Diversification: a path breaking perspective

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Diversification: a path

breaking perspective

Jordy de Vries s1693522 12/15/2013

First supervisor: Dhr. G. de Jong

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Rijks Universiteit Groningen | 2

Abstract

Purpose - The objective of this thesis is to determine why managers choose path breaking acquisitions.

Design/Methodology/Approach- This thesis presents a theoretical framework and based on this framework and previous research a conceptual model is created which identifies four factors and is tested via a case study approach, which is appropriate for this type of research. It builds on grounded theory, considered appropriate for such descriptive research.

Findings- Based on the results of the interviews with the various managers and the derived answers on the sub-questions it can be stated that evidence has been found that the factors; risk perception, internal company culture and the financial background all have had a significant impact upon the decision for a particular type of acquisition. However for the fourth proposed factor, management, no significant evidence has been found.

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Rijks Universiteit Groningen | 3

1. Introduction

This thesis looks into the path dependent and path breaking acquisitions in this first chapter I will explain the rationale, the aim and the main research question. In this first chapter an outline of the following chapters will also be presented. There has already been done a lot of research into the field of mergers and acquisitions (Erel et al., 2012; Jemison & Sitkin, 1986a; Kaplan & Weisbach, 1992; Rossi & Volpin, 2004) and there has been a lot of research of path dependency on a national level (Deeg, 2001; Hausner et al., 1995; Peters et al., 2005). However research linking path dependency in a business context is scarce(Karim & Mitchell, 2000; Sydow et al., 2009). Sydow et al. (2009) have written an extensive and academically important thesis about path dependency and path breaking, in their paper they encounter several issues that require further research.

One of the possibilities for future research that Sydow et al. (2009) suggest is to look into industry or industry effects. One of the issues that is uncovered when looking into industry effect is mergers and acquisitions(Slovin et al., 1991). When linking the intra-industry effects of path dependency and path breaking (Sydow et al., 2009) with mergers and acquisitions we find that currently only one study of this phenomenon has been done (Karim & Mitchell, 2000). Karim and Mitchell (2000) have researched path dependency and path breaking in relation to acquisitions in the US medical sector. In their research Karim and Mitchell (2000), define path dependency as the acquisition of resources similar or complementary to existing resources, and path breaking as the acquisition of resources unrelated to existing resources.

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Rijks Universiteit Groningen | Introduction 6 I would say going back one, two, or three years ago, that due to the constraints of the profit-sharing and the incentive program for the divisions, we probably underinvested in our two growth businesses ... We were doing very well but we were underinvesting in what turned out to be a very high-growth industry. We weren't putting in the marketing dollars and we weren't putting in the R&D dollars. We were growing ... at close to 20 percent, how-ever, the semiconductor market was growing at 30 percent. So we were losing market share and didn't know it. From The Dexter Corporation (White, 1979)

This example provides backup for the western managerial rationale that specialization and focus on core competencies is the best strategy (Prahalad & Hamel, 1990), however Prahalad and Hamel (1990) also state that if diversification is the core competence of the company then it is a viable strategy. The importance that firms focus on their core competencies is driven by the western emphasis of shareholder value creation, when we look deeper into shareholder value creation, Dial and Murphy (1995) argue that restructuring and specializing has a positive effect on shareholder value, however there have also been studies that indicate that for some companies diversification may very well lead to significant value creation (Daley et al., 1997) and another reason for diversification according to Amihud and Lev (1981) is that this enables companies to spread risks.

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Rijks Universiteit Groningen | Theoretical Framework 7 This is the starting point of what the problem discussed in this thesis, if most of the literature suggests specialization then why do companies still engage in path breaking acquisitions? This leads to the following research question:

Why do managers choose to diversify and thereby engage in path breaking acquisitions?

To define the problem discussed in this thesis according to Thomas (2003) the main category where this problem would be placed is: What seems to be a bad phenomenon is in reality a good one (Thomas, 2003). Because one would expect based on previous research that path breaking acquisitions is a bad phenomenon, however if companies keep engaging in it, it might actually be a positive phenomenon.

