Determinants of successful
post-acquisition integration
in the IT industry
Group 13
Behnam Boujarzadeh, Balázs Hardi, Nikolay Kolev, Morten
Leegaard, Maciej Urbanski, Oliver Fecko
AALBORG UNIVERSITET
08/01/2014
Table of Content
1
Introduction ..................................................................................................................... 3
1.1
2
Problem formulation ................................................................................................ 3
Methodology ................................................................................................................... 4
2.1
Introduction ............................................................................................................. 4
2.2
Methodological discussion ...................................................................................... 4
2.3
Methodology of the project and research design ..................................................... 6
3
Literature review ........................................................................................................... 11
4
Theoretical part ............................................................................................................. 13
4.1
Acquisition............................................................................................................. 13
4.2
Post-acquisition integration ................................................................................... 16
4.3
Determinants
of successful
post-acquisition integration from
marketing
perspective ....................................................................................................................... 20
4.4
Determinants
of
successful
post-acquisition
integration
from
financial
perspective ....................................................................................................................... 24
4.5
Determinants of successful post-acquisition integration from knowledge seeking
perspective ....................................................................................................................... 31
4.6
Determinants of successful post-acquisition integration from human resource
perspective ....................................................................................................................... 36
5
6
Empirical part: Google and Motorola case study ......................................................... 40
5.1
Introduction of Google .......................................................................................... 40
5.2
Introduction of Motorola ....................................................................................... 40
5.3
Why did Google need to buy Motorola? ............................................................... 41
5.4
Google acquires Motorola – Introduction of the deal............................................ 42
Analysis......................................................................................................................... 44
6.1
Marketing analysis ................................................................................................. 44
6.2
Financial analysis .................................................................................................. 47
1
7
6.3
Knowledge analysis ............................................................................................... 60
6.4
HR analysis ............................................................................................................ 65
6.5
Analytical framework ............................................................................................ 73
Conclusion .................................................................................................................... 75
7.1
Marketing............................................................................................................... 75
7.2
Finance................................................................................................................... 75
7.3
Knowledge ............................................................................................................. 76
7.4
Human Resource.................................................................................................... 76
8
Reflection ...................................................................................................................... 77
9
References ..................................................................................................................... 78
2
1 Introduction
This project is based on theoretical and practical understanding of post-acquisition
integration stage of acquisition. The integration part of the acquisition will be the focus of the
project and the determinants of a successful acquisition will be the area of research in this
project. By focusing on acquisition as our main topic makes it easier and more
comprehensive to look for relevant theory. The assumptions of the theory from the resourcebased view point of view will help us figure out why a software company like Google
decided to buy a hardware company like Motorola. Furthermore, through consideration of
this acquisition, it is possible to get a better understanding of which kind of challenges and
opportunities are related to such purchases.
The reason for choosing this subject is to drill into a new area of study. This will
challenge our knowledge and show us the world of business’s transactions from a different
perspective. This perspective will widen our knowledge of business as well as giving us an
understanding of how the used theories and frameworks can be put into place in real life
situations. It would have been better to cooperate with a company. As we do not have the
opportunity to use interviews and different first-hand sources, we have to find the most
appropriate news articles, academic papers and other relevant sources.
1.1 Problem formulation
Many different perspectives could be considered to become the main reason of the
acquisition. Our decision was made to use four versatile dimensions for argument and
analysis. This can provide a wide and applicable view from different mindsets of motivations
and sequenced challenges in order to create a better understanding of why such an acquisition
carries a high affection into the IT industry. With different theories it gives a more wide view
of the reality and helps to understand which factors are the reasons why the post-acquisition
integration becomes successful. Using this kind of four view analysis will be used to show a
general understanding of post-acquisitions integration and should therefore be useful not just
for the selected case study, but for post acquisitions in general, at least within the business
area of the case study.
Therefore, the problem statement is formed this way:
"What are the determinants of successful post-acquisition integration in IT sector?”
3
2 Methodology
The main goal of this chapter is to introduce how the group of researchers working on
this project see the reality from the Philosophy of Science perspective. And on the other hand
how this point of view influences the research and chosen theories to solve the main issue of
this project. Describing the methodology used in the project work and the way of
understanding business environment will help the readers to understand which perspective
led to conclusions found in this project.
2.1 Introduction
Building on understanding four sets of assumptions, human nature, ontology,
epistemology and strategy methods, we define our understanding and approach to philosophy
of science and regarding to that also the use of certain paradigms is explained.
2.2 Methodological discussion
2.2.1. Human Nature
The position of researchers that belongs to the human nature describes similarly as
ontology how we see the linkages between humans and the environment. The researchers
either see the strong cooperation between individuals and the environment where the actors
cooperate on creating the social world, or the environment is totally independent from social
actors. The authors of this paper definitely see the strong connection between social world
and social actors.
2.2.2. Ontological foundation
The main issue of the ontological view is whether social actors are independent from
the social phenomena or the social phenomena is constructed by the actors. In other words it
asks the question if the social world is real and external to an individual human beings and
therefore is independent, or the individual human beings constructs their own social world
(Kuada, 2012)
This led us to two different ontological positions which is objectivism and
constructivism. The group of researchers working on this project follow and agree with
objectivism, which is an ontological position that argue that social phenomena and their
meanings have an existence that is independent of social actors. Simply, the environment
have an existence that is independent or separated from actors (Bryman & Bell, 2011).
Constructionism would not fit into our understanding since we do not agree with the fact that
social phenomena and their meanings are continually being accomplished by social actors.
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2.2.3. Epistemological foundation
Epistemology explains what is understood under the acceptable knowledge in a
discipline. Our understanding of knowledge is through the empiricism and positivism. Both
positions agree on the fact that knowledge only can be gained through experience and senses.
(Bryman & Bell, 2011). It also says that the science must be conducted in a way that is value
free and the generated hypothesis could be tested (principle of deductivism).
2.2.4. Strategy methods
This subchapter called “Methods” explains the technique or plan of collecting data or
in other words gaining the knowledge in its entire process. It could involve a specific
instrument such as a self-completion questionnaire, a structured interview, participant
observation whereby the researchers listen to and watch others or the strategy of collecting
secondary data from several reports, transcripts from interviews, news and journals. For the
group of researchers working on this project makes sense to use quantitative research or
combined qualitative and quantitative research. We would not use only qualitative research as
a matter of fact that our epistemological approach is empiricism or positivism which means
that knowledge could only be gained through experience and senses. Qualitative research
strongly cooperate with our others approaches such as objectivism, positivism and also
deductive orientation (Bryman & Bell, 2011)
2.2.5. Paradigmatic Position
Each paradigm, in other words bunch of beliefs, explains how the researchers in
certain discipline should do the research, what should be studied and it also explain the right
interpretation of conclusion (Bryman, 1988). Every paradigm is different from each other
because of their divergent assumption and methods. (Kuhn, 1970). Our approach is described
as “Functionalism” that from epistemological perspective is connected to positivism. It
correlates with objectivist and positivists types of research. Researchers that build their
project on functionalist paradigm see the organizations as the actors that are flexible as well
as good at adapting to the environment in which the company operates. If the company is up
to date with the environment it will hold the effectiveness on the high level (Kuada, 2012).
Very popular example of this approach is S-O-R model. It is explained by words stimulusorganism-response that simply explains the stimulation of organizations by environmental
factors which results in environmental stimulus with adjusted behaviour.
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There are already some limitations and critics of the model. One of them argue that
the strategic adjustments happened due to manager’s decisions which occur because many
subjective elements such as perceptions and beliefs (Davis et al., 1997).
2.3 Methodology of the project and research design
2.3.1. Initial theory: Resource-based view (RBV)
Over the last decade, much of the strategy literature has emphasized resources
internal to the firm as the principal driver of firm profitability and strategic advantage.
Existing literature does not seem to have consistently identified what drives the acquisition
performance, yet firms continue to acquire without an established framework to guide the
acquisition process (Hitt et al., 1990; King et al., 2008; King et al., 2004).
The mergers and acquisitions (M&A) literature is filled with various theoretical
attempts to explain value creation, and researchers have battled to agree on whether firms
should be valued for the resources they possess, or by the outputs they produce. While there
are many contradicting theories, the resource-based view has been acknowledged to hold
explanations of strong accountability (King et al., 2004).
The importance of the resource-based view (RBV) of strategic management is
manifest in its rapid diffusion throughout the strategy literature (e.g., Wernerfelt, 1984;
Barney et al., 2001; Mahoney & Pandian, 1992; Maijoor & Witteloostuijn, 1996).
Drawing on previous research in RBV, we desire to find determinants of success in
the IT industry battle field from the acquirer lens as this study aims at illustrating the
interrelationships between RBV and organizational Strategies like Financial, Marketing,
Human Resource and R&D (knowledge management). Specifically, we focus on those
aspects of RBV that critically determine the firm’s capacity to adopt and create value to the
post-acquisition integration stage. We integrate the relevant theoretical and empirical
evidence as well as relevant frameworks and we highlight a number of useful research
contributions.
2.3.2. Research design
Research design is a framework or action plan that aims to provide the reader with a
logical and clear view of, how it will be attempted to answer the research questions given in
the introduction chapter. Furthermore, it is an opportunity to state the assumptions underlying
the approach of the project and the methods used to analyze the collected data as well as the
findings and conclusions (Kuada, 2012).
6
Figure 2.1- Research Design (Kuada, 2012)
2.3.3. Human nature foundation
From the objective approach, human nature is a part of a social context that is always
its object of concern”. Therefore, it can be perceived Human nature is also being constituted
by (concrete) responses to external stimuli. If we take into the consideration the main theory
of this project which is resource-based view it has been seen that the business environment
and resources are strongly connected and strongly influence each other.
2.3.4. Ontological foundation – Objectivism
We agree with the position that argues that social phenomena and their meanings have
an existence that is independent from social actors. The ontology is also the “glasses” the
research has on while doing the research, also called the viewpoint. The view used in this
project is considered to be objective, as the concentration has been on one reality. The view
7
might change for further studies, as the result of this project should be a dynamic model for
use in different purposes. The view is for now only concentrated upon one reality, which is
the acquisition of Motorola by Google Inc. Again, by seeing business environment and
resources that companies need to exist it is necessary to mention that resources does not
create the environment, as soon as business environment changes, it is necessary to assess
and adjust appropriate resources that are needed for the new situation.
2.3.5. Epistemological foundation
In this project the knowledge is gained by a qualitative and quantities case study
research. The data has mainly been collected from the desk, as the project is based mainly on
secondary sources. However, there are some parts which pertains calculations and
modifications of the determinants done by the group, due to find appropriate measuring tools
of success from different perspectives.
The “glasses” that the researchers can put on in the epistemology is either positivism
or anti-positivism. The difference on these two is that in the positivism the researcher
believes that the best way to see the world is from outside, while the anti-positivist researcher
believes that the world should be understood through interaction (Kuada, 2012). This project
is made on the belief of the positivist view, but with more resources could have been made
according to the anti-positivist view.
This paper has also no intention of providing an in‐depth discussion on research
philosophy. However, it has been deemed relevant for the reader to know that the authors
adhere to the ‘realist’ approach to epistemology.
This means that carefully constructed analysis, founded on solid theoretical reasoning
and backed up by empirical evidence can provide insight about things that is not directly
observable for the researcher (Godfrey & Hill, 1995). This assumption is argued to be of high
relevance when dealing with the RBV, mostly due to the theory’s fundamental assumption of
“causal ambiguity” and “imitability”.
“The power of the (RBV) theory explains performance persistence over time is based upon
the assumption that certain resources are by their nature unobservable, and hence give rise
to high barriers to imitation… In short, if there are no unobservable resources, the RBV loses
much of its explanatory power.” (Godfrey & Hill, 1995, p. 523)
Without a realist approach to research in the field of RBV, scholars could never be
sure of the existence of many unobservables, such as tacit knowledge, organizational routines
8
and bundles of capabilities, which are believed to create and sustained competitive
performance (Godfrey, and Hill, 1995).
2.3.6. Paradigmatic approach
Since our approach is described as “Functionalism” that from epistemological
perspective is connected to positivism, we see the organization as the actors that are flexible
due to adapting to the environment in which the company operates where also resources have
to be adopted. We see that Google Inc. as the acquirer is under affection of the IT market so
that it will hold the effectiveness. The company is trying to expand its resources by acquiring
the other company from different field of business. Therefore, consideration of S-O-R
approach can describe the stimulation of organizations by environmental factors.
Organism
Stimulus
Response
Figure 2.2- Stimulus-Organism-Response model (Dudovsky, 13 Feb 2013)
Figure 2.3 summarize the paradigmatic positioning of the resource-based view theory
for this project:
Paradigm
Functionalism; S-O-R Model
Theoretical base
Theories of industrial economics and business policy
The strategic Management/ The strategic competition perspective
Dimensions
Internationalization driven by above-average financial goals and
competitiveness in industries with high entry barriers
Major contributors
Penrose, E. T. (1959) / Barney, J.B. (2001)
Ontology
Realism
Epistemology
Positivism
Human nature
Determinism / man as a responder
Methodology
Nomothetic
Figure 2.3 - Paradigmatic Positioning of RBV theory for this project
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2.3.7. Methodological decision
The final methodological decision for this project is Yin’s Case Study Research. As
the research ended up becoming a deductive research Yin’s Case Study Research was the
strongest candidate. However as the innovative part from the Grounded Theory would suit
the project very well, but then the data collection method and deductive part would be
missing! Grounded Theory is a research tool which enables researchers to find and
conceptualize the latent social patterns and structures through the process of constant
comparison. Grounded Theory is a general research method which guides on matters of data
collection where applies quantitative data or qualitative data of any type e.g. video, images,
text, observations, spoken word etc.
The justification for this choice is to be found in the differences of the Grounded
Theory and Yin’s Case Study Research, which as it was mentioned earlier, Yin’s method is
the most appropriate as we are about to test the theory, focusing on the overview through
likely desktop researches and as we are applying for an academic student Specific
(Nomothetic) approach in an analytical perspective not as an actor approach (Company).
Generally, Yin’s case study research leads us to through the recognition of three
conditions such as the type of research question, the control an investigator has over the
actual behavioural events and the focus on contemporary as opposed to historical phenomena
(Yin, 2009).
He utters that in case studies, the richness of the phenomenon and the extensiveness
of the real life context require case study investigators to cope with a technically distinctive
situation.
2.3.8. Strategy methods and techniques
In this project, we apply to both combined Qualitative and Quantitative Research
method. We would not use only Qualitative Research as a matter of fact that our
epistemological approach is positivism which means that knowledge could only be gained
through experience and senses.
In fact, the non-participant observation techniques can be one of the techniques the
sources for this project have used. It can be either non-participant or participant observations.
