Can Green Mergers & Acquisitions Provide “Pockets of Value” to Energy Incumbents?

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Can Green Mergers & Acquisitions Provide

“Pockets of Value” to Energy Incumbents?

An Analysis on the Response of Incumbents to the Energy Transition

Master Thesis

MSc International Business & Management | MSc BA: Strategic Innovation Management

Author: P. van der Veen Student number: S2977990

Supervisor: H. ul Haq Co-assessor: K. J. McCarthy Date of Submission: 22nd_{of June 2020}

Word count: 12,195

Abstract

This research describes how energy incumbents can increase their firm performance by acquiring green firms, a possible strategy to successfully survive the energy transition. By acquiring VRIN resources and achieving resource synergies, incumbents can increase their performance. However, this relationship is also affected by the incumbent’s absorptive capacity in such a way that firms with higher absorptive capacity will benefit more from acquiring renewable firms than firms with lower absorptive capacity. In contrast, a higher degree of international diversification will negatively influence the relationship between green acquisitions and firm performance. The investigated relationships were tested using a quantitative analysis using panel data. The sample consists of 1,183 unique firms active in the conventional energy industry that engaged in a total of 5,448 mergers & acquisitions in the period between 2010 and 2019.

Keywords: mergers & acquisitions, resource-based view, absorptive capacity, international

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Introduction

In 2017, almost half of the growth in energy consumption was produced by wind and solar energy (BP, p. 6, 2017). Everyday more electric vehicles are on the road, in 2017 the total amount of electric consumer cars in use went up 50% compared to 2016 with an absolute number of 1 million electric cars sold (International Energy Agency, 2018). The danger of these new products and production methods is that they may eventually destroy the old processes (Schumpeter, 1942). For the energy industry, this means that in the end there will be no gasoline cars left and no one will use gas to heat their homes. The market in which the current energy giants are operating is shifting to a new phase, and the incumbents must consider adapting their businesses in order to avoid getting ‘destroyed’ and stay relevant in the long run. Even though the oil demand is still expected to grow in the near future (McKinsey, 2019).

Some incumbents already started to shift to renewable energy by acquiring green firms. Shell for example acquired several firms in the renewable industry, such as Sonnen (electricity storage start-up) and Greenlots (charging start-up) (Greenlots, 2019; Shell, 2019). Maarten Wetselaar, director of Shell’s integrated gas and new energies division, thinks Shell will find “serious pockets of value” by building a clean power business (Pyper, 2019). However, will these green acquisitions really result in “serious pockets of value”? It is not yet clear whether acquiring green firms will be beneficial to the incumbents. Many studies even found a negative relationship between acquisitions and firm performance (Buono et al., 1985; Nahavandi & Malekzadeh, 1988; Cloodt et al., 2006).

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4 Some researchers have indeed found evidence that the energy transition affects the incumbent’s current ways of doing business. Steen & Weaver (2017) interviewed Norwegian energy firms that invested in different types of energy. Managers indicated that they made these investments in order to position themselves to be futureproof for the change in the energy industry. However, the authors called for more empirical research to find out whether “making the firm futureproof” by investing in other types of energy would positively or negatively influence firm performance. Furthermore, Wüstenhagen & Menichetti (2012) developed a model to determine renewable energy investment as a function of risk, return and policy. They argue that strategic choices such as M&As should be further investigated and quantitatively analysed to provide more insights into green energy investment. Moreover, Hockerts & Wüstenhagen (2010) developed a cyclical model in which small green firms would push for new technology. Over time, they will be joined by an increasing number of large firms or ‘Goliaths’. These large firms would then attempt to scale up the green innovations until a new status-quo would be reached. Eventually, this status-quo would be disrupted again by other small innovative firms which would restart the cycle. This paper can add to this discussion by analysing whether green acquisitions by energy incumbents will form an instrument to engage in this cycle and if this will benefit the incumbent as well rather than merely benefit the sustainability of the energy industry. Finally, Sengers et al. (2019) concluded that sustainable innovations have now moved beyond the niche stage and more research is required on how conventional firms can benefit from green firms and innovations.

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5 is also likely to influence the value that green M&As will add to the incumbents. These pressures are not present in traditional M&A research. Chen et al. (2006) found that engaging in green activities such as pollution prevention would provide an answer to governmental pressure and lead to positive effects on firm performance in the Taiwanese IT and electronics industries. It would be interesting to see whether this translates to green acquisitions in the energy industry as well.

All in all, several academics call for more empirical investigations on the effect of green M&As within the energy industry. Managerial intentions have been measured (Steen & Weaver, 2017), theoretical models have been proposed (Hockerts & Wüstenhagen, 2010) and investment models have been developed (Wüstenhagen & Menichetti, 2012). However, none of these have quantitatively measured whether traditional energy firms should engage in mergers and acquisitions of green firms and if this would add value to their firms. Besides, there is academic evidence that M&A performance depends on various contingencies such as industry (Maksimovic & Phillips, 2002; Madura et al., 2012). The energy industry appears to be in a special situation with the sustainable transition and faces increasing pressure to participate in this transition (Berrone et al., 2013). This implies there is most likely a difference between “normal” M&As and green M&As in the energy industry.

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Do energy incumbents engaging in acquisitions of green firms enhance their firm performance?

What impact do Absorptive Capacity and International Diversification have on this relationship?

The answer to these research questions will be of high value to managers in the energy industry, who can use this paper to aid their decision-making process on who to acquire or merge with. Furthermore, green firms and start-ups can benefit from the answer to these research questions because they gain better insights in their potential value in the market for other companies, possibly even providing evidence for arguments in negotiations with other firms. Finally, this paper is of relevance to governments as it provides them information on the possible response to (regulatory) pressures, which is crucial intelligence for creating new energy and climate policies.