In the following chapter the theoretical framework of this thesis will be presented. In the third chapter the conceptual model will be presented with the accompanying sub-questions for this research. In the fourth chapter the research methodology will be discussed. In the fifth chapter the results of the interviews will be presented. In the sixth chapter a discussion of the results and in the seventh chapter implications for academics and managers will be given. The eighth chapter finishes this thesis off with the limitations and suggestions for future research.

2. Theoretical Framework

In this chapter the theoretical framework of this thesis will be presented. The theoretical framework is split up into three different sections where the first sections covers transaction cost economics which is most commonly used theory in respect to mergers and acquisitions, in the second part the resource based view will be presented, this theory is becoming more influential in respect to mergers and acquisitions and in the third part the theory of path dependency and path breaking is discussed, this theory is more recent and explains more properly the choices for diversification.

2.1 Transaction cost economics

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Rijks Universiteit Groningen | Theoretical Framework 8 cost economics was developed by Williamson (1979) and tries to explain how trading partners choose the arrangement that protects their relation-specific investments at the lowest total costs. According to this theory transactions differ in several ways; the degree to which relation-specific assets are required, the amount of uncertainty about the future and the other parties’ actions, the complexity of the agreement and the frequency with which the transaction occurs. Where the most important factor is the relation-specific assets, Williamson (1979) defines asset specificity as “durable investments that are undertaken in support of particular transactions, the opportunity cost of which investments is much lower in best alternative uses or by alternative users should the original transaction be prematurely terminated.” The height of the total transaction costs determines the governance mode the firm employs for a certain transaction. There are several governance modes which can all be placed in a spectrum where at one end lays the pure, anonymous spot market, which is great for simple transactions, where on the other end, lays the integrated firm, which is great for transactions that require a high level of asset specificity. In between these ends of the spectrum hybrid modes can be found, in example; franchising or joint-ventures (Shelanski & Klein, 1995). This is also the point which links transaction cost economics to mergers and acquisitions, the choice on whether a transaction requires a level of asset specificity that it should be done internally and therefore could require a merger or acquisition.

2.2 Resource based view

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Rijks Universiteit Groningen | Conceptual Model 9 provide an opportunity to trade otherwise non-marketable resources. According to the resource based view a resource-based set of acquisition strategies is (Salter & Weinhold, 1980):

 Related supplementary resources (get more of those resources you already have)  Related complementary resources (get resources which combine effectively with those

you already have).

Therefore according to the resource based view firms should focus on those resources that either enhance or complement their current resources. However this does not explain why companies would acquire resources that are unrelated to their current resources. This is why we turn towards the theory of path dependence and path breaking which will be explained in the following chapter.

2.3 Path dependency and path breaking

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Rijks Universiteit Groningen | Conceptual Model 10

3. Conceptual Model

In this chapter the conceptual model will be presented, accompanied by the sub-questions of this research. Since this research makes use of an open research question it is important to describe the sensitizing concepts used in this research. Sensitizing concepts suggest directions along which to look (Blumer, 1969), they are “theory-embedded” notions used by the researcher to collect empirical data. A sensitizing concept gives the user a general sense of reference and guidance in approaching empirical instances, whereas definitive concepts provide prescriptions of what to see, sensitizing concepts merely suggest directions along which to look (Blumer, 1969).

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Rijks Universiteit Groningen | Conceptual Model 11

Figure 1

Based on the conceptual model and the main research question several sub questions that should help to answer the main research question were created.

1. Do managers perceive risk associated to path dependent and path breaking acquisitions differently (Wildavsky & Dake, 1990)?

