M&A as an innovation strategy : the case of high technology corporations

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M&A as an Innovation Strategy: The Case of

High Technology Corporations

Liran Sadeh

Degree: MSc Business Administration: Entrepreneurship and Innovation, Amsterdam Business School, University of Amsterdam

Word Count: 12132

Student ID: 11672129

Supervisor: Tsvi Vinig

2nd Reader: Michele Piazzai

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Statement of Originality

This document is written by me, Liran Sadeh, who takes full

responsibility for the content of this document.

I declare that the text and the work presented in this document are

original and that no sources other than those mentioned in the text and

its references have been used in creating it.

The Faculty of Economics and Business is responsible solely for the

supervision of completion of the work, not for the contents

.

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1. Abstract

The increase in complexity and in the number of challenges associated with innovation has greatly affected the activities of many high tech corporations.

Considering the importance of innovation and its impact on the competitiveness and long-term success of companies, more companies have been looking for inorganic strategies and sources of innovation, and thus they have been turning to M&A (Mergers and Acquisitions). A recent growing body of research is centered on the relation between M&A and innovation. The goal of this present study is to establish whether M&A can be considered an innovation strategy, a mechanism that helps high-tech corporations to overcome unique innovation challenges. To this end, a holistic multiple-case study was carried out analyzing the M&A activity of four leading high-tech corporations over a ten-year period. This study found that there was clear evidence that M&A has been used as part of innovation strategies and therefore suggests that M&A should be considered when assessing innovation capabilities of large tech corporations.

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2. Introduction

In recent years, the basis of the global economy has been increasingly moving towards innovation, as the pace of change has reached an unprecedented level _{(Brown & Eisenhardt 1998). More and more high-technology firms are} allocating substantial resources to different innovation strategies, as innovation is both a powerful driver for rapid corporate growth and an important determinant for their competitive advantage _{(Jia 2017).}

However, _{innovation projects are risky, unpredictable, long-term, multistage,} labor-intensive, and unique, as they involve the exploration of new untested approaches _{(Holmstrom 1989). Hence, innovation is a challenge to all firms, but the} challenge to tech corporations is unique _{(Belloc 2011) because organizational} structures _{(Belloc 2011; Staudenmaier & Schürle 2010), speed to market (Belloc} 2011; Staudenmaier & Schürle 2010; Parry et al. 2009) _{, and operating control} (Kuratko et al. 2014) all run against the interests of corporate innovation. In order to overcome these challenges, tech companies operate through different innovation strategies to advance their innovation performance on the market. Corporations 1) allocate significant investments to in-house R&D _{(Lin et al. 2006); 2) encourage open} innovation as part of the organizational culture _{(Chesbrough 2003); 3) form} accelerators and incubators to bridge the gap between corporations and the startups _{(Weiblen & Chesbrough 2015; Cohen 2013); 4) turn towards} entrapreneurship _{(Mair 2006; Pinchot & Pellman 1999); 5) invest in entrepreneurial} ventures and corporate venture capital _{(Dushnitsky & Lenox 2005); and 6) use}

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mergers and acquisitions (M&A) _{as a strategic mechanism to achieve different} specific goals in the innovation field.

There is growing body of literature on the relation between M&A and innovation _{(Ruckman 2004), but little on the connection between M&A and} innovation strategy_{(Ruckman 2004). However, during the last decades, the attention} to innovation-driven M&A made by tech corporations has increased, and since the dot-com bubble in 2000, there have been hundreds of M&A made by today’s most innovative technology-driven corporations, in order to expand into other business sectors with new markets and technologies, advance and sustain their market leadership position, and overcome the upcoming competition_{(Prakash 2017). These} activities can be explained either by intensified market dynamics or by shifts in the corporate strategy. Tech companies constantly browse the market to discover different ventures _{(Prakash 2017).}

Despite this trend, the question of whether M&A is used as an innovation strategy still stands. The implications of this question are both academic and practical. Whether M&A is held as an innovative strategy bears implications on innovation theory; from a practical perspective, regarding M&A as an innovation strategy impacts how a company’s attitude toward innovation, budget allocation for innovation, and innovation performance should be judged. Thus, the aim of this research is to identify whether M&A can be considered an inorganic innovation growth strategy.

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2.1 Objectives

The objective of this research is to shed light on the relation between M&A and innovation strategy, and whether M&A can be considered as an innovation strategy in the context of large high-technology corporations. Today’s business world is increasingly focusing on innovation strategies of all sorts, as innovation is a pivotal success factor for many economies globally. The research will primarily focus on the high-tech industry, which is characterized by a high rate of innovation-related activities. The goal of this thesis is not to suggest M&A as a sole innovation strategy, but to offer M&A as one of the several existing inorganic innovation strategies. The research focuses on established high-tech companies to limit the scope of the research. The high-tech industry was selected because this sector is constantly outsourcing innovative development. Despite the limited scope, the conclusions could be theoretically applied to other large tech corporations throughout the world.

The research question addressed in this thesis is, therefore, _Can

innovation-driven M&A be considered an innovation strategy_{? To answer this}

question, a holistic multiple-case study of four large high-tech corporations was conducted.

2.2 The high-tech sector

The definition of high-tech industry is to some extent ambiguous as it can be defined as either an industry that produces technology or one that intensively uses technology. The Organization for Economic Cooperation and Development (OECD) identifies high-tech industries based on a comparison of R&D intensities, which is

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found by dividing industry R&D expenditures by industry sales. Industries identified as high-tech are aerospace, pharmaceuticals, computers and office machinery, communication equipment, and scientific (medical, precision, and optical) instruments. These industries perform above-average levels of R&D (Hatzichronoglou 1997)_{. The OECD classifies industries by R&D intensities, with} those spending greater than 4% of turnover (such as ICT or pharmaceuticals) classified as high-technology, between 1% to 4% of turnover (such as vehicles or chemicals) classified as medium-technology, and those spending less than 1% (such as textiles or food) as 'low technology' _{(Hatzichronoglou 1997). For the sake of the} research, a high-tech industry is defined as one exceeding four percent of R&D expenditures out of its total revenue. In this thesis, the terms knowledge-intensive industries _{(Tödtling et al. 2006), technology-intensive} industries _{(Vaaler &} McNamara 2010)_{, and high tech industry will refer to the same industry.}

3. Literature review

This review of literature details M&A and their traditional use in corporate strategy, the prominent role of innovation in large tech corporations, and the challenges innovation poses for large corporations. It then presents different innovation strategies and the rationales behind them. The overall focus is on large tech corporations. The review of literature concludes with the identification of the research question and the formulation of the conceptual model.