The rest of this paper will look as follows: First, the relevant literature to describe the relevant theory and concepts is presented. Second, the hypotheses and conceptual model are proposed. Third, the methodology section describes the variables that were used as well as the data analysis. Fourth, the results of the quantitative analysis are discussed. Fifth, the results are placed in the context of the existing literature in the discussion. Finally, the implications, limitations, and future research directions are presented followed by the conclusion.

Literature Review

Resource-Based View

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7 Prahalad & Hamel used the principles from Wernerfelt’s article to explain the core competencies of the firm in their HBR publication. The RBV was also used to develop other theories such as dynamic capabilities and the knowledge-based view (Teece & Pisano, 1994; Eisenhardt & Santos, 2002).

The RBV views firms as a bundle of resources from which the firm can generate rents (Montgomery & Wernerfelt, 1988). According to Barney (p. 101, 1991) “Firm resources include all assets, capabilities, organizational processes, firm attributes, information, knowledge, etc. controlled by a firm that enable the firm to conceive of and implement strategies that improve its efficiency and effectiveness.” One decade later Barney & Arikan (p. 138, 2001) divided resources in two main categories: “resources are the tangible and intangible assets firms use to conceive of and implement their strategies”. Examples of tangible resources include machines and buildings, while intangible resources mostly relate to human perceptions or knowledge. Some examples of these intangible resources are reputation, culture, innovation and human resources (Strong et al., 2001; Russo & Harrison, 2005; Surroca et al., 2010). Tangible resources can generally be relatively easy transferred as they can typically be acquired through factor markets. Intangible resources are still transferable, but this is relatively harder as the process requires human interaction and more time. However, this also makes intangible resources in general a stronger ingredient for a sustainable competitive advantage (Wernerfelt, 1984; Dierickx & Cool, 1989; Barney, 1991).

Firms are expected to maximise profits by gaining a sustainable competitive advantage over competitors through their resource base. These profits are maximised by extracting Ricardian rents through unique factors, according to neo-classical economists, or unique resources according to the scholars of the resource-based view. Following Barney (1991), resources can lead to a sustainable competitive advantage when four criteria are satisfied. The resource should be valuable, rare, imperfectly imitable, and non-substitutable (VRIN).

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8 impossible for competitors to duplicate the bundle of resources, i.e. to transform the competitive advantage into a sustained competitive advantage. When a resource is inimitable, it means that firms that do not possess the resource in question cannot easily obtain this resource either (Lippman & Rumelt, 1982; Barney, 1986). This can be due to three reasons: unique historical conditions, causal ambiguity, and social complexity (Dierickx & Cool, 1989). The final condition of the VRIN framework is that resources should be non-substitutable. This means that there should not be very similar resources available in the market which are imitable or commonly available (Barney, 1991).

Peteraf (1993) further developed the resource-based view and described the four cornerstones that result in a (sustained) competitive advantage. The first cornerstone is a key principle throughout the RBV literature: heterogeneity (Wernerfelt, 1984; Barney, 1991). Firms are heterogenous in their resource bases which allows them to outperform competitors and derive Ricardian rents. The second cornerstone is ex posts limits to competition. This means that once a firm possesses heterogenous resources from which it can derive rents, it should also be able to protect these rents against competitors. Examples of isolating mechanisms through which a firm can protect its rents are reputation, property rights, and specialised assets (Rumelt, 1984; 1987). The third cornerstone of competitive advantage is imperfect mobility, which ensures that valuable resources or factors remain within the firm. Resources are not perfectly mobile when they are to some extent specialised to the needs of the company that currently employs the resource (Boxall, 1998). Finally, the fourth cornerstone described by Peteraf (1993) is ex ante limits to competition. This means that even before a firm generates rents from its resources, there should be some degree of uncertainty and imperfections in the factor market for acquiring or developing the resource. This will subsequently lead to a limited amount of competition for the resource as not all companies are able to predict the value of the specific resource at that moment in time. Thus, the ex post value of the business with the resource is higher than the acquisition cost of the resource (Rumelt, 1987).

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9 advantage. Thus, if managers gather resources that are in itself not necessarily consistent with all VRIN characteristics, new (bundles of) VRIN resources may be developed if those gathered resources can be combined with existing resources and strategically implemented (Kraaijenbrink et al., 2010).

In the RBV, the key focus is naturally on resources. However, managers also play an important role. They can be seen as ‘card players’ since they control the resources (or cards) of the firm. They can acquire new resources or combine existing resources and subsequently choose how to deploy these resources (Lockett et al., 2009). Wernerfelt (1984) argued that resources are semi-permanently tied to an organisation, although managers can shift the resource base of a firm over time through their actions. One means of doing so is via mergers and acquisitions.

Mergers & Acquisitions

M&As are a form of external growth, a growth strategy in which the firm grows through the acquisition of external assets or resources. In contrast, firms can internally grow by expanding their customer or resource base via the use of internal resources (Dalton & Dalton, 2006). Mergers can be defined as the combination of assets of two previously separate firms into a single new entity, whereas acquisitions imply that the assets of the target firm (acquired entity) are fully absorbed by the acquirer (Ghauri & Buckley, 2003).

Before 2000, the M&A market was mainly dominated by publicly traded US and European firms. Since then, private equity firms have increased their engagement in M&As as well. While they accounted for four percent of the global M&A market in 2000, they increased their share up to thirty percent in 2013. Furthermore, the market has shifted geographically as well, now including an increasing number of firms from emerging market economies such as India (Caiazza & Volpe, 2015). Since 1985, over nine-hundred thousand M&As have been completed, of which 65,978 were in the Energy & Power sector, accounting for 7.2% of all M&As executed globally (IMAA, 2020).