2. Does leadership style employed influence the type of acquisition (Malmendier & Tate, 2008; Turner & Müller, 2005)?

3. Does the internal company culture affect the type of acquisition (Gordon & DiTomaso, 1992)?

4. Does the financial background of the acquiring company influence the type of acquisition (Shleifer & Vishny, 2003)?

The first sub question is aimed at one of concepts discussed by Hofstede and Bond (1984), they use risk perception as a parameter to discern cultural differences. Based on this and on the works of Wildavsky and Dake (1990) and Weber and Hsee (1998) it is likely that risk perception will have an influence on the managerial choice of path breaking acquisitions. The second sub question is based on the presumptions of Malmendier and Tate (2008) that with an

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Rijks Universiteit Groningen | Methodology 12 hierarchical leadership style there is an increased chance of path breaking acquisitions. They highlight this with the following example:

“Many managers apparently were overexposed in impressionable childhood years to the story in which the imprisoned handsome prince is released from a toad’s body by a kiss from a beautiful princess. Consequently, they are certain their managerial kiss will do wonders for the proﬁtability of Company Target...We’ve observed many kisses but very few miracles. Nevertheless, many managerial princesses remain serenely conﬁdent about the future potency of their kisses-even after their corporate backyards are knee-deep in unresponsive toads.” -Warren Buffet, Berkshire Hathaway Inc. Annual Report, 1981

The third sub question is related to the works of Beckman and Burton (2008) who indicate that all current work is done based on imprints of past company behaviour, and if we combine this with the work of Gordon and DiTomaso (1992) it can be expected that company culture will have an impact on the decision of making a path dependent or path breaking acquisition, for the purpose of this research corporate culture will be defined as “the pattern of shared and stable beliefs and values that are developed within a company across time(Bate, 1984)”. The fourth and final sub question is related to the financial aspects of acquisitions, based on the work of Shleifer and Vishny (2003) it can be expected that the financial background of the acquiring company has an impact on the decision of making path dependent or path breaking acquisitions.

4. Methodology

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Rijks Universiteit Groningen | Methodology 13 of cases to be included in the research is two cases, which according to Eisenhardt (1989) is sufficient. Since the aim of the research is descriptive the selected cases reflect the varied attributes of companies engaging in path dependent and path breaking acquisitions. The benefits of this case study approach, a high chance of producing rigorous data to yield findings of internal validity, outweigh the disadvantages of having low generalization or external validity (Thomas, 2003). Furthermore the aim of using multiple cases is also that it should provide replicable data which according to Yin (2009) is required to be able to draw cross-case conclusions and might the be the basis for a modification of the conceptual model.

For this study first a pilot case study will be conducted on Bovemij Verzekeringsgroep NV, the reason for this pilot case study is that this company offers unusual amounts of documentation and is unusually accessible (Yin, 2009). During this pilot case study the following acquisitions will be taken into account: Bovemij Verzekeringsgroep´s acquisition of Mobiel Garant, Schadeverzekeringsmaatschappij Bovemij´s acquisition of Kroymans Assuradeuren and Armac Assurantiën, Bovemij Verzekeringsgroep´s acquisition of Delps and Bovemij Verzekeringsgroep´s acquisition of Stern Finance (Table 1). Of these companies Bovemij has already sold Mobiel Garant, due to the fact that this company is also starting to sell electric vehicles and thereby Bovemij would be competing in the market against its own clients (Annual report 2012). Within this company the following persons will be interviewed: Mr Coenradus Cornelius Petrus Post and Mr Albertus Gerhardus de Vries.

After the pilot case study has been completed and if needed any modifications to the conceptual model have been made a secondary case study will be started, this case study will feature Albron BV. During this case study Albron´s acquisition of Centre Parcs food activities will be examined (Table 1). Within this company an interview with Mr. Stefan Farkas will be conducted. After this interview all results will be analyzed and used to answer the sub questions and main research question.

