Case Studies on Successful M&A Practices in Acer and Lenovo: A Dynamic Capabilities Perspective

Case Studies on Successful M&A Practices in Acer and Lenovo:

A Dynamic Capabilities Perspective

DBA Thesis Oral Exam

By

David M. Liu, DBA Candidate 2006

March 5, 2010

Overview

I. Research Motivation

II. Literature Review

III. Conceptual Lens

IV. Research Method

V. Acer and Lenovo Case Studies

VI. Discussion and Conclusion

VII. Q&A

Two Chinese PC Firms

I. RESEARCH MOTIVATION

1. The Phenomenon: The increasing trend of Chinese firms overseas expansion via M&A; Many failures due to lack of organizational learning in experience and integration; A few successful cases because of organizational learning and strategic integration

2. A Gap in the Literature

• Lack of study in Chinese M&A with a comprehensive approach• Short of study in a reverse M&A

situation from developing country to developed country• Non-existence of case comparison

between Taiwan and China in IT sector

3.Research Purpose & Questions

• A: RESEARCH PURPOSE• Develop a dynamic model for successful M&A

• Understand how firms link their dynamic capabilities in post M&A integration

• Examine how firms develop and manage dynamic capabilities via organizational learning and experience

B: RESEARCH QUESTIONS• What critical dynamic capabilities needed for

successful cross-border M&A under Chinese context?

• How can dynamic capabilities achieved before or after M&A?

. What is needed for true value creation in Chinese M&A?

. What are the key success factors in Chinese cross-border M&A?

4. Research Approach

• A. Literature Review• B. Theory development in

considering all aspects of dynamic capabilities• C. Integration as key success factor

explored• D. Firm’s general business

environment examined

II. LITERATURE REVIEW1. Motivation of Chinese M&A

2. Seven Main Streams of M&A Literature Review

3. Cross-border M&A in Chinese context

4. Measurements for successful M&A

5. Theory development for dynamic capabilities perspective

6. The role of post M&A integration

1. TEN MOTIVES FOR CHINESE M&A

. Answering to government call

.Market power enhancing

. Pushing for globalization

. Moral hazard

. Financial claims

. Under value target

. Efficiency

. Capabilities in technology or management

. Private equity

. Management objectives

2. Seven Streams of M&A Literature

• Transaction Cost Economics (TCE) and O-L-I Approach

• Resources-based View (RBV) and Organizational Learning

• TCE and RBV, Institutional theory and Culture Difference Approach

• Uppsala Model• Outcome Study• KSF Approach• HRM Approach

3. Cross-border M&A in Chinese Context

• Linage-Leverage-Learning (LLL): important approach for the firms in developing countries

• Springboard Perspective: Emerging market MNES using M&A to compensate for their compensate for their competitive weakness

• Evolutionary Perspective for MNEs in Taiwan• Weakness of Chinese Firms: limited

knowledge of overseas market; Poor R&D; lack of international brands; lack of strategic focus;

4. Measurement of Successful M&A

• Synergy Effect: 1+1=3 or 2+2=5• Aspects of Synergy Realization such as:

Financial, operating and market synergy

Cost synergy, cost savings

Centralization and capabilities transfer

NEGATIVE synergies: HR conflict; High cost of integration; Customer and revenue losses; Cost of compromise and inflexibility

5.Development History of Dynamic Capabilities Perspective

• Resources-based View: only VRIO resources lead to sustainable competitive advantage (Penrose; Wenerfelt; Barney; Dirickx and Cool)

• Competence-based View: firms as bundles of skills and technologies (Prahalad and Hamel)

• Knowledge-based View: Firm as the source of knowledge creation through organizational learning(Grant; Kogut and Zander)

• >DYNAMIC CAPABILITIES PERSPECTIVE

Dynamic Capabilities Perspective(Teece and Pisano; Zollo and Winter; Adener and Helfat)

• Benefited from RBV, CBV, KBV and focusing more on the following:

Process and routines as dynamic capabilities

Coordinating / integrating, learning and reconfiguring as Core Elements

Skills in technological, organizational; managerial aspects as essential elements

Criticism: confusing definitions and unclear about a fit organizational structure for DCP

6.The Strategic Role of Post M&A Integration

• Strategic integration as dynamic capability based on specific and organizational routines

• Elements of integration in procedural; procedural and socio-cultural aspects

• Degrees of integration: Absorption; preservation; symbiosis (with moderate levels of synergy and cultural difference)

• CHALLENGES: Risk areas in leadership; culture; communication; vision; growth etc.

