ventures drawn from a unique dataset combining multiple sources, we examine the signals of founders' human capital (i.e., education, industry experience, and founding experience) and investor prominence and their influence on the amount of external funding received across two stages of venture funding. We find that founders' founding experience and education have the greatest effects for acquiring first-round financing, but in later stages, only the signaling effect from education remains. Furthermore, we find important interactions between founders' human capital and investor prominence in the second round of funding. By utilizing lagged funding information, we show that different types of signals have a dynamic and temporal impact on new ventures' resource acquisition, including the persistence of some signals and the temporariness of others.
Research Summary: While recent literature has depicted status as an intangible asset that is firm‐specific and mobile, we have a limited understanding of whether status confers advantage in a way similar to other intangible assets. This study examines the macro‐structural contingencies that influence the marginal value of firm status as firms expand to new markets. Building on the literatures on status and social approval assets, as well as globalization and international management, we hypothesize that two conditions influence how valuable home‐country status will be in a given host country: the interconnectedness of the home and host countries, and their relative position in the global network. We test our hypotheses in a study of 187 venture capital (VC)‐backed biotechnology ventures in 19 countries between 1990 and 2006.
Managerial Summary: Startups typically prefer high‐status VC investors for endorsements, network connections, and resources. One might expect the benefits of high‐status VCs to be even higher when they invest across borders. Yet, we show that status is ingrained in context, and that the performance advantage of partnering with high‐status cross‐border VC firms depends on the relationship between the country of the VC firm and that of the startup. We find that, when the VC industries in the two countries are more connected, the positive effect of cross‐border VC firm status on successful exit is amplified. However, when the VC firm comes from a more central country than the startup, the benefits of VC firm status are less pronounced and vice versa.
In this exploratory work, we examine the relation between founder exits and firm performance in new and emerging ventures using data (N = 3120) from the Kaufmann Firm Survey (KFS) database which tracked firms over a seven-year period. We find that founder exits have an inverted-U shaped relationship to firm performance. Furthermore, the relationship between exits and performance is weakened when ownership is consolidated and governed by formal ownership agreements, and strengthened when owners are actively engaged in management of the firm. Overall, our results suggest that new and emerging firms' organizational development influences the relationship between exits and performance. We discuss the theory-based and practical implications of this work as well as multiple lines of future research that can build on our findings.
We highlight a largely unstudied phenomenon that affects postacquisition performance: nested acquisitions. Nested acquisitions occur when a firm acquires a target firm that has itself recently acquired another firm. In our study of publicly traded U.S. acquirers and targets from 2000 to 2014, we theorize that nested acquirers face unique integration difficulties that reduce acquirer postacquisition performance. Specifically, we build on Penrosian logic and theorize that nested acquisitions tax the managerial capacity of the acquiring and acquired firms more than nonnested ones and that, as nested acquisition complexity increases due to variance within the embedded nested targets (i.e., greater number, more recent, less related, and larger nested targets), the drain on managerial capacity also increases. Ultimately, these challenges increase the likelihood of reduced postacquisition performance. Given these suggested difficulties, we theorize that retaining focal target managers can aid the acquiring firm and thereby help to reduce negative performance outcomes. In our unique sample of matched-pair firms, we find that nested acquisitions are associated with lower postacquisition performance but that retaining target firm managers can reduce this effect.
We show how knowledge-based and incentive-based perspectives complement each other to explain the effects of acquisitions on the productivity of inventors from acquired firms. Incentive-based theories account for their lower productivity relative to that of inventors at nonacquired firms, and both perspectives jointly explain why their productivity converges with that of inventors from acquiring firms. Higher productivity is achieved when there is greater overlap in routines and moderate overlap in skills, and when the acquired firm is large relative to its acquirer. This study clarifies the subtle manner in which incentives and the knowledge-based view are intertwined.
Research Summary:
Extending research on the effect of experience on acquisition outcomes, we examine how the differential in previous M&A experience between the target and the acquirer affects the value they respectively obtain when the acquirer takes over the target. Drawing on literature about organizational learning, negotiation and information economics, we theorize that the party with greater experience will be able to obtain more value. Furthermore, we theorize that the effect of differential M&A experience on value obtained is contingent on the level of information asymmetry the acquirer faces with respect to the target, specifically as a function of the target’s product-market scope and whether the deal is friendly. We test and find support for these predictions in a sample of 1,241 M&As over a 30-year period.
Managerial Summary:
Corporate strategy is about a firm’s scope and development decisions and outcomes, but corporate strategizing is incomplete unless managers anticipate the moves of other economic actors. We demonstrate the importance of these points when it comes to learning to make acquisitions. Using an innovative research design and theory that enables comparison between acquirer and target gains, we show that whatever their firm’s acquisition history and capabilities, acquisitive managers should mind the negotiation and other pitfalls that arise when target firms possess ample acquisition experience of their own. We also demonstrate that the effect of experience advantage, whereby the more experienced party benefits, depends on the target firm’s scope and whether the deal is friendly – two dimensions that acquirers can and should take into account.
Research summary: Does the degree to which founders keep control of their startups affect company value? I argue that founders face a "control dilemma" in which a startup's resource dependence drives a wedge between the startup's value and the founder's ability to retain control of decision making. I develop hypotheses about this tradeoff and test the hypotheses on a unique dataset of 6,130 American startups. I find that startups in which the founder is still in control of the board of directors and/or the CEO position are significantly less valuable than those in which the founder has given up control. On average, each additional level of founder control (i.e., controlling the board and/or the CEO position) reduces the pre-money valuation of the startup by 17.1-22.0percent. Managerial summary: A founder's vision and capabilities are key ingredients in the early success of a startup. During those early days, it is natural for the founder to have a powerful, central role. However, as the startup grows, founders who keep too much control of the startup and its most important decisions can harm the value of the startup. Both qualitative case studies and quantitative analyses of more than 6,000 private companies highlight that startups in which the founder has maintained control (by retaining a majority of the board of directors and/or by remaining as CEO) have significantly lower valuations than those where the founder has relinquished control. This is especially true when the startup is threeyears old or more.
We analyze the frequency and nature by which new firms are acquired by established businesses. Acquisitions are often considered to reflect a technology transfer process and to also constitute one way in which a “symbiosis” between new technology-based firms (NTBFs) and established businesses is realized. Using a micro-level dataset for Sweden in which we follow new entrants up to 18 years after entry, we show that acquisitions of recent start-ups are rare and restricted to a small group of entrants with defining characteristics. Estimates from competing risks models show that acquired start-ups, in particular by multinational enterprises (MNEs), stand out from entrants that either remain independent or exit by being much more likely to be spin-offs operating in high-tech sectors, having strong technological competence, and having weak internal financial resources. Our overall findings support the argument that acquisitions primarily concern NTBFs in market contexts where entry costs are large, access to finance is important and incumbents have valuable complementary capabilities and resources.
Increasingly, strategy scholars are exploring the relationships between innovation, competition, and the persistence of superior profits. Sustained high profitability may result when a firm repeatedly introduces valuable innovations that service previously unmet consumer demands. While the returns to the firm from each innovation may erode over time, innovation ensures that, overall, the firm maintains a high performance position. At the same time, sustained high profitability may also accrue to firms that innovate less often, but effectively avoid the competition that otherwise erodes high returns. This paper elaborates these relationships before presenting an empirical analysis of the effects of differential innovative propensities and differential rates of competition on pharmaceutical firms' abilities to sustain profit outcomes that are above those earned by competing firms. The analysis, which is situated within the U.S. pharmaceutical industry, finds support for the expected relationship between high innovative propensity and sustained superior profitability, but no support for a link between persistence and the ability to avoid competition.
The emergence of radical technologies presents a significant challenge to incumbent firms. We study firms' management of radical technological change by separating their actions into upstream research (the "R" of R&D) and downstream development (the "D" of R&D). We introduce two contingencies to explain when incumbents' research investments in radical technologies translate into product development and when these upstream investments may get voided by organizational inertia downstream. First, radical technologies can differ in how they conform to incumbents' existing business models, impacting the extent to which the movement of research outputs toward development will be subject to inertial pressures. Second, incumbents can invest in a radical technology through a variety of modes (internal research, external research contracts, alliances, acquisitions). These modes represent unique combinations of who does research and who is involved in the decision for subsequent development, and, hence, differ in the extent to which they are shielded from inertial pressures. This difference helps explain why incumbents, despite responding to radical technologies, may still be unable to adapt, as well as what types of investments will be more effective in helping firms navigate technological change. Evidence from pharmaceutical incumbents' pursuit of monoclonal antibodies and gene therapy offers strong support for our arguments.
We develop a capabilities-based theory of acquirer target selection, arguing that acquirers will pursue both low capability targets in existing contexts to deploy existing capabilities, and high capability targets in new contexts to acquire new capabilities. These arguments are formalized in an analytical model that jointly considers the benefits and costs of acquisition as a function of target capability level and context. The predictions from this model are tested in the Chinese Brewing industry (1998-2007), with results showing that acquirers strongly prefer inferior targets in existing geographic markets, but are relatively more likely to choose superior targets in new markets, especially if they have strong acquisition capabilities. Our study provides insight into the factors driving target selection, and contributes to a capabilities-based understanding of acquisitions.
This study is an effort to reveal market-driven innovation via acquisitions. By differentiating the organizational process of resource integration pertaining to market- versus technology-driven innovation via acquisitions, we show that product market relatedness and technology relatedness have differential effects on postacquisition innovation performance, depending on the size of the acquirer. Our analysis of acquisitions in high-tech industries indicates that larger firms maximize their postacquisition technological innovation performance at a lower level of technology relatedness and, in contrast, at a higher level of product market relatedness, whereas the opposite is true for smaller firms. This study contributes to the acquisitions research by identifying (a) market-driven innovation via acquisitions and (b) different mechanisms through which product market and technological resources affect postacquisition technological innovation.
How to improve the performance of mergers & acquisitions (M&A) continues to be a confounding issue. We show that a dedicated M&A function is a new phenomenon that is positively related to a firm's M&A performance and M&A learning process. Moreover, we find that an M&A learning process (involving articulation, codification, sharing, and internalization) helps build up an M&A capability, which in turn is positively related to a firm's overall M&A performance. We use survey data from a sample drawn from the M&A activities of German firms to test our arguments. Ltd. Copyright © 2015 John Wiley & Sons, Ltd.
Building upon the observation that individuals feel ownership toward a variety of targets, we suggest that under certain conditions, organizational members can develop feelings of ownership toward the organization and various organizational factors. We define psychological ownership, identify its "roots" and the primary "routes" through which it develops, and propose certain organizational outcomes. We discuss the conceptual distinctiveness of psychological ownership from a set of related constructs and suggest some theoretical and managerial implications of our theory.
While some previous studies have found that the role of founders' collective experiences is paramount in resolving problems inherent in startups, others have failed to substantiate this. This study claims that this incongruence is attributable to a failure to consider organizational processes in which founders' experiences translate into organizational assets through information distribution and interpretation. Using the data from the Panel Study of Entrepreneurial Dynamics, this study demonstrates that startups reach their break-even point faster when their founders have had work experience in the same industry, and that this effect becomes stronger when these firms commit more resources to information distribution and interpretation.
Why do some new technologies emerge and quickly supplant incumbent technologies while others take years or decades to take off? We present a framework that considers both the focal competing technologies as well as the ecosystems in which they are deployed. We consider the joint effects of the ecosystem emergence challenges that confront the new technology and the ecosystem extension opportunities that are available to the old technology. We identify four qualitatively distinct regimes with clear predictions for the pace of substitution. We test our framework with data on ten technology transitions in the semiconductor lithography equipment industry from 1972–2009. We find strong support for our framework in explaining variance in the pace of substitution. We discuss the implication of our approach for firm strategy.
When a firm's chief executive officer is also the chairperson of its board, directors have opposing objectives. According to organization theory, such CEO duality establishes strong, unambiguous leadership. But according to agency theory, duality promotes CEO entrenchment by reducing board monitoring effectiveness. We developed a contingency framework to resolve these perspectives. Sampling three industries to enhance generalizability, we found that board vigilance was positively associated with CEO duality. Duality was less common, however, when CEOs had high informal power and when firm performance was high.
This article investigates the effects of prior firm founding experience, prior venture capital (VC) financing experience, and prior success with regard to subsequent venture survival by distinguishing serial entrepreneurs with and without prior VC financing experience. My analysis shows that ventures founded by serial entrepreneurs perform better than those founded by novice entrepreneurs regardless of whether entrepreneurs had prior success or failure. However, contrary to expectations, this study finds that serial entrepreneurs without prior VC financing experience perform better than serial entrepreneurs with prior VC financing experience, suggesting that there may be an inadvertent cost of learning about the VCs. Copyright © 2013 Strategic Management Society.
This study examines the impact of female board representation on firm-level strategic behavior within the domain of mergers and acquisitions (M&A). We build on social identity theory to predict that greater female representation on a firm's board will be negatively associated with both the number of acquisitions the firm engages in and, conditional on doing a deal, acquisition size. Using a comprehensive, multi-year sample of U.S. public firms, we find strong support for our hypotheses. We demonstrate the robustness of our findings through the use of a difference-in-differences analysis on a sub-sample of firms that experienced exogenous changes in board gender composition as a result of director deaths.