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3.1 Mergers and Acquisitions

According to Yang et al., the term “mergers and acquisitions” (M&A) refers to the “process of combining or gaining parts or all of other companies’ property rights under certain conditions in order to have the controlling rights. This critical business activity supports complementarity between companies, based on various dimensions such as resources, channels, brands, and technologies” _{(Yang et al. 2014).}

M&A have traditionally been seen as a means to achieve economies of scale, gains in market share, or geographical expansion _{(Dewey & Scherer 1972). More} recently, the relevance of technological motives for M&A has increased sharply in high-technology industries. Through M&A, companies are attempting to obtain highly developed technical expertise and research and development (R&D) skills, experienced personnel, and specific new technologies _{(Bower 2001).}

M&A activities are especially critical for companies in the high-tech industries, such as information and communications technology (ICT), electronics, biotechnology, or pharmaceuticals. M&A activity is a common strategy for high-tech companies to preserve or extend their competitive advantages in the market, by improving their power in the technology market and strengthening their innovative performance _{(Yang et al. 2014).}

M&A is not only crucial for the acquiring company but also the acquired company, presenting a win-win outcome for both. For the young start up, selling to a large company is in many cases the desired exit path that provides its founders the desired financial reward and the recognition of success. For the acquiring corporation there may be several different benefits: It may gain access to new

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innovation sources, add a new skilled labor force, acquire additional intellectual property and products or services, increase market share, expand towards a larger geographic area, reduce or block competition, and leverage the economies of scale to increase efficiency and productivity _{(Dashti & Schwartz 2015).}

There are several different reasons that M&A deals are made; however, the objective to overcome the weaknesses and consolidate the strengths of the acquiring companies are similar. When executed effectively, M&A deals can generate economies of scale or other synergies, increase market power, and change market structures. Generally, companies with unique resources or superior solutions for emerging technologies are considered M&A targets. As previously stated, technology and innovation are highly important for high- tech companies’ strategic competitiveness; therefore it is crucial for them to consider technological factors in their M&A decisions _{(Yang et al. 2014).}

3.2 Innovation

Since the beginning of the 21st century innovation has remained a major concern, especially for large technology companies worldwide. While innovation is a powerful driver for rapid and profitable corporate growth _{(Staudenmaier & Schürle} 2010)_{, it also represents an important determinant of competitive advantage} (Lengnick-Hall 1992)_{. For the sake of this study, O'Sullivan and Dooley’s (2008)} definition of innovation—namely, as the process of making changes, large and small, radical and incremental, to products, processes, and services that result in the introduction of something new for the organization with the ultimate aim of adding value for customers and contributing to the knowledge store of the organization—will

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be used _{(O’Sullivan & Dooley 2008). Generally, corporate innovation involves} product and/or service, process, and organizational innovation. Product and/or service innovation represents the company’s capability to successfully introduce a new or upgraded product and/or service to the market; process innovation involves the adoption of a new or revamped production/distribution process; and organizational innovation relates to the company’s explicit efforts en-route to encourage through its different schemes and structures _{(Huse et al. 2005). The} motivation behind the organizational efforts to innovate, include capturing new markets, increasing market share, improving product quality, increasing choice of products, replacing outdated products, and reducing environmental impact_(Petrescu 2012)_{. Innovative companies are organic, open, dynamic, enthusiastic, anticipative,} and creative organizations that foster an innovation culture and are eager to put innovation into practice _{(Cruz-Cázares et al. 2013).}

3.3 Innovation in the high-tech industry

For innovative high-technology corporations such as Apple, Google, Amazon and Facebook, innovation plays a major element in technology creation and in sustaining their competitive advantage, which in turn improves their overall performance _{(Prakash 2017). The corporations’ success depends on innovation,} which provides protection against highly uncertain and unstable scenarios, and strengthens the corporations’ capabilities to seek new opportunities and efficiently exploit the existing ones _{(Cruz-Cázares et al. 2013; Matzler et al. 2013). Innovation} ensures the growth base and survival of technology-creation firms. Furthermore, ongoing technology creation increases corporate competitiveness, which is an

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important element for its market survival and business success _{(Mas-Verdú et al.} 2015)_.

Technological innovations are those that advance new features, performance, and price attributes to the technologies and products already on the market. Technological innovations create new products based on the novel technological structure. Over time, the novel technology, with the improved technological performance, begins to cannibalize the already existing technology as it drives a shift in the demand of the mainstream customers _{(Slater & Mohr 2006). When looking at} technology creation, the complexity level varies from small tweaks and adjustments of existing products, processes, or services to the development of breakthrough products, processes, or services that introduce novel features and perform exceptionally well _{(Slater & Mohr 2006; Huang et al. 2016).}

Innovation has become a corporate core competency. High-tech firms are committed to investing organizational resources to foster innovation. The management literature has shown that innovation strategy has significantly impacted corporations’ innovation outcome and financial performance _{(Jia 2017).}

3.4 Innovation challenges for large corporations

Holmstrom refers to innovation projects as risky, unpredictable, long-term, multistage, labor-intensive and unique, as they involve the exploration of new untested approaches _{(Holmstrom 1989). Innovation is a challenge for all firms,} however the literature has pointed to unique challenges for large corporations. These challenges are outlined in the following sections.

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3.4.1 Organizational structure

According to Belloc, the leading innovative players in the market are the individual entrepreneurs, heading new and small firms that advance a ‘creative destruction’ process. The small organizational structure has the flexibility to run-over the organizational inertia and can more easily introduce breakthroughs that will challenge the established firms in the industry _{(Belloc 2011). Startups are innovative,} growth-oriented businesses searching for a repeatable, scalable business model, while established large corporations operate with an existing successful business model, making them more risk averse _{(Blank & Dorf 2012). In addition, there is} ample evidence that radical innovations depend upon an entrepreneurial initiative, which is discouraged by large corporate structures. _{By definition, large corporations} and startups are different organizations; hence they complement each other once combined _{(Belloc 2011; Staudenmaier & Schürle 2010).}

3.4.2 The importance of cycle time

Speed to market is an important element for the success of large high-tech corporations. Reducing the corporations’ cycle time allows them to exploit emerging markets and respond more effectively to competitive threats. Cycle time is crucial for corporations operating under high-tech, fast-paced change and shortens product life cycles _{(Belloc 2011). However, the cycle time literature has determined that large} corporations are facing difficulties in keeping up with the pace of product and service development in small and medium enterprises and startup companies (Staudenmaier & Schürle 2010)_{. The complexity of resolving technological}

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uncertainties and defining product/ service attributes are among the main barriers that cause this lag in product/ service development at large corporations _{(Parry et al.} 2009)_.

