Department of Innovation Management & Strategy
RESEARCH MASTER THESIS
Research Master in Economics & Business, spec. Innovation & Organization
Expanding Alliance Portfolios:
The Impact of Acquired Alliances on Firm Performance
Aneta A. Oleksiak
s2375346
a.a.oleksiak.1@student.rug.nl
First supervisor: Prof. Dr. Dries Faems Second supervisor: Dr. Pedro de Faria
- From a small seed a mighty trunk may grow.
Aeschylus
First and foremost, I would like to express my gratitude towards my supervisors Prof. Dr. Dries Faems and Dr. Pedro de Faria who have taken me on this exciting research journey. You have always been able to motivate me to do further and better. In situations where I was doubting about the next steps, you always found time to discuss it and jointly come up with a solution. Your reach feedback and useful remarks have helped me to arrive at this final stage and be proud of myself.
Conducting this study would have been impossible if not the data from Dr. Kilian McCarthy. I am grateful for giving me the access to the Securities Data Corporation Database on Mergers & Acquisitions.
Throughout the process of writing this thesis I got insightful comments from Prof. Dr. Wilfred Dolfsma, Dr. Florian Noseleit and Brenda Bos. I am very thankful to you for your helpful input.
My sincere thanks go also to my parents. During this five-year trajectory of my studies abroad you were always supportive and were the biggest believers. I would also like to thank my friends who no matter what the geographical distance was were for me when I needed it.
The Impact of Acquired Alliances on Firm Performance
Aneta A. Oleksiak
University of Groningen, The Netherlands
ABSTRACT
When firms conduct an acquisition, they do not only buy the assets of the acquired firm, but they also incorporate the alliances in which the acquired firm has been active. Acquisitions therefore may lead to a drastic change in the alliance portfolio of the acquiring firm. Surprisingly, existing alliance portfolio research has ignored the phenomenon of acquired alliances – i.e. alliances that are not created by the focal firm itself but that enter the portfolio via an acquisition. In this paper, we explore the performance implications of acquired alliances. In order to do so, we perform a quantitative study in which we apply a longitudinal approach and conduct a panel data analysis of the biotechnology and pharmaceutical industries for a period of eleven years. The results show that both the size of the acquired alliance portfolio and the share of the acquired alliances in the total alliance portfolio negatively influence firm performance. Jointly, the findings highlight the importance of studying acquired alliances and demonstrate their negative implications.
INTRODUCTION ... 5
THEORY AND HYPOTHESES ... 8
Strategic alliance portfolio typology ... 8
Size of the acquired alliance portfolio and its impact on firm performance ... 10
Share of the acquired alliances and firm performance ... 15
METHOD ... 18 Data collection ... 19 Analytical method ... 21 Sample ... 21 Measures ... 21 RESULTS ... 25 Descriptive statistics ... 25 Regression results ... 27 DISCUSSION ... 29
Implications for alliance portfolio management and M&A research areas ... 30
Implications for practitioners ... 33
Limitations ... 33
CONCLUSION ... 34
INTRODUCTION
Just as the firms’ focus has shifted from the management of individual strategic alliances
towards the management of alliance portfolios, so did the academic research (Wassmer, 2010). Alliance portfolios are collections of alliances in which a firm is engaged simultaneously. They are viewed as an efficient strategy to obtain access to external resources, which are essential for further innovation and generation of profits; however these resources are missing in the internal repository (e.g. Duysters et al, 2012; Jiang et al., 2010; Wassmer, 2010).
In order to determine what is needed for a successful management of alliance portfolios, scholars have given substantial attention to both structural (e.g. Duysters et al, 2012; Faems et al., 2010; Lahiri and Narayanan, 2013; Jiang et al., 2010; Noseleit and de Faria, 2013; Rothaermel and Deeds, 2006) and managerial aspects (e.g. Chang and Tsai, 2013; Deeds and Hill, 1998; Faems et al., 2008; Ireland et al., 2002; Neyens and Faems, 2013). Yet, the evidence and our understanding are limited to the alliances that were directly initiated by the focal firm.
Based on the conducted literature review, no research attention was given to the alliances that enter a firm’s portfolio by means of an acquisition. Acquisitions, however, may
2012; Vasudeva & Anand, 2011; Wassmer, 2010) have emphasized that a more fine-grained understanding of how focal firms transfer and recombine knowledge across different alliances is needed. Research on knowledge recombination within firms emphasizes that the existence of particular boundaries and differences between entities can severely hamper knowledge recombination in the alliance portfolio (Galunic and Rodan, 1998). By translating our insights into the context of alliance management and knowledge recombination we expect that the differences and boundaries between the original and acquired alliances influence the knowledge recombination capability in the portfolio and thus firms’ outcomes.
