ranft and lord (2000)

8/9/2019 Ranft and Lord (2000)

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ACQUIRING NEW KNOWLEDGE: THE

ROLE OF RETAINING HUMAN CAPITAL INACQUISITIONS OF HIGH-TECH FIRMS

ANNETTE L. RANFTWake Forest University

MICHAEL D. LORDWake Forest University

Many acquisitions of high-tech firms are motivated by the acquirers desire toenhance their strategic technological capabilities. However, these capabilitiesare likely to be embedded to a large degree in the tacit and socially complexknowledge of the acquired firms individual and collective human capital. Thispresents a dilemma for acquirers because, unlike tangible or financial assets, theacquired firms valuable human assets cannot be purchased or owned outright

and they can leave the firm at any time. Retention therefore is likely to be ofcentral importance during acquisition implementation in knowledge-intensivefirms. Using data from a sample of acquisitions in high-technology industries,the results of this study confirm that retention of specific types of human capitalis critical for determining the success of the acquirers efforts to gain valuablenew technological capabilities. Applying the theory of relative standing to predictpost-acquisition retention, we find that autonomy, status, and commitment sig-nificantly affect retention, but economic incentives do not. We discuss and inte-grate these results in the context of knowledge-based views of the firm and theexisting literature on acquisition implementation. 2000 Elsevier Science Inc.

INTRODUCTION

Since 1990 there has been a substantial increase in merger and acquisition (M&A)activity, with a significant portion of the activity occurring in technology-based

Direct correspondence to: Annette L. Ranft, Calloway School of Business and Accounting, Box 7285Reynolda Station, Wake Forest University, Winston-Salem, NC 27109-7285; Tel: (336) 758-5098; Fax:

(336) 758-6311; E-mail: [email protected]

The Journal of High Technology Management Research, Volume 11, Number 2, 295319

2000 Elsevier Science Inc.

All rights of reproduction in any form reserved.

ISSN: 1047-8310


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296 THE JOURNAL OF HIGH TECHNOLOGY MANAGEMENT RESEARCH VOL.11/ NO.2/2000

industries. More than 11,000 M&A deals were completed in 1997, for example,valued at over $900 billion. These results indicate a 47% increase over the numberof mergers and acquisitions occurring in 1996 (Aley & Siegel, 1998). The overalllevel of M&A activity has continued to increase notably in subsequent years. Acqui-sitions in computer hardware and software, electronics, telecommunications, bio-technology, and pharmaceuticals dominate much of this activity. These industriesfrequently place among the top 10 most active merger and acquisition industriesin the Securities Data Corporations annual merger and acquisition almanacs.

Many of the acquisitions in the 1990s appeared to be motivated by firms needto obtain critical technologies or capabilities. In contrast to acquisitions used toachieve economies of scale, gains in market share, or geographical expansion, manyacquisitions are attempting to obtain highly developed technical expertise and skillsof employees, high-functioning teams for product development or other functions,or specific new technologies in fast-paced industries (Kozin & Young, 1994; Wysocki,1997). Acquiring firms may not have the ability to develop these valuable knowl-edge-based resources internally or, alternately, internal development may take toolong or be too costly.

As an example, one of the most aggressive acquirers in the 1990s was CiscoSystems, Inc. Between 1994 and 1997, Cisco acquired over 30 technology companies:

. . . mostly small software outfits, with 50100 employees, just on the brinkof launching commercial products. Cisco is buying new product teams onthe open market because it takes too long to assemble them from the

ground up. And it is paying lofty pricessometimes as much as $2 millionan employee . . . [According to CEO John Chambers] Its the criticalmassbringing in the team of people in a different area of expertise thanwe have today (Wysocki, 1997).

According to Chambers, Cisco makes acquisitions both to obtain critical technol-ogies and to retain the services of the best-skilled knowledge workers, includinghard to find engineers and programmers. In these high-tech acquisitions, some ofthe acquiring firms couldnt care less about product lines, plants, equipment, orreal estate, assets which have traditionally been the focus of many other types of

acquisitions (Wysocki, 1997).The academic literature highlights that many acquisitions do not succeed in

achieving their desired objectives and instead result in poor organizational andfinancial outcomes. Problems with post-acquisition implementation are among theprimary reasons given for this disappointing record. Acquisition implementationproblems often arise because of clashes of organizational cultures, systems, orstrategies and because of the loss of key executives in the acquired firm. In theacademic literature, researchers have focused on the causes and consequences oftop management team turnover in an acquired firm (Hambrick & Cannella, 1993;Krug & Hegarty, 1997; Very, Lubatkin, Calori, & Veiga, 1997; Walsh, 1988, 1989;

Walsh & Ellwood, 1991). The departure of an acquired firms top managers, andthe consequent loss of their knowledge and skills, is thought to be one importantdeterminant of poor post-acquisition performance (Cannella & Hambrick, 1993).

This study builds from a knowledge-based view of the firm to investigate thecauses and consequences of employee turnover throughout the acquired organiza-


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Retaining Human Capital 297

tion, and the impact of this turnover on the newly combined firms knowledge-based resources. As illustrated by John Chambers comments regarding Ciscosacquisition strategy, key employeesboth individually and collectivelyembody anacquired firms intellectual capital and are the repository of much of its technologicalcapabilities. Many of these employees are not top managers, but instead are locatedat different levels and in different functions or locations throughout the firm (Badar-acco, 1991; Nonaka, 1994). Because the acquisition of key employees valuableknowledge and skills may be a primary motivation for the acquisition in the firstplace, their departure makes the success of the acquisition much more difficult andmuch less likely.

The existing acquisitions literature offers limited understanding of the anteced-ents and consequences of retaining key employees throughout an acquired firm,however, because of a predominant focus on the upper echelons of the organiza-tion. Empirical research to date has primarily focused on turnover in the topmanagement team of the acquisition target (Cannella & Hambrick, 1993; Ham-brick & Cannella, 1993; Very et al., 1997; Walsh, 1988, 1989; Walsh & Ellwood,1991). In contrast, knowledge-based views of the firm argue for the importance ofemployees elsewhere in the organizationthose who possess critical individualexpertise and skills or those who in combination possess valuable team- or group-based capabilitieswho may be critical for determining the overall success of theacquisition.

Integrating perspectives from the acquisitions and knowledge literatures, thisstudy empirically explores the determinants and the effects of retaining key employ-

ees on the transfer of an acquired high-tech firms knowledge-based resources,specifically its valued technologies and capabilities, to the acquirer.

