A Capabilities-Based Perspective on Target Selection in Acquisitions

We develop a capabilities-based theory of acquirer target selection, arguing that acquirers will pursue both low capability targets in existing contexts to deploy existing capabilities, and high capability targets in new contexts to acquire new capabilities. These arguments are formalized in an analytical model that jointly considers the benefits and costs of acquisition as a function of target capability level and context. The predictions from this model are tested in the Chinese brewing industry (1998-2007), with results showing that acquirers strongly prefer inferior targets in existing geographic markets, but are relatively more likely to choose superior targets in new markets, especially if they have strong acquisition capabilities. Our study provides insight into the factors driving target selection, and contributes to a capabilities-based understanding of acquisitions. INTRODUCTION The study of mergers and acquisitions (M&A) is a topic of central interest to the corporate strategy literature. While early work on acquisitions focused on their role in enhancing scale economies (Singh and Montgomery, 1987), and increasing market power (Chatterjee, 1986; Kim and Singal, 1993), a growing body of strategy literature has emphasized a capabilitiesbased perspective on acquisitions, viewing acquisitions as a means for firms to access and deploy capabilities and resources, especially those whose services cannot be directly transacted through the factor market, and that therefore require the firm to take ownership of the asset in order to make use of it (Capron, Dussauge and Mitchell, 1998; Villalonga and McGahan, 2005; Capron and Mitchell, 2009). More specifically, the recent literature suggests two distinct sources of value from acquisitions: on the one hand, acquisitions may be a 1 We distinguish conceptually between resources, which are defined as stocks of available factors, and capabilities, which are the firm’s capacity to deploy these resources (Amit and Schoemaker, 1993; Capron and Mitchell, 2009). Our focus in this study is on acquisitions as a means of deploying or acquiring capabilities, though to the extent that this will often require the deployment or acquisition of the associated resources (Karim and Mitchell, 2000; Capron and Mitchell, 2009) we also build on prior work that has examined the acquisition and deployment of resources through acquisition. 1