The purpose of the proposed research is therefore to address this research gap and increase our understanding of the impact of acquired alliances on firm performance. Our first objective is to examine the effect of acquired alliance portfolio size on firm performance. With respect to the relationship between the size of the original alliance portfolio, a consensus among scholars emerges. Namely, it is argued that this relationship has a shape of an inverted U (e.g. Rothaermel and Deeds, 2006). We expect that the relationship between the size of the acquired alliance portfolio and firm performance will follow a similar pattern. However, the inflection point will manifest itself earlier, i.e. for a rather low number of the acquired alliances. We argue that this is mainly caused by the fact that the inherited alliances were not formed by the acquiring firm and therefore strategic misfit might be at play. Secondly, this study aims at exploring the impact of share of acquired alliances in total portfolio on firm performance. We argue that when in the portfolio there is a large share of inherited partners, the process of knowledge recombination is impeded. This occurs due to the fact that the affected parties will try to isolate themselves from unwanted knowledge leakage (Jiang et al., 2013) because there is a lack of relational capital across the parties (Sambasivan et al. 2013).
industries for a period of eleven years between 2000 and 2010. We used Thompson Securities Data Corporation Platinum Mergers & Acquisitions and Alliances databases as well as annual reports and Securities and Exchange Commission forms to construct a complete dataset.
We did not find support for our first hypothesis. However, we found that there is a negative linear effect of the size of the acquired alliance portfolio on firm performance. The results support our second hypothesis that the higher the share of acquired alliances in the total alliance portfolio the lower the performance of the firm.
The evidence of this study brings both the academic and business community closer to understanding the unexplored phenomenon of acquired alliances. This study builds awareness that such a punctuated expansion of alliance portfolio through an acquisition deal may have considerable consequences. The negative impact of acquired alliances on firm performance that was revealed in this study signals the managerial challenges and knowledge recombination issues which arise and are difficult to face and solve for the acquiring firms. This study also explicitly shows how and why it is so relevant to merge data on alliances and acquisitions, inclusively acquired alliances. It proposes a novel way of operationalization of alliance portfolio-related dimensions, which allows for establishing a complete picture on what an alliance portfolio is and what may constitute it.
THEORY AND HYPOTHESES
In this section we first conduct a literature review in which we describe the relevant concepts, define in detail the research gap, and explain the difference between original and acquired alliances. Subsequently, we develop two hypotheses. In the first hypothesis we look solely at the impact of the size of acquired alliance portfolio on firm performance. In the second hypothesis, we consider the total portfolio. Namely, we predict the influence of the share of acquired alliances in the total alliance portfolio on firm performance.
Strategic alliance typology
An increased business activity in the area of alliance portfolios is thus observable. Therefore, research on alliances has also shifted its attention towards the management of alliance portfolios (Wassmer, 2010). Interestingly, although scholars offer substantial evidence on structural (e.g. alliance portfolio size, alliance portfolio diversity) and managerial (e.g. alliance portfolio capability, alliance portfolio governance modes) aspects of alliance portfolio management, the current lens is limited strictly to the original alliance portfolios, meaning portfolios that were negotiated and formed directly by the focal firm.
In practice however, the alliance portfolios are being extended not only due to firms’ direct initiative but also due to acquisitions, in which the target company had active alliance(s) at the moment of an acquisition deal. As Figures 1a and 1b illustrate, when Firm A is acquired by Firm B, Firm A loses its independence and becomes part of Firm B. Such acquisition also has implications for the alliance portfolio of Firm B. Before the acquisition, Firm B had an alliance portfolio consisting of three alliances. However, after the acquisition, the addition of Firms A’s alliances implies a sudden expansion of the portfolio by 2 additional
alliances. In such way, the acquirer becomes an owner of acquired alliances, which obviously are different in nature and origin than the original alliances.
Figure 1a. Alliance portfolio of firm A (to be acquired) and B (acquirer) prior to acquisition.
Figure 1b. Alliance portfolio of firm B after it acquired firm A.
By definition, acquisitions are transactions in which one firm takes over another firm and becomes the majority owner of its resources and capabilities (Chang and Tsai, 2013; Wiklund and Shepherd, 2009). Acquisition deals are widely recognized as viable strategies to realize ambitious growth strategies in a relatively short-term (Harrison et al., 1991). However, previous research warns about high failures rates of acquisitions (Agrawal et al., 1992; Loughran and Vijh, 1997; Penrose, 1959). They are a high-risk strategy due to high uncertainty regarding the target company’s overall quality until the deal is actually completed
and can be fully unpacked (Chang and Tsai, 2013; Graebner, 2009). This also holds for such resources as acquired alliances and the newly inherited alliance partners. We expect that the nature of acquired alliances may pose certain challenges to the acquirers. These we explore in detail in the next subsection.
