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What Determines Performance of CrossBorder M&As by Chinese Companies? An Absorptive Capacity Perspective By Ping Deng Chinese companies are increasingly using cross-border merger and acquisitions (M&As) as a vehicle to source knowledge or strategic assets, so as to enhance their competitive advantage. However, a critical question is: Can strategic assets be effectively acquired by Chinese firms, thereby leading to superior firm performance? This article addresses this fundamental question from an absorptive capacity perspective. This approach concentrates on how an acquiring firm’s absorptive capacity influences its ability to identify, assimilate, integrate, and apply external new knowledge into commercial use. By comparatively examining two high-profile international M&A deals completed by leading Chinese firms Lenovo and TCL, we argue that the performance of Chinese companies’ overseas acquisitions is substantially affected by the acquiring firm’s absorptive capacity at multiple dimensions, thus drawing strategic implications for multinationals in other emerging markets. © 2010 Wiley Periodicals, Inc. Correspondence to: Ping Deng, Shanghai Lixin University of Commerce, Maryville University, John E. Simon School of Business, 650 University Drive, St. Louis, MO 63141, 314.529.9687 (phone), 314.529.9975 (fax), [email protected].

Published online in Wiley Online Library (wileyonlinelibrary.com) © 2010 Wiley Periodicals, Inc. • DOI: 10.1002/tie.20376

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ross-border merger and acquisitions (M&As) have become a dominant mode of entry for Chinese firms’ outward foreign direct investment (FDI). In 2005, Chinese companies were involved in 274 cross-border M&As valued at $5.3 billion (United Nations Conference on Trade and Development [UNCTAD], 2006), while in 2006 the acquisition value jumped to $20.7 billion (“Global Agenda,” 2007). In the first quarter of 2008, M&A volume from China reached $28.5 billion, four times the value from the prior year (“China’s FirstQuarter M&A,” 2008). Although there are a variety of reasons for this, strategic asset seeking is an important rationale for Chinese cross-border M&As—that is, utilizing foreign M&As as the means to acquire strategic assets or knowledge so as to compensate for their competitive disadvantage (Child & Rodrigues, 2005; Deng, 2007). However, such resource-driven M&A does not guarantee success, particularly due to the tacit and proprietary nature of knowledge. For many Chinese companies, global acquisitions have proven to be highly problematic and value-destroying (“The Tigers That Lost,” 2008). In light of the growing importance and prevalence of China’s cross-border M&A activities and a number of examples of acquisition failure, it is imperative for us to consider the strategic and performance dimensions of such M&As (Alon & McIntyre, 2008; Deng, 2004, 2009). By drawing on theories of absorptive capacity, we intend to uncover some of the key firm-level factors and mechanisms that may make foreign M&As successful. Absorptive capacity literature (Cohen & Levinthal, 1990; Zahra & George, 2002) highlights the importance of taking in external knowledge, combining it with internal knowledge, and absorbing it for commercial use. Firms with higher absorptive capacity tend to have a better foundation to create knowledge, assimilate and interpret opportunities, and more effectively develop and apply explicit knowledge (Lane, Koka, & Pathak, 2006). Building on the literature, it is proposed that whether, and to what extent, Chinese companies can effectively acquire strategic assets and enhance their competitive advantage is determined by those acquiring firms’ absorptive capacity at multidimensional levels. Guided by this theoretical framework, we empirically analyze two influential M&A cases completed by leading Chinese companies (Lenovo and TCL). These M&A cases differ substantially in terms of their capability to source strategic assets and resulting performance outcomes. For TCL, its 2004 acquisition of Thomson’s TV (France) business has proven to be highly problematic and is regarded as a typical example

of a Chinese company that “failed miserably in overseas expansion” (“Global Agenda,” 2007). For Lenovo, its acquisition of IBM’s PC unit in 2005 has clearly helped the company become one of the most internationally established Chinese brands (Liu, 2007). The surge in Chinese outward FDI since the early 2000s has attracted growing attention from international business scholars. Contributors to the discussion of its determinants and consequences have tended to argue for the primacy of either Dunning’s eclectic paradigm or institutional theory (Alon & McIntyre, 2008; Morck, Yeung, & Zhao, 2008). For instance, by building on the comprehensive Y model of institution, industry, and resources, Yang and her colleagues (2009) compare and contrast the internationalization of multinational corporations (MNCs) in China and Japan with two case studies: Haier and Matsushita. Their paper concludes that how firms internationalize (mainly via outward FDI), in addition to being influenced by industry- and resource-based considerations, is inherently shaped by the domestic and international institutional frameworks governing these endeavors. By emphasizing the potential of an absorptive capacity perspective for explaining cross-border M&A performance, we offer an alternative standpoint. Specifically, as the first study that applies an absorptive capacity lens to overseas M&As from Chinese MNCs, we aim to explain in detail why diverse performances exist in these M&A deals, thereby prompting business academicians and practitioners to think about M&A strategy in new and innovative ways. In addition, by arguing that M&As represent a means for Chinese MNCs to acquire strategic assets within the constraint of their absorptive capacity, this study may also draw important lessons for other emerging MNCs that are closely watching Chinese firms’ international expansion strategy and are eager to see how Chinese MNCs succeed in establishing a global competitive position (Child & Rodrigues, 2005).

Theoretical F oundation and Propositions Knowledge and Cross-Border M&As According to the knowledge-based view (Kogut & Zander, 1992), knowledge, especially tacit knowledge, is the most important strategic asset and the ability to acquire, integrate, share, and apply knowledge is critical for building sustaining competitive advantage. With the growing importance of knowledge as the rationale for the existence of an MNC, the search for strategic assets is now recognized as a major driver of FDI and cross-border M&As in particular

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(Nadolska & Barkema, 2007). The more a firm is equipped with strategic assets, and the stronger its capabilities to use these assets, the more likely it is to develop complex and advantageous strategies (Amit & Schoemaker, 1993; Vermeulen & Barkema, 2001). As new international players, Chinese companies are most interested in acquiring strategic assets in order to compete successfully in the global marketplace (Deng, 2004; Luo & Tung, 2007). Companies may use cross-border M&As as a quick way to build a foreign presence by gaining access to new knowledge and skills controlled by indigenous firms (Nadolska & Barkema, 2007; Vermeulen & Barkema, 2001). Typically, overseas M&As may also help companies overcome barriers to entry, access new knowledge of markets and technologies, promote organizational learning, and achieve competitive advantage (Capron, 1999; Zollo & Singh, 2004). Intel and Cisco are good examples of companies that have acquired many small foreign firms so as to upgrade their product mix and technological capabilities. Using M&As for resolving knowledge deficiencies, however, does not necessarily result in superior returns because strategic assets often are tacit, specific, and complex (Amit & Schoemaker, 1993). It is challenging to realize synergies from a combination of the merging firms’ strategic assets, because there are numerous difficulties arising from differences in corporate cultures, management systems, perceived inequalities in compensation, and resistance to the acquirer’s directives (Child, Falkner, & Pitkethly, 2001). In addition, in the early stages of internationalization, firms tend to underestimate the complexities of foreign acquisitions and exaggerate the synergistic potential of M&A deals (King, Dalton, Daily, & Covin, 2004). To become successful at overseas acquisitions, firms need to develop the knowledge and routines to overcome these problems—that is, absorptive capacity (Zollo & Singh, 2004).

