1. business and industrial
2. company
3. merger and acquisition

How to Select Target Firms in M&As? Evidence from the Medical Technology Industry
Tian Wei, Xin Tian
International Journal of Engineering and Industries Volume 2, Number 2, June 2011
How to Select Target Firms in M&As? Evidence from the Medical
Technology Industry1
Tian Wei2, Xin Tian
Institute for Manufacturing, University of Cambridge, UK
[email protected]
Laboratory of Virtual Business, Research Center on Fictitious Economy and Data Science,
Chinese Academy of Sciences, China
[email protected]
doi : 10.4156/ijei.vol2.issue2.2
Abstract
This paper identifies attributes of target companies and proposes a theory to explain and support
the decision making of acquiring companies. Four in-depth case studies were conducted across three
primary sectors in the Medical Technology Industry. Data were collected by series of semi-structured
interviews with director of Business Development, and Chief Financial Officer in the acquiring firms.
Data were analyzed to explore the strategies of business development of the big companies in the
Medical Technology Industry. Three research findings are implicated to academia. First, a list of
target selection criteria is developed to capture the characteristics of the targets in mergers and
acquisitions in the Medical Technology Industry. Second, crisis assessment theory is proposed as
theoretical foundation for target selection by addressing the strategy which can save the company from
danger or put them in a crisis. Third, six constructs of the crisis assessment theory are developed to
show the details of the theory and indicate its applications.
Keywords: Target Selection Strategies, Mergers and Acquisitions, Strategic Management,
The Medical Technology Industry
1. Introduction
In the last two decades, there was a witness on the surge of a growing mergers and acquisitions in
Medical Device I ndustry bo th in volume and value. However, it has been ap peared that ac quiring
companies failed to ob tain positive benefits in most of the deals. Also, during the development in 20
years, this industry has come to a phenomenon which differs itself from other industries: the business is
dominated by only a few large companies. In total, small companies accounted for less than 20% of the
value of the sector but more than 80% of the number of companies in this sector. Due to this particular
situation, MNCs have been more careful in selecting target companies in acquisitions.
M&A research has been developed largely along disciplinary lines. There are five research schools
to reveal di fferent u nique pe rspectives o n mergers and a cquisitions. Br oadly, th ese s chools can be
divided into q uantitative (hard sid e) versus qualitative ( soft side ) i ssues. Econom ics and finance
researchers f ocus pri marily on ha rd iss ues such as the
measurement of st ock and accounti ng
performance, m erger valu ation and securiti es law . On th e other ha nd, r esearchers in strategic
management, organizational research and human resource management look at soft side. They focus on
qualitative issues such as the analysis of acquisition candidates, merger negotiations, decision-making
processes, and integ ration (Kr ug, 200 8). H owever, organ izational res earch and human resource
This research was supported in part by the National Natural Science Foundation of China under Grant
No. 70731003 and EPSRC (Engineering and Physical Sciences Research Council) in the UK under
Grant No. EP/C541588/1.
1
Corresponding author 2
-8-
How to Select Target Firms in M&As? Evidence from the Medical Technology Industry
Tian Wei, Xin Tian
International Journal of Engineering and Industries Volume 2, Number 2, June 2011
management emphasize on culture, conflicts and psychology. Similar to oth er strategic issues, how to
choose target companies is subject to strategic management, which is the focus of this study.
Literature on strategic management trace back to 1960s, when the work began to transit to researchoriented. Rese arch on st rategic con tent is consid ered to show the rationale of decision making by
examining relatio nships bet ween co rporate d iversification s trategy, orga nizational str ucture and f irm
performance. Transaction cost economics (TCE) and resource-based view (RBV), which are two most
popular theories, are reviewed as a basis of further discussion after case analysis.
However, research on target selection in mergers and acquisitions are st ill limited by only focusing
on developing the long li st o f t arget select ion criteria, without any in -depth thinking o n theory
underlying. In recogn izing t he knowledge gap and business n eeds, we argue th at t arget selectio n
strategy has critical impact on the synergies captured in the integration. It is considered as the source of
success or f ailure o f an acq uisition. How ever, previous res earch f inds t hat it is d ifficult to d o deep
analysis and g eneralize th e resul ts to f it all ty pes o f mergers and acqui sitions i n all the in dustries
(Schweizer, 2005). Al so, f requent use of M&As in th e M edical Technology Industry mean that the
industry is a rich source of case examples. Thus, research in this industry may provide a comprehensive
understanding of target sel ection str ategies i n acqu isitions. O ur resea rch questi on i s “ How do t he
acquiring firms select ta rget companies in Medical Techno logy I ndustry f rom strategic management
perspective”. The research methodology adopted for the research presented in t his paper is essentially
exploratory. I n-depth case s tudies were un dertaken in four medical devi ce co mpanies. Significant
access to staff and records allowed the detailed capture and t racking of the business strategies in each
case.
This paper is structured as f ollows. In Section 2, we expl ore the r esearch backg round across the
literature in mergers and acquisitions, strategic management and target selection strate gies in M&As.
It co ncludes wi th identified several rese arch g aps f or th is stu dy. In Sectio n 3, w e set out t he
methodology in th is r esearch an d exp lain the research approach in terms o f data c ollection, d ata
analysis, and quality of research. In Section 4, we present the data collected and describe within-case
analysis i n this m ultiple case rese arch. In Section 5, w e discuss th e f indings of the study, which are
organized under the p reliminary f ramework propo sed in Sect ion 3 . In Section 6, we su mmarize this
study with highlights on th e major findings, analyze the c ontributions to bot h academia and practice,
and explore research limitations and future study directions.
The findings from this r esearch inclu de a list o f targe t selection criteria and th e crisis as sessment
theory underlying to choose appropriate target companies. I t shows the nature and logic o f decisio n
making in target selection among numerous small and medium sized companies. The framework fills a
theoretical gap be tween th e strategic management and target select ion i n acquisitions in th e medical
technology industry . Fin ally, it off ers det ails in the t heory by addres sing six c onstructs wh ich are
critical for decision making. Future research can focus on validate the theory by more cases to improve
the usability of the theory in different contexts.
2. Literature review
2.1. Mergers and acquisitions
Acquisitions have lo ng been a pop ular strategy for firms to e xpand th eir bu siness, acquire
technological capability and achieve cost r eduction (Shimizu et al., 2004 ). A corporate acquisition is
the process by which the stock or assets of a corporation co me to be owned by a buyer (Reed et al.,
2007). For t he definition o f acquisition, a f irm (A), t he ‘acquirer’, purchases a controlling interest i n
another firm (B), the ‘target’. (Angwin, 2007). Most of time, acquisitions are mentioned with the term
“mergers” at th e sa me t ime as “Mergers and acquisitions (M&A s)”. However, t hey refer to d ifferent
business activities. Theoretically, mergers are activities that bring together two ‘equals’ to form a new
firm with t rying t o keep the best p ractices of bot h o f th e two origi nal f irms. D ifferent f rom th e
acquisition, after merger, management teams will work together to realize benefits. Although there are
differences between mergers and acqui sitions, usuall y, acqu isitions ar e u sed to re fer bot h o f t hem.