Size of the acquired alliance portfolio and its impact on firm performance
Among the scholars there is an emerging consensus regarding the relationship between the size of the original alliance portfolio and firm performance (e.g. Duysters et al., 2012; Rothaermel and Deeds, 2006). Namely, they identify an inverted U-shaped relationship between the two constructs, indicating that large alliance portfolios are negatively influencing firm performance. In other words, increasing the size of the original alliance portfolio is beneficial for firms due to gaining access to new resources, which complement and supplement their current repository of internal resources (Lavie, 2006). Next to that, having to deal with external but inter-connected partners in the alliance portfolio helps firms to learn how to face environmental uncertainties (Duysters et al., 1999). And lastly, strategic alliance activity gives opportunities for exploiting economies of scale (Lahiri and Narayanan, 2013).
agreements as strategic alliances obliges parties to contribute diverse resources. Next to physical resources firms have to manage the share their time and attention across all alliances. As research shows firms are not capable to give enough attention to each of the alliances. Firms engaged in numerous strategic alliances, meaning those that have larger and larger original alliance portfolios, become overwhelmed with the amount of information to process and with fulfilling the requests of each alliance partner (Hitt et al., 1997; Rothaermel and Deeds, 2006). This additionally constrains building relational ties with all of the portfolio partners, which as shown in previous research (Faems et al., 2008) may be of high importance in the process of enhancing the success of alliance portfolio. While the alliance managers are unable to exploit the potential residing in numerous alliances and to form an engaging trusty relationships with all partners, the need for managerial attention across the portfolio increases. This drives further to heightened coordination expenses which exceed the potential benefits of any additional alliance when the portfolio is already large (Rothaermel, 2001). For those reasons, having too many alliances in the portfolio negatively influences the firm performance.
manufacturing, access to unexplored markets as well as sensitive and often tacit R&D know-how can be found (Cui and O’Connor, 2012; Jiang et al., 2010; Noseleit and de Faria, 2013).
Through an acquisition of a firm that has on its disposal strategic partnerships, the acquiring firm has an opportunity to enhance its repository of resources and its performance. As previous research has shown, strategic alliance activity not only increases the rate of patenting (Shan et al., 1994) and positively affects product innovation (George et al., 2002) but it also improves sales performance (Leiblein and Reuer, 2004).
Although the acquired resources such as target’s alliance portfolio may have a potential value (Wilkund and Shepherd, 2009) to contribute to firm’s competitive advantage
(Lavie, 2006), other management-related factors surrounding the process of acquired alliance portfolio incorporation have to be considered. Due to the fact that the acquired alliances were formed in a different way, they may trigger unique managerial challenges – even more resource exhausting than those caused by original alliances.
managing coordination costs (e.g. Das and Teng, 2000; Parkhe, 1993; Williamson, 1985) are of particular importance when building the understanding of the dynamics in the management of acquired alliances.
Recently, several scholars (e.g. Badir and O’Connor, 2015; Cummings and Holmberg,
2012; Lavie, 2006; Li et al., 2008) have argued that a careful partner selection is the most important success factor for the alliance portfolio to function and for firm to improve its performance (Badir and O’Connor, 2015). In a similar vein, Lavie (2006, p.26) stated that ‘the
success of an alliance portfolio depends (…) on the nature of partners with whom a company decides to ally.’ It has to be highlighted that the fundamental difference between original and acquired alliances is rooted especially in their nature. In case of the first ones, the focal firm has a full authority and influence on the partner selection and is actively involved in the process of negotiating conditions of the alliance agreement (Li et al., 2015). The firm is fully in charge of designing the alliance portfolio (Neyens and Faems, 2013) in such way that it is able to control and safeguard the ties across partners engaged in the alliance portfolio (Cummings and Holmberg, 2012). Opposing to that, upon an acquisition of a target with a set of strategic alliances, the acquiring firm had no impact on the choice of the acquiree’s alliance
partners. It also implies that it did not have any impact on rigidity (or flexibility) of the contract and its conditions. In other words, the acquirer becomes an owner of pre-defined and already operating strategic alliances.
alliance partners’ motives. Being in a mismatch position leads to suboptimal results or even to
an overall failure of cooperation (Doz, 1996) resulting in lessened firm performance.
Being in such a disadvantageous position hinders firms in the process of transforming potential onto actual value, and hence stands on the way of capturing benefits (Lavie, 2006) from the acquired alliances. Such situation forces the acquiring organization to examine backgrounds and foundations of the acquired alliances to develop managerial tactics in order to cope with misfit. This circumstances bring the acquirer to attention allocation dilemma. Investigation of acquired alliances involves exhaustive information processing which may overwhelm managers who try to reconcile the tensions in the alliance portfolio (Hitt et al., 1997). As far as time resources could be found for few acquired alliances, a larger number of such partnerships might be too challenging and too complex to manage them (Hitt et al., 1997). The pre-defined character of their nature is making the acquired alliances very unique and more difficult to manage than the original ones and require more special attention.
