INTERNATIONAL ACQUISITIONS FROM A NETWORK PERSPECTIVE AND MARKET BASED COMPETENCIES Timothy S. Kiessling Eastern Kentucky University Richmond, KY R. Glenn Richey The University of Alabama Tuscaloosa, AL Abstract Trillions ofdollars are spent annually on international acquisitions and often these acquisitions are considered a failure in regard to performance. The im- portance of valuation of an international targetfirm cannot be underestimated, especially in the global market where networks ofstrategic alliances are required to compete. For international acquisitions - the value of the firm is often its network ofrelationships. Thus, the valuation by the acquiringfirm takes on new - more complex - dimensions than simply reviewing the Balance Sheet and income Statement results. This manuscript explores the valuation o.finternational target acquisitions when the intangible value is its network ofstrategic alliances. Additionally, the manuscript employs theory and grounded examples to develop a theoretical model for future examination. Introduction The market for international expansion is certainly a complex one for managers to navigate. The complexity is increasing as domestic markets continue to become more concentrated, economic barriers to trade continue to fall, transportation and technological advances lower physical barriers to trade, and international trade blocks continue to form. Yet each of these complexities can also be considered a motivation as, now more than ever, firms are encouraged to enter the global marketplace. One popular choice of international market entry, international acquisition, continues to be a course taken by many firms. In 1984, in the United States alone, nearly $36 billion was spent in acquiring 241 firms. In 1998 it was estimated that over $1 trillion was spent in international acquisition activity (Business Week, 1998). In 1999, in the United States alone, $1.75 trillion in mergers and acquisitions were announced and $3.4 trillion was spent worldwide (Hitt, Harrison and Ireland, 200 I). Recent examples of this strategy are Petro-Canada's $3.2 billion acquisition of Verba Oil and Gas GMbH (January, 02), China National OffShore Oil Co. 's $598 million purchase of Rep- 2 Journal ofBusiness Strategies Vol. 22, No. 1 sol-Yepeo (December, 0 1), Tyco International's $650 million purchase of Paragon trade brands (December, 0 I), and Baxter International's $470 million purchase of Asta Medica Onkologie GMbH & Co Kg (SEC filings, 2001, 2002). In 2002, over 5,400 deals worth more than $346 billion were announced through September 30 (Business Week, 2002). The managerial importance of the international acquisition phenomena is made apparent by the size of these figures alone. Subsequently, expansion through acquisition continues to be a viable international strategy utilized by firms. As these numbers grow - so grows the importance of the correct valuations of a target firm. Managers will no doubt be forced to access both the traditionally tangible assets and the often more important intangible market based assets to arrive at an appropriate valu- ation of an international acquisition. Increasingly the question becomes how to value potential international acquisi- tions. Numerous answers, that are often conflicting, have been proposed. Most of these focus on valuation with disregard to one of the true values of the target firm: its network of relationships. This manuscript suggests the potential value of a target firm's intangible assets (such as the firm's network or relationships) is much greater than the value of the tangible assets (Lusch, Harvey, and Speier, 1998). Specifically, this manuscript focuses on the determinants of value of an acquisition when its value is its network. Researchers have investigated the logic behind the acquisition/ownership de- cision for years. The Transaction Cost Theory (Williamson, 1975) rationale for acquisition rests with minimizing the sum of production and transaction costs. The Resource-Based View (Wernerfelt, 1984) suggests that through acquisition a firm can maximize value by gaining access to the target firm's valuable resources (Madhok, 1997; Ramanathan, et. aI., 1997). Additionally, the Resource-Based View suggests that, as a firm acquires another firm for its network of relation- ships, it must be able to utilize the very same network it is hoping to acquire to earn normal returns (Wemerfelt, 1984). It is definitely an unrealistic assumption to expect that the entire network of relationships will transfer to the acquiring firm. Issues such as network or partner incompatibility, cultural distance, loss of boundary spanners, insufficient resources of the acquirer, and/or positional embeddedness within the network may all deter ongoing relationships between the acquirer and the established network. If the acquisition is driven by the in- tangible value of the target firm's network ofrelationships, it must be recognized that any loss of network partners may devalue the target firm. The focus ofthis manuscript is on how to value the acquisition of an international foreign target firm when its value is its network ofrelationships. Strategic theories of management and marketing that make up the Network Paradigm - Transac- tion Cost Theory, the Resources Based View, and Relationship Marketing - will be used to determine the relative value of the integration of the acquirer into the target firm's network. First, we will review the literature in regard to networks