A CORPORATE LEVEL PERSPECTIVE ON ACQUISITIONS AND INTEGRATION

Abhirup Chakrabarti Fuqua School of Business Duke University Durham, NC 27708, USA Tel: +1(919) 660-4080 Fax: +1(919) 660-7996 Email: ac55@duke.edu

Will Mitchell Fuqua School of Business Duke University Durham, NC 27708, USA Tel: +1(919) 660-7994 Fax: +1(919) 681-2818 Email: willm@duke.edu

September 1, 2004 Abstract Most research of post-acquisition integration examines integration of individual business units. The research pays less attention to corporate level integration processes, by which we mean the standardization of integration routines and synchronization of integration activities across a firm's business units. We argue that corporate level acquisition activities and post-acquisition integration processes strongly influence long term corporate performance, particularly as a firm which comprises interdependent business units becomes geographically diffuse. Acquisitions tend to increase system diversity and goal diversity across business units. Some goal diversity is beneficial, but excessive goal diversity and the existence of system diversity can reduce long run corporate performance by requiring greater managerial effort and increasing the opportunity cost of managerial efforts. The negative effects become stronger as a firm becomes geographically diffuse or if business units are interdependent. Firms that employ active corporate level integration processes particularly firms that acquire frequently and have interdependent business units can enhance the benefits and eliminate some of the problems of diversity.

Many studies have examined post-acquisition integration. Questions include how acquiring firms retain, redeploy, reconfigure, and divest resources (Capron, Dussuage, & Mitchell, 1998; Capron, Mitchell, & Swaminathan, 2001; Finkelstein & Haleblian, 2002; Karim & Mitchell, 2000); the background organization and human processes that occur during post-acquisition integration (Fried, Tiegs, Naughton, & Ashford, 1996; Greenwood, Hinings, & Brown, 1994; Schweiger & DeNisi, 1991); how the nature and extent of prior acquisition experience affects focal acquisition management (Haleblian & Finkelstein, 1999; Zollo & Singh, 2004); the choice of the level of integration (Datta, 1991; Pablo, 1994); and the performance implications of implementing high or low integration (Zollo et al., 2004). Most of this research has focused on the acquiring business unit, without explicit attention to corporate processes for managing acquisition-based growth. As the number of acquisitions that a firm implements increases and the geographic span of its acquisitions grows, it accumulates an increasingly diverse set of product lines and business practices, making it increasingly important for the firm to look beyond the process of integrating individual acquisitions and implement formal corporate level integration techniques. By corporate level integration, we mean the standardization of integration routines and synchronization of integration activities across business units. Little research has considered how the interdependence between geographically dispersed business units affects the nature and performance impact of corporate level integration techniques. This article argues that corporate integration processes influence long term corporate performance, particularly as a firm comprising interdependent business units becomes geographically diffuse. We argue that acquisitions increase system and goal diversity across business units. Incompatible differences in financial and management reporting structures are examples of system diversity, while intangible differences between employees and groups of employee that may lead to incompatible differences in objectives are examples of goal diversity. Although goal diversity creates potential benefits by allowing a firm to experiment with different ways of operating, excessive diversity can reduce long run corporate performance by requiring greater managerial effort and by increasing the opportunity cost of relatively unproductive activities. The negative effects increase as a firm becomes more geographically diffuse, owing to difficulties in managing intangible differences at a distance, or if business units are interdependent, owing to the greater negative impact of existing differences on performance. Our approach suggests that corporate integration is a dual-edged sword for growing firms. Firms that employ formal integration techniques may enhance the benefits and eliminate some of the problems that diversity and variety cause. At the same time, though, integration may also be costly to implement. Nonetheless, despite the implementation costs, when the corporation acquires frequently or when its acquiring business units are strategically interdependent through vertical or complementary relationships, then corporate level formal integration techniques can play a significant role in enhancing long term corporate performance. We start with a review of the literature on post acquisition integration, before extending the arguments and incorporating corporate level concerns. Existing studies on post acquisition integration have made significant progress in the formulation and impact of post acquisition integration, while raising intriguing open questions. In particular, formal research has largely tended to treat the integration of a focal acquisition as independent of a corporations other