The Theory of Absorptive Capacity Absorptive capacity is widely defined as “the ability of a firm to recognize the value of new, external information, assimilate it and apply it to commercial ends” (Cohen & Levinthal, 1990, p. 128). It derives from stocks of knowledge within the firm and is a function of prior organizational problem solving (Kogut & Zander, 1992). The absorptive capacity construct has emerged as an underlying theme in global strategy management and has been used to explain diverse organizational phenomena such as strategic alliances, organizational learning, knowledge acquisition and transfer, and business performance (Lane et al., 2006). It is generally agreed that absorptive capacity represents an organization’s dynamic capabil-

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To the best of our knowledge, this article is the first to apply the arguments of absorptive capacity to resource-driven M&As from emerging-market firms and examine their competitive and performance implications.

ity and it is a multidimensional construct; hence, each dimension plays a different but complementary role in explaining how absorptive capacity influences knowledge acquisition and business outcomes. For example, Zahra and George (2002) conceptualize it as a dynamic capability—a multidimensional construct involving a firm’s ability to acquire, assimilate, transform, and exploit knowledge. Moreover, absorptive capacity itself is determined by a number of organizational antecedents that have differing influences on different components of absorptive capacity (e.g., Jansen, van den Bosch, & Volberda, 2005). This clarifies why certain firms are able to acquire and assimilate new external knowledge but are not able to transform and exploit it successfully. For instance, Kim (1998) has considered the level of prior related knowledge as the determinant of absorptive capacity, and van den Bosch, Volberda, and De Boer (1999) have demonstrated how organizational forms and combinative capacities influence the level of absorptive capacity. To the best of our knowledge, this article is the first to apply the arguments of absorptive capacity to resourcedriven M&As from emerging-market firms and examine their competitive and performance implications. Following the main stream of literature on cross-border M&As (e.g., Shimizu, Hitt, Vaidyanath, & Pisano, 2004) and for the purpose of this study, we use overall effectiveness to reflect different dimensions of performance such as reputation, profitability, competitive advantages,

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perceived overall performance, and achievement of goals. The performance data are based primarily on the case firms’ quarterly and annual reports and prestigious media reports. Building on the literature, we propose an absorptive capacity model that takes into account the most important developments in the literature as well as the most relevant features in the cross-border M&A context. This conceptual framework links an organization’s ability to identify and assimilate strategic assets to the firm’s competitive advantage by concentrating on three determinants that shape an acquiring firm’s absorptive capacity, as summarized in Figure 1. In the first dimension, antecedents of absorptive capacity, such as prior knowledge, are critical for the firm in order to recognize and understand the strategic assets to be acquired. The second dimension involves applying combinative capabilities to assimilate and combine newly acquired assets with the firm’s existing resources. Finally, the last dimension focuses on how the acquiring firm effectively transforms and applies the acquired strategic assets. This model also indicates that the relationship between the antecedents of absorptive capacity to acquisition of strategic assets and business performance is an indirect or mediated effect. That is, the acquiring firm’s ability to understand and assimilate strategic assets via cross-border M&A activities influences performance (a → c), but the influence is transmitted by the strategic assets actually obtained (a → b → c). The logic is that while learning abilities are important, it is the outcome of the transformation and application of those acquired

figure

strategic assets that matters for cross-border M&A performance. In the following, we elaborate on each component of the theoretical model by focusing on some of the key determinants, as shown in bold in the figure.

Ability to Understand Strategic Assets and Its Key Determinant: Prior Related Knowledge Recognizing and identifying the value of new external knowledge is the first step toward acquisition of strategic assets or knowledge. To a large extent, the existing literature has identified absorptive capacity as a knowledge base and specifically as the extent of prior knowledge in the firm (Lane, Salk, & Lyles, 2001). This is because an organization “needs prior related knowledge to assimilate and use new knowledge. . . . [A]ccumulated prior knowledge increases . . . the ability to put new knowledge into memory” (Cohen & Levinthal, 1990, p. 129). In essence, a firm’s prior knowledge contributes to its absorptive capacity, as it helps the firm to understand the industry, products, and customers that are related to the knowledge held by the foreign firm, thus facilitating knowledge absorption and the development of new knowledge in ongoing businesses (Zahra & George, 2002). In other words, firms need a certain level of absorptive capacity before they can benefit from technologies developed by other firms (Ahuja & Katila, 2001; Cohen & Levinthal, 1990). In the context of cross-border M&As, the extent of a firm’s prior related knowledge may determine the magnitude of the M&A effect on knowledge acquisition (Shimizu et al., 2004). To be successful in cross-border M&As, firms need to develop the

1  An Absorptive Capacity Model of Acquisition of Strategic Assets via M&As

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knowledge and skills to screen targets with corporate and national cultures different from their own, and to integrate them into their own organization (Vermeulen & Barkema, 2001). Furthermore, with a high level of prior knowledge, firms are more likely to harness new knowledge from acquired firms to help their innovative activities; otherwise, it is hard for them to learn or transfer knowledge from one unit to another (Szulanski, 1996). For example, one critical factor contributing to the success of Cisco’s series of overseas acquisitions in the 1990s was that Cisco had profound knowledge about the target market and target firms, thus allowing it to spot the most valuable targets faster than its competitors and acquire its needed technologies and innovations (Chatterjee, 2009). As a firm’s prior related knowledge serves as an important stepping-stone for learning how to handle cross-border M&A activities, it is critical for a company to build its knowledge stocks and, hence, increase its absorptive capacity. In order to increase a firm’s knowledge base, managers may either increase investment in internal research and development (R&D) (Lei & Hitt, 1995) or acquire a firm with relative absorptive capacity, because firms sharing similar knowledge and experience inherently have an easier time working together (Lane & Lubatkin, 1998; Szulanski, 1996). For emerging-market firms like Chinese MNCs, the intensity of effort is a crucial element for accumulation of prior related knowledge particularly about the potential target firms (Kim, 1998). In sum, the higher the prior related knowledge, the more likely it is that the acquiring firms will effectively acquire strategic assets. Therefore: Proposition 1: The success of cross-border M&As carried out by Chinese companies will be contingent upon the prior related knowledge of acquiring firms, which will enable them to effectively value the target firm and acquire strategic assets.