1. Deal headline Bovemij Verzekeringsgroep to acquire Stern Finance (Deal No 1601234445)

Target STERN FINANCE BV (Car leasing services - Netherlands)

Acquiror BOVEMIJ VERZEKERINGSGROEP NV (Car and mobility insurance carrier -

Netherlands)

Vendor STERN GROEP NV (Car dealer, Car leasing services, Car rental services, Car repair

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Rijks Universiteit Groningen | Methodology 14 Date announced 15/12/2010

Deal value n.a.

2. Deal headline Bovemij Verzekeringsgroep acquires Delps (Deal No 1601342135)

Target DELPS BV (Employer and employee insurance processing application developer -

Netherlands)

Netherlands) Vendor -

Deal status Completed Date completed 15/07/2010 Deal value n.a.

3. Deal headline Bovemij Verzekeringsgroep acquires Mobiel Garant (Deal No 1601342156)

Target MOBIEL GARANT BV (Mobility scooter wholesaler - Netherlands)

Netherlands) Vendor -

4. Deal headline Schadeverzekeringmaatschappij Bovemij acquires Kroymans Assuradeuren and Armac Assurantiën (Deal No 1601347793)

Target KROYMANS ASSURADEUREN BV (Lease assets and car insurance services -

Netherlands)

ARMAC ASSURANTIËN BV (Lease assets and car insurance services - Netherlands)

Acquiror SCHADEVERZEKERINGMAATSCHAPPIJ BOVEMIJ NV (Insurance brokerage

services - Netherlands)

Vendor KROYMANS FINANCIAL SERVICES BV (Car leasing services, Financial holding

company - Netherlands)

KROYMANS FINANCIAL SERVICES BV (Car leasing services, Financial holding

company - Netherlands) Deal status Completed

5. Deal headline Albron acquires Center Parcs food activities (Deal No 1601208411)

Target CENTER PARCS EUROPE NV'S RETAIL FOOD, CAFE AND RESTAURANT ACTIVITIES IN THE NETHERLANDS AND BELGIUM (Holiday village operator)

Acquiror ALBRON BV (Catering services - Netherlands)

Vendor CENTER PARCS EUROPE NV (Holiday village operator - Netherlands)

Table 1

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Rijks Universiteit Groningen | Methodology 15 conducted. The development of the questions and structure of the interview is based mainly on the works of Hart (1988), Healey and Rawlinson (1994) and Yin (2009). During the interview both level one and level two questions (Yin, 2009) have been asked, the essence of the level two questions can be found in Table 2. The obtained data from the interviews has been condensed into summary statements (Hossack, 1972) and used to identify the structural properties. In order to achieve this coding was needed. There are three types of coding involved in the coding process according to grounded theory research: open coding, axial coding and selective coding(Corbin & Strauss, 1990).

Methodology for the first sub question: Do managers perceive risk associated to path dependent and path breaking acquisitions differently (Wildavsky & Dake, 1990)? This particular question is based around the works of Hofstede (1980), Weber and Hsee (1998) and Wildavsky and Dake (1990) who all determine that culture has a major impact upon the risk averseness of managers. Therefore to determine whether risk perception has an impact on the choice of either a path dependent or path breaking acquisition during the interview this has been discussed, to determine the actual risk averseness of the management an adapted scale of Sitkin and Weingart (1995) has been used. For this research the scale is adapted to path dependent and path breaking acquisitions. Table 2 presents the interview questions adapted from Acedo and Jones (2007).

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Rijks Universiteit Groningen | Methodology 16 breaking acquisitions, which could mean that nonhierarchical organizations might be more inclined towards path dependent acquisitions.