and then apply the literature to international valuation of firm acquisition. Next, we will develop propositions that derive a model of the valuation of international Spring 2005 Kiessling & Richey: International Acquisitions 3 firms from a network perspective. Finally, we will discuss the implications of the model and draw conclusions. The Network and Firm Value The global economy has created a new competitive landscape - one in which events change constantly and unpredictably (Ireland and Hitt, 1997). Even before the forces of global competition became more visible, there was a trend toward more flexible organizations. These organizational forms are difficult to capture with a traditional organization chart because they include a network of complex relationships that provide value to the firm as a whole (Miles and Snow, 1984, 1986; Powell, 1990; Thorelli, 1986; Webster, 1992). This shift in organizational form drives the research focus away from transactions and towards relationships. Here, customers become partners and the firm must make long-term commit- ments to maintaining quality, service, and innovation (Anderson and Narus, 1991). Instead of developing these relationships over time some firms hope that the acquisition of a target firm will automatically transfer the existing network of relationships. Thus, the inherent value placed upon a network of relationships is contingent upon its transferability. To compete effectively in the global dynamic economy firms have evolved to focus on large-scale managed networks representing a legitimate alternative to markets or hierarchy. Embeddedness (concrete relations and structures "networks" which generate trust and discourage malfeasance) is the fundamental concept differentiating the Network Paradigm from economic theories of organization (Granovetter 1985). A firm's core competency may be the valuable resource and capabilities that attract acquisition attempts. Specific to each successful company is a core com- petency, or a unique amalgam of skills, resources, technologies, people, etc, that make a company a leader in a specific area (Valentino, 1992; Planning Review, 1994). Core competencies are described as unique, not imitable by competitors, and sustainable or durable (lasting). These core competencies are frequently composed of intangible assets that allow a company to effectively compete in marketplaces and to differentiate themselves from primary competitors (Willens, 1993; Prahalad and Hamel, 1990). Examples of intangible assets are: I) company reputation, 2) product reputation, 3) employee know-how, 4) networks, 5) sup- plier know-how, 6) databases, and 7) distribution know-how (Hall 1992). Ifthe core competency of the international target firm is its network of relationships, supplier know-how, or distributor know-how (Hall's, 1992; 1993) the question then becomes how to value the target firm. Financial analyses frequently fail to recognize that the acquisition includes an important network offirm and human relationships, as well as, financial activity. In focusing only on financial results - such as income statement, ratios, and balance sheet issues - the role of people, knowledge gained, and/or other im- measurable goals are often overlooked (Hunt, 1987; Levinson, 1970; Kitching, 4 Journal ofBusiness Strategies Vol. 22, No. I 1967). Despite this, acquisition decisions and negotiations still typically center on financial results and rarely involve any analysis of relationships (Cartwright and Cooper, 1992). For example, a recent study illustrates that although all the organizations in the study conducted detailed and thorough legal and financial audits, no audit in regard to human resources occurred. Surprisingly, thirty percent considered the implications ofa pension plan which is directly related to retention of employees and thus intangible relationships (Hunt, 1987). In an international acquisition, the managers of the acquirer firm must be cautious in evaluating the target's value based solely on accounting measures. This is because managers at the target firm have discretion as to what account- ing methods and allocation procedures (ex. overhead, indirect costs, etc.) will be utilized. Thus, target managers may intentionally or unintentionally inflate the costs/value of the acquisition. Accounting practices can significantly im- pact such things as the setting-up of accruals, writing off goodwill, eliminating costs from other divisions through allocation, etc. Possibly the largest flaw in utilizing accounting measures, especially in the new knowledge economy, is the valuation of intangible assets and liabilities. A firm's intangible resources and capabilities are productive assets that are difficult to observe, describe, and value. Nevertheless, these resources can have a significant impact of a firm's performance. Researchers have noted that the impact of this limitation is great and the magnitude for misrepresentation is significant (Fisher and McGowen, 1983; Ijiri and Kelly, 1980). Recent research has focused on the external value of the firm or firm's market based asset value. Market based assets fall into two categories: 1) relational - outcomes of the relationship between a firm and key external stakeholders, including distributors, retailers, end customers, other strategic partners, etc.; and 2) intellectual- the types of knowledge a firm possess about the environment, such as the emerging and potential state of market conditions and the entities