Ability to Integrate Strategic Assets and Its Key Determinant: Combinative Capabilities However, mere exposure to related external knowledge is not sufficient to ensure that a firm will internalize it successfully. Companies need to develop combinative capabilities so that firms can synthesize and acquire new knowledge and generate new applications from those resources of the acquired firms (Kogut & Zander, 1992; Zollo & Singh, 2004). Common features of combinative capabilities, which are particularly relevant to international acquisitions, involve coordination capabilities and socialization mechanisms, so that each provides specific ways of dealing with different dimensions of absorptive capacity (Lane & Lubatkin, 1998). Coordination capabilities include cross-

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functional interfaces and participation in decision making (van den Bosch et al., 1999). They bring together different sources of expertise and increase lateral interaction between areas of functional, or component, knowledge so as to deepen knowledge flows across disciplinary boundaries and lines of authority, therefore enhancing a firm’s potential absorptive capacity to acquire and assimilate external knowledge (Lane & Lubatkin, 1998). Accordingly, they enable employees to combine sets of existing and newly acquired knowledge and provide an effective way of generating commitment and facilitating the implementation of decisions (Jansen et al., 2005). Socialization mechanisms, on the other hand, may influence absorptive capacity by creating broad, tacitly understood rules for appropriate action under unspecified contingencies and by contributing to common codes of communication and dominant values (Kogut & Zander, 1992). They include cross-cultural skills and the density of linkage or connectedness, which can serve as a governance mechanism and facilitate knowledge exchange (Bjorkman, Stahl, & Vaara, 2007; Stahl & Voigt, 2008). In the context of cross-border acquisitions, culture compatibility or cultural fit between merging firms may serve as major channels to achieving integration benefits and positively affecting sociocultural integration and synergy realization (Stahl & Voigt, 2008). Moreover, for effective knowledge integration, managers and other key personnel in the acquiring firm need to view the acquired firm not from an idiosyncratic cultural perspective, but from a broader perspective recognizing the value of different cultures (Ahuja & Katila, 2001; Bjorkman et al., 2007). On the other hand, connectedness develops trust and cooperation, encourages communication and interactions, and improves the efficiency of knowledge exchange, thus facilitating the integration and assimilation of newly acquired knowledge and developing competencies (Jansen et al., 2005). The rationale underlying the above studies is that the combinative capabilities of absorptive capacity bring together resources in new ways that alter the new company’s resource base, thereby contributing to assimilation and integration of the sought-after strategic assets. In summary: Proposition 2: The success of cross-border M&As carried out by Chinese companies will be contingent upon the combinative capabilities of acquiring firms, which will enable them to effectively assimilate and integrate the acquired strategic assets.

Ability to Apply Strategic Assets and Its Key Determinant: Strategy Execution and Effort While acquisition of strategic assets provides the opportunity for significant value-creating activities, this

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does not translate automatically into strong competitive market positions or high performance (King et al., 2004; Seth, Song, & Pettit, 2002) because “applying external knowledge involves the ability to diffuse knowledge within the organization, to integrate it with the organization’s activities, and to generate new knowledge from it” (Lane et al., 2001, p. 1157). Depending on the absorptive capacity, some firms are in a position to exploit the potential of acquired new external knowledge, while others are not (Zahra & George, 2002). M&A performance problems may be attributed to execution issues because the strategic context in which the knowledge is used, as well as the acquiring firm’s ability to apply the knowledge to a strategic context, will influence its ability to effectively exploit the acquired knowledge (Lane et al., 2006). Zollo and Singh (2004) have demonstrated that an acquiring company’s postacquisition strategies can distinguish success from failure. As a result, the effectiveness of strategy execution of the acquiring firm is another essential factor that may influence a firm’s absorptive capacity (Lane et al., 2001), thereby enhancing its competitive advantage. That is, knowledge obtained matters, but the acquiring firm’s strategy execution appropriate for its competing market matters more. Therefore, a central question for emerging-market firms is how to manage acquired knowledge and enhance business performance. Ineffective strategy execution is one of the primary reasons that acquisitions fail to create value for an acquiring firm’s shareholders (Child et al., 2001). The problem is exemplified in the DaimlerBenz acquisition of Chrysler, where there were multiple

Ineffective strategy ­execution is one of the ­primary reasons that acquisitions fail to create value for an acquiring firm’s shareholders.

resource differences because the companies produced different types of autos that served different markets. Unfortunately, the significant opportunity to achieve economies of scope was not realized because of highly ineffective strategic execution (Hitt et al., 2001). On the other hand, an effective strategy execution that draws on the acquired assets in line with an organization’s own objectives contributes to the success of Nestlé and its latest acquisition, designed to give it a competitive advantage in the health and well-being industry—and that is “where Nestlé is unique—our M&A strategy and our R&D vision are connected at the hip” (Chatterjee, 2009, p. 146). In addition, elements of an effective overseas M&A program are ensuring that every deal supports the corporate strategy (Hitt et al., 2001). At companies that handle cross-border M&As more productively, the top executives explicitly identify acquisitions as a pillar of the overall corporate strategy. At GE, for example, the CEO requires all business units to submit a review of each cross-border deal, which, in addition to the financial justification, must articulate a rationale that fits the storyline of the entire company and spells out the requirements for implementation (Uhlaner & West, 2008). In sum, whether acquired knowledge can be used to develop distinct competitive advantages depends on the acquiring firm’s effective strategy execution that supports the corporate strategy. Increased absorptive capacity would provide a basis for more effective management (Lane et al., 2001; Zollo & Singh, 2004). With subsequent increases in absorptive capacity, which draws upon acquired knowledge, there would likely be fewer errors, development of specialized and standardized routines, and increased execution effectiveness (Ahuja & Katila, 2001). Thus: Proposition 3: The success of cross-border M&As carried out by Chinese companies will be contingent upon the strategy execution of acquiring firms, which will enable them to effectively apply the acquired strategic assets into commercial ends and enhance their business performance.