3.4.3 Checks and balances

Corporate innovation and operating control are two distinctive phenomena. The aim of corporate innovation is to lead the firm in new directions while the aim of operations control is to channel and often restrict actions. Operating control processes and mechanisms, part of the bureaucratic corporate environment, stand in contrast to the interests of corporate innovation _{(Kuratko et al. 2014) and can restrict} and undermine the motivation of the employee _{(Belloc 2011; Staudenmaier &} Schürle 2010; Parry et al. 2009)_.

The way in which operating controls are executed in organizations may have an important influence on the success of innovative initiatives and behaviors. Covin and Miles indicate that the strategy, structure, procedures, and systems of corporations are the components of the contextual framework in which the individuals act. Operating control plays a crucial part and effects the individual corporation’s innovative behavior _{(Covin & Miles 1999). Operations control} processes and mechanism are important components for the corporations, and in order to productively foster the corporate innovation strategy, they have to be in line with it. The operations management research has proposed that control systems may be vital to successfully introducing new technologies and products; however, operations management still poses a challenge to corporations _{(Das & Joshi 2007).}

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3.5 Innovation strategy

In order to overcome these unique innovation challenges, large corporations have developed innovation strategies, to increase their ability to achieve market leadership and competitive advantage. Gilbert maintains that innovation strategy determines to what extent and in which approach a company attempts to use innovation to execute its business strategy and improve its performance _{(Hittmár et} al. 2014; Gilbert 1994)_{. Dodgson contend that innovation strategy not only helps} corporations to decide, in a consistent and viable manner, which innovation type falls in line with the corporate objectives, but also directs decisions related to resource utilization to meet the company’s innovation objectives and thereby deliver value and build the desired competitive advantage _{(Dodgson et al. 2008). Strecker’s definition} of innovation strategy is more focused, referring to innovation strategy as the sum of strategic choices a firm makes regarding its innovation activity, part of its cross-functional meta-strategy _{(Strecker 2009).}

Thus, more generally, innovation strategy is a management concept, consisting of many internal and external activities that enhance the innovative potential of the business and helps to understand what, why, and when to carry out innovation activities _{(Hittmár et al. 2014). In pursuing such a strategy, corporations} pay close attention to new services and novel products in the marketplace _{(Hurley &} Hult 1998; Wei & Wang 2011)_.

Furthermore, innovation strategy is an important source of competitive advantage _{(Rindova & Fombrun 1999) that may enhance business performance or} reduce a performance gap emerging from changes in the market environment

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(Morgan & Berthon 2008) _{. As previously mentioned, in order to survive and grow,} corporations must be innovative to gain a competitive edge _{(Morgan & Berthon 2008;} Grønhaug & Kaufmann 1988)_.

For the sake of this research, Hittmar’s broad definition, which regards innovation strategy as the set of internal and external processes that are used to enhance the innovation potential of an organization, is used.

3.6 Innovation strategy models

In order to achieve a successful innovation strategy a variety of mechanisms to advance the goals of the strategy are used. The literature details six key strategic mechanisms: R&D, open innovation, _{corporate intrapreneurship, corporate} incubators and accelerators, corporate venturing, and mergers and acquisitions (M&A).

3.6.1 Research and Development (R&D)

In the words of Edith Widder, “Exploration is the engine that drives innovation” (Widder 2013)_{, and thus in hi-tech the classic mechanism driving the innovation} strategy is R&D. Multiple definitions for R&D can be found in the literature, but according to the OECD, R&D is a “creative work undertaken on a systematic basis in order to increase the stock of knowledge, including knowledge of man, culture and society, and the use of this stock of knowledge to devise new applications” _(Manual 2015)_{. In other words, the term amounts to using knowledge to develop new} services, products, and processes that will answer the market needs and eventually lead to development _{(Manual 2015).}

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R&D has long been recognized as the driving force of innovation and productivity growth, as well as the most important activity supporting companies׳ long-term viability _{(Aghion & Howitt 1992). The literature identifies a strong} connection between R&D and economic performance and indicates that R&D efforts influence firms’ financial performances _{(Lin et al. 2006). High-technology industries} are characterized by high production rates of new products that incorporate new regenerations of technology and short product life cycles. R&D efforts are the most critical driving force behind successful innovation, and are highly important for survival in these industries. An exceptional, state-of-the-art R&D capability not only leverages a company’s strong capabilities in process and product innovation in order to dominate the high-technology market, but also provides the company the desired competitive advantages _{(Lin et al. 2006; Dutta et al. 1999). In an extremely} competitive environment, survival is based on the ability to generate innovation often through the rapid delivery of R&D output, to upgrade technology, and to increase the added value from markets and productivity, as recognized by recent reforms in high-technology sectors. Because they are integral to hi-tech growth and viability, R&D innovation activities have taken center stage in economic analyses of the high-technology industry _{(Zhong et al. 2011; Blonigen & Taylor 2003); in fact, R&D} investments have become one of the most crucial indicators of scientific and technological progress _{(Zhong et al. 2011).}

3.6.2 Open innovation

Open innovation is the process of managing knowledge flow across organizational boundaries, it provides insights into how firms can harness the inflow

