A TEMPORAL PERSPECTIVE OF
CORPORATE M&A AND ALLIANCE
PORTFOLIOS
John E. Prescott and Weilei (Stone) Shi
ABSTRACT
How and whether the rhythm, synchronization and sequence of firms’
M&A and alliance activity over time impact firm performance is our core
question. We seek to advance a temporal lens in the M&A and alliance
discourse by explicitly incorporating time-associated theories, constructs
and methods. A temporal view of M&A and alliance activity requires
strategists to study fundamental questions related to when and under what
conditions firms should accelerate, slow down and coordinate their M&A
and alliance initiatives, whether firms’ trajectory of M&A and alliance
have discernible and distinctive patterns over time, and whether these
initiatives demonstrate a temporal pattern that becomes an integrated
part within firms’ M&A and alliance routines that create a time-based
source of competitive advantage. Using a sample of 57 small to mediumsize firms in the global specialized pharmaceutical industry and their
M&A and alliance activities for 19 years we find support for our
temporal-based hypotheses.
Advances in Mergers and Acquisitions, Volume 7, 5–27
Copyright r 2008 by Emerald Group Publishing Limited
All rights of reproduction in any form reserved
ISSN: 1479-361X/doi:10.1016/S1479-361X(08)07002-6
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JOHN E. PRESCOTT AND WEILEI (STONE) SHI
INTRODUCTION
How and whether the rhythm, synchronization and sequence of firms’ M&A
and alliance activity over time impact firm performance is the core question
of our on-going research agenda. Our objective is to advance a temporal lens
(Ancona, Goodman, Lawrence, & Tushman, 2001) in the M&A and alliance
discourse by explicitly incorporating time-associated theories, constructs
and methods. A temporal view of M&A and alliance activity focuses our
attention towards questions related to when and under what conditions
firms should accelerate, slow down and coordinate their M&A and alliance
initiatives, whether firms’ trajectory of M&A and alliance initiatives have
discernable and distinctive patterns over time, and whether these initiatives
demonstrate a temporal pattern that becomes an integrated part of firms’
M&A and alliance routines that create a time-based source of competitive
advantage.
While there are a variety of temporal theories constructs and approaches,
we focus on rhythm, synchronization and sequence because they directly
address the above-mentioned time-based questions that are central to the
M&A and alliance literature. We define rhythm as the pattern of variability in
the intensity and frequency of M&A and alliance activity (McGrath & Kelly,
1986; Vermeulen & Barkema, 2002). Synchronization or mutual entrainment
is the adjustment of one activity to match with that of another (Ancona &
Chong, 1996). We explore both internal synchronization of M&A and alliance
initiatives and the external synchronization of these strategic initiatives with
competitors. The sequence of a firm’s M&A and alliance activity is the
trajectory of the incidence of these activities over a specific period of time,
their timing and duration and the transition between the two activities.
In this chapter, we first articulate the value of adopting a temporal
perspective in the M&A and alliance dialog. Next we present in narrative
form the theory, methods and results for three research projects related to
our research agenda. Finally, we speculate on fruitful M&A and alliance
time-based initiatives.
THE VALUE OF INCORPORATING A TEMPORAL
LENS IN THE M&A AND ALLIANCE DIALOG
While the M&A and alliance literatures have a rich and diverse tradition, a
temporal perspective focusing on the rhythm, synchronization and sequence
A Temporal Perspective of Corporate M&A and Alliance Portfolios
7
of M&A and alliance initiatives has received scant attention. At this point,
you might be asking yourself questions such as whether firms consciously
and deliberately develop a rhythm for their M&A initiatives or whether
firms synchronize their M&A and alliance activities with competitors. As we
explored these assumptions, we ran across the following quote from
Mike Tomlin, Head Coach of the Pittsburgh Steelers: ‘‘We’re thoughtfully
non-rhythmic’’.1 While Coach Tomlin was not referring to M&A or
alliances, his quote is consistent with our perspective that managers can
intentionally conceptualize and implement time-based approaches for
important decisions.
A temporal dimension of strategy is embedded in a wide range of phenomenon, including, but not limited to first mover advantage (Lieberman &
Montgomery, 1988), resource-based view (Dierickx & Cool, 1989),
dynamic capabilities (Teece, Pisano, & Shuen, 1997), decision making
under uncertainty (Eisenhardt, 1989), change management (Huy, 2001)
and the real option perspective (Kogut, 1991). While these research
streams have provided significant practice and process insights, their
central focus has not addressed temporal constructs such as tempo, cycles,
rhythm, synchronization and sequence (with some notable excepts such as
time-based competition). A fundamental underpinning of strategic
management logic lies in a prevailing focus on substance, i.e. what to
do, over temporality, i.e. when, how fast, how often and how frequently to
do. Thus, the temporality of strategy is relegated to a peripheral role
(Ancona et al., 2001) in that time-associated constructs and assumptions
are not explicitly developed but implicitly assumed (Butler, 1995) and often
employed as methodological proxies for other constructs of interest. For
example, in the top management team literature, tenure is a methodological proxy for firm or industry knowledge, group cohesion, inertia and
harmonious working relationships (Mosakowski & Earley, 2000). In the
alliance literature, repeated partnering with the same firm is a proxy for
trust and positive working relationships (Gulati, 1995).
