Technological Overlap, Technological Capabilities, And .

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Strategic Management JournalStrat. Mgmt. J., 35: 48–67 (2014)Published online EarlyView 26 April 2013 in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2083Received 4 June 2011 ; Final revision received 13 December 2012TECHNOLOGICAL OVERLAP, TECHNOLOGICALCAPABILITIES, AND RESOURCE RECOMBINATION INTECHNOLOGICAL ACQUISITIONSJOSHUA SEARS1* and GLENN HOETKER21Department of Managerial Sciences, J. Mack Robinson College of Business,Georgia State University, Atlanta, Georgia, U.S.A.2Department of Management, W.P. Carey School of Business, Arizona StateUniversity, Tempe, Arizona, U.S.A.The performance of technological acquisitions depends heavily on the overlap between theknowledge bases of the target and acquirer. We argue that overlap is best viewed as two distinctconstructs: target overlap, the proportion of the target’s knowledge base that the acquirer alreadypossesses, and acquirer overlap, the proportion of the acquirer’s knowledge base duplicated bythe target. Each affects the value created from the firms’ technological capabilities differentlydue to absorptive capacity, knowledge redundancy, and organizational disruption. Further, thelow quantity of innovations observed in acquisitions with low target overlap may conceal anoffsetting increase in their novelty. Copyright 2013 John Wiley & Sons, Ltd.INTRODUCTIONMuch of the foundational research on technological acquisitions examined the relationship betweenacquisition performance and the amount of overlapbetween the technological knowledge bases of thetarget firm and acquiring firm (Ahuja and Katila,2001; Graebner, Eisenhardt, and Roundy, 2010;Kapoor and Lim, 2007). More recent research hasextended the concept of technological overlap byinvestigating the effects that technological similarities and complementarities have on acquisitionperformance (Makri, Hitt, and Lane, 2010). In thisstudy, we further extend the concept of technological overlap along two different dimensions.First, we extend technological overlap to encompass both target and acquirer overlap, which mayKeywords: acquisitions; resource recombination; technological overlap; innovation; capabilities*Correspondence to: Joshua Sears, Department of ManagerialSciences, J. Mack Robinson College of Business, Georgia StateUniversity, 35 Broad Street NW, Suite 1029, Atlanta, GA 30303,U.S.A. E-mail: jsears6@gsu.eduCopyright 2013 John Wiley & Sons, Ltd.be asymmetric. Most empirical constructions oftechnological overlap have measured what we call‘target overlap,’ the portion of the target’s knowledge already known by the acquirer (Ahuja andKatila, 2001; Cloodt, Hagedoorn, and Van Kranenburg, 2006; Kapoor and Lim, 2007). However,acquisitions also vary in the degree to which theacquirer’s existing knowledge is duplicated by thetarget’s knowledge, what we call ‘acquirer overlap.’ In addition to identifying target overlap andacquirer overlap as conceptually and empiricallydistinct, we develop differential hypotheses regarding their effect on the creation or destruction ofvalue.Second, while previous research has tested thedirect effect of either technological overlap (Ahujaand Katila, 2001; Cloodt et al., 2006; Kapoor andLim, 2007; Makri et al., 2010) or technologicalresources/capabilities on acquisition performance(King, Slotegraaf, and Kesner, 2008), we examinethese factors jointly. By doing so, we are able toshow how acquirer and target overlap differentiallyaffect the acquirer’s ability to generate value