This is consistent with the transaction cost argument which proposes that the costs arising from the managerial efforts in terms of financial as well as time resources required to coordinate and monitor the behavior of numerous acquired alliances goes beyond potential benefits from inheriting additional alliances, when the number of them is already higher (Deeds and Hill, 1998; Jones and Hill, 1988; Judge and Doley, 2006; Nielsen, 2010; Parkhe 1993; Sambasivan et al., 2013). This is because the managers cannot contribute to all alliances in a sufficient manner.
Taking the abovementioned reasons into consideration, we conclude that it is the very unique pre-defined character of acquired alliances that makes their management more challenging than the management of original ones. Hence, we hypothesize that:
Hypothesis 1: The inflection point on the inverted U-shaped curve depicting the relationship between the size of alliance portfolio and firm performance will be situated at a lower number of alliances for acquired alliance portfolio than in case of original alliance portfolio.
Share of the acquired alliances and firm performance
In the first hypothesis we focused on acquired alliances in isolation. This allowed us to understand the managerial challenges that emerge in the dyadic interactions between the acquirers and their acquired alliances. In this section, we develop the second hypothesis in which we further explore the implications of acquired alliances. Namely, we look at the interactions between acquired and original alliances, and possible obstacles in attaining synergies across different alliances.
support this claim, we refer to research on knowledge recombination which emphasizes that the existence of particular boundaries and differences between entities can severely hamper the process of knowledge recombination (Galunic and Rodan, 1998). We expect tensions in the total alliance portfolio to emerge as a result of competition for resources at the alliance portfolio level and lack of relational capital across the parties included in the total portfolio. We argue that these tensions are responsible for disrupting the knowledge exchange processes in the alliance portfolio (Lavie, 2006).
As explained in the beginning of this paper, acquired alliances are not initiated by the acquirer. To large extend these acquired partnerships remain rather unknown until the deal is fully unpacked. As a result of these circumstances, original alliances are exposed to a situation in which they must cope with a threat of collaboration with potential rivals as well as with a general uncertainty regarding the acquired partners – who they are, what are their objectives, motives and what their strategy and tactic will be. The same insecurities await for acquired parties with respect to the original alliances of the acquirer. Since the portfolio consists of both initiated and not initiated alliances by the acquirer, the total portfolio is strategically not aligned. Owing to this fact original and acquired alliances compete with each other for resources that are to be provided by the acquirer, for instance physical resources but also time and attention, rather than strive for benefits arising from pooling their resources together. The strategic boundaries between the alliances and the high level of competition in the portfolio may also encourage alliance partners to change the strategic orientation for their participation in the portfolio to safeguard their individual market position (Szczepański and Światowiec-Szczepańska, 2012). Such a rivalry setting does not serve knowledge
Besides, another related mechanism may explain the impediment of the knowledge recombination process, namely lack of relational capital and of established trusty relationship between original and acquired alliances. Owing to the high levels of uncertainty and ambiguity of this very specific situation in the alliance portfolio, both original and acquired alliances may perceive the interaction with each other as a potential context for an unfair behavior. Judge and Dooley (2006) and Sambasivan et al. (2013) found that not only a factual opportunistic deed but even a perception of potentially occurring opportunistic act dampens the chance for the development of relational capital across partners. Sambasivan et al. (2011) and Sambasivan et al. (2013) also argued that lack of strong relationship across the engaged parties in the portfolio is a factor that seriously hinders the ability of innovating and achieving desired financial results. Lack of relational capital in the set of alliances makes parties reluctant to proactively cooperate, share and recombine knowledge, and strive towards appointed objectives (Sarkar et al., 2001).
argues that for successful knowledge recombination activities strong ties are preferred. Having a large share of acquired alliances in the total alliance portfolio involves a lot of complexity and difficulties in knowledge transfer and recombination processes due to rather weak ties across such alliances.
Taking the above arguments together, knowledge recombination is constrained by the competitive mood in the portfolio. Additionally, between the original and acquired alliances there is only little or no relational capital to enable a constructive interaction and an effective knowledge exchange. In turn, these identified mechanisms inhibit or at least slow down the generation of financial profits as the knowledge recombination process at the portfolio level is insufficient. Hence, we hypothesize that:
Hypothesis 2: The higher the share of the acquired alliances in the total alliance portfolio, the lower the firm performance.