There are some important exceptions with respect to our focus in the
M&A and alliance streams, for example, questions related to accelerating or
slowing down post-acquisition integration (Homburg & Bucerius, 2006),
preemptive acquisition (Carow, Heron, & Saxton, 2004), M&A and alliance
experience relationship with performance (Haleblian & Finkelstein, 1999)
and M&A and alliances as learning tools and races (Hamel, 1991). While
these different thrusts offer unique contributions for enhancing our
temporal understanding of M&A and alliance initiatives, two important
temporal issues remain under-developed. First, their focus typically centers
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JOHN E. PRESCOTT AND WEILEI (STONE) SHI
on a single M&A or alliance and therefore does not incorporate the
nature of multiple strategic initiatives and their interplay. In other words,
they are not approached from a portfolio perspective (Hoffmann, 2007).
Second, those scholars that have recognized the interdependent nature
among multiple M&A and alliances (Haleblian & Finkelstein, 1999)
have not addressed their periodicity and the fact that multiple initiatives
can occur synchronously at the same level of analysis (e.g. firm) or
across levels of analysis (firms and their competitive environment).
In other words, M&A and alliance initiatives can demonstrate a discernable
pattern in the timing of their occurrences conditioned by internal or external
pacers.
Thus, a temporal lens of M&As and alliances calls for theoretical
development and empirical examination of temporal constructs. From our
perspective, a temporal lens of M&As and alliance portfolio development
can contribute to the enrichment of our understanding of these strategic
initiatives in at least four ways.
First, studying temporal constructs such as rhythm, synchronization and
sequence addresses the fundamental concerns of strategy, i.e. how firms
behave and why firms differ (Rumelt, Schendel, & Teece, 1994). In
particular, a temporal view that emphasizes the role of rhythm, synchronization and sequence suggests a past–present–future link (when to do) and is
in line with the conceptualization of strategy as emergent, dynamic, logically
incremental, path dependent and patterns of interaction (Mintzberg, 1990;
Ofori-Dankwa & Julian, 2001).
Second, temporal constructs such as internal and external synchronization of M&As and alliance initiatives help us to better understand and
model them as multi-level phenomenon which is consistently called for in
strategy research (Pettigrew, 1992). Theoretical approaches such as the
entrainment model (which is the core theory behind the concept of rhythm)
provide a theoretical explanation for why firms coordinate rhythmic M&A
and alliance processes within the boundaries of their firms as well as their
interactions with their environment. As such, the entrainment model among
others (Ancona & Chong, 1996) serves as theoretical foundation for
studying multiple activities, multi-level phenomena and their interactions
across time. Viewing M&As and alliances from multiple activities and
multi-level phenomena is important since they can be viewed as two separate
activities that have different momentums, rhythms and trajectories.
Alternatively, viewing M&As and alliances as internally (within firm)
embedded is consistent with the call for an explicit understanding of
A Temporal Perspective of Corporate M&A and Alliance Portfolios
9
multiple activities at the same level of analysis. Alignment and coordination
between activities, as Powell (1992) concluded, can become a competitive
advantage.
Third, a temporal view that focuses on theoretical concepts such as
rhythm, synchronization and sequence of M&As and alliances complements the opportunity-driven perspective. In this regard, a temporal
strategy is particularly important for small- and medium-sized firms since
they typically have limited capabilities across their industry value chain
and have not developed specialized corporate development offices. As we
noted above, a rhythm-driven approach is based on an assumption that
managers purposely plan and implement M&A and alliance activities.
In large corporations, corporate development offices staffed with analysts
often assume this role (Kale, Dyer, & Singh, 2002). In the context of
small- and medium-sized firms, corporate development offices are not
common or economically feasible, yet these firms often undertake multiple
M&A and alliance initiatives. We propose that small- and medium-sized
firms are likely to adopt a rhythm-driven M&A and alliance (and more
generally a temporal) approach under two interrelated circumstances.
For firms whose growth strategies are mostly driven by M&A and alliance
initiatives, one would expect to see a rhythm-driven approach. In addition,
firms who lack capabilities or resources for internally generated growth
will adopt a rhythm-based approach to M&A and alliances. Either as a
conscious choice or due to limited resources, many small- and mediumsized firms that lack capabilities to internally develop new products will
proactively search for targets and allying partners rather than passively
wait for M&A and allying opportunities to emerge. Later in this
chapter, we share interesting finding regarding our rhythm example in
the context of small- and medium-sized global specialty pharmaceutical
firms.
Lastly, a temporal perspective of M&A and alliances provides a fresh
view for the static vs. dynamic strategic fit debate (Zajac, Kraatz, & Bresser,
2000). For instance, the theoretical approach underlying our rhythm and
synchronization studies asserts that M&A and alliance activities are
embedded and interdependent, and that a fit should be achieved by
matching M&A and alliance activities across time. This serves two purposes
in clarifying the fit debate. On the one hand, incorporating time constructs
explicitly (rather than as methodological proxies) helps to explain the
dynamics of why and how outcomes are differentially shaped by multiple
on-going activities. Second, we argue that fit has an inherent temporal
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JOHN E. PRESCOTT AND WEILEI (STONE) SHI
characteristic that influences and is influenced by multiple activities within
and external to firms.
M&A AND ALLIANCE RESEARCH: A TEMPORAL
LENS RESEARCH AGENDA
While there are several temporal constructs, the selection of rhythm,
synchronization and sequence builds on and complements the extant
literature in several ways. First, the prevalence of active acquirers
(Laamanen & Keil, 2008) and alliance portfolios (Lavie, 2007) indicates
that companies, rather than executing isolated deals or alliances, often
execute a serial of mutually interrelated acquisitions or alliances over time.