in it (Srivastava, et. aI., 1998). The most common market based assets include: brand equity (Aaker, 1991; Keller, 1993; Shocker, Srivastava, and Ruekert, 1994), customer satisfaction (Yi, 1990) and the management of strategic relationships (Anderson and Narus, 1996; Bucklin and Sengupta, 1993). Traditional theories describing marketing channel interactions are founded on the assumption that in the absence of suitable safeguards, economic agents are prone to opportunistic and self-interest-seeking behavior (Williamson 1975). Thus, firms must determine the most efficient contract to govern the relation- ship given the characteristics of the parties involved. Still, the fact remains that environmental uncertainty and the costs of obtaining information make it impos- sible for the principle to efficiently and effectively monitor the agent completely (Agency Theory, Arrow 1985). Thus, network theories have evolved to explain phenomena that emphasize the normative and social structure in which exchanges are embedded as the primary determinant of behavior (Granovetter, 1985). Much ofthe research in relationship management and marketing strategy point to the mediating and moderating characteristics of key relational variables. Such Spring 2005 Kiessling & Richey: International Acquisitions 5 is the case with firm trust and commitment (Morgan and Hunt 1994); interpersonal relationships (Crosby, Evans, and Cowles 1990); and relational aspects of culture (Nakata and Sivakumar 2001). A central theme in these works is the importance of relationships to the success of the firm. Thus, the value of a firm may often be attributed to its network of relationships. Positional Embeddedness of Firm and Acquisition Valuation Positional embeddedness ofa firm captures the impact ofthe positions organiza- tions occupy in the overall structure of the alliance network. The more central an organization's network position, the more likely it is to have better information about a larger pool of potential partners in the network (Gulati and Gargiulo, 1999). The embeddedness argument stresses the role of concrete personal rela- tions and structures (or networks) of such relationships in generating trust and discouraging malfeasance (Granovetter, 1985). The greater the centrality of the positional embeddedness of a firm, the more valuable the firm should be (Gulati and Gargiulo, 1999). Hence, the control of information throughout the network should create valuable opportunities for the central firm, as well as its more numerous contacts. It is the central firm that often decides whether to allow new firms to enter the fringes or to end relationships with those found untrustworthy or invaluable. Communication is a capability used to coordinate outputs. Communication serves to embed an organization in its environment and network. Guetzkow (1965) identifies several important characteristics of communication in organizations, including formal and informal flows; vertical and lateral flows; and omissions and distortions. Ultimately, " ... communication can be described as the glue that holds together a channel of distribution (Mohr and Nevin, 1990, p. 38)." The positional embeddedness of a firm in an international marketplace is of great value to an acquirer who may know little of the host-country marketplace. The information flow from the network members may assist the acquirer in en- tering the new marketplace and allow for some early control over other network members. Grounded Evidence Part One On September 23, 2002, DATATRAK International (Ohio) announced a definitive agreement to acquire French technology firm Oriam. Dr. Jeffrey A. Green, President & Chief Executive Officer of DATATRAK International, Inc., suggests that the acquisition was very much in regard to Oriam's central role in its network (i.e. Oriam's customer base and knowledge base). Oriam's customer base currently includes 33 clients, predominantly European-based pharmaceutical companies, although expansion into the American markets was recently evident with the adoption of Oriam's software suite by a prominent biotechnology firm and a major U.S. academic medical center. Several of Oriam's key customers 6 Journal ofBusiness Strategies Vol. 22, No. 1 have utilized its technology for many years and have progressively expanded their base to more than 500 users per company. "This strategy is based on management's conviction that the breadth of tech- nological applications used in clinical trials should be integrated and follows a continuous [continuum], compatible, and progressive flow of information... However, in today's environment for clinical trials such integration is presently absent. At this time, there only exist 'point solutions' throughout this industry offered by a variety of different companies with completely disjointed data models - none of which inherently or easily communicate with each other" (PR Newswire Europe, 2002). In essence, Oriam's central control of their client's technology and reporting structures is the value focus of this acquisition. There- fore, we propose: Position I: The international decision-maker svaluation ofa target acquisition will be higher when he/she perceives high centralization of the target firm within a network. Dependence and Network Compatibility to Acquisition Valuation 1. Dependence and Acquisition Valuation Dependence is generally described as: Firm A's dependence on B is directly proportional to the motivational investment in goals mediated by