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and outflow of knowledge to improve their innovation success _{(Bogers et al. 2018).} The model was developed by Chesbrough and _{based on the observations of a} handful of large innovative companies and their deviations from the traditional practice _{(Chesbrough 2003). Chesbrough stated, “In the new model of open} innovation, a company commercializes both its own ideas as well as innovations from other firms and seeks ways to bring its in-house ideas to market by deploying pathways outside its current businesses” _{(Chesbrough 2003). The basic notion of} open innovation is to break the “not invented here” (NIH) phenomenon and to embrace external ideas and knowledge in conjunction with internal R&D, assuming that the boundary between the company and its surrounding environment is porous, enabling the transition of innovations between the two and advancing their innovation output _{(Chesbrough 2003). In contrast to the traditional vertical integrated} model, in which in-house departments have developed technologies for in-house use only, the open-innovation models holds that corporate innovation activities are part of an open system. In 2008, Chesbrough further developed the concept and presented it as means to share and reduce risks, as well as improve competitiveness and productivity _{(Chesbrough et al. 2008). Open innovation, based on the logic of} co-creating and capturing value, requires the collaboration of people and companies, in an across-sector dynamic, to overcome the corporation’s boundaries in the innovation ecosystem _{(Ritala et al. 2013).}

3.6.3 Corporate accelerators and incubators

Corporate accelerators and incubators both have strategically been used by large corporations to foster corporate engagement with the external environment in

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general and with startups in particular. Corporate accelerators are company-supported programs of limited duration that support cohorts of startups by educating, mentoring, and providing targeted resources and services _{(InBIA 2018;} Kohler 2016)_{. Accelerators serve as a means to bridge the gap between} corporations, which seek potential external innovation partners, and startups _(Cohen 2013)_{, and they are a promising way for established corporations to explore new} ideas as an auxiliary part of their innovation efforts. By bringing startups and corporations together, corporate accelerators provide a unique platform for long-term corporate growth and function as a corporate renewal source of talented and passionate founders, innovative ideas, and new technology _{(Scott 2012).}

Corporate incubators are another strategy characterized by an entrepreneurial mindset and used by large, mature technology-intensive corporations to overcome innovation barriers, develop new technologies, and pioneer new products or services, thereby supporting their growth _{(Burgelman 1984). Corporate incubators} are specialized corporate units, with the strategic objective to produce new business opportunities, that hatch new businesses with smart ideas and promising technologies, and enhance the corporation’s technology base to support its overall development and growth _{(Hornsby et al. 1993). Corporate incubators generally do} not operate under time restrictions, and they serve as fertile ground in which radical innovations can grow, within a startup like environment, eliminating the _bureaucracy associated with operations _{(Weiblen & Chesbrough 2015). High technology} corporations constantly nurture and develop new businesses within corporate incubators with the long-term vision that these ventures will be a future source driving innovation and business growth _{(Burgelman 1983; Ford et al. 2009).}

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3.6.4 Corporate intrapreneurship

Sharma and Chrisman define corporate intrapreneurship, also known as corporate entrepreneurship, as the process in which an individual or a group of individuals, in an existing corporation, create a new company or innovation within parent corporation _{(Sharma & Chrisman 1999). In other words, it rejuvenates and} revitalizes by creating new businesses and developing new services, products, or processes with a high degree of novelty, to ensure future revenue growth and profitability _{for a company (Zahra 1995; Miles & Covin 2002). The new business} activities address and open up new markets, engaging in risky projects with long-term time horizons until profitability _{(Czernich 2004). Although engaging in} riskier ventures, intrapreneurship focuses on strengthening firm competencies to acquire skills and innovative capabilities, and is thus a key factor for the future development of corporations _{(Bosma & Levie 2010; Hornsby et al. 2002).}

Corporate entrepreneurship serves as a strategic behavior, which by tapping into the internal and external accumulated knowledge, allows the corporations to extend their capabilities, enter into new markets, discover additional synergies and pursue new strategic directions _{(Burgelman 1983). Large corporates are turning} towards intrapreneurship as a strategy that will foster the continual innovation, growth, and value creation that they once had _{(Mair 2006; Pinchot & Pellman 1999).}

3.6.5 Corporate venturing

Corporate venturing (CV) is defined as equity investments in entrepreneurial ventures by established corporations _{(Dushnitsky & Lenox 2005). CV is the process}

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through which corporations pursue strategic and financial objectives by cooperating with a small autonomous venture _{(Reimsbach & Hauschild 2012). However,} financial gain is not the sole purpose of CV investments, and it has numerous strategic objectives including tapping into non-core markets, serving as a gateway to technology breakthroughs, adding corporate diversification, providing access to new capabilities, searching acquisition targets, leveraging internal technological developments, securing demand on own products, and enhancing innovation within existing business units _{(Dushnitsky & Lenox 2005; Chesbrough 2006; Reimsbach &} Hauschild 2012; Weiblen & Chesbrough 2015)_.

3.7 Measure of Innovation level

The current literature focuses mainly on four indicators for measuring innovation. Some studies have chosen R&D expenditures as an indicator of innovation level _{(Romer 1990); also most of the literature ranking innovation has} based its analysis on such parameters as R&D intensity, measured by R&D expenditure divided by the total revenue, in order to determine the relative level of innovative activity at a company (see, for example, _{(Toma 2017). R&D activity} affects whether future output becomes part of a firm’s technological performance in terms of finding new ideas and processes, ultimately resulting in the launch of new patents and products to existing or new markets. However, not all innovations end up with a patent, and not every R&D activity leads to patents. Several studies have shown increased R&D investment has a positive impact on new technology and new product development, but also on the overall business success, as reflected in sales revenue, profit, productivity, and research _{(Huang et al. 2016). The process of}

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searching for novel technologies is key to a company’s competitiveness in the market; therefore, senior managers allocate substantial resources to R&D activities, as they want to fuel growth through innovation and response to the threats and opportunities driven by environmental changes _{(Cusumano et al. 2014). As} previously mentioned, R&D is an important characteristic of high technology, and one of the main sources used by innovative tech companies in order to improve their innovative capacity _{(Hatzichronoglou 1997). In 2016, Samsung, Amazon, Google,} and Microsoft were four out of the ten most innovative companies and also among the highest R&D spenders (percentage out of revenue) in 2016 _{(Toma 2017).} However, a “larger availability of high level resources does not necessarily lead to superior performance in R&D” _{(Cruz-Cázares et al. 2013). As the ecosystem} uncertainty, complexity of innovation, and knowledge recombination have changed, the organizational innovation boundaries have changed as well, and corporations understand that internal R&D alone is insufficient; therefore, they understand the importance of interacting with their external environment through, for example, open innovation _{(Felin & Zenger 2014). The R&D indicator is a popular and useful} indicator for measuring technology-based activities, and can provide information about some of the innovation inputs, but it is still limited, offering little information on the outputs and impacts of these processes. In addition, the OECD _Innovation

Survey have shown cases in which companies introduce new products to the market by adopting complementary strategies, without necessarily performing R&D _(OECD 2010)_.