The non-participant technique is where the researcher is observing a group of people, e.g. in a
work situation, without participating. While the participant observations are where the
10
researcher is participating in the research process, while he is researching, this requires a lot
of resources (Kuada, 2012).
2.3.9. Limitations
There are already some limitations and critics of the model. One of them argue that
the strategic adjustments happened due to manager’s decisions which occur because many
subjective elements such as perceptions and beliefs (Davis et al., 1997).
Since objectivism is criticized by Jenks (1993) in the way that being objective does
not help to establish absolutely correct data just the support of selected facts (Kuada, 2012).
Positivism, which is one of the approaches used in this project simply look for
causalities and similarities that help to predict the behaviour of social world. On the other
side if we used anti-positivism the project would explain the problems and the business
environment from the point of view of individuals in our case companies that would create
the business environment. On the top of it stands the paradigmatic approach of the project,
what is functionalism described before. Functionalism has been criticized in the way that the
companies are adapting and changing the strategy not only because of environment changes
but also due to subjective elements covered in the manager’s decisions for instance personal
beliefs or perceptions (Kuada, 2012).
In this project the data about the case study comes from secondary information
gathered from different sources. This is because we do not find it realistic to think that
Google or Motorola will give inside information about the acquisition. We have to rely on
only secondary data. Therefore the analysis chapter of the project is mainly based on the lot
of press releases and news articles that are available on the internet. Another obstacle in this
project is the time limit which this semester makes for information gathering.
3 Literature review
In principle, the literature review aims to expand the cognitive boundaries of the
authors and guide focus of the study. Through the use of a reference analysis style, the
structure and trends of the applied theories are laid out, which provides a valuable road map
for the researchers. For the reader, the essence of the conducted literature review is to become
familiarized with the RBV theories and their focus on the M&A research field. As such the
aim is to prove a fundamental understanding of theoretical perspectives and obtain a
comprehensive overview of theory development and empirical focus of different mindsets
and goals of acquisition. Through the project it will become clear how the theory is used on a
11
real life example and make it more clear why and how the theories fit the analysis. The
literature review further intends to identify gaps in the literature and stipulate how the study
wishes to contribute to the RBV academia toward post-acquisition integration stage, basically
according to the financial, marketing, HR and knowledge perspectives, as part of RBV root
assumptions. These gaps will be the area of study and will become the
This project has been limited because of the choice of company and the limit of time.
Due to these, in this project it has been necessary to rely on secondary data and desktop
research as second-hand information. This information comes from well-known news sources
as often as possible. However it necessarily include less known news sources for specific
information. To analyse this information in the project we rely on theories and models from
academic articles, news, reliable reports and interviews.
12
4 Theoretical part
4.1 Acquisition
4.1.1. Introduction
During last few years a great growth has been noticed in many national and
international companies on almost all free markets around the world (Sherman, 2010). In
accordance to Bain & Company research released (2004) in 2004 around 70 % of all M&A
failed to create shareholder value. According to the literature and practice there were
distinguished 3 types of strategic growth options: organic, external means and inorganic.
Organic growth refers to developing new products, hiring additional salespeople or
expanding geographically. The term of external revenue growth is related to franchising,
licensing, joint ventures or strategic alliances. An alternative for external revenue and organic
growth is inorganic growth. Inorganic growth is mainly about acquiring (or merging with)
other companies to gain a growth by getting an access to new product line, customer segment
or geography (Sherman, 2011). In accordance to a technical definition of David L. Scott
(2003) in Wall Street Words: An A to Z Guide to Investment Terms for Today’s Investor the
process of acquisition is “The purchase of an asset such as a plant, a division or even an
entire company. For example, Oracle’s acquisition of Sun Microsystems was a significant
technology transaction in 2009”. The company which is in a position of the buyer during the
acquisition process, acquire from the seller either the assets or shares of the other firm
(Sherman, 2010).
4.1.2. Construction of acquisition process
Process of the acquisition can be described either from the buyer’s or the seller’s
perspective. For both parties acquisition is a long and demanding process which consist of
more or less similar steps (Sherman, 2010). For buyers the mergers and acquisitions very
often play a main role in company’s growth process. Achieving certain corporate goals may
involve external acquisition of assets and resources which are essential from the perspective
of company’s growth. Moreover, this kind of activity may be even more efficient than
internal expansion. Although acquisition could be very important in company’s growth
process it must be preceded by preparation of an acquisition plan which identifies specific
objectives of transaction. It should also contain the criteria to be applied in analysing
potential target companies. Acquisition plan identifies also the value-added efficiencies and
13
cost savings from the proposed transaction (Sherman, 2010). Below we present the
acquisition process from both buyer’s and seller’s perspective divided into bullet points:
1. Identifying and selecting
acquisition candidates
2. Before the closing: target analysis,
first contacts valuation, pricing,
deal structuring and negotiations
3. Negotiation with target and other
stakeholders
4. After the closing: integration
Figure 4.1- Acquisition process (Very & Shweiger, 2001)
Figure 4.1 is very compacted and shows the most essential steps. Two most important
parts of the whole process are pre-acquisition (step 2) and post-acquisition (step 4).
According to the Andrew J. Sherman there is usually correlation between the time seller
spends on preparation of transaction and the price ultimately paid for transaction (Sherman,
2010). On the other hand in a survey that Business Week conducted among merger-seasoned
managers in the US, almost 40 percent blamed the integration process for the transaction’s
failure (Wyman, 2008).
4.1.3. Motives of M&A
There are several motives which drives both parties to acquire other companies or get
acquired, but apart from various types of M&A motives’ categorization, the dominant factor
which influences M&A activity and accords to Resource Based-View theory is that the
acquirer seeks improved financial performance.
14
The main theory which we used in this project is Resource Based-View. Resource is
meant to be anything what can be regarded as a strength or weakness of a given company.
Formally, firm’s resources can be defined as tangible and intangible assets that are tied semi
permanently to the company. Resources as well as products are great and essential part of the
firm. Examples of resources are know-how, brand names, customers, employees, assets etc.
(Wernerfelt, 1984).
There are many classifications of M&A motives. In accordance to Resource Based-View
theory, research problem and the perspectives that are taken in the following parts of this
project, we have classified the M&A motives in four categories (Murshed, 2005):
Financial
•Taxation issues
•Increasing revenue
•Achieving economics of scale
Marketing
• Increasing market share
• Entering new channels of distribution
• Increasing products' range
Human
Resources
& Culture
• Hiring new valuable employees
• Gaining knowledge and uniqe experience
• Treating M&A as a substitute of recruitment process
Knowledge
• Gainng new patents
• Extending R&D
• Gaining know-how
Figure 4.2
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4.2 Post-acquisition integration
4.2.1. Introduction
As we claimed in the very beginning of this project many M&A transactions fail in
theirs’ last phase. The parties of acquisition process often feel relief when it comes to the
closing phase but actually that is the point from which the hard work just begins. Integration
is in fact the most important and demanding part of whole acquisition. It is a moment when
two companies have to link human resources departments, the corporate culture, the
operating and management information systems, the accounting methods and financial
practices. It is also a time of big stress, fear and frustration not only for the team who
participates in a deal but also for those employees who did not take part in an acquisition
process and regarding their position have limited information. Creating sustainable value
requires great amount of strategizing and care in many vital areas. The researchers estimated
that three out of every five M&A deals have an ineffective plan for integration of the two
companies and even if the plan seems to be alright It does not always work well (Sherman,
2010).
4.2.2. Plan of integration
As stated before, one of the main factors which influences the final success of the whole
acquisition process is an effective plan for integration. Although there is no “one size fits all”
integration process, a satisfactory consensus can be often achieved as few key things are
understood. The predominant task of senior management is to identify group’s strategic
objectives. On the other hand designated key management personnel should continue to be
involved in the information gathering phase and in strategic and tactical decision making the
analysis phase. For constructing of any financial models needed to understand the tax impact
should be responsible appropriate management personnel (Post-Acquisition Integration
Handbook, 2011).
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1.Identification of strategic
and key objectives
2.Information gathering
3.Preliminary analysis and
overall plan development
4.Initial evaluation of overall
plan
5.Final detailed steplist
development
6.Evaluation and approval of final
detailed steplist
7.Implementation of detailed final
steplist
Figure 4.3- The process can be broken down in to seven phases (Baker & McKenzie, 2011)
Practical definition of acquisition failure would claim that acquirer did not achieve
financial, commercial or strategic objectives which were set at the time of buying the
business. According to Denzil Rankine’s briefing on Why Acquisition Fail there can be
distinguished 20 reasons for failure which are categorized under 5 bullet points (Rankine,
2011):

Flawed business logic

Flawed understanding of the new business

Flawed deal management

Flawed integration management

Flawed corporate management (Rankine, 2011)
In relation to failures in post-acquisition phase we will mainly focus on flawed integration
management and flawed corporate management.
17
Flawed integration management:
Poor communication
The acquisition parties must answer one main question, if the exact communication
plan has been prepared. At the time of integration the stress level is very high which means
that messages must be very clear, direct and key messages must be repeated over and over.
The golden in this case is: no hype and no empty promises (Rankine, 2011).
Lack of leadership
Acquisition process needs in each strong and clear leadership. Tasks should be
allocated on the basis of merit and ability (Rankine, 2011).
Wrong steps to implement change
Very often acquirers are making mistakes at the field of implementing changes. They
think they can asset which changes are essential but in fact they make either fundamental
mistakes of dithering or failing to asses which changes can be made realistically. Changes are
usually expected but uncertainty related to them is accompanied until everyone is said that
the process is finished. The most critical factor is in this case speed of action. Even when
acquirer makes some mistakes it is best served by acting quickly (Rankine, 2011).
Scale of task underestimated
Post-acquisition integration rarely proceed more smoothly than it was anticipated in
the beginning. AMR researchers shows that the perfect target size is 5-10 % of the acquirer.
At that size, the buyer should possess sufficient resources to manage the integration
(Rankine, 2011).
Flawed corporate development:
Changes were inappropriate
The acquirer has to answer the question if the changes he proposed augment the
business. A one-size-fits-all solution can spell disaster instead of providing successful ending
(Rankine, 2011).
Cultural differences not addressed
Acquirer should be aware of how close or distant the corporate cultures of seller and
buyer companies are because effective integration requires people to work together. Very
often, the companies are not prepared for culture clash which causes problems in integration
phase of the deal (Rankine, 2011).
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Customers ignored during integration
Although acquisition process requires great communication from the both parties, the
acquirer cannot fall into the trap of focusing strongly on internal reorganization and leave the
customers out in the cold (Rankine, 2011).
Own business ignored during integration
Another issue which could badly affect acquisition is related to managers’ regular
tasks. Even though they are part of acquisition and they spend their time on working on a deal
and integration they need ensure that their regular duties are still carried out (Rankine, 2011).
4.2.3. The synergy hypothesis - introduction
The synergy hypothesis claims that the acquisition occurs when the value of the
combined firm is higher than the sum of the value of the individual firms. The additional
value (different name could be synergistic gain) evolves from an increase in operational
efficiency, market power or some form of financial benefit. The benefit is shared between
both parties which took part in acquisition process. The synergy hypothesis is the general
explanation for firm’s growth. According to Seth, Song and Pettit the firm is described as set
of productive assets and it was said that the long-run profitability of the company is tightly
associated with the firm’s development productive opportunity. Productive opportunity leads
the company to look for new products and markets where it can realize efficiencies and a
high rate of growth without the rigor of accepting lower marginal revenues. The synergy
theory claims that the company’s unique and specialized resources are not costlessly
appropriable by other companies, and there exist market frictions which prevent the company
from trading its stock of valuable “excess” resources (Seth et al., 2000).
The important source of the synergy comes from the potential to transfer valuable assets,
such as know-how, between the parties which leads to failure of factor markets. When a
company controls know-how that can be used in the markets where the sale or lease of such a
knowledge is inherently not efficient, then the company will try to exploit it inside. All
studies assume that transacting in the international markets leads substantial cost which will
decrease the value of proprietary information. In accordance to that cost the company will
desire to internalize the transaction and use the proprietary information within expanded firm.
The benefits may also come from “reverse internalization”, when on the basis of cross-border
acquisition company buys know-how, skills and resources which are expected to be valuable
in their home markets.
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4.3 Determinants of successful post-acquisition integration from marketing
perspective
The main purpose of this chapter is to explain readers what the most appropriate figure
and movement is at the integration stage during the acquisition process from the Marketing
perspective. The whole project work has been based on resource-based view theory and this
chapter is so as well. The RBV agree that firm is a collection of resources where all of them
need to have certain characteristics to provide the company with competitive advantages
(Barney, 2001). The main principle of RBV is also a significant link between the customer
value, competitive advantage and encouraging of performance. One of the key resources is
intangible assets such as customer trust and relationship simply how customers create a value
in the firm’s resources (Clulow et al., 2007).
Looking into the recent history of M&A, apparently the firm’s strategy will continue to
utilize M&A as the way of acquiring bigger market share in the 21st Century (Richey et al.,
2008). The role of marketing in the field of strategic management at the level of integration
after the acquisition is getting more and more important. There are some conclusions
available saying that marketing’s impact is strongly dependent if the leading issues of
strategic management are coming through marketing scholars (Homburg & Bucerius, 2005).
Marketing synergy is getting a more critical determinant of merger success or failure (Weber
& Dholakia, 2000).
The popularity of acquisitions in the business world is increasing significantly. This fact
proves the importance of researching all kinds of factors that have an impact on
successfulness of merges and acquisitions. There is always a danger of losing customers after
the integration process of acquisition. At the integration stage of acquisition the focus of
management is absorbed internally and the customer related tasks are undertaken that could
lead to decrease in quality of service and affect market-related performance (Hitt et al.,
1990). From the customer’s perspective the decline in service quality is followed by
uncertainty about future relationship with the company.
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•Extent of integration
•Speed of integration
•Customer orientation
•Market positioning
•Relative size of acquiree
Integration OutcomesDETERMINANTS
•Magnitude of cost savings
•Market-related performance
•Financial performance
Marketing integration
process-VARIABLES
Performance
outcomes
Figure 4.4
4.3.1. Marketing Integration Process – Variables
Is defined as everything that has any kind of impact on the scope pace and rhythm of the
acquisition either from the firm’s perspective or from the market perspective. Examples:
Position and size of a target, market growth, product vs. service industry, customer
orientation (Homburg & Bucerius, 2005).
Extent of integration
Looking at the Marketing integration process company managers focus on to what extent
the differences between two marketing systems vanish. Either by using strategy of one of the
firms or combine both strategies and pick the best for both that will be implemented in the
newly created marketing system (Homburg & Bucerius, 2005).The best result of integration
is achieved if all differences in marketing of both firms are balanced (Birkinshaw et al.,
2000).