ACQUISITION OF KNOWLEDGE-BASED RESOURCES:LITERATURE & HYPOTHESES

From a knowledge-based view of the firm, firms are dynamic repositories of differentsets of knowledge that are critically dependent upon the individual and collectivehuman capital of the organization. Unique sets of knowledge, and the distinctive

ways in which knowledge is integrated and organized by the firm, can generatecapabilities that either create or support a firms competitive advantage (Grant,1996; Leonard-Barton, 1995; Nonaka, 1994; Winter, 1987). Knowledge-based re-sources can be better understood by examining the degree to which they are basedon knowledge that is tacit in nature, and the degree to which they are sociallycomplex and embedded in the social fabric of the firm (Badaracco, 1991; Itami &Roehl, 1987; Kogut & Zander, 1992; Nelson & Winter, 1982; Winter, 1987). Knowl-edge that is highly tacit and socially complex is a valuable competitive resourcebecause it is very difficult for other firms to imitate (Barney, 1991). This sametacitness and social complexity, however, make it difficult for firms to manage,

particularly in the context of mergers and acquisitions (Coff, 1997).Tacit knowledge consists of individuals implicit, non-codified body of expertise

and skills accumulated through experience (Polanyi, 1962; Reed & DeFillippi, 1990).In contrast to more explicit types of knowledge that can be readily articulated andcodified in the form of manuals, blueprints, and other documented material, tacit


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knowledge cannot be specified and communicated independent from the possessorof the knowledge (Winter, 1987: 168). In many cases, only through lengthy experi-ence and learning-by-doing can tacit knowledge be successfully acquired. Preciselybecause they are difficult, costly, and time-consuming to obtain, tacit forms ofknowledge may be of paramount strategic value and may be a relatively strong andlasting source of competitive advantage for firms (Barney, 1991; Winter, 1987).However, managing this tacit knowledge creates unique challenges. Firms cannotbuild and maintain an advantage if their most valuable knowledge assets simplywalk out the door to go to work for competitors or to start their own companies(Coff, 1997).

Not all of a firms knowledge assets are contained within specific individuals,however. Critical organizational competencies often are embedded in relationshipsamong individuals, or in a firms more general social and organizational fabric, ratherthan in any particular person (Huber, 1991). A significant portion of a firms knowledgemay be located in the formal and informal networks of relationships within theorganization, and even across organizational boundaries (Badaracco, 1991; Coff, 1997;Nelson & Winter, 1982; Winter 1987). In other words, a firms valuable knowledge-based resources may reside not only in particular individuals, but also in sociallycomplex relationships among different individuals and organizational subunits (Bar-ney, 1991; Kogut & Zander, 1992; Leonard-Barton, 1995). Socially complex knowledgeresides primarily in specialized relationships among individuals and groups and inthe particular norms, attitudes, information flows, and ways of making decisions thatshape their dealings with each other (Badaracco, 1991: 79). In the case of socially

complex knowledge, no single person has the full set of skills and capabilities requiredto create a commercially viable product or service. This social complexity makesknowledge difficult to manage because critical interrelationships can be easily dis-turbed, such as when key individuals or teams leave the firm (Leonard-Barton, 1995;Nelson & Winter, 1982). Consequently, retention of key employees is not only acritical issue for retaining individual knowledge, but also for preserving valuable typesof knowledge that are socially complex.

A firms total stock of knowledge develops both from the individual experiencesof organizational members, and from the collective experiences of the organizationas a whole (Nelson & Winter, 1982). Leonard-Barton (1992, 1995) discusses how

knowledge sets giving rise to organizational capabilities are embedded in bothhuman and organizational capital. Specifically, she notes that knowledge-basedcapabilities reside in a complex combination of employee skills, managerial systemsand processes, organizational values and norms, and the physical capital or physicalsystems of the organization. A firms intangible, knowledge-based resources are aninterrelated and interdependent system arising from these dimensions of human,organizational, and physical capital (Leonard-Barton, 1995). Technological capabili-ties built on socially complex knowledge transcend the level of individual expertise,though disruption of one or more critical individual links can cause problems forthe whole system.

Retaining Human Capital During Acquisition Implementation

When a firm attempts to gain another firms valuable technological capabilitiesthrough an acquisition, the tacitness and social complexity of the acquired firms


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knowledge-based resources creates a critical challenge during post-acquisition im-plementation. In particular, the need for retention of individual and collectivehuman capital is a central concern because many valuable employees of the acquiredfirm tend to leave during the post-acquisition transition period, resulting in the lossof their knowledge and skills (Hambrick & Cannella, 1993; Walsh, 1988, 1989;Walsh & Ellwood, 1991). Cannella and Hambrick (1993), for example, concludethat the departure of acquired firms top executives is detrimental to post-acquisitionperformance. This negative performance effect was found in both related andunrelated acquisitions. Consistent with Castanias and Helfat (1991), Cannella andHambrick suggest that executives from acquired firms are an intrinsic component ofthe acquired firms resource base, and that their retention therefore is an importantdeterminant of post-acquisition performance. In other words, if executives of ac-quired firms are part of the valuable resources obtained in the acquisition (Pitts,1976; Walsh & Ellwood, 1991), then the success of the acquisition may hinge onthe retention of their knowledge and skills. Though these prior studies have focusedon the post-acquisition turnover of top management team members, these argu-ments might be extended to consider the impact of the departure of other membersof the acquired firm.

Particularly from a knowledge-based view of the firm, focusing only on retentionof top managers omits an important part of the motivation for many acquisitions.Top managers may be a central source of knowledge in an organization throughtheir particular individual skill sets, through the ways in which they work with oneanother, and through their organizational actions and leadership. As the literature

highlights, however, valuable knowledge may reside in individuals and relationshipsthroughout the organization, in different functions and areas and levels, and notsimply at the upper echelons of the firm (Badaracco, 1991; Davenport & Prusak,1998; Nelson & Winter, 1982; Nonaka, 1994). Top managers are likely to possessa great deal of the acquired firms valuable managerial knowledge and skills, forexample, but much of the firms technological knowledge and skills may resideelsewhere within the organization. This technological knowledge may reside inresearchers, engineers, programmers, marketers, and middle- and lower-level man-agers, both in the form of individual human capital (Saura-Diaz & Gomez-Mejia,1997) and in the form of effective, high-functioning teams or groups (Leonard-

Barton, 1995).Not all individuals in the firm are necessarily critical to maintain a firms knowl-

edge base. Key employees to retain are those that possess individual expertise abouta particular technology, or those individuals that are part of a highly functioninggroup that plays a critical part in generating the firms value-creating capabilities.These key employees are critical to the maintenance of knowledge-based resourcesduring the post-acquisition implementation period. If these employees leave a firm,the loss of their tacit and socially complex knowledge will cause organizationalcapabilities to mutate or wither (Nelson & Winter, 1982). In addition to the relativelydiscrete effects of individual departures, turnover of key employees may cause

more systemic disturbances in the social structure of the acquired firm that maynegatively alter the firms capabilities (Fryxell & Judge, 1997).

Extending the logic of the knowledge-based view of the firm, we discuss howretaining valuable human capital is likely to be necessary to preserve and transferboth tacit and socially complex knowledge when one firm acquires another. The


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success of knowledge transfer is evident when the desired skills and capabilitiesare ultimately redeployed to the acquirer (Capron, Dussauge, & Mitchell, 1998).If key employees depart during the acquisition transition, the acquirer may finditself losing the skills and capabilities which largely motivated the acquisition inthe first place. Consequently, retention of the acquired firms key employeesthroughout the acquired organization, not just at the top management team level,should significantly enhance the success of the transfer of knowledge-based re-sources to the acquirer.

Hypothesis 1: Retention of key employees in the acquired firm ispositively associated with the transfer of technologicalcapabilities from the acquired firm to the acquirer.

In the next section, we discuss the theory of relative standing and the existingacquisition implementation research. We extend the theory of relative standing anddevelop hypotheses that consider factors that may influence the retention of valuablehuman capital throughout the acquired firm, not just at the top management teamlevel.

Relative Standing and Post-Acquisition Retention of Key Employees

The abnormally high rate of departure of acquired firms top executives duringthe first two to three years after an acquisition has generated considerable attention

in the strategy literature (Cannella & Hambrick, 1993; Hambrick & Cannella, 1993;Krug & Hegarty, 1997; Very et al., 1997; Walsh, 1988, 1989; Walsh & Ellwood,1991). Much of this research uses the theory of relative standing (Frank, 1986) toexamine why turnover in acquired top management teams occurs. The theory ofrelative standing describes the importance of individuals feelings of status andworth relative to that of others in a proximate social setting. Relative standing ismanifested in such things as access to centers of power, titles, others acts of respect,inclusion, and warmth (Frank, 1986: 736). Researchers have argued that someacquisitions result in extremely low relative standing for acquired executivestheyfeel inferior, the acquirers see them as inferior and themselves as superior, autonomy

is removed, status is removed, and a climate of acrimony prevails (Hambrick &Cannella, 1993: 733). The theory of relative standing predicts that acquired execu-tives are more likely to be retained after an acquisition when they are given agreater degree of autonomy and a greater sense of status and importance in thenewly merged firm. Appointing acquired executives to the newly merged firmsmanagement team may help provide them with a positive sense of their status andworth in the new organization. Likewise, other actions or symbols that indicate theimportance of the acquisition to the acquiring firm, and that signal the commitmentof the acquirer to the success of the acquisition, are likely to minimize departureof key managers (Hambrick & Cannella, 1993).

In addition to the work by Hambrick and Cannella (1993), Walsh (1988, 1989)and Walsh and Ellwood (1991) also investigated top management turnover followingacquisitions. These studies attempted to determine the underlying reasons for turn-over but found that neither the relatedness of the acquisitions (Walsh, 1988), thedegree of hostility of negotiating the acquisition deal (Walsh, 1989), nor market


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for corporate control theories (Walsh & Ellwood, 1991) were able to explain highturnover rates. Consequently, the theory of relative standing appears to offer thebest explanation for top management turnover in acquired firms. Because topexecutives are not the only important form of human capital in technology-moti-vated acquisitions, the theory of relative standing may have implications beyondthe acquired firms top management team. The theory might also be applied toother human capital in the acquired firm, such as scientists, engineers, programmers,middle managers, sales personnel, etc. (Very et al., 1997).

Drawing on concepts from the theory of relative standing, we predicted threesignificant influences on the post-acquisition retention of valuable human capitalin acquired firms. First, the degree of autonomy given to the acquired firm increasesthe relative decision-making latitude of acquired managers and employees. Ratherthan be dominated or subjugated by the acquirer, greater autonomy provides incen-tives for employees to stay with the firm because they are able to maintain greatercontrol over their environment (Hambrick & Cannella, 1993; Huselid, 1995; Veryet al., 1997). This is especially likely to be the case in knowledge-based acquisitions,where acquiring new skills and capabilities is the objective, because highly skilledprofessionals or knowledge workers tend to desire or require relatively highlevels of autonomy (Jelinek & Schoonhoven, 1995; Raelin, 1991).

Second, relatively greater post-acquisition status of the acquired firms humanassets may also increase their propensity to stay with the newly merged firm (Coff,1997). Status may be indicated by the acquired firms role in the management of

the newly merged firm after the acquisition is completed (Hambrick & Cannella,1993). Managers and other employees from the acquired firm may be allowed tomanage not only their own operations, but they also may be promoted to assumegreater responsibilities through being appointed to larger general management orfunctional responsibilities within the new, overall combined organization. Perhapsmore typically, many acquirers strip the acquired firms managers and employeesof their key responsibilities, effectively demoting them and reducing their status,and instead appoint their own executives to manage the acquired firms operations(Hambrick & Cannella, 1993; Haspeslagh & Jemison, 1991).

Finally, evidence of the acquirers commitment to the success of the acquisition

is likely to increase feelings of relative standing among the acquired firms managersand employees. This commitment may be expressed through positive internal andexternal media emphasizing the importance of the skills and capabilities of theacquired firm to the newly combined organization. Such positive publicity mayincrease acquired employees feelings of worth within the new organization. Othertypes of evidence of the acquirers commitment might include mechanisms such asincreased resources for training and professional development for acquired manag-ers and employees. Highly skilled employees are likely to value opportunities forcontinued learning, training, and other forms of personal development in order toincrease their expertise and skills (Coff, 1997; Huselid, 1995; Pfeffer, 1994; Raelin,

1991). Investment in such opportunities by the acquiring firm demonstrates theircommitment to the success of the acquisition. Consistent with the predictions ofthe theory of relative standing, these positive expressions of commitment are likelyto increase the propensity of acquired firms employees to remain after the acquisi-tion deal is closed.


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Applying these insights from the theory of relative standing in the specific contextof high-tech acquisitions, we propose the following three hypotheses:

Hypothesis 2: Post-acquisition autonomy is positively associated withretaining key employees.

Hypothesis 3: Post-acquisition status of the acquired firm (as indicatedby management roles and responsibilities) is positivelyassociated with retaining key employees.

Hypothesis 4: Evidence of the acquirers post-acquisition commitmentto the acquired firm is positively associated with re-taining key employees.

Financial Incentives and Retention of Key Employees

As applied in the strategy literature, the theory of relative standing primarilyemphasizes the importance of non-financial incentives, related to perceptions ofthe acquired firms autonomy, status, and worth, for determining post-acquisitionretention. But financial incentives may substitute at least partially for many ofthese more intangible factors (Coff, 1997; Hambrick & Cannella, 1993). Financialincentives provide another form of indication of an employees worth to an organi-

zation. The use of financial incentives to help achieve strategic and operationalobjectives, including specifically to enhance retention of valuable managers andknowledge workers, has received some attention in the literature (Saura-Diaz &Gomez-Mejia, 1997). In high-technology industries, for example, the use of financialincentives to retain highly skilled workers sometimes is a key component of retentionstrategies (Balkin & Gomez-Mejia, 1990).

In the specific context of acquisitions, however, there is relatively little researchon the use and efficacy of financial incentives as a mechanism to enhance retention.Some practitioner-oriented literature supports the use of short- and long-termincentives to help keep valuable executives on board during the transition period

and signal key executives that they have important roles to play in the organizationgoing forward (Ferracone, 1987: 61). Financial incentives used to retain employeesin acquisitions can take several forms: (1) stay put bonuses, generally a largebonus payable after the expiration of a certain period of time; (2) long-term contractswith bonuses payable over a given period of time; (3) stock options that can beexercised over some period of time or after a future date; and (4) increased basesalary and/or benefits.

To retain valuable human capital, firms may need to share the wealth they helpgenerate through some form of rent sharing, such as through various types offinancial incentives. Sharing the profits generated by knowledge workers valuable

expertise and skills promotes retention by raising their compensation higher relativeto the general labor market, as well as by increasing their perceived status in thefirm (Coff, 1997; Hambrick & Cannella, 1993). Economic rewards linked to keyemployees continued employment within the newly merged firm therefore arelikely to enhance the prospects that these employees will remain after the acquisition


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is consummated. The logic behind the use of such direct economic incentives sug-gests the following hypothesis:

Hypothesis 5: The use of financial incentives is positively associatedwith retaining key employees in the acquired firm.

METHODS

Sample Selection

Three criteria guided the selection of an appropriate sample of acquisitions forthis study. First, we focused on domestic acquisitions of high-technology firms.

Second, these acquisitions were relatively recent events, having occurred duringthe time period 19941995. Third, the acquisitions had a transaction value between$10 million and $250 million. These criteria and the resulting sample are discussedin this section.

Acquisitions of domestic firms in industries classified as high-technology inthe Securities Data Corp (SDC) Worldwide Mergers and Acquisitions databasecomprised the initial sample set. These industries include biotechnology, computerequipment, computer software, computer services, electronics, and communications.We selected these industries both because of a high level of recent acquisitionactivity and because they represented technology-intensive businesses in which

knowledge-based resources were likely to be important strategic motives for theacquisitions. The desire to obtain a particular technology or capability is a keydriver of most of these acquisitions (Kozin & Young, 1994). Because much of thedata were gathered through surveying of key managers, the use of relatively recentacquisition events (19941995) helped minimize recall or bias problems due toelapsed time.

The sample was limited to acquisitions valued at between $10 million and $250million. Transactions of this size were more likely to be acquisitions of single-business or single-division firms. This criteria helped control for the complexitiesarising in acquisitions of larger and more diversified multidivisional firms. The focus

on small to medium-sized firms also increased the likelihood of being able to identifyissues related to acquisition of specific knowledge-based resources and increasedthe likelihood of being able to identify key managers intimately involved in theacquisition implementation process. In acquisitions of this size, generally two ormore managers in each firm had familiarity with both the acquisition decision andthe acquisition implementation process. In larger, more complex transactions, anysingle manager would likely have had only limited information regarding the entireacquisition process.

A total of 268 acquisitions of high-tech firms that met the three criteria wereidentified in theSDC Worldwide Mergers and Acquisitionsdatabase. Subsequently,

Lexis/Nexus was used to searchPR Newswire and Business Wire for press releasesassociated with each of these acquisitions. Press releases were not available for 32acquisitions. We examined press releases for each of the remaining 236 acquisitionsfor evidence of whether gaining knowledge-based resources such as a specific tech-nology or capability was described as an important motive for the acquisition.


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Examination of the press releases resulted in elimination of 42 acquisitions fromthe sample because there was no evidence of a technology or capability to betransferred. These press releases typically discussed issues such as pending bank-ruptcy in the acquired firm, acquiring specific physical assets such as a particularplant, or they described partial acquisitions of a single division or product line.Seven additional acquisitions were eliminated because of a lack of sufficient contactinformation. In these cases, contact information in the press releases was invalidand the information also was unavailable in Wards Business Directory or otherreferences. A contact person for each of the remaining 187 acquisitions was identi-fied from the press releases and other references, including through direct contactwith the firms. For the majority of acquisition cases, key managers were directlycontacted by phone to describe the project and to secure their participation beforethe survey was actually sent. The survey was then sent through the mail to theprimary contact person and to one other senior manager in the firm. In all themailed survey packages, a cover letter explained the nature and intent of the studyand specified which acquisition the respondents were to consider when answeringthe questionnaire.

Managers from 27 firms indicated that they would not be able to participate inthe research. The most common reasons given for not participating in the studywere company policy and time pressures. Four of the returned surveys had incom-plete data and so were not used. When multiple responses for the same case werecompared, the average rate of inter-item agreement between the respondents was73%. Response scores were averaged for these cases (Very et al., 1997). A total

of 89 cases, accounting for 48% of the initial sample of 187, were included in thefinal sample. Given the potentially sensitive nature of the questionnaire and thelevel of manager queried (CEO, etc.), the level of response was reasonably good.Prior research reports response rates range from 1827% (Datta, 1991; Very et al.,1997).

Respondents reported average experience of six years in their current position,10 years in their current firm, and 19 years in the industry. Forty-eight percent ofrespondents were affiliated with the acquired firm prior to the acquisition. Fifty-two percent were affiliated with the parent firm prior to the acquisition. T-testsrevealed no significant differences between these two groups of respondents with

regard to the survey measures. In addition, 69% of respondents reported that theywere senior managers (CEO, president, executive or senior vice president, etc.).

The average transaction value of the acquisitions in our final sample was $69million, with values ranging from $11 million to $249 million. Sixty-one percent ofthe acquisitions were related at the two-digit SIC level. Thirty-six parent firms andforty-seven acquired firms were computer software or information technology firms.Thirty-six parent firms and twenty-seven acquired firms were involved in electronicsor related industries. The remaining firms were from the biotechnology, computer-related equipment, and telecommunications sectors.

To check for nonresponse bias, respondents and nonrespondents were compared

according to several criteria: the average value of the acquisition, the average sizeof the parent firm, and the relatedness of the acquisition. The means of each ofthese variables for the final sample were compared with the means for the totalpopulation of firms in the initial survey sample. Each of the calculated t-statisticswas statistically insignificant.


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Measurement of Key Variables

Established scales were used when such scales existed. Five management re-

searchers examined the survey instrument for both content and face validity. Inaddition, managers in seven acquisitions participated in a pretest of the survey.Following the pretests, slight wording and ordering modifications were made toimprove the clarity and organization of the survey. A description of the measuresof each of the variables is provided in this section.

Descriptive Information

Motivation for the Acquisition. Each survey respondent first identified the pri-mary knowledge-based resource that was a key motivation for the acquisition in

each particular case. A list of 10 examples was developed from a series of structuredinterviews with managers who pre-tested the survey, from press releases of acquisi-tion announcements, and from prior literature categorizing knowledge-based re-sources (e.g., Grant, 1996). In 35% of the acquisitions, specific product-relatedtechnology was identified as the most important knowledge-based resource of theacquired firm. Product innovation and engineering capabilities accounted for 32%of the acquisitions. Market or customer knowledge and sales relationships wereidentified as most important in 18% of the acquisitions. Basic research capabilitiesand production technology each accounted for 6% of responses. Finally, managerialcapabilities were identified as most important in only 2% of the acquisitions. These

survey responses were consistent with information gathered from the press releasesof the acquisitions.

Social Embeddedness of Knowledge. Several items assessed the social embed-dedness of the acquired technology or capability by asking respondents the locationof the key knowledge-based resources within the acquired organizations. Based onLeonard-Bartons (1992) work, King (1996) developed a measure to assess wherethe knowledge supporting a particular organizational capability resides. This five-item measure asked respondents to divide 100 points among the five places withinthe firm that hold knowledge critical to sustain the acquired resource. Respondentsindicated that 40% of the key acquired knowledge resided in the technical skills

of the employees. Another 16.5% were identified as residing in employees socialand professional relationships. Organizational mission and values was identified asthe location of 16% of the critical acquired knowledge. Managerial systems ac-counted for 8% of the acquired knowledge, while physical systems accounted for

just 18%. These values are consistent with the knowledge literature in that themajority (82%) of the acquired knowledge was cited as residing either in particularindividuals or in the social complexity of the relationships, teams, and culture ofthe acquired firm (Badaracco, 1991; Kogut & Zander, 1992; Leonard-Barton, 1995;Winter, 1987).

Dependent Variables

Retention of Key Employees. To examine the retention of key employeesthroughout the organization, multiple survey items were developed to measure twodimensions: (1) a weighting of importance of different types of employees in the


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acquired firm, and (2) the actual percentage retained. Respondents first identifiedkey employees by their location within the acquired firm (R&D, engineering, middlemanagement, marketing, etc.). Managers then provided objective data representingthe actual percentage of employees retained in each of these areas. This measureallowed for an assessment of retention of employees in different areas and functionsthroughout the acquired firm.

The overall retention measure was created by using a weighted average scorebased on the two criteria: (1) the indicated importance of retaining a particulargroup of employees (1 not important at all; 7 extremely important), and (2)the actual percentage retained from that group (0100). Table 1 provides a summaryof the disaggregated data regarding which groups of employees were consideredto be most important and the corresponding mean percentage retained for eachgroup. Table 3 provides the mean and standard deviation for the weighted averageretention score for all of the cases.

Transfer of Knowledge-Based Resources. To assess the transfer to the acquirerof the knowledge-based resources of the acquired firms (i.e., their valued technolo-gies and capabilities), we adapted our measure from prior work attempting toexamine the transfer of resources and capabilities in an acquisition context (Capronet al., 1998). Respondents were asked to identify to what extent each of the keyknowledge-based resources of the acquired firm had enhanced the competitivenessof the newly merged firm (1 not at all; 7 to a very large extent). Scores onthese items were averaged to obtain an overall indicator for this variable. Managers

in each firm were contacted and asked to provide additional follow-up data approxi-mately 912 months after our initial data collection. In addition to helping providegreater assurance of the validity and reliability of the survey data, this follow-updata also was used to assess and reduce concerns about potential common methodbias. Respondents were asked about: (1) the percentage of key acquired employeesretained after the acquisitions, and (2) the success of the acquirers at gaining andutilizing critical technologies and capabilities from the acquired firms. Comparisonof the initial survey responses for these variables with the follow-up data indicateda correlation of 0.84 between the initial measure of retention and the follow-up

TABLE 1

Retention of Key Employees (n 89)

Average Importance Average %

Function of Retention Retained

Research & development 5.79 77.3%Middle management 5.49 72.0%Engineering 5.10 69.9%Top management 5.10 56.0%Sales 5.04 66.0%

Marketing 4.75 63.8%Manufacturing 3.91 59.5%Finance 3.37 54.8%Purchasing 3.10 59.1%Distribution 3.06 58.5%


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TABLE 2

Composition of Key Management Group After

the Acquisition (n 89)

Mean Standard

Origin % Deviation

Originally part of acquirers management 27.4 31.5Originally part of acquired firms management 48.1 36.0Originally in parent firm but not part of management 7.5 18.4Originally in acquired firm but not part of management 8.6 15.1Hired after the acquisition 10.2 19.7

measure of retention, and a correlation of 0.76 between the initial measure ofknowledge transfer and the follow-up measure.

Independent Variables

Post-Acquisition Autonomy of the Acquired Firm. To assess post-acquisitionautonomy of the acquired firm, the survey included a multiple-item scale developedby Very and colleagues (1997) examining autonomy by functional area. This scaleincludes 12 items that ask respondents to what extent various functions were consoli-dated with the parent (1 totally independent; 7 totally consolidated). The

functional areas included in the items were production, supply sources, R&D,engineering, distribution, sales, marketing, personnel management, strategic plan-ning, financial & budget controls, accounting, and senior management. An aggregatemeasure of autonomy was calculated by averaging the scores on all the items ( 0.95). Results for this measure were compared with responses on the single-itemmeasure developed by Hambrick and Cannella (1993) to assess overall autonomy,which also was included on the survey. The two measures were highly correlated(r 0.78, p .001).

Post-Acquisition Status of the Acquired Firm. To measure post-acquisition sta-

tus of the acquired firm, respondents were asked to indicate the percentage of thetop management team of the newly merged firm that was originally employed bythe acquired firm. The total percentage of the acquired firms employees that werepart of the newly combined firms top management team was used as our measureof the relative post-acquisition status of the acquired firm (Hambrick & Cannella,1993). Table 2 provides descriptive data regarding the post-acquisition compositionof the top management team.

Acquirers Commitment to the Acquired Organization. Because no existing mea-sure could be found to assess this variable, a new scale was developed from ourliterature review and from background interviews (Haspeslagh & Jemison, 1991;

Huselid, 1995). The four items in this measure assessed various dimensions of theacquirers corporate commitment to the success of the acquisition. First, respondentsindicated to what extent they agreed or disagreed with the statement that theacquirer was visibly committed to making the acquisition a success (1 stronglydisagree; 7 strongly agree). The remaining items assessed other potential indica-


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tors of commitment: the use of positive public relations; support for travel andliaison between the acquired firm and the new corporate parent; and support forcontinued training and development of the acquired firms employees. Factor analy-sis of the items (with varimax rotation) extracted a single factor. An aggregatemeasure of commitment was calculated by averaging respondents scores on thefour items ( 0.91).

Financial Incentives. The survey presented respondents with items assessingthe use of four different types of financial incentives that might be used to encourageemployees to stay with a company. These items included (1) short-run incentives,(2) long-term contracts, (3) stock options, and (4) performance bonuses (Balkin &Gomez-Mejia, 1990; Gerhart & Milkovich, 1990). Respondents were asked to rateon a seven-point scale the extent of use for each type of incentive (1 did not

offer; 7 used to a great extent). Factor analysis on these items (with varimaxrotation) extracted two factors with eigenvalues >1. The first factor consisted ofshort-run incentives and long-term contracts, each linked to a specific time framefor retaining an employee. The second factor consisted of stock options and othertypes of bonuses linked directly to performance outcomes of the newly mergedbusiness. An overall score for each of the factors was calculated by averaging thescores for the items that loaded on each factor. Because each measure appearedto tap into a different type of financial incentive, both measures were used insubsequent analyses.

Control Variables

Three control variables were included in the analysis. The three controls were(1) the relatedness of the acquisition, (2) the acquired firms performance relativeto the acquirers at the time of the acquisition, and (3) the acquired firms size relativeto the acquirer. A well-developed argument in the strategy literature suggests thatrelated acquisitions should be more successful than unrelated ones because bothtangible and intangible resources can be more easily combined when a firm extendsits activities into a related area (Bettis, 1981; Lubatkin, 1987; Ravenscraft & Scherer,1987). To control for potential effects of relatedness, the relatedness of the acquired

firm and the acquirer was included in the analysis and was coded as a binaryvariable. The acquisition was considered related if the acquirer and the acquiredfirm operated in the same primary 2-digit SIC code (Lubatkin, Merchant, & Sriniva-san, 1993).

In addition, previous researchers have argued that acquisitions of relatively largerand more successful firms may be more difficult to implement effectively (Kitching,1967; Nahavandi & Malekzadeh, 1988). When the acquired firm is relatively largeand/or successful, this creates pressures to give it more post-acquisition autonomy,and to allow it to retain more control and greater assets, even if they are notconsidered to be critical to achieving the objectives of the acquisition. In acquisitions

of relatively larger or more successful firms, it may be more difficult for the acquirersto control the post-acquisition implementation process. The size and performanceof the acquired firm relative to the acquirer therefore were used as control variables.

Over half of the acquisition sample consisted of privately held firms for whichpublic data was not available. Therefore, an item was included on the survey asking


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respondents to assess the relative size of the two firms at the time of the acquisition.For 42 acquisitions for which complete public data were available, we also obtainedthe ratio of the number of employees in the acquired firm to the number of employ-ees in the parent firm from Wards Business Directory to check the reliability ofour survey measure. The archival measure and the survey measure were highlycorrelated (r 0.79) for these 42 acquisitions. To measure relative performance,an item on the survey asked respondents to state the relative annual sales growthof the two firms at the time of the acquisition. We again obtained archival datafrom Wards Business Directory to check the reliability of the survey measures.The archival data and the survey measure were highly correlated ( r 0.89), provid-ing greater assurance of the reliability of our survey measure of relative performance.These data are summarized in Table 3.

RESULTS

We screened the survey data to check for outliers, out-of-range values, missingdata, and assumptions of normality and homoscedasticity by examining univariatestatistics and scatterplots of the residuals (Tabachnick & Fidell, 1996). Descriptivestatistics and correlations for each of the variables used in the analyses are presentedin Table 3.

A mediated regression model was used to test the five hypotheses. Mediatedregression allows for assessment of both direct and indirect effects of independent

variables and an intermediate variable on the dependent variable (Baron & Kenny,1986). Three regression models were analyzed. First, we tested a regression modelassessing the impact of the independent variables (autonomy, status, commitment,and financial incentives) on the intermediate variable (retention). This first modelallowed for testing of Hypotheses 24. Second, a regression model examining theimpact of the independent variables on the ultimate dependent variable (knowledgetransfer) was conducted. Finally, a regression model examining the impact of boththe independent variables and the intermediate variable (retention) on the depen-dent variable (knowledge transfer) was tested. Comparing models 2 and 3 allowedfor the assessment of any direct effects the hypothesized independent variables

may have on knowledge transfer, as well as their indirect effects through retention(Baron & Kenny, 1986). Condition indices and variance inflation factors wereanalyzed for all three models to assess any potential problems with multicollinearity(Tabachnik & Fidell, 1996). No significant problems with multicollinearity werefound as a result of these diagnostic checks. The regression models are presentedin Table 4.

The first model was significant (R2 .50, F 10.129, p .001). Specifically,autonomy ( 0.321,p .001), status ( 0.270,p .01), and commitment ( 0.259, p .01) were positive and significant predictors of retention during post-acquisition implementation, providing support for Hypotheses 2, 3, and 4. However,

neither type of financial incentive (time-based, performance-based) was a significantpredictor of retention. Hypothesis 5, therefore, was not supported. In addition, thecontrol variable for relative size was significantly related to retention ( 0.189,

p .05). The other control variables, relatedness and relative performance, werenot significant (p .05) predictors of retention.


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TABLE

3

Descriptive

Statisticsand

Correlations(n

89)

Variable

Mean

S.D.

1

2

3

4

5

6

7

8

9

Autonomy

3.6

8

1.8

5

Commitmen

t

5.5

3

1.6

9

.0

4

Relativestatus

56.7

5

35.3

6

.49**

.15

Financialincentive(perf.)

3.5

0

1.4

3

.2

1*

.32**

.0

3

Financialincentive(time)

3.0

6

1.9

4

.2

9**

.31**

.2

5*

.22*

Relativesize

5.3

8

1.7

0

.09

.0

3

.0

8

.19

.0

7

Relativeper

formance

4.8

0

1.6

7

.2

2*

.0

1

.1

7

.04

.04

.13

Relatedness

0.6

1

0.4

9

.2

7**

.12

.3

7**

.13

.10

.05

.01

Retention

45.9

5

19.8

8

.56**

.23*

.54**

.0

5

.1

9

.16

.2

6*

.2

7**

Knowledgetransfer

4.1

5

1.1

7

.15

.25*

.12

.02

.08

.30**

.0

6

.00

.53**

*p

.05.

**p

.01.


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TABLE 4

Mediated Regression Analysis (n 89)a

Variable Model 1 Model 2 Model 3Controls

Relative size 0.189* 0.341** 0.214*(2.256) (3.207) (2.287)

Relative performance 0.159t 0.069 0.038(1.934) (0.660) (0.413)

Relatedness 0.112 0.015 0.090(1.279) (0.134) (0.938)

Independent variablesAutonomy 0.321*** 0.081 0.135

(3.295) (0.650) (1.198)Status 0.270** 0.083 0.098

(2.676) (0.648) (0.859)Commitment 0.259** 0.255* 0.081

(2.864) (2.220) (0.788)Performance incentives 0.052 0.131 0.096

(0.593) (1.170) (1.001)Time incentives 0.072 0.098 0.147

(0.810) (0.861) (1.502)Retention 0.672***

(5.531)Model

F-statistic 10.129*** 2.448** 6.379***R2 0.503 0.197 0.421

DV Retention DV Knowledge DV KnowledgeTransfer Transfer

a Standardized coefficients are presented with T-ratios in parentheses.t p .1.* p .05.** p .01.*** p .001.

The second model used the same independent variables, but with knowledgetransfer as the dependent variable. The overall model was significant (R 2 .197,

F 2.448, p .01). However, commitment was the only significant independentvariable ( 0.255, p .05). Neither autonomy, status, nor financial incentiveswere individually significant predictors of knowledge transfer. Results for the controlvariable for relative size ( 0.341,p .01) again were significant, however. Theother controls, relative performance and relatedness, were not significant predictorsof knowledge transfer.

The third model used knowledge transfer as the dependent variable and includedretention as an intermediate variable. This model was also was significant overall(R2 .42,F 6.379,p .001). The change in theF-statistic from model 2 to model3 was also significant (F 30.589, p .001), indicating that retention explained

a significant amount of variance in knowledge transfer apart from the independentvariables. In other words, retention was a significant and positive predictor of theextent to which technologies and capabilities had been successfully transferred fromthe acquired firms to the acquirers ( 0.672,p .001), consistent with Hypothesis1. Commitment was no longer significant in this model, indicating that the effects


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of commitment are primarily through its positive influence on retention. In addition,autonomy, status, and financial incentives also were not significant in model 3,further suggesting that the key influence of these variables on the transfer oftechnologies and capabilities to the acquirers is through their significant effects onretention. The control for relative size remained positive and significant in model3 ( 0.214, p .05). Relative performance and relatedness again were notsignificant.

DISCUSSION & CONCLUSIONS

This study provides one of the first empirical tests of several key issues relatedto high-tech acquisitions, transactions in which the transfer of knowledge-basedresources to the acquirers is a paramount strategic concern. First, the study con-firmed the suggestion that many acquisitions in the contemporary business environ-ment are occurring with the specific objective of obtaining critical knowledge-based technologies and capabilities from the acquired firms. Second, retaining keyemployees throughout the acquired organizations (not just at the level of topmanagement) appears to be a critical prerequisite to promote the successful transferof their technologies and capabilities to the acquiring firms. Third, the resultsprovide evidence of some important determinants of retention of these key acquiredemployees. These three contributions are discussed in turn.

The first portion of the survey asked respondents to (1) identify the most impor-

tant resource of the acquired firm that motivated the acquisition, and then (2) toidentify the location of valuable knowledge-based resources within the acquiredfirm. Eighty-four percent of the acquisitions in this study were made for the purposeof acquiring specific product-related technologies, market or customer knowledgeand sales relationships, product innovation capabilities, or engineering capabilities.Respondents indicated that over 40% of the knowledge necessary to sustain thesecritical resources resided in the technical skills of key acquired employees. Another32% of the knowledge was identified as located in the greater social context ofthe organizationthe relationships employees had with one another, with otherprofessionals and other outside stakeholders, and in the organizations mission and

values. These descriptive data provide evidence that the desire to obtain bothindividual and collectively embedded knowledge is a key motivation for manyacquisitions of high-tech firms.

While most prior research has focused on retention of the top management teamfollowing an acquisition (Cannella & Hambrick, 1993; Hambrick & Cannella, 1993;Walsh, 1988, 1989; Walsh & Ellwood, 1991), our results provide evidence suggestingthe importance of retaining valuable human capital other than top executives. Infact, the data in Table 1 indicate that the acquired firms top managers, and theknowledge and skills they possess, often are not the most critical portion of theacquired firms human capital. For example, research and development personnel

were cited as the most important source of the knowledge-based resources forwhich the firm was acquired. Given the focus of prior acquisitions research on topmanagement teams, these data also give a different perspective in that respondentscited middle managers in the acquired high-technology firms as a more importantrepository of the knowledge they sought to acquire. Engineering personnel tied


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with top management as a location of critical expertise and skills, and the importanceof retaining acquired sales personnel was not significantly different from the impor-tance of retaining acquired top managers. The importance accorded to these groupsof employees is consistent with the respondents primary acquisition objectives ofacquiring product-related technologies, sales relationships and customer knowledge,product innovation capabilities, and engineering capabilities. R&D, sales, and engi-neering play critical roles in generating and sustaining the acquired technologiesand capabilities.

These results may suggest that the negative performance effects of top manage-ment turnover that have been observed for some acquisitions (e.g., Cannella &Hambrick, 1993) may not necessarily be direct effects nor are they necessarily themost important effects in all acquisitions. At least in certain types of acquisitions,top management turnover in acquired firms may be acting as a highly correlatedproxy for departure of other key employees. A more direct cause of poor perfor-mance may be the loss of R&D employees, middle managers, or engineering person-nel. As others have speculated (Very et al., 1997), another explanation is that topmanagement turnover may be an indicator of broader organizational problems thatthen affect other organizational members. The departure of non-executive keyemployees from the acquired firm may be intertwined with organizational difficul-ties, perhaps as both cause and effect in some sort of negative feedback loop ordownward spiral. Retention of the top management team may nonetheless beimportant in some cases because their retention may provide some stability andcontinuity for the acquired organization through a transition period, even though

other employees possess the actual expertise and skills that are of interest to theacquirer. The reasons for keeping top managers therefore are likely to involvesymbolism to some degree (as our findings for the status variable suggest) and not

just to retain their executive experience and skills. Retaining top managers may benecessary or helpful for a period of time, perhaps long enough to provide a smoothtransition and to gain loyalty of key R&D, engineering, sales, and middle manage-ment employees. Interestingly, however, actual retention of top managers rankednext to last among the different groupings of employees, with only finance employeesmore likely to leave the firm than members of the top management team.

The second, more general contribution of this research is the empirical linkage

of retention of key employees with the successful preservation and transfer ofknowledge-based resources from the acquired firms to the acquirers. The resultssupporting Hypothesis 1 indicate that higher retention of key employees throughoutthe acquired organization does result in significantly greater transfer of knowledge-based resources to the acquirer, at least in this sample of high-technology acquisi-tions. The conceptual framework developed in this study stresses the importanceof retaining these key acquired employees because valuable tacit knowledge maybe packaged both in the form of particular individuals and in the relationships andinteractions of teams or groups of key individuals. Consequently, if this knowledgeis to be successfully preserved and transferred during the acquisition implementation

process, retention of key employees should be a critical strategic objective of thetop management team of the acquiring firm. In contrast, this sort of objective maynot be as important when the motivation for an acquisition is to obtain increasedmarket share, greater economies of scale, or physical assets such as plant andequipment, acquisitions in which eliminating large numbers of employees may be


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an explicit part of the implementation plan. This contrast suggests that futureacquisitions research may be improved and refined by more specific considerationand distinction of the different and specific motivations for an acquisition and ofwhat is actually being acquired.

Because of the importance of retention in these acquisitions, four possible deter-minants of key employee turnover were examined. These four factors were: (1) theautonomy granted to the acquired firm; (2) the status of the acquired firm, asindicated by the composition of the post-acquisition top management team; (3)corporate commitment to the acquisition; and (4) the use of financial incentives totry to keep employees from departing.

First, the results provide support for the positive influence of continued autonomyof the acquired organization on the retention of key employees. Past researchindicates that granting autonomy to an acquired firms managers increases theirfeelings of relative standing in the firm and, therefore, minimizes their tendency toleave. Consistent with the theory of relative standing and Hambrick and Cannellas(1993) findings for top executives, our data suggest that preservation (Haspes-lagh & Jemison, 1991) or separation (Nahavandi & Malekzadeh, 1988) modesof acquisition implementation may be sometimes appropriate for acquisitions ofknowledge-based resources (at least for some period of time) to prevent the lossof key resources through personnel turnover.

With recent high levels of M&A activity, some have recommended relativelyrapid and complete integration of acquisitions in order to increase the chances ofsuccess (Ashkenas, DeMonaco, & Francis, 1998). For some types of acquisitions,

implementation strategies based on quick integration may be appropriate. But theresults for autonomy in this sample of high-tech acquisitions suggest that a cautiousconsideration of such strategies is warranted. Critical aspects of acquisition imple-mentation strategies, such as levels of autonomy, perhaps need to be dictated moreby the specific motivations and resources of the acquisition situation rather thanby some general prescription for all acquisitions. Again, additional research mayhelp better define key parameters or contingencies that should guide these acquisi-tion implementation choices.

The autonomy findings also highlight a persistent dilemma when higher levelsof autonomy are granted to an acquired firm. With lower levels of integration and

higher levels of autonomy, how can the resources of the acquired firm and theacquirer be successfully transferred, shared, and combined? Assuming that thereare synergies to be realized through integration in many acquisition cases, the needto maintain a large degree of post-acquisition autonomy for the acquired firm (inorder to retain key employees) creates a serious challenge. How this tension canbe successfully managed is another question for future research. Other types ofacquisition implementation mechanisms such as formal and informal communica-tions and other types of exchanges between the acquired firm and the acquirer maybe critical (Shrivastava, 1986). Frequent meetings and active project-based teamsmight be useful where there is the necessity for exchange of ideas and combination

of knowledge across a continued post-acquisition boundary of autonomy betweenthe acquirer and the acquired.

As with greater autonomy, greater status accorded to the acquired firm alsoappears to increase retention of key employees. The percentage of the managementteam of the acquired firms operations who were originally part of the acquired


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firm was positively associated with retention of other key acquired employees. Bymaintaining or increasing acquired employees executive responsibilities in thenewly merged firm and by keeping or making them part of the new managementteam, their feelings of importance and status in the new organizational context arebolstered and the status of the acquired organization within the combined firm isvalidated. As previously discussed, the importance of retaining top managers ofthe acquired firm may be largely for symbolic and organizational reasonsto keepthe organization stable and functioning and to thereby prevent personnel lossesrather than to retain top managers executive knowledge and skills.

Relatively unique among acquisition studies of this type, the turnover measureused in this study included turnover/retention data for a variety (10) of differentgroups of employees within the acquired firm, as well as ratings of the actualimportance of their retention. The results therefore clearly support the argumentthat issues of relative standing have consequences beyond just the top managementteam of the acquired firm. Relative standing issues appear to flow throughoutthe acquired organization. The dynamics of relative standing may be particularlyimportant in the sort of high-tech acquisitions examined in this study because, inmany of the cases, the acquired firm possessed some superior and relatively scarceknowledge-based resource, which was the motivation for the acquisition. If thesetypes of acquisitions are implemented surrounded by an aura of conquest [of theacquired firm], as many acquisitions are (Hambrick & Cannella, 1993: 735), thenegative consequences may be particularly acute, both in terms of departure ofpersonnel as well as in terms of lowering morale of those who remain. Instead,

relatively high status for the acquired organization and its key employees in thenewly combined firm may be appropriate, especially given the valuable knowledgeand skills that ostensibly motivated such an acquisition. The theory of relativestanding, then, is not only important for understanding turnover of acquired execu-tives, but may also help to understand turnover of acquired employees throughoutthe firm.

Third, the acquirers corporate commitment to the acquisition was also foundto be a positive influence on the retention of acquired employees. Expressions ofcommitment to the success of the acquisition, support for training and travel, andpositive public relations on the part of the acquirer appear to enhance acquired

employees comfort within, and commitment to, the newly combined organizations.The significant findings for this commitment variable are consistent with the theoryof relative standing and therefore also support the utility of applying relative stand-ing concepts to examine retention of personnel throughout the acquired firm.

Perhaps one of the most surprising findings of this study was that financialincentives did not significantly influence actual retention. Neither incentives basedon time spent with the firm following the acquisition, nor incentives based on post-acquisition performance criteria, were effective determinants of retention in oursample of high-tech acquisitions. Less economically related and more socially ori-ented issues related to autonomy, status, and commitment clearly were more impor-

tant determinants of retention than were financial incentives. The broader sociallogic behind the theory of relative standing therefore appears to be a better predictorof employee retention than a theory simply based on direct, personal economicinterests.

These results for the financial incentives variable are worthy of further consider-


22/25


ation in future research, especially given the apparent popularity of such incentivesin many acquisition implementation plans. At least for some groups of employees,broader issues related to relative standing ultimately may prove more importantthan financial incentives in determining whether they decide to remain with anorganization after the deal is done. An alternative explanation is that highly skilledindividuals or teams that are worthy of substantial financial incentives for retention,are likely to be in demand not just by the acquirer, but also by other firms whomay offer even greater incentives for these key employees to leave. Yet anotherplausible explanation is that key employees in these high-technology firms mayhave already realized substantial economic gains when their firm was acquired,especially if they possessed a significant stake in the company for which they worked.After realizing such a buyout windfall, further financial incentives may haverelatively less appeal to these employees and thus may have much lower utility asa retention mechanism than in other situations.

Early research on work design emphasized the importance of autonomy in in-creasing an employees internal motivation (Hackman & Oldham, 1980). Autonomyhas also been linked to increased innovation and creativity for technology workers(Amabile, Conti, Coon, Lazenby, & Herron, 1996; Bailyn, 1985). Highly skilledtechnology workers may be able to move to other firms without requisite loss offinancial compensation; tight labor markets in technology professions (McGee,1998) may allow them to seek organizational settings that provide other factorsthat increase their internal motivation and creativity without much, if any, econo-

mic loss.Finally, from the perspective of management practice, this study may providemanagers with some direction for where to focus their efforts and expend theirresources in order to retain valuable human capital when they acquire other knowl-edge-intensive organizations. While the relatively direct approach of financialincentives for retention did not appear to be particularly effective, other less tangibleand more social factors were more significant determinants of retention. Ratherthan solely focus on compensation issues, managers of the acquiring firms probablyshould spend a good portion of their efforts on issues related to autonomy, status,and commitment during acquisition implementation.

Ultimately, the retention of key employees may only be a precursor or a precondi-tion for the successful appropriation of technologies and capabilities by the acquirer.The successful transfer and combination of knowledge between the acquired firmand the acquirer, and its successful application to commercial ends, will continueto be critical and complex issues both for researchers and for those managersactually tasked with acquisition implementation.

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