According to Hagedoorn & Cloodt, the number of patents is the second innovation performance indicator of a firm and is generally accepted as one of the

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most direct indicators of innovation output. There is a difference between patents pending and patents granted, and the process of transforming a novel idea into a granted patent comes with associated uncertainties and challenges _{(Hagedoorn &} Cloodt 2003)_{. Yet, this indicator is useful for understanding certain innovation-related} strategies, but it cannot measure the full extent of innovative activities _{(OECD 2010).}

The third indicator, is the number of citations of patents, which is being used more and more by researchers to measure innovation. The number of patents does not indicate anything about the quality of the patents. Likewise, the number of patent citations does represent the quality of innovation. However, specialists doubt the applicability of this measure because of the subjective opinion people may have when assigning the citations to a patent _{(Hagedoorn & Cloodt 2003).}

Fourth, recently some researchers have started using new-product announcements as a measurement of innovation, a key metric of innovation that studies have tended to ignore _{(Prabhu et al. 2005; Freeman 2013).}

3.7.1 Innovation as measured by the OECD

Aiming to create a standard indicator for levels of innovation, the OECD has developed the _{Innovation Survey to create a more holistic view of innovation in order} to develop more effective innovation policies. These surveys collect broad qualitative information about types of innovation, flow of knowledge, the underlying reasons for innovating, and extrinsic collaborations and linkages among companies or public research institutions; but they also gather quantitative data on R&D spending and sales from product or service innovations. These surveys shed light on and provide valuable information regarding how and why innovation happens, what its impacts

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are on the corporate and economic level, and how it can be stimulated in the future. The data from the _{Innovation Survey should serve as a means to measure} innovation and tell a story about how the level of innovation was achieved _(OECD 2010)_.

3.8 M&A as an emerging innovation strategy

As mentioned, M&A is driven by several different motives, varying from firm-level economies of scale and scope, to macroeconomic factors, to directors' self-interest _{(Trautwein 1990). Generally, the literature has not analyzed M&A in} conjunction with innovation, rather it has focused mainly on the benefits derived from economies of scale and scope, and the impact of concentrated economic power within an industry _{(Cassiman et al. 2003).}

As previously noted, innovation has become more complex for corporations, and hence they rely more on external sourcing strategies, including M&A _{(Burkart &} Panunzi 2006)_{. M&A can serve as a strategic mechanism to achieve different} specific goals in the innovation field _{(Dodgson & Phillips 2014). The growing volume} of literature demonstrates that through M&A, companies obtain technical expertise and R&D skills, specific new technologies, new markets, and experienced talent (Ruckman 2004)_{. It is common that technology corporations exploit and boost their} technological capabilities by acquiring small, technology- based companies and incorporating their technologies _{(Granstrand & Sjölander 1990). Furthermore, it has} been emphasized that large corporates have used M&A to develop their market offering and enhance their innovation capacity, in terms of both process and product (Adner & Levinthal 2001) _{, which is one of the main strategic levers for firm growth}

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and sustaining a competitive advantage _{(Miglietta et al. 2017).}

Finally, M&A advances innovation because the access to new technologies can be used to develop process innovation that can help achieve economies of scale and scope by reducing the average cost of production and creating synergies between complementary assets _{(Adner & Levinthal 2001; Singh & Montgomery} 1987)_.

Given the previously noted challenges to innovation, such as cycle time and operation control, that established corporations face, oftentimes the acquisition of another firm is fastest and most effective strategy to foster innovation and nurture firm growth _{(Ahuja & Katila 2001; Lee et al. 2015; Michelino et al. 2014). In the case} of innovating and changing a firm’s business model, the M&A option has been shown to be the most effective innovation strategy _{(Dezi et al. 2018).}

In the case of technology acquisition, acquiring intellectual capital (IC), as a key component in innovation activity, has become a central objective of M&A, and intangible assets have become one of the main motivations for targeting a company (Gupta & Roos 2001; Calza et al. 2014; Giacosa et al. 2017) _{. IC, defined as array of} intangible assets that serve as the basis for sustainable competitive advantage, is a crucial asset for a company’s success, and the connection between IC and innovation has been firmly established _{(Chen, L., Chen, Y. and Li, F. 2015).}

Alternatively, another form of acquisition is acqui-hiring, in which the main motivation of the acquiring company is to hire either a few or all the employees of the target company. In other words, acqui-hiring is the process of being acquired for startup’s talent and not product. The rationale behind this phenomenon is that it allows technology corporations to effectively and efficiently gain the services of

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talented engineers and entrepreneurs. In addition, instead of trying to assemble an expert team in a certain field from scratch, acqui-hiring offers an already well-functioning team ready to work _{(Coyle 2013).}

According to Bower, five key aims underlie acquisitions: 1) eliminating competitors in geographically fragmented industries; 2) addressing overcapacity through consolidation in a mature industry; 3) substituting for R&D; 4) introducing new products or penetrating new markets; and 5) exploiting industry boundaries by inventing an industry _{(Ferraris et al. 2017; Bower 2001). Shuen has highlighted the} last three motivations and segmented them, identifying them as part of the innovation strategy of a company. These three key M&A drivers serve as a strategic tool that accelerates innovation by providing access to new technologies, resources, products, and knowledge _{(Shuen et al. 2014). More specifically, Shin et al. have} shown that technological know-how and technical capabilities are perquisites to successful acquisitions _{(Shin et al. 2017).}

The existing literature reveals that the link between innovation and M&A is well established from the perspectives of both practice and academia; however, there is little literature about the link between M&A and innovation strategy. More specifically, the question of whether M&A can be considered an innovation strategy in the context of large high-technology corporations remains open _{(Dodgson &} Phillips 2014)_{. The research question addressed in this thesis is, therefore, Can}

innovation-driven M&A be considered an innovation strategy_?

The aim of this research is to investigate the relationship between M&A and innovation, and gain more insight into how M&A have been used strategically in the

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context of innovation. To fulfill this objective, a holistic multiple-case study of four large high-tech corporations was conducted.