Paradoxically, prevailing research centers on individual acquisition or
alliance. There are few theoretical lenses that can accommodate multiple
or a series of acquisitions and/or alliances. A temporal lens that focuses on
rhythm, synchronization and sequence has the potential to offer a
systematic theoretic foundation that directs our empirical examination.
For instance, when firms engage in more than one acquisition, both its
short- and long-term performances are not longer driven by an individual
acquisition or alliance, but rather by the overall pattern and structure of
the strategic portfolio over time (Koka & Prescott, 2002). Temporal
constructs such as sequence provide a sociological foundation for why
firms’ strategic initiatives do not occur in infinite combinations but rather
in a limited set of types or what is often referred as typologies or
taxonomies. Typologies such as Miles and Snow (1978) have played an
important role in the strategy field and a temporal-based typology of
M&A and alliance initiatives would be a valuable contribution to the field.
Second, our three constructs have been studied extensively in other fields
such as sociology and organization behaviors, but have only recently
attracted the interest of strategy scholars (Laamanen & Keil, 2008;
Vermeulen & Barkema, 2002). Third, the constructs demonstrate one
way to organize firms’ M&A and alliance initiatives along a time
dimension which captures their historical and holistic M&A and alliance
momentum.
In the next section, we provide an overview of our sample and its
appropriateness for our research questions. We then develop our
theoretical reasoning and empirical support for a set of hypotheses linking
rhythm, synchronization and sequence to performance. We use a narrative
form to present our findings. Scholarly papers are available for each of the
A Temporal Perspective of Corporate M&A and Alliance Portfolios
11
studies we present below as well as one on pacing and M&A and alliance
initiatives.
INDUSTRY CONTEXT AND SAMPLE
CHARACTERISTICS
We used the global specialized pharmaceutical industry as the context to
examine our temporal-based hypotheses. Our sample consisted of 57 small
to medium-size firms (SME’s) and their M&A and alliance activities for
19 years beginning in 1985 and ending in 2003. We carefully selected our
sample firms applying the following procedure. First, we identified firms
that have value chain activities in the pharmaceutical industry (SIC 2834).
We also identified key words such as special drug and specialty pharmacy,
and searched company websites, annual reports and major industry journals
for potential firms to include in our sample. We then narrowed the sample to
firms that were listed on either the NYSE or NASDAQ because we explore
performance implications. Finally, we had two pharmaceutical industry
experts provide an assessment of our sample as a validity check.
The global specialized pharmaceutical industry provides an excellent
context for us to study firms’ M&A and alliance temporal behavior. Smalland medium-sized specialized pharmaceutical firms’ growth strategies are
largely driven by M&A and alliances activities. As we mentioned above,
firms utilizing M&A and alliance growth-driven strategies provide an ideal
context to study temporal constructs such as rhythm, synchronization and
sequence. Specialty pharmaceutical firms often do not possess the requisite
complementary skill sets and knowledge for in-house development activities;
they instead rely on partner firms for important resources. The lack of
internal capabilities to develop therapeutic products suggests that these firms
are more likely to search for targets or partners proactively. Their overall
M&A and alliance initiatives are less likely to be driven opportunistically. In
addition, small, young and specialized firms are regarded as a driving force
for industrial renewal and innovation (Audretsch, 1995). Their survival
environment is extremely dynamic and competitive advantage often accrues
to those firms that can manage the temporality of their collaborative activities (Barkema, Baum, & Mannix, 2002). Finally, most of our SME’s were
established around the mid-1980s, when the Securities Data Corporation
(SDC) began to collect complete alliance and M&A data. This allowed us to
collect a fairly complete history of firms’ M&A and alliance behaviors which
is critical to understand firms’ temporal patterns over time.
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JOHN E. PRESCOTT AND WEILEI (STONE) SHI
We obtained M&A and alliance data from SDC Platinum and verified them
through company 10k reports, firm websites and interviews with industry
experts. Firm level and performance data were collected from COMPUSTAT
industry annual database and from interviews with industry experts.
To measure and test the rhythm and synchronization of firms’ M&A and
alliances, we employ Kurtosis measure as well as other variability measure.
We test our hypothesis of rhythm using econometric models that deal with
both autocorrelation and heteroskedasticity. We test our synchronization
(fit) hypothesis using traditional difference score analysis and cross-level
polynomial regression (combined with hierarchical linear modeling) for
internal synchronization and external synchronization, respectively.
To empirically identify the sequence pattern of firms’ M&A and alliances
behaviors, we transformed the raw data into sequence format, which
provide sufficient information on transitions and trajectories over firms’
historical courses on the number of M&As and alliances conducted each
year, their timing and transitions between the dominant forms of strategy
(M&As or alliances).