METHOD
In order to capture the effect of acquired alliances on firm performance over time, we apply a longitudinal approach. To perform such analysis, we created a unique panel dataset. The study focuses on large firms, being more than 250 employees, from biotechnological and pharmaceutical industries. Scholars (e.g. Hagedoorn and Duysters, 2002) have argued that the phenomenon of alliances and acquisitions is well represented in those industries. The two industries are characterized by very similar operational domain as well as dynamics in their business environment. Hence, they can also be considered as well-suited to study the phenomenon addressed in this paper.
after acquisition only the remaining time was considered; if firm A acquired firm B in year 2000 and it became the owner of an alliance that was formed in 1998 by firm B, for firm A the acquired alliance will count for three consecutive years following the acquisition deal, i.e. 2000, 2001 and 2002. The main observation period captures an eleven-year range, from 2000 to 2010. However, in order to build alliance portfolios for all those years, we collected data for a period of fifteen years between 1996 and 2010 to fulfil the five year assumption regarding the alliance duration. We report the process of alliance portfolio construction in detail when describing the independent variables and their measurement.
Below, we outline all methodological steps and describe them in detail.
Data collection
We identified large firms operating in biotechnological and pharmaceutical industries based on their Standard Industrial Classification (SIC) codes – 2836 for biotechnological and 2834 for pharmaceutical (Jiang et al., 2010).
firms that did not pursue any acquisition between 2000 and 2010, meaning they owned only self-formed alliance portfolios, were identified (see Table 1 for more details). For all identified companies we collected the alliance announcements and processed them to make the csv files workable in Excel.
Table 1. Types of firms included in the sample
Type of firm Acquired alliances
No. of firms
Description
Acquirer Yes 27 Firms that pursed acquisitions and in the main observation period become an owner of acquired alliances.
Acquirer No 4 Firms that pursed acquisitions but in the main observation period did not become an owner of acquired alliances. Merger Yes 1 Firm that was established by a merger between two
companies and in the main observation period became an owner of acquired alliances.
Merger No 3 Firms that were established by a merger between two companies but in the main observation period did not become an owner of acquired alliances.
Acquired Yes 1 Firms that in the main observation period were acquired by other firm but before that happened they became an owner of acquired alliances.
Acquired No 4 Firms that in the main observation period were acquired by other firm but before that happened they did not become an owner of acquired alliances.
No M&A activity No 3 Firms that owned only original alliance portfolios. Yes 29
No 14
TOTAL 43
In order to ensure the highest accuracy of the firm-level data, we collected annual reports for all firms and Securities and Exchange Commission (SEC) forms (10-K and 20-F) for US-based firms for all relevant years (2000-2013). From the reports, financial and employee data were extracted.
Analytical method
In this paper, we perform a longitudinal study using a panel dataset. Due to the fact that our main objective is to capture what impact the acquired alliance portfolios have on firm performance within each of the firms, we used the fixed-effects model. An additional advantage of this approach is the fact that it accounts for the unobserved heterogeneity between firms (Noseleit and de Faria, 2013).
Sample
After excluding firms with incomplete data as well as outliers1, the final sample consisted of 43 publicly listed large companies (428 observations). In this sample there are 7150 original alliances and 1083 acquired ones, meaning that in total 8233 strategic alliances were investigated. Out of 43 firms 29 became an owner of acquired alliances, whereas 14 owned the original portfolios exclusively.
Measures
Dependent variable:
- Three-year average net profit margin
One of the measures of firm performance that has been widely applied in previous research in the strategy field (e.g. Faems et al., 2010; Jiang et al., 2010) is net profit margin. It is calculated as a percentage of net profit (loss) relative to total revenue. In order to reduce bias caused by one exceptional year in which net profit margin was either very high or very low, we followed other scholars (Jiang et al., 2010) and considered three-year average net profit margin of the three consecutive years as the measure of firm financial performance, which implies that firm performance (FP) in tequals to:
, where t ∈ {2000, … , 2010}
Independent variables:
The main objective of this paper is to analyze the acquired alliance portfolios as they are characterized by different nature that firm’s original alliance portfolio. To fully explore this
phenomenon, we constructed three types of alliance portfolios: original, acquired and total (being a sum of original and acquired portfolios).
- Size of the original alliance portfolio
We built the original alliance portfolio based on the alliance announcements found in the SDC Strategic Alliances. This type of alliance portfolios consists exclusively of alliances that were formed by the focal company. Following previous research (e.g. Jiang et al., 2010; Sampson, 2007), we assumed that each alliance lasted for five-years. Each year in the main observation period corresponds to a cumulative number of alliances (Deeds and Hill, 1996; Lahiri and Narayanan, 2013). For instance, the number of alliances in the original alliance portfolio in 2000 is a cumulative from years 1996-2000, in 2001 from years 1997-2001, etc.