(Angwin , 2007).
-9-
How to Select Target Firms in M&As? Evidence from the Medical Technology Industry
Tian Wei, Xin Tian
International Journal of Engineering and Industries Volume 2, Number 2, June 2011
M&A research has b een ca rried o n b y f ive d ifferent scho ols of t hought (Table 1), wh ich are
identified by Larsson and Finkelstein (1999).
Of these fiv e research schools, strategic management, organizational behavior studies, and finance
are three main streams. Most finance studies examine performance from gains accruing to shareholders
of acquiring and tar get f irms as a result of acqui sition annou ncements (Jarr ell, Br ickley, and Netter,
1988). Generally, studies focus on the r elationship between issues related to the market for corporate
control and shareholder gains.
Strategic management r esearchers f ocus on how issue s th at ar ise d uring th e integration of
acquisitions c ontribute to po or acquisition p erformance. Integration has bee n f ound t o b e a k ey
determinant to acq uisition p erformance ( Haspeslagh an d Je mison, 19 91; Pabl o, 19 94). In addi tion,
studies in strategic management examine the performance implications of “strategic fit” or relatedness
(Lubatkin, 19 83). Empirical stud ies ha ve show n that “strategic fit” is po sitively relat ed t o value
creation in acqui sitions (Chatterjee, 198 6; Singh and Mon tgomery, 198 7; Seth, 19 90). On th e other
hand, “organizational fit” influences the ease with which two organizations can be assimilated after an
acquisition (Datta, 1991).
Table 1. Summary of research schools in M&As (Larsson and Finkelstein, 1999)
Research school
Issue
Key researchers
Strategic management
M&A as a method of diversification,
focusing on both motives and
performance for different types of
acquisitions
Ansoff et al., 1971; Salter and Weinhold, 1981;
Walter and Barney, 1990; Lubatkin, 1987;
Seth, 1990; Singh and Montgomery, 1987
Economics
Economies of scale and market power as
motives; acquisitions performance with
mostly accounting-based measures
Goldberg, 1983; Ravenscraft and Scherer,
1987; Steiner, 1975
Finance
Acquisition performance relying on
stock-market-based measures
Jarrel et al., 1988; Weston and Chung, 1983
Organizational research
Human resource
management
Post-integration process, highlighting Haspeslagh and Jemison, 1991; Pablo, 1994;
both culture clash and conflict resolution
Mirvis, 1985
Psychological issues, the importance of
Astrachan, 1990; Schweiger and DeNisi, 1991;
effective communication and how M&As
Hambrick and Cannella, 1993
affect careers
Organizational behavior studies investigate culture i mpact (or ganizational culture, national culture
and other types of culture) on the acquisition performance (Schweiger and Walsh, 1990; Schoenberg,
2006; Teerikangas and Very, 2006). Additionally, from organizational learning perspective, researchers
actively relate acq uisition e xperiences to acquisition performance (Haleblian a nd Fin kelstein, 1 999;
Zollo and Sin gh, 2 004). Hayward ( 2002) identified the broad cond itions in w hich firms gen erated
adoptive and timely inferences from acquisition experiences. Zollo and Sin gh (2004) pointed out that
acquiring firms nee d to not only select th e appropriate mix o f integration decisi ons b ut also hav e to
simultaneously develop the o rganizational c apability to i mplement it in or der to en hance acqu isition
performance.
This s tudy f ocuses on the strategi es o f acq uiring co mpanies in target selection in order to gain
positive benefits in acquisitions. From this perspective, the research school in this study is the school of
strategic management.
2.2. Strategic management
The bi rth o f strateg ic management w as in 1960s. Th e con cept of strategic management was
proposed based on three i mportant b ooks: Alfred Ch andler’s “ Strategy and Structure ” (1962 ); Igo r
Ansoff’s “Corporate St rategy” (1965); and the Har vard textbook “Business Poli cy: T ext and Cases”
(Learned et al., 1965 ). Work on strategic management started to transit towards a research orientation
in 1970s. This period could be characterized by the development between two sets of research, which
- 10 -
How to Select Target Firms in M&As? Evidence from the Medical Technology Industry
Tian Wei, Xin Tian
International Journal of Engineering and Industries Volume 2, Number 2, June 2011
were based on very different ontological and epistemological perspectives (Furrer et al., 2008). From
an ontological perspective, “strategy process” studies how strategies are formed and implemented. The
research is on t he basis of the observati on of actua l or ganizational de cision-makings whi ch lead to
more r ealistic conceptions and pr ocess. On the othe r hand, from an episte mological perspective,
another stream of research studies “strategy content” and starts to understand the relationship between
strategy and perf ormance. Apparently, in this study, strategy content is chosen as it expl ores the log ic
and nature underlying the strategic thinking.
The evolution of classic the ories in strategy conten t has five stages. Firs t, I ndustrial organ ization
economics (1970s) co mes w hen strateg ic management moves t owards econ omics, particu larly
industrial organizational (IO) econ omics, both in t heory and m ethod. M ajor w ork i nvolves t he
“Porter’s f ive f orce model”, whi ch provi des a usef ul an alytical t ool t o asses s an ind ustry’s
attractiveness and facilities competitor analy sis by more clearly specif ying t he various aspects o f a n
industry structure (Porter, 1980); “Strategy group”, which was commonly defined as a group of firms
in the same i ndustry f ollowing the sa me or similar strategies (Porter, 198 0); and “Competitive
dynamics” emphasized on the firm level and recognized that the firm’s strategies were dynamic (Bettis
and Hi tt, 19 95; D’Av eni, 19 94). Second , f rom mid o f 1980s, strategy resear ch swit ched th eir f ocus
from industry struct ure as a unit o f analysis to firm’s internal structu re, re sources, an d capab ilities.
There were two branch es o f o rganizational eco nomics generating the most i nterest i n st rategic
management: transaction costs economics (TCE) (Williamson, 1975, 1985) and agency theory (Fama,
1980; Jensen and Meckling, 19 76). T hird, s ome sch olars ar gued th at there we re idiosyncratic
characteristics of firms to contribute to their competitive advantages (Barney, 1991; Wenerfelt, 1984).