Methodology and Data Collec tion To empirically explore the above theoretical model, we employed a case-study research method. Case studies can provide valuable insights and richness of information, especially when the researcher’s focus is on how and why questions (Yin, 2003). For the purpose of this study, we employed a comparative case-study method and focused on two high-profile Chinese cross-border M&A deals: Lenovo’s acquisition of IBM’s PC unit in 2005 and

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TCL’s merger with Thomson’s TV business in 2004. The focus on China is appropriate because it is the largest emerging economy, and outward FDI from China, and particularly its M&As, is growing exponentially (Alon & McIntyre, 2008). Moreover, the international expansion strategy adopted by Chinese firms is closely watched by other emerging-market companies (Child & Rodrigues, 2005). Most relevantly, the motivation underlying their M&A deals is the same: acquisition of strategic assets so as to overcome their competitive disadvantage in the global marketplace (Hemerling, Michael, & Michaelis, 2006). However, the subsequent business performances are substantially different. Lenovo’s acquisition of IBM’s PC unit is considered a highly successful story, whereas TCL’s acquisition of Thomson’s TV business performed poorly (“Global Agenda,” 2007; Newman, 2007). Such performance differentials provide us with a unique opportunity to use the absorptive capacity construct to illustrate and inform the phenomenon of cross-border M&As, so as to achieve an insightful explanation for the differing M&A outcomes in the same strategic context. For research purposes, we collected two sources of data. The primary data were collected by semistructured interviews at the headquarters of the two firms in October and November 2007. Informed by the literature review, before the interviews, we had developed a set of openended questions gathering views and opinions, as well as factual data gathering. Specific questions include: 1. Please list and elaborate on your company’s recent major cross-border M&A activities. 2. What is the strategic rationale for the M&As as well as the competencies and strategic assets acquired throughout the process? 3. Please list and explain the key factors that affect the success or failure of your overseas M&As (e.g., knowledge about the industry and target firms, prior M&A experiences, cross-cultural skills and interaction, integration competence, product relatedness, and strategy execution). 4. How do you perceive your overall acquisition performance as well as other dimensions of performance (e.g., sales volumes, market share or profits, knowledge acquisition, strategic objective)? For each of the firms, approximately three-hour interviews were made with four senior managers who were directly involved in international expansions of their firms. Owing to the secrecy and delicacy of the M&A processes, the interviewees were promised anonymity. They were requested to answer the M&A questions with respect

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to those specific acquisitions that he or she was most familiar with. We interviewed in Chinese and translated the interview data into English. The secondary data are from numerous internal and external sources that cover both the preacquisition and postacquisition periods of their major cross-border M&A activities. They include memos made by key managers, corporate newsletters and press releases, strategic reports, quarterly and annual reports, media reports, and industry experts. For triangulation purposes, we constantly crosschecked information and data from the two different sources, so as to increase the reliability and validity of our explanations and to avoid either internal or external bias (Eisenhardt, 1989). In addition, the data were coded according to the typical content analysis procedures, with specific events being identified as the unit of analysis (Yin, 2003). Then we started to look for themes emerging from the data and compared these emerging findings using insights from the absorptive capacity literature. This comparison of emerging concepts or themes with the extant literature involves asking what it is similar to and what it contrasts with and why (Eisenhardt, 1989). Eventually, the theoretical framework was illustrated and informed by discussing the two cases, with the purpose of obtaining insights into how the differences in absorptive capacity influenced their M&A performance.

Absorptive C apacity Approach and Cross-Border M& A From Chinese MNCs Among a number of significant M&A deals from Chinese MNCs, the 2004 merger of TCL with the TV division of France’s Thomson and the 2005 acquisition of IBM’s PC business by Lenovo are the biggest and most high-profile. These aggressive M&A strategies have numerous aspects in common. As two of the most prominent Chinese companies championed by the Chinese government, TCL and Lenovo are at the forefront of a new wave of Chinese MNCs that are globalizing their businesses (Deng, 2009; Luo & Tung, 2008). Both Lenovo and TCL explicitly declare that their overseas M&A activities serve their goals of becoming first-class multinationals in the world. Lenovo’s goal was to become a Fortune 500 company by 2010 (Morck et al., 2008). Likewise, in the words of TCL’s chief financial officer, the company aims “to be the next Sony or the next Samsung” (Deng, 2007). To achieve such ambitious goals, they needed globally valued brands, leading-edge technologies, or genuinely innovative and admired business methods (Child & Rodrigues, 2005; Wu, 2005).

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In spite of the same strategic asset-seeking motivation, their performance outcomes are dramatically different. After acquiring Thomson’s TV business in 2004, TCL suffered huge losses (with a cumulative loss of over RMB 6 billion, or $680 million, as of 2006), and sought bankruptcy protection for its European operations in May 2007 (“The Tigers That Lost,” 2008). Conversely, for Lenovo, the IBM purchase has clearly emerged as the quickest and most efficient way to build up its global presence and international competitive position (Newman, 2007). Since the absorptive capacity construct explains why there are significant variations among firms in their ability to evaluate and utilize outside knowledge (Lane et al., 2006), this framework may provide new insights into their M&A performance differentials. For the convenience of analysis, Table 1 highlights the business performance data of the two case firms in 2007 as well as their major cross-border M&A activities. In the following two sections, based on both primary and secondary data and information, the theoretical approach is illustrated by making a comparative case study of the two prominent cross-border M&A deals from Chinese MNCs. This will provide insights into how their differences in absorptive capacity influence their performance outcomes.

Le n o v o ’s A c qui si t i on of I BM’ s PC Un i t—A S u c cess S t or y Lenovo (originally known as Legend Group) is the largest computer company and the second-largest electronics manufacturer in China. In 1984, it began as a spin-off

table

from a new technology unit at the Chinese Academy of Sciences (CAS). With its $1.75 billion acquisition of IBM’s PC business in May 2005, Lenovo doubled its workforce size and quadrupled its revenue; specifically, the former IBM operations now accounted for about 70% of the combined firm’s revenue (Wu, 2005).

High Prior Related Knowledge of the Target Firm Initially, Lenovo achieved its competency in PC distribution through joint ventures (JVs) with well-established MNCs like AST Computers, IBM Corp., and particularly with Hewlett-Packard (HP). Through these international JVs, Lenovo started manufacturing its own hardware products and developed its own PC brand. In 1997, seven years after it started making its own PC, Lenovo became the best-selling PC in China. Lenovo’s prior related knowledge is also evident in that it continuously invests in its R&D capabilities (at least 1% of its annual revenue on R&D) and utilizes R&D resources in modification research, which is essential to succeed in the new market. In addition, based on the corporate strategic direction, every employee gets extensive training through Lenovo University. When Yang Yuanqing, chairman of Lenovo, recognized that his poor English prevented him from global responsibilities, he hired a private English teacher who forced him to watch CNN so that in less than one year, he could speak English fluently. Furthermore, “in order to attract more international talents and make our compensation globally competitive, we have substantially increased the corporate salary levels, thereby successfully transforming the old Lenovo into a truly multinational” (Lenovo, personal interview, November 2007). It is obvi-

1  Company Profile and Cross-Border M&As by Lenovo and TCL

Revenues (2007) Net profit (loss) (2007) Core businesses Key management team Major crossborder M&A activities

Lenovo Group $16.35 billion (17.0% increase over 2006) $481 million (200.5% increase over 2006)

TCL Group $5.80 billion (21% decrease from 2006) ($262 million) ($321 million loss in 2006)

PCs, mobile handsets, servers, motherboards, and digital products. Yang Yuanqing (chairman) William Amelio (president and CEO) Liu Chuanzhi (founder) In December 2004, acquired IBM’s PC unit for $1.75 billion, the biggest overseas acquisition for Chinese manufacturing firms. The acquisition immediately made Lenovo the world’s third-largest PC maker. It also received IBM’s brand, managerial teams, R&D centers, and distribution network.