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10 large companies capitalised on the situation by acquiring smaller firms with worse cash positions. In the context of M&As executed by green firms, Curran et al. (2017) analysed the strategy of Chinese wind and solar energy firms. In general, these green Chinese companies preferred M&As to avoid large transaction costs (Obi, 2008; Liu, 2009). However, when moving to Europe’s green energy sector, these Chinese firms prefer greenfield investments over M&As to engage in market-seeking behaviour with their green technologies (Lv & Spigarelli, 2016). Consistent with these findings, Bednarczyk et al. (2010) argued that energy firms will gain more value from related M&As with firms active in the traditional energy sectors compared to firms that did not belong to this industry. Thus, overall we see research about energy incumbents acquiring energy incumbents and green firms interacting with green firms. As several researchers called for more research on the interplay between energy incumbents and green firms (Hockerts & Wüstenhagen, 2010; Wüstenhagen & Menichetti, 2012; Steen & Weaver, 2017), this study will research whether energy incumbents can find ‘pockets of value’ by acquiring green firms.

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11 Eschen & Bresser (2005) use the RBV to explain another reason for firms to engage in M&As: to solve resource deficiencies. M&As are a better solution to these deficiencies compared to alternatives such as factor markets and internal development. The reason for this is the nature of the acquired resources, which should be strategically valuable or VRIN to result in a competitive advantage (Barney, 1991; Eisenhardt & Martin, 2000; Helfat & Peteraf, 2003). Acquisition of strategically highly valued resources is difficult through factor markets since these strategic resources are often tacit, specific, and complex which makes them difficult to transfer. Therefore, commodity assets and resources are most frequently traded in factor markets (Amit & Schoemaker, 1993; McEvily & Chakravarthy, 2000). Internal development of the strategic resources is possible in some situations, however it is often more time consuming and only feasible in situations where the difference between the existing resource base and the new resources is small (Reed & DeFillippi, 1990; D’Aveni, 1994; Tripsas & Gavetti, 2000). In contrast, M&As allow a firm to directly acquire an entire bundle of resources which can lead to a competitive advantage and ultimately enhance firm performance (Tsoukas, 1996; Reuer, 2001; Eschen & Bresser, 2005). Furthermore, firms are able to access a broader variety of resources through M&As, including strategic resources and cheaper resources (Holland et al. 2000; Bednarczyk et al., 2010; Kumar et al., 2012).Finally, M&As can lead to resource synergies since resources can be shared and combined among the involved parties (Capron & Pistre, 2002; Eschen & Bresser, 2005; Popli et al., 2017).

This paper will also discuss the concepts of absorptive capacity and international diversification in the theoretical light of the resource-based view. The reason for this is that these concepts are expected to have an impact on the manner in which an energy incumbent will enhance its current resource base through engaging in mergers and acquisitions. The concepts are described briefly below and the relationships with green acquisitions and firm performance will be further elaborated in the hypotheses section.

Absorptive Capacity

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12 together, but not be too similar, in order to be most beneficial. If the right amount of similarity is present, shared language and cognitive structures will enable communication and mutual learning (Cohen & Levinthal, 1989; Lane & Lubatkin, 1998). Similarly, several researchers found that M&As are most beneficial when there is a strategic fit between the resources of the involved companies, these should not be too similar and also not too dissimilar (Lubatkin, 1983; Hayward, 2002). This shows an overlap with absorptive capacity. After all, while similar acquisitions might be easy to learn from yet offer a limited amount of new resources, dissimilar acquisitions may offer more new resources, yet can be harder to learn from due to the small number of similarities in resource bases (Harrison et al., 1991; Kogut & Zander, 1992).

International Diversification

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Hypotheses Development

Green Acquisitions & Firm Performance

The RBV view argues that differences in firm performance are caused by differences in resource endowments (Wernerfelt, 1984; Dierickx & Cool, 1989; Barney, 1991). In the case of green M&As two types of resources are especially important in realising positive effects on firm performance. The first resource is the acquired technology. Incumbents are behind in the learning curve compared to innovative green firms which possess a first-mover advantage (Lieberman & Montgomery, 1988). Therefore, incumbents can use M&As to catch up with these new firms in the renewable industry by acquiring their knowledge and technologies. The second is the green reputational resource that the incumbent can gain by involving itself with green activities through M&As. Via green M&As an incumbent signals that it will behave more in accordance with stakeholders’ environmental expectations, which will improve its reputation (Donaldson & Preston, 1995; Brammer & Pavelin, 2006). Applying Barney’s theory (1991) to these acquisitions, the incumbents should acquire valuable, rare, imperfectly imitable, and non-substitutable resources in order to obtain a sustainable competitive advantage which can enhance firm performance in the long term.

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14 Regarding the rarity, the acquired resources should not simultaneously be owned by a large number of competing firms (Barney, 1986). Only a limited number of firms are able to produce the means for green energy production as it requires advanced technological knowledge and substantial capital investments (Van Hoof, 2018; WindEurope, 2019). Moreover, innovations may be protected through property rights such as patents which serve as an isolating mechanism for the resource (Rumelt, 1984; 1987). When looking at the current energy industry, most incumbents do not have the greenest image due to various reasons such as oil scandals and the very nature of their industry (Arora & Lodhia, 2017). If a firm would gain a greener reputation, this could therefore be a rare resource in this industry. To illustrate, BMW was the first German car manufacturer to achieve such a leading environmental reputation through being the first to engage in car disassembly recycling (Hart, 1995; Surroca et al., 2010).