Therefore, a re source-based t heory of co mpetitive advantage was developed. Fourth, th e k nowledgebased view (KBV) was based on RBV by conceptualizing firms as heterogeneous, knowledge-bearing
entities ( Hoskisson et al., 1999). I t focused on th e acquisition, internal development, accumulation,
exploitation and diffusion of knowledge-intensive organizational capabilities (Herrmann, 2005). Fifth,
Teece, Pisano and Shuen (1997) proposed the dynamic capabilities as “the firm’s ability to integrate,
build, and reconfigure inter nal and e xternal competences to addres s r apidly changing e nvironments.”
This definition attracted increasing attention within the management literature in recent years (Barreto,
2010).
Among these classic th eories, TCE and R BV are the tw o which ar e mature and most commonly
used. The formulation of TCE is to s eek the answer to why organizations exist. The basic premise of
TCE is th at m arkets and hierarchies can be used to complete transactions instead o f gov ernance
mechanisms. It is based on a set of assu mptions about h uman behavior and attributes of transactions
that affect transactions between two firms: bo unded rationality, opp ortunism, un certainty, s mall
numbers, information i mpactedness and as set specifici ty (Willia mson, 1 975, 19 85). TCE cont ributes
into three directions: First, a theoretical rationale was developed for the adoption of the multidivisional
structure and firm’s performance (Hoskinsson et al., 1991). Second, TCE had been used to explain the
functioning o f hy brid f orms o f organ ization (i.e. strat egic alli ance and joint ventures ) as a n
intermediate form between markets and hierarchies (Hennart, 1988; Kogut, 19 88; Williamson, 1991).
Finally, TCE h ad been appl ied to ex plain the ch oice of in ternational m odes o f market en try (Join t
venture and acquisitions) (Hennart and Park, 1993).
RBV is based on the theory of firm growth. Penrose (1959) found the i dea of viewing a firm as a
bundle o f r esources in her th eory of t he gr owth of the firm. She defin ed r esources as “the phys ical
things a firm buys, leases, or produces for its own use, and the people hired on terms that m ake them
effectively part of the firm” (Penrose, 1959). Wernerfelt (1984) suggested that evaluating firms by their
resources can lead to new insights which ar e different from the traditional perspectives. Wernerfelt’s
(1984, 1985) work built t he groun d for lat er researchers on r esource-based vi ew ( RBV). A group of
researchers focused on relationship between differentiation of resources and firm performance (Rumelt,
1984; D iericks and Coo l, 1989). An other group o f res earchers e mphasized on ex amining spec ific
resources which were related to sustainable co mpetitive advantage (Barney, 1986; Teece, Pisano and
Shuen, 19 97; Nelson, 19 91). I mportant theoretical developments also cam e from Barney (1991) and
Grant ( 1991). I n 1991, Ba rney pres ented a concrete and co mprehensive framework to genera te
competitive advantage by identifying the needed characteristics of firm resources. Further, Grant (1991)
suggested that there was a need to examine the dynamic interrelationships among the resources. More
- 11 -
How to Select Target Firms in M&As? Evidence from the Medical Technology Industry
Tian Wei, Xin Tian
International Journal of Engineering and Industries Volume 2, Number 2, June 2011
recently, Danneels (2002) tested a model which integrated organizational resources with organizational
learning and p ath dependency to show how produ ct inn ovation led to firm r enewal. Fa rjoun ( 2002)
developed an i ntegrated perspective which emphasized on action, coordination and adaption and saw
strategic management as a process of managing change.
However, it appears that these theories cannot fully answer some issues in strategic management.
2.3. Target selection strategies
The search f or target f irm flows from the acquirer’s st rategy and valu e-creating insigh ts, a set of
criteria f or select ing tar gets can b e es tablished. It is of ten ver y dif ficult to find a target f irm t hat
actually fits all criteria perfectly and is also likely for sale. The acquiring co mpanies can throw their
nets widely in the initial search stages and may draw on their own industry and trade contacts, a range
of advisors (banks, accountants, lawyers) and in the case of cross-border deals, embassies (Angwin and
Savill, 1997).
Apart from th e i ssue w hether th e target is li kely to be f or s ale, the facto rs inf luence th e tar get
selection include:
 Whether the target is financially healthy;
 The size of the target: too small to be bothered or too large to handle;
 Whether the target is too much dependence on one customer;
 Whether the target has long-term contractual arrangements with suppliers;
Research o n t arget selecti on strategies is quite l imited as most of the resear ch on acqu isition
performance foc using on the post-deal in tegration or t he whole ac quisition p rocess (Lubatkin, 1983;
Morck and Yeung, 1992; Seth, 1990). However, as target selection is the first step of acquisitions, it is
considered as the source of the success or failure of acquisitions. It appears at least as important as the
integration in capturing synergies. As such, this study explores the target selection strategies in detail
and tries to fill in gaps in the theories of strategic management.
2.4. Medical Technology Industry
The medical techno logy in dustry p rovides t ools t o h ealthcare p ractitioners. The ter m “medical
technology” was introduced to en compass a wide range of instruments and equipment which are used
by h ealthcare practitioners and diagnosis, treat ment and t he con tinuing pr ovision o f car e. D ifferent
sectors have different behaviors and regu lations in doing b usiness. Ma jor sectors i n this in dustry
include car diovascular devic es, orthop edic devices and equipment, diagnostic imaging equi pment,
radiationtherapy equipment, and device delivery system.
The medical techno logy industry d ifferentiates itself f rom o ther industries as follows. Firs t, rapid
technology innov ation r equires s ignificant r esources to be spent on R&D. As a re sult, s mall firms
generally focus on single or platform product innovations in a specific clinical or therapeutic niche and
expect larger firms acquire them. Second, high market barriers make it very difficult for small firms to
access sales and distribution channels, whic h are d ominated by several large corporations. Third, the
procurement pr ocess f or medical techn ology products is co mplex and varies sig nificantly among
countries. F orth, regulatory a nd r eimbursement sy stems vary in major cou ntries and set barr iers f or
start-ups to commercialize and large corporations to expand business. Therefore, value creation in t he
medical technology industry appears more difficult than in other industries.
In sum, the medical technology industry has many M&A p rocesses compared with other industries
and the findings are expected to be important in successful acquisitions in this industry.
2.5. Research gap
It app ears f rom the previous stud ies that research in targ et selection strategi es are s till f ar less to
explain th e phenomenon, ide ntify the ration ale o f decision making and develop a theo ry in s trategic
management. The purpose of this study is to explore the criteria of target selection and investigate the
appropriate theory underneath in strategic management.
- 12 -
How to Select Target Firms in M&As? Evidence from the Medical Technology Industry
Tian Wei, Xin Tian
International Journal of Engineering and Industries Volume 2, Number 2, June 2011
3. Methodology and Research Approach
3.1. The case study approach
This study ch ooses multiple case s tudy approach by hol ding social co nstructionism view. It has
been chosn for three reasons. Fi rst, the m ethod is appropriate for answering “how” and “why”
questions (Yin, 2009). Second, it offers an opportunity to test and expl ore the preliminary framework
with first-hand data. Thi rd, i t f acilitates the coll ection o f rich data thro ugh multiple case stud ies to
provide a comprehensive understanding of each block in the preliminary framework.