RHYTHM AND SYNCHRONIZATION IN M&A
AND ALLIANCE PORTFOLIOS
Rhythm is defined as the pattern of variability in the intensity and frequency
of organizational activities (McGrath & Kelly, 1986; Vermeulen &
Barkema, 2002) and synchronization or mutual entrainment is defined as
the adjustment of one activity to match with that of another (Ancona &
Chong, 1996). These temporal concepts are largely borrowed from the
entrainment model in biologic sciences, in which the notion of entrainment
refers to one cyclic process being captured by, and setting to oscillate in
rhythm with, another process. McGrath and Kelly (1986) were among the
first to introduce the entrainment model in the social sciences. The social
entrainment model specifies that psychological and behavioral cycles can
become entrained to other social or environmental processes. For example,
in universities, the academic calendar and faculty teaching/meetings are
entrained. As McGrath and Kelly (1986, p. 80) stated, ‘‘the social
entrainment model provides a coherent framework for describing the
operation of rhythmic process, their coupling to or synchronization with
one another and potentially to outsider cues’’. For the social entrainment
model employed here, we define the three temporal constructs in the
A Temporal Perspective of Corporate M&A and Alliance Portfolios
13
following way: rhythm is the pattern of variability in the intensity and
frequency of M&A and alliance initiatives, internal synchronization is the
rhythm synchronization between alliances and M&As within firms, and
external synchronization is the rhythm synchronization between M&A and
alliance activities of focal firms and their competitors.
In the M&A and alliance context, rhythm emphasizes the recurring nature
of a frequency pattern, i.e. the pattern of variability in the frequency of
M&A and alliance initiatives. To this end, our major focus in discussing the
rhythm of M&A and alliance initiatives is the variability, consistence and
regularity of the pattern across a specified time period.
In biology, although there is no rigorous physicochemical explanation for
rhythm, two conjectures of rhythmic activity have emerged (Oatley &
Goodwin, 1971) and we will draw on them for our synchronization argument. The intrinsic (internal) view (cellular biochemical clock hypothesis)
suggests that it is an essential dynamic feature of the observed process. The
fundamental periodicities in living systems are the cycle of growth and
division in cells, which need bear no relation to any environmental
periodicity. The extrinsic perspective (hypothesis of environmental timing
of the clock), on the other hand, maintains that such rhythms represent
adaptive responses to a periodic environment such as solar, lunar and
annual rhythms. Biologic scholars tend to agree that complicated periodic
organisms can be understood as partly adaptive and partly of internal origin.
The origins of rhythm in corporate strategic actions can be understood in
a similar way since the physiological processes of biologic organisms can be
applied reasonably well to psychological processes of individual decision
makers or to social–psychological mechanisms at the interacting dyads,
groups or even larger organized social units (McGrath & Kelly, 1986).
Internally, a rhythmic M&A or alliance pattern can be formed through
multiple means over time. It can be influenced and shaped consciously by a
top management team whose members have some sort of rhythmic
orientation intended to achieve economic efficiency. Individuals who are
more rhythmic will be more likely to reflect such a mindset in their actions.
For example, major PC manufacturers release upgraded products at
Christmas time each year in order to take advantage of newly released
versions of software (i.e. Microsoft: games) or hardware (i.e. Intel: memory
chips). Events such as annual strategic planning create ‘‘repetitive
momentum’’ providing a time-based routine for managers to reconsider
or revise their M&A or alliance behaviors. In the case of small- to mediumsized specialized pharmaceutical firms in our empirical context, M&A and
alliance activity is largely driven by sales gaps.2 As a result, the overall level
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JOHN E. PRESCOTT AND WEILEI (STONE) SHI
of M&A and alliance is not stable over time, with periods of sped-up activity
and slowed-down activity that is consciously driven.
From an external perspective, rhythmic M&A and alliance behaviors may
be captured or entrained by external cyclic phenomena often reflected in
isomorphic (mimicking) behavior. For instance, Jansen and Kristof-Brown
(2005) reported that an individual’s work rhythm matches their working
environment’s rhythm. Souza, Bayus, and Wagner (2004) found that the
optimal rhythm of new product introduction is primarily driven by external
industry conditions. M&A and alliance initiatives can also be captured by
external competitive dynamics such as competitor initiatives or regulatory
change (Brown & Eisenhardt, 1997).
Building on the internal and external drivers of rhythm, the main feature
of rhythmic behavior is revealed in stability properties as opposed to
duration, magnitude and frequency. The degree of stability or regularity
differs across organizations. This can be understood in two extreme
examples consistent with the resource-based view that resources and
capabilities are distributed heterogeneously among firms (Barney, 1991).
On one hand, firms may conduct M&As or alliances without deliberate
planning, plotting along the temporal dimension and thus demonstrating a
purely random or stochastic process. On the other hand, firms may perceive
time as a variable that can be purposely designed and effectively managed,
making M&A and alliance activity a temporal regularity within which the
pattern persists over time. In other words, firms differ in their capability to
design their corporate strategy with respect to time. Clearly, most firms will
not fall at the extremes of pure random or pure regularity. The differentiated
rhythmic pattern among firms reflects the underlying combination of firms’
distinctive capabilities including, but not limited to, top management team,
strategic planning, environmental scanning systems, history and managerial
intent.
Like the concept of rhythm, the notion of synchronization is largely
derived from biologic science. The intrinsic and extrinsic views of rhythm
suggested that synchronization can occur both internally and externally.
Within an organization, multiple processes are entrained with each other
(i.e. synchronized) through conscious decision processes, coordination,
repetitive momentum and isomorphic mechanisms (McGrath & Kelly,
1986).