Simply said, the integration actions bring the opportunity to reduce the costs of resources
(Capron, 1999). Extensive integration leads to the decreased number of brands, products and
services, etc. This could have an impact on market-related efficiency. Furthermore, the
market- and customer-related issues are more likely to be neglected during the extensive
integration. In other words, the more extensive is the integration the less efficient it is for
market-related performance of post-merger company (Homburg & Bucerius, 2005).
21
Speed of integration
How long the integration process last is described by the speed of integration. The shorter
the integration process is, the lower are several kinds of risks. If the post-acquisition
integration does not last for a long time it will reduce customer’s uncertainty and afterwards
increase the market-related performance (Homburg & Bucerius, 2005).
As the conclusion we can say that the high speed of integration is simply beneficial for
every post-acquisition integration.
Customer orientation integration
If the goal of integration is to create additional customer value rather than reducing costs.
If the attention is paid to the integration of brands, products variants and distribution channels
with the focus on consumers the market-related consequences will be lower than if customers
see the integration as the process driven by their demands they are more likely to become
trustworthy towards the company after integration.
This variable has the significant impact on market related performance. The focus on
customer will definitely decrease the negative market-related outcomes. Majority of M&A
could be described with large internal orientation and minor customer orientation. This
evidence could solve the question why such a huge number of acquisitions fail (Homburg &
Bucerius, 2005).
Relatedness of the firm’s market positioning
The extent of integration is higher and it is more successful if market positioning are
strongly similar. The merging firms will not be forced to change their product and customer
focus.
Relative size of acquired firm
Relative size of acquired firm is high if the target is almost as big as acquirer. If the
relative size of acquired firm is low it means that the acquired firm is much smaller than
acquirer. There is a greater potential in cost-savings in case of integration of high relative size
of acquired firm as a matter of fact that there are many structural similarities and then there is
plenty of space for redundancies (Blau & Schoenherr, 1971).
If we look at the relative size of the acquired firm from the perspective of market-related
performance, we would not agree with the previous statements. The lower is the relative size
22
of acquired company the less number of customers will be affected caused by rumours about
changes and uncertainty (Homburg & Bucerius, 2005).
Market growth
It is defined as the market growth before the M&A. It is not a part of the post-acquisition
integration process but it has definitely significant influence on market-related performance
after acquisition therefore it must be taken into the consideration.
High level of market growth- It is common for emerging markets. If there is uncertainty
produced by acquisition these markets create less danger related to customers as a matter of
fact that these markets consists of less competitors then the low level growth markets.
Low level of market growth- It is common for matured markets and the market is less
volatile (Wasson, 1974). One of the characteristics is that there are high switching barriers for
the customers if they plan to migrate due to uncertainty produced by acquisition.
Manufacturing vs. Service firms
Firms offering services experience more difficulties during the integration than firms
selling tangible products.
4.3.2. Integration outcomes
Magnitude of cost savings describes how the cost of the companies were reduced after
the post merging integration in comparison with the amount of money spent on the resources
before the transaction. If there is not the significant difference between pre- and post-merger
costs the magnitude of cost savings is low (Homburg & Bucerius, 2005).
Market-related performance or the effectiveness of marketing activities is measured after
integration with customer loyalty and market share. Also to what extent has the negotiation
power increased.
4.3.3. Performance outcomes
Before/after profitability of merging companies (Capron, 1999). This approach is mainly
used as a measurement of failure or success of M&A.
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4.4 Determinants of successful post-acquisition integration from financial
perspective
The purpose of this chapter is to provide a theoretical perspective to the financial
determination of successful post-acquisition integration, tracking the perception of the
Resource-based view literatures. By virtue the “Capital” of the firms as tangible key resource
which acquirer firm seeking to obtain, it is formulated that an acquisition can be seen as a
purchase of a bundle of resources in a highly imperfect market however the analysis is
typically confined to the categories such as labour, capital, and perhaps land
(Wernerfelt,1984).
In this vein, we emphasize that financial determination of acquisition is likely relevant to
both “firm level perspective” as well as “shareholders wealth”. The RBV’s focus on firm
level determinants of company performance and widely regarded as a key advantage (Peng,
2001). On the other hand, given the financial perspective from the view of shareholders and
value distribution notion, well suited for an integrative analysis which will create
determinations of successful acquisition performance. (Finkelstein, 1999).
Hence, we deploy Agency theory in order to assist and equip our financial perspective
through understanding the relationship between acquisition and governance from the
stakeholder’s point of view with the theory of individual’s opportunistic root assumption.
Bidder’s lens
It is interesting that management scholars have focused more on bidders than targets,
specifically their motivations to acquire. Consistent with this notion, indicators of CEO
hubris were highly associated with the size of the premiums paid (Hayward & Hambrick,
1997). Therefore, in this project, conceptualization of synergy execution as a value creation
activity is diffused to acquisition in bidder’s lens.
Capital asset as Resource
Resources, which are the basic unit of analysis for RBV, can be defined as those
assets which are tied semi-permanently to the firm (Maijoor & Witteloostuijn, 1996;
Wernerfelt, 1984). It includes financial, physical, human, commercial, technological, and
organizational assets used by firms to develop, manufacture, and deliver products and
services to its customers (Barney, 2001). It can be classified the financial resources as the
firm's capital asset which includes the type of security so that, these security could signify
ownership and represent a claim on part of the corporation's assets and earnings. However,
24
the diversification theory claim that related acquisitions should outperform unrelated ones
that have not withstood the empirical test (the “synergy paradox”.) (Cording et al., 2002).
However, we argue that revenue from the acquired firm as well as all financial benefits
generated from the patents or selling off acquired assets are including in financial benefits
from acquisition. In this case, there might be a benefit from tax deductions accrued and in
contrast there would be cost of revenues consolidated to the total revenue brought off for
acquirer firm.
Limitation to this financial perspective
Studies based on those two types of measures of M&A performance also pay little
attention to such potentially important influences on M&A success as organizational
integration and employee reactions to the merger or acquisition (Schweiger & Walsh, 1990).
As a result, the economics and finance literatures implicitly treat M&A as though postacquisition processes (short-term view). However, much of the value from a merger or
acquisition may be created during the acquisition integration process which has long-term
view. (Haspeslagh & Jemison 1991).
Measuring success in previous literatures
It is widely agreed that the “success” of a merger or acquisition may be defined as the
creation of synergy: the value of the combined firm is greater than that of the two firms
operating separately. This reflects the simple observation that the price paid for a strategic
asset must be lower than its expected value if it is to add economic value to the acquiring
organization. The empirical literature with respect to measuring success in mergers and
acquisitions includes four principal methodologies have been employed: event study,
accounting-based measures, survey data and case studies (Cording et al.2002).
Since in this stage, the authors are taking conceptualization of acquisition
performance in terms of synergy creation which includes other incorporating perspectives
(Larsson & Finkelstein, 1999), given the financial perspective from the view of shareholders
wealth and value distribution mechanisms, well suited for an integrative analysis which will
create determinations of successful acquisition performance in short-term and long-run
modified goals. Therefore, we urge the framework below can support our assumptions
terminologically through the main descriptive variables in both firm and shareholder’s level.
25
Figure 4.5
26
Suited theory and its seized definitions
4.4.1. Agency theory
In general, the agency theory describes the relationship between two parties: “One party
Principal wants another party's agent to act on her behalf (Froeb & McCann, 2010, p.269).
Jensen and Meckling’s article “Theory of the firm.” (1976) is mostly seen as the starting
point of the Agency Theory (Bryant & Davis, 2012). “Agency theory holds implicit several
assumptions about human motivation and the goals of corporate ownership.” (Bryant &
Davis, 2012 page 3).
The agency theory states that the interests of the shareholders or owners are not
parallel to the interests of management. The separation of capital and control induces
managers to strive for their own interests (Mueller, 1989). The confliction between the
managers and shareholders is the topic we should include from the agency theory perspective
and Eisenhardt (1989) calls the confliction as agency problems which arise when the
principal and the agent have a different viewpoint of the risk that should be taken ergo which
kind of action that should be conducted in the business.
Confliction between managers and shareholders
A corporation's managers may have personal goals that compete with the owner's goal
of maximization of shareholder wealth. Since shareholders authorize managers to administer
the firm's assets, a potential conflict of interest exists between the two groups (Eisenhardt,
1989).
In other words, despite the empirical evidence shows that, on average, mergers fail to
create value for the acquiring firm’s shareholders, corporations continue to employ this
strategy at ever-increasing rates (the “success paradox”) (Cording, et al.2002).
According to Cording (2002) statement, we argue that a Resource-based view of the
resource bundle that an acquiring firm purchases and integrates can better illuminate the
sources of valuation and integration problems than the traditional approaches. As a matter of
fact, managerial self-interest could make value destruction for the shareholders.
Managerial Self-Interest (Value Destruction)
It is interesting that although much work assumes that acquisitions are made to
maximize shareholder value (e.g., market power, efficiency, asset redeployment, market
discipline), a substantial amount of studies make the opposing assumption which is that
27
acquisitions destroy shareholder value as managers attempt to maximize their own selfinterest.
However, a growing body of recent evidence suggests that managers’ desire for
increased compensation elicits strong, self-interested motivations to acquire. This is
consistent with evidence demonstrating that acquiring CEOs’ post-acquisition compensation
generally increases, irrespective of acquisition performance (Harford, 2005).
4.4.2. Definition of financial success
From the firm level
In theory, a merger or acquisition should be deemed a “success” if the objectives
identified during the due diligence process are met. Capron’s survey-based work claims:
“…traditionally available financial data are too gross to permit differentiation between the
types of fine-grained value-creating mechanisms…” (Capron, 1999)
Some academics have opted to use survey measures to elicit the management team's
views on whether or not the merger was a success (Cannella & Hambrick, 1993; Capron,
1999; Chatterjee et al., 1992). A merger or acquisition should be deemed a “success” if the
objectives identified during the due diligence process are met.
However, the definition of “success” began to take on a longer-term perspective:
perhaps it took three to five years to fully reap the benefits of the combined firm. Krishman,
Miller and Judge (1997), for example, hypothesized that the ability of top management teams
to work effectively together would drive M&A success, measured by return on assets
(Cording et al., 2002).
From Shareholder’s perspective
Later studies examined the distribution of this new wealth, and concluded that the
stockholders of acquired firms capture most of the gains (Chatterjee, 1986).
After description of the theories, definitions and frameworks we are going to use them in
the analysis chapter, there are following specific variables which are taken into the
examination.
4.4.3. Variables
Pay the right price
Specifically, a merger makes no sense if the additional cash flow is lower than the
takeover premium and/or is lower than the costs incurred by integration. (Frederikslust,
2012). While the event study literature demonstrates that the acquired firm’s shareholders
28
reap above-normal returns (due to the payment of a premium for the firm), this represents
value capture, not value creation (Seth, 1990) The newly combined entity is left with the task
of creating value in excess of the premium paid.
Acquisition premium
In general, an acquisition premium is measured by the difference between the
purchase price of the target firm’s stock, paid by the acquiring firm, and the target’s preacquisition stock price, divided by the target’s pre-acquisition stock price. (Haleblian, 2009).
There is an implicit assumption, as well as some empirical evidence, that lower acquisition
premiums lead to better acquisition performance (Hayward & Hambrick, 1997).
Increase of the share price
In some recent handbooks of M&A, financial success of acquisition has been
measured by database pertain the share price and financial information for companies and
deals in some scholars. From this perspective, the only sensible ways to measure success
from an outside view is to see if the share price increases because of the purchase and
therefore, clear financial focus on delivery of target costs and savings in a speedy and timely
manner, could make profit improve rapidly (Davis, 2012).
Method of payment
There are two fundamental methods by which an acquiring firm can pay for an
acquisition: cash and stock shares (equity). Research from finance suggests that an acquiring
firm’s managers will seek to finance an acquisition in the most profitable way (Travlos,
1987).
Specifically, managers will finance an acquisition with cash if they believe their
firm’s stock is undervalued, and with equity (i.e., shares of stock) if they believe their firm’s
stock is overvalued. Therefore, the use of cash as the acquisition medium may signal manager
expectations that post-acquisition performance will be particularly strong (King et al, 2004).
The price of the acquisition is totally clear and is financed by long-term liabilities,
which in turn necessitates management to achieve a return that is sufficient to cover the
outstanding debt. The incurred cost of the long-term liability back in the annual report, so that
management can be held accountable for their decisions. (Sirower, 1997).
With consideration of above variables, we understand that there are two types of
measurement methods which support us to evaluate an acquisition from short-run and longrun point of view and both should be considered for better evaluation.
29
4.4.4. Measurement
Traditional Measurement (Short-run)
Traditionally, the capital asset pricing model (CAPM) has been the primary
measurement tool for determining the degree to which mergers and acquisitions create
economic value. Utilizing the “event study methodology” (Fama, 1968), the stock prices of
both acquiring and acquired firms are examined shortly after the merger announcement. The
“cumulative abnormal returns” (CAR) are calculated (the increase in stock price over and
above that which CAPM would predict absent the merger), and the results assessed. (Jensen
& Ruback, 1983)
Strategic long–run measures
With conducting the measures to the specific purpose of this project’s problem
formulation proved that we can deploy other financial measures of success rather than event
study results. As mentioned before, there are mainly relevant Non-GAAP earnings measures
of the performance of the firm and there are cash earnings, operating earnings, revenue and
expenditures from the acquired segment, tax benefits and comparison between financial
expectations and actual results within post-acquisition integration.
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4.5 Determinants of successful post-acquisition integration from knowledge
seeking perspective
4.5.1. Knowledge-based view introduction
The resource-based view of a firm describes the firm’s competitive advantage as the
application of a bundle of its resources, which contains not only the tangible but intangible
resources (Ranft, 2006). In that sense the knowledge-based view (KBV) that values
intangible assets highly is an extension of the RBV. KBV considers knowledge as the most
important strategic resource of the firm because it is difficult to imitate (Curado, 2006). The
knowledge barriers make the firms knowledge to the source of its competitive advantage,
especially in high-tech industries (Ranft, 2006).
According to KBV, the firm exists to create, transfer and transform knowledge into
competitive advantage (Curado, 2006). Acquisitions are commonly justified by gaining
access to or creating new knowledge, because they provide an opportunity for learning
(Junni, 2011). The literature suggest that the successful synergy following an acquisition are
only achievable when the knowledge integration happens both on the operational and human
level. (Gammelgaard et al., 2004) However, because of the scale of the chapter, we do not go
as deep as the individuals’ level and will only stick to the firm’s level.