Color TV sets, cellular phones and handsets, home theaters, and DVD players. Li Dongsheng (chairman, CEO, and president) Leong Yue Wing (CEO, effective from October 2007) 1. In 2002, acquired Germany’s Schneider Electronics; 2. In 2003, acquired United States’ GoVideo; 3. In July 2004, through M&A, set up $560 million JV, “TCL-Thomson Electronics” (TTE); 4. In 2004, set up 55% owned cellular phone JV—TAMP, via merging Alcatel’s mobile phone business.

Sources: Firms’ annual reports and official documents.

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ous that the management team of Lenovo is hungry to learn what it takes to build a truly global business, which was also observed in the study of Hemerling and his colleagues (2006). This commitment to learn and to absorb successful techniques is a potential strength as Lenovo ventures into other different geographic regions and cultural clusters (Newman, 2007). In the IBM PC acquisition, Lenovo’s ability to identify and acquire strategic assets was particularly enhanced by its intensity of effort before the deal. Lenovo’s top executives were aware of the challenges that they faced not just trying to combine two different cultures, but also managing highly complicated logistics and supply chains. Moreover, IBM’s PC business had had a cumulative loss of $4 billion during the four years before it was sold to Lenovo. In order to fully recognize and acquire the strategic assets from the deal, supported by consultant McKinsey and investment bank Goldman Sachs, Lenovo’s top management team analyzed potential challenges and risks carefully by asking these questions repeatedly: Were Lenovo’s executives really capable of running a complex global business? Would the new Lenovo be accepted by IBM’s clients and the PC market? Could the two corporate cultures be successfully consolidated? Why was there no profit for IBM’s PC business? Based upon this in-depth analysis and thorough knowledge of the target firm, Lenovo clearly identified the strategic assets that the target could bring. As one senior Lenovo manager commented, “As discussions progressed, we gained confidence that many of the risks we had feared could be distributed or controlled. For example, we worried about losing customers. So we worked out an agreement that would allow us to continue using the IBM brand, to keep the IBM salespeople, and even to keep the top IBM executive as CEO. . . . Equally important, rather than sell its PC business outright, IBM decided to keep 18.9% in the merged firm, as we had hoped” (Lenovo, personal interview, November 2007). Equipped with valuable strategic assets, including IBM’s ThinkPad brand and ThinkVantage technologies, the new company started from a strong foundation.

Strong Combinative Capabilities In addition to its practice that leads to systematic and focused information gathering about the target firm, combinative capabilities are also important for Lenovo to integrate and assimilate new knowledge. Immediately after the IBM PC takeover, the board created a powerful strategy committee headed by Lenovo’s chairman, Yang Yuanqing, supported by first-rate, well-connected executives, including company cofounder Liu Chuanzhi. In the first year of the combined company’s operation, the

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committee played a major role in setting strategies and recruiting key corporate executives: “The strategy committee sent out the clear message, internally and externally, that the new Lenovo acquires talent, not just assets, and it would always deploy the best person for the job” (Lenovo, personal interview, November 2007). Indeed, as of 2007, among the 21 top executives with positions of senior vice president or above, there are only seven top executives from mainland China and the rest are from foreign countries, including six from Dell Corporation and five from IBM. Lenovo also assembled an international management team in charge of integration, which boasted a combination of management savvy, technical expertise, and a proven track record of diversity. Such diversified top management has demonstrated strong coordination capabilities that emphasize cross-functional interfaces and participation in decision making. In the words of one Lenovo executive, “These design steps are intended to create the best organization for extracting cross-border synergies and, at the same time, protect IBM’s old value and absorb Dell’s strong direct sales model. . . . Our cohesive team helped find ways to turn diversity into competitive advantage” (Lenovo, personal interview, November 2007). In the meantime, the IBM-ers, instead of rejecting their new corporate parent, embraced Lenovo. This is well expressed by one old IBM executive: “A lot of IBM’s managers expressed a kind of glee at being out from under IBM. Compared with the plodding pace at Big Blue, we describe Lenovo as if it were a Silicon Valley start-up. It’s a young, international, ambitious company. It is also willing to change—a good base for cultural integration. On top of that, the new Lenovo truly emphasizes the interactions among all types of staff and managers. As an old IBM employee, my sense is that a win-win corporate culture, which well integrates the strengths of old Lenovo, IBM, and even Dell, has already been shaped here” (Lenovo, personal interview, November 2007). Furthermore, the new company actively looked for opportunities to operate business within a regional and geographic clustering by clarifying the accountability of key individuals and enforcing a common culture where needed. As one senior manager said, “The benefits of regional clustering are numerous, including stronger integration of the relevant functions across countries, the avoidance of duplication and the move toward organization integration. The mechanism also helps us share best practices in formal and informal networks, rotate key people from one country to another, and create a corporate culture to develop common work patterns that facilitate cross-border cooperation” (Lenovo, personal

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interview, November 2007). There is no doubt that socialization mechanisms, particularly in terms of compatible corporate culture, have significantly enhanced Lenovo’s capabilities to integrate acquired strategic assets.