Technological overlap and resource combination in acquisitionpost-acquisition from both its own technologicalcapabilities and those it acquires from the targetfirm.This study makes four primary contributions tothe literature on technological acquisitions. First, itoffers a conceptually and empirically more accurate and nuanced measure of technological overlap.Second, it applies that measure to show that targetand acquirer overlap have distinct, but interrelated,impacts on the value created from each firm’s technological capabilities. Third, it broadens the theoretical explanation of value creation in technological acquisitions by simultaneously incorporatingthree drivers: the acquirer’s absorptive capacity,knowledge redundancy, and exposure to organizational disruption due to conflict between theacquirer’s and target’s knowledge workers. Lastly,it extends the literature on technological acquisitions by studying the acquirer’s shareholder valuecreation, which has been a neglected dependentvariable in the technological acquisitions literature(Graebner et al., 2010).THEORY AND HYPOTHESESIn innovative industries, technological change israpid and frequent (Sarkar et al., 2006). Whileboth incumbents and start-ups strive to innovate,past research provides evidence that much ofthe truly novel innovations originate in start-ups(Abernathy and Utterback, 1978; Pavitt, Robson,and Townsend, 1987). As a result, technologicalacquisitions have become a popular complementto internal innovation, allowing firms to overcomethe time compression diseconomies (Dierickx andCool, 1989) inherent in the rapid and frequentlychanging technologies of innovative industries.Accordingly, technological acquisitions havebecome an important stream in the broader acquisitions literature (Ahuja and Katila, 2001; Benson and Ziedonis, 2009; Capron and Mitchell,2009; Graebner, 2004, 2009; Kapoor and Lim,2007; Makri et al., 2010; Paruchuri et al., 2006;Puranam, Singh, and Chaudhuri, 2009; Puranam,Singh, and Zollo, 2006; Puranam and Srikanth,2007; Ranft and Lord, 2002; Schweizer, 2005).Work in this stream has focused on the acquisition of small, technology-intensive target firms,as do we. Beyond their managerial importance,such acquisitions allow researchers to focus on theeffects of technological synergies by minimizingCopyright 2013 John Wiley & Sons, Ltd.49the impact of potential confounding factors usuallypresent in the acquisition of large and/or nontechnological targets, such as cost (scale) synergies ormarket power synergies.Barney (1988) argued that acquirers can capture economic value by creating novel recombinations from their resources and capabilities andthose of the target. More recent research providesevidence that the pursuit of such novel recombinations motivates many acquisitions (Karim andMitchell, 2000; Larsson and Finkelstein, 1999).A consistent finding is that the degree to whichthe technological knowledge bases of the acquirerand target overlap (i.e., technological overlap)affects the acquirer’s ability to generate novelrecombinations.However, the measurement of technologicaloverlap in existing research obscures importantcontingencies that determine the potential to create or even destroy value post-acquisition. Priorstudies have measured technological overlap asthe amount of the target’s knowledge base thatthe acquirer already knows (Ahuja and Katila,2001), the sum of the technological overlap fromboth firms (Mowery, Oxley, and Silverman, 1996,1998), or subsumed technological overlap in amore coarse-grained measure of resource overlaprepresented by product lines and product categories (Karim, 2006; Karim and Mitchell, 2000).Examining target and acquirer overlap separatelyallows us to explore the possibility that they differentially influence the ability of the firm to create value from its own technological capabilitiesand those of the target. We focus on technological capabilities as the source of potential valuebecause as Grant (1996: 380) stated, ‘the key tosustainable advantage is not proprietary knowledgeitself, but the technological capabilities which permit the generation of new knowledge.’Our research question demands that ourhypotheses examine the interaction betweenoverlap and technological capabilities, allowing usto determine how, for example acquirer overlapaffects the value created by acquirer technologicalcapabilities, separate from its effect on the valuecreated by target technological capabilities. Theresulting hypotheses tell us whether the contribution of a ‘unit’ of technological capability tovalue creation increases or decreases as technological overlap increases. That is, they tell ushow effectively the firm translates technologicalcapabilities into value. Incorporating both overlapsStrat. Mgmt. J., 35: 48–67 (2014)DOI: 10.1002/smj

