Effects of Relative Size and Firm Relatedness

Our first hypothesis predicted that relative firm size and the degree of post-acquisition integration were negatively associated. After empirically testing this relationship we find strong support for our hypothesis. Our results clearly highlight the difference between integration of relatively smaller versus larger firms, and we find that relatively smaller targets are more likely to be integrated to a higher degree. Congruent with literature, there is less complexity in the integration process of these smaller firms since the acquirer needs to employ less resources and faces fewer problems and risks (Cloodt et al., 2006; Cording et al., 2008; Larsson &

Finkelstein, 1999; Zollo & Reuer, 2010). The literature, however, is inconclusive and relative firm size remains as an underexplored predictor of post-acquisition outcomes (Ellis et al., 2011). We therefore believe that our findings contribute towards filling this gap.

The observed relationship, however, can be questioned and may have other potential explanations from the ecological theory perspective of the firm. Bruderl and Schussler (1990) argue that the more employees a firm has, the longer it will

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survive. When building up on theories such as the “liability of newness” and

“liability of smallness”, which predict higher risks of failure for young and small firms compared to old and big ones (Stinchcombe & March, 1965), Bruderl and Schussler (1990) introduce the “liability of adolescence”. They claim that individual firms face an adolescence, during which mortality is very low. After this phase, death risk jumps to a high level because of the depletion of initial resources (e.g. number of employees). The length of this adolescence varies with the amount of initial resources a firm has, and death risk is expected to be lower for organizations with more resources. If we assume this to be the case, small tech firms which are often in the role of a relatively small target should also be subject to this scenario. Consequently, acquirers might pursue a structural integration approach instead of leaving the targets autonomous in order to preserve them. Hence, in some instances an alternative explanation to why relatively smaller targets are subject to a higher degree of post-acquisition integration could be connected to higher mortality risks of these firms.

Lastly, referring to our first hypothesis, the relationship we predicted was that relatively smaller firms are likely to be more integrated, which also implies that relatively larger targets are likely to be left autonomous. The latter implication, however, could be challenged from the viewpoint of the ecological perspective, and thus calls for attention in future studies. According to the ecological perspective, growth is followed by structural change. In other words, organizations cannot grow indefinitely and remain in their original forms (Hannan & Freeman, 1977), a view which can be also applied on growth through M&A. Therefore, it might be intriguing to test the integration approaches and outcomes of relatively large targets and observe whether our implication that they are likely to be left autonomous holds or not. The ecological perspective would predict that by getting larger, a firm is bound to undergo structural change at some point, which might often imply a high degree of integration after growing through M&A. Interesting predictors to examine in this case would be pre-acquisition growth of the acquirer or acquirer’s acquisition experience, for instance.

We also find ground for our second hypothesis, which claims that firm relatedness and degree of post-acquisition integration are positively associated.

This suggests that the more similar the firms are in terms of their market and products, the more integrated will the targets be to unlock potential synergies that will lead to cost reductions or efficiency gains. Phrased differently, unrelated firms

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will be left more autonomous due to the acquiring firm’s lack of familiarity about the acquired firm. Our finding is very much in line with the relatedness literature that investigates post acquisition integration (e.g. Cassiman et al., 2005; Datta &

Grant, 1990).

However, many authors interested in the firm relatedness literature stream decompose firm relatedness into similarity and complementarity of products and markets (Bauer & Matzler, 2014; Kim & Finkelstein, 2009; Zaheer et al., 2013).

On this more granular level, decisions about the degree of integration can be very different. What we refer to when saying relatedness is similarity. This view of similarity, however, may have entirely different implications for integration.

Depending on whether the products and technologies are standalone (Galbraith, 1974; March & Simon, 1958) or complementary (Makri et al., 2010), various outcomes for integration/autonomy decisions can be justified. For example, closely related to our argument, Lane and Lubatkin (1998) assert that when firms acquire targets with similar technologies (similar knowledge), it should have a high relative absorptive capacity that eventually facilitates integration. On the other hand, the presence of knowledge complementarities would, especially in high-technology acquisitions when technology complementarities are combined, foster integration (Makri et al., 2010). Both streams would come to the conclusion to have a higher degree of integration for the target firm, but with very different initial assumptions about firm relatedness. Imagine a pharmaceutical company acquires a robotics company. On paper, these firms would appear seemingly unrelated, which would also be suggested by SIC codes. However, even though they are not similar, they might be highly complementary, if, for example, the pharmaceutical acquirer buys the robotics firm with the goal to modernize its medical device systems. In reality, this type of a case could be recognized as a related acquisition. Due to the existence of such examples, the differentiation between similarity and complementarity is inevitable.

For the purposes of this study though, we generalized firm relatedness as similarity with the use of SIC codes because we could not obtain specific data about the knowledge similarity or complementarity due to a lack of available information.

Overall, our finding coincides with the literature. However, considering this on a more granular level, firm relatedness should contain a more thorough analysis of similarity and complementarity because similarity on its own is not the only proxy to assess an acquisition’s potential to create value (Kim & Finkelstein, 2009).

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