Effective Strategy Execution and Effort In the postacquisition stage, effective strategy execution is one of the key attributes to successful cross-border M&As (Child et al., 2001), and elements of an effective acquisition are ensuring that every cross-border deal supports the corporate strategy (Uhlaner & West, 2008). With increasing pressure for faster cost cutting and more effective decision making, William Amelio, Dell’s former senior vice president for Asia-Pacific and Japan, replaced Steve Ward as CEO of Lenovo in December 2005, seven months after the acquisition. Amelio contributed his knowledge to Lenovo, a company that dominated the Chinese market but whose top management was deemed to possess scant experience on a global stage. Under the leadership of Amelio, Lenovo was relentless in cutting costs from its PCs, and did so through production efficiencies, not by cutting R&D or product features. Such effective strategy execution has also been observed by other scholars (e.g., Hemerling et al., 2006). In the meantime, Lenovo accelerated its business expansion, particularly in emerging markets. In July 2007, Lenovo announced two new manufacturing plants and fulfillment operations centers in Monterrey, Mexico, and Baddi, India, at an investment of more than $30 million. The new product range offered in the Indian market included notebooks

Under the leadership of Amelio, Lenovo was relentless in cutting costs from its PCs, and did so through production efficiencies, not by cutting R&D or product features.

with three models—IdeaPad Y710, IdeaPad Y510, and Idea Pad U110—and the desktops—Idea Center K200 and Idea Center Q200. As of March 2008, Lenovo had service centers in 15 Indian cities. As its latest move in a string of global expansions, in December 2007, Lenovo announced its first European manufacturing site in Poland with a total investment of $20 million. Before the M&A, Lenovo’s executives were clearly aware of the problems HP faced after it acquired Compaq in 2002. But Lenovo-IBM had some advantages that HP-Compaq did not; their resources complement each other neatly. This is well summarized by a former IBM-er and now Lenovo’s top supply-chain executive: “Part of the reason that our strategy execution has gone so well is that there is hardly any overlap between the Lenovo business and the old IBM PC division. With the IBM PC unit, more than 60% of our business was with notebooks. And when you look at Lenovo in China, 85% of it was in desktops. IBM focused a lot on the largeenterprise market and they were focused on consumers and small business. Note too that Lenovo and IBM are each other’s biggest customer” (Lenovo, personal interview, November 2007). Such resource complementarity now helps the combined firm successfully put the acquired knowledge and skills to commercial ends. Furthermore, Lenovo shows its capability of how to accommodate vastly different needs of consumer and business customers in the newly competitive setting. Such practice is similar to IBM, whose ability to tailor its strategic implementation has been critical in driving its acquisition performance (Uhlaner & West, 2008). This is evident in that Lenovo has developed two distinct sales models, and products rally around these models. The traditional Lenovo PC products are aimed at consumers (outside the United States) and sold through a high-volume “transaction” model. The ThinkPad brand of business products are sold through a low-volume “relationship” model. This dual business model enabled Lenovo to quickly expand into the small-business- and home-PC markets outside of China, which is becoming increasingly important. This innovative business method proved very successful, particularly in the United States, where the old IBM had an exclusive focus on serving large corporations (see also Liu, 2007). In early 2006, Lenovo launched a new range of PCs targeted at small and mid-sized businesses in the United States. In January 2008, it launched a new line of IdeaPad notebooks and desktops, its first-ever consumer computers in the United States. By early 2008, Lenovo’s distribution networks in the United States had 2,600 partners focusing on the small and medium-sized enterprise (SME) market. As one Lenovo executive commented, “Lenovo has a very successful business model in China.

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A lot of it applies to other markets, particularly to other emerging markets, but not everything. So we intensively discuss what makes sense to replicate and what doesn’t make sense. We want to extend the business model that was so successful in China across the world” (Lenovo, personal interview, November 2007). Due to the effective dual business model, Lenovo has boosted its already dominant 35% market share in China, while making a push into the consumer sector of Europe, the United States, and Japan as well as other emerging markets. Judged by several measures of high absorptive capacity, Lenovo has acquired the valuable strategic assets, and after two years Lenovo has begun to turn in superior business results. The company has successfully reassured old ThinkPad customers of the brand’s high-quality reputation, and “there has been minimal drop-off in loyalty and Lenovo has succeeded in maintaining over 90% of IBM’s previous customers” (Lenovo, personal interview, November 2007). Most importantly, on November 2, 2007, Lenovo severed ties with the IBM brand name two years earlier than originally planned, in a sign that it is ready to stand on its own. For the three months ended September 30, 2007, Lenovo’s net profit nearly tripled to $105.3 million and well surpassed the average forecast of $72.3 million. This was Lenovo’s fourth consecutive quarter of dramatically increasing sales revenue and achieving well above performance expectations. With 2007 global sales revenue of over $16.3 billion, in July 2008, Lenovo became the first Chinese private company that successfully entered the elite Fortune 500 list, an ambitious strategic goal accomplished in just three years after the M&A.

TCL ’ s M & A of T V Bus i ness of Th o ms o n —A n A cqui s i t i on F ai l ure As China’s largest color TV and second-largest mobile phone maker, TCL began to aggressively promote its brand internationally in 2000. Its global expansion culminated in January 2004 when it struck a $560 million deal of merging its TV and DVD operations with those of French consumer electronics giant Thomson. The resulting venture, TCL-Thomson Electronics Co. Ltd (TTE), in which TCL held a 67% equity share, was put into formal operation in July 2004, and was totally acquired by TCL in 2006. When the TCL-Thomson deal was announced, it was praised as “the latest and most dramatic example of China’s determination to put its own stamp on the global marketplace . . . there’s no company that has a better chance of becoming China’s first truly global corporation than TCL” (“Corporate Strategy,” 2004). As another indicator of the significance, the signing of the agree-

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ment took place in the presence of the French prime minister and Chinese president. Unfortunately, the deal is now widely regarded as a typical example of a Chinese company that “failed miserably in overseas expansion” (“Global Agenda,” 2007). Due to its highly problematic and value-destroying European operations, during 2005 and 2006, TCL cumulatively suffered a total loss of RBM 5.07 billion ($680 million) and continued to suffer losses of $262 million in 2007 (see Table 1). As a result, a star sign was added to the stock symbol, “*ST TCL”, indicating that TCL’s stock was at risk of being delisted. In November 2007, TCL declared its European operation “insolvent” and overhauled its TV manufacturing operations (“The Tigers That Lost,” 2008). TCL’s primary goal for acquiring Thomson’s TV unit was to obtain its technology, distribution channels, brand, and network assets (Ramstad & Li, 2006). With the massive restructuring, TCL gave up Thomson’s original business model, distribution channels, and even the Thomson brand. Since absorptive capacity is one of the major constraints for acquiring firms to obtain new external knowledge, and has a direct impact upon business performance (Lei & Hitt, 1995), the framework may provide insights into how and why this important M&A failed.