50J. Sears and G. HoetkerLow AcquirerTechnological OverlapQ1.Low Absorptive CapacityLow RedundancyLow ConflictLow TargetTechnologicalOverlapAAQ2.Low Absorptive CapacityLow RedundancyHigh ConflictTATQ3.High Absorptive CapacityHigh RedundancyLow ConflictHigh TargetTechnologicalOverlapHigh AcquirerTechnological OverlapQ4.High Absorptive CapacityHigh RedundancyHigh ConflictATTA Acquirer’s technological knowledge base;T Target’s technological knowledge base.Figure 1.Asymmetries in acquirer and target technological overlap. A Acquirer’s technological knowledge base;T Target’s technological knowledge baseallows us to test simultaneously the effects ofabsorptive capacity, knowledge redundancy, andpost-acquisition conflict in a way prior studieshave not been able to accomplish.Our measure of value creation is cumulativeabnormal return of the acquirer’s stock. This measure has been extensively used to evaluate thevalue created from an acquisition in the management literature (Arikan and Capron, 2010;Capron and Pistre, 2002; Goranova, Dharwadkar,and Brandes, 2010; Kim and Finkelstein, 2009;McWilliams and Siegel, 1997; Uhlenbruck, Hitt,and Semadeni, 2006). Although used less often inthe study of technological acquisitions, it offersa special advantage in this context. It capturesinvestors’ perceptions of the acquirer’s ability tocreate future cash flows from unique and potentially inimitable synergies generated by recombining its technological capabilities with those of thetarget, which Barney (1988) has identified as thesource of acquirer value appropriation in acquisitions. Since our interest is in the degree to whichoverlap shapes the realization of such synergies,cumulative abnormal return (CAR) offers benefitsbeyond other common measures, such as patentcounts, in capturing not only the amount of subsequent inventive activity but also whether thatCopyright 2013 John Wiley & Sons, Ltd.activity represents novel synergies likely to generate value.Figure 1 illustrates four idealized combinationsof target overlap and acquirer overlap. The squaresrepresent each firm’s knowledge base, that is,the set of knowledge a firm has ‘demonstratedfamiliarity with, or mastery of,’ as describedby Ahuja and Katila (2001) in their seminalpaper. Citing Kim and Kogut (1996), Ahuja andKatila further describe the knowledge base as‘the distinct elements of knowledge with whichthe firm has revealed a relationship.’ The shadedarea represents technological overlap, that is,knowledge common to both target and acquirer.The nonshaded areas represent knowledge uniqueto the acquirer or target.We begin by considering the impact of targetoverlap. When target overlap is low (quadrants 1and 2), a large proportion of the target’s knowledge is new to the acquirer and there are manyopportunities for novel combinations of the target’s knowledge and the acquirer’s knowledge.However, the acquirer may not be able to realize these novel recombinations because it lacksabsorptive capacity (Cohen and Levinthal, 1990).Lacking what Zahra and George (2002) call potential absorptive capacity, the ability to value andStrat. Mgmt. J., 35: 48–67 (2014)DOI: 10.1002/smj

Technological overlap and resource combination in acquisitionacquire external knowledge, and realized absorptive capacity, the ability to transform and exploitexternal knowledge, the acquirer will be unable toextract maximal value from the target’s capabilities (cf. Mowery et al., 1998). Poor performancemay occur because the acquirer is unable to incorporate and exploit the target’s capabilities and/orbecause the target never possessed the amount ortype of capabilities the acquirer believed it did.When target overlap is high (quadrants 3 and4), the acquirer has a greater ability to understand and absorb the target’s knowledge. However, since much of the target’s knowledge isredundant to knowledge the acquirer already possesses, there are fewer possibilities to create novelrecombinations of the target and acquirer’s knowledge. Indeed, the increase in knowledge redundancy not only decreases the possible number ofnovel recombinations that can be made using thenewly acquired knowledge; it may also decreasethe novelty and quality of those recombinations(Makri et al., 2010).In summary, when target overlap is low, thereare many opportunities for novel recombinations,but the acquirer lacks the absorptive capacity torecognize and execute them. The technologicalresources of the target are largely wasted. Whentarget overlap is high, the acquirer has the necessary absorptive capacity, but knowledge redundancy means there are few novel recombinationsavailable. The target’s capabilities offer few opportunities to create value.If both the positive impact of absorptive capacity and the negative impact of redundancy increaselinearly as target overlap increases, their combined effect will, of course, be constant—a givenchange in target overlap will change the valuecreated by the target’s capabilities by the sameamount at any level of target overlap. Whether thechange is positive or negative depends on whetherthe impact of absorptive capacity or redundancychanges more quickly with changes in targetoverlap.It seems more likely that absorptive capacityincreases at a decreasing rate as target overlapincreases. The negative impact of redundancymay also increase nonlinearly as target overlapincreases, although it is less clear whether it willincrease at a decreasing or increasing rate. Thecombination of these nonlinear effects is likely tobe nonlinear as well. However, nonlinearity doesnot imply that the combined effect will necessarilyCopyright 2013 John Wiley & Sons, Ltd.51be nonmonotonic when target overlap is between0 and 100 percent, as it must be by definition.Depending on the relative magnitude and curvature of the relationship between (1) value creation and absorptive capacity and (2) value creation and redundancy, their combination couldyield three potential outcomes. Theory is uninformative as to the relative magnitude and curvatureof these two relationships, so we offer competinghypotheses.It may be the case that, for any increase intarget overlap, the improvement in absorptivecapacity increases the ability of the firm tocreate value from the target’s capabilities by morethan the increase in redundancy decreases it.Colloquially, familiarity outweighs novelty. Thecombined effect would be a monotonic, possiblynonlinear, increase in the ability of the acquirerto generate value from the target’s capabilities astarget overlap increases.Hypothesis 1a: An increase in target technological overlap will positively affect the impact thetarget’s technological capabilities will have onabnormal returns.It may rather be the case that, for any givenincrease in target overlap, the increase in redundancy reduces the ability of the firm to createvalue from the target’s capabilities by more thanthe improvement in absorptive capacity increasesit. Colloquially, novelty outweighs familiarity. Thecombined effect would be a monotonic, possiblynonlinear, decrease in the ability of the acquirerto generate value from the target’s capabilities astarget overlap increases.Hypothesis 1b: An increase in target technological overlap will negatively affect the impact thetarget’s technological capabilities will have onabnormal returns.The last possibility is that the combined effectis nonmonotonic as target overlap increases, witheither a U or an inverted U-shaped relationship.The latter would result if, for a given increase overa low level of target overlap, the improvement inabsorptive capacity increases the ability of the firmto create value from the target’s capabilities bymore than the increase in redundancy decreasesit—a relationship that is reversed when startingfrom a high base.Strat. Mgmt. J., 35: 48–67 (2014)DOI: 10.1002/smj