- Size of the acquired alliance portfolio
- Share of the acquired alliances in the total alliance portfolio
Share has been defined as the fraction of acquired alliances in the total alliance portfolio. Control variables:
- Size of the total alliance portfolio (used only in regression testing Hypothesis 2)
The total alliance portfolio represents the complete size of firm alliance portfolio. The cumulative number of original and acquired alliances per each year was added. For instance, in 2000 if the original alliance portfolio equaled 12 and the acquired alliance portfolio amounted for 4, then the total size of the portfolio was 16. In case of firms where acquired alliance portfolio was 0, then the total alliance portfolio corresponded to the original alliance portfolio.
- Industrial and functional diversity of the total alliance portfolio
The alliance portfolios differ in terms of partners’ industrial origin as well as in their
functional role. Previous research has argued that these two have an impact on firm performance; therefore, their effects will be controlled. Whereas too high industrial heterogeneity across the portfolio is rather negatively affecting the firm performance (e.g. Duysters et al., 2012; Jiang et al., 2010; Wuyts and Dutta, 2014), high functional diversity is positively related the financial outcomes (Jiang et al., 2010).
assess the level of heterogeneity relative to focal firm industrial activity; where the closer to zero the more homogenous the alliance portfolio is.
Further, to build the measure of functional diversity we followed the approach of Jiang et al. (2010). The measure reflects the diversity of functions performed by alliances in the portfolio. Here there was no need of comparing it with the focal firm. Based on the information available in SDC Strategic Alliances database, we assigned to each alliance its function. Namely, if alliance was focused on R&D, we categorized them with 1, if on marketing then 2, if on manufacturing then 3, and if it belonged to other category then 4. If all alliance partners performed the same function, then the value for this variable was zero.
In order to calculate the diversity measures we took Blau Index of Variability (BIV) (e.g. Wuyts and Dutta, 2014). Below its formal notation:
i – category
k – total number of categories
pi - portion of category i in the alliance portfolio
In general BIV can take all values between 0 (perfectly homogenous alliance portfolio) to
, where the maximum BIV value, being the highest possible heterogeneity score, is
dependent on the number of categories. It means that the higher the number of categories, the higher the maximum possible diversity score. For instance, in this study, the industrial diversity is based on five categories; hence the maximum value of BIV is 0.8, whereas for functional heterogeneity it is 0.75, due to the fact that it has lower number of categories, i.e. four. In order to obtain a standardized and interpretable range DIVERSITYI,F ∈ <0,1>, Agresti and Agresti (1978) advise to apply a correction approach, i.e. to multiple the BIV values by
Index of Qualitative Variation (IQV), which is equal to . Hence, we multiplied the
- Firm size
Previous research (Lahiri and Narayanan, 2013) points out that firm financial performance is dependent on scale effects. Hence, we control whether the bigger the firm the higher the financial results. In addition to this, Duysters and Lokshin (2011) highlight that usually larger firms have on their disposal more resources that the smaller organizations. Further, larger organizations may score better on general alliance management capability and therefore, it is important to control for the firm size. In this study we measure it as number of employees. Due to the skewness of the raw variable, we calculated a logarithm of the number of employees.
- Intensity of acquisition activity
In order to grow and expand the resource repository, firms often commit to a fast growth strategy, i.e. pursuing acquisitions. Previous research has shown that engaging in acquisitions is a very costly growth strategy and it is negatively affecting firm performance (Gregory, 1997; Longhran and Vijh, 1997; Riviezzo, 2013). Therefore, we control for the number of fully-owned acquisitions pursued per year.
RESULTS
In this section we present our findings. We start by providing main descriptive statistics. Subsequently, we demonstrate the regression results for both hypotheses.
Descriptive statistics
Table 3 and 4 present an overview of the core descriptive statistics together with correlations
original portfolio in the sample was 16 alliances, of acquired portfolio was 2 alliances, and of total portfolio was 19. In the space of eleven years the average size of original portfolio decreased from 19 (in 2000) to 12 (in 2010), of acquired portfolio increased from 0 (in 2000) to 4 (in 2010), and of total portfolio decreased from 20 (in 2000) to 16 (in 2010). The average share of acquired alliances in the total alliance portfolio amounted for 11%, whereas in 2000 it was 5% and in 2010 increased to 15%. From this descriptive data, it can already be seen that the phenomenon of acquired alliances is becoming more present, and even more importantly, the number of acquired alliances managers have to manage has an increasing tendency. The data gives a proof that the configuration of the alliance portfolios is more complex than the simplistic view applied up till now in the literature, i.e. considering only original alliance portfolios.
With respect to control variables, the firms’ portfolios in this sample belong to
moderately or highly heterogeneous portfolios, with the index of industrial diversity equal to 0.67 and of functional diversity to 0.75. Further, the sample consisted exclusively of large firms where on average 32457 employees were employed. Lastly, on average 1 acquisition deal was signed, with the lowest number per year equal to 0 and highest to 10.