Social behavior can be entrained/synchronized to powerful external
pacer event or cycles. However, external pacer events or cycles should be
understood from an ontological assumption of co-evolution rather
than an assumption of independence of the firm and its environment
A Temporal Perspective of Corporate M&A and Alliance Portfolios
15
(Volberda & Lewin, 2003). We cannot understand these external zeitgebers
by separating them on their own since these exogenous forces are often
endogenized over time.
PERFORMANCE IMPLICATION OF RHYTHM
Rhythm can affect performance through its impact on the ability to
coordinate internal events (Goodwin, 1970) or increase the predictability
and hence the control of human behaviors. Essentially, rhythm creates a
dominant temporal order and reflects ‘‘the underlying dynamic equilibrium
processes by which the many aspects of complex social systems’’ (McGrath
& Kelly, 1986, p. 89) or a series of repeated activities are coordinated.
We argue that neither regular/consistent nor irregular/random patterns of
M&A and alliance activity will influence performance positively. An
effective rhythmic pattern requires organizations to alternate between
regularity and irregularity. This suggests that organizations can experience a
regular rhythm for a period of time and then adjust their learning speed
thereafter. This can be understood from three interrelated theoretical
mechanisms. From learning mechanism point of view, regularity can allow
companies to absorb knowledge in a habitual temporal order and over time
can facilitate the formation of a routine that is an essential element to
managing uncertainty. However, regularity seldom allows companies to
modify or revise their existing rhythm strategy and is prone to generate
inertia (Carroll & Hannan, 1990). Minor adjustments can serve as a
benchmark against which an existing rhythm can be compared, revised and
modified.
A second mechanism is based in a resource availability perspective. A
consistent rhythm allows companies to coordinate resource allocation
processes in line with M&A and alliance activities. It also makes the
resource allocation process more predictable and hence alleviates pressure
from unexpected capital investment needs. However, a regular path reduces
the diversity of absorptive capability. Regular repetition of similar activities
with a fixed variation implies a logic of linearity (Geibler, 2002) and
continuity, neither of which is essential building block for creativity.
Creative resource allocation processes require freedom, flexibility and
diverse forms of absorptive capability
Lastly, unlike many internal initiatives which can be shielded from
competitors’ attention, M&A and alliances are corporate actions easily
caught by competitors’ radars. M&A and alliances can be interpreted by
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JOHN E. PRESCOTT AND WEILEI (STONE) SHI
competitors as a preemptive strategy to occupy a market or to acquire
valuable resources. From an action and reaction or competition mechanism
point of view (Grimm & Smith, 1997), a regular pattern of M&A and
alliances reduces within-firm variability (unpredictability) and hence the
complexity of a firm’s sequence of competitive actions over time. In
contrast, regular patterns coupled or alternated with adjustment and
modification can increase the possibility of surprise actions, therefore
limiting a competitor’s ability to map action and reaction cycles in an
accurate or predictable way. Simply put, semi-predictability (or inverted U
relationship) generates the highest level of performance.
In our empirical investigation, we find an inverted U-shape relationship
between the combined rhythm of M&A and alliance initiatives and
performance as measured by firm’s Tobin’s Q, i.e. a rhythmic pattern that
is characterized by a mixture of regularity and irregularity achieves the
highest level of performance. Interestingly, we also find that the curvilinear
relationship between rhythm and performance is largely driven by M&As
rather than alliances when we de-couple the two types of initiatives.
PERFORMANCE IMPLICATION OF INTERNAL AND
EXTERNAL RHYTHM SYNCHRONIZATION
While internal rhythm synchronization helps to coordinate internal events
(Goodwin, 1970), external rhythm synchronization can create a coordination
interface between focal firms and their environment. Such congruence is
more likely to be ‘‘satisfying’’ to firms since it creates order and coordinated
interaction patterns out of chaos. These effects are transformed into a sense
of control with respect to the external environment. Therefore, external
synchronous rhythm reduces uncertainty and increases predictability.
Rhythm compatibility between firms and the external environment
also validates behaviors in a mutually reinforcing manner through which
firms feel comfortable due to a ‘‘social norms’’ mechanism (Jansen &
Kristof-Brown, 2005). In particular, the alignment of a firm’s rhythms of
M&As and alliances with competitors can influence performance through its
impact on the perception of other stakeholders.
While external rhythm compatibility allows firms to better control their
environment and increases the accuracy of predicting the future, internal
rhythm synchronization can achieve a similar goal, i.e. more control over
A Temporal Perspective of Corporate M&A and Alliance Portfolios
17
and predictability of the internal environment. These can be achieved in at
least two ways in the cases of M&A and alliance initiatives.
First, when M&As and alliance initiatives proceed simultaneously within a
firm, it can establish a minimum levels of overlap between each activity. Such
an overlap establishes a foundation for a knowledge-sharing mechanism
between M&As and alliances. For instance, knowledge acquired from
experiential learning in M&As can be shared and utilized in experiential
learning of alliances if the underlying knowledge structure (such as target/
partner selection) of M&As and alliances is similar. Second, synchronization
of multiple activities can strengthen their cumulative effect. It creates a
heightened sense of beginning or of ending for organization members. We
suggest that such a heightened sense of time can create an institutionalized
temporal map mechanism for members to adhere to and coordinate with.
Internal rhythm compatibility smoothes the resource allocation process
through deploying resources to the ‘‘right activities at the right time’’.
In our empirical testing, we find support for our internal synchronization
hypothesis, i.e. when firms synchronize their acquisition and alliance
activities, their performance is enhanced. However, as for external
synchronization, we only find performance improvements for external
synchronization of alliance but not for acquisitions.