When the acquired resources are valuable and rare, the incumbent obtains a competitive advantage, which can already enhance its financial performance (Porter, 1980). However, the incumbent will only be able to sustain this competitive advantage over a long period of time if it is able to avoid imitation from competitors and competitors do not succeed in developing an alternative (Barney, 1991). Imperfect imitability means that firms which are not in the possession of the resource, cannot easily obtain it either (Lippman & Rumelt, 1982). In this case, once energy incumbent X acquires green firm A (and thereby A’s full bundle of resources), these resources can no longer be directly acquired by incumbent Y. Incumbent Y can possibly develop similar resources, but if green firm A has developed the resource(s) as a result of unique historical conditions, causal ambiguity, or social complexity, this can be incredibly hard to achieve and will at least be very costly and time consuming (Dierickx & Cool, 1989).

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15 stakeholders that they are concerned about the environment and are willing to move to a more sustainable way of doing business (Fombrun & Rindova, 2001; Greenwood et al., 2005). This green signalling is a response to the international stakeholder pressure and an attempt to satisfy the incumbents’ stakeholders (Fombrun & Shanley, 1990; Pfeffer & Salancik, 2003). It can ultimately lead to an increased financial performance since a good reputation has proven to provide benefits because customers actively search for companies with a good status (Beatty, 1989; Podolny, 1994). This status develops goodwill with customers and a positive reputation towards stakeholders which is not substitutable (Krishnan & Schauer, 2000).

Thus, by acquiring renewable firms, energy incumbents can gain VRIN resources. These include technological as well as reputational resources, which are increasingly valued by governments and customers and will ultimately allow incumbents to increase the longevity of their organisation. Therefore, I propose the following hypothesis:

H1: Energy incumbents will increase their firm performance by acquiring green firms.

The effect of acquiring VRIN resources is then influenced by both internal and external forces. The internal force is absorptive capacity which determines to what extend the energy incumbent is able to absorb and apply the resources of the green target firm. The external force is the international environment in which the firm operates. The more internationally diversified the incumbent is, the more it can leverage the reputational resource across all of its subsidiaries to satisfy its stakeholders in several countries. This will be explained more in depth below.

Absorptive Capacity

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16 Absorptive capacity is defined by Cohen & Levinthal (p. 1, 1990) as: “the ability to recognize the value of new, external information, assimilate it and apply it to commercial ends”. This is expected to moderate the relationship proposed in Hypothesis 1, since incumbents that are better able to recognise the value of the (potential) target firm’s resources will acquire green firms with a more valuable resource base (Ahuja & Katila, 2001). Moreover, if the incumbent is able to assimilate the resources and apply them to commercial ends, the resources will lead to an even higher increase in performance (Tsai, 2001; Rhee, 2008; Zahra & Hayton, 2008;Chen et al., 2009).

Lane et al. (2006) stated that absorptive capacity is a construct that is often used to describe the underlying phenomena for M&As and performance. According to Amit & Schoemaker (1993), M&As do not per definition result in better returns. The reason for this is that the strategic assets or resources of the acquired firm are often very specific, tacit, and complex. This makes these resources difficult to integrate into the acquiring firm. Thus, a firm will need absorptive capacity to truly unlock the potential synergies of the acquired resources (Carbonara & Caiazza, 2009). Furthermore, energy incumbents do not solely invest in green technologies. Often this is just a part of their overall investment strategy as they invest in oil, gas, solar, wind, charging stations and other technologies. This means that the incumbents actually display ambidexterity in their sourcing of technologies, since they invest in a variety of renewable and non-renewable energy sources (Raisch & Birkinshaw, 2008). Rothaermel & Alexandre (2009) proposed that firms with higher absorptive capacity are better able to benefit from the ambidexterity in their technology sourcing as these firms are better able to simultaneously exploit and explore resources as well as combine internal resources with external resources, which can be acquired through M&As. This ultimately leads to a higher firm performance as firms ensure their current and future viability (Levinthal & March 1993).

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H2: The level of absorptive capacity of an energy incumbent positively moderates the relationship between green acquisitions and firm performance, such that incumbents with more absorptive capacity have a higher firm performance than firms with lower absorptive

capacity.

International Diversification

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18 resource as it subsequently satisfies more stakeholders due to the international exposure of the firm (Barney & Arikan, 2001; Brammer et al., 2006; Mayer et al., 2015).

As explained above, internationally diversified energy incumbents that gain reputational resources by engaging in green M&As can leverage this reputation and image across country borders (Grant et al., 1988; Wright, 2016). The acquisition of the green German start-up Sonnen by Shell mentioned in the introduction provides an example. Shell does not only signal to German stakeholders that Shell is becoming greener. Shell shared the news article on its web site and is trying to show the entire world that it cares about the environment (Shell, 2019). Shell is trying to leverage this acquisition as a green reputational resource internationally. Thus, by leveraging a green image as a reputational resource across borders, internationally diversified firms can increase the value of this resource and thereby improve their performance more via M&As of green firms. Therefore, the following hypothesis is proposed:

H3: The level of international diversification of an energy incumbent positively moderates the relationship between green acquisitions and firm performance, such that incumbents that are

more internationally diversified have a higher firm performance than firms with a lower degree of international diversification.