The transfer, in the meaning of how the knowledge is being shared after the
acquisition is highly important when the acquirer firm wants to reach the value potential of
knowledge synergies between the two firms (Gammelgaard et al., 2004). Synergy is an
outcome of knowledge integration rather than knowledge itself (Gammelgaard et al., 2004).
Transferring knowledge in an acquisition is highly dependent on the characteristics of the
resource (Ranft, 2006). The type of knowledge (explicit or tacit) has a highly important role
in successful knowledge transfer. Transferring and teaching codified explicit knowledge
might be simple after the acquisition. By comparison tacit knowledge is a bigger difficulty to
the firms (Junni, 2011), because it is hard to transfer as it is embedded in different contexts
(physical systems, individuals, or social systems (Ranft, 2006)). From resource-based view
the embedded tacit knowledge has the most potential to create value through synergies as it is
rare and difficult to imitate (Junni, 2011). While the transfer of a patent for instance is
relatively easy because of the few knowledge barriers, the transfer of the R&D capability that
led to the patent is difficult. Although it might be more important as it can create long-term
competitive advantage (Ranft, 2006).
31
The mentioned researchers argue that the effective knowledge transfer is the way how
the acquirer firm reach the value potential of the acquisition. Through efficient knowledge
sharing the two firms can exploit their resources and create new competitive knowledge. The
main aim of this part is to find the grounds that determine the knowledge sharing capabilities
of the two firms. We are looking for the factors that help the acquirer firm to discover useful
knowledge and transfer it successfully from the target firm. Multiple sources mention that
cultural distance of the firms (Bresman, 1999; Gammelgaard et al., 2004; Ranft, 2002) or the
acquirer firms experience through frequent acquisitions (Gammelgaard et al., 2004) has
important influence on acquisitions outputs.
In this study, we base our argument on Makri et al. (2007) who use two concepts to
describe how the knowledge backgrounds of the two firms are related. On one hand the
similarity of the two firms refers to how similar their cultures and routines are (Lee et al.,
1996). The knowledge similarities help the firms to share the existing knowledge and exploit
it. On the other hand “the argument of complementarity is that firms that have balanced
bundles of resources across resource dimensions will perform better since they may not have
underutilized resources” (Lee et al., 1996). These two factors define the potential innovation
outcome of the firms, which is a measurable and evaluable characteristic of the acquisition
that shows how well the firms perform after the acquisition (Makri et al., 2007). Larsson &
Finkelstein (1999) describe similarity as “economies of sameness” and complementarity as
the “combination potential” between two firms.
4.5.2. Similarity
The technological knowledge of the firms is the knowledge that is used to develop
products and services as well as their production and delivery systems (Makri et al., 2007).
Although it has the primarily importance, tacit knowledge, which is embedded in the firms
individuals and systems is also highly important in reaching the value potential of the
acquisition. Having similar characteristics between the acquirer and acquired firms obviously
affects the knowledge transfer during post-acquisition integration and the latter outputs. In
this part we look at the different aspects of the two firms’ similarity and what their effects
are. According to Lee & Pennings the similarity in the following factors have a significant
role in post-acquisition success:
32
Age similarity
Firms with similar ages had the same regulations and environment at the time of
founding and they have been adopted to similar external effects and therefore their
organizational practices are similar. The more similar practices help the target firm to adopt
to the acquirer’s practices and quicken the integration process (Lee & Pennings, 1996).
Size similarity
According to researchers, size determines the bureaucratic features of the firms and
also relates to the organization’s culture (Lee & Pennings, 1996). This suggest that the postacquisition can be executed more easily as the bureaucratic barriers and the employees’
resistance is lower.
Structural similarity
Similarity in the structure of the two firms also helps the acquired firm’s employees to
accept the changes as their responsibilities are the same.
Familiarity
Existing communication channels between the two firms’ members and other ties
between them means that they are used to similar routines and cultures (Lee & Pennings,
1996), therefore the likeliness of the effective knowledge exchange is higher.
The important question is whether the similarity in these factors has a positive effect
after the acquisition or not. It is clear that the more similar the two firms’ knowledge is, the
more quickly the acquired firm’s knowledge can be assimilated and exploited (Makri et al.,
2007). However Cloodt et al. (2006) suggest that a too high degree of similarity between the
two firms might be disadvantageous, because it undermines the acquirer firm’s intention in
expanding its existing knowledge base. Expending resources and effort into the integration
without the opportunity of exploiting the learning potential rather weaken the acquirer firm
(Cloodt, 2006). That’s why some degree of differentiation is needed between the two firms to
reach a high post-acquisition innovation performance. Makri et al. (2007) found that
“innovation quantity was lowest where the firms were in highly similar or largely unrelated
technology areas and highest when there was a moderate degree of overlap.”
4.5.3. Complementarity
As it was mentioned in the previous paragraph, the potential for the firms to learn from
the partner is essential in an acquisition. Complementarity attains this by ensuring that both
companies offer different knowledge to the relationship (Kale et al., 2000). Kale et al.
33
introduce complementarity as the lack of similarity or overlap between the two firms’ core
businesses or capabilities – “the lower the similarity, the greater the complementarity”.
Furthermore they define complementarity in an acquisition as the different valuable
capabilities each partner can bring.
Like in the previous part, we collect the main complementarity factors that Lee &
Pennings (1996) mention with high importance:
Geographical Complementarity
Geographically a firm that has more multiple offices and is located physically close to
client has a competitive advantage (Lee & Pennings, 1996). Therefore an acquired firm
complements its partner successfully if it covers different relevant territories.
Human and Social Capital Complementarity
The firm’s social capital refers to the aggregated network ties of all the individuals that
are affiliated with the firm (Burt, 1992). In an acquisition the two firms can benefit from the
usage of their under-utilized social capabilities.
Prior M&A experiences
By frequent acquisitions the firm can benefit from the learning effect and utilize its prior
experience in the new situation (Gammelgaard et al., 2004). The firm collects useful
knowledge not only from successful acquisitions but from integration problems it could
overcome.
4.5.4. Innovation outcomes
Innovation is a “process that begins with an invention, proceeds with the development
of the invention and results in the introduction of a new product, process, or service to the
marketplace (Edwards & Gordon, 1984).” The post-acquisition innovation is an important
indicator of the performance of the two firms’ partnership. Based on Makri et al. (2007)
study, we argue that the innovation outcomes after the acquisition shows how successful is
the target firm’s integration to the acquirer.
Especially in high-tech industries, creating the opportunity for the organization to
learn through acquiring and transferring new knowledge from the partner firm is a way
towards new diverse ideas. Researchers suggest that the relatedness of the acquirer and the
target firms’ knowledge determines how successful the post-acquisition innovation will be
(Cloodt et al., 2006). As it was declared previously the lack of similarity between the two
firms is as disadvantageous as too much similarity. Acquisitions that can improve their
34
innovation performance are those where the two firm’s knowledge is similar enough help its
exchange, but different enough to provide new opportunities (Makri et al. 2007). Industryrelated acquisitions are much likely to be more successful than diversification-oriented ones
(Gammelgaard et al., 2004) because of the similarity of the firms’ knowledge. But if a firm
acquires a target in the similar area it will much likely reduce its R&D efforts, than when it
acquires the target in a complementary area (Makri et al., 2007). While knowledge similarity
enhance innovation productivity, complementarity means an opportunity to extend the scope
of innovations by novelty. Although integrating complementary resources may be more
complex than integrating similar resources.
In short we argue that firms that acquire a similar target can integrate quickly without
serious barriers, while if they acquire a target with complementary knowledge, they can
produce more innovation outcomes in number and diversity.
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4.6 Determinants of successful post-acquisition integration from human
resource perspective
Firms that see their Human Resources (HR) as a source of competitive advantage have
better chances to have a good performance. Human resources are often seen as one of the
biggest assets a company could have. This makes HR a valuable resource. According to the
resource-based view, top managers may be the most unique and valuable resource
(Athanasiou, 1999). The experience the top managers get is a key to success and better
performance of the company. Managers’ experience is very attractive for other firms
interested in acquiring companies (Carpenter, 2001).
HR are crucial for success in acquisitions but it can also be a challenge to be managed.
The parent company should look at acquired company from the perspective of HR
organizational behaviour and the local HR culture.
There are two points of view: how HR affect acquisitions’ success and how acquisitions
affect HR. The two views are interconnected because there is a positive correlation between
M&A and HR. When HR are satisfied and is managed properly, the chances for successful
integration are much higher, although the integration process could be painful at the
beginning.
4.6.1. Problems and difficulties
Some other problems are the layoffs, relocation of personnel and loss of individual
influence when a company takes over other employees. This can be bad for the individual
career plans of the employees and causes their resistance towards the acquisition. People
want opportunities for career mobility and career development, but these are often neglected
in the post-acquisition process (Teerikangas, 2010).
Employee resistance
The individual and collective unwillingness for changes and their opposition to the
acquisition is called employee resistance. It can be active or passive resistance. Active
resistance is when people openly explain their unhappiness, voluntarily leave the job or
sabotage work. Passive means that they are disobedient, shirking or staff is absent. This
negativism is bad for realizing the synergy possible. The greater the employee resistance, the
less the synergy realization (Larson & Finkelstein, 1999).
36
Employees are expected to react more negatively when there is a big potential for
synergy between the target and acquirer. There will be some overlapping positions which
causes consolidation and layoffs. Having this in mind, the greater the combination potential,
the greater the employee resistance (Larson & Finkelstein, 1999). Resistance is caused by
restructuring plans too. This increases uncertainty and stress and the employees wonder about
the future of their departments and jobs. They get scared of the uncertainties of the future and
become resistant to changes. The greater the organizational integration, the greater the
employee resistance (Larson & Finkelstein, 1999).
The question that arises is how to get the employees to support the acquisition and the
integration process in order to have successful results. The key is to obtain the participation
of the people involved, to create a supportive atmosphere and to recognize cultural
differences but not to try to fight against them (Zaheer, 2011).
Some acquiring firms evaluate the acquisition with overestimated assumptions so that
this is a cause for failure, provided that they cannot meet the expectations. They really want
to achieve synergy, coordination and integration and also set goals, impose expectations and
rules. This is not necessarily positive accepted by the acquired company’s management and
employees. They can become resistant because they see their autonomy disappear. This
causes a clash because the acquirer believes it can manage the human and physical resources
in a better way and the acquired personnel believes the opposite. The people in the acquired
company feel the pressure to conform to the management practices of the buyer, this causes
even bigger negative attitude, lower cooperation and lower commitment to success and
integration (Weber, 1996). The bigger the removal of autonomy of the acquired firm, the
more sever the HR problems like stress, negativism, lack of the cooperation and commitment
(Weber and Drori, 2011).
4.6.2. M&A Syndrome
M&A syndrome refers to the psychological challenge caused by changes connected with
the merger and acquisitions. Negative reactions like increased level of uncertainty, stress,
rumouring and lower morale occur (Terikangas, 2010). In this part we describe these
problems and show what could be done to solve them.
The success of post-acquisition integration depends on how the new organization is
managed after the acquisition. Consequently an appropriate performance would bring
positive synergy to whole post-acquisition integration result. The integration of the acquired
37
or merged company into the acquirer company is an important consideration in achieving the
results wanted (Datta, 1991). In the HR perspective in the post-acquisition integration
process, the individual and collective employee reactions are examined. Individual reactions
are seen from psychological perspective (Walsh, 1989) and collective reactions from a
cultural perspective. The employees react negatively towards the acquisition which is another
reason for acquisitions to fail (Cannela & Hambrick, 1993). One reason for a negative
employee attitude is that they have difficulties in “accepting the new owner of the company”.
They feel distrust, tension and hostility from the mother company. Some authors describe the
so called “merger syndrome”:
Employees of the acquired entity deal with worst-case rumours, they are stressed, and
communication is constricted.
4.6.3. Measurement tools
We have chosen a framework with four variables for measuring the determinants of
successful
post-acquisition
integration
perspective. The measurement
from
HR
tools can be seen in Figure
HR Satisfaction
4.5.
Management
Employees’
Work-life
skills
turnover
balance
Compensation
Figure 4.6 – Determinants of post-acquisition integration from HR perspective
Management skills
These skills are crucial in any acquisition because managers are the ones who lead the
deal to the success. In most of the companies, acquisitions are few and there is big time
difference between them, so managers could lack the experience to understand the whole
process and how to achieve the goals set. Managers are responsible for planning, doing and
integrating the deal and so the more experienced in mergers and acquisitions they are, the
better the expected results should be.
38
Employees’ turnover
Another problem to be considered is a “staff turnover” after the acquisition. Walsh
(1989) has examined the turnover rates in US companies when they are acquired and the
results show that it is abnormally high. Most of the buyers say they need to change the top
management in order to accelerate change and to have a new begin. But it is impossible to
change all the personnel and changes can cause uncertainty. Staff feel the lack of belonging
to the company, their importance while taking decisions decreases or disappears and then
they feel that they are not valuable and welcomed anymore.
If we examine the pre-acquisition and post-acquisition reactions of employees, we
would see that pre-acquisition reactions tend to be negative, but post-acquisition – positive.
This could be explained with the successful integration and the fact that people see the
benefits of the changes they needed to make and in the same time their uncertainty about their
job decreases (Terikangas, 2010).
Work-life balance
Work-life balance has a great importance for employees with families. The damages
that long working hours causes to families should be considered. Solutions could be some
combination of family-friendly employer policies like flexible working hours, homeworking
and state assisted nursery places (White et al., 2003).
Compensation
Payment compensation has an effect on job satisfaction but the relationship is not that as
simple as high salary corresponds with a higher degree of job satisfaction? Employees base
their satisfaction according to the amount others are paid and what they feel they deserve for
their position. To ensure job satisfaction companies should create a salary range for a
position. They could also impose a wage floor and ceiling to ensure workers receive similar
compensation (Gould & Penley, 1984).
39
5 Empirical part: Google and Motorola case study
5.1 Introduction of Google
Google is a multinational corporation based in Mountain View, California, US. Its
core business is internet related services and products .Its specialization in search engines,
cloud computing, software and online advertising. Online advertising brings over 90% of its
revenue this is done through its search engine which is its core business. Its other products
are offered with the idea to support its core business.
Google was founded 1998 by Larry Page and Sergey Brin. Nowadays they own 16
percent of company’s shares. Its mission statement is: “to organize the world's information
and make it universally accessible and useful”. Google’s rapid growth ambitions have caused
acquisitions and partnership beyond its core business. Because of this the company involved
itself in the smartphone business first through Android and now through Motorola.