The case study firms were selected on the basis of criterion sampling (Patton, 2002). The selection
of cases should meet a set of priori criteria which are important to the research. Specifically, the firms
should be: (1) the two companies should not have equity based relationship before the deal. (2) the deal
achieved at least some synergies to s hareholder of acquiring firms at a period after the deal from the
interviewees’ perspective. (3) all the business areas of acquiring firms involved in acquisitions are from
developed countries to r educe the r egional impact. (4) all the cases should be in major sectors in the
medical technology industry. (5) The integration should not be interrupted by external factors.
Generally, research m aturity ref ers to a s ituation that data collection becomes e xhaustive and
emergence of key concepts become repetitive. Normally, 4 to 10 cases in case study methodology are
understood to be typical (Eisenhardt, 1989). With the criterion sampling strategy, 4 cases were selected
across three major sectors: radiat iontherapy, orthopedics an d del ivery s ystems and all the people
involved in acquisitions are based in the UK.
3.2. Data collection
Data w ere co llected from a variety of sources, incl uding 2 0 in -depth personal se mi-structured
interviews, archi val data in acquisitions, and field visits. Ab out 5 in terviews in ea ch case were
conducted, am ounting to a to tal o f 20 in -depth per sonal i nterviews wi th d irector o f Busi ness
Development, Integration leader (Director of Product Managers in most cases) or CFO in the acquiring
firms. All these executives were chosen due to their direct experiences of the acquisitions.
Data were coll ected based o n the corporate str ategies of acquirin g co mpanies in target s election,
attributes of target companies, and the motivation, which is used as a test to validate the strategic fit of
two companies.
3.3. Data analysis
The data analysis was in six steps. Fi rst, f ully transcribed the taped inte rviews as sources of cas e
analysis. Secon d, con ducting wi thin cas e a nalysis by sum marizing an d co mparing interviews within
one case (Miles and Huberman, 1994). Third, analyzing interviewee’s feedback on within case analysis
to check the validity of the description. Fourth, comparing the interview findings with the preliminary
framework t o id entify potential modifications and fulfillment t o t he f ramework. Fifth, cross -case
analysis a mong all the case to identi fy si milarity and d ifferences to g eneralize the findings. Sixth,
refining the preliminary framework according to both within case analysis and cross case analysis.
3.4. Quality of findings
In order to ens ure the quality of the case study findings, numerous practices were used to increase
the validity and reliabi lity of the evidence. Specifically, dat a collected are ar ound th e issue o f tar get
selection strategies but from three di fferent perspectives: acquiring companies, target co mpanies, and
validation. Also, the evidence was acquired from three sources of evidence (interviews, archives and
field visits) and from different key people in acquisitions (Director of Business Development, Director
of Product Development and CFO) to present a thorough view of each case. Further, the data collected
were co mpared across cr oss-case stu dies and aga inst to the pr eliminary f ramework. I n addition, the
quality of findings was also safeguarded by organizing the procedures of data co llection, the use of a
- 13 -
How to Select Target Firms in M&As? Evidence from the Medical Technology Industry
Tian Wei, Xin Tian
International Journal of Engineering and Industries Volume 2, Number 2, June 2011
case study protocol throughout the data collection process, and the circulation of case study reports t o
respondents (Yin, 2009).
4. Main case studies
4.1. The sector and firms investigated
With regard to sampling criterion, four companies in the three medical technology industrial sectors
were selected (Table 2). All the acquiring firms are public companies and the key people in executing
acquisitions were involved in the offices in the UK to provide opportunities to have sufficient visit and
interviews.
Table 2. Descriptions of M&A cases as samples
Case
No.
Acquiring firm
(Year, No. of
employees)
rm A
(1972, 2,000)
Target firm
(Year, No of
employees))
Target A1
(1995, 20)
BF
irm B
(1886,
114,0003)
Target B1
(1895, 5,300)
CF
irm C
(1856, 10,000)
Target C
(2001, 830)
Private
D Fi
rm D
(1940, 7,500)
Target D2
(2001, 2,000)
Private
A Fi
Firm
Type
Region
Private
German
y, UK
Time
of the
deal
Dec.,
2005
Deal
value
Sector
Radiotherapy
Delivery
system
US
July,
1998
Switzer
land,
UK
US, UK
Mar.,
2007
€20M in
cash and
€5M
earnout
$35.00
per share
and $3.5
in total
$889M in
cash
Dec.,
2004
$925M in
cash
Public UK,
Orthopedics
Orthopedics
4.2. Case A
Sector Overview: Radiotherapy sector is qui te mature and oli gopolistic. There ar e three main
global players having over 50% of the global market share. However, the field is technology led. There
are lots of start-ups, which are usually single technology solutions. The vast majority of start-ups fail
after a few years, usually because the costs of entering the market are so high (e.g. in meeting medical
regulatory standards for desig n and manufacture) and the adop tion of ne w tech nology is slow,
especially if they haven’t established sales channels. Most of these start-ups are acquired by one of the
big players in certain stages.
Company A: Company A i s an i nternational medical-technology group, whi ch p rovides clinical
solutions, information sy stems a nd ser vices for cancer care and management o f b rain disorders . Its
solutions in oncology and ne urosurgery are used in over 5,000 hospitals globally. I t employs around
2,500 employees globally.
Company A has an active ac quisition strategy, and choo ses acquisition targets for different reasons
(Table 3).
3
Number of employees in total but not in the medical field
- 14 -
How to Select Target Firms in M&As? Evidence from the Medical Technology Industry
Tian Wei, Xin Tian
International Journal of Engineering and Industries Volume 2, Number 2, June 2011
Table 3. Reasons for acquisitions of Company A
Reasons
To expand product and
service range
To fill gaps in product
line
To enter emerging
markets with low price
products
Examples
Acquisition in 1997 to enter the RT business as a linac manufacturer
Acquisition in 2005 to offer more complete RT solution for customers and increase
profitability (high margin products)
Acquisition in 2005 and 2007
Acquisition in 2008 to fill major gap in treatment planning and provide a complete
software solution offering
Acquisition in 2006 in China to provide factory, R&D skills, and low-cost products
suited to emerging market.
With these acquisition strategies, Company A has shown a very conservative policy on acquisitions.
They have no t acquired any speculative start-ups. Even for those targets which were not profitable at
the ti me of acquisition, Company A can se e that th ey wo uld beco me pro fitable in a very sho rt-time
route. Thus, Company A would like to acquire a company with established products and revenues.