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Methodology

This paper tests the proposed hypotheses using quantitative research methods. Quantitative research aims to explain real phenomena by collecting numerical data which are analysed using mathematically based methods or statistics (Cresswell, 2017). The empirical part of this paper consists of a longitudinal study, which studies the relationships between phenomena that evolve over time. The particular type of longitudinal study that is used is a panel study, which belongs to the category of prospective longitudinal studies that collect data about the same subjects over a certain period of time (Ruspini, 2002). In this paper, the acquisition activity from energy incumbents was measured during the past ten years.

Sample & Data Collection

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20 firms reporting their environmental impact rose from 20% to 86% (Kwon et al., 2018). This research analyses if acquiring green firms is more profitable than acquiring non-green firms. Green firms are active in for example the wind, hydrogen or solar energy industry and related industries.

A list of all industries that were used to determine whether a firm is a green firm or an energy incumbent as well as the respective North American Industry Classification System (NAICS) 2017 industry codes are provided in the appendices. Widely used definitions for green firms as well as the energy industry in general are lacking in the current literature (Wemyss & Blumer, 2015; Demirel et al., 2017; Sdrolia & Zarotiadis, 2019). Therefore, the choice for these industries is based on research from the US Bureau of Labor Statistics (BLS). The US BLS (2010) describes its green classifications as “those goods or services that benefit the environment or conserve natural resources”. On the same basis, I selected a list of non-green classifications, which will therefore be defined as “those goods or services that harm the environment or extract natural resources”. The NAICS 2017 codes used are in line with the literature concerning non-green energy firms (Dangerman & Schellnhuber, 2013; Sadovnikova & Pujari, 2017).

Dependent Variable

Firm Performance

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Independent Variables

Share of Acquisitions of Green Firms

To measure this variable, I used Zephyr data on company acquisitions. Renewable firms are firms that are active in for example the solar, hydrogen or wind industry. The exact industries and their corresponding NAICS industry codes are available in the appendices. A variable was created which shows the ratio of green mergers and acquisitions over the total amount of merger and acquisitions completed in that year. This therefore shows the percentage of green M&As completed by an energy incumbent.

Absorptive Capacity

For the measure of absorptive capacity, R&D expenditure and intensity are widely used (Belderbos et al., 2004; Meeus et al., 2001; Oltra and Flor, 2003; Stock et al., 2001; Tsai, 2001). Alternatively, the number of patents has also been used by a variety of researchers (George et al., 2001; Mangematin & Nesta, 1999; Schildt et al., 2012; Xhiong & Bharadwaj, 2011). However, these measurement methods are not set in stone (Ayala & González-Campo, 2015). Moreover, the measurements were not usable for my research due to the availability of the data within the energy incumbent industry (less than 1%). Therefore, I will use the amount of organisational slack as a proxy for absorptive capacity.

Organisational slack is defined as the amount of resources that are not necessary for daily operations, thereby being an excess type of resource that allows for experimentation (Cyert & March, 1963). Organisational slack can be used as an appropriate measure for absorptive capacity for various reasons. First, Levinthal & March (1981) state that slack provides organisations the opportunity to engage in 'irresponsible search', in other words to explore activities that cannot be justified by short term profits. Additionally, Nohria & Gulati (1996) found that firms without slack resources will focus on short term results rather than long term innovative projects. Finally, Burcharth et al. (2015) argue that slack resources help to prevent organisational inertia and foster knowledge accumulation and absorption thereby positively influencing both potential and realised absorptive capacity.

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22 and can act as an excess resource to foster the absorption of new knowledge and innovations. This variable was logarithmically transformed in order to account for the differences in the maximum values between the firms in the sample.

International Diversification

For the measure of International diversification I used a construct based on the number of host countries the firm is active in. The number of host countries provide a proxy for the degree of exposure to stakeholders and thereby the ability to leverage (reputational) resources across borders (Kostova & Zaheer, 1999; Bartlett & Ghoshal, 1989; Wright, 2016; Perlmutter, 2017).

Control Variables

Firm Size

This variable will measure the size of the firm by using the number of employees, which is often used as measurement in quantitative research (Kitching, 1967; Kusewitt, 1985; Dimson & Marsh, 1986; Mantravadi & Reddy, 2008). This variable was logarithmically transformed in order to account for the differences in the maximum values between the firms in the sample. It will control for the differences in size which can potentially lead to differences in firm performance. Larger firms typically have a higher firm performance due to having access to larger resource base and the ability to achieve economies of scale (Aaby & Slater, 1989; Moen, 1999).

Firm Age

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Merger & Acquisition Experience

It is often argued that firms that perform many M&As know better how to acquire new firms, thus the level of acquisition experience tends to affect the level of firm performance in the post-acquisition period (Hitt et al., 1998; King et al., 2004; Kroll et al., 1997; Very & Schweiger, 2001). I will therefore correct for acquisition experience by using the mergers and acquisitions completed by the energy incumbent prior to the acquisition.This variable was logarithmically transformed in order to account for the differences in the maximum values between the firms in the sample.

Data Analysis

When analysing panel data, two types of models can be used: fixed effects models and random effects models. “…the crucial distinction between fixed and random effects is whether the unobserved individual effect embodies elements that are correlated with the regressors in the model, not whether these effects are stochastic or not” (Greene, 2008, p.183). Researchers have to carefully determine which model to use. When using a fixed effects model, the ability to estimate the impact of a variable that is time invariant is lost (Bollen & Brand, 2010; Bell & Jones, 2015). All variables used in this study change over time. However, some variables can fluctuate substantially such as the share of green acquisitions in a year, while for example firm age only changes by one unit each year. Thus, some variables are close to being time invariant. Therefore, a Hausman test was conducted in order to check which type of model should be used. The null hypothesis of the Hausman test is that the preferred model is the random effects model (Greene, 2008). For this study, the Hausman test provided a value of 0.0803, which leads us to not reject the null hypotheses since p>0.05. Therefore, a random effects model was the most appropriate way to determine the statistical outcomes of this paper.