• costly; time consuming; business declining

III.CONCEPTUAL LENS

• 1. Theoretical Underpinnings

• 2. Concepts, Definitions, and Observations

• 3. Conceptual Lens

1. Theoretical Underpinnings

• A conceptual framework or supporting foundation to explain a specific set of phenomena

• DYNAMIC CAPABILITIES:

Prior experience in M&A

Organizational learning before and after M&A

Managerial capabilities in strategy, relational and innovative capabilities

Post M&A integration capabilities

2. Concepts, Definition and Observations

• Cross-border M&A Involvement: sales revenue; market share; net profit / loss; patents; brand equity; globalization ratio

• M&A Capabilities: prior experience; target size; management quality; firm ownership type; country of origin of acquirer

• Strategic Integration: procedural; physical; managerial; social and cultural areas

Continuing…

• Dynamic managerial capability: strategic agility and flexibility; relational capabilities; innovative capabilities

• Organizational Learning: learning by doing; knowledge creation; knowledge transfer; knowledge absorptive capacity

3. CONCEPTUAL LENS

• PROFITABLE M&A BASED GROWTH =

M&A CAPABILITIES x

DYNAMIC MANAGERIAL CAPABILITY x

ORGANIZATIONAL LEARNING x

STRATEGIC INTEGRATION

IV: RESEARCH METHOD• 1. An interpretive approach• 2. Case study approach• 3. Unit of analysis• 4. Data collection• 5. Conducting interviews• 6. Data Analysis and Interpretation• 7. Theory generation• 8. Quality of research• 9. Ethical Consideration• 10. Research process

1. INTERPRETIVE APPRAOCH• Person (researcher) and reality are

inseparable (life-world)• Knowledge of the world is intentionally

constructed through a person’s life experience• Research object is interpreted in light of

meaning structure of person’s (researcher’s) lived experience

• Focus: Constructivism, inductive logic, understanding, multiple participant meanings, social and historical conjunction, theory generation

Qualitative Interpretive• Justification for qualitative approach: • A. Research occurs in natural settings• B. Data reported in words rather than

numbers• C. My personal experience in the IT field and

human action oriented experience plus training in business studies make me more suitable in conducting face to face interviews

• D. A qualitative approach based on description and exploration make it more appropriate in providing insights to intended audiences

2. Case Study• An empirical inquiry:• Investigates a contemporary phenomenon• Within its real-life context• When boundaries between phenomenon and

context are not clearly evident (Yin,1994)

• BEST in addressing the descriptive or explanatory questions and producing a first-hand understanding of people and events (Yin, 2004)

Limitation of Case Study

• Lacking of rigor• Possess an excess of bias• Ad hoc theorizing• Hard to measure internal validity of the data

and external validity (Berger, 1983)• Difficult to generalize findings to different

settings as phenomenon and context are necessarily dependent

3. Unit of Analysis

• Cross-border M&A in Chinese IT companies Acer and Lenovo

• Looking for the linkage between successful M&A practices and dynamic capabilities

Case Selection Criteria

• WHY ACER?• #1 Chinese PC company from Taiwan• Tried and true in globalization through

incremental M&A• Similar background as China’s Lenovo in

pursuing global initiatives• Strong profitable M&A based growth since

2005

WHY LENOVO?

• #1 PC firm from mainland China with 30% market share

• Bold move in acquiring IBM PCD in 2005 at US $1.75 billion

• Struggling to be profitable even since 2005• Typical example of mainland Chinese

company in pursing globalization through means of M&A in overseas market

4. DATA COLLECTION

• Three main sources of data in this research: documents; archival records; interviews

• Data Triangulation: All three sources pointing to the same direction

• The use of multiple measures drawn from different data source is to improve both the validity and reliability of case study findings

5. Interview as main source for empirical data collection

• TOTAL 23 INTERVIEWS CONDUCTED• Acer : 5 • Lenovo: 9• 3rd Party: 9

METHODS: Three interview guides provided; semi-structured interview and open-ended questions

6. DATA ANALYSIS & INTERPRETATION

• Data Analysis including: data reduction; data display; conclusion drawing / verification (Miles and Huberman, 1994)

• Data Interpretation: 3 Levels of Understanding

Subjective understanding:

Interpretive understanding:

Analytic Understanding:

7. THEORY GENERATION

• Based on the principles of abstraction and generalization (Klein and Myers, 1999)

• Inductive Process of building from data to broad themes to a generalized model or theory (Creswell, 2003)

8. QUALITY OF RESEARCH

• Criteria for trustworthiness: credibility; transferability; dependability; confirmability (Lincoln and Guba, 1985)

• CREDIBILITY: through peer debriefing and member checking; data source triangulation;

• TRANSFERABILITY: generalizability to other context; emergent theory

• DEPENDABILITY & CONFIRMABILITY: properly managed audit through my advisors; inquiry process, notes and recordings well kept

9. Ethical Consideration

• Don’t Harm. Keep interviewees confidential• Data triangulation was conducted by sending

back the interview summary to the interviewees to ensure correct interpretation

• Asking for permission to record • Encouraging the interviewees to speak out

and pointed out there is no right or wrong answers in interview

10. RESEARCH PROCESS

• Step 1: Review Literature• Step 2: Building conceptual lens• Step 3: Carrying out empirical data

collection• Step 4: Discussing the findings

V. ACER AND LENOVO CASE STUDIES

• 1. PC INDUSTRY OVERVIEW• 2. INNOVATION BACKGROUND

DIFFERENCE BETWEEN TAIWAN AND MAINLAND CHINA• 3. TAIWAN ACER INC. CASE STUDY• 4. MAINLAND LENOVO GROUP

STUDY• 5. ACER AND LENOVO CROSS-CASE

STUDY

1. Overview of PC Industry

• A. Dominance of Intel and Microsoft with a Wintel Frame• B. PC Value Chain in Acer Founder’s

Stan Shih Smiling Curve• C. Major PC players in 2008: HP

(19.2%); Dell (15%); Acer (10.9%); Lenovo (7.4%); Toshiba (4.6%); Others (43%)

Stan Shih’s Smiling Curve

2.INNOVATION BACKGROUND IN TAIWAN AND CHINA

• A. Taiwan as the Silicon Island: with 23 million highly educated population, GDP per capital US $15,203.00 in 2005, Spending $345.00 per capital on R&D; Patent in USA 5300 cases in 2003; R&D Spending Intensity ranking #8 in the world in 2006

Largest PC producer in the world (72%)

Largest LCD producer (68%)

Largest PDA producer (79%)

B. China’s Advantage and Disadvantage in IT Industry

• China’s largest population (1.3 billion) in the world and 3rd largest economy; R&D spending only $38.00 per capital and only 1.31% of total GDP

China was closed to the outside world (1949~1978) and no business or social engagement with the West

IT firms were mostly State-Owned Enterprises which enjoy guaranteed orders and with strong government financial support

3. Acer Case Study• A. Acer study background: knowing Mr. Lin

from Acer HK; 5 inside interviews and 9 from 3rd party.

• B. History of Acer INC

Founded in 1976 with $25K by Shih as Multitech

4 Phases in company history

a. 1976-1986: commercializing microprocessor technology

b.1987-2000: create a brand name and globalize

Continuing: 4 phases in Acer history

• c: 2001-2007: transform from manufacturing to services

• d: 2008 – beyond: Multi-brand strategy

C. M&A HISTORY IN ACER1987 Counterpoint; Failed

1989 Service Intelligence, Failed

1990 Altos, Failed in most part

1997 Travelmate brand, limited success

M&A History in Acer…continuing

2007 Gateway. Succeeded with more than 2% market share increase in USA; adding two brands to the Group: Gateway and eMachines

2007 Packard Bell. Succeeded in Europe and now expanding to Japan and Middle East

REALITY CHECK: 10 YEARS GAP BETWEEN TRAVELMATE BRAND M&A AND GATEWAY ACQUISTION. BIG RE-ENGINEERING AND LEADSHIP SHAKE UP IN ACER.

D. CAUSES OF ACER’S NEWLY SUCCESS – DYNAMIC CAPABILITIES• Accumulating M&A Capabilities• Strategic Integration• Dynamic Managerial Capabilities• Organizational Learning• Successful Measurements in Synergy

In sales and market performance etc.

Acer: Accumulating M&A Capabilities

• Prior cross-border M&A Experience: 4 big mistakes brought learning opportunities, reflection, and managerial capabilities improvement

• Quality of management team improved through mistakes. Used to send managers from Taiwan; later on used local talents. Used to delegate too much to local units, later on, more centralization is used. The Dynamo Duo: Wang and Lanci replacing Shih etc.

Accumulating M&A capabilities…continuing

.Learning to acquire the right size target: snake-eat-frog approach

.More responsible management style due to Acer’s private owned enterprise (POE): very frugal and cautious with shareholder’s money; lean and mean;

. Taking good advantage of Taiwan’s economic and non-political position in the world: more Westernized thinking; open systems in education and social settings; Good will in the West for being non-communistic like China

Acer: Strategically managing integration

• Procedurally: efficiently centralized product design, production and marketing to HQ. Implemented New Business Model aggressively to newly acquired units

• Physically: downsized quickly on unnecessary staff and offices

• Managerially: use one HQ in Taiwan to manage all worldwide IBUs

• Socio-culturally: use local talents to manage local teams.

Acer: Winning with Dynamic Managerial Capability

• Strong in Strategic Agility and Flexibility: very sensitive to ever-changing environment; quick in modifying and relocating resources; effectively executing Channel Business Model; clear vision and strong passion; quick in product launch and fast in innovation

• Mature in relational capabilities with institutions, suppliers and customers: strong government support in R&D and innovation; leading role in trade and industry associations;

Winning in dynamic managerial capabilities …continuing

• Key accounts with major suppliers and OEM; aggressive prices for dealers and strong incentives to push the product; using its own and strong OEM manufacturing network

• Pushing customer satisfaction by promoting a global image through sports etc.; giving customers value for money; taking advantage of its unique position not being an American brand or a mainland Chinese brand;

Acer winning in dynamic managerial capabilities…continuing• First-class in Innovative Capabilities: new lean

and mean Channel Business Model (Indirect sales model); fast in new product development; effective in international marketing; timely in business execution; right product at the right timing such as its 11” netbook in 2008/2009 being #1 in the world

Acer: Strong in Organizational Learning

• Learning by doing: 6 major M&A deals. Learnt from mistakes made in first 3 and matured in later 3 with Travelmate, Gateway, Packard Bell

• Knowledge Creation: creation of Channel Business Model; performance based apprasial introduced by Lanci as well; creativity from diversified work force worldwide; quicker product development due to staying close to the market

Acer: Organizational Learning…continuing

• Knowledge Transfer and Absorptive Capacity

Strong transfer among IBUs in product knowledge, in business model, and through newly acquired targets in marketing etc.

Good environment for absorptive capacity: healthy and open communications;

SUCCESSFUL MEANSUREMENT IN THE PROFITABLE M&A GROWTH

• Acer the Racer: 30% growth in shipment since 2002 to 2008 (33 million PC shipped, Revenue $16.65billion, NP $428 million)

• Beat Dell in becoming #2 in notebook shipment in 2Q 2009

• Global revenue counts for 98% of group revenue, only 2% from Taiwan

• Ready to challenge #1 HP soon

4. LENOVO CASE STUDY

• A. Data Collection for Lenovo Case: 9 interviewed from within; 9 from 3rd party

• B. History of Lenovo: A Mainland LEGEND

1984-1989:Distributing PC Components

1990-1994: Gaining foothold in China

1995-2000: Making waves in China

2001-2004: Failure in over-diversification

2005-beyond: Pushing for globalization

C. MARRIAGE BETWEEN LENOVO AND IBM PC DIVISION ON 5.1.2005• Strongly promoted by Yang in 2004 after his

failure in diversification in China• IBM PCD loss in 2003 was $500 million, ready

to be dumped by the Group. Approached Acer but got rejected

• Acquisition agreement on 12.8.2004 with full day celebration: Viewed as Chinese Red Chip conquering American Blue Chip by many (Lenovo was 65% owned by Chinese Academy Science from the government)

D.LENOVO DECLINING PERFORMANCE AFTER IBM PCD

DEAL• Profit Record (in US $)• 2000: 110m• 2001: 131m• 2002: 130m• 2003: 135m• 2004:143m• 2005:22m; 2006:161m; 2007: 484m• 2008: - 226 m