Target A: Target Co mpany A1 w as co -founded by two scien tists in 1995 i n Ger many. I t p rovides
innovative products that improve patient handling and positioning. Before acquired by Company A, it
was a leading worldw ide sup plier of in novative and advanced radiation oncology and interven tional
guidance products.
Motivation: The primary motive of this acquisition was to fill gaps in product line of Company A. The
products of Target A could be integrated to the products of Company A very well. The market for these
products was expected to grow rapidly in the next a few years. Development capability, which is highly
related to th e products, was also complementary and one o f the motives of t he acquisition. Also, the
manufacturing site of Target A was in Germany, while the site of Company A was in the UK. The sales
of Target A r elied o n third p arties but n ot direct sales, which was quite diff erent from Co mpany A.
Finally, Target A was in a healthy financial status and became profitable before the acquisition.
4.3. Case B
Sector Overview: The orthop edics sector does no t have rapid ly chan ging tech nology, co mpared
with tech nology in ot her sect ors, such as cardiology. I t is do minated by three top pl ayers. Each has
20% market share. There are two o ther players which have 14% or 15% market share. And there are
lots of pl ayers le ss th an 2%. I t is quit e a stable market on co mpetition. Theref ore, it is hard for a
company to change its position. Surgeons in orthopedics usually take a number of efforts and trials to
get comfortable to use the new product. Once a surgeon gets comfortable to a particular design, shape
and other attributes of the product, he doesn’t want to change. In order to switch, the surgeon runs the
risk of making mistakes. In this ci rcumstance, the only way for companies with small market share to
get market in o rthopedics s ector is through acquisition . How ever, in ortho pedics, apar t from spi ne,
most of the companies cannot compete with market leader in terms of products. Therefore, a majority
of acquisitions in this sector are for the market channels but not the products.
Company B: Co mpany B is a gl obal A merican pha rmaceutical, medical dev ices and co nsumer
packaged goods manufacturer. T he corp oration i ncludes so me 250 subsidiary co mpanies wi th
operations in over 57 count ries. I ts pr oducts are sold i n over 17 5 cou ntries and it s brands incl ude
numerous household names of medications and first aid supplies.
In target selection, from Company B’s view, which stage of the target company is more appropriate
to acquire depends on the individual technology and how much risk there is in each of these stage. First,
if Company is acqu iring a well-paid p rotected tec hnology that was v ery si milar to some they have
already had, t hey would be happy to acq uire t he b usiness ea rly as t hey u nderstand this b usiness
extremely well and can assess what risks are associated with regulatory approval, clinical outcome and
etc.. But if there is a huge risk in regulatory approval, unless if they missed this opportunity it would be
- 15 -
How to Select Target Firms in M&As? Evidence from the Medical Technology Industry
Tian Wei, Xin Tian
International Journal of Engineering and Industries Volume 2, Number 2, June 2011
dangerous to them in case of their competitor acquiring, they generally tend to wait. Second, the stage
of start-ups dep ends heav ily on how th e te chnology chang ing the way of the p roducts and services
offered in a particular healthcare. Generally, if it is a rapidly changing technology, it is changing the
way t hat the disease is treated or th e cost or th e availa bility o f h ow h ealthcare delive red: receivin g
treatment at home or i n hospital. Then it is wi se to do an early acquisition. On the other hand, if it is
more steady mature technology, it is more likely to buy a stable stage company, after the company has
already proved their products work. Although more money is expected to pay, it would be safe.
Target B: Tar get B was a v ery f irst co mmercial orthopedic manufacturing co mpany in th e Unite d
States. Bef ore the acq uisition, its po rtfolio in cludes more th an 20 0 produ cts and h eadquartered i n
Warsaw, Indiana, USA and Leeds, U.K.
Motivation: At the time o f the acqu isition, t he bu siness of Tar get B w as more mature t han the
orthopedics b usiness o f Co mpany B. The orthopedics bu siness w as part o f the whole busin ess of
Company B. T he pri mary in itiative o f this acqui sition is from the corpo rate str ategy o f Company B.
Company B has a clear view to be No.1 or No.2 in the key markets they play in. They took a br oad
picture o f where the growth opp ortunities in healthcare might b e an d o rthopedics is on e o f thes e
segments identified. After reviewing the ava ilable companies in th e market, they found that Target B
could be a strong candidate as it had a relative complete product portfolio in orthopedics (knees, hips,
spine, trau ma a nd sports medicine), str ong dev elopment cap abilities, global footprint an d better
financial performance. However, Company B only had some products of hips and knees and American
market. As a result, Company B benefited a lot from this acquisition, mostly from revenue synergies
(market growth, full range of produc ts and sales channels in Eur ope an d other co untries), but not s o
much from cost synergies, which are only from economies of scale on the overlapped products.
4.4. Case C
Company C: Company C is an industry leader in each of three main global business units: orthopedic
reconstruction and trau ma, e ndoscopy and advanced wound management. I t curr ently operates in 32
countries an d is t op listed in Arthroscopy, Ad vanced Wound Management, Tr auma and Clinical
Therapies and reconstruction. It is one of the top companies in its field in the world.
There ar e no t s o many co mpanies which are availab le to be acqu ired. Co mpany C has experts in
business development to keep an eye on the companies which can be available for acquisitions. In the
orthopedics industry, DePuy, Stryker and Zimmer are the market leaders with more than 20% of the
market each. Company C is at the fourth place and wants to improve its market position. Therefore, in
seeking the t arget, Co mpany C chooses c ompanies wh ich can i mprove it s market pos ition throu gh
consolidation.
Target C: Target C was founded in Switzerland in 2001. At the t ime of the acqu isition, it had sales
about 300 million dollars and the trading profit was 36 million dollars.
Motivation: T he str ategic ratio nale o f t his deal is to i ncrease t he market coverage a nd posi tion of
Company C in the market. Tar get C ha d a good g eographical co verage i n Eu rope, w hich was
complementary to Company C. The two companies had similar products and similar ongoing research
projects. The sales channels were overlapped in most of the regions. Target C had two manufacturing
facilities: Switzerland and China, which wer e complementary to Co mpany C. The two co mpanies do
not have similarities in suppliers. Therefore, synergies of Company C are potentially from revenue and
cost. Revenue s ynergies were primarily from the c ross-selling. O pportunities for co st sy nergies were
from rationalization of sales force, head office, administrative and back office functions across Europe.
4.5. Case D
Sector Overview: In medicine, infusion therapy deals with all aspects of fluid and medication infusion,
usually vi a the in travenous rout e. A speci al in fusion pump can be used for thi s pur pose . I nfusion
- 16 -
How to Select Target Firms in M&As? Evidence from the Medical Technology Industry
Tian Wei, Xin Tian
International Journal of Engineering and Industries Volume 2, Number 2, June 2011
therapy sector doesn’t have high or rapidly changing technology. Its customers are more widely spread
across ho spitals an d ho me. It has been recogn ized as co nsumer-based products. The manufacturing
sites of this business sector are now moving to developing countries to benefit from the low labor costs.