Methodology for the third sub question: Does the internal company culture affect the type of acquisition (Gordon & DiTomaso, 1992)? For this sub question a twofold analysis has been conducted, where during desk research the history of the firm was studied, with a focus on whether they had engaged in path breaking acquisitions (Beckman & Burton, 2008)? Secondly during the interview questions about the manager’s perception of the company culture and whether the company culture supports or limits path breaking acquisitions have been discussed. To validate the manager´s perception of company culture the methods of Gordon and DiTomaso (1992) have been used, Gordon and DiTomaso (1992) use the concepts of stability and adaptability to determine the strength of the company culture. Where adaptability can be measured via risk perception (Gordon & DiTomaso, 1992) stability required attention be paid to the following three factors; communication, development and promotion from within and fairness of rewards (Gordon & DiTomaso, 1992). The factors to determine the stability have been discussed during the interview (Table 2). Combining the information about the company history and the manager´s perception of the internal company culture we were able to establish whether the internal company culture is indeed an influencing factor regarding path dependent and path breaking acquisitions.

Methodology for the fourth sub question: Does the financial background of the acquiring company influence the type of acquisition (Shleifer & Vishny, 2003)? For this sub question desk research has been done where the financial status of the acquiring company has been analysed (Table 4,5). Furthermore during the interviews questions regarding the financial motivations have also been discussed (Table 2). This has as a goal to see if companies with ample resources are indeed more likely to engage in path breaking acquisitions (Malmendier & Tate, 2008)?

Interview questions

General Question: 1. Why where these acquisitions conducted?

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Rijks Universiteit Groningen | Methodology 17 Bovemij)

Risk Perception: 3. A path breaking acquisition implies high risk.

4. Path breaking acquisitions are an opportunity for my firm. 5. Path breaking acquisitions are a positive thing in my

business.

6. My firm has a high probability of success in other markets.

Leadership style: 7. Who is authorized to make decisions regarding acquisitions?

Company culture: 8. Is the internal communication within the company of an

adequate level?

9. Are there options for development of skills and internal promotions?

10. Are the rewards for good job performance represented by fair compensation for the effort involved?

Financial Background:

11. Was the goal of the acquisition to increase profitability? 12. Was the acquisition successful in this respect?

13.

Where there ample resources available with the acquiring firm?

Table 2

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Rijks Universiteit Groningen | Results 18 the future (Yin, 2009). The fourth and final test is reliability, to counter this issue during the research every step will be made as operationalized as possible and also by keeping in mind that if someone were to repeat this research they would arrive at the same results (Yin, 2009).

5. Results

In this chapter the results of the interviews will be presented, in the first part the results of the interviews with the managers of Bovemij will be presented and in the second part the results of the interview with manager of Albron will be presented.

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Rijks Universiteit Groningen | Results 19 and we see future potential the market for electrical vehicles”. Since both these companies conducted business unrelated to Bovemij´s both of these acquisitions can be classified as path breaking acquisitions.

The second question, what was the acquisition with the highest risk, both managers differed in their perception of what the acquisition with the highest risk was, according to C.C.P. Post it was “Delps, because this is a joint venture and we are operating this with multiple other insurance companies”, however according to A.G. de Vries it was “Stern finance, because it´s profit are highly dependent on the operating results of the Stern Group”. Based upon the answers of the managers on questions three to six we have created a risk profile:

Coen Albertus Stefan

Question 3 0.5 0 0 Question 4 1 1 1 Question 5 0.5 0.5 0 Question 6 1 1 1 Total 3/4 2.5/4 2/4 Table 3

According to Acedo and Jones (2007) this risk profile indicates that both managers should be open to acquisitions with a higher risk rating.

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Rijks Universiteit Groningen | Results 20 of a path breaking acquisitions decreases(Simons & Thompson, 1998). However acquisitions with a value less than one million euros don´t have to pass the risk comity and therefore could be initiated by a single person, which would therefore increase the probability of a path breaking acquisition (Malmendier & Tate, 2008).

Figure 2

In Figure 2 we can see the organizational chart of the Bovemij Group, based on this chart and the results of the interview we can state there is the opportunity for small path breaking acquisitions, however it is less likely that the Bovemij will engage in a large path breaking acquisition, since a large group of people is required for any major acquisition.