Lack of Related Knowledge of the Target Firm TCL had prior knowledge related to the global TV industry and had served other emerging markets that have characteristics similar to the home market before moving into developed markets. In Asia, for example, TCL products are sold under its own brand, claiming a 14% share in Vietnam and 8% in the Philippines. However, TCL failed to recognize the true value of the acquired firm because it had not carefully examined Thomson’s brands and its related products and services (see also Hirt & Orr, 2006). For those senior TCL directors who had thorough knowledge of the target firm but held differing points of view, they would most likely be demoted or not be hired. A case in point is Hu Qiusheng, a former TCL senior director: “Hu was thoroughly involved in the entire [TCL-Thomson M&A] negotiation process. He was firmly against the deal because he had perceived numerous ambiguities and unfavorable terms, including paying license fees for using Thomson’s trademark in Europe after 2008. Consequently, he was not appointed as the first CEO of TTE when it was set up in July 2004” (TCL, personal interview, October 2007). Moreover, throughout the negotiation process, TCL did not even hire experts as its acquisition advisors. TCL did spend 10 million euros and hired BCG Group to do an appraisal. Based on BCG’s appraisal report, the deal’s outlook was not very

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optimistic due to the risk involved. However, TCL’s chairman, Li Dongsheng, ignored the so-called “pessimistic” report and decided to gamble on the deal simply because the deal appeared attractive; it was considered a marriage between TCL’s cost advantage and Thomson’s strengths in brands, distribution, and research network in Europe and the United States (see also Deng, 2009). Unlike Lenovo, which acquired the IBM PC unit only after it had carefully figured out what it would achieve by buying the target firm, TCL took over Thomson’s TV business without an appropriate financial and competitive justification. As said by one former TCL executive, “Our internal review did not articulate a rationale that fits the storyline of the entire organization and also did not spell out the economic requirements for integration. The deal failed largely because we did not ask the right questions during due diligence” (TCL, personal interview, October 2007). After all, the Thomson brand in Europe and its RCA brand in the United States were rather tired and dormant names; Thomson’s TV and DVD operations lost more than $100 million in 2003 alone (Lau, 2006). In addition, the deal was highly complex because the JV resulted in specific contracts for access to those parts of the business not being transferred to TCL—for example, the sales and IP businesses from Thomson. To make matters worse, in late 2004, Thomson surprised the market by announcing that it was taking a small stake in Konka, a TCL rival (see also Lau, 2006). As one TCL executive admitted, “The international setback was mainly because we did not make good preparations before the deal. We were not familiar with the local business operations in Europe. We simply thought about the overseas market using our Chinese logic. When we copied the Chinese business model abroad, it did not work” (TCL, personal interview, October 2007).

Weak Combinative Capabilities TCL not only lacked prior knowledge related to Thomson’s business operations, but it also lacked combinative capabilities to integrate and assimilate the acquired knowledge. The shortage of TCL managers with international experience and expertise in global marketing constituted a major constraint. Also, the new company did not work well with people from different cultures, with different experiences, and with different routines. Indeed, there were almost no face-to-face social interactions among Chinese and French employees. Because of language issues and disagreements on compensation issues, it took a long period of time for the new company to develop a common technology strategy and get its reporting periods aligned. In the words of one TCL senior manager,

“We failed to grasp and address the barriers that might hinder the level of integration we desired. In addition, we did not understand and address organizational barriers that might obstruct the capture of cross-border value or risk destroying the sources of local and international value associated with the acquisitions” (TCL, personal interview, October 2007). On top of that, TCL did not maintain continuity of its acquisition team, so it could not internalize learning incrementally, thereby teaching the company something new and serving as a stepping-stone toward further acquisitions, as the organization learning literature argues (e.g., Vermeulen & Barkema, 2001). In addition, TCL wanted greater management and hierarchical cultural control of its European operations. Unfortunately, it imposed control structures that were suitable for China, but not for France, so that many French employees quit in frustration. For example, TCL’s French executives were unhappy to find that a meeting was planned for the weekend (which occurs regularly in China), and TCL’s French managers just turned off their cell phones. TCL managers also failed to understand changes in the industry, initially because they repeatedly tried to assimilate new external knowledge through TCL’s old decision-making models, which ignored crossfunctional interfaces and participation in decision making (see also Hirt & Orr, 2006). Only after a series of failed assimilation processes did they change their domestically oriented coordination structures and socialization mechanisms, which had led to high talent turnover and much room for conflict. There is no doubt that differences in cognitive structures, integration systems, and behavioral norms all contributed to the fact that the new company was less likely to acquire and assimilate the acquired assets. As one TCL executive commented, “Obviously, we were not aware of the cross-border opportunities, and we ignored the chance to collaborate with colleagues in the other parts of the new merged company. Surprisingly, few people had the knowledge needed to truly consider the cross-functional, cross-cultural approach. We failed to help the acquired assets to be more productive because we could not share best practices and could not find common ground” (TCL, personal interview, October 2007).

Problematic Strategy Execution When the deal was done, TCL executives believed that the synergy of the M&A would benefit the company in the long term, through economies of scale, complementary resources, cost control, and shared R&D capacities (see also Lau, 2006). But, the challenges and difficulties appeared to be much more serious. In essence, the M&A case went far beyond typical arrangements that shift a Western

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company’s high-cost manufacturing operations to lowercost China (see also Ramstad & Li, 2006). Because of too many overlapped product lines and manufacturing facilities, it was not practical for TCL to easily shift production to less expensive facilities in China and realize greater economies of scale. In India, for instance, TTE products appeared under both Thomson and TCL brands. It was hard to save money by using common designs for chipsets and leveraging their buying power as a large customer to get lower parts prices. On the other hand, the sources of TCL’s competitive edge in China—its relationship, local knowledge, and distribution networks—could not be transferred overseas. The ability to share and transfer knowledge across national borders is the prime reason behind the international M&As; it is obvious that TCL’s practices failed to live up to the strategic rationale for acquiring Thomson’s TV and DVD operations. Moreover, TCL’s international expansion strategy was too rapid and too aggressive; hence, the company failed to develop its own absorptive capacity. As a result, each of the initial acquisitions failed to teach the company something new and serve as a stepping-stone toward another acquisition. Besides the Thomson deal, in September 2002, TCL acquired the German-based Schneider Corp. In 2003, it acquired GoVideo, an Arizona-based U.S. company focusing on visual products and DVD players. In August 2004, it created another majority-owned JV, TCL & Alcatel Mobile Phones Limited (TAMP), to engage in mobile phone development, production, sales, and services. In 2005, it set up a third majority-owned JV with InFocus, a subsidiary of South Mountain Technologies Ltd to produce rear-projection TV components. Since TCL appeared to be set on a course of almost unlimited international expansion, it was unable to learn from its prior experiences and apply them throughout the organization (Lei & Hitt, 1995). Elements of an effective M&A should ensure that every deal supports the corporate strategy (Hitt et al., 2001; Seth et al., 2002). Unfortunately, almost all of TCL’s M&A deals were only generally related to its strategic direction, and the connections were neither specific nor quantifiable, and it was hard to integrate the new knowledge and apply it to commercial ends. A major motivation behind TCL’s acquisition of Thomson’s TV unit was acceleration of its development of TV technology, but Thomson’s CRT and projection TV technologies were quickly replaced by new technologies. As one of the TCL senior managers said, “Acquisition of Thomson didn’t help because its technical expertise lies in projection TV sets. We had expected to sell a breakthrough design by Thomson in large-screen TVs: a rearprojection model with a 61-inch screen in our traditional