Table 3. Descriptive statistics and correlation matrix (for testing hypothesis 1)1
Variable Mean S.D. 1 2 3 4 5 6 7
3-year average net profit margin 12.88 8.15 1.00 Size of the original portfolio 16.71 16.53 0.30 1.00 Size of the acquired portfolio 2.53 5.52 0.09 0.24 1.00 Industrial diversity of total portfolio 0.67 0.24 0.14 0.48 0.25 1.00 Functional diversity of total portfolio 0.75 0.23 -0.06 0.33 0.10 0.55 1.00 Firm size (log) 4.18 0.58 0.35 0.62 0.34 0.49 0.34 1.00 Intensity of acquisition activity 1.02 1.32 0.12 0.28 0.17 0.16 0.11 0.28 1.00
1
Number of observations = 428; number of firms = 43
Table 4. Descriptive statistics and correlation matrix (for testing hypothesis 2)2
Variable Mean S.D. 1 2 3 4 5 6 7
3-year average net profit margin 12.88 8.15 1.00 Share of acquired alliances 0.11 0.20 -0.16 1.00 Size of the total portfolio 19.24 18.64 0.29 0.10 1.00 Industrial diversity of total portfolio 0.67 0.24 0.14 0.01 0.25 1.00 Functional diversity of total portfolio 0.75 0.23 -0.06 0.02 0.10 0.55 1.00 Firm size (log) 4.18 0.58 0.35 0.04 0.34 0.49 0.34 1.00 Intensity of acquisition activity 1.02 1.32 0.12 0.11 0.17 0.16 0.11 0.28 1.000
2 Number of observations = 428; number of firms = 43
Regression results
Table 5. Fixed-effects regression results (Model 1-6 testing hypothesis 1; Model 7-9 testing hypothesis 2)1,2
Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8 Model 9
Size of the original portfolio 0.065*
(0.038)
0.203** (0.094)
0.243** (0.099)
Size of the original portfolio (squared) -0.002*
(0.001)
-0.002** (0.002)
Size of the acquired portfolio -0.938*
(0.063)
-0.141 (0.127)
-0.229* (0.131)
Size of the acquired portfolio (squared) 0.002
(0.005)
0.006 (0.005)
Share of the acquired alliances -7.839***
(1.842)
-8.460*** (1.893) Industrial diversity of total portfolio -2.897
(1.902) -3.140* (1.901) -3.478* (1.909) -2.638 (1.907) -2.581 (1.913) -3.173* (1.916) -3.086* (1.916) -2.299 (1.882) -2.572 (1.891) Functional diversity of total portfolio -2.822*
(1.632) -3.015* (1.631) -3.347** (1.641) -2.982* (1.633) -3.009* (1.636) -3.667** (1.648) -2.859* (1.633) -2.668* (1.598) -3.007* (1.615)
Firm size (log) 6.977***
(2.162) 7.172*** (2.160) 7.333*** (2.158) 7.253*** (2.167) 7.264*** (2.170) 7.664*** (2.162) 6.979*** (2.164) 8.277*** (2.138) 8.423*** (2.138) Intensity of acquisition activity -0.199
(0.229) -0.211 (0.228) -0.228 (0.228) -0.194 (0.228) -0.179 (0.231) -0.180 (0.230) -0.206 (0.229) -0.167 (0.224) -0.182 (0.224)
Size of the total portfolio 0.029
(0.035) 0.061* (0.035) 0.180* (0.092) -0.001 (0.001) Constant -12.052 (9.160) -13.631 (9.179) -15.159* (9.210) -13.027 (9.169) -13.063 (9.180) -16.604* (9.228) -12.458 (9.176) -18.331** (9.082) -19.675** (9.122) Number of observations 428 428 428 428 428 428 428 428 428 Number of firms 43 43 43 43 43 43 43 43 43 F-test 5.44*** 4.99*** 4.60*** 4.80*** 4.03*** 3.88*** 4.49*** 6.93*** 6.23*** R2 within 0.054 0.062 0.068 0.060 0.060 0.076 0.059 0.099 0.103 R2 between 0.181 0.193 0.202 0.179 0.180 0.203 0.188 0.216 0.218 R2 overall 0.136 0.143 0.150 0.137 0.137 0.153 0.139 0.165 0.167 1
In the first hypothesis we expected that the inflection point for the size of acquired alliance portfolio will demonstrate itself earlier than the inflection point for the size of original alliance portfolio. In support of previous research (e.g. Rothaermel and Deeds, 2001), we were able to replicate the inverted U-shaped relationship between the size of original alliance portfolio and firm performance. Contrary to our prediction, we do not find any indications regarding an inverted U-shaped relationship between the size of the acquired alliance portfolio and firm performance. Hence, the hypothesis 1 cannot be supported. However, the results show an interesting relation. Namely, the size of the acquired alliance portfolio has a negative linear impact on firm financial performance (B = -0.229, p < 0.1). In other words, with each additional acquired alliance, the financial performance drops by 0.229 percent of net profit margin.