acquisitions, but firms that integrate acquisitions independently of each other will face organizational constraints that arise from internal diversity. We build on this argument and discuss how corporations change during the process of acquisitions, and how they may need to revise their post acquisition integration design over time. Post acquisition integration research This section defines post acquisition integration and discusses the arguments and findings of existing research. We then identify challenges and distinguish between acquisition level and corporate level concerns. Post acquisition integration is the interactive and gradual process of strategic and administrative combination of acquiring and target firms (Shanley & Correa, 1992), in which individuals from the two organizations learn to work together and cooperate in the transfer of strategic capabilities (Haspeslagh & Jemison, 1991). The process is multidimensional, including the integration of financial, information, human resource, purchase, production, marketing and distribution systems, as well as planning and public relations policies (Yunker, 1983). During the integration process, managers have to mobilize each department to act together in a combined entity. Integration is the engine of organizational change and development in acquisition-based growth and plays a critical role in overall corporate renewal strategy. The process changes organizational structures, systems, cultures and functional activity arrangements (Pablo, 1994), not only at the point of the focal acquisition, but also throughout the corporation. It involves the post acquisition reconfiguration (Karim et al., 2000), redeployment (Capron et al., 1998), and disposal (Capron et al., 2001) of tangible (physical assets) and intangible (routines) resources of the acquiring and target firms. Integration encompasses several forms of organizational structure: (a) the target may become a stand-alone after acquisition, (b) the acquirer and the target may blend into a new organization, and (c) the acquirer may assimilate the target. This classification of different approaches to integration mirrors Haspelagh & Jemison's (1991, page 145) categorization, which they base on the need for strategic interdependence and the need for organizational autonomy. Sometimes, acquirers can avoid the problems associated with integration by keeping the acquired firm as an autonomously operating unit. It often is not feasible to follow this approach, however, and most acquirers expect that the benefits from synergies are greater than the costs associated with integration. When acquirers expect target firms to contribute to long term growth, the most general prescription is that integration is an important determinant of corporate performance and even survival. Integration involves retention, redeployment, reconfiguration, disposal of assets While the industrial organization literature emphasizes market power (Scherer & Ross, 1990) and cost savings (e.g. Dutz, 1989; Sirower, 1997) that may arise from acquisition strategies, the strategic management literature now commonly considers the acquisition process as a means to organizational change and development (Berry, 1975; Capron et al., 1998; Capron & Mitchell, 1999; Karim et al., 2000; Penrose, 1959; Rock & Rock, 1990; Seth, 1990). The change process

requires business reconfiguration, including redeployment and disposal of resources. Capron, Dussuage & Mitchell (1998) found that acquiring firms frequently redeploy i.e. share and cross utilize R&D, manufacturing and marketing resources between themselves and target firms. Acquirers redeploy managerial and financial resources, although to a lesser extent. The redeployment of resources can help create more efficient use of existing resources, as well as expand the scope of the firms activities (Karim et al., 2000). Disposal of resources reflected in retrenchment and sale of businesses and organizational assets provides an important part of post acquisition reconfiguration (Capron et al., 2001). Overall, this body of literature demonstrates that acquiring firms have greater potential to change than do non-acquiring firms (Karim et al., 2000). Moreover, acquisition based organizational change is unique for each acquisition. The nature of change and development in acquiring firms depends on the unique circumstances of strategic objectives and similarity between businesses surrounding particular acquisitions. Human and organizational factors in integration The human resources and organizational behavior literatures delve into the human, managerial, and organizational processes that occur in the background of the process of resource addition and reconfiguration (e.g. Cannella & Hambrick, 1993). These literatures identify human and organizational sources of resistance to integration, and inform how managers can bring about anticipated post acquisition performance improvements. Indeed, human and organizational factors could have a greater impact on post acquisition performance than do external strategic factors (e.g. Chakrabarti, 1990). Acquiring firms that underestimate the importance of human factors in the integration phase often face severe impediments to smooth post acquisition operations (e.g. Fried et al., 1996; Greenwood et al., 1994; Schweiger et al., 1991). Research shows that acquisition announcements - especially in combination with poor handling of the communication - increase uncertainty, stress, and absenteeism, while reducing job satisfaction, commitment, the intent to remain in the new organization, and perceptions about organizations trustworthiness (Schweiger et al., 1991). Post acquisition changes often involve a forced reduction in the work force and structural redesign in order to cut cost and reduce redundancy. The impact of such organizational change is particularly strong on employees who perceive that they lack control on the forces of change. Such employees are likely to feel a greater reduction in job control, experience feelings of helplessness, withdraw psychologically from the work they do, and generate an intention to leave the organization (Fried et al., 1996). Another impact of acquisition activity is that middle level managers sometimes centralize authority in order to strengthen or protect their own position (Pfeffer, 1981; Sutton & D'Aunno, 1989). This can, in turn, lead to greater role ambiguity (Oldham & Hackman, 1981) and demotivation among subordinates, who then reduce their participation in organizational processes (Guth & MacMillan, 1986). Cultural incompatibility has been widely cited as a source of insurmountable post acquisition problems (Altendorf, 1986; Buono & Bodwitch, 1989; Nahavandi & Malekzadeh, 1988; Olie, 1994; Sales & Mirvis, 1984; Walter, 1985). Researchers have built on the theory of acculturation (Berry, 1980) to examine changes in behavior that result from forced interaction of

