How Acquisitions Can Revitalize Companies

Although most companies undertake acquisitions with an eye toward fueling growth, the resulting infusion of new ideas, perspectives and processes can produce lasting benefits that are broader and deeper.

When you ask corporate executives why they are making a particular acquisition, they usually offer a strategic explanation, such as “The geographic spread lines up perfectly with where we are,” or “Their product portfolio has remarkable synergy with ours.” If you ask them two years later how the company has benefited from the acquisition, the answer is often dramatically different. They tend to focus at that point on the “softer” factors with comments such as “They made us rethink our decision-making processes,” or “They introduced us to a new approach to product development,” or simply “They shook up our culture.” Usually, these softer considerations had nothing to do with the original impetus for the acquisition, yet they often turned out to be critical to the direction of their companies.

Indeed, revitalization is an important outcome of acquisition and should be a strong consideration when making the decision to acquire. In my research, I analyzed the acquisitions and subsequent performances of a number of large, successful companies, several of which, at some point in their histories, had become rigid and inert in their thinking — a well-known phenomenon that has been labeled thesuccess trap.1 (See “About the Research.”) The analysis showed that the acquisitions helped the companies restore a sense of vitality to their businesses and unleashed a subsequent surge in performance. Indeed, the acquired companies often stimulated the acquiring companies to develop new perspectives and different ways of doing things at times when they were most needed. Acquisitions kept their organizations fresh and vital. Even if the companies did not pursue acquisitions for this reason, the process of buying businesses and deciding how to integrate them into their corporate structures enabled acquirers to renew themselves before their products and operating methods became outdated.

Consider the case of Pfizer, the pharmaceutical giant that acquired Warner-Lambert, a conglomerate that included the pharmaceutical division Parke-Davis, in June 2000. Management’s rationale for this acquisition was fairly straightforward — it wanted to gain full control over the anticholesterol drug Lipitor, which it had been jointly copromoting with Parke-Davis. After the acquisition, Pfizer intended to sell off Warner-Lambert’s other divisions while integrating Parke-Davis into its corporate structure. In the midst of this process, however, Pfizer saw that many of Parke-Davis’ functions were organized differently from its own.


1. This is often referred to as thesuccess trap or acompetency trap. See, for instance, D.N. Sull, “Why Good Companies Go Bad,” Harvard Business Review 77 (July/August 1999): 43–52; D. Miller, “What Happens After Success: The Perils of Excellence,” Journal of Management Studies 31 (1994): 325–358; D.A. Levinthal and J.G. March, “The Myopia of Learning,” Strategic Management Journal 14 (1993): 95–112.

2. Personal communications, February to April 2003.

3. Hybrid vigor occurs when a large, secluded population whose gene base has grown narrow over the years is combined with a relatively small group with a different set of genes. Although in itself a small event, it may trigger an exponential process that in a short period of time restores the variety in the population’s gene base, enabling it to avoid decline and readapt to its environment. For instance, there is some evidence that this effect took place in Polynesia when the mutineers of the H.M.S. Bounty took their Polynesian wives. An acquisition may have a similar effect on a larger firm; the practices of the acquired unit may combine with those of the acquiring corporation to enable the creation of a new repertoire, in terms of the firm’s beliefs, systems and practices, which revitalizes the entire company. See L.F. Keller and D.M. Waller, “Inbreeding Effects in Wild Populations,” Trends in Ecology & Evolution 17 (2002): 230–241; P.K. Ingvarsson, “Restoration of Genetic Variation Lost — The Genetic Rescue Hypothesis,” Trends in Ecology & Evolution 16 (2001): 62–63.

4. Personal communication, April 2003.

5. There may be other ways. Prior research, for instance, shows how a firm’s foreign subsidiaries may bring fresh approaches from their local environment into the firm. See J. Birkinshaw, “Entrepreneurship in Multinational Corporations: The Characteristics of Subsidiary Initiatives,” Strategic Management Journal 18 (1997): 207–229; J. Santos, Y. Doz and P. Williamson, “Is Your Innovation Process Global?” MIT Sloan Management Review 45 (summer 2004): 31–37. For a similar effect for a variety of product markets, see D. Miller and M.-J. Chen, “Sources and Consequences of Competitive Inertia: A Study of the U.S. Airline Industry,” Administrative Science Quarterly 39 (1994): 1–23. Hiring executives from outside the company may also bring in fresh ideas. See, for instance, D.W. Boeker, “Executive Migration and Strategic Change: The Effect of Top Manager Movement on Product-Market Entry,” Administrative Science Quarterly 42 (1997): 213–236.

6. See P.J. Lane and M. Lubatkin, “Relative Absorptive Capacity and Interorganizational Learning,” Strategic Management Journal 19 (1998): 461–477.

7. Specifically, in a series of panel data and survival models, the financial performance and success rate of the acquiring companies was regressed on their number of acquisitions during the preceding five years. The effect was generally positive. In contrast, the effect of acquisitions in unrelated businesses (measured through the companies’ SIC codes) and the effect of acquisitions in regions in which the firm had not been active before were statistically insignificant.

8. P. Puranam, “Grafting Innovation: The Acquisition of Entrepreneurial Firms by Established Firms” (Ph.D. dissertation, University of Pennsylvania, 2001); P. Puranam, H. Singh and M. Zollo, “A Bird in the Hand or Two in the Bush? Integration Trade-Offs in Technology-Grafting Acquisitions,” European Management Journal 21 (2003): 179–184.

9. For some pairwise comparisons between these two approaches see, for instance, R.F. Bruner, “Applied Mergers and Acquisitions” (New York: John Wiley & Sons, 2004): 895–900.

10. For empirical evidence on this topic see C.B. Gibson and F. Vermeulen, “A Healthy Divide: Subgroups as a Stimulus for Team Learning Behavior,” Administrative Science Quarterly 48 (2003): 202–239.

11. Snapple, for example, carefully retained core people within Nantucket Nectars, and after discovering their value made sure to promote them within the larger company to stimulate cross-fertilization. See also M.E. Graebner, “Momentum and Serendipity: How Acquired Leaders Create Value in the Integration of Technology Firms,” Strategic Management Journal 25 (2004): 751–778.

12. Thus, blending is designed to create something new. As Igor Landau, chairman of Aventis, put it, “The strategy was to create anew company and not be the sum of the two previous companies. We decided either we create something new or we would pay the price down the line.”

13. For a more specific focus on the role of culture in acquisition integration, see J.R. Carleton and C.S. Lineberry, “Achieving Post-Merger Success” (New York: John Wiley & Sons, 2004).

14. See also F. Vermeulen and H. Barkema, “Learning Through Acquisitions,” Academy of Management Journal 44 (2001): 457–476.

15. As CEO Cees van der Hoeven put it on Oct. 29, 1999: “How do we realize growth? In the first place, through strong autonomous growth. As a second course of growth, we regularly add small takeovers to existing store chains. This year, for example, we announced a number of acquisitions in Spain, Poland, Argentina and Brazil. Absolutely essential is that both parties, for the benefit of all stakeholders and particularly the consumer, can increase each other’s value.”

16. Early in 2003, Ahold had severe financial difficulties and CEO Van der Hoeven was forced to step down.


I would like to acknowledge the helpful comments of Marcus Alexander, Julian Birkinshaw, Costas Markides, Don Sull and the late Sumantra Ghoshal.