In our second hypothesis we predicted a negative linear impact of the share of acquired alliances in the total portfolio on firm financial performance. In model 9 it can be observed, that indeed the share of acquired alliances is negatively affecting the firm performance (B = -8.460, p < 0.01). Hence, the hypothesis 2 is supported.
DISCUSSION
In this section, we provide a discussion of the results, wherein we outline the main implications of the findings. We will start with outlining the implications for the alliance portfolio management research and subsequently we do the same for M&A research. We will close this section by providing the managers with a practical advice.
Implications for alliance portfolio management and M&A research areas
The main focus of the previous research in alliance portfolio management was put on revealing the best structural and managerial strategies, and dependencies to enhance the performance of the original alliance portfolios (e.g. Duysters et al., 2012; Jiang et al., 2010; Wuyts and Dutta, 2014). We add to this research by providing a richer perspective on alliance portfolio composition by extending the alliance portfolio typology. We identify one additional type of alliances – acquired alliances.
The main contribution of the present study is showing that engagement in strategic alliances indeed has an impact on firm performance. However, it is important to consider not only the original but also acquired alliances and investigate how the interdependencies between the two influence firms’ outcomes. This is because the relationship between the size
of portfolio and firm performance depends on the nature of the alliance portfolio. This research contributes to previous studies also by showing that having a large share of the acquired alliances in the total portfolio impedes capturing financial benefits from cooperation. In order to obtain a more complete understanding of acquired alliances and their implications more research with different dependent variables is requisite. The present study gives us evidence with respect to financial performance. However, it would also be interesting if future research could devote attention to such aspects as innovation performance in terms of quantity or quality of the innovative output. It would offer us even deeper insights on the knowledge recombination outcomes. For example, scholars could consider measuring joint patents (see Sampson, 2007). Such operationalization of innovation performance will allow to measure whether and to what extent the knowledge recombination across different alliances succeeded.
previous research on original alliance portfolio and compare how the (un)successful management of original and acquired portfolios differs between the two.
Our study shows that pursuing acquisitions is not lessening the performance of the firm per se (B = -0.182, p > 0.1). This stresses that other factors may be relevant when reviewing the M&A post-performance. Previous research on mergers and acquisitions points to high M&A failures rates at the level of 70% or even 90% (Christensen et al., 2011). In the analysis why the M&A deals fail previous research puts emphasis on rather intra-firm related aspects such us cultural discord, lack of owners’ involvement or integration expenses (Lander
and Kooning, 2013). These aspects take a dyadic perspective, i.e. relation acquirer – acquiree. Our study has a potential to extend the research on M&A failures by providing it with an interesting network perspective on why M&A activity may lead to lower performance of the firm. With our perspective, research can go beyond the dyad and investigate the interactions with multiple parties involved in the acquisition deal that may influence firms’ operations,
and later performance. As shown, becoming an owner of pre-defined acquired alliances lessens firm performance. Therefore, we would like to encourage future research to extend the examination of M&A success and failure determinants to both intra- and inter-firm-related indicators by examining firm’s network and the particular context in which it is embedded after the M&A deal. It would also be interesting if scholars could develop a hierarchy among the intra- and inter-firm-related factors by showing which of such determinants as cultural discord, lack of owners’ involvement, integration expenses or managerial and knowledge
Implications for practitioners
Based on our findings, we can encourage managers to be more cautious in pursuing acquisitions encompassing numerous acquired alliances since these may have considerable negative consequences for firm performance. The results let us also urge managers to apply a network-based due diligence when examining the potential of targeted firms. Namely, practitioners should go beyond the intra-firm factors such as cultural or strategic fit between the acquired firm and itself. The dyadic perspective on the relationship between acquirer and acquiree should be substituted with a network perspective, which captures the inter-firm relations of the acquired organization. Since our findings highlight the negative implications of the acquired alliances, it is relevant that executives investigate in detail the contracts the acquirees is engage in, evaluate and manage it to prevent loss, which may potentially be evoked by the mismatching acquired alliances.
Limitations
This study is not without its limitations which could be addressed by the future research. Firstly, we conducted this research on a sample of firms active in biotechnology and pharmaceutical industries. It would be interesting to investigate, whether the effects also hold in other industries to potentially enhance the generalizability. Further, the sample consisted of solely large firms. Since the probability that small firms pursue acquisitions is very low, they might not be objective of the future studies. However, studying medium-sized firms might still be an interesting sample to explore whether for them the implications of acquired alliances are similar or not.
could explain differences between firms in managing and capturing benefits from acquired portfolios. Studying this might therefore be an interesting avenue for the future research.
CONCLUSION
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