Android is a smartphone and tablet open source operating system (OS). This OS was
first developed 2005 by Android Inc. with the financial support of Google. The same year
Google bought Android, Inc. which made Google a major player in the mobile business. The
first Android phone is HTC Dream, it was sold in October 2008 (T-Mobile G, u.d.).
The number of these apps is over 700 000. Android’s apps platform is the second biggest
after Apple’s iOS with over 900 000 apps but Android is catching up very fast and it is the
most popular platform for developers, used by 71 percent of them (Developer Economics Q3
2013 analyst report, 2013).
Android is the world's most widely used smartphone platform (Alto, 2011). Its share
of the global smartphone OS market is 80 percent (Lunden, 2013). The most of the products
using the Android OS are made by Samsung. Android’s success made it a target for patent
litigation as part of the so-called "smartphone wars" between technology companies (Theron,
2011). This is said to be the main reason why Google bought Motorola (Thomas, 2012).
5.2 Introduction of Motorola
Motorola was a multinational telecommunications company based in Schaumburg,
Illinois, US. It was founded 1928, its first product was a battery eliminator for radios. 1930 it
launched the Motorola radio, one of the first car radios which was a big commercial success
(Stim & Pressman, 2007). 1940 it introduced the first walkie-talkie in the world, later on it
was producing defense electronics, cellular equipment and mobile phones. 1973 Motorola
40
showed the first portable telephone. 1983 the first commercial cellular phone, DynaTAC
8000X was launched by Motorola. In 1998 two thirds of Motorola’s revenue was coming
from producing mobile phones (Romero, 2009).
Motorola was very successful in the beginning of the 21th century with its RAZR
mobile phones. The company was second on the world mobile market after Nokia but it lost
significant market share in the second half of the decade. 2009 Motorola focused on
producing smartphones with Google’s Android OS (T-Mobile G, u.d.).
Between 2007 and 2009 Motorola lost 4.3 billion us dollars, this was the reason why
the company got divided 2011 into two independent companies: Motorola Mobility and
Motorola Solutions (Google Finance, u.d.). 22 May 2012 Google’s CEO, Larry Page
announced that Google acquires Motorola (Google Official Blog, 2012).
5.3 Why did Google need to buy Motorola?
With its Android OS Google got involved in the smartphone licensing and litigation
battle or in the so called “smartphone wars”. The main sides of this battle are Sony, Samsung,
Motorola, HTC, Microsoft, Nokia and Apple. This conflict is part of the wider “patent wars”
between the same companies.
Since 2010 the lawsuits became much more often and most of the times Google and
its partners using Android OS were losing: 2 March 2010 Apple sues HTC over 20 patents;
27 April 2010 HTC signs an agreement with Microsoft to licence Microsoft patents in return
for royalties ($5 per handset) on HTC's Android-based devices (Microsoft Announces Patent
Agreement with HTC, 2010); 12 August 2010 Oracle sues Google over 7 patents relating to
the use of Java in Android (Ha, 2010); 21 March 2011 Microsoft sues Barnes & Noble over
the Android operating system in the Nook ebook reader; 15 April 2011 Apple sues Samsung
for patent and trademark infringement (Chen, 2011). There are many lawsuits and not all of
them could be mentioned here. Almost always Google or its Partners (especially Samsung
and HTC) are losing. This makes Google’s partners mistrust Android. The acquisition of
Motorola enabled Google to use Motorola’s over 20 000 patents to defend Android from
lawsuits (Kumar, 2012).
41
5.4 Google acquires Motorola – Introduction of the deal
11 February 2010 Motorola announced that it splits into two independent companies.
The reason for doing this was to prepare the sale of the handset division of the company.
Google was under a big pressure to increase its patent portfolio to protect its Android OS
from a growing number of legal challenges. First Google wanted to buy only Motorola’s
Patents, but this was declined by Motorola’s Management which said the patents are not for
sale, but the whole company could be. Motorola was using at this time Google’s Android OS,
so there was a possible fit between the two companies. Google and Motorola began
discussions about the acquisition in July 2011 (Levy, 2013).
15 August 2011 Google announced on its website that both companies have entered
an agreement under which Google, Inc. acquires Mobility Holdings, Inc. for 40$ per share in
cash (which is 60 percent over its stock market price) or a total of $12.5 billion (Facts about
Google’s acquisition of Motorola, u. d.).
Sanjay Jha, CEO of Motorola Mobility, said: "This
transaction offers significant value for Motorola Mobility's
stockholders and provides compelling new opportunities for our
employees, customers, and partners around the world. We have
shared a productive partnership with Google to advance the
Android platform, and now through this combination we will be
able to do even more to innovate and deliver outstanding mobility
solutions across our mobile devices and home businesses." (Levy,
2013). Larry Page, CEO of Google, said: "Motorola Mobility's total
commitment to Android has created a natural fit for our two
companies. Together, we will create amazing user experiences that
supercharge the entire Android ecosystem for the benefit of
consumers, partners and developers. I look forward to welcoming
Motorolans to our family of Googlers." (Google to Acquire
Motorola, 2011).
Figure 5.1
After 9 months of regulatory approvals in US, EU and China
Google completed its acquisition of Motorola on 22 May 2012. Motorola’s CEO Sanjay Jha
got replaced by Dennis Woodside, who has worked many years for Google. Google’s CEO,
Larry Page says about the first goals after the acquisition: "One of his first jobs at Google was
42
to put on his backpack and build our businesses across the Middle East, Africa, Eastern
Europe and Russia," (Ziegler, 2012).
43
6 Analysis
6.1 Marketing analysis
First of all it is necessary to mention that Google’s highest operating cost is still
running Motorola’s division. Up to September 2013 Motorola’s department had cost the
internet giant $861 million (Google Inc. Announces Third Quarter 2013 Results, 2013). On
the other hand Google’s purchase of Motorola Mobility has been seen as a defensive move
for their patents collection but recently customers can finally see the output from Google and
Motorola cooperation which are MOTO X and MOTO G. As mentioned before in the
theoretical part the case study also confirms that the Market-related performance should be
considered as one of the most important figure of financial performance after M&A.
Determinants
Magnitude of cost savings
Variables
Assumptions
Analysis
result
Extent of Marketing
integration
1) Combining marketing strategies of both
acquirer and target has positive impact
on successful integration
+
Extent of Integration
2) The huge extent of integration as
negative impact on integration since the
organizational energy is focused on
internal issues and Market- and
Customer-related performance are
neglected
+
Speed of integration
3) The shorter is the integration process,
the less affected are market-related
performance
-
Customer orientation
4) Customer orientation integration leads
to sustention of customer
trustworthiness and support market
related performance
+
Market positioning
5) Going to the new market makes the
integration success more complicated
and more time is needed to achieve
goals
-
Relative size of acquired
company
6) If the actors want to avoid decrease in
market-related performance the lower is
the relative size of the company the
better it is for successful integration
-/+
Market growth level is
low
7) High level of market growth has positive
impact on integration and low level of
market growth has negative impact
-
Market-related performance
Figure 6.1
44
6.1.1. Extent of Marketing Integration
A1: Combining marketing strategies of both acquirer and target has positive impact on
successful integration.
In the case study of Google and Motorola, there is also the combination of hardware and
cell phone provider and worldwide software giant. The fact that even in this acquisition there
are still some strengths that only Motorola assess support the situation that google does not
push Motorola into the changing its brand to Google phones because “People don’t associate
Google with phones,” he says. “Motorola’s the brand that resonates to consumers.
Woodside (Levy, 2011). On the other hand Google has such a strong advertising advantage.
The combination of hardware and Software Company will enhance Android, increase the
competitiveness and increase the quality of products.
6.1.2. Extent of Integration
A2: The huge extent of integration as negative impact on integration since the organizational
energy is focused on internal issues and Market- and Customer-related performance are
neglected.
Google’s acquisition was very broad and that is why so much energy was taken by
layoffs, replacing the managers, rebuilding the facilities and developing the new products. In
this case the market and customer related issues are neglected. The result is that very
successful phone Motorola Moto X is still completely ready only in US market not in the
others which is a big mistake as a matter of fact that the developing countries are the target
market for such a phone. (Popper, 2013).
6.1.3. Speed of Integration
A3: The shorter is the integration process, the less affected are market-related performance.
In the case study, used as a foundation of this project the speed of integration is
definitely longer than expected. It has been already 12 months of integration and the
integration outcomes are still not in the green numbers. Since Google entered a new market it
takes a plenty of time to come up with something new and successful. Larry page identified
products MOTO X and MOTO G as the very first outcomes of this integration that has been
introduced in the last quarter of the current year which is more than after 9 months of
integration (Popper, 2013).
45
The longer Google will wait with outcomes of integration, from marketing perspective
with new products, the harder will be to retain existing customers and also to take an
advantage of buzz that is happening due to loaded media with details about acquisition.
6.1.4. Customer orientation
A4: Customer orientation integration leads to sustention of customer trustworthiness and
support market related performance.
In this specific case the research shows that the whole Google-Motorola integration is
highly customer oriented. New products MOTO X and MOTO G prove the high level of
orientation on customer requirements (Battery life, Unbreakable screen, faster and easier
software, customization, deep research on customer requirements based on focus groups, STP
process). Mainly to fill the gap on the market where customers seek a high quality
smartphone for a reasonable price.
The other one move that proves the customer orientation integration is when the
development of Webtop (a software that allows to power notebooks through the Lapdock
accessory) was abandoned. The reason was a lack of customer flexibility (Cheng, 2012).
Motorola’s product portfolio was reduced significantly. They used to make 45 products
and it decreased to 5 pieces. This movement is connected not only with customer orientation
but also with cost reduction
6.1.5. Market positioning-new market for google
A5: Going to the new market makes the integration success more complicated and more time
is needed to achieve goals.
Cell phones market is a new business for the software giant and this is one of the reasons
why the results of integration will be seen in 12 to 18 months as CFO Patrick Pichette said
(Google CFO, 2013).
6.1.6. The relative size of acquired firm
A6: If the actors want to avoid decrease in market-related performance the lower is the
relative size of the company the better it is for successful integration.
The relative size of acquired firm in Google’s case is low. The acquired firm is small
compared to Google.
6.1.7. Level of Market Growth
A7: High level of market growth has positive impact on integration and low level of market
growth has negative impact (Clulow, 2007).
46
Theoretically, Google’s target market for its new products (Moto G and Moto X) are
markets with high level of growth. But what people can see so far is that product outputs of
integration entered first US and then some European countries which means that Google is on
markets with low level of growth what makes it more difficult due to high competition,
saturated market, and high switching barriers for customers.
6.2 Financial analysis
In this chapter we are about to analysis the main determinants of successful postacquisition integration from a financial point of view regarding the case study of “Google and
Motorola, acquisition”, through the Google Inc.’s lens.
As mentioned and described in the theoretical chapter, there are some major
determinants of acquisition motives from the Resource-based view which emphasize
remarkably on the profitability, value added and cost effective factors. Meanwhile, we argued
that there are two levels which are the firm and shareholders, affecting acquisition success.
Cost deductive actions and free cash flow distribution could also decrease the risk of
investment and ensure Google’s shareholders wealth. However, taking only the short-run
sequence of events leading to this acquisition on shareholder wealth which is determined by
the Cumulative Abnormal Return (CAR) is not an appropriate measure of the Google’s
wealth as Non-GAAP factors, which would be obtained long-run.
It has been found that acquisitions involving innovative targets are positively related
not only to the future patenting outcome of the acquirer, but also to the value creation
experienced by the acquirer both in the short run around the deal announcement and in the
long run after deal completion. These results are complementary to the findings in
Trajtenberg (2005) that impactful innovations contribute to firm market value.
Following the previous theoretical chapter, herewith we point out the analyses of the
determinants through their belonging variables and consequently to the relevant assumptions.
6.2.1. Assumptions
Assumptions from short-run determinants
By looking at the analysis of the event study wealth effects through the CAR in U.S
capital market, it is shown that the effect of the event sequence culminating in merger is
significantly negative for acquiring firms. The immediate impact of merger per se is positive
and highly significant for acquired firms but larger in absolute value, and negative for
acquiring firms (Malatesta, 1983). Besides, share’s value reaction can give us other
47
information rather than relying on previous studies which reported the most shareholders
reaction negatively. Consequently there are variables such as “paying the right price”,
“acquisition premium” and “method of payment” can lead us to the unique assumption:
A1: Pay the right price for the acquired firm and high payment of premium in cash, affects
the short-run success of acquisition positively.
In regard with traditional measurements, we should emphasize that, we are not about
to calculate the CAR factor of this acquisition as this study is relevant between the preacquisition and the date of acquisition, so unlikely to use post-acquisition integration.
A2: Positive abnormal return of cumulative share price affects the short-run success of
acquisition positively.
As value distribution determinants are also underlying the “Terminology of the
acquisition”, we justify the paradoxes between shareholders’ contributed equity prior and
during the process acquisition as well.
A3: Degree of confliction between shareholders and managers affects the success of
acquisition negatively.
Assumptions from long-run determinants
Mainly the “value creation strategies” that Google’s managers always incurred along
with the main criterion of previous acquisitions, leads us to diffuse broader view toward postacquisition period, while the most effective actions took by the Google after the acquisition
date, May 22, 2012. That’s why we take the “Case Study” analysis in addition to the “Event
Study” which takes place the days before acquisition announcement. Therefore, the
assumption can be formulated as follows:
The revenue at Motorola Mobility, which has been a drag on Google's bottom line since
acquiring the company last year (2012) and continued to fall, was dropping $600 million
since this time in 2013. Despite the losses, Google is profitable overall, and its cash on hand
has grown steadily and this makes us analysis whether the share price value of the acquirer
affects the long term success or not.
A4: Increase of share price value affects long-run success of acquisition positively.
Cost of revenues includes the expenses associated with the operation of our data centers,
including depreciation, labour, energy, and bandwidth costs, credit card and other transaction
48
fees related to processing customer transactions, amortization of acquired intangible assets, as
well as content acquisition costs. In addition, cost of revenues includes manufacturing and
inventory-related costs from our Motorola Mobile business.
A5: Higher amount of acquisition cost causes lower pace of ROA and affects long-run
success of acquisition negatively.
Google Inc. completed its acquisition of Motorola on May 22, 2012 (the acquisition
date). The operating results of Motorola were included in the Consolidated Statements of
Income from the acquisition date through December 31, 2012.
A6: Degree of contributed revenue from the acquired segment affects long-run success of
acquisition negatively.
Acquiring loss making company by a profit making company Google can make a tax
advantage each year till 2019 can utilize the losses. "The tax benefits of the deal make what
was a good deal into a great deal," said Robert Willens, a New York accounting and tax
expert (Browning & Byrnes, 2011).