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Rijks Universiteit Groningen | Results 21 communication is of an adequate level, but there is also room for improvement, especially between the different business units. When looking at the development of talent and internal promotions both managers agree that this is positive thing that the company embraces, as C.C.P. Post states; “Yes, we try to fill most job openings internally with the exception of a few sensitive functions, like HRM and the executive secretary. And we are working on standardizing the employment contracts for all the different business units so it becomes easier to switch between the different business units”. In respect to the reward system C.C.P. Post stated the following; “We have a good salary structure which we benchmark every 3/4 years and the compensation of the directors is bound by law”. Furthermore the interviews indicated that Bovemij is moving towards an internal company culture which is capable of handling path breaking acquisitions. An example of this change in company culture is the unification of employment contracts of all employees.

The financial background of Bovemij:

Balance sheet Annual report/Consolidated 31/12/2012 th USD 31/12/2011 th USD 31/12/2010 th USD 31/12/2009 th USD

Exchange rate: USD/EUR

12 months Unqual Local GAAP AR 1.31940 12 months Unqual Local GAAP AR 1.29390 12 months Unqual Local GAAP AR 1.33690 12 months Unqual Local GAAP AR 1.44060 Assets Total Investments 516,370 489,480 453,685 409,737 Insurance Debtors 25,476 20,366 16,501 16,509

Total Other Assets 18,217 13,560 21,218 22,698

TOTAL ASSETS 560,063 523,406 491,404 448,944

Liabilities

Surplus 164,599 134,648 121,151 78,487

Net Technical Reserves 350,679 349,855 324,832 314,136

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Rijks Universiteit Groningen | Results 22

TOTAL LIABILITIES 560,063 523,406 491,404 448,944

Table 4

we can see in Table 4 that at the time of the acquisitions Bovemij was in a position where it had a large amount of money available to make these acquisitions, which according to Malmendier and Tate (2008) is a factor which contributes to the likelihood of path breaking acquisitions. During the interview it became clear that the path breaking acquisitions of Bovemij were more offensive acquisitions whereas the path dependent acquisitions were more defensive acquisitions. The financial situation of Bovemij was described by the managers in the following manner, according to A.G. de Vries “Due to an IPO we were able to raise money and now we have enough resources to do another acquisition” and according to C.C.P. Post “We have enough resources available to do another acquisition in the near future.”

The second round of interviews was conducted with a manager of Albron of this interview a summary statement was created. Starting off with the reason behind the acquisition of Center parcs´ food and retail activities, this was according to S. Farkas due to “The main reason was that Albron saw no growth opportunities in their current market (catering) and was looking for expansion opportunities and therefore they decided to do a path breaking acquisition into a new sector, the food and retail sector”.

Based on the answers on questions three to six a risk profile has been created (Table 3), based on Acedo and Jones (2007) the risk profile of the manager of Albron can be indicated as intermediate, indicating a possible dampening effect on chance of path breaking acquisitions.

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Figure 3

According to Simons and Thompson (1998) this would indicate that there is a lower chance of the engagement into path breaking acquisitions.

Since this is the first major acquisition of Albron (Table 1) they have no previous experiences with any other path breaking acquisitions. The risk perception of the manager indicates that a moderate level of adaptability is present within Albron (Gordon & DiTomaso, 1992). The factors that determine the stability of an organizations are communication, development and promotion from within and fairness of rewards, the communication within Albron is currently not doing very well, as S. Farkas stated “This is still a work in progress as we’re still working on the integration of ACP into Albron”, which also links to the development and promotion from within as this currently not a specific focus it, it might become one due to the benefits it possesses for integration purposes. Albron does give employees first chance at job openings however they are also prone to hiring people from the outside. The fairness of rewards indicates that Albron has a reward system which would promote safe behavior, as S. Farkas stated “We have a market conform salary system and the bonus structure of Albron tries to limit the risk the managers take.” which lowers the chances of a path breaking acquisition (Gordon & DiTomaso, 1992).