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Table 1: Correlation Matrix & Descriptive Statistics

Column1 Column2 1 2 3 4 5 6 7

1 Firm Performance 1

2 Share of Green M&As ,068* 1

3 International Diversification ,056** ,066* 1 4 Absorptive Capacity -,046** -,026 -,044** 1 5 Firm Size ,274** ,011 ,357** -,230** 1 6 Firm Age ,076** ,062* ,307** ,035** ,275** 1 7 M&A Experience ,032** ,041 ,602** -,044** ,197** ,186** 1 Mean 1,973498 0,033195 22,15838 0,5051 8,798232 28,41 0,8096 Standard Deviation 12,50773 0,169221 30,14687 0,1267 2,802707 25,128 0,56916 Minimum -99,944 0 1 0 0 2 0 Maximum 97,849 1 104 2 13,22277 139 2,54 N 1183 1183 1183 1175 1183 1183 1183

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Results

Before the regression analysis was conducted, the sample was checked for multicollinearity. This did not lead to any issues since the Variance Inflation Factors (VIF) were below the necessary threshold of 10 (Marquaridt, 1970; Belsley et al., 1980; Mason et al., 2003), with the highest VIF being 2,787 for International Diversification. Furthermore, Table 1 shows the correlations between all variables that were used in this study. When looking at this table, the highest correlation value is 0.602 for M&A Experience and International Diversification. Other relatively high correlations are 0.357 for Firm Size and International Diversification and 0.307 for Firm Age and International Diversification. These are all logical since older firms in a traditional industry are more likely to have engaged in M&As and be internationally diversified than young firms in a traditional industry (Johanson & Vahlne, 1990). Furthermore, firms that are highly internationally diversified tend to be larger in order to manage their presence around the world. All other correlations are substantially lower and even the highest correlations are below the crucial threshold of 0.8 (Hutcheson & Sofroniou, 1999; Field, 2013).

When assessing the descriptive statistics, there seems to be large difference across firms in the sample regarding their green M&A activity. On average, 3.32% of an energy incumbent’s M&As in a year are green. However, this variable has a standard deviation of 16.92%, which indicates that some incumbents acquire much more green firms than others. This is in line with the numbers for M&A experience, which indicate that some firms acquire much more than others. Furthermore, there are substantial differences in international diversification as well. The most internationally diversified firm is active in 104 countries, while there are also firms that only operate in their home country. On average, an energy incumbent operates in 22 countries (including its home country).

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26 they have a larger resource base which allows them to gain economies of scale (Aaby & Slater, 1989; Moen, 1999) In contrast, M&A Experience shows a small negative effect on Firm Performance. This was against the expectation that firms which engage frequently in M&As, perform better (Hitt et al., 1998; King et al., 2004). A potential reason for this may lay in the Hubris theory (Roll, 1986; Malmendier & Tate, 2008). Managers that have completed M&As in the past might become overconfident and as a result either overpay for target firms or overestimate the potential benefits of an acquisition.

In Model 2, the same control variables are used and the main effect of Share of Green Mergers and Acquisitions is added. This model explains 11.1% of the variance in Firm Performance. The model shows a significant positive effect of 1.156 on Firm Performance at the 5% level. Therefore, confirmation was found for Hypothesis 1: Energy incumbents will increase their

firm performance by acquiring green firms. There is large standard deviation for Share of Green

M&As, which indicates that some firms hardly acquire any green firms while others acquire more. Those that do acquire a relatively higher amount of green firms annually, increase their firm performance. This is because they acquire technological resources such as knowledge and products used to generate green forms of energy, which are valued by governments and consumers (Barney, 1991; Lyon & Maxwell, 2011). Furthermore, the incumbents acquire a reputational resource, which attracts more customers and allows the incumbent to charge premiums (Podolny, 1994; Greenwood, 2005).

In Model 3, the effect of Absorptive Capacity on the relationship between Share of Green M&As and Firm Performance is added. Model 3 explains 11.62% of the variance in ROA. The interaction term of Absorptive Capacity has a positive significant effect. Thus, the results are aligned with Hypothesis 2: The level of absorptive capacity of an energy incumbent positively

moderates the relationship between green acquisitions and firm performance, such that incumbents with more absorptive capacity have a higher firm performance than firms with lower absorptive capacity. The first reason for this is that Absorptive Capacity enables firms to

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27 Model 4 accounts for the effects of the International Diversification of an energy incumbent. This model explains 12.41% of the variance in Firm Performance. In contrast with the findings described above, the moderating effect of International Diversification on the relationship between Share of Green M&As and Firm Performance did not match the expectations as it actually has a negative influence instead of a positive influence. The interaction term has a value of -0.081, which is significant at the 10% level. Therefore, there is no support for Hypothesis 3: The level of international diversification of an energy incumbent positively

moderates the relationship between green acquisitions and firm performance, such that incumbents that are more internationally diversified have a higher firm performance than firms with a lower degree of international diversification. It was initially expected that the more