4. Conceptual model

As mentioned, the existing literature shows that there are three key M&A drivers that serve as a strategic tool to improve innovation. M&A is considered an innovation strategy when is used (i) as a substitute for R&D, (ii) to extend into new products or penetrate new markets, or (iii) to exploit industry boundaries by inventing an industry. Those drivers accelerate innovation by providing access to new technologies, resources, products, and knowledge _{(Shuen et al. 2014). Using the} previously identified M&A drivers, the current study will create individual analyses of multiple case studies in order to identify whether corporations are developing innovation strategies around those main M&A drivers.

The below conceptual model highlights the relations between the specific drivers for an M&A and innovation strategy. If the motivation of the M&A deal was to increase the firm’s innovation capacity, then the M&A was designated a component of the firm’s innovation strategy.

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Fig. 1 - Conceptual Model

5. Methodology

5.1 Case study method

Given the nature of the research question, it is more suitable to use a qualitative approach to address the topic-- hence, case studies are employed. Eisenhardt contends that the case study is “ a research strategy which focuses on understanding the dynamics present within a single setting”. Since the research about this phenomenon (M&A and innovation strategy) is limited, theory building from case studies is preferable, as it does not rely on previous literature _(Eisenhardt 1989)_{and instead investigates a phenomenon within its real-life frame of reference} (Eisenhardt 1989)_.

The research question aims at investigating the underlying key drivers behind M&A in the tech industry and understanding whether innovation was a major driver, as part of each corporation’s innovation strategy. The objective of this research is to highlight whether there is a common approach to innovation-driven M&A that future research can analyze in a quantitative and systematic measure. As an exploratory

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research, a narrative is the appropriate means to deliver the work _{(Yin 2009). A} narrative technique will help reveal the the motivations behind M&A, as it will entail a description of the acquired company’s coveted qualities. As Saunders states, a narrative is an “account of an experience that is told in a sequenced way, indicating a flow of related events that, taken together, are significant for the narrator and which convey meaning to the researcher” _{(Saunders et al. 2009).}

The literature that covers the relationship between M&A and innovation strategy is not significant, and therefore the main objective of this research is to contribute some real-life cases to the existing limited theoretical framework. The exploratory case study has as its purpose the illustration of conclusions and the development of a preliminary comprehensive understanding of the cases. An

in-depth holistic case study of multiple corporations can provide valuable insight into the question of whether innovation was the main driver behind each of the M&A of the corporations.The answer to the research question will contribute to our

understanding of the broader use of M&A as an innovation strategy for high tech corporations.

5.2 Research instruments and procedures

In order to achieve the research objectives, document analysis was chosen as a stand-alone method, characterized as one that has exactness (i.e., the inclusion of exact names, references, details of events, etc.) and coverageness (i.e., the breadth to cover the long span of time, with different events and settings) _{(Eisenhardt 1989).} The exactness and broad coverage are crucial in order to understand the drivers behind M&A. The adopted research method falls under the mono-method category

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as only document analysis and no other data collection technique was carried out (Saunders et al. 2009)_{. The answer this research aims to provide is based on} document analysis because the information this study seeks comes from official press releases, analyst reports, and industry yearly reports, which cannot be better collected by any other method.

5.3 Description of sample/ case study

A multiple holistic case study with four corporations, taking the firm as the unit of analysis, was conducted in order to discover what type of drivers lead to M&A of large technology corporations. The number of firms is sufficient according to Eisenhardt’s case range, allowing for an appropriate complex theoretical framework and data saturation _{(Eisenhardt 1989). The choice to conduct a multiple case study} was made with the aim in mind to ensure that the evidence would be compelling. The chosen cases from different sectors of the high-tech industry allows for comparisons and limits potential biases. A holistic approach was taken as the research looks at the same metrics in four different cases _{(Yin 2009). Considering} the limited theory available, and the little investigated nature of the phenomenon at hand, the study uses predominantly inductive reasoning, as it aimed to reach valid conclusions and develop preliminary knowledge based on the findings of the study, thereby contributing conclusion to and integrating new knowledge with the existing theory. Deductive reasoning was also employed in the research design and data collection in line with theory, as outlined in the literature review

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5.4 Case selection

The case studies were conducted with four corporations active in high- technology industries which embody high R&D expenditures, as defined by the OECD, with R&D/ Revenue proportion higher than 4% on average. The number of cases was chosen due to time constraints; however the sample size allowed for constructive and insightful conclusions.

The multiple holistic case studies have been selected on the basis of purposeful sampling in order to address the research question and objectives, and to replicate or extend the existing theory (Saunders 2011). The process of selecting the corporation relied on certain criteria: The corporations had to (i) be public, (ii) belong to the high technology industry (R&D/Revenue>4%), (iii) have a obtained more than 40 M&A between 2005-2015, and (iv) be of comparable financial size. Given the small number of cases, the sample cannot be considered fully representative. Nonetheless, the cases are data-rich, making them useful in generating valuable information and a preliminary answer to the research question. The four cases, Google, Apple, Facebook, and Amazon, have been selected from the article “The World’s Most Innovative Companies in the Period 2015-2016” _(Toma 2017)_{. Apple belongs to the computing and electronics sector, and Facebook,} Amazon and Google belong to the software and internet sector. All sectors fall under the high tech industry definition used in this research. Between 2005-2015 the average ratio between R&D and revenue was 8.4% for Amazon, 21.8% for Facebook, 14% for Google, and 3.08% for Apple. However, in absolute numbers, Apple has increased its R&D/R ratio in the last two years and is considered the

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company with the highest R&D expenditures worldwide (see R&D tabs in data collection file) _{(Upbin 2018; Gallagher 2016).}

The heterogeneous sampling of corporations from two different high tech sectors is one of the strengths of the research design _{(Saunders et al. 2009). The} four corporations not only fall in line with all the selection criteria, but also were among the 10 most innovative companies in the world in 2016. Google and Amazon ranked among the ten biggest R&D spenders in 2016, and according to PwC’s ranking, Apple was the world’s most innovative company in the period from 2015 to 2016. All four corporations are headquartered in the United States of America _(Toma 2017)_.

5.5 Data collection procedure

The first stage of research included data collection and the creation of a M&A dataset, using Zephyr online database _{(Zephyr 2018). The second stage utilized} document analysis to develop an understanding of the key drivers and underlying motivation for each M&A and to identify the innovative element of value to the acquiring company, by analysing the acquired company, its core technology assets, and the acquiring company’s press releases. Resources been used (online and offline), including journal articles, company yearly reports, and financial and industry analyst reports, were all presented in the data collection spreadsheet per M&A deal. The results of the key drivers has been presented at the firm-level, allowing for comparison and generalization of the results.