The profits of this sector are primarily from reducing the costs by economies of scale.
Company D: Company D is a leading global provider of medical devices for the hospital, emergency,
home and specialist environments. Their products are u sed during critical and intensive care, surgery,
post-operative care during recovery, and in a series of high-end home infusion therapies. They employ
around 7,500 people, with manufacturing concentrated in the U.S., the U.K., Mexico and Italy.
Company D pref ers to buy ing co mpanies which is r elatively in small size. They call it “bolt on”
acquisitions. From their perspective, big acquisitions are not value creative. There are three reasons to
buy small companies.
 Non-core business
Because the tar get co mpany i s small, it doesn’t h ave so many bu sinesses that t he acquiring
company doesn’t want. It reduces the possibility of disposal in the future.
 Culture
For “bolt on” acquisitions, the company doesn’t tend to worry so much about the culture. But for
bigger acqu isitions, t here is a cu lture p roblem. On e o f th e major cult ure probl ems is power
struggle. Usually, senior managers have their team around. If they are fired, their team would go
with them. The power struggle after the acquisition can be very disruptive.
 Restructure
For small co mpany, th e acqu iring ca n ta ke o ff some c osts and nurture it by devel oping t he
technology from that company and cross-selling. In theory, it makes more value than acquiring a
big co mpany. For th e big co mpany, th e acqu iring company need h uge amount of energy t o
restructure the mesh the two companies, which makes creating value difficult.
In te rms of ri sk o f acqui sitions, Co mpany D alwa ys buy s mature bus inesses. The y tend to b uy
companies w hich al ready ha ve prod ucts o n t he market b ecause o f l ow risk. No rmally, they ch oose
targets in mature business because they plan to be profitable in three years.
Target D: Target D is a global manufacturer and marketer of critical care and alternate care medical
products. It markets an d sells critical systems an d pr oducts to over 5 ,500 h ospitals i n more than 75
countries through a global sales force and distribution network. Target D is headquartered in California,
the U.S.
Motivation: The primary motive of Co mpany D was to complete i ts p roduct port folio to de velop a
small but f ast growing safety business. Target D had safety catheters which filled the gap. It also had
strong R&D capabilities in safety business. The two companies were complementary in manufacturing
and supply ch ain. How ever, they cov ered the s ame market, both in the U.S. Syner gies are expect ed
from both product portfolio complement and savings from economies of scale.
5. Cross-case Analysis
5.1. Corporate strategy in target selection
In th e Medical Techn ology I ndustry, t he st art-ups have f ive disti nctive s tages: Pr oof of concep t,
POC cli nical trial, Reimbursement, CE Approval / FDA Approval and CE 1 st rev enue/ FDA 1st
revenue. Generally, the latter stage the start-up has been acquired, the higher the transaction price and
the low risk f or the acquiring firms. The strategies in target selection for each acquiring company are
summarized in Table 4.
- 17 -
How to Select Target Firms in M&As? Evidence from the Medical Technology Industry
Tian Wei, Xin Tian
International Journal of Engineering and Industries Volume 2, Number 2, June 2011
Acquiring
Company
A
B
C
D
Table 4. Corporate strategy in target selection
Strategy
Conservative strategy: acquisitions should be neutral or
creative in the first year;
Choose major acquisitions to jump into new products and
market segments, or extend installed base;
Choose minor acquisitions to add small but significant
products to complete product portfolio
Big acquisitions rather than a series of small ones.
The objective of Company B is to be the top in every
market segment they are in. Therefore, small companies
which meet the growth of Company B are not so many.
Also, big acquisitions can bring more growth rate by
consolidation.
Companies which can improve the market position
dramatically. These companies are usually with a
relatively high market share and there would be a huge
reduction after acquisition.
Buying companies which are relatively in small size -"bolt
on" acquisitions but not big acquisitions as they are
typically not value creative (Reasons: non-core business;
culture; restructure)
Stages
CE 1st revenue/ FDA 1st revenue
Similar technology: can acquire at
early stage, such as clinical trial,
but heavily depends on the
assessment on the risks
Rapid changing technology: early
acquisition, such as clinical trial
Steady and mature technology:
CE 1st revenue/ FDA 1st revenue
CE 1st revenue/ FDA 1st revenue
CE 1st revenue/ FDA 1st revenue
All the acq uiring companies (Company A, B, C and D) are large corporations in their own sector.
Different co mpanies ha ve different s trategy in s electing the t arget. Ge nerally, th ey ten d to a cquire
companies a fter thei r 1st revenue, whi ch means t he co mpany has alr eady proved their produc ts on
market. Ho wever, company B diff erentiates th e target c ompanies in to t hree catego ries. Firs t, if the
technology which the target company owns is similar to what the acquiring company has, it is easy for
the acquiring company to have assessment of the business and technology in terms of risk and costs to
put in. Based on the assessment, the acqu iring co mpany can acquire the business in an e arly stage if
there is low risk. Second, if it has rapid changing technology which changes the way of products and
services offered in a way that the disease is treated or the healt hcare delivered, it is wi se to an ear ly
acquisition bu t s till a fter the cli nical trial to be sa fe. T hird, if the target co mpany has more stead y
mature technology, Company B buys it after the 1st revenue to reduce risks. These differentiations are
based on the Company B but not on its orthopedics business. Orthopedics is a mature business and do
not have r apid chang ing technology. In th is context, Co mpany B also h as a conservative strategy in
choosing mature t arget u nless t hey are qu ite familiar with the technology. On t he other hand, al l t he
three sectors i n this r esearch do n ot have rapid changing tech nology. It can be a reason that all the
companies have a conservative strategy. For s ectors wh ich have rapid changing tec hnology, such as
cardiology, acquiring companies may prefer to acquire the targets in its early stage.
All the co mpanies aim to be profitable as soon as possible. However, the sa me objective does not
lead t o sa me strategy in cho osing the tar get in ter ms of s ize. Co mpany B and C tend to ha ve b ig
acquisitions for si milar r easons: dr amatically i ncrease t he market. Co mpany B d oes acqui sitions to
become a dominate p layer in a market s egment. Si milarly, Co mpany C aims t o i ncrease it s market
position and ju mp t o the t op 3 by acquisitions. I n cont rast, Company D pref ers to a cquire s mall
companies with con siderations of non-core bu siness, cu lture conf licts and costs o f rest ructure. In
comparison, Company A seems quite rational. It uses both major acquisitions and minor ones, each for
different objectives: major acquisitions for totally new products and market and minor acquisitions for
completing product portfolio. In sum, big acquisitions give acquiring companies opportunities to s tep
into a new market segment or products, or to greatly increase the market position. However, acquiring
companies should h ave p reparations for so me ob stacles in in tegration: culture conflicts, costs i n
restructuring, and nega tive effects from non-core business acqui red. On the other h and, s mall
acquisitions can cont ribute sig nificantly on co mpleting prod uct p ortfolio and bringing in n ew
- 18 -
How to Select Target Firms in M&As? Evidence from the Medical Technology Industry
Tian Wei, Xin Tian
International Journal of Engineering and Industries Volume 2, Number 2, June 2011
technology w ithout much e ffort i n i ntegration. The disadvantage is that th ese acquisitions can not
strongly change the status of acquiring companies and lead them to a total new future.