A7: Higher tax benefits affect long-run success of acquisition positively
Cost of revenue is also one of the variables which could affect the post-acquisition
synergy creation as the acquirer could predict these expenditures prior to acquisition date and
this could reflect the future of successful acquisition as well.
A8: Higher cost of revenue affects long-run success of acquisition negatively
However, heading future plans in new innovative market can be of the determinants of
successful acquisition. Financial justifications in this regard can also be one of remarkable
factors which strengthen the confliction between managers and shareholders and therefore
can negatively affect acquisition. Herewith, we need to analysis Google Inc. and shareholders
expectations separately in order to figure out the exact degree of confliction between these
two parties.
A9: Total revenue of the acquired segment causes shareholders uncertainty and affects longrun success of acquisition negatively
6.2.2. Analysis of the short-run assumptions
After the Google Inc. announcement in 15 August 2011, the impact could be seen
in the stocks of these companies. Google paid $40 per share of Motorola led to an almost
49
60% increase in the share price of Motorola with a value of around $38 that week rising from
around $24 per share in the week before the announcement.
Figure 6.2
Tables show that Google's stock , on the other hand, lost value very quickly following
the announcement losing more than 10% in that week going from around $557 to $499. This
is a common trend observed where the acquirer experiences a loss in the share price
following such an announcement and the company which is acquired gains because of the
market sentiment where there is substantial risk that is expected in each merger.
Figure 6.3 – (Ycharts Google: http://ycharts.com/companies/GOOG/price)
Also after the news broke, Google fell 3% in afternoon trading. It means shares of
acquirer were down 7% since January 2013 and 20% below their all-time high price reached
in 2007. (Hoff, 2011)
GOOG Price Range, Past 5 Years
Minimum
282.75
20 Jan 2009
Maximum
1086.22
19 Dec 2013
Average
609.70
50
Figure 6.4- (Ycharts Google: http://ycharts.com/companies/GOOG/price)
This decline surge also continued even at the date of acquisition, while followed by the
completion of the deal on May 23, 2012 resulted in a decline in the share price for Google
Inc. undervalued Google’s share value from $608 to $565.
The event study analysis generally shows that the shareholders (and investors) were in
doubt even about the world’s biggest search engine’s strategy of acquisition in the market.
Questioning whether Google's deal happened to get the patents or to control the new
hardware market through vertical integration. It is supposed that drawing consumers and
other execrator to the added margins was for the purposed of future growth of Google.
Therefore, it leads us to search for the success of this acquisition in post-acquisition financial
steps of Google to make Motorola, loss maker, to a profitable contributor.
Motorola’s actual value and the right price
In Aug 15, 2011, Google and Motorola entered into an agreement under which Google
would acquire Motorola Mobility with details as follows from New York stock exchange:
Figure 6.5 – Facts about Google’s acquisition of Motorola, undefined date
Analysis shows that by the acquisition of Motorola in 2012, Google could get Motorola’s
Equity of $ 1,732,000,000 (number of shares multiple by the share value before
announcement) so that the post-merger equity value attributable to Motorola was $
3,014,781,959 (number of shares multiple by the share price prior at the date of acquisition).
However, Google paid around 63% premium, the table below shows the actual asset value of
Motorola, before acquisition (2010).
Figure 6.6 – Source: Nikhil Raj, October 2011
51
It shows that the actual price of Motorola was far under the price Google paid.
Relatively, we can conclude that high premium percentage predicts and document a robust
relation between the successes of acquisition. But according to the Alexandridis & Fuller
(2011) in 2011, we also find that despite the payment of lower premium, acquisitions of large
targets destroy more value for acquirers and result in sharper increases in their return
uncertainty around the deal announcement, implying that investors perceive these deals as
more uncertain projects.
Furthermore, Motorola provides more than 17,000 existing and 7,500 pending patents
worldwide in addition to $3 billion in the bank, reducing the actual worth of the deal to $9.5
billion (Hoff, 2011).
Consequently, we can simply utter that Google’s managers expected higher assumptions
than the actual value of Motorola’s value. So that the patent’s potential value might be the
most concrete reason to pay such premium, although the shareholders reflected negatively to
this transaction.
Patents’ value
According to Google evaluation, $5.5 billion is the value of the patents, revealed the
figure in a regulatory filing (Welsh, 2012). However, a judge order declared that Motorola's
patents are not worth the $4 billion. The judge presided over a legal battle between Microsoft
and Google-owned Motorola issued and valued elements of Motorola's patent portfolio far
below what the company felt they were worth by a difference of over $3.9 billion a year.
(Welsh, 2012).
What is the right price?
In addition to the share price which Google paid, Google Inc. assumed $401 million of
unvested Motorola stock options and restricted stock units, which will be recorded as stockbased compensation expense. Transaction costs were approximately $50 million, which were
recorded as general and administrative expense as it incurred. The fair value of assets
acquired and liabilities assumed was based upon a preliminary valuation .The value that
Google paid ($12.4 billion total purchase price) is pertaining following details:
52
Figure 6.7 - Google Inc. Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934, 2012
The table shows that the right price paid for Motorola is highly dependent on the
overestimated patent’s value which discussed above and also the goodwill of $ 2.5 billion
which is not expected to be deductible after tax purposes and highly dependents to the
synergies expected to arise after the acquisition. Therefore, valuation of the right price of
Motorola is highly ambiguous and we believe that it affects the success of post-acquisition
integration negatively as this variable as bringing uncertainty over the next steps.
6.2.3. Analysis of the long-run assumptions
Google’s value creation strategy (18 months of pipeline)
In February 28, 2013 Google’s CFO answered when questioned on where things stand
with Motorola at the moment, it is said that Google executives are engaging in postacquisition integration so far and this process might take longer than 18 months. So that longrun observation invites shareholders to be patient again and look forward to the value creation
strategies and return on investment.
This makes scenes that the Motorola acquisition equates to a third of Google's cash
balance. Motorola reported in 2012 an $86 million net loss for the first quarter, slightly
higher than its loss for the same period previous year (Varma, 2012). Clearly, Google sees
continued high potential in the Smartphone market.
Tax benefit
Accordingly, in April 2013, Forbes released an article to describe how Google did a tax
deduction. It was estimated that through the acquisition, Google could expect to reap $700
million a year in tax deductions from future profits in each year until 2019. Also, Google will
be able to reduce its taxes by $1 billion due to Motorola Mobility’s US net operating loss, and
by a further $700 Million due to its foreign operating loss (http://www.forbes.com).
To sum up, by a simple calculation it is exposed that $7.00 billion over the decade plus
the $1.7 billion immediately. That’s the savings on Google’s tax bill that also has to be
53
deducted from the purchase price. Hence, interestingly we can see that the true cost to Google
of Motorola Mobility was that $1.5 billion. (Worstall, 2013).
Sold assets and laying off employees
In December 2012 , Google sold the Motorola Home division, makers of cable boxes,
routers, and other non-mobile hardware, to Arris for $2.35 billion in cash and stock, laying
off several thousand employees. This means Google had to issue two sets of revenue and
profit numbers, one including Motorola Home, and one without.
Revenue from Motorola
By Looking at Q3 2013, Google’s Quarterly Earnings Summary we can see that
Motorola Mobile segment revenues were $1.18 billion it means 8% of consolidated revenues
in the third quarter of 2013, compared to $1.78 billion, or 13% of consolidated revenues in
the third quarter of 2012. (Google Inc., 2013b). It is resulted that Motorola Mobile segment
operating loss was $248 million, or -21% of Motorola Mobile segment revenues. This
compares to segment operating loss of $192 million, or -11% of Motorola Mobile segment
revenues in the third quarter of 2012.
Cost of revenue from Motorola
In case of Motorola, the cost of revenues increased $7,446 million from 2011 to 2012
and R&D expenses increased $1,631 million from 2011 to 2012. Furthermore, Sales and
marketing expenses increased $1,554 million in the same period and General and
administrative expenses increased $1,121 million. Accordingly, the follow table shows the
overall relevant revenue costs conducting Motorola case:
Figure 6.8 - Google Inc. Announces Fourth Quarter 2012 Results, 2013a
6.2.4. Expectations versus actual results (A comparison analysis)
Expectations: Company level
In regard with performance analysis of Google Inc. to make Motorola’s profitable after
affecting date of acquisition, we take Q4 2012 cumulative earnings, when the acquisition is in
post-acquisition phase so that we can compare the results to the next year in almost the same
dates (Q3 2013), due to make the comparison more tangible. (Google Inc., 2013a, 2013c)
54
This is translated that including all Motorola revenue, both Home and Mobility, Google's
revenue would be $12.89 billion.
Figure 6.9 - Google Q4 2012 – Quarterly Earnings Summary, 2013
Motorola Mobility revenues worked out to $1.51 billion or % 11 of total revenue for the
quarter and it means that Motorola Mobility posted an operating loss of $353 million so far.
Overall, Google pulled in $2.89 billion in net income, up slightly over the $2.71 billion
the company pulled in during Q4 of 2011. (Ingraham, 2013). Results shows that Google
postponed profitability of Motorola to the future as the CFO would like to redirect attention
from today's losses to the product pipeline 12-18 months out.
Result of Company level expectation; Google does not care about the profitability
Even though the CEO called Motorola's $353 million loss "not consequential… relative
to Google or the kind of turnaround we're seeing," Pichette said "we do care about
profitability. That is our goal in every one of the areas where we invest... We are not in the
business of losing money on Motorola," .Until the new products arrive and find a foothold,
Pichette warned analysts to expect more volatility in Motorola's revenue and profits. "It's just
the nature of the beast when you reinvent the business," he said
So that's where Google stands on the losses at Motorola. Now, Google has to deliver that
promise, with compelling new devices that it can't disclaim responsibility for.
55
On one hand, Larry Page announced in January 2013, "In today’s multi screen world, the
opportunities are endless." On the other, he said later that "the best way to predict the future
is to make it." In order to turn its Motorola division around, Google will have to find some
way to turn its endless opportunities into new inventions of its own design. (Carmody, 2013)
Expectations: Shareholder’s perspective
In order to analysis the shareholders satisfaction, we should ask the question that “Does a
money pit like Motorola have a major impact on Google’s bottom line or not”. Forbes
estimated that this answer in a lot of ways, right now NO! Despite the losses, Google is
profitable overall, and its cash on hand has grown steadily. But if Motorola continues to slide,
Google may eventually be forced to write down the cost of the $12.5 billion acquisition and
its investors could clamor for the company to scuttle what has so far been a painful
experiment into the world of mobile hardware. So the best answer to the mentioned questions
is:
“Looking at the purchase I’m still scratching my head about why they did it,” says Avi
Greengart, the research director for consumer devices at Current Analysis,” and how they
see it playing out going forward.” (Worstall, 2013)
Cumulative total return to shareholders
The following graph compares the 5-year cumulative total return to shareholders on
Google Inc.’s common stock relative to the cumulative total returns.
56
Figure 6.10 (Google Inc. Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934, 2012)
Google indicated that the Stock-based compensation increased $675 million from 2011
to 2012 and this increase was primarily due to additional stock awards issued to existing and
new employees, awards issued in connection with the acquisition of Motorola, and
acceleration of certain awards resulting from Motorola restructuring.
Conclusion to the analysis chapter
As discussed earlier, determinants of success acquisition from the financial perspective
are constantly relevant to the long run Google operation and we believe that it is too early to
say that this acquisition will produce handsome returns for Google. Google's track record on
acquisitions has been relatively good and financial reports, official released statistic and
manager’s interviews have been considered as the most reliable evidence for both short and
long run success evaluation. In respect with short-run success (from pre-acquisition to the
acquisition date), however the variables of success are conducted to the assumptions such as
paying the price, high rate of premium payment and the proportion of cash payment by
Google are positively affect success of acquisition through the short time value added
determinants and further the value distribution. The impact of Cumulative abnormal return
(CAR) which has obtained from event study, is not clearly stated as less scientific and
business researches have been done throughout the last two years for the reason of time
reliability. Confliction between the shareholders and Google Managers are the most
57
remarkable topic uttered by the financial experts and it has negatively affected this
acquisition, evidently by stock market fluctuation within the acquisition period.
Value creation and distribution determinants are the main and remarkable headline in
the most reliable financial magazines and criticizers. These determinants are directly
reflecting the post-acquisition integration stage and express the results and acquisition in long
run assumptions.
Overall results from the analysis of determinants of successful post-acquisition
integration in relation with pre-acquisition stage have been showed in Figure 6.11.
Acquisition
terminology
Financial
success
Determinants
of success
Variables
Assumptions
Pay the right price
1) Pay the right price for the
acquired firm - high payment
of premium and payment in
cash affect the acquisition
success positively.
Acquisition premium
Value added
factors
Pre-acquisition
Analysis
result
+
Method of payment
Short-run
Value
distribution
factors
Acquisition date
Value
creation
factors
Post-acquisition
integration
Long-run
Cumulative abnormal
return (increase of
hare price)
2) Positive abnormal return of
cumulative share price affects
the acquisition success
positively
N/A
Confliction between
managers and
shareholders
3) Degree of confliction
between shareholders and
managers affects the success
of acquisition negatively
+
Impact of postacquisition market
share price
4) Increase of share price value
affects success of acquisition
positively
N/A
Return of asset /
Acquisition
expenditures
5) Higher amount of acquisition
cost causes lower pace of
ROA and affects success of
acquisition negatively
+
58
Value
distribution
factors
Revenue creation /
Segment profitability
/ Consolidated
revenue
Tax benefits
Cost of revenue from
acquired
shareholders
Cumulative total
return to
shareholders
6) Decrease of contributed
revenue from the segment
affects acquisition negatively
+
7) High tax benefits affect
success of acquisition
positively
+
8) High cost of revenue affects
success of acquisition
negatively
+
9) Total revenue of the acquired
segment causes shareholders
uncertainty so it affects
success of acquisition
positively
N/A
Figure 6.11- Results from the analysis of determinants of successful post-acquisition integration in
relation with pre-acquisition stage
Variables such as Impact of share price, could increase the success of acquisition
although for this case study, it could not be neither accepted nor rejected as Google has spent
one third of its free cash flow to buy Motorola and this amount could not has specific role in
the Google stock price determinants. We can also argue that the size of the acquired and
acquirer companies affects the accumulated share price. However, this assumption is not the
topic of this chapter and it is discussed in marketing perspective.
Other assumptions within post-acquisition integration are highly reflect the
performance of Google to size the revenue that comes from Motorola and decrease the
relevant cost of acquisition as well as deploy the financial benefits from it. So that, higher
amount of costs can postpone the return of assets so it negatively affects the success as it does
for Google. Decrease of contributed revenue likewise, affects negatively the profitability of
acquired segment and the success too.