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the four case studies, including 43 M&A deals made by Amazon, 50 by Facebook, 141 by Google, and 44 by Apple over the period from 2005 to 2015.

Fig. 2 - Number of M&A deals per case study

The case study Number of M&A Google 141 Facebook 50 Apple 44 Amazon 43 Total 278

5.6 Strengths of the research design

Given the limited size of the study sample and the choice to focus on technology companies with extensive M&A records, the results will be generalizable only to a limited extent, impacting the external validity. This limitation will be discussed further. On the other hand, the novelty and lack of research on the topic may lead to interesting and valuable insights that may benefit scholars, corporations, and entrepreneurs. To confer construct validity to the research, a detailed theoretical framework was provided to identify the operational measures that match the concepts _{(Yin 2009). In addition, in order to provide a sufficiently operational set of} measures the units of analysis used to draw conclusions were previously stated. External validity may be conferred by the broad theoretical framework of the relation between M&A and the innovation strategy of high tech corporations that was provided, and by the generalization of the set of case studies to the theoretical framework previously provided _{(Eisenhardt 1989). To confer reliability to the study,} all the research steps and procedures have been documented in an operational manner, making repetition of the study easier and reducing biases.

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5.7 Analysis strategy

Document analysis strategy

The document analysis has been done by analyzing relevant documents including company yearly reports and financial and industry analyst report (see reference list in the data collection file) on the M&A deals documented in the multiple holistic case studies (Google, Amazon, Facebook, and Apple). The documents were coded, utilizing computer software Nvivo _{(Welsh 2002), which is used to aid in the} analysis of the qualitative data collected through document analysis, allowing it to be structured in a thematic way _{(Cormack et al. 2018).}

Coding is a process of labeling and assigning short phrases, sentences, or whole paragraphs to each section based on their meaning or relevance (Simula 2018). The process of moving from codes to themes began by highlighting the codes relevant to the M&A drivers. These highlighted codes were then grouped into the themes (Miles & Michael Huberman 1994). The analysis focused on highlighting the key statements relevant to M&A drivers. When the company’s press release regarding the acquisition was focused on the acquired company’s technology and technology component, then the key driver was classified as technology-driven; when the focus was on the acquired team and talent, the acquisition was classified as acqui-hire; and when acquiring an additional new market, with a large user base was mentioned in the press release, then the acquisition was classified as market-driven acquisition.

The Nvivo software revealed the trends and patterns, running queries that could help explain and visualise the data. The following is an example of such

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codification: The original quote, was “Urchin Software Corporation makes software to help companies analyze the traffic at their Web sites. This technology will be a valuable addition to the Google’s suite of advertising and publishing products." The quote was then highlighted as relevant to the M&A motivation and thereafter grouped into the theme of “technology”. The examples of the Nvivo codes list generated for the four companies are given in the Appendix. The codes were constantly analysed during the process in order to group and regroup the codes in a way the added meaning and highlighted links and relationships.

6. Results

6.1 Overall findings

The analysis of the data resulted in four main findings. First, innovation has become the fundamental motivation behind all the M&A deals performed by tech corporations, generating support and endless opportunities for enhancement. Second, technology was found as the main underlying motivation in the M&A deals. Third, market was found as the second main underlying motivation in the analysed M&A deals. Last, acqui-hire was found as the least common driver for M&A deals.

The results indicate that the main motivations behind M&A were technological know-how _{(talent), technology capabilities, and the extension into new products or} markets _(market). _{The data collected on each M&A driver, a detailed description is} included in figure 4 below.

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Fig. 4 - summary of M&A deals analysis

Key M&A driver Deals number % of Total

Technology 200 72%

Market 43 15%

acqui-hire 35 13%

Total 278 100%

As presented, technology-driven acquisition emerged as the most prominent M&A motivation, with 200 deals. Market-driven acquisition was the second most prominent, with 43 M&A deals. Third, acqui-hire,with 35 M&A deals, was found as the third most common M&A driver.

6.2 Elaborated conceptual model

The elaborated conceptual model below depicts the emerging themes and main results from the data analysis, emphasizing how acqui-hiring, market acquisition, and technology acquisition are M&A drivers that can serve as innovation strategies.

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Fig. 3 - Elaborated conceptual model

The conceptual model is split into three sections: specific motivations, M&A key drivers, and the innovation strategy. The specific motivations, stated in the original conceptual model (Section 4), were determined from the press releases. The specific motivations are subdivided into three categories based on whether they refer to acqui-hire, market, or technology. These three categories are each a key driver of innovation-based M&A, and all form part of a firm's innovation strategy

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6.3 Resource allocations

As all the M&A deals analyzed were innovation-driven, it is worthwhile to look at the magnitude of resources allocated to M&A activities. These M&A expenditures may be regarded as an additional efficient benchmark for the innovativeness of a company. The figure below (Fig. 5) presents additional findings of the cumulative R&D vs. M&A expenditure. The average annual M&A expenditures are ~4.2B$, representing approximately a third out of total R&D expenditures within the ten year dataset (2005-2015). The R&D and M&A linear trend lines suggest a positive expenditures patterns.

Fig. 5 - Cumulative R&D and M&A expenditures of the four case studies 2005- 2015

6.4 Individual case analysis

To outline the findings and provide specific illustrations of concrete M&A situations that subsequently offered additional innovation capabilities to the

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companies analyzed in this study, the document analysis has been organized according to the case studies and the themes.

6.4.1 Google

Key finding: _{Each and every M&A deal that was done by the company within the}

ten-year period of analysis, between the years 2005- 2015, was either technology, acqui-hire, or market driven.

As presented in Figure 6, we can see that the most notable driver for Google’s M&A deals was within the technology theme, with 122 deals out of 141 in total, which is approximately 87% percent of the M&A performed by the company within the ten-year time frame. Listing second, with 12 M&A deals, acqui-hire constitutes ~8% of the M&A performed by the company. Listing third, market is the third most prominent with 7 M&A, constituting ~5% of the M&A deals performed by the company.