two organizational cultures (Janson, 1994; Nahavandi et al., 1988; Sales et al., 1984). Some empirical evidence indicates that greater cultural differences lead to greater integration problems and hence to lower post acquisition performance (Chatterjee, Lubatkin, Schweiger, & Weber, 1992; Datta, 1991). On the other hand, the existence of a strong culture in the acquirer can also assist performance impact if it can be transferred effectively to the acquired firm (Roberts, 1994). The current consensus, though, is that cultural compatibility typically reduces acculturative stress and eases the integration process. The level of integration and its impact on performance One part of the research on the post acquisition integration process attempts to explain the level of post acquisition integration. Pablo (1994) distinguishes between three levels of integration. At a low level of integration, a limited degree of technical and administrative changes share financial risk and resources, while standardizing basic management systems and processes to facilitate communication. A moderate level of integration involves increased alterations in the value chain, including selective modifications in reporting relationships, authority, structure, and cultural bases of decision-making. At the highest level, integration involves sharing all types of resources, along with generalized adoption of the acquirers operating, control and planning systems and procedures, combined with deep structural and cultural absorption of the target firm. The level of integration depends on the strategic (Howell, 1970; Pablo, 1994; Shrivastava, 1986), organizational (Datta, 1991; Jemison & Sitkin, 1986), cultural (Nahavandi et al., 1988) and political (Pablo, 1994) characteristics of acquisitions. Because unrelated acquisitions typically involve minimal sharing of resources and hence less post acquisition integration, relatedness in products and services between acquirers and targets often leads to a high level of integration (Shrivastava, 1986). Other work differentiates between strategic and organizational tasks. Strategic tasks involve the successful sharing of resources and capabilities that form the foundation for value creation, while organizational tasks involve the preservation of key resources and capabilities of the acquired firm (Pablo, 1994). Using an experimental approach, Pablo found that the level of integration positively associated with strategic tasks and negatively associated with organizational tasks, and that managers are often unable to balance these requirements. Pablo (1994) also found that organizations that have tolerance and even a preference for cultural diversity have a tendency to implement lower levels of integration. Post acquisition integration has been empirically related to post acquisition performance. Capron (1999) found that performance increases with post acquisition reconfiguration in targets and acquirers. Zollo, et al. (2004) found that higher levels of integration contributed to post acquisition performance. Integration in practice The challenges in the process of integration arise out of the multidimensionality and diversity of the task. Integration involves the synchronized efforts of personnel associated with the finance,