59
6.3 Knowledge analysis
In the 4.5 chapter we argued that innovation outcomes can offer relevant information
on the success of a post-acquisition integration. According to Makri et al. (2007) research, the
acquirer and acquired firms similarity and complementarity factors affect the innovation
outcomes in several ways. In the following we look at these determinants that affect the
acquisition’s short and long term success. Since first-hand informations are not available
about the integration process, we base the assessment of the presumptions on second-hand
data coming from Google’s press releases and data about the company’s performance located
on the internet.
6.3.1. Assumptions
Knowledge is an essential resource of firms in reaching competitive advantage in
high-tech industries, like the IT sector. In an environment where technological development
plays a great part and firms have to not only follow their competitors but rush in front of
them, the innovation abilities of the firms are highly important. Therefore the fundamental
determinant of the Google – Motorola acquisition’s success was how quickly the two firms
could share their knowledge in the new relationship and how they are capable of exploiting it
to create value.
Many researchers suggest that the integration performance in the short-run is
determined highly by the similarity of the two firms (Lee & Pennings, 1996; Makri et al.,
2007). We assume that that the tacit knowledge that is embedded in the firm is highly
important. The following similarity factors play a high role in the integration success:
A1: The acquirer and acquired firms similarity in size/structure/culture is positively related
to the integration process by quickening the knowledge transfer.
The acquirer can have knowledge from prior acquisition experience that can utilized
through the integration (Gammelgaard et al., 2004). The second assumption is that this
knowledge helps the acquirer to integrate the target.
A2: The acquirer firm’s prior experience is positively related to the integration success.
As innovation outcomes are great indicators of the acquisition success, we will look at
what the two firms could achieve after the acquisition, and what are the predictions on the
long-term run. That is because the two firms’ focus through the integration cannot lead to
innovation results immediately as R&D activities have often uncertain outcomes. We assume
that the main factor that helps the two firms to exploit their knowledge base quickly and
60
produce value is their industrial similarity. However, as it was mentioned in chapter 4.5, the
too high degree of similarity is disadvantageous, because it reduces the opportunity to acquire
new knowledge.
A3: A moderate market/product similarity has a positive effect on innovation outcomes.
Makri et al. (2007) argued that the acquirer presence in diverse product markets has a
positive effect on utilizing acquired complementarities. We assume that the acquirer has a
wider scale available on which it can exploit the new knowledge coming with the target.
A4: The more diversified the acquirer is, the greater the influence of complementarities on
innovation outcomes.
In the following we look for evidence to the four assumptions. The summary of the
analysis can be seen on Figure 6.12.
6.3.2. Statistical analysis
While the size of the two firms were similar in many ways, the differences between
them are more conspicuous. Before acquiring around 20 000 from Motorola, Google
employed around 29 000 people. The numbers suggest, that this was an integration of an
approximately equal firm, although Google fired about 30% of Motorola employees, doing it
by shutting down or selling some departments of the company during the first year after the
acquisition (Constantinescu, 2012). Motorola is a more than 80 years old company compared
to Google that was founded in 1998. The culture and operation practices of the two firms are
highly different because of the different foundation and experiences.
Google has a massive acquisition experience as the company was involved in more
than a hundred M&A procedures since 2001 (Popper, 2012). These vary on a high scale in
price, size and market, but the acquisition of Motorola stands out from them in almost every
aspects. Larry Page structured Google into seven groups according to the firm’s business
areas since its appointment of the CEO in 2011 (Waters, 2011). Google has acquired
companies in every group almost equally in number and size in the past five years, which
gives a great knowledge to the firm how to integrate them.
There are limited available data to evaluate the innovation performance of the
acquisition so far. Google came up with two smartphones since acquiring Motorola. The
Moto X, which was released in September 2013 underperforms on the market with far less
sales than its direct competitors. Though Google introduced some new features in the phone.
Both in hardware and software that predicts how the two firms can combine their knowledge
61
in the future (Contact ABI Research, 2013). The company entered the phone market by
acquiring Android in 2005 and became the operating system supplier with the biggest market
share (Fingas, 2013). It means that by acquiring Motorola, they built a relationship and get
knowledge from a competitor in one of their main markets. Google’s actions in 2012-13
show that the company wants to exploit Motorola’s resources only in the mobile phone
market. The selling of its set top box unit is a clear sign for that, as Motorola was one of the
world’s biggest manufacturer of these type of home television products (Louis, 2012).
Google might not see the development in this market sector, but the company’s overall R&D
spending shows that innovation plays an emphasized role in its strategy. Google’s R&D
expense has continuously grown in every year, and exceeded 2 Billion USD in Q3 2013
(Ycharts Google, u. d.). The start of Project Ara plan suggest that the company wants to
exploit the value potential in the new relationship, even finding revolutionary developments
on the mobile phone market (Strategy Analytics, 2013).
In the knowledge seeking analysis the unavoidable part of the acquisition is that
Google most important intention was to purchase the patents Motorola owns. Acquiring the
mobile manufacturer they get around 17 000 patents immediately in order to be secured
against competitors like Microsoft, Apple and Oracle (Sawers, 2011).
Acquisition
terminology
Knowledge
Determi-
seeking
nants of
success
success
Variables
Assumptions
Analyzis
result
1) The acquirer and acquired firms
Similarity
Firms size,
similarity in size/structure/culture
structure
is positively related to the
and culture
Post-acquisition
Short-run
Comple-
Prior M&A
mentarity
experience
Post-acquisition
Long-run
integration process by quickening
the knowledge transfer
integration
integration
N/A
Similarity
Industrial
similarity
2) The acquirer firms prior experience
is positively related to the
N/A
integration success
3) A moderate market/product
similarity has a positive effect on
+
innovation outcomes
62
4) The more diversified the acquirer
Further
Comple-
Acquirer
is, the greater the influence of
mentarity
diversity
complementarities on innovation
+
outcomes
innovation
Figure 6.12 - Assumptions from knowledge seeking perspective
6.3.3. Information analysis and result
Assumption 1 relates to the size, structure and firm of the two firms. The postacquisition integration of Motorola was not complete in the meaning of that Google left
Motorola to operate separately (Facts about Google’s acquisition of Motorola, u. d.). The full
integration of Motorola would mean so high costs to Google (because of the company’s
outstanding compensations and perks for example (Cleland, 2011) that Motorola’s vertical
integration became the final solution. Therefore we do not have relevant information to
confirm Assumption 1. However it can be seen that the lack of similarity in the two firms’
culture pulled back Google from full integration.
We also find that Google’s prior acquisition experience had little effect in this case.
On one hand this was the far biggest acquisition in size that Google has made, and on the
other hand the company had lacked experience in vertical integration in the past. One
observation we can make is that by learning from frequent acquisitions Google could choose
a more appropriate solution with vertical integration. They did not take unwanted risk by
assigning resources on the integration that cannot pay off later. But we again do not have
enough information to confirm Assumption 2.
Assumption 3 and 4 address the similarity and complementarity factors relatedness to
the innovation outcomes. Google officially positions the acquisition in the situation where the
two company together can increase innovation on the market, and offer better phones at
lower prices (Facts about Google’s acquisition of Motorola, u. d.). The idea behind it is that
whilst Motorola is a powerful mobile hardware manufacturer, Google is a world leader
software vendor. Both firms have massive knowledge base from the mobile phone market.
Furthermore Motorola used Android operating system since 2009, which means that the two
firms were already familiar with each other (Segan, 2009). The fact that only in 18 months
after the acquisition date they released two new phones shows that the two firms can
cooperate well with the other. The sales do not support so far that Motorola can be successful,
but the two devices show some forward-thinking from the two firms. The new features
63
Google introduced can be the predecessor of a high amount of new and revolutionary
innovations coming in the future. Therefore we argue that the similarity of the two firms
accelerated the integration and helps to create knowledge synergy and affects innovation
outcomes positively.
Google has a wide variety of products and services that can be combined with phone
technology. Looking at the seven separated groups the company operates now (mobile,
search, chrome & apps, YouTube, ads, geocommerce, social), all the other six has a
connection with mobile phones by now. If Google can only boost the number of consumers
who use their search engine, advertising interface or social site, they are in a winning
situation already. The diversified knowledge the acquirer has is the ground for innovation
ideas after the acquisition, which confirms Assumption 4.
6.3.4. Conclusion
We based the analysis of determinants for success in knowledge seeking on Makri et
al. (2007) research. In short we did not found enough evidence in the Google-Motorola
acquisition to decide whether the similarity in tacit knowledge that is embedded in the firms
is related positively to the post-acquisition process. It does not play a high role in the success
when the two firms are vertically integrated. The lack of experience in this kind of integration
in Google’s case also didn’t provide enough information about the importance of prior
acquisition experience.
Although in short term only explicit knowledge, like patents are easily exploitable by
the two firms, in the long term run innovation outcomes show the real value of the
acquisition. The new products and actions toward future innovation by the two firms show
that similar knowledge about the market and products paired with a diversified knowledge of
the acquirer are significant determinants of the acquisition success.
64
6.4 HR analysis
6.4.1. Introduction
For analysing the human resources (HR) it has not been possible or even realistic to
get interviews from Google or Motorola employees. Instead it has been possible to find
employee reviews from each company on Indeed.com. These can be used to look into how
satisfied the employees are and use this as a variable to determine success compared to the
working environment. Since all of the reviews are from 2012 or later it is also possible to
look into the reaction since Google acquired Motorola. The liability of the interviews can be
questioned especially because that people who have something to complain about usually
often is the ones who write about their worries. People who are happy about their job has
nothing to argue about and maybe do not see as much reason to tell about it. There are above
two hundred Google reviews and just thirteen Motorola interviews, which make the Motorola
reviews less reliable, but since the reviews has a good mix of good and bad reviews they still
seem to have good liability. To support the analysis of employee happiness, turnovers of the
employees will be added. The focus in this case will be on the salary in Google and how their
compensation rate affect the employees. We use one determination in the analysis of HR
which is satisfaction of employees. To analyse this determination we look at five different
variables which are work and life balance, security, management skills, compensation and
salary and culture
6.4.2. Pre-acquisition thoughts from the view of Motorola
Before comparing the employee reviews, this chapter will look into some pre-acquisition
thoughts from Motorola. First of all the former CEO of Motorola, Sanjay Jha, describes the
difference between the two companies saying that there is a big gap between the two
companies working atmosphere (Raice, 2011). They see Google as an eleven year old child
of the internet age and Motorola as a forty year old and more classic company with
“bureaucratic layer of middle management and little innovation from rank and file workers”
as described by a former Motorola employee (Raice, 2011). Sanjay Jha also tells how he sees
Google as bigger risk takers because they come from an environment of programming where
mistakes can be corrected later. There is not the same room for error in Motorola where an
error will be sent into the market (Raice, 2011). Motorola’s first meeting with Google came
as Motorola struggled to get into the smartphone market which they almost missed according
to Sanjay Jha (Raice, 2011). To get into the smartphone market they decided to choose
android as the phones platform. Despite the companies differences they started cooperate in a
65
smaller level before the acquisition, which have helped the companies understand each other.
This is a typical beginning to a cooperation that ends with the bigger company acquiring the
smaller company to incorporate the function into the existing company (Schuler and Jackson,
2001).
6.4.3. Culture of the firms
A1: The cultural difference between acquirer and target affect the integration process
negatively.
Another potential clash between the companies are what they were before the
acquisition. The companies’ size, location and income has been significantly different. Before
the acquisition Google around 29.000 people and Motorola 20.000 people which meant an
increase in staff of 68% (Raice, 2011). This is a huge increase of employees and Google will
face a challenge how to suddenly have such a growth in their amount of employees. Google's
headquarters are based in Silicon Valley, San Francisco, the hometown of technology and
innovation. Besides the rich technological advantage of this area, they have ergonomic
benefits from restaurants and shops right next to their own offices (Raice, 2011). This is in
contrast to the headquarters of Motorola in Libertyville where the closest restaurant is one
mile away.
According to Sanjay Jha this will never become an issue because the companies will
be run as separate entities (http://online.wsj.com), but the question is if this is a good strategy
for Google, as it will seem like that the original Google employees will benefit the most from
being an employee at Google. It is clear that Google still need to incorporate the Motorola
employees and make them feel like a part of Google. Software engineer James King tells that
“"I don't know if we're as Google as Google is," said the 40-year-old, an 11-year veteran of
Motorola. He doesn't yet see himself as a Google employee. "Right now, no," he said. "Can
I? Yes." (Raice, 2011).
66
Figure 6.13 (Raice, 2011)
This clearly shows that some of the employees in Motorola are still in a face where they
need to get used to being part of Google. The question is if it is possible when Google
decided to run Motorola as a separate entity or if the employee will feel separated and
alienated from Google. It seems like that not only the employer value is a concern for the
Motorola employees but also the values of the company’s knowledge that had been gathered
throughout the companies forty year history. Martin Cooper who worked used to be an
engineer fears that Google does not value the knowledge Motorola have in radio technology.
He tells that “It's a sad thing to see an 82-year-old culture of focus on radio specifically, and
on excellence in technology, and see that be absorbed by an Internet company," (Raice,
2011).
In the culture comparison some of the cultural differences between the companies are
shown. It has not been possible to find material about how the staff at Motorola will be
treated, but if Google does not make the people in the Motorola building equal, it could
potentially split the employees and make a hostile environment. One of the comparisons is
salary and as mentioned in the beginning this will be used to support
the human resource
analysis.
67
6.4.4. Salary and compensation analysis
A2: Salary gap between acquirer and target generally affects success of post-acquisition
integration negatively.
As seen in the above comparison Google pays 114.084 dollars to their software
engineers compared to Motorola’s salary payment of 79.776 dollars. This is a 34.308 dollar
or 30 % different in salary payment. This is an expression of a higher appreciation in salary
from Google, but this maybe also a clear view of software engineers being more valuable in
Google than in Motorola. Google is mainly a software company which makes it critical for
them to have experts within this area of expertise. Motorola on the other hand produce cell
phones and other kind of hardware and have other priorities than just software engineers. Still
it is interesting to see this 30% difference in salaries which Google should be aware of and
equalize the salaries for all their employees.
Another matter is compensation. Here the focus is on the compensation giving to the
former CEO of Motorola Sanjay Jha. When completing the acquisition Google also decided
to chance the CEO of Motorola. Sanjay Jha was paid 64.3 million dollars which Chicago
Tribune calls a “golden parachute” (Wong, 2012). This can make the employees look
negative on the company as they change things as they are and as mentioned earlier people do
not like changes. Google are working together with Sanjay Jha in the post-acquisition face
(Google completes Motorola Mobility acquisition, 2012), which could help the employees
with the transfer from the Motorola to Google working environment. To look more into the
employee reactions and feeling it has been possible to find online reviews from employees at
both companies. This will be analysed now.