E. CAUSES FOR FAILURES IN LENOVO: Lacking in Dynamic

Capabilities• Non existence of M&A Capabilities

before acquiring IBM PCD• Poor execution in post M&A

integration• Weak in dynamic managerial

capabilities• Short in global organizational

learning

Lenovo: lack of M&A capabilities before taking M&A

• No real international M&A experience. QDI failed overseas and Hong Kong

• Not a strong management team under Yang• Too greedy in becoming big fast: IBM PCD 3

times bigger than Lenovo• State Owned Enterprise (SOE) with managerial

hubris and strong political motivation• From a developing country and different

ideology put itself in a more difficult seat

Lenovo: poorly executed integration process

• Power struggle between Western and Chinese executives from 2005 to 2008

• Still difference MIS system• Three HQs between 2005 and 2008• IBM PCD ran like a different company with

product design, marketing, and sourcing• C.A.G.E. difference strongly existed

Lenovo: short of dynamic managerial capability

internationally• Lack of strategic agility and flexibility• Weak in international relational capabilities.

Unable to extend its domestic advantages to international arena

• Working with Intel and AMD in component in a dangerous balance act

• Failed in keep Thinkpad premium image and struggling putting Lenovo brand to consumer market overseas

Continuing…dynamic managerial capabilities

• Slow in coming up with new products. 6 months behind Acer

• Struggling in business model• Did poorly in 2008 Olympics for international

marketing with most $$ spent in China

LENOVO: without much global organizational learning

• No previous M&A experience before IBM deal• Weak in knowledge creation and knowledge

transfer after the IBM deal• Many obstacles for absorptive capacity

transfer• Compromising too much or too little between

acquired IBM PCD and its Chinese parent company

Lenovo Case Summary

• IBM deal lifted Lenovo from #9 in the world in PC shipment in 2004 to #3 in 2005 but failed to #4 since 2006 after Acer passing them.

• IBM deal made Lenovo #499 in G500 in 2008 (partially due to RMB exchange rate appreciation against USD) with revenue of $16.3 billion in 2007

• Lenovo’s snake-devour-elephant of IBM has become a typical managerial case study since 12.8.2004

Acer and Lenovo Cross-Case Study

SIMILARITIES OF THE TWO:

Same industry

Similar Chinese culture

Same passion for international growth

Both used foreign born executives

Both working hard pushing global image

Both gaining huge government support

Both are quite strong in product development

Acer and Lenovo ComparisonDIFFERENCE BETWEEN ACER AND LENOVO:

Different in prior M&A experience

Different in managerial team quality

Different approach to target size

Different country of origin in economics and political system

Different in firm’s ownership

Different in strategy integration, managerial dynamic capabilities and organizational learning

OTHER FINDINGS

• Political motivation• Influence of traditional Chinese culture• Open social system impact on OB• Age of top management• Degree of Westernization of the firm• Moral hazard behavior in SOE• Negative knowledge tranfer

VI. DISCUSSION & CONCLUSION• A. MAJOR FINDINGS:

The strong linkage between profitable growth through M&A with dynamic capabilities including M&A capabilities; Strategic integration; Dynamic managerial capabilities and Organizational learning

B. Theoretical Contribution

• A holistic approach toward firm performance and dynamic capabilities

• Proposed that dynamic managerial capabilities are country dependent and path dependent

• Organizational learning as the most important factor in successful cross-border M&A

• Successful global integration must overcome C.A.G.E. difference

Continuing…theoretical contribution

• Pointed out the role of country of origin in M&A

• Focused the OB difference between SOE and POE

• Studied a reverse M&A case (developing to developed country; small eating big; communist country vs. capitalist country)

• Fresh approach in comparing IT companies from Taiwan and Mainland China

C. PRACTICAL CONTRIBUTION

• The importance of M&A capabilities readiness before global MA&A activities

• The handling of foreign managerial talents could be rewarding and backfiring

• The virtue of patience needed in globalization• The importance of organic growth in getting

things set before going global• The necessity of “system thinking” of heaven,

earth, human for managerials.

D. LIMITATIONS & FUTURE RESEARCH DIRECTION

• Inherent limits in a qualitative interpretative study such as subjectivity and generalization

• Company age of 8 years difference between Acer and Lenovo could make all difference

• Founder Shih and Liu from both companies were not studied enough

• More future study on cultural and political factors, traditional values, open systems, means to create a global learning organizations are needed.

E. CONCLUSION

• A PROFITABLE M&A BASED GROWTH depends on the following dynamic capabilities:

1).READINESS OF M&A TOTAL CAPABILITIES

2).STRATEGIC INTEGRATION

3).DYNAMIC MANAGERIAL CAPABILITES

4).ORGANIZATIONAL LEARNING

VII. Q&A

Thank You!