human resources, marketing, and production areas (Haspeslagh et al., 1991; Johnson, 1985; Lajoux, 1998; Pritchett, 1985; Yunker, 1983). Integration of financial systems involves modifying the targets corporate chart of accounts in accordance with the acquirers account control manual. Usually, the acquirers corporate chart of accounts has many more subdivisions and is more detailed and complex than that of the acquirer. Similarly, reporting forms and instructions are also likely to differ between the acquirer and target firms, with acquirers having a more detailed corporate schedule for reporting than what the target has had experience with. Firms may face significant constraints in their attempt to integrate financial systems because of potential miscommunication and over-expectations (Yunker, 1983). Many post acquisition problems arise from the direct or indirect mishandling of human resources (e.g. Fried et al., 1996). Mismanaging the process of blending in corporate cultures or comparing two sets of employee relations policies, job descriptions, performance evaluation structures, salary structures, benefit plans, pension, medical insurance policies, and profit sharing plans many of which differ significantly across firms can lead to a clash of priorities, create ambiguities that cause resistance to change (Pritchett, 1985; Yunker, 1983), and therefore increase the probability of failure of the acquisition. Purchasing and marketing interfaces of acquirers and acquired firms also often must be integrated. Most commonly, different sub-units (e.g., business divisions) catering to different markets have their own purchasing and marketing activities. Therefore, if the acquired firm operates in a new business area, it is likely to retain its own purchase and marketing teams. However, if the acquired firm is merged into an existing business unit with existing purchase and marketing teams, or if related products are grouped together and marketed by a common sales force then the firm must integrate the resources of suppliers and sales representatives in order to avoid overlaps and subsequent confusion. The acquirer needs to review which industries and markets to operate in, and which goods and services to offer. In turn, the acquirer must also judge the effectiveness of its existing purchasing and marketing resources, before making unilateral decisions. The integration of production and technology also is challenging because of the specialized nature of knowledge involved (Yunker, 1983), and the difficulty to quantify the value of technology during the time of acquisition (Slowinski et al., 2002). Top managers tend to be specialists in narrowly defined production process and techniques, rather than general experts who understand the technological evolution taking place in all the corporations businesses. In sum, post acquisition integration is a critical part of an acquisition-driven corporate renewal strategy and has the potential to significantly alter post-acquisition performance. Acquiring firms change themselves during the process of integration by retaining relevant resources, redeploying resources to and from targets, and disposing redundant resources. However, problems can arise from employee or group related issues, from cultural incompatibility, and from mishandling of the integration process.

These arguments raise further research questions. Acquisition-based growth tends to make corporations increasingly complex if acquiring business units - which are also interdependent, either vertically or as producers of complementary goods and services - evolve independently of each other. This is more so if acquiring business units are geographically dispersed and if a corporation acquires frequently. Although the literature acknowledges the role of the post acquisition integration process, it falls short of explicitly providing a basis to judge how acquisition and integration activities support overall corporate level growth and performance enhancement. By developing a corporate level perspective of post acquisition integration, we attempt to complement the arguments and evidence in the existing literature. We elaborate on the role of corporate integration in the next section. Propositions: Corporate Level Acquisition Integration In this section, we develop propositions linking acquisition activity to the objective of corporate renewal, growth and development. We argue that formal corporate level integration techniques reduce incompatible differences that tend to arise across the corporations business units, hence contributing to better post acquisition performance. We first state the baseline assumptions and frame the problem. We then address a set of related issues: how acquirers change as they grow; how the increase in complexity and diversity across business units affects the corporation; how corporate level integration may mitigate such problems; and, finally, how spatial, structural and strategic factors moderate the impact of corporate level integration on long run corporate performance. Assumptions In order to examine the impact of integration design on performance, we assume that managerial limitations form the primary constraint to post acquisition performance enhancement. We assume that corporations have finite managerial resources at any given point of time, and that managers have physical and cognitive limitations. These assumption reflect arguments extended in a body of literature that regards managerial resources as a key input but also the primary source of constraint to performance enhancing and sustainable firm growth (reflecting arguments in Gander, 1991; Penrose, 1959; Richardson, 1964; Slater, 1980). In combination, these studies imply that an inefficient allocation of managerial resources can marginalize long run performance. For example, there is a trade off involved if managers spend greater than desired effort on future productive activities, because they will not be able to allocate as much time and effort on current productive activities. In the present context, the above assumption implies that any external or internal condition that leads to the expenditure of greater than expected, feasible, or available managerial resources on any current or future productive activity, could lead to tradeoffs and opportunity costs, requiring managers to shift attention from productive activities into relatively unproductive activities. This, in turn could reduce the post-acquisition performance of the corporation We treat the firms decision to acquire as exogenous. Moreover, we do not judge the strategic value of these decisions. We also assume that all firms have an average level of managerial capability. For example, we do not account for the performance impact of excessive product