6.4.5. Comparison between Google and Motorola employee satisfaction
A3: The employees’ fear of change negatively affects the work and life balance and finally
affects success of acquisition and affects their work negatively, so they need security.
The overall view of Google as a working place is rated one star better than Motorola
with 4.5 compared to 3.5 ratings. This shows that Google has a better working atmosphere
compared to Motorola. Since Motorola now is a part of Google and has been it for some time,
it is interesting to see that there is a difference in employee satisfaction. Variables like work
life/balance, job security and management is all rated one star lower in Motorola than in
Google. This can prove that employees in an acquired company feel more insecure about
their job future both compared to their tasks, job security and how the management will
68
change due to the takeover. This insecurity do not decreasing with the new from Google’s
second quarter results. This document describes the following “Headcount – On a worldwide
basis, we employed 44,777 full-time employees (40,178 in Google and 4,599 in Motorola
Mobile) as of June 30, 2013, compared to 53,891 full-time employees (38,739 in Google,
9,982 Motorola Mobile, and 5,170 Motorola Home) as of March 31, 2013.” (Google Inc.
Announces Second Quarter 2013 Results, 2013) In other words Google have fired 5300
people in Motorola just within 2013 and as mentioned earlier, Motorola had around 20.000
employees at the time of the acquisition. From what has been shown in the media it seems
like that a big part previous firings have been a part of Google sale of the factories in China
and Brazil. In this sale the workers was transferred to work for the buyer of the factories.
Figure 6.14 (Google Employer Reviews, u.d.)
Figure 6.15 (Motorola Mobility Inc. Employer
Reviews, u.d.)
In the more positive view parameters like compensation and job culture seems to be
similar between the companies. We can assume that these factors has been affecting
Motorola positively before and after the acquisition, but at least the level of satisfaction
compared to compensation/benefits did not change and is almost on the same level as the
satisfaction in Google’s employees (Google Employer Reviews, u.d.).
By taking a deeper look into the reviews it is interesting to see that none of the Google
reviews mention Motorola but in the Motorola reviews, Google is mentioned four times in
the thirteen reviews. So again it seems like that the acquisition is affecting the Motorola
employees more than it does at Google, and this can potentially make a gap between the
employees and make the former Motorola employees feel alienated (Kusstatscher, 2005). But
as seen in the overall rating tables above it is not all bad news in Motorola. One former
employee say that “I enjoyed the corporate culture at Motorola Mobility Inc. My co-workers
were very knowledgeable. The changes that Google brought to Motorola made the work
place even more productive” (Motorola Mobility Inc. Employer Reviews, u.d.) and another
69
“Productive and fun workplace” (Motorola Mobility Inc. Employer Reviews, u.d). But of
course there is also reviews in the other end of the scale, one of them saying “Productive and
fun work place” and another “Enriching and fun place to work.” (Motorola Mobility Inc.
Employer Reviews, u.d). Compared to the Motorola employee reviews there is a general view
of google being a good working place. Most unhappy reviews seems to come from people
who cannot adjust to Googles work environment with an open work space which is expressed
by this review “Working at Google is like trying to do your homework in a frat house living
room.”. (Google Employer Reviews, u.d)
6.4.6. Google’s management of Motorola
A4: Managers experience with acquisitions affects the acquisition positively
Google have had lot of experience with acquisitions and have made 103 acquisitions
since 2007 (Google M&A History and Trends, 2013). This shows that the management has
experience with acquisitions and should be able to incorporate Motorola into Google. The
most of the acquisitions made by Google has been in the “internet software and service” area
which make up for 64% of Google's acquisitions (Google M&A History and Trends, 2013).
Figure 6.16 (Google M&A History and Trends, 2013)
70
Motorola is far from the first company which Google acquire in the mobile phone
sector. Since 2010 80% of all acquisitions has been in the “mobile and telecommunications”
area and in total 17% of all Google’s acquisitions has been within this sector (Google M&A
History and Trends, 2013). This shows that Google have been working on becoming a part of
this sector and Motorola can still be argued to be a big step for them as they now go from
software acquisitions into a hardware acquisition. With this 3 year intensity of investments in
the mobile phone area it seems like Google have a plan and the managers should be prepared
for incorporating Motorola. Anyway it seems like that there is uncertainty at the Motorola
employees which is showed in the reviews above where Motorola just give management
three out of five stars. This is hard to measure because of the few reviews from Motorola and
if a closer look is taken nine out of the thirteen answers have rated management with four
stars or higher. If this is a general point of- view Google is heading in the right direction and
just need to keep on improving and getting everybody on board with the plan and get the
approval from the employees to their managers.
One of the things Google do to make the post-acquisition face go smoother is by getting
advice and help to the new CEO Dennis Woodside from the former CEO of Motorola Sanjay
Jha. According to www.thestar.com “Woodside oversaw planning for the Motorola
integration, according to Google. Jha will be retained to help manage a transition period.”
(Google completes Motorola Mobility acquisition, 2012). By keeping Woodside as a kind of
consultant it is easier for the management in Google to get a more natural chance for the
Motorola employees to be integrated into Google.
6.4.7. Overview of the employee satisfaction
After looking at different variables it seems that Google want to make the acquisition a
small deal compared to the employees. If they just ignore the risk of Motorola’s employees
feeling alienated it will be difficult to get the employees work together as a team. Because of
this and the above reviews and interviews the success of the acquisition can be questioned so
far compared to HR. Google need to focus more on letting the former Motorola employees
know that they are not a separate unit who should fear about their job situation or if the
Google headquarters know what is going on in the former headquarters of Motorola in
Libertyville. As mentioned in the behavioural theory it takes time for employees to feel like
they belong to the new company. That is why it can be hard to say if Google have failed
totally or still face post-acquisition challenges compared to create a working atmosphere
where everybody feels welcome. Anyway Google have lot of experience with acquisitions
71
and the former CEO of Motorola is helping Google with the post-acquisition process, which
make it seem like that Google are doing what they can to create a better atmosphere for the
employees. To make a clear view of this HR analysis variables are described in cue words in
the box below. This should make a view of what this project see as positive or negative
compared to the HR analysis.
Figure 6.17 shows the analysis results for the four assumptions related to the
determinants for integration success from HR perspective.
Determinants
Variables
Assumption
Analysis result
Satisfaction of the
employees
Security and work
life balance
The employees’ fear of change and the lack of
security negatively affects the work life balance and
finally affects success of acquisition
+
Management skills
Managers experienced with acquisitions affect the
acquisition success positively
+
Compensation
(salary)
Salary gap between acquirer and target generally
affects the success of post-acquisition integration
negatively
-
The cultural difference between acquirer and target
affects the integration process negatively
+
Culture
Figure 6.17
72
6.5 Analytical framework
Persp.
Determinants
Magnitude
cost savings
of
Marketing
Market-related
performance
Variables
Assumption
A.R.
Extent of Marketing
integration
1)
Combining marketing strategies of both acquirer and target has
positive impact on successful integration
+
Extent of Integration
2)
The huge extent of integration as negative impact on integration
since the organizational energy is focused on internal issues and
Market- and Customer-related performance are neglected
+
Speed of integration
3)
The shorter is the integration process, the less affected are marketrelated performance
-
Customer orientation
4)
Customer orientation integration leads to sustention of customer
trustworthiness and support market related performance
+
Market positioning
5)
Going to the new market makes the integration success more
complicated and more time is needed to achieve goals
-
Relative size of acquired
company
6)
If the actors want to avoid decrease in market-related performance
the lower is the relative size of the company the better it is for
successful integration
-/+
Market growth level is
low
7)
High level of market growth has positive impact on integration and
low level of market growth has negative impact
-
1)
Pay the right price for the acquired firm - high payment of premium
and payment in cash affect the acquisition success positively.
+
Cumulative abnormal
return (increase of hare
price)
2)
Positive abnormal return of cumulative share price affects the
acquisition success positively
Confliction between
managers and
shareholders
3)
Degree of confliction between shareholders and managers affects
the success of acquisition negatively
Impact of post-acquisition
market share price
4)
Increase of share price value affects success of acquisition positively
Return of asset /
Acquisition expenditures
5)
Higher amount of acquisition cost causes lower pace of ROA and
affects success of acquisition negatively
+
Revenue creation /
Segment profitability /
Consolidated revenue
6)
Decrease of contributed revenue from the segment affects
acquisition negatively
+
Tax benefits
7)
High tax benefits affect success of acquisition positively
+
Cost of revenue from
acquired shareholders
8)
High cost of revenue affects success of acquisition negatively
+
Cumulative total return
to shareholders
9)
Total revenue of the acquired segment causes shareholders
uncertainty so it affects success of acquisition positively
N/A
Pay the right price
Value added
factors
Acquisition premium
Method of payment
Finance
Value distribution
factors
Value creation
factors
Value distribution
factors
N/A
73
+
N/A
Persp.
Determinants
Variables
Firms size, structure and
Assumption
1)
Knowledge
Industrial similarity
Prior M&A experience
Human resource
Complementarity
Satisfaction of
the employees
Acquirer diversity
Security and work life
balance
The acquirer and acquired firms similarity in size/structure/culture
N/A
is positively related to the integration process by quickening the
culture
Similarity
A.R.
knowledge transfer
2)
A moderate market/product similarity has a positive effect on
+
innovation outcomes
3)
The acquirer firms prior experience is positively related to the
N/A
integration success
4)
The more diversified the acquirer is, the greater the influence of
+
complementarities on innovation outcomes
The employees’ fear of change and the lack of security negatively affects
the work life balance and finally affects success of acquisition
+
Management skills
Managers experienced with acquisitions affect the acquisition success
positively
+
Compensation (salary)
Salary gap between acquirer and target generally affects the success of
post-acquisition integration negatively
-
The cultural difference between acquirer and target affects the
integration process negatively
+
Culture
74
7 Conclusion
The main purpose of this project is to examine the main determinants of successful postacquisition integration in IT industry, from four different perspectives, if there is a
relationship between the successfulness of acquisition for the acquirer firm and the outcome
of the acquisition.
We have chosen to investigate four measures of resource as the outcome from marketing,
finance, human resource and knowledge. Even though our result is not significant, due to the
lack of observations, our findings indicate that some relationship between the resources
identities and acquiring return after the merger exists. Therefore, the following relationships
have been observed.
7.1 Marketing
As discussed before one of the reasons of failures in post-acquisition integration process is
the situation where marketing integration is neglected. Obviously, it depends on what kind of
firm is the acquirer and also what kind of firm is being acquired. By analysing the postacquisition integration of Google and Motorola the results show that this specific integration
is highly motivated by market-related performance, simply marketing plays significant role.
By looking at variables important for successful marketing-integration process, it is obvious
that Google is trying to make a success out of this merge by following them. Google’s
authorities constantly say that this is a “long shot” and the real outcomes will be seen after
two years of time. Since this is a vertical integration, the market-related performance cannot
be neglected as a matter of fact that Motorola creates products for the last consumer. For that
reason we see the significant potential for the success out of this movement and the
acquisition path is correct even if it does not look like that so far.
7.2 Finance
According to the result of the financial analysis of successful post-acquisition, it is critical
to consider long-run terminology as well as effective variables which make concrete
assumptions from Google’s lens. Consequently, value creation affection and value
distribution determinants are the most remarkable results. Whereas, the higher the amount of
acquisition costs, the lower pace of return of assets so called to be reflected in corporate
finance audits were negatively contributes in decrease of acquired segment revenue.
Furthermore, high ongoing taxes and on the other hand the amount of tax benefits can
directly make the acquisition either a loss making decision or a beneficial action. Besides,
75
Google suffers from high cost of revenue from the Motorola’s hardware business which
causes negatively the acquisition worthless on one hand. On the other hand, that plays
outstanding role in the confliction between shareholders and managers of Google. However
the degree of this financial damage could not evidently measured even in long-run analysis
since Google’s profitability is huge enough to disguise Motorola’s losses inside itself.
7.3 Knowledge
The two firms face two basic task after the acquisition from knowledge seeking
perspective. They have to find the easiest and quickest way to build an efficient knowledge
synergy, and achieve it in a way that they can exploit their knowledge based on value
creation. We presume that the tacit knowledge of the two firms, coming from their size,
structure and culture has a significant effect, as much as the acquirer prior acquisition
experience on the integration process. However Google’s vertical integration does not
provide enough information about the importance of these factors. Contrary, looking at
innovation outcomes as signs of acquisition’s success help to find other determinants. We
argue that the two firms’ moderate industrial similarity is related positively to the innovation
process speed and success. The acquirer knowledge diversification on the other hand make
more ways available for the firms to reach the acquisition’s value potential, because
knowledge complementarities offer the opportunity for varied innovation outputs.
7.4 Human Resource
When looking at the resource-based view it shows us the acquisition process from several
different perspectives. Each of them is important for the overall success in its own way. The
human resource perspective shows the variety of challenges the acquirer faces struggling to
integrate the employees of the target into its company. It seems that Motorola employees are
the most nervous about their future after lot of firings, but as it seems Google needed to get
rid of Motorola’s factories in China and Brazil, so the firings should not affect the rest
employees at bigger scale. HR integration is crucial because the employees and the
management team are the ones who implement the firm’s strategy, who find the way to
success and they are responsible for any failure. Compared to Google’s history of acquiring
plenty of firms, it should be possible for them to do a good integration of Motorola. Finally
the similarity among the two companies makes it easier for the two cultures to work together
and create a common work culture.
76
8 Reflection
The overall goal of the project is to provide the model for analysing the success of postacquisition integration in IT industry. It does not have to be a finalized model, but a model
that other projects could develop further. The results also cannot be generalized identically
because of the lack of reliable information coming from inside of the acquired and acquirer
firms and due to the short time since the acquisition has happened. Furthermore, the results
might differ when comparing mergers and acquisitions and where the target and acquiring
company are not from the same country, the same industry or the same size. Our case
provides a special view as both the target and acquiring company are operating on the U.S
stock market. Also we only used secondary data that includes remarkable news and
transactions with significant effects. We based the project on the RBV in four perspectives
(finance, knowledge, marketing, HR) in order to analyse the major questions related to
acquisitions.
After the analysis and observing also other post-acquisition integration the evidence shows
that every integration process differ from the others and different determinants and variables
play important role. Based on that the integration should not be taken only from the financial
perspective, specifically cost-savings strategy, but firms need to realize where they are and
where they would like to be after the integration. By doing so the company pick the right
perspectives that will help them to achieve the pre-planned success. As mentioned before,
70% of post-acquisition integrations are failed, probably by focusing not on the appropriate
determinants but only on the financial outcomes.
77
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