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28

Robustness Analysis

In order to check whether the results described above will hold under varying circumstances, two robustness checks were conducted. The regressions were run again, but then with subsets of the sample. The regression results of the robustness analysis can be found in Table 3. In this table, each model shows the conceptual model described in the introduction in a different context. Model 6 only includes domestic M&As. In contrast, Model 7 only shows foreign or host country M&As. The reason for conducting this robustness check is that there is substantial evidence in previous literature that home country M&As influence firm performance differently than foreign M&As (Barkema & Vermeulen, 1998; Reuer et al., 2004; Cavusgil & Deligonul, 2012). Foreign M&As can result in extra costs due to differences in culture and regulation which will make it harder to benefit from resource synergies (Ahern et al., 2015). In this study, it can be seen that Green M&As have a stronger effect in the home country than in the host country with a coefficient of 1.358 for home country M&As and 0.973 for foreign M&As respectively. This could imply that for energy incumbents its relatively harder to integrate resources from green firms abroad than those present in the home country. Furthermore, the interaction term and the direct effect of International Diversification became insignificant in the home country sample. This is logical, since experience abroad is less necessary when acquiring a firm that operates in the same country. Interestingly, International Diversification continues to have a significant negative effect when foreign firms are acquired. Thus, experience abroad does not result in better foreign M&A performance in the energy industry. It seems that increased coordination costs and liability of foreignness weigh stronger than the benefits of leveraging resources across borders.

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31

Table 2: Regression Results

Column1 Model 1 Model 2 Model 3 Model 4 Model 5

Share of Green M&As

1.156** (0.477) 0.978* (0.482) 1.425** (0.513) 0.959* (0.526)

Interaction Term: International Diversification

-0.081* (0.035) -0.158* (0.091) International Diversification -0.068* (0.039) -0.075* (0.039)

Interaction Term: Absorptive Capacity

3.249*** (1.240) 2.009** (1.127) Absorptive Capacity 0.027* (0.012) 0.035* (0.020) Firm Age 0.008*** (0.001) 0.007*** (0.001) 0.003*** (0.001) 0.009*** (0.002) 0.011*** (0.002) M&A Experience -0.027** (0.008) -0.021** (0.008) -0.021** (0.008) -0.026** (0.012) -0.022* (0.015) Firm Size 4.151*** (0.192) 3.966*** (0.384) 3.993*** (0.400) 4.155*** (0.398) 4.422*** (0.552) Constant 3.578* (2.019) 7.115* (3.278) 4.765* (3.182) 8.222* (4.729) 12.243* (6.151) Observations 1183 1183 1175 1183 1175 R-Squared 0.0760 0.1110 0.1162 0.1241 0.1444

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32

Table 3: Robustness Analysis

Home Host Majority Minority

Column1 Model 6 Model 7 Model 8 Model 9

Share of Green M&As

1.358* (0.798) 0.973** (0.286) 1.485** (0.464) 0.896* (0.501)

Interaction Term: International Diversification

-0.190 (0.172) -0.223** (0.089) -0.436* (0.214) -0.144** (0.072) International Diversification -0.019 (0.045) -0.066* (0.031) -0.085* (0.042) -0.091 (0.081)

Interaction Term: Absorptive Capacity

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33 Firm Size 1.445*** (0.261) 1.812*** (0.269) 1.675*** (0.276) 1.834*** (0.334) Constant 2.164** (0.494) 1.769** (0.505) 2.629* (1.508) 2.456** (0.971) Observations 358 817 772 403 R-Squared 0.1379 0.1421 0.1490 0.1425

Robust standard errors in parentheses

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34

Discussion

The aim of this paper was twofold. First, to answer the call of academics for more research in the energy industry and add to the discussion about the effects of mergers and acquisitions (Cartwright & Schoenberg, 2006). Second, to analyse the effects of acquisitions of green firms by energy incumbents as a possible answer to the energy transition from fossil fuels to renewable energy sources. Both aims were combined in the following research questions:

“Do energy incumbents engaging in acquisitions of green firms enhance their firm performance?”

“What impact do Absorptive Capacity and International Diversification have on this relationship?”

The results showed that energy incumbents can indeed enhance their firm performance by acquiring green firms and thereby their resources. Incumbents can acquire resources via green M&As that are valued by customers and governments and difficult to obtain otherwise (Dierickx & Cool, 1989; Barney, 1991; Brammer & Pavelin, 2006Lyon & Maxwell, 2011). It was also found that incumbents with higher absorptive capacity can enhance their firm performance even more through acquiring green firms since these incumbents are better able to identify strategic resources, absorb the acquired resources, and unlock resource synergies (Ahuja & Katila, 2001; Zahra & George, 2002; Carbonara & Caiazza, 2009).

In contrast, the expectations regarding the effect of international diversification did not match the findings. Initially, it was expected that more internationalised firms would benefit more from green M&As since they could leverage their acquired (reputational) resources across borders and signal their concerns about the environment on a global scale (Grant et al., 1988; Wright, 2016). This could then be used to attract more customers, charge premiums, and reduce threats from stakeholders such as governments and activist groups which ultimately enhances firm performance (Beatty, 1989; Podolny, 1994; Krishnan & Schauer, 2000; Pfeffer & Salancik, 2003).