diversification. We also do not focus on external factors that can influence performance. A broader evaluation of post acquisition performance must consider the interaction between internal and external factors, but this is beyond the scope of the present discussion. Acquisitions increase system and goal diversity across business units This section conceptualizes a net level of differentiation that exists between business units from the time any business unit acquires to the time it finishes implementing post acquisition integration in dimensions of external diversity (product diversity and geographic diffusion) and internal diversity (system diversity and goal diversity). We argue that these factors increase with acquisition activity, irrespective of the level of integration at the acquisition level. Figure 1 illustrates the basic model. ********** Figure 1 about here ********** Acquisitions lead to increasing external corporate diversity. External diversity includes two dimensions product diversity and geographic diffusion. Product diversity refers to the number of related and unrelated business the firm operates in, while geographic diffusion refers to the geographic expanse of the firms business units. Product diversity may or may not be an explicit objective of acquirers, but most firms are likely to at least diversify into related areas by acquiring. At the very crux of the gains from expansion is the ability of the firm to utilize its existing underutilized productive resources (Penrose, 1959). However, the very act of expansion gives rise to new directions to expand, often leading firms to diversify. Acquirers are also likely to become increasingly geographically diffuse. Some studies have explicitly reported that acquisition based growth can lead a firm steadily away from its core region of operation (e.g. Chapman & Walker, 1987; Green & Cromley, 1984; Leigh & North, 1978; Watts, 1980). Proposition 1a: The greater the number of acquisitions a firm has implemented, the greater the product diversity and geographic diffusion across its business units. Acquisitions also lead to increasing internal diversity within the corporation. Internal diversity, which exists across business units, includes system diversity and goal diversity. System diversity refers to differences across business units in the corporate chart of instructions, corporate schedule of reporting, financial systems, employee relations policies, job descriptions, performance evaluation structures, benefit plans, pension plans, medical insurance policies, profit sharing plans, and purchase and marketing setups. Goal diversity refers to intangible differences that exist in employees and groups of employees within the organization. As we noted earlier, the literature on acquisitions indicates that in the absence of any effort, acquiring business units of a corporation tend to evolve independently of each other, since the nature of renewal, reconfiguration, redeployment and disposal of resources is peculiar to the particular strategic and managerial issues surrounding individual acquisitions. This independent evolution increases system and goal diversity across business units of the acquiring firm.

Proposition 1b: The greater the number of acquisitions a firm has implemented, the greater the system and goal diversity across its business units. Moreover, geographic diffusion can further increase the system and goal diversity, because geographic expansion is likely to involve acquisitions in distant areas, which are likely to differ significantly in the manner in which firms operate and interact with their economic environments. Proposition 1c: The greater the geographic diffusion of business acquisitions, the greater the system and goal diversity within the acquiring corporation. In sum, the tendency of acquiring business units to evolve independently of each other will increase with the number of acquisitions the firm has implemented. We capture this independent evolution in terms of system and goal diversity that exists across business units of the corporation as a consequence of its acquisition activities. Moreover, firms that implement geographically diffused acquisitions are likely to have higher levels of system and goal diversity across its business units. Impact of system and goal diversity on performance This section discusses how system and goal diversity affect the acquiring corporations performance. Prahalad & Bettis (1986) argue that the diversity of the firm arises not so much from the variety in technologies or markets, as from strategic variety among business units. Top management is constrained by an upper limit - by virtue of finite managerial resources and by limited cognitive ability (also see Duhaime & Schwenk, 1985) - to the capability of managing diversity relating to strategic variety. Managing strategic variety requires variety in the dominant logics that top management use, For such a diversified firm to perform well, it has to respond quickly and appropriately to competitors' moves. Prahalad & Bettis (1986) infer that top managers are less likely to respond quickly and appropriately to situations where the dominant logic is different, and where they find it difficult to interpret information regarding unfamiliar businesses. These arguments apply to the presence of sub-unit level diversity in financial, human resources, purchase and marketing, and production and technology related business systems and control mechanisms, which similarly constrain the availability of managerial resources. Different subunits in a corporation often have different financial reporting systems because of differences in the size, scale, scope and complexity of manufacturing, operational and managerial functions. However, if they are also incompatible, then coordination and strategic functions become very challenging. Therefore, the existence of system diversity hampers growth and development because it draws on finite managerial resources into relative unproductive activities. Proposition 2a: The greater the system diversity across business units, the lower the corporate performance.