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TCL’s international expansion strategy was too rapid and too aggressive; hence, the company failed to ­develop its own absorptive capacity.

market, China, but the market simply disappeared for large-screen LCD TVs. . . . Our top decision makers also underestimated the sheer difficulty of getting hundreds of people to cooperate on a common goal. They do not have clear accountability and simply take a one-size-fits-all approach to all the M&A deals” (TCL, personal interview, October 2007). Finally, TCL not only failed to anticipate a boom in consumer demand for flat-panel TV sets, but it also was very slow to respond to a shift in consumer preferences. Flat-panel models became the majority of TV sets sold in the United States during the third quarter of 2006. Japan and Europe reached that milestone during mid2006 (Lau, 2006). When customers started switching to new LCD screens and stopped buying old-fashioned CRT and projection TV sets, TCL’s European operations faced major restructuring problems (Ramstad & Li, 2006). In an effort to catch up, TCL announced plans in 2005 to buy flat panels for its new flat-panel TV sets from LG.Philips LCD Co. Even so, it already lost a key U.S. distribution outlet when its contract expired with Best Buy Co. in 2006. As its CRT and projection TV sales slowed down sharply, TCL not only lost its crown as the world’s largest TV maker to Korean rivals, but it also piled up big losses on TCL and Thomson television brands amid a series of strategic missteps.

Conclusions and Implications Based on theories of absorptive capacity, firms are motivated to enhance their competitive advantage via acquir-

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ing strategic assets within the constraint of their absorptive capacity. Following this logic, we make a comparative study of two most prominent cross-border M&A deals from Chinese MNCs and confirm that any attempt to explore a firm’s strategic choice, such as a cross-border M&A, requires an understanding and incorporation of an acquiring firm’s absorptive capacity and its determinants (i.e., prior related knowledge, combinative capabilities, and strategy execution) on multiple dimensions. The calculus of acquiring firms’ absorptive capacity captures the extent to which Chinese companies may utilize M&A strategy to acquire strategic assets and achieve superior business performance. Differences in absorptive capacity may therefore provide an insightful explanation for why acquiring firms facing similar competitive landscapes may achieve substantially different outcomes. Firms like Lenovo with strong absorptive capacity are likely to have a better understanding of new knowledge and harness it to help their innovative activities and financial performance. Without such capability, acquiring firms like TCL are not able to acquire and transfer new knowledge from the acquired firm, nor change structures and practices that are suitable to the new markets, thereby destroying the source of their competitive advantage. Equally important, an acquiring firm’s absorptive capacity can be improved or enhanced through numerous ways. As the case of Lenovo indicates, when a company does not have enough related prior knowledge about the specific target firm, or the relatedness of knowledge between acquirer and target firms, it can obtain that knowledge by hiring consultants such as McKinsey and Goldman Sachs. Additionally, Lenovo’s absorptive capacity is also fostered by the fact that Lenovo and IBM (division) complement each other. Such complementary businesses and resources enhance Lenovo’s combinative capabilities and facilitate the integration and assimilation of newly acquired knowledge. Furthermore, effective strategy execution, as exemplified by Lenovo’s two distinct sales models, constitutes one of the primary attributes to its successful cross-border M&As. The study also offers practical guidance for decision makers interested in formulating and implementing a resource-driven M&A strategy. By itself, a preoccupation with the seemingly positive contribution of strategic assets to competitive advantage is not likely to realize M&A potential. Rather, decision makers’ appropriate evaluation of their own absorptive capacity, and how to enhance that ability, should be the first step in cross-border M&A activities. Only then can they judge whether, and if so how much, they can utilize cross-border M&A

deals for their global expansion strategy. Even if a firm internalizes transactions through international acquisitions, with weak absorptive capacity or simply by “gambling” on the M&A deal without sufficiently considering the acquirer’s absorptive capacity, it may be unable to effectively identify, assimilate, and successfully apply the benefits of acquired strategic assets, as shown in TCL’s acquisition of Thomson’s TV business. Alternatively, for a firm with strong absorptive capacity, it can internalize synergies to leverage the acquired strategic assets, thus enhancing its competitive advantage, as shown in Lenovo’s acquisition of IBM’s PC division. One of the biggest practical challenges that most cross-border acquisitions face is not only getting the right deal, but also having the capability to handle the integration efforts productively. Therefore, acquiring firms should invest in the building of their absorptive capacity as a pillar of their overall corporate strategy before launching an aggressive M&A agenda. In conclusion, this study emphasizes the importance of understanding the effect of absorptive capacity on the strategic and performance dimensions of overseas M&As from Chinese companies. Given that existing empirical research has failed to identify the factors that affect the performance of firms engaging in cross-border M&A activity (King et al., 2004; Stahl & Voigt, 2008), our study has important strategic implications for both business academicians and practitioners. A fundamental and longstanding question is whether acquisition of foreign firms has allowed emerging-market companies to improve their international competitive positions relative to well-established global giants. Equipped with strong absorptive capacity and also by continuously fostering that ability, Lenovo’s case provides a remarkably straightforward answer to this question.

Acknowledgments I gratefully acknowledge the three anonymous reviewers and the editor, Dr. Mary Teagarden, for their valuable comments and critical suggestions of early versions of this manuscript. I am also grateful to Professors John Lewington and Kimberly Temme for carefully editing the manuscript for typographical and grammatical errors during the review process, Dean Pam Horwitz for her consistent support, and Dr. Chen Tao for excellent research assistance. This research was supported in part by the Program for Professor of Special Appointment (Eastern Scholar) at Shanghai Institutions of Higher Learning and the sabbatical leave allowance provided by Maryville University.

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Ping Deng is a professor of business administration in the John E. Simon School of Business at Maryville University of St. Louis and also Eastern Scholar (Professor of Special Appointment at Shanghai Institutions of Higher Learning) at Shanghai Lixin University of Commerce. His current research interests focus on internationalization of Asia-Pacific firms and outward foreign direct investment by multinational corporations from emerging economies and particularly from China. His numerous publications have appeared in refereed journals such as the Journal of World Business, the Journal of Leadership and Organization Studies, the Journal of International Management, Business Horizons, Asian Survey, and others.

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