Acquisitions and Product Failures: Evidence from U.S. medical device industry

One way through which firms can obtain external knowledge is by acquiring other firms or even competitors so that they would be able to access ‘everything’ from the acquired firms. Accordingly, each party (i.e., buyer [acquirer], seller [target]) should actively engage in pre- and post-integration process in order to facilitate internalization of the newly obtained resources and further the organization (e.g., Villalonga & McGahn, 2005).

While previous studies predominantly have highlighted successful innovation outcomes, and the importance of acquiring external technology/products via M&As, surprisingly, very little research has been conducted on the possibility that acquired technology or products can be exposed by some risks such as product quality failures, i.e., product recall. Although the acquisition can be an effective way to obtain newly, innovative products from the sellers right away, however, it does not necessarily guarantee that the buyers would understand ‘everything’ about the acquired resources.

In this proposal, I examine how firms’ efforts to acquire technology and products from external markets through acquisitions could affect their innovation failure rates, which is measured by product recall hazard. Although pursuing acquisitions for external knowledge can be an effective way to speed up the innovation processes of firms competing in high-tech industries, it also may raise other underexplored issues around the management of acquired resources or further organizations. Generally, searching for and coordinating new technologies require heavy investments of time and resources. Acquiring firms may not fully understand or may inaccurately evaluate external knowledge ex ante. Furthermore, organizational dissonance may be created, and the benefit of gaining new resources from acquisitions may decrease ex post. For instance, acquisitions create disruptions among R&D employees that often lead to the loss of specific human capital, subsequently harming post-acquisition innovation performance (e.g., Kapoor & Lim, 2007). Given the complexity of managing the acquisition process and that understanding resources originating from other organizations may be more difficult than understanding resources from inhouse R&D efforts (e.g., Makri, Hitt, & Lane, 2010), managers may be challenged in trying to understand and manage the acquired organization and technology properly to achieve innovation. By incorporating research on value-destroying acquisitions, I propose and empirically test underlying mechanisms that explain the relationship between acquisitions and product failures. I suggest that adverse selection and post-acquisition integration problems impose substantial costs on firms pursuing acquisitions.