Goal diversity induced by business unit diversity, in turn, is likely to have a nonmonotonic impact on corporate performance. Goal diversity could help firms at moderate levels, but become sources of constraints at excessive levels. At moderate levels, goal diversity allows firms to avoid an overwhelming preoccupation with any particular strategic process, objective, activity, division or world view. This can contribute to the management and operations of the firm. Goal diversity, which is the inverse of simplicity (Miller, 1993), can contribute to the long run performance and survival of the firm (Lumpkin & Dess, 1995). Some variety within the firm often enhances decision making, problem solving, and creativity. Excessive goal diversity, though, can cause resource allocation problems such as interdepartmental and intergroup competition for limited resources, while causing conflicting opinions and practices. A direct impact of such problems is that the firm will find it difficult to generate cohesive corporate level core values and strategy. Many successful firms have a core set of values that do not change or change only slowly as the firm itself changes and grows over time. Collins and Porras (1994) articulated this view of preserving the core while stimulating progress. Core ideology refers to the organizations guiding principles, above and beyond specific operating practices. Embedded in the meaning of core is the firms fundamental reason for existence, which extends beyond the appropriation of short run profits. This reflects the long run focus of such firms. The argument of excessive variety suggests that the firm may lose its core set of values if the top management makes inadequate effort to ensure that all business units adhere to the values. At the business unit level, decision makers that produce different goods and services in different markets will often have different views about how to ensure sustainable performance. Diverse sub-unit level mission statements, dispersed objectives, and disagreements over the nature of core values arising out of the existing diversity of perspectives and practices can reduce current efficiency, interfere with long-term core ideology, and damage performance. Therefore, goal diversity initially improves long run corporate performance, but excessive goal diversity reduces long run corporate performance. Proposition 2b: Increasing degrees of goal diversity have a nonmonotonic impact on corporate performance, first increasing and then decreasing. The negative influences of system and goal diversity will tend to be more pronounced when business units are interdependent. The more that business units of a corporation share resources with each other, the greater the interdependence between them. While interdependence could take many forms, examples of interdependent business units include those that are vertically related and those that produce complementary products. Interdependent business units depend on the resources that other business units within the corporation share with them. In such cases, coordination and planning activities are also critical in the smooth functioning of the firm. Resource sharing, coordination, and planning activities become difficult if the business units have incompatible systems and if they differ in their objectives to the extent that the firm cannot carry out key activities quickly.

Proposition 2c: The greater the interdependence between business units, the more that system diversity and goal diversity will reduce corporate performance. In sum, we argue that excessive system and goal diversity can hurt corporate performance. Performance disruptions are likely to be greater if the acquiring business units are interdependent. Corporate level integration reduces system and goal diversity While the integration of individual acquisitions alleviates some problems associated with excessive internal diversity, initial integration primarily occurs at the business unit level. This section defines corporate level integration, discusses how formal integration techniques may guide the direction of acquisition based expansion, and addresses how corporate level integration may help acquiring firms control excessive system and goal diversity. Corporate level integration is the implementation of consistent post acquisition policies across all acquisitions that a corporation implements. For instance, acquires may need to generate a uniform financial structure across its sub-units and integrate the financial systems of acquired firms so that they are compatible with other units of the corporation. Corporate integration also commonly includes maintaining uniform human resource practice across business units owing to needs for equity, efficiency, and personnel transfers. Corporate level integration may help firms control the system and goal diversity that results from acquisition activity. As we discussed earlier, most firms differ in the manner in which they conduct their internal organization. Therefore, each target is likely to differ in its internal organization. Unless adjusted, such differences are likely to increase the acquirers corporate diversity of systems and goals, creating organizational complications. By implementing consistent general policies across all its acquisitions, an acquiring firm can control diversity in control mechanisms, reporting structures, codification strategies, and other tangible routines that follow from acquisition activity. Proposition 3a: The greater a firm's emphasis on corporate level integration, the lower the system and goal diversity in acquiring corporations. Acquiring firms implement corporate level integration in two ways. Firstly, they can acquire only targets that are organizationally similar. Second, they may choose any target and then implement necessary organizational change in the targets, in order to make their systems compatible with those of the acquiring corporation. We state these possibilities as propositions. Proposition 3b: The greater a firm's emphasis on corporate level integration, the more likely that acquiring corporations will select targets that are similar.