SEQUENCE IN M&A AND ALLIANCE RESEARCH
Sequence is conceptualized as an ordered list of elements (Abbott, 1995),
and has been employed extensively by sociologists (Abbott & Hrycak, 1990;
Han & Moen, 1999) and discussed widely in the social sciences including
political science (Carmines & Stimson, 1986), linguistics (Gisiner &
Schusterman, 1992), archeology (Tolstoy & Deboer, 1989), economics
(Chand & Chhajed, 1992) and psychology (Pak & Tennyson, 1986), to name
a few. The sociological conceptualization of sequence embraces several
distinctive features. First, unlike economists, sociologists make no stochastic
assumptions, which suggests that sequences need not be generated step by
step, as depicted in the psychology and economics literature. The step by
step sequence has been widely applied to study the track of occupational
professionalization, the development of organizations, the life cycles of
individuals or families and the unfolding of revolutions (Edwards, 1927), or
any other ‘‘history’’ that can be expressed as a sequential list of events
(Abbott & Hrycak, 1990, p. 145).
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JOHN E. PRESCOTT AND WEILEI (STONE) SHI
Second, the central focus of a sociological view of sequence is nearly
always to fish for patterns in the sequences (Abbott, 2000) rather than to
seek dependence between sequence states as adopted by many nonsociological works. For instance, sociologists are interested in identifying
different trajectory patterns in individual career progression (Abbott &
Hrycak, 1990; Halpin & Chan, 1998; Han & Moen, 1999), and in locating
different daily routines in time-use analysis (Lesnard, 2004). Such a view
explicitly acknowledges that there can be varying degrees of interdependence
between various ‘‘whole’’ sequences in addition to the dependence between
different states in a single sequence. In other words, sequences are often
subject to influence by other sequences.
In our study of sequence, the elements of a sequence are ‘‘events’’ (Abbott,
1995, p. 95), which specifically refer to M&A’s and alliances. Of particular
interest are firms’ M&A and alliance histories, which provide detailed
information on trajectories over a specific period of time in the incidence of
M&As or alliances, their timing, duration and the transition between
different dominant modes of corporate strategy (M&A and alliance).
We explore the issue of sequences by asking three related questions,
namely the substantive question, the pattern question, and the generation
and outcome question, which are all embedded in the following three goals.
The substantive question mainly deals with the rationale of adopting a
temporal lens. We argue that understanding the sequence of strategic
actions along firms’ trajectories or paths is a central research endeavor in the
field of strategy (Mintzberg & Waters, 1985; Van de Ven, 1992). Comparing
past histories for a phenomenon to identify patterns is a very natural activity
for human beings (Levinson, 1978). Our second goal deals with the search
and identification of commonality and dissimilarity among firms in terms of
their sequences of M&A and alliance behaviors (the pattern question). In
particular, we are interested in constructing gestalts (Miller & Friesen,
1980), or taxonomy3 of firms’ sequences under the assumption that the
strategic phenomena of interest do not occur in infinite combinations, at
least not with equal likelihood (Hambrick, 1983, p. 214). Lastly, using
multivariate analysis, we expect to find differences across pathways or
patterns of sequences in terms of firms’ resources, capabilities and
performance outcomes (the generation and outcome question) although
we embrace the concept of equifinality.
In order to explore the sequence patterns in firms’ M&A and alliance
histories, we used a sequence analysis technique known as ‘‘optimal
matching’’ (Abbott, 1995). The fundamental rationale underlying the use of
this dynamic programming technique is to measure sequence resemblance
A Temporal Perspective of Corporate M&A and Alliance Portfolios
19
when sequences consist of strings of well-defined elements. It is based on an
algorithm to measure the distance between each pair of sequences in terms
of the insertions, deletions and substitutions required to transform one
sequence into another.
Essentially, the optimal matching algorithm will generate a dissimilarity
matrix, indicating how distant/dissimilar each pair of sequences is. This
matrix is then used as an input matrix to the network software UCINET.
Hierarchical clustering is performed on this matrix to identify a set of
clusters that share similar trajectory patterns. This identification process is
analogous to that of using ‘‘structural equivalence’’ (occupying similar
positions in a network) to cluster actors in network analysis (Krackhardt,
1990). Put differently, two sequences are temporally equivalent or
sequentially equivalent (Han & Moen, 1999) when they share similar
patterns of trajectory along the time line.
We discerned seven types of distinct clusters based on the clustering
analysis (see Table 1). We labeled them ‘‘focused strategy periodic
sequence’’ (cluster 1), ‘‘focused strategy irregular sequence’’ (cluster 2),
‘‘synchronized dual strategy periodic sequence’’ (cluster 3), ‘‘single strategy
periodic sequence’’ (cluster 4), ‘‘single strategy irregular sequence’’ (cluster 5),
‘‘unitary sequence’’ (cluster 6) and ‘‘cipher sequence’’ (cluster 7).
Firms in different clusters tend to develop their M&A (alliance) strategy
differently. For instance, firms in cluster 2 (focused strategy irregular
sequence) tend to roll out their predominant strategy in a very irregular
rhythm, while, in cluster 3, firms conduct alliance and M&A activities
simultaneously. Interestingly, these activities are coordinated in a synchronized fashion and are conducted in a well-developed rhythm, i.e. they
develop these strategies either periodically or progressively.