52J. Sears and G. HoetkerHypothesis 1c: An increase in target technologicaloverlap will have a nonmonotonic effect on theimpact the target’s technological capabilities willhave on abnormal returns.We next consider acquirer overlap, which thisstudy is the first to examine. We hypothesizethat acquirer overlap affects the value createdby both the acquirer’s and the target’s capabilities. Increased acquirer overlap is associatedwith increased routine disruption and conflictbetween the knowledge workers of the target and acquirer, a recognized source of valuedestruction in the acquisitions literature (Mirvis,1985; Paruchuri et al., 2006; Puranam et al.,2006).When acquirer overlap is low (quadrants1 and 3), there is little basis for conflict arisingpost-acquisition. Since the overlapping knowledgerepresents a small portion of the acquirer’sknowledge base, few of the acquiring firm’sknowledge workers will find themselves incompetition with the target’s knowledge workers.Rather, supplementing the acquirer’s capabilitieswith complementary capabilities of the targetcan generate novel recombinations. Since bothworkforces can benefit from being associated withthese new recombinations, there is incentive forcooperation, setting the stage to increase the valueof both the acquirer’s and the target’s capabilities.For example, in 2000 MKS Instruments acquired Applied Science and Technology (ASTeX),a supplier to the semiconductor industry that hadlow acquirer overlap. The Chairman and CEO ofMKS Instruments stated that ‘ASTeX is an idealstrategic fit for MKS. We serve virtually the samemarkets with zero product duplication; our product lines are fully complementary . . . The combined technological capabilities of the two companies will enable us to add further value throughnew innovative product solutions’ (PR Newswire,2000b). Because there was no significant corresponding activity preexisting within MKS, ASTeXwas integrated as a distinct product group whilesimultaneously maintaining an effort to identifypossibilities for companywide integration for newproduct development (Business Wire, 2001). Theavoidance of reconfiguration and conflict allowedASTeX to maintain its innovative capability postacquisition, and it received two SemiconductorInternational 2002 Editor’s Choice Best ProductCopyright 2013 John Wiley & Sons, Ltd.Awards for products developed by members of theASTeX team at MKS (PR Newswire, 2002).In contrast, as acquirer overlap increases, represented by a move from the left two quadrantsto the right two quadrants in Figure 1, more ofthe acquirer’s knowledge workers are redundant to,rather than complementary to, the target’s knowledge workers. Since the target’s knowledge duplicates a larger proportion of the acquirer’s existing resources, the acquirer is unlikely to maintaintwo separate bodies of related expertise. Effortsto combine the acquirer’s and target’s knowledgebases will expose teams from both firms, as wellas their respective routines, to disruption. Theteams may not work well together due to differences in culture, norms, and routines for communication and problem solving, reducing theirperformance (Chatterjee et al., 1992). Further, thetarget’s knowledge workers will go from being‘big fish in a small pond’ to small fish in thelarge pond of the acquirer’s preexisting capabilities, leading to lost standing and diminished productivity (Kapoor and Lim, 2007; Paruchuri et al.,2006).Even if teams from the acquirer and targetare not actually combined, their similar expertisemakes it likely that they will find themselves competing for limited resources related to an alreadyestablished capability rather than supplementingeach other in order to build a new capability.As the firm seeks to resolve this internal competition, it is often the target’s workfor

2 Department of Management, W.P. Carey School of Business, Arizona State University, Tempe, Arizona, U.S.A. The performance of technological acquisitions depends heavily on the overlap between the knowledge bases of the target and acquirer. We argue that overlap is best viewed as two distinct

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