5.2. Attributes of target companies
Attributes of target companies are summarized from each case (Table 5). Stage and size are used to
validate the strategies getting from the views of people from Business development. Core competency
and opportunity to restructure are used to explore more on target selection.
Target Company
Table 5. Attributes of target companies
Stage
Size4
Key acquired
assets
A1 1st
revenue
Small
A2 1st
B1 Publ
B2 1st
revenue
ic
revenue
Small
Big
Big
C
1st revenue
Big
D2
1st revenue
Big
Product and
manufacturing
Product
All
Product and
innovation
capabilities
Manufacturing and
market
Product and market
Opportunity to
restructure
No
No
Yes
No
Yes
Yes
In terms of validation, all the target companies are i n their mature stage, which is the same as t he
results f rom Sectio n 5.1. The only excep tion in the si ze of the target com panies is i n Case D 2.
Company D does not con sider it as a successf ul case as it bring s lo ts of prob lems an d no t as val ue
creative as small acquisitions. Therefore, the findings of Section 5.1 are quite reliable.
Furthermore, it i s easily t o identify that there are opp ortunity i n obtaining cost e fficiencies in
restructuring and access to new markets for big acquisitions. For most of the cases, product is a kind of
core competency, either as a way to access a new market or to complete product portfolio. However,
for small acquisitions, manufacturing and innovation capabilities can also be core competency of target
companies in some cases.
5.3. Summary
Section 5 reviews strategies in target selection both from the views of Business development people
and attributes of target companies in the research. There is no strong conflict between the findings from
the two views.
Generally, acqui ring c ompanies tend to ac quire mature b usiness wh ich ha s al ready proved t heir
products on the market. However, for so me companies with si milar technology, acquiring companies
may acquire early after careful assessment. For some companies which have rapid changing technology,
acquiring companies buy the target at the early stage, but still after doing the clinical trial.
Acquiring companies can choose to acquire big companies or small companies on the basis of their
corporate mission and experiences in handling merger. If the acquiring company aims to access a n ew
market segment, increase their market position dramatically or benefit from economies of scale, and is
confident i n dealing with no n-core busin ess, cul ture con flicts an d r estructuring, big acqui sitions are
suggested. Otherwise, small acquisitions are saf er and value creative expect by bringing huge benefits
in market. In addition, small acquisitions are an effective way to obtain innovation capabilities which
big companies may not have.
4
Based on the definition 2003/361/EC(http://ec.europa.eu/enterprise/policies/sme/facts-figuresanalysis/sme-definition/index_en.htm).
- 19 -
How to Select Target Firms in M&As? Evidence from the Medical Technology Industry
Tian Wei, Xin Tian
International Journal of Engineering and Industries Volume 2, Number 2, June 2011
6. Discussion
6.1. Firm growth of companies in the Medical Technology Industry
In the practice review, the growth path of SMEs in the Medical Technology Industry is divided into
six stages: I ntellectual Pr operty Filling & Issuance, Proof of c oncept, PO C clinical trial,
Reimbursement, CE Approval/ FDA Approval and CE 1st revenue/ FDA 1st revenue. However, not all
of these stag es have im pacts on strateg ies of target sele ction and so me criti cal stage needs to be
inserted to the growth path. From the analysis in Section 5, the growth path which needs to be concern
in target selection in acquisitions is categorized as clinical trial, 1st revenue, and manufacturing ability
for SMEs.
Companies expand their critical resources when they grow their business. Typically, in the Medical
Technology Industry, when the company has just finished clinical trial, they only have the technology.
After the company has the 1st revenue in the market, they have possessed the resources of technology,
reimbursement, regu latory an d products. When t he co mpany starts t o bu ild up their manufacturing
ability, they have stable sales channels and mature business of after-sales service. In the few years after
the company obtain the manufacturing ability, the company steps into the period of big companies and
they have their own market which have significant influences on the industry.
Resources
Market
Manufacturing
Service
Sales
Product
Regulatory
Reimbursement
Technology
Clinical
Trial
1st
Revenue
SMEs
Manufacturing
ability
Stage
Big
Figure 1. Path of firm growth in the Medical Technology Industry
Figure 1 shows the stages of firm growth and the key resources they have in each stage in the Medical
Technology Industry. The vertical axis means the resources which become considerations of acquiring
companies in acquisitions. In f act, when the company comes to the stage of 1st revenue, they have all
the resources listed.
- 20 -
How to Select Target Firms in M&As? Evidence from the Medical Technology Industry
Tian Wei, Xin Tian
International Journal of Engineering and Industries Volume 2, Number 2, June 2011
6.2 Target selection criteria
After clearing the gr owth pat h o f companies in the Med ical Techno logy Industry and changes of
their off erings t o acqu iring co mpanies, target select ion cr iteria is d eveloped from t he an alysis i n
Section 5.
The conditions f or target com panies bei ng acqu ired in d ifferent s tages ar e li sted in Tabl e 6. For
example, i f the co mpany ha s di sruptive t echnology, acqu iring c ompanies pre fer to acquire it a fter
clinical trial. Acquiring companies would like to acquire the target when it has its manufacturing ability
under o ne of the following conditions: t he target co mpany ha s stab le and mature te chnology; t he
acquiring co mpany are no t familiar wi th the tech nology; t he acquirin g co mpany has keen on the
innovation capabilities of the target company; or the target company has complementary manufacturing
capabilities to the acquiring company. The acquisition may happen when one of the conditions has met.
Clinical Trial
Conditions D
isruptive
technology
U
Innovation
Risk Hi
gh
Table 6. Target selection criteria
After the stage of
SMEs
1st revenue
Manufacturing
ability
Stable and mature
technology
nfamiliar
technology
capabilities
Low
Big
Stable and mature
technology
Unfamiliar
technology
Innovation
capabilities
Access to new market
segment
Dramatically increase
market position
Benefit from economies
of scale
Complementary
manufacturing
capabilities
Ability to deal with
conflicts
Low
Not bring too much noncore business
High
The risk a ssociated with the acquisitions varies for different stages which target companies are i n.