We also examine characteristics of firms categorized into these seven
sequence types and find some distinctive features. For instance, firms
following different sequences of M&A and alliance activities differ significantly in terms of asset, profitability and market performance as showed by
Tobin’s Q, while different sequence types do not differ significantly on
growth or financial leverage. Firms following a synchronized dual strategy
periodic sequence (cluster 3) have the highest level of assets, while firms
without any acquisitions or alliances (cipher sequence) have the lowest level
of asset. Given the nature of SME, most firms have negative profitability,
while only firms in focused strategy periodic sequence and synchronized
dual strategy periodic sequence have positive return on asset. Our analysis
also reveals that investors perceive distinctive sequence types differently. It
seems that firms adopting a unitary sequence type (i.e. firms conduct either
39%
25%
21%
64%
40%
55%
19%
32%
6.712
1.697
366.46
1085.66
828.21
191.02
151.18
545.58
547.30
15.998
11.925
Asset
Growth
917.82
Asset
($million)
13.571
24%
20%
13%
10.629
31%
20%
1%
2%
6%
Profitability
0.378
41%
12%
26%
2.566
96%
54%
4%
2%
22%
Financial
Leverage
6.572
6.35
3.06
4.10
16.881
6.03
3.38
3.45
3.80
3.56
Tobin’s Q
9.707
6.50
2.87
4.14
25.491
6.40
3.50
3.39
3.78
3.66
71%
65%
52%
86%
25%
20%
43%
0%
Tobin’s Q (3-year Stage
moving average)
1
Seven Sequence Types and their Characteristics.
29%
18%
33%
0%
75%
40%
29%
100%
Stage
2
0%
18%
15%
14%
0%
40%
29%
0%
Stage
3
Cluster 1: Adopts predominantly a M&A (alliance) strategy over the alliance (M&A) strategy with a periodic rhythm. Cluster 2: Rolls out
their predominant strategy in a very irregular rhythm. Cluster 3: Conducts alliance and M&A activities simultaneously and these activities are
coordinated in a synchronized fashion with a well-developed rhythm. Cluster 4: Similar to cluster 1, with the exception that firms in cluster 4
adopt one type of strategy, i.e. either M&A or alliance. Cluster 5: Similar to cluster 1, with the exception that firms in cluster 5 adopt one type
of strategy but in an irregular sequence. Cluster 6: Conducted either one alliance or one M&A during that time period. Cluster 7: Never
conducted any M&As or alliances during the study period.
po0.05;
po0.01;
po0.001.
a
Since test of homogeneity of variances was rejected, we therefore use Dunnett’s C procedure to conduce multiple comparison test.
Focused strategy periodic
sequence (1)
Focused strategy irregular
sequence (2)
Synchronized dual strategy
periodic sequence (3)
Single strategy periodic
sequence (4)
Single strategy irregular
sequence (5)
Unitary sequence (6)
Cipher sequence (7)
Total
Test of homogeneity of
variances
F-Testa
Cluster
Table 1.
20
JOHN E. PRESCOTT AND WEILEI (STONE) SHI
A Temporal Perspective of Corporate M&A and Alliance Portfolios
21
one alliance or one M&A during the study’s time period) receive significant
rewards from investors compared to others (as demonstrated by their
Tobin’s Q).
More interestingly, our study reveals that firms’ life cycle stage is a crucial
factor that shapes firms’ strategic choices of certain sequences over others.
Firms adopting a focused strategy periodic sequence type (cluster 1) are
found only in a developmental stage. Single strategy periodic sequence
(cluster 4) and unitary sequence types (cluster 6) consist exclusively of firms
in either the emerging or developmental stages. In general, we observe
two patterns in the data. First, on average, there seems to be distinctive
M&A and alliance sequences for firms in different life cycle stages. Second,
firms in both emerging and developmental stages seem to have quite
diverse sequences, whereas established firms’ sequences tend to be much
more normalized, and can be categorized primarily into a couple of
sequence types.
Given that we found that firms’ life cycle stage plays a critical role in
their temporal strategy, it is important to study the contingent context
under which different sequences impact performance differentially. From a
theory building perspective, establishing the relationship between sequence
and performance also corresponds to the notion that testing for predictive
validity is often an important yet under-developed element in social
science research (Dubin, 1978). Specifically, we propose that firms’ life
cycle stage will moderate the relationship between sequences types and
performance.
We find in our results that focused strategy periodic sequence and
synchronized dual strategy periodic sequence show positive effects on
performance controlling for other important factors. These results provide
support for our proposition that sequence types do have an effect on
performance, thus establishing predictive validity through validating the
sequence variables with a particular criterion (Carimines & Zeller, 1979).
However, a close examination of the contingency effect reveals a more
complex picture. We find that life cycle stage has a positive moderating
effect on the relationship between synchronized dual strategy periodic
sequence type and performance, indicating that firms in an established
stage will have higher performance when adopting synchronized dual
strategy periodic sequence type than firms following the same temporal
sequence strategy in either emerging or developmental stages. We think
that our tentative results demonstrate that sequence analysis has much to
offer to the M&A and alliance field and should be a priority area for
future research.