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Balance sheet

Local registry filing/Consolidated 31/12/2012 th USD 31/12/2011 th USD 31/12/2010 th USD 31/12/2009 th USD

Exchange rate: USD/EUR

12 months Local GAAP 1.31940 12 months Local GAAP 1.29390 12 months Local GAAP 1.33690 12 months Local GAAP 1.44060 Assets Fixed assets 21,294 24,254 20,386 14,265

Intangible fixed assets 157 230 302 0

Tangible fixed assets 21,085 23,757 19,496 13,277

Other fixed assets 51 267 588 988

Current assets 99,247 108,541 139,275 132,701

Stock 4,234 5,531 6,277 3,214

Debtors 43,450 47,534 68,385 49,332

Other current assets 51,562 55,476 64,614 80,155

Cash & cash equivalent 51,562 55,476 64,614 80,155

TOTAL ASSETS 120,540 132,796 159,662 146,966

Liabilities & Equity

Shareholders funds 69,631 73,886 92,721 96,926 Non-current liabilities 3,883 6,018 1,528 1,017 Provisions 3,883 6,008 1,513 981 Current liabilities 47,026 52,892 65,413 49,022 Loans 0 0 0 0 Creditors 13,753 16,971 28,262 18,837

Other current liabilities 33,273 35,921 37,151 30,185

TOTAL SHAREH. FUNDS & LIAB. 120,540 132,796 159,662 146,966 Memo lines

Working capital 33,931 36,095 46,400 33,709

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Rijks Universiteit Groningen | Discussion 25

Number of employees 5,260 3,110 4,730 3,890

Table 5

Table 5 would indicate that Albron had enough monetary resources available to finance the acquisition of Centerparcs, as S. Farkas stated “Yes, due to favorable market circumstances Albron was able to generate enough money to finance the acquisition out of its own pocket.” Which according to Malmendier and Tate (2008) is a factor that increases the likelihood of path breaking acquisitions.

6. Discussion

In this chapter the results of the research will be discussed. The main goal of this research was to be able to determine why managers choose for path breaking acquisitions. This was researched by using a qualitative research method and a theoretical framework.

The theoretical framework presented at the beginning of this thesis discussed three main theories; transaction cost economics, resource based view and path dependency and path breaking. Starting off with the relation between the results of this research and transaction cost economics, the main idea of transaction cost economics is that any activity which requires a high level of asset specificity should be done internally and all other activities should be outsourced, the acquisition of Delps by the Bovemij is a good example of the applicability of this theory as this acquisition internalized activities which required a high level of asset specificity. However for the other acquisitions studied in this research the transaction cost economics theory cannot be used as an explanation. The resource based view can be used to explain the acquisitions of both Kroymans and Stern by the Bovemij, since both acquisitions where performed with the interested of acquiring supplementary resources. However for the other acquisitions this theory does not provide a proper explanation. The theory of path dependency and path breaking helps to explain the remaining acquisitions, since these were conducted with the motivation of seeking new markets and expanding opportunities.

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Rijks Universiteit Groningen | Discussion 26 acquisitions differently (Wildavsky & Dake, 1990)? All managers that were interviewed all perceived path breaking acquisitions as having a higher risk than path dependent acquisitions, this result is interesting and relevant, because according to Hofstede (1983) the Netherlands has a relatively intermediate level of uncertainty avoidance, indicating that managers would be more risk averse than the results of this research would suggest. However one interesting result here was that in the opinion of A.G. de Vries, when asked what was the most high risk acquisition? He chose the path dependent acquisition of Stern over the path breaking acquisitions of Bovemij. Another interesting result from the risk perception perspective is that all interviewed managers see the potential for their companies to be successful in other markets, because this is an important part of their risk perception, since if you think that you will be successful in other markets then you are more likely to make path breaking acquisitions to start operating in those markets.

The second sub-question is; Does leadership style employed influence the type of acquisition (Malmendier & Tate, 2008; Turner & Müller, 2005)? For both companies the major acquisitions had to be approved by a rather large number of people, this according to Simons and Thompson (1998) indicates a lower chance of path breaking acquisitions. There was however the interesting result of the Bovemij, where it was possible for acquisitions of a value below 1 million euros to be done by individual managers which according to Simons and Thompson (1998) indicates a higher chance of path breaking acquisitions. However it is to be noted that the Bovemij operates in the insurance industry and in the Netherlands this industry is subject to heavy regulations which are there to diminish the risks managers take. Furthermore the power distance should also be taken into account, since this research has been done in the Netherlands which has a relative small power distance (Hofstede, 1983), it is therefore less likely that companies in the Netherlands would have a hierarchical leadership style. Based on this and the results from the interviews it cannot be stated whether leadership style has a significant impact upon the type of acquisition.

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Rijks Universiteit Groningen | Discussion 27 interviews with managers of Bovemij also have given evidence of this process of adapting it´s company culture so that it is able to more effectively able to integrate new acquisitions into the existing company structure. Since the company culture of the Bovemij is both adaptable and stable it is capable of handling the influx of new company culture, as is the case in a path breaking acquisition. Therefore we can state that the company culture of Bovemij did have an impact on the decision of the type of acquisition (Gordon & DiTomaso, 1992). However for Albron it is much harder to determine whether company culture had a significant impact on their acquisition of Center parcs, because this was their first big acquisition the company culture of Albron was not able to be reconciled with the company culture of Center parcs. This is reflected in the results of the interviews, which indicate that Albron has an adaptable company culture, however due to having a not very stable company culture Albron was unable to integrate Center parcs into their own company culture. The interview does indicate that Albron has realized this and is in the process of creating a more stable company culture. Therefore it can be stated that for this particular acquisition there has been no significant impact from the company culture on the choice for the path acquisition, however as Albron has realized that this is an important aspect it might become a significant factor in future acquisitions.

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Rijks Universiteit Groningen | Implications 28 All of this leads to the main research question; Why do managers choose to diversify and thereby engage in path breaking acquisitions? Based on the results of the interviews with the various managers and the derived answers on the sub-questions it can be stated that evidence has been found that the factors; risk perception, internal company culture and the financial background all have had a significant impact upon the decision for a particular type of acquisition. However for the fourth proposed factor, management, no significant evidence has been found, this is partially due to the institutional environment in which the companies are operating and also due to the cultural environment of the Netherlands (Hofstede, 1983).

7. Implications

This chapter discusses the implications of this research, firstly for the academic world and secondly for the managers.

Starting off with the implications for the academic world, this research has provided a better understanding of the phenomenon of path breaking acquisitions. Furthermore this research has confirmed the findings of Gordon and DiTomaso (1992), that culture has a significant impact on choice of acquisition and also confirmed the findings of Shleifer and Vishny (2003) that the financial situation of a company has an impact on their choice of acquisition. Furthermore the results of this study also correlate to the works of Malmendier and Tate (2008) and Wildavsky and Dake (1990), however the results of this study did differ significantly due to origin of this research.

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Rijks Universiteit Groningen | Limitations and suggestions for future research 29

8. Limitations and suggestions for future research

To complete this thesis I acknowledge that certain limitations have to be taken into account. First of all due to using a case study method and conducting this research on Dutch companies the results from this study cannot be generalized to all western companies, but it serves the purpose of exploring this phenomenon of which little research has been done. For this research the choice has been made not to use tools like Kwalitan, however for future research which could incorporate multiple interviews it might be an option to employ this tool, since it provides a quantitative basis for qualitative research. If access and resources allow, a future research may employ a quantitative method to validate the findings of this thesis. Additionally future research could focus if there is difference in factors between different industries. In this research the decision has been made to look at all the factors independently, however it might very well be the case that all of the factors discussed in this research are interconnected, this could lead to the following conceptual model:

Figure 4

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Rijks Universiteit Groningen | References 31

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Diversification: a path breaking perspective