Early acqui sitions can alw ays have h igh r isk. When t he target c ompanies prove them selves in t he
market, the risk becomes low. However, after target companies finish their life of SMEs and become
big companies in the market, the acquisition risk increases because of culture conflicts and huge costs
in rationalization.
However, it is difficult to find a theory in strategic management to explain or support the strategies
of acquiring companies in target selection. There are two most popular used theories: Transaction cost
economies (TCE) and Resource-based view (RBV).
Transaction costs ar e the neg otiating, monitoring, and enf orcement costs that have to be borne to
allow an exchange between two parties. It is to seek the answer to why organizations exist. The sources
of costs are the transaction difficulties that may be present in the exchange process (Williamson, 1975).
The six main f actors whi ch p roduce t ransaction difficulties are b ounded rati onality, opportunism,
uncertainty and co mplexity, s mall numbers, in formation i mpactedness, and asset s pecificity.TCE
cannot e xplain the phenomenon of strategies in target select ion. Fo r e xample, if the organi zation
becomes big, t he major di fficulties wh ich acq uiring co mpanies concern are th e costs i nvolved i n
integration. Ho wever, acq uiring companies c an also get t he assets, such as new market segment.
Similarly, it ca nnot expla in t he behavior of acquiring companies to bu y s mall co mpanies which only
have disruptive technology. From the view of TCE, the company which has disruptive technology is
very costiv e because o f unc ertainty and complexity. Yet it is also wo rth i nvesting for th e specified
assets. T herefore, TCE o nly p rovides con siderations of t he transactio n in acq uisitions bu t does not
present foundations for strategies in target selection.
A r esource-based v iew focuses o n th e c ompetitive advantage of a c ompany. It argue s t hat the
primary m otive of acqu isitions i s that ac quiring companies seek c ritical assets t o maintain their
- 21 -
How to Select Target Firms in M&As? Evidence from the Medical Technology Industry
Tian Wei, Xin Tian
International Journal of Engineering and Industries Volume 2, Number 2, June 2011
competitive advantages th rough the acquisit ion. T he th eory pe rfectly ex plains why acqui ring
companies buy co mpanies in their early stage (after clinical trial). How ever, it cann ot sh ow t he
evidence of why acquiring companies do not acquire big companies because of they are lack of ability
to deal with conflicts. Based on Tab.6, obviously, in target selection, acquiring companies do not only
consider resources which contribute to their competitive advantages. They have some other concerns,
such as potential costs involved.
In sum, b oth of t hese popular th eories can not f ully su pport the strategies in ta rget selec tion. N ew
theory which identifies underpinning of the decision making needs to be developed.
6.3. Crisis assessment theory
There are varieties of motives for acquisitions, such as, product portfolio, new market segment, and
etc. However, all o f these motives are based on the thinking of not putting acquiring c ompanies in a
crisis. For exam ple, for the co mpany which has disr uptive technology, if the acqui ring company does
not buy it in its early stage, it is possible that this company will be bought by their co mpetitors. The
disruptive technology wi ll ch ange the method to tr eat the disease. Sever al years later, thi s co mpany
would lose their whole market and be in a crisis. Similarly, the reason for acquiring companies to buy a
new market se gment is to broad their business areas an d to make t hemselves safe in t he co mpetitive
market.
Disruptive
Technology
New Market
Crisis Assessment Theory
Uncertainty
New Business
model
Management skills
Cost
Figure 2. Crisis Assessment Theory
The details for the constructs of crisis assessment theory are illustrated in Figure 2:
 New market
The acquisition can help the company to expand to a new market segment to beco me more stable
in competitive environment.
 Disruptive technology
The acquisition can help the company to obtain disruptive technology to succeed in the reform of
technology.
 New business model
If the b usiness model of the t arget company is quite different, the acquiri ng company may face a
situation to handle two different business models. It is difficult and may bring lots of troubles to
make operations in danger.
- 22 -
How to Select Target Firms in M&As? Evidence from the Medical Technology Industry
Tian Wei, Xin Tian
International Journal of Engineering and Industries Volume 2, Number 2, June 2011
 Management skills
Acquiring co mpanies h ave the management skill s t o in tegrate th e two busin ess to gether, ev en
there might be lots of conflicts because of the merger of two large organizations.
 Cost
The cost involved in acquisitions is not too high to afford. Or there might be more costs which are
not expected in the future.
 Uncertainty
Too much uncertainty is involved in the acquisition. It is possible that acquiring companies would
be in a crisis for some unforeseen troubles.
The core of crisis assessment theory is that companies should be aware of the strategy if it can make
the co mpany i n a cr isis o r i t can prevent the co mpany from a crisis. The six co nstructs show t he
primary considerations to justify the results of a strategy. For example, companies can benefit from the
new market e xpansion and increase their market position from acquiring big companies but they can
also hardl y ge t t he r eturn of invest ment b ecause th ey d o n ot hav e necessary management ski lls to
integrate two businesses or the acqu isition is too c ostive. Theref ore, whether a co mpany do es t he
acquisition or not depends on the res ults of t he strategy . If the co mpany is con fident i n the ir
management skills and have enough money to do the acqui sition, the acquisition will not make it in a
big trouble but to save them by acquiring a new market. Otherwise, if the company cannot handle the
difficulties after the assessment, it is better not to acquire the company.
Crisis assessment theory may not only be used in strate gies in target selection in acqu isitions, b ut
also be used in ot her corporate str ategies. For exa mple, if a company decides whether to s et up new
factories in an e merging country . It can h ave an ass essment on whe ther thi s st rategy can put t he
company in a crisis or prevent them from a crisis according to the six constructs. Overall, this theory
needs to be tested and validated in broader areas.
6.4. Summary
This section does a further analysis based on Section 5. At first, it develops a new growth path of
companies in the Medical Technology I ndustry and show s obtained r esources whic h can be primary
offerings in acquisitions in each stage. Then, target selection criteria and risks involved are summarized.
After that, when looking for theoretical explanations for these target selection criteria, existing theories
are not approp riate to supp ort these criteria. Theref ore, crisis asses sment t heory is d eveloped by
addressing the strateg y w hich can save the co mpany f rom danger o r put th em i n a crisis. H opefully,
this theory can be used in broader areas in decision making.
7. Conclusion
This paper exp lores the st rategies in target select ion in acquisitions i n th e medical technology
industry f rom a strateg ic management perspectiv e. Fi rst, it starts wi th exa mines th e tar get selectio n
strategies from three views: corporate strategy of acquiring companies, attributes of target companies
in each case, and motives to test the strategic fit of th e acquisition. Second , cross-case an alysis
summarizes the data against the first two views and finds there are no big gaps between the two views.
Third, discussions are aroun d the criteria of target selection and the crisis assessment theory which is
supposed to explain the underlying thinking in decision making.
The research set out in this paