Content M-6: Post-acquisition integration

Question 1

Management of alliances centers on value creation and value capture. What’s the difference?

Answer 1

• Value creation: Creation of relational rents (creating a pie)
  > Determined by the scope of the alliance
• Value capture: Appropriation of rents by one of the partners (taking a larger chunk of the pie).
  > Determined by overlap beyond scope of the alliance

Question 2

Recap: Dynamic relational view.
Which four components, leading to relational rents?

Answer 2

• Complementary resources (precedes the other 3)
• Relation-specific assets
• Effective governance
• Knowledge-sharing routines

Question 3

Recap: Value creation declines are a result of which internal and external factors?

Answer 3

Internal:
- Changes in complementary resources
> Resource convergence
> Resource divergence

• Changes in governance
  > Information governance develops trust that may lead to inertia
  > Not introducing ore vigilant formal governance

External:
- Market competition
> Resource imitation by competitors
> Imitation of knowledge sharing and relation-specific assets

• Rate and magnitude of environmental change
  > Inhibits adaptation of independent resources
  > May require development of new resources

Question 4

Recap: Value capture can change as a result of… ?

Answer 4

• Replication of partner’s resources
• Development of additional competitive resources
• Unequal investment in relations-specific assets
• Prevention of imitation of competitive resources

These change the bargaining power positions!

Question 5

Recap: What are the three main governance structures?

Answer 5

• Non-equity alliance
  > Collaboration is not formalized in equity stake but by contract, or kept informal
  > Bilateral and unilateral contracts
• Equity alliance
  > Partners take an equity stake in each other as a safeguard
  > Minority equity and joint ventures
• Acquisition
  > One partner (target) looses legal and economic independence.

Question 6

Why do you want to have control? Opportunistic behavior.
Opportunism results form which three types of information asymmetries?

Answer 6

• Adverse selection (ex ante): misrepresentation of the resources that will be brought into the alliance before the alliance contract is signed.
• Moral hazard (ex post): behaving inconsistently with the goals of the alliance after the alliance contract is signed.
• Holdup (ex post): specific form of moral hazard, occurring when one of the partners does not make the relation-specific investments agreed upon after the alliance contract is signed.

Question 7

Two control and coordinate partner activity within certain governance structure, alliance partners make use of two types of control mechanisms. Which are they?

Answer 7

• Formal mechanisms: contracts, output measurement, behavioral guidance, business plans, performance indices, internal prices.
  > Used when property-based / hard resources are involved
  > Ineffective, and even detrimental, for knowledge-based resources.
• Relational mechanisms: teams, committees, task forces and project groups, job rotation, cooperation managers.
  > Required when knowledge-based / soft resources are involved.
  > Since property-based resources also depend on use of knowledge and skills, effective in all alliances.

Question 8

What is integration?

Answer 8

The means by which interfirm coordination and system control are achieved.

Question 9

When is integration preferred over partnering / no integration with respect to the type of resources?

Answer 9

• Same or similar resources: integration
• Complementary, unique or superior resources: No integration / partnering

Question 10

When is integration preferred over partnering / no integration with respect to type of value creation?

Answer 10

• Lowering costs by combining resources and activities: integration
• Growth in revenue through new market access and sharing best practices: no integration / partnering.

Question 11

What are organizational characteristics with integration? And for partnering?

Answer 11

• Integration
  > Organizational form: hierarchical
  > Tolerance for ambiguity: little
  > Approach: I know better
  > Time perspective: short-term results
• Partnering
  > Organizational form: collaborative
  > Tolerance for ambiguity: much
  > Approach: I want to learn
  > Time perspective: long-term growth

Question 12

Integration strategy: An infamous framework.
Four categories/strategies can be distinguished alongside two dimensions. What are these two dimensions and in which strategies to they result?

Answer 12

Dimensions:
- Need for strategic interdependence (low vs. high)
> Focal resources complementary, resource modification/integration needed, transfer of management skills leads to value, goals aligned.
- Need for organizational autonomy (low vs. high)
> focal resources are dissimilar, cultural distance, organizational dissimilarities (e.g. systems, procedures), preservation of target’s unique, context-specific set of capabilities.

Strategies:
- Low need for autonomy, low need for interdependence: Holding
- Low need for autonomy, high need for interdependence: Absorption
- High need for autonomy, low need for interdependence: Preservation
- High need for autonomy, high need for interdependence: Symbiosis

Question 13

Two important aspects: degree and level of integration.
What do they entail?

Answer 13

• Degree (or level) of integration: The degree of post-acquisition change in an organization’s technical, administrative, and cultural configuration.
• Speed of integration: the time period from closing of the deal to the desired degree of integration

Question 14

What could be an advantage of degree (level) of integration, and what could be a disadvantage?

Answer 14

• Advantage: High levels of integration technically enhance realization of interdependency-based synergistic potential
• Disadvantage: They might also result in realization of negative synergies as a result of increased coordination cost and potential for conflict.

Question 15

What are advantages of high speed of integration?

Answer 15

Shorter time frames facilitate synergy realization, reduce employee uncertainty, create momentum, and limit competitor responses.

Question 16

What are two processes of integration?

Answer 16

• Task integration: identification and realization of operational synergies
• Human integration: creation of positive attitudes towards the integration among employees on both sides.

Both will have an impact on the acquisition success.

Question 17

Sequence of integration. Many organizations view the integration process mainly as the combining of tasks and activities. What would be the right sequence? (within the two processes)

Answer 17

• Task integration
  > Start only with elementary first draft of task integration
  > Proceed with task integration only when human integration has advanced.
• Human integration
  > Start with human integration quickly
  > Keep focus on human integration as task integration proceeds.

So human integration first!

Question 18

In sum (conclusion).
- Degree (level) of integration: the degree of post-acquisition change in an organization’s technical, administrative, and cultural configuration.
> Higher degree needed to realize synergies, but creates risk of additional costs.

• Speed of integration: tie period form closing the deal to the desired degree of integration.
  > Speed instrumental in realizing synergies and reducing uncertainty, but effect dependent on number and type of activities involved in integration.
• Sequence of integration: the order in which various integration activities - notably human and task integration - take place.
  > Emphasis on human / social / relational integration first, then gradually include task integration.

Answer 18

True!

Question 19

Strategic management literature presumes the strategic fit as decisive for M&A success. Why?

Answer 19

• High fit enlarges market power and productivity
• Strategic fit improves M&A performance as similarity is seen as an indicator for efficiency-based synergies (scale and scope).

However, no empirical evidence for the impact of similarity on M&As!

Question 20

The greater the strategic complementarity, the greater the M&A success.
True or false?

Answer 20

True! If the strategies of the two firms are complementary, they’re mutually supportive -> increased likelihood that cultures are compatible -> higher cultural fit.

Question 21

The greater the strategic complementarity, the greater the speed of integration.
True or false?

Answer 21

True! In the post-merger phase, complementary firms can use their common potential better than non-complementary firms.

Question 22

What is one of the most common reasons for low success rate of M&As?

Answer 22

Cultural incompatibility or misfit, because the organizational culture has influence on nearly all organizational practices, directives, leadership styles and administration processes.

Question 23

It is argued that high speed of integration can lead to…

Answer 23

• Faster exploitation of synergies
• Faster returns on investments
• Reduction of uncertainty and resistance among employees
• Faster and more effective synergy and potential realization
• Minimization of time spent in a suboptimal conditions
• Taking advantage of the momentum int he early enthusiasm phase after the deal.

Question 24

Two examples (areas) of issues in the pre-merger stage are…?

Answer 24

• Strategic complementarity
• Cultural fit

Question 25

Two examples (areas) of issues in the post-merger stage are...?

Answer 25

- Degree of integration - Speed of integration

Question 26

Cultural distance could possibly hamper integration performance in M&A integration, but what could the upsides of this be?

Answer 26

- Cultural distance offers learning opportunities - Cultural distance increase willingness to accept differing cultures

Question 27

What is an example of superstitious learning in integration?

Answer 27

If the number of previous integrations isn't large, generalization form 1 integration event to another is difficult and often misleading. With more completed integrations, firms are more likely to trust their experience.

Question 28

What conditions can hep leverage pre-acquisition experience in a positive way and help avoid negative learning curves?

Answer 28

- High-level management attention - Careful and through integration planning - Codification of integration experience (handbook)

Question 29

Why do employees often enter integration processes with a skeptical attitude?

Answer 29

Employees often experience job insecurity, process changes and cultural clashes. This can be influenced by leaderhsip actions!

Question 30

To retain key employees during the integration phase, which things are crucial?

Answer 30

- Status and appreciation - Clearly outlined future career paths - Incentive systems - Corporate language (in international mergers)

Question 31

Integration depth. When does deep integration yield beneficial results?

Answer 31

When firms seek to realize cost synergies and align processes and procedures.

Question 32

Integration depth. When is there less need for deep integration?

Answer 32

For acquisitions focusing on growth or knowledge

Question 33

Integration depth. What are advantages- and disadvantages of integration depth?

Answer 33

- Advantages: it limits value appropriation by the target firm's stakeholders and it allows the acquiring firm to salvage the healthy parts of the target. - Disadvantages: it might disrupt both firms as it's often necessary to change routines or structures in both firms to exploit fully the benefits of deep integration.

Question 34

Integration speed. What are reasons why fast integration might be preferable?

Answer 34

- Shorter period of uncertainty for stakeholders - Quicker realization of benefits associated with the M&A deal. - The momentum of the early integration stage tends to get lost when attention of management and employees turns elsewhere.

Question 35

Integration speed. What are reasons why slow integration might be preferable?

Answer 35

- Less demanding for employees and integration management - More attentive communication - Avoids disturbances caused by abrupt changes of organizational identity - Allows for more time to trust building and sensegiving - When a deal is difficult regarding cultural distance or employee retention.

Question 36

Operational integration. There are 3 general tasks for operational integration. Which are they?

Answer 36

1. Procedural tasks: e.g. alignment of accounting systems 2. Physical tasks: e.g. resource allocation 3. Managerial & sociocultural tasks: e.g. design of reward systems or the definition of roles.

Question 37

Leaders communicate with and lead stakeholders to set the pace for the integration and smooth the integration process. To mobilize, leaders steer the integration towards a preferred outcome through... (3)?

Answer 37

- Sensegiving: involves attempts to develop and influence the collective interpretation of ongoing change (powerful tool for reducing resistance towards change). - Goal setting: important because integration processes involve long periods of uncertainty and ambiguity. Intermediate goals are a way to provide guidance along the way. - Identify building: changes in organizational identity can affect employees' perception of the integration process.

Question 38

What is mitigation in the context of integration?

Answer 38

Leadership actions that attempt to reduce the negative responses of employees in the integration process.

Question 39

When two entities are merged, we can expect 4 types of value creation derived from strategic interdependencies:

Answer 39

1. Resource sharing: value is created using economies of scale and combining functions at operating level. 2. Functional scale transfer: value is created by sharing information and know-how. 3. General management scale transfer: value is created through governance, better coordination and control. 4. Combination benefits: value is crated by leveraging the size of the entity, purchasing power, and more borrowing capacity.

Question 40

What are the four integration strategies? And what do they entail?

Answer 40

- Holding: acquirer has no intention of integrating the target and value is created by financial transfers, risk sharing, or general management capabilities. There's little to no economies of scale. Any target is potentially a good fit. - Absorption: the acquirer needs to impose its governance model. Firms usually adopt an absorption strategy to accelerate growth or in case of shortage of resources. Often about economies of scale and creation of cost-cutting synergies. Downside: cultural conflicts. - Preservation: the acquirer's focus is to keep the target's sources of value intact. Some claim that more autonomy can be a factor of motivation to the management team. - Symbiosis: the acquirer must ensure simultaneously boundary preservation and boundary crossing. It's the most complicated PMI model, but when successful, the most rewarding. Try to preserve the unique capabilities of the acquired firm, keeping them independent, while creating economies of scale and creating interdependencies between the acquired and acquiring firm.

Question 41

What is the difference between internal relatedness and external relatedness (context of integration)

Answer 41

- Internal relatedness: concerns management styles, pre-merger performance, and strategic orientation. - External relatedness: concerns target markets & marketing positioning in terms of product quality and price. Speed is beneficial when external relatedness is low and internal relatedness is high. Speed is detrimental when external relatedness is high and internal relatedness is low.