B and inversely proportional to the availability of those goals to A outside the A-B relationship (Emerson, 1962). Pfeffer and Salancik (1978) argue that dependence comprises three elements: 1) the importance of the resource and the extent to which the orga- nization requires it, 2) the extent to which the other party has discretion over that resource, and 3) the extent to which there are few alternatives. For example, a firm is considered more dependent on a supplier when that supplier provides a larger fraction of its business. If alternative suppliers are not available (i.e. options are limited), dependence also exists. Transaction Cost The- ory also postulates that transaction specific investments (assets of considerable cost with few to no alternative uses) may create a dependency situation (William- son, 1985). Identification oflarge asset specific holdings by network partners may result in "hostage" type relationships by the acquiring firm until and only if other relational options can be established. Resource dependence theory suggests that a lack of self-sufficiency creates po- tential dependence on the parties from whom the focal resources are obtained (Emerson, 1962). The main implication is its identification of dependence and un- certainty as the key antecedent variables motivating the establishment of interfirm relationships. As the acquisition occurs, firms may re-evaluate their relationship with the acquirer, especially when the acquirer is of a different nationality. Management practices and routines vary significantly due to differences in na- tional culture (Hofstede, 1983). Thus cultural uncertainty may increase for the acquiring firm (in the target firm's network) after acquisition. However, if the Spring 2005 Kiessling & Richey: International Acquisitions 7 network offinns is resource dependent upon the target finn, they may not imme- diately embark on the uncertain territory of establishing new ties. The greater the uncertainty of other finns within the market, the greater the potential that the ac- quirer may be given the opportunity to establish a relationship within the network. With an inability to obtain focal resources, the network may continue to rely on the acquirer unless negative market signals are delivered. 2. Network Compatibility and Acquisition Valuation If an acquisition attempt is to have an opportunity to have access to the network relationships the target finn has, one must realize that in an international/cross cultural context the network may be culturally directed (such as in a Kieretsu or Chaebol). Moreover, the acquiring finn brings its own network of strategic alli- ances and relationships into the scenario. In this ambiguous and complex configu- ration of finns that constitute the network, the finn themselves develop network identities (Hakansson and Johanson, 1993). Network identity is meant to capture the perceived attractiveness (or repulsiveness) of a finn to an exchange partner due its unique set of connected relations with other finns, links to their activities, and ties with their resources (Anderson, Hakansson, and Johanson, 1994). Each identity communicates a certain orientation toward other actors. The identity of the acquiring finn may be deemed unacceptable/unsuitable to the members of the network due to past perfonnance, the relationships it has es- tablished in its network of suppliers or customers, a nationalistic network (ex. Chaebol), or even direct competition with the new network members. Thus, the network the acquiring finn is embedded in may actually hinder successful entry through acquisition. Gulati and Gargiulo (1999) show that membership in one cohesive network truly hinders the ability to build cooperative ties with other networks. Acquiring the target member of a network due to its value of network relationships does not represent an automatic "get in free card" for the acquir- ing finn. Acquirer network associations and those of the target finn should be reviewed before committing resources to the acquisition. An important element in any business partnership is a common business under- standing, mission identity, or network identity. This has also been tenned organi- zational identity (Albert and Whetton, 1985) meaning "the theory organizational members have about who they are" (Barney and Wright, 1998: p. 103). How- ever this identity is not stable and evolves as new members enter and exit (Gioia, Schutz and Corley, 2000). In essence, the target finn also influences the acquiring finn's network and relationships among the members. Each finn's network identity communicates a certain orientation toward other actors. It conveys a certain competence, because it is based on each actor's per- ceived capability to perfonn certain actions and is based on the particular resources each actor possesses (Yamagashi, Gillmore, and Cook, 1988). Allowing finns to enter the alliance without attention to composition can lead to conflict among a finn's partners. This is enhanced as duplication of roles, tasks, and positions cre- ates rivalry among the partners (Gomes-Casseres, 1994). Careful attention should 8 Journal ofBusiness Strategies Vol. 22, No.1 be paid to not only the compatibility of the purchaser's network, but to what the effect will be of the inclusion of the target's identity into the purchaser's network. Grounded Evidence Part Two PLlVA's (Croatia) June 11, 2002 acquisition of US-Based Sidmak Labora- tories for $219 million was done mainly to access