22
JOHN E. PRESCOTT AND WEILEI (STONE) SHI
CONCLUSION AND DISCUSSION
Adopting a temporal lens requires that we explicitly incorporate time
theories, assumptions, constructs and methods into the phenomenon we
study (e.g. M&A). One of our goals is to make a modest contribution to
the M&A and alliance literature by demonstrating how a temporal lens
allows us to conceptualize questions that complement and sometimes
challenge conventional modes of thinking. For example, during presentations of our work, many scholars have challenged our suggestion that firms
develop M&A rhythms or synchronize their M&A and alliance initiatives
with competitors. Yet, unless one can demonstrate that the results are
statistical artifacts, we provide evidence that some firms do use a temporal
lens and there are important performance consequences to the type of
rhythm, synchronization and sequence firms pursue. While we acknowledge
a variety of theoretical and methodological limitations in our work, our
results suggest that adopting a temporal lens is a rich and rewarding
direction for M&A and alliance research. Below, we briefly explore some of
our contributions as well as areas for future research.
In examining the rhythm, synchronization and sequence of firms’ M&A
and alliance initiatives, we placed time at the center stage of our both
theoretical and empirical inquiry. This is consistent with strategy
researchers’ call for an examination of time as an important issue on its
own right rather than as part of the general background (Albert, 1995;
Ancona et al., 2001), which limits our ability to fully realize the potential of
a temporal lens in strategy field. Drawing on Mosakowski and Earley
(2000), our conceptualization and methods assume the nature of time as real
(has direct consequences on performance), objective, cyclical and discrete
(time consists of equal and comparable units and a temporal reference point
incorporating the past, present and future (Tobin’s Q)). While our approach
is internally consistent, other approaches are equally viable. For example,
research exploring a subjective view of time and international differences in
managers’ temporal perspectives would provide valuable contributions to
the M&A and alliance literature.
The temporal constructs of rhythm, synchronization and sequence are
characterized by complex forms of temporal repetition and as such differ
significantly from temporal concepts such as speed or duration. These
complex forms of repetition create unique challenges and opportunities for
understanding the dynamics of building M&A and alliance portfolios. The
current emphasis on studying multiple processes and multi-level phenomena
A Temporal Perspective of Corporate M&A and Alliance Portfolios
23
over time (Pettigrew, 1992; Powell, 1992; Van de Ven, 1992) requires theory
and methods that accommodate complex interactions. In this respect, our
research complements the focus on a single M&A or alliance in that we are
interested in how and why the temporal pattern of a firm’s overall M&A and
alliance history impacts its performance rather than how a single initiative
impacts performance. In our theory, we described a few mechanisms which
help explain our statistical findings. A fruitful area would be to identify and
catalog a set of mechanisms (Hedstrom & Swedberg, 1998) that explain why
and how firms develop rhythms, synchronization and sequences in their
M&A and alliance initiatives.
Theoretically, we suggest several theoretical lenses from other disciplines
that can be leveraged to better understand M&A and alliance temporal
patterns. The social entrainment model and the sociological view of
sequence used in our studies have the potential to shed new light on a variety
of important M&A and alliance questions. For instance, the sociological
perspective provides theoretical underpins of why firms’ sequences of
strategic initiatives along their trajectories or path do not occur in infinite
combination and therefore can be empirically identified as gestalts (Miller &
Friesen, 1980). The social entrainment model also allows researchers to
incorporate temporal constructs in a systematic way and explore the
rationale underlying the rhythmic behaviors of companies’ strategic
initiatives. Alternatively, leveraging some of our strategy theoretical
frameworks such as the resource-based view, the knowledge-based firm
and industrial organization economics by integrating a temporal perspective, its associated constructs and relevant research questions would be
valuable. Given the limited attention to a temporal lens, our ability to
conduct evidence-based research in this emerging and rewarding field has
been greatly restricted.
The most exciting aspect of our core research question: ‘‘How and if the
rhythm, synchronization and sequence of firms’ M&A and alliance activity
over time impacts firm performance?’’, centers on the practicing manager.
If our results are robust, managers have another tool, a temporal lens, as
they conceptualize, build, negotiate, implement and restructure their M&A
and alliance portfolios. The adoption of a temporal lens focusing on the
rhythm, synchronization and sequence of M&A and alliance initiatives can
help achieve corporate goals and possibly create another form of
competitive advantage. Hopefully, we have stimulated some thought
regarding how your firm can incorporate a temporal lens to complement
your others lens.
24
JOHN E. PRESCOTT AND WEILEI (STONE) SHI
NOTES
1. According to Collier (2007), ‘‘His (Tomlin’s) thoughtfully non-rhythmic
remark was crafted to explain that (training) camp schedule is designed to make
players uncomfortable and unable to anticipate any pattern to the tasks, the better to
sharpen their cognition and adaptability y’’. In our context, we extend his meaning
to reflect a desire to be semi-predictable not only to the players but also to the other
teams and coaches in the NFL.
2. We thank George Lasezkay, a former Corporate Vice President, Business
Development at Allergan, for identifying this rationale during our interview.
3. The distinction between ‘‘typology’’ and ‘‘taxonomy’’ is sometimes taken as the
difference between conceptually derived and empirically derived schemes (Hambrick,
1983; Sneath & Sokal, 1973). The two words are often used interchangeably in the
previous organizational literature (Hawes & Crittenden, 1984; Miles & Snow, 1978;
Miller & Friesen, 1980; Slater & Olson, 2001). We used taxonomy to specifically refer
to empirically derived classification schemes (Harrigan, 1985; Hawes & Crittenden,
1984; Slater & Olson, 2001).
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