Fig. 6 - Analysis of Google’s M&A key drivers between 2005- 2015 Key M&A Driver Deals number % of Total

Technology 122 87%

Acquhire 12 8%

Market 7 5%

Total 141 100%

An example of the findings for each of the three emerged themes is given to demonstrate the data collection through document analysis.

Technology-driven acquisition

Google’s acquisition of Urchin Software Corporation, which makes software to help companies analyze the traffic on their websites, serves as an example of one of

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Google’s technology acquisitions carried out to add innovative value to the company. The terms of the deal were not disclosed.

Post acquisition, Urchin Software was integrated in Google’s systems, and its name has been changed to Google Analytics. Currently, Google Analytics is the most widely used web analytics service on the Internet and is employed by more than 55 percent of all websites _{(Blogger 2017). Jonathan Rosenberg, Google's vice president} for product management, said in a statement announcing the deal, "This technology will be a valuable addition to Google's suite of advertising and publishing products" (The Associated Press 2005)_.

Acqui-hire driven acquisition

The acquisition of GreenBorder is an example of one of Google’s acqui-hire acquisitions that intended to expand Google’s innovative activities. In 2007, Google acquired GreenBorder for an undisclosed sum. The company provides protection from corruption, theft, and invasion of business data systems, as well as engages in the protection of enterprises from Internet threats that are picked up by compulsively-clicking users and mobile PCs. It offers mobile and PC solutions, and distributes its products through a network of resellers. The founders of the company and its employees have great expertise in the security domain that are a great asset for Google. As Aaron Zamost, a corporate communications representative with Google said, "This is pretty straightforward, it's primarily a talent acquisition for us; they have a small team of engineers that we were really impressed with" _(Hines 2007)_.

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Market-Driven Acquisition

Google’s acquisition of YouTube, which took place in 2006 and added an estimated 50 million users worldwide in less than a year, serves as an example of a market acquisition that was executed with the motivation to increases Google’s innovation capacity. As Eric Schmidt, the Chief Executive Officer of Google states in Google’s press release, "The YouTube team has built an exciting and powerful media platform that complements Google’s mission to organize the world’s information and make it universally accessible and useful" _{(Murchinson 2006).}

R&D vs. M&A expenditures

Key finding: _{Google has allocated a significant portion of its budget to M&A.}

Fig. 7 compare between Google’s total R&D and M&A expenditures per year. The outliers years were 2005, 2007, 2008, 2012, and 2014, representing more than 40% of Google’s R&D expenditures. The significant acquisitions were: Android for 50M in 2005, Doubleclick for 3.1B$ in 2007, Motorola Mobility for 12.5B$ in 2012, and Nest Labs for 3.2B$ in 2014, and the key driver behind these deals was technology acquisition. The R&D and M&A linear trend lines suggest a positive expenditures patterns.

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6.4.2 Apple

Key finding: _{Each and every M&A deal made by Apple within the years 2005- 2015 was}

either technology, acqui-hire, or market driven.

As presented in Figure 8, we can see that the prominent key driver of Apple’s M&A deals was technology, the driver for 41 deals out of 44 in total, or roughly 93% of the total M&A performed by the company within the ten-year time frame. Listing second, market-driven deals, of which there were only two, represented approximately 5% of the M&A performed by the company. Listing third, acqui-hire was the driver in only one deal, representing 2% of the total M&A deals performed by the company.

Fig. 8 - Analysis of Apple’s M&A key drivers between 2005- 2015 Key M&A Driver Deals number % of total

Technology 41 93%

Market 2 5%

acqui-hire 1 2%

Total 44 100%

An example of the findings for each of the three emerged themes is given to demonstrate the data collection through document analysis.

Market-driven acquisition

In 2014, Apple acquired the subscription streaming music service, Beats Music, and Beats electronics for 3B$. In an official statement, Eddy Cue, Apple’s senior vice president of Internet Software and Services, shed some light on in the company’s press release regarding the drivers behind the acquisition and the benefits for Apple,

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“The addition of Beats will make our music lineup even better, from free streaming with iTunes Radio to a world-class subscription service in Beats, and of course buying music from the iTunes Store as customers have loved to do for years” (Neumayr 2014)_{. The motivation behind the acquisition of Beats was to access its} large user base, to enable Apple to enhance its existing offerings, and to enter a new market, thus increasing market share _{(Neumayr 2014).}

Technology-driven acquisition

The motivation behind the acquisition of SIri , the maker of a mobile virtual personal assistant app, in 2010, was the technology to enhance Apple’s software

offering. The company was interested in incorporating the underlying natural

language processing and semantic search technology more broadly into its apps.

Apple’s CEO _{Tim Cook noted in an official statement that Apple still has a lot of} plans with Siri and that the company is "doubling down" on the technology. This

acquisition was undertaken in order to enabled the company to release in 2011 the

iPhone 4S, which featured the embedded digital assistant software and was

considered revolutionary. It took other leading technology corporations several years

to catch up with this technology; for example, Amazon’s Alexa assistant appeared on

the market in 2014, and Google Assistant hit the market in 2016 (Simonite 2017).

Acqui-hire driven acquisition

In 2013, Apple acquired Novauris Technologies, an automatic speech

recognition (ASR) technology company, for an undisclosed amount. _{Following the} acquisition, the company reported that Novauris team started working on improving Siri, the speech-based virtual assistant technology that comes pre-installed on

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could obtain the know-how it needed to enhance its existing Siri software and provide a better user experience.

R&D vs. M&A expenditures

Key finding: _{Apple allocated a significant portion of its budget to M&A}

Fig. 9 compare between Apple’s total R&D and M&A expenditures per year. The outlier years were 2007, 2011, and 2012, representing more than 30% of Apple’s R&D expenditures. The significant acquisitions were Anobit Technologies for 500M in 2011 and AuthenTec for 365M$ in 2013, and the key driver behind these deals was technology acquisition. The R&D and M&A linear trend lines suggest a positive expenditures patterns.

Fig. 9 - Comparison of Apple’s R&D and. M&A expenditures between 2005 and 2015

6.4.3 Facebook

Key finding: _{Each and every M&A deal made between 2005 and 2015 was either}

technology, acqui-hire, or market driven.

As presented in Figure 10, we can see that the prominent key driver of Facebook’s M&A deals from 2005 to 2015 was technology, constituting 24 out of a

M&A as an innovation strategy : the case of high technology corporations