Sidmak's network. Zeljko Covic, Chief Executive Officer of PLlVA, suggested that direct access to the US pharmaceutical market through an established sales network, an experienced management team, and skilled employees were the main reasons for acquisition (Business Wire, 2002a). If PLlVA anticipated loss of either the sales network or the internal network, the target acquisition would either not have occurred or would have been valued at a lower price. Therefore in regard to dependence and network compatibility we propose: Position 2: The international decision-maker 50 valuation of a target acquisition will be higher when he/she perceives a higher level ofdependence ofand compatibility in the network to the target firm. Network Based Relational Density and Acquisition Valuation In essence, what makes the network valuable is the quality ofrelationships. Re- lationship dimensions include: non-hierarchical/long-term commitments, multiple roles and responsibilities, mutuality, and affiliational sentiments. Therefore, what differentiates the network organization is its density, multiplexity, reciprocity of ties, and shared value system defining membership roles and responsibilities. In short network relationships add value to the firm (Achrol 1997). Grounded Evidence Part Three An example of such importance is the recent Daisytek International Corpo- ration's (Texas) Aug. 19, 2002 acquisition of ISA International pic (UK), one of the largest pan-European distributors of computer supplies with revenues of more than $500 million. Daisytek suggests that the synergistic combination of Daisytek's distribution expertise, financial resources, and management experi- ence - combined with ISA's pan-European reach, customer relationships, and local knowledge may provide firm value (Business Wire, 2002b). The importance of the acquisition is in the network of customer relationships as well as local knowledge of the distribution, suppliers, and marketplace dynamics. The number offunctioning relationships a target holds in a network is a target's relational density. The relational density of a firm represents a significant con- tribution to the global success of the respective firm. The relationships between the target firm and alliance members may very well contribute extensively to the revenue generation and innovative ability of the firm. Transference of these Spring 2005 Kiessling & Richey: International Acquisitions 9 relationships to the acquiring firm may, or may not, be accomplished. If the relationships do not transfer, performance may be negatively impacted. Addi- tionally, the cultural distance of the firm may also directly affect the process of assimilation into relationship network. Therefore, we suggest: Position 3: The international decision-maker s valuation of a target acquisition will be higher when he/she perceives higher relational density that will transfer with the acquiring firm. Credibility Portion of Trust and Boundary Spanner Retention to Acquisition Valuation I. Transference of the Credibility Portion of Trust and Acquisition Valuation: Literature that is more recent examines networks from a Relationship Mar- keting perspective (Day, 1997). Relationship Marketing is seen as relationships, networks, and interactions in which two or more parties (supplier, customer, com- petitor, etc.) create value for each other. Relationship Marketing is part of the developing "network paradigm" which recognizes that global competition occurs increasingly between networks offirms (Thorelli, 1986). Frequently quoted prop- erties of Relationship Marketing include trust, reliability, and commitment. Rela- tionship Marketing is clearly more than a theory; it represents a paradigm shift in marketing thought (Gummesson, 1997). Trust is dimensionalized as credibility (a partner's perception of require ex- pertise to perform ajob effectively) and benevolence (a partner's perception that the intentions and motives of the other firm, when reacting to new conditions, will match its needs) (Ganesan, 1994). Several terminologies are borrowed from Transaction Cost Theory including opportunistic behavior and transaction specif- ic assets (Williamson, 1981). In Relationship Marketing, relational governance or relational contracting is seen as providing the best (both lowest cost and produc- tive) governance mechanism and transaction specific investments may be shared due to high levels of trust. A firm that that enters a network through the acquisition of another firm may not transfer the benevolence portion of trust that has been developed over time (i.e. history of actions/interactions). This may occur despite the acquiring firm having substantial credibility identified/signaled through its resources, its history of actions within it current network, and/or market capabilities. The acquiring firm may transfer the credibility portion of trust, but it may take time to success- fully develop the benevolence portion if at all. Grounded Evidence Part Four Yincor International Inc., one of North America's largest producers of wine and related products announced on October 9, 2002 that it has entered into a defini- tive agreement to purchase privately held Goundrey Wines of Australia. "Goun- 10 Journal ofBusiness Strategies Vol. 22, No.1 drey also has an excellent network of distributors and company sales force which provides an outstanding platform for continued sales growth within Australia," said Donald Triggs, Vincor's President and CEO. From the Goundrey side, "I am pleased that joining Vincor and leveraging its economies of scale and grow- ing distribution reach may provide an opportunity for our exceptional people and wines to realize their full potential in domestic and international markets", added Jack Bendat, Goundrey's owner and Chairman. "Equally important to our deci- sion to join Vincor was its ongoing commitment to preserve the unique culture and identity of each member of its growing family of estate wineries." (Canada News Wire Ltd., 2002). 