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35 acquiring green firms. However, merely acquiring green firms might not be sufficient to satisfy these stakeholders as facing more stakeholders from several countries will lead to more stakeholder demands. Different regions prioritise different demands, which internationally diversified firms all need to address properly (Henriques & Sadorsky, 1996; Becker & Henderson, 2000; Connell, 2005). For example, a firm might have a very positive reputation because it takes good care of its employees in country A, while it might have a bad reputation in country B where taking care of employees is considered normal and environmental goals are more important (Brammer et al., 2006). Thus, the reputational resource is not able to satisfy stakeholder demands in both countries, which means its utility differs across countries (Chen & Zheng, 2004). Second, Kang (2013) found that firms that are more internationally diversified, are generally also more short-term profit oriented. Successful integration of an acquired firm and its resources costs a substantial amount of time (Haleblian et al., 2009; Jemison & Sitkin, 1986; Balloun & Gridley, 1990). In the short term, it can even decrease profits (Fowler & Schmidt, 1989; Oduro & Agyei, 2013). It takes time to integrate the green firm’s resources. Similarly, it takes time to build a green reputation. Long term benefits could therefore be ignored or not achieved because the international diversified incumbent is too short-term oriented to invest effort into leveraging resources across borders via, for example, advertising its green activities. Finally, it might also be due to the nature of the industry. Energy companies provide an essential resource to society and typically rely on natural resources, which creates a strong bond with the home country. This often means energy companies are (partially) state-owned or receive privileges in their home country. These home country advantages may be lost when energy companies move abroad and face a lack of roots in the local host environment (Porter, 1990; Zaheer, 1995).

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36 et al., 2008). Past M&A research has also found that acquirors are faster to innovate and can increase their firm performance (Tsai & Wang, 2008).

Additionally, these mergers and acquisitions can also lead to synergies that are created by combining the resources of the energy incumbent and the green firm (Capron & Pistre 2002; Hitt et al. 1998; King et al. 2003; Puranam et al. 2006). Regarding Maarten Wetselaar’s words that Shell expects to find “serious pockets of value” in green energy, Greenlots provides such an opportunity as the EV charging technology is combined with Shell’s existing infrastructure of gas stations. This is in line with Williamson’s argument (1975) that technology should be acquired by companies that are able to commercialise them. It is a perfect marriage of two resource bundles that, when combined, result in resource synergies that generate significantly more value. Shell’s capital and gas station infrastructure allows for a quick roll-out of the new charging stations while Greenlots’ innovative charging technology and software allow drivers to quickly charge their cars faster than at competitor’s charging stations. As Brett Hauser put it: “Greenlots and Shell have been exploring synergies since we were acquired” (Greenlots, 2019). Past research has also indicated that the integration and synergy of resources between the acquiring and the target firm is key to determining the value created by an M&A (Capron & Mitchell 1998, Larsson & Finkelstein, 1999; Uhlenbruck et al., 2006). It will be interesting to see which role resource synergies will take in future mergers and acquisitions and if these will play a key role in the energy transition.

Implications

The results of this study have implications for managers, policymakers, and academics. For managers active at energy incumbents, the results indicate that acquiring green firms is a profitable strategy. When considering to acquire a green target, these managers should however take into account that there should be enough slack present in the organisation in order to absorb the green target firm and integrate the strategic resources successfully. Managers should also beware of the international position of their firm, which might negatively impact the benefits of acquiring a green firm. For managers of green firms, this study provides an additional argument to convince potential acquirors of their market value.

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37 an economic incentive. However, in relatively new industries it is common that governments want to achieve technological leadership by supporting innovative firms founded in their countries (Peters et al., 2012). Based on these grounds, it would still be acceptable for policymakers to block foreign acquisitions. Especially since internationally diversified firms were found to benefit less from acquiring a green firm.

Academics should view this study as an insightful addition to the literature about mergers & acquisitions as well as the resource-based view. This study is inconsistent with most M&A research finding a negative impact of M&As on performance (Cartwright & Schoenberg, 2006; Haleblian et al., 2009), however this study does support the finding that one of the key contingencies in measuring post acquisition firm performance is the industry. It is not unlikely that the state the energy industry is currently in, which is a transition from fossil energy to renewables, causes this positive effect of acquiring green firms. Moreover, it would be interesting from an RBV perspective to further develop the impact of resource synergies between incumbents and new entrants in industries that are changing. Furthermore, research in the energy industry is somewhat limited, especially when linking green and non-green firms via M&As. This study shows that benefits can be achieved by linking green and non-green firms, which can be amplified via enhancing absorptive capacity or negatively influenced by being more internationally diversified.

Limitations

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38 mainly measures the receptiveness of energy incumbents to the effects of technological and reputational resources via absorptive capacity and international diversification. It would be interesting for future researchers to perform a combination of qualitative and quantitative analyses on incumbents to more carefully detect if these firms acquire technological and reputational resources and then link these results with the incumbent’s firm performance. Finally, this paper studied the effects of green acquisitions performed by energy incumbents. The results were positive, however, the results do not provide a ‘license to acquire’ and should not simply be generalised to other industries. The energy industry is in a unique situation, since it is currently transitioning from a state with severe pollution problems to a green state, while it was (up to now) able to generate large profits. It might be that, for example, a firm active in the manufacturing industry experiences different effects when acquiring a green firm due to different levels of uncertainty and impacts on performance.

Future Research Directions

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39 investigate the impact of this virus and the related changes in society on the positive effects of green acquisitions in the energy industry.

Conclusion

This paper presented a study that analysed the effects of green mergers and acquisitions executed by firms active in the traditional fossil fuel industry (energy incumbents). The main findings are that an energy incumbent can positively enhance its firm performance by acquiring a green firm. Energy incumbents can obtain VRIN resources and combine the acquired resources with its own resources which can lead to resource synergies. The positive outcome of acquiring a green company is even larger when the acquiror has well-developed absorptive capabilities, which allow for better absorption of the acquired resources. In contrast, if the acquiring firm has a global presence and is thus internationally diversified, it will benefit relatively less from acquiring a renewable firm. Thus, energy incumbents that are trying to survive the energy transition by acquiring green firms, may be successful. At the very least, they are enhancing their firm performance and gaining “serious pockets of value” in an environmentally sustainable way.

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Can Green Mergers & Acquisitions Provide “Pockets of Value” to Energy Incumbents?