^ Academy of Management loumal 2001. Vol. 44, No. 3. 457-I17B. LEARNING THROUGH ACQUISITIONS FREEK VERMEULEN London Business School HARRY BARKEMA Tilburg University Research on acquisitions has typically focused on acquisitions per se, examining issues such as performance and implementation problems. This study moves beyond that perspective and studies the influence on a firm's later expansions. We argue that exploitation of a firm's knowledge base through "greenfields" eventually makes a firm simple and inert. In contrast, acquisitions may broaden a firm's knowledge base and decrease inertia, enhancing tbe viability of its later ventures. Over time, firms strike a balance between the use of greenfields and acquisitions. Various implications of this theory���tested with survival analysis and "logit" models���were strongly corroborated. Acquisitions may have various benefits com- pared to "greenfields," or newly formed affiliates of a firm. Acquisitions allow firms to achieve greater market power, to overcame barriers to entry, to enter new markets quickly, and to acquire new knowledge and resources. However, acquisitions also imply additional costs for acquiring firms, such as a takeover premium of 20���40 percent, on the average (Eckbo & Langohr, 1989 Jarrell, Brick- ley, & Netter, 1988). and the costs of integrating the acquired firms into the acquiring organizations. From the 1980s onward, researchers have made much progress in uncovering the dark side of ac- quisitions, including the above-mentioned costs and the time and attention that top management needs to spend on buying and implementing acqui- sitions, which is diverted from other activities (Hitt, Hoskisson, & Ireland, 1990 Hitt, Hoskisson, Johnson, & Moesel, 1996). They have also ques- tioned the cognitions and incentives of top manag- ers it has been suggested that managers may act out of hubris, overvaluing their ability to manage ac- quired businesses (Hayward & Hambrick, 1997 Roll, 1986), imitating others that have made acqui- sitions (Haunschild, 1993). and pursuing personal goals that do not necessarily coincide with the in- terests of their shareholders (Jensen, 1986 Morck, Shleifer, & Vishny, 1990). It is consistent with this critical view that the shareholders of acquiring firms typically reacted negatively to new acquisi- tions in the 1980s (e.g., Jarrell et al., 1988). Yet, This research was sponsored by the Netherlands Or- ganization for Scientific Research. We thank Maarten Vankan and Harm Jan Kanis for excellent research assis- tance. despite the critical stance of researchers and share- holders, the top managers of firms have continued to make acquisitions at a high rate worldwide. Our study uncovers a neglected, yet positive, side of acquisitions: they may revitalize acquiring organizations and foster their long-term survival. Our study is anchored in a stream of research that emphasizes organizations' tendency to gradually become rigid, narrow, and simple (Millar, 1993) owing to the repeated use of their knowledge bases (Leonard-Barton, 1992 Levinthal & March, 1993 Miller, 1994). Tbeir adaptation is thus hampered when, over time, external conditions change and alternative responses are required, a phenomenon known as a competency trap (Levitt & March, 1988]. Population ecologists have asserted organi- zations have little scope to adapt to new circum- stances, which ultimately leads to their demise (Hannan & Freeman, 1984). Radical change theo- rists (Tushman & Romanelli. 1985) have argued that long periods of inertia may be punctuated by short periods of heavy turmoil, painful restructur- ing, and radical change, which may again synchro- nize a firm's knowledge and routines with external circumstances. Our study extends a more recent stream of research that emphasizes that organiza- tions may get exposed���or may expose them- selves���to less radical shocks to their systems more regularly and that these shocks may also break through rigidity and inertia and infuse tbe firms with fresh knowledge. This new knowledge comes through technological renewal at regular time in- tervals (Brown & Eisenhardt, 1997), or through en- tering a variety of product environments and geo- graphical environments (Barkema & Vermeulen, 1998 Miller & Chen, 1996), or through forging a chain or an alliance (Ingram & Baum, 1997 Noote- 457

458 Academy of Management Journal June boom, 1999). These strategies may enable firms to maintain their ability to react adequately to chang- ing external conditions and, consequently, to sur- vive in the long run. Our study adds to this research by advancing and testing the idea that acquisitions are another way for organizations to administer shocks to their sys- tems and to counter the process of progressing sim- plicity. We argue that expansion through green- fields may contribute to progressing simplicity, but that acquisitions, in contrast, revitalize a firm and enhance its ability to react adequately to changing circumstances. Acquisitions may lead to cultural clashes and tensions when they are implemented (Haspeslagh & Jemison, 1991), which may cause immediate problems and unsatisfactory perfor- mance, but they may also enrich the knowledge bases and break the rigidities of acquiring firms��� which enhances the viability of their later ventures. Clearly, if acquisitions serve to revitalize, the cur- rent critical stance of researchers and shareholders toward them may be exaggerated and, in fact, richer and perhaps more positive evaluations of these im- portant strategic decisions may be needed. Hypotheses were tested on data on the expan- sion patterns of 25 firms over a window of almost three decades (1966-94). A first set of hypotheses concerns the idea that acquisitions, contrary to greenfields, increase the viability of a firm's later ventures. These hypotheses were tested using survival analysis. A second set of hypotheses concerns the actual expansion strategies of these firms (greenfield or acquisition). A key implica- tion of our theory is that it is the balance between prior acquisitions and greenfields that deter- mines a firm's current need for revitalization through acquisitions. We tested hypotheses about how various types of prior expansion influence a firm's propensity to make acquisitions using logit analvsis. BACKGROUND This research focuses on the distinction between acquisitions and greenfield investments. An acquisi- tion is defined as the takeover of an existing com- pany a greenfield is defined as setting up a subsidiary from scratch. For reasons of simplicity, we follow existing literature in treating greenfields and acquisi- tions as dichotomous [e.g., Barkema & Vermeulen, 1998 Caves & Mehra, 1986 Hennart & Park, 1993). Greenfields include jointly owned greenfields. Ac- quisitions include partial acquisitions. Acquisitions An important empirical insight of the last two decades is that acquisitions are often associated with implementation problems and unsatisfactory postacquisition performance. Ravenscraft and Scherer (1989) found that, on the average, the prof- itability of target firms declines after their acquisi- tion. In fact, a large proportion of acquired compa- nies are again divested or sold off (Porter, 1987 Ravenscraft & Scherer, 1987), with the prime rea- son being their unsatisfactory performance (Raven- scraft & Scherer, 1991 Roll, 1986). An important reason for the disappointing performance is the problems that are associated with the integration of acquisitions (Haspeslagh & Jemison, 1991). Such problems are avoided in the case of greenfields. Indeed, several studies have found that greenfields usually perform better than acquisitions (Li & Guisinger, 1991 Nitsch, Beamish, & Makino, 1996 Simmonds, 1990 Woodcock, Beamish, & Makino, 1994). The integration of an acquired company into a parent firm is complicated by the differences be- tween the organizations involved. Various studies, for instance, have found that differences in organi- zational culture and management style damage postacquisition performance (Chatterjee, Lubatkin, Schweiger, & Weber, 1992 Datta, 1991). Acquisi- tions in new lines of business may be particularly problematic (e.g., Hopkins, 1987 Singh & Mont- gomery, 1987), since the dominant logic differs considerably across businesses (Prahalad & Bettis, 1986). Acquisitions in unrelated businesses are therefore often given a high level of autonomy (Datta & Grant, 1990). Differences between acquired firms and acquiring companies are not necessarily detrimental several researchers have emphasized that differences rather than similarities between organizations create opportunities for synergies and learning (Harrison, Hitt, Hoskisson, & Ireland, 1991 Krishnan, Miller, & Judge, 1997). However, the combined theory and evidence suggest that the differences between the organizations involved are only beneficial if they are not so large that they prevent synergies, learning, and the creation of value. A related stream of research has studied how acquisitions infiuence acquiring companies. Hitt, Hoskisson, Ireland, and Harrison (1991) empha- sized that acquisitions require both funding and the time and attention of top management, which is diverted from internal growth and innovation. In keeping with this idea, these authors found that acquisition intensity was negatively related to the innovation levels of acquiring firms. This finding

2001 Vermeulen ond Barkema 459 implies a real danger for acquiring companies: they may not only become more skilled in the acquisi- tion process, but may, eventually, also lose the ability to innovate and grow internally (Hitt et al., 1990, 1996). As a result, tbey may get locked into a trajectory of making acquisitions only, rather than establishing greenfields. In practice, however, firms often appear to follow a diversity of strate- gies they do not pursue either internal growth or acquisitive growth but combine the two [Lamont & Anderson, 1985). Apparently, in addition to the influences that push firms to the extremes���a strat- egy of either acquisitive or internal growth���there are also forces that push them to the middle, to- ward a strategy of making both greenfield invest- ments and acquisitions. Building on insights devel- oped in the organizational literature on progressing simplicity, we sought to provide a better under- standing of why firms strike a balance between greenfieids and acquisitions over time and how it helps them to survive in the long run. Progressing Simplicity A key insight from the literature on organiza- tional learning and adaptation is that, over time, firms need to strike a balance between exploration, or the search for new knowledge, and the exploita- tion of existing knowledge resources (Levinthal & March, 1993 March, 1991). Exploitation, or the ongoing use of a firm's knowledge base,^ helps an organization to refine its routines in the domains of product and process technology, marketing, logis- tics, and so on and allows it to recoup the initial investment and to become profitable. Exploration, in contrast, enables a firm to renew its knowledge base, but it is a costly process. Through exploitation, a firm focuses on the knowledge and routines that contribute most to its success and filters out those routines that are less successful in the current setting (Cyert & March, 1963). Each time the knowledge base is applied, opinions about what works and why are more firmly settled in the minds of managers, and rou- tines are more firmly established in an organization (Levitt & March, 1988 Nelson & Winter, 1982). Gradually, knowledge that is less successful in a particular setting will disappear from the organiza- tion's memory (Levitt & March, 1988). Information ^ We interpret knowledge base broadly, as the total articulated and tacit knowledge of an organization (Hed- lund, 1994 Nonaka, 1994), "leading to a set of capabili- ties that enhance the chances for growth and survival" (Kogut & Zander, 1992: 384). processing and search are limited, which in turn hampers the creation of new knowledge and rou- tines (Huber, 1991). A strong, homogeneous culture begins to dominate the organization (Harris, 1994 Leonard-Barton, 1992 Miller, 1994), and secondary skills are lost because their practitioners fail to garner power and respect (Milliken & Lant, 1991). Other parties lose influence, "infosystems" and routines increasingly reflect only a narrow range of skills and concerns, and the lion's share of re- sources goes to one central tactic or activity. Step- by-step, exploitation and fine-tuning reduce variety in the firm's knowledge base and promote ossifica- tion and simplicity���an overwhelming preoccupa- tion with a single goal, strategic activity, depart- ment, or worldview that increasingly precludes consideration of others. In tbe words of Miller: "Before long, there is no more noise left in the system: no court jesters, no devil s advocates, no iconoclasts with any say, no countervailing models of the world. This progressing conformity de- creases flexibility, engenders myopia and blocks learning and adaptation" (1993: 134). THEORY AND HYPOTHESES The Effect of Greenfields on Subsequent Subsidiary Survival We will argue that ongoing expansion through greenfields may contribute to this process of ossi- fication and progressing simplicity. When a firm sets up a subsidiary from scratch, it will be inclined to implement its habitual ways of organizing and managing (Hedberg. 1981 Levinthal & March, 1993). Especially if the acquisition concerns an af- filiate in a familiar market in which the firm is already active, it will tend to concentrate on those aspects of its repertoire that appeared to have been most successful in the old situation (Miller, Lant, Milliken, & Korn, 1996), replicate those, and trans- fer them to the new subsidiary. As a result, the same (limited) set of technical systems (Leonard- Barton, 1992), competitive actions (Miller & Chen, 1996), and functional departments (Miller. Droge, & Vickery, 1997) will be installed. Greenfields may partly be staffed by new recruits, but organizations tend to hire people who fit their existing culture the newly hired are then socialized to fit the culture even more (O'Reilly, Chatman, & Caldwell, 1991), a process that will get even more emphatic when the organization's culture becomes simple and compel- ling. Hence, due to repeated replication, the com- pany's knowledge base narrows and the organiza- tion becomes increasingly simple. Each time a firm expands through a newly