2. Boundary Spanner Retention and Acquisition Valuation A major source of information relevant for firms and networks is boundary spanners. Boundary spanning refers to the effective interaction between an organization and its external environment through people or firms. Boundary spanners link an organization to its environment by the nature of their interac- tions with non-members (Thompson, 1967). Boundary spanning communica- tion is important to organizations as a source of new information that increases awareness of environmental changes (Weedman, 1992). Ultimately, boundary spanners facilitate an even flow of information between the two or more parties. This vital transference of information allows the parties to share strategic views on the external market environment, mutually decide a course of action, and then implement a truly synergistic strategy. Dyer and Singh (1998) described knowledge sharing routines as a regular pattern of interfirm interactions that permits the transfer, recombination, or creation of specialized knowledge. Von Hippel (1978) argues that a production network with superior knowledge transfer mechanisms among users, suppliers, and manufacturers may be able to "out innovate" production networks with less effective knowledge sharing routines. The cultural differences that an international acquisition may have to overcome to build upon a network of strategic alliances require the establishment and man- agement of informal and formal communication chains. Boundary spanners help establish and manage these chains of communication that may assist in overcom- ing many of the cultural differences that threaten future relations. For example, personal relationships among key individuals have played a crucial role in pro- ducing trust between organizations in Japanese industrial groups (Lincoln, Ger- lach, and Ahmadjian, 1996) and in contractual relationships (Bradach and Eccles, 1989). Beneath the formalities of contractual agreements, multiple formal inter- personal relationships emerge across organizational boundaries, which facilitate the active exchange of information and the production of trust that foster interor- ganizational cooperation (Walker, Kogut, and Shan, 1997; Gulati, 1995). Culture diversity can be an obstacle in cross-national business relationship communication. Previous research has shown that developed country joint ven- tures tend to have an instability rate of around 30% with developing countries Spring 2005 Kiessling & Richey: International Acquisitions 1I between 45% to 50% (Beamish, 1984; 1985; Reynolds, 1984). Although joint ventures have concerns that differ from acquisitions, the failure rate due to cul- tural diversity is a point not to be over looked. Grounded Evidence Part Five The Daimler-Benz acquisition of Chrysler corporation appeared to be a sure success due to the potentially complementary core businesses of the two firms; that of Chrysler's mid-priced autos and minivans and Daimler's luxury automo- biles. However, due to major difficulties in cultural nuances and complicated communication, integration was difficult and performance of the merged firm suf- fered. Even worse, many members of Chrysler quit, and with them their network of relationships was lost. In addition, Wal-Mart acquired a 21-store hypermarket in 1997 and acquired 74 Interspar stores in 1998. They imposed their own style of management and suffered significant human resource loses (turnover) due to cul- tural problems. Wal-Mart learned from this experience when it approached target firms in England. It gave the managers the freedom to adjust market style to fit the necessary cultural nuances and be successful (Zellner, et. aI., 200 I). Given this extended discussion on the transference of the credibility portion of trust and boundary spanner retention, we propose three possible moderating relationships: Position 4a: The international decision-maker s valuation of a target acquisition will be higher when he/she perceives high centralization of the target firm within a network given the re- tention ofthe targetfirm s existing relationships. Position 4b: The international decision-maker s valuation of a target acquisition will be higher when he/she perceives a higher level ofdependence ofand compatibility in the network to the targetfirm given the retention ofthe targetfirm:~ existing relationships. Position 4c: The international decision-maker s valuation ofa target acquisition will be higher when he/she perceives higher relational density that will transfer with the acquiringfirm given the retention of the target firm s existing relationships. Summary and Managerial Implications The dynamic global marketplace has forced firms to utilize networks of rela- tionships and strategic alliances as a vehicle for international success. As firms expand internationally, the acquisition of firms continues to be a popular mode of market entry. To value these international target firms, acquiring firms use tan- gible assets and intangible assets as tools. Often the true value of a firm is the 12 Journal of Business Strategies Vol. 22, No.1 intangible value of its network of strategic alliances. Due to the network as the source of value of the acquisition target, the importance of the acquiring finn's ability to maintain these relationships is examined, We have discussed the value of the target finn due to its network of relation- ships from a theoretical perspective. This was accomplished through the examina- tion of several components of the Network Paradigm including: Transaction Cost Economics, the Resource Based View, and Relationship Marketing. A managerial holistic model of international target finn valuation follows (see Figure I), Figure 1 A Valuation Model of International Acquisitions ........................ .. ... "'\. . : ~ _---------Total Value ~," .....,.,, ., . ',~ ~ ... ............................. •r------------~------------,, L ~ .------------------------------------~~ Control Variable Considerations • Tangible Accounting Value • Other Intangible Assets • Other Intangible Liabilities Spring 2005 Kiessling & Richey: International Acquisitions 13 The acquisition target's value is due to its network of relationships developed over time. The acquiring firm may value the target corresponding to the number of relationships. The greater the number of relationships, the larger the network and ability to obtain new sources of competencies from other firms, thus mak- ing the target firm more valuable. Unfortunately, a firm can be overvalued if the relationships cannot be transferred to the acquiring firm. Major local suppliers, customers, etc., or groups of these relationships, ifperceived to potentially be lost, may then force decision-makers to lower the projected value of the target and/or cancel the acquisition. Firms are either developing or entering networks to compete in the global market. These networks each have an identity of their own and the firms within identify themselves as such. The acquisition of a firm due to its value within a network also suggests that this firm has a network identity that mayor may not be compatible with the acquiring firm's network. If the networks are incompat- ible, the perceived resulting value may diminish due to the inability to transfer the relationships. As noted, although a greater number of relationships makes more resources available, the inability to transfer a larger number of these, especially key relationships, would diminish the value of a target firm. The target firm may be valued higher when the network has a high dependency on it and if the firm is centralized within the network. Dependence of other firms on the target firm may give the acquiring firm time to begin to establish a rela- tionship. If the acquirer's resources and reputation are credible, this portion of trust could transfer and hopefully develop the benevolence portion of trust over time. The centralization of the target firm within the network makes the firm more valuable as it controls most of the information and often decides which firms will enter/exit the network. This control of knowledge also creates increased network dependence on the target firm. In essence, international acquisition managers must evaluate their own firm's resources, reputation and network with regard to the target firm. If the networks are not compatible or their resources and reputation are not transferable, the tar- get firm's valuation may decline. If the target firm has high dependence on other firms (or interdependence within the network) and is central within in its net- work, then the acquiring firm may value the firm more highly. 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Markets and hierarchies, analysis and antitrust implications. New York: Free Press. Williamson, a. E. (1985). The economic institutions of capitalism. New York: The Free Press. Yamagishi, T., Gillmore, M. R. & Cook, K. S. (1988). Network connections and the distribution of power in exchange networks. The American Journal of Sociology, 93(4), 833-852. Yi, Y. (1990). A critical review of customer satisfaction. In V. Zeithaml (Ed.) Review of marketing. Chicago: American Marketing Association, 68- 123. Zellner, W. Schmidt, K., Ihlwan, M. & Dawley, H. (2001). How well does Wal-Mart travel? After early missteps, the retailing giant may finally be getting the hang of selling overseas. Business Week, September 3, 82- 92. Timothy S. Kiessling is an Assistant Professor of Management at Eastern Ken- tucky University. He has published in academic journals such as Thunderbird International Review, Journal of Global Marketing, Journal of Applied Manage- ment and Entrepreneurship, International Journal of Human Resource Manage- ment, and International Journal of Intercultural Relations. Professor Kiessling has over 14 years in international business before entering academia. R. Glenn Richey is an Assistant Professor of Supply Chain Management at The University ofAlabama. He has published in academic journals inc1udingAmerican Business Review, International Journal of Logistics Management, International Journal of Physical Distribution & Logistics Management, Journal of Business Logistics, Journal of International Management, and Journal of Marketing Chan- nels. Before joining academia, professor Richey worked for 10 years in various supply chain management positions. International Acquisitions from a Network Perspective and Market Based Competencies