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Proposition 3c: The greater a firm's emphasis on corporate level integration, the more that acquiring corporations will implement organizational change in targets. Nonetheless, each of these strategies will be costly to implement, which can affect corporate performance. For instance, it may be costly for acquiring firms to limit their acquisitions to organizationally similar targets, both because it may be costly to search for such targets and because of the opportunity costs that arise if a firm limits itself to similar targets. Moreover, it can be costly to implement organizational change in dissimilar targets. The next section considers the performance implications of corporate level integration. The performance impact of corporate level integration This section combines the previous arguments to identify the performance implications of corporate level integration. We argue that geographic diffusion of business units, the interdependence between business units, and the frequency of acquisitions moderate the performance impact of corporate level integration. Figure 2 illustrates the basic relationships. ********** Figure 2 about here ********** Formal integration techniques can enhance performance by reducing system and goal diversity within the organization, but can hurt performance if integration is costly to implement and maintain. On one hand, it may be costly to implement corporate level integration in geographically diffuse acquisitions because acquirers face limits in their ability to evaluate and monitor geographically distant targets. Acquiring firms that implement corporate level integration by limiting themselves to similar targets face cost and information constraints in the search for organizationally similar targets, especially if the targets are also geographically dispersed. Moreover, acquirers may find it costly to implement organizational change in dissimilar targets, particularly if these targets are also geographically dispersed. Acquiring corporations have to shift personnel who will have to fit in integration routines to different integration contexts. This is often a challenging process, requiring significant effort. However, the magnitude of the difficulty and cost involved depends on the nature and level of dissimilarity prevailing across acquiring business units, and between acquiring units and target firms. If system diversity increases with geographic distance reflecting regional differences in cultural, business, and legal factors then the cost of implementing corporate level integration also increases with geographic dispersion. On the other hand, increase in geographic diffusion of business units increases the need for an emphasis on corporate level integration. Theoretical and empirical research notes that organizational and spatial structures are very much interrelated (e.g. Chapman et al., 1987; Keeble & McDermott, 1978; Taylor & McDermott, 1982; Wood, 1978). Geographic dispersion of business units implies greater system and goal diversity because of the cultural, business, and legal differences across geographic areas. This implies that corporate level integration could play an important role in geographically dispersed acquisitions.

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Simon (1960) suggested a hierarchical internal structure with manufacturing activities and plant level routing administrative activities at the bottom; coordination functions that bind the different elements of the corporation in the middle; and strategic decision making, planning and monitoring functions at the top of the hierarchy. As the firm grows in size, this structure becomes more visible, while the importance of middle and top level functions gain importance. While Simon was mostly concerned about lines of authority and flows of information within organizations, Hymer (1972) translated Simons (1960) administrative structures into physical terms and was considered the relative location of each of these (also see Chapman et al., 1987 page 102). As firms increase in size, more complex functional and spatial divisions of labor emerge. Because people responsible for coordination and strategic functions need to access information across business units quickly, the opportunity cost of not implementing corporate level integration may be significantly higher than the cost of actually implementing it. Therefore, it is useful to judge the impact of corporate level integration from the point of view of the importance of coordination and planning activities in a firm. If these activities are crucial for the functioning of the firm, then the presence of system and goal diversity can lead to significantly greater than expected expenditure of managerial resources, and can hence reduce long run performance of the corporation. As discussed earlier, these activities are of prime importance when different business units within a firm are interdependent, either because they are vertically related or because they produce complementary goods. The frequency of acquisitions also impacts the ability of the firm to integrate successfully. Penrose (1959 page 47) states that if a firm deliberately or inadvertently expands its organization more rapidly than the individuals in the expanding organization can obtain the experience with each other and with the firm that is necessary for the effective operation of the group, the efficiency of the firm will suffer (even if optimal adjustments are made in the administrative structure) leading to stagnation. Thus, firms face increasing managerial costs to growth these costs prevent firms from moving immediately to any desired size (e.g. Slater, 1980). In turn, the greater the frequency of its acquisitions, the greater a firm needs to integrate quickly. Under conditions of finite managerial limitations and cognitive limitations of managers, corporate level integration plays an important role in choosing feasible targets and quickly integrating businesses. The argument that formal integration techniques play an important role for acquirers that have geographically diffused business units, interdependent business units, and those that acquire at a high frequency leads to the following propositions. Proposition 4a: The greater the geographic dispersion of business units, the greater the performance enhancing impact of corporate level integration Proposition 4b: The greater the interdependence between business units, the greater the performance enhancing impact of corporate level integration.

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Proposition 4c: The greater the frequency of acquisitions, the greater the performance enhancing impact of corporate level integration In sum, we argued that the acquisitions tend to increase system and goal diversity across business units, especially if business units are geographically diffuse. The diversity requires extensive managerial effort to tackle problems as the corporation grows and becomes geographically diffuse. This evolution makes it increasingly important for acquiring corporations to implement corporate level integration as well as integrate individual acquisitions. While corporate level integration may reduce some of the problems associated with incompatible practices across business units, corporate integration may also be costly to implement. Firms will benefit most from accepting these costs when the corporation acquires frequently, when its acquiring business units are strategically interdependent, and when its units are geographically diverse. Discussion Research has long suggested that the process of implementing acquisitions is an important determinant of post acquisition performance outcomes. The research further indicates that human and organizational resistance can severely limit an acquiring corporations attempts to change and evolve. Resistance to acquisition based growth arises at two levels. The first source of resistance arises is at the level of the acquiring business unit reflecting unique circumstances surrounding individual acquisitions and has an immediate impact on performance. At the unit level, the process of reducing the impact of resistance involves synchronizing the efforts of finance, human resources, marketing, production, technology, and other personnel, leading to the strategic and administrative combination of the acquirer and target. The second source of resistance, which has longer term effects on performance, is at the level of the corporation. At this level, the process of reducing resistance involves controlling and limiting the tendency for acquired business units to function as independent entities with respect to business systems and goals, while facilitating the sharing of resources and other coordination and strategic corporate functions. This article explores corporate level integration concerns. We argued that corporate level integration plays an important role in corporations with geographically dispersed and interdependent business units, which is true of many acquisition-active corporations today. We argued that the acquisition process tends to increase system and goal diversity across business units, especially if business units are geographically diffuse, which means that firms require extensive managerial effort to tackle organizational problems as the corporation grows. This makes it increasingly important for acquiring corporations to look beyond the process of managing individual acquisitions and to also undertake corporate level integration. While corporate level integration may reduce some of the problems associated with incompatible practices across business units, they may also be costly to implement. However, when the corporation acquires frequently or when its acquiring business units are strategically interdependent then it is often worthwhile to undertake the costs of corporate level integration. The paper also has implications for the general acquisition strategy literature. Many studies have failed to generate a consensus about the average impact of acquisitions on firm performance. As
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a result, researchers have focused on factors that may explain the variance in post acquisition performance outcomes. These studies indicate that prior experience, strategic and organizational fit, and post acquisition integration play important roles in explaining the variance in post acquisition performance. We discuss how acquiring corporations change during the process of acquisitions, and how the increased internal diversity in systems and goals may marginalize corporate level performance, even though the corporation may be identifying appropriate targets, negotiating good deals, and integrating these individual acquisitions successfully.

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Figure 1

Acquisition Activity

Interdependent Business units

P 1b(+)

P2c (+)

P1b +-)

P 1a(+)

Corporate level integration

P5a (-)

System diversity
P2c (+)

P2a (-)

Corporate Performance

P5a (-)

Goal diversity
P1c(+) P1c(+)

P2b (invU)

Geographic Diffusion

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Figure 2

Geographic dispersion of acquisitions

P 4a (+)

Corporate level integration

Corporate Performance

P 4b (+) P 4c (+)

Frequency of acquisitions

Interdependence between acquiring business units

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