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Resource Deepening Vs. Resource Extension: Impact on Asset-Seeking Acquisition Performance

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Abstract

Seeking critical assets is known to be a key motivation for emerging economy firms to make acquisitions in foreign markets, especially those in developed economies. In this study, we probe this motivation further by identifying two categories of asset-seeking acquisitions: resource deepening and resource extension. Using a sample of 1004 cross-border acquisitions conducted by Indian firms during the period 2000–2010, we find support for the hypothesis that the type of resources sought and their intended utility impacts acquisition performance. Additionally, for resource extension acquisitions, we find that acquisition performance outcomes vary by the assimilative capacity of the firm and the extent of experience in acquisitions at the firm and business group level.

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Notes

  1. Under asset-seeking acquisitions, we include both upstream and downstream assets, since when firms from emerging markets “…acquire companies abroad, they may appear to be engaging in market-seeking internationalization when, in fact, they are engaging in strategic asset seeking.” (Ramamurti 2012, p. 43).

  2. Generally, when firms make acquisitions, they diversify operations. Diversification can be viewed from the output side as inter- or intra-industry diversification and from the input or process side in terms of resource or functional relatedness (Li and Greenwood 2004; Tanriverdi and Venkatraman 2005). Given the context of emerging economies in the post-reform period, our interest is mainly in the notion of relatedness on the input or process side. Hence, both resource deepening and resource extension acquisitions mainly conform to related acquisitions with a varying degree of relatedness between the acquirer and target resource profiles.

  3. As described in the results section, we incorporate the Heckman (1979) two-step procedure to account for the propensity of a firm to engage in acquisitions. For this purpose, we take into account all the firms with data in the Prowess database corresponding to the industries in which acquisitions were made.

  4. As an alternate, we cross-verify all our models with a 7 day window period (−3 to +3 days).

  5. Two variables were created, since historical and social aspiration performance measures tend to strongly correlate and cannot be used in the same model.

  6. We do not anticipate interactive relationships between resource deepening acquisitions and moderators due to a lack of strong theoretical rationalizations. However, for the sake of completeness we created the relevant variables with interaction effects. We included these additional interaction terms in the fully specified model reported in Table 3. We did not find any statistically significant interaction between resource deepening acquisitions and the moderators, and hence do not report them in the tables.

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Acknowledgments

Both authors contributed equally to this article. First author would like to gratefully acknowledge financial support from SOM at the Faculty of Economics and Business, University of Groningen. The second author would like to gratefully acknowledge support from the Hobart and Marian Gardner Hinderliter Endowed Professorship at Illinois State University. The authors thank Chris Anderson for his assistance with this project. We would like to thank the participants at the Academy of International Business conference in Bengaluru for their comments and feedback. We are grateful to Co-Editor-in-Chief Joachim Wolf and three anonymous reviewers for their helpful guidance and support.

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Authors and Affiliations

  1. Department of Global Economics and Management, Faculty of Economics and Business, University of Groningen, Groningen, Netherlands

    Sathyajit R. Gubbi

  2. Management and Qualitative Methods Department, College of Business, Illinois State University, Normal, IL, USA

    B. Elango

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Appendix 1

Appendix 1

Industry

Content

Source

Coding

Telecommunication services

Bharti Airtel Ltd … approved the acquisition of 100 % of Telecom Seychelles Limited, the leading telecom operator of Seychelles…With this acquisition, Bharti Airtel will expand its African footprint to 16 countries and its overall presence to 19 countries. …Mr. Manoj Kohli, CEO (International) & Jt. MD, Bharti Airtel, said, … operations will benefit … by leveraging the efficiencies of scale of our African operations

Bombay Stock exchange

Date: 8/11/2010

Resource deepening

Other chemicals

“Godrej Consumer Products Ltd (GCPL) … acquire PT. Megasari Makmur Group and its distribution company in Indonesia. …Commenting on the acquisition, Adi Godrej, Chairman, GCPL, said: “Megasari Group provides …a significant foothold in Indonesia … leading position in household product categories in Indonesia and …significant synergies and create value for shareholders. As an emerging market multinational, this acquisition is an important step in our global 3 by 3 strategy – presence in 3 continents – Asia, Africa and Latin America through 3 core categories - home care, personal wash and hair care… We look forward to working with the Megasari team to take the company to the next level along with creating a platform for other Godrej products in Indonesia

Bombay Stock exchange

Date: 4/6/2010

Resource extension

Computer software

Aurionpro Solutions Ltd … acquire 100% control in Coban Corporation (Coban), based at San Francisco, USA…Commenting on the proposed acquisition Mr Amit Sheth, Managing Director, of the Company said “Coban’s acquisition shall provide an added impetus to Aurionpro’s growth plans in the US markets… Coban’s team with its rich experience in working on high end, large and complex products in global environment synergistically complements the bouquet of existing skill sets and … by adding offshore delivery capabilities to already strong onsite presence

Bombay Stock exchange

Date: 8/31/2006

Resource extension

Computer software

Wipro Ltd … acquire the Finland based Saraware Oy in an all cash deal. … This acquisition adds expert domain competencies in the areas of Radio Networks and Secure Mobile platforms. Saraware has nearly 200 specialists in these domains based out of Finland… Ramesh Emani, President, Product Engineering Services of the Company said “This acquisition gives us much needed local presence in Finland and puts us in the heart of the Nordic region. …In addition, this acquisition brings niche skills in development of Base Station Controllers and mobile communication platforms. Combined with Wipro’s existing competencies, it helps us penetrate into high growth segments like secure communications and gives us the capability to handle complete outsourcing deals in the evolving GSM, 3G and Tetra markets

Bombay Stock exchange

Date: 6/8/2006

Resource deepening and Resource extension

Drugs and pharmaceuticals

Ranbaxy Laboratories Ltd … acquired a generic product portfolio …belonging to the Spanish pharmaceutical Company EFARMES, S.A. …Commenting on the development, Mr. Peter Burmea, Regional Director, Europe, CIS & Africa of the Company said, …[t]he acquisition fortifies our presence in Spain while augmenting our existing product portfolio. With this strategic development, we will be able to provide a wide range of quality generics …The Company has a presence in 21 of the 25 EU countries and is fast consolidating its presence in Europe

Bombay Stock exchange

Date: 6/9/2005

Resource deepening

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Gubbi, S.R., Elango, B. Resource Deepening Vs. Resource Extension: Impact on Asset-Seeking Acquisition Performance. Manag Int Rev 56, 353–384 (2016). https://doi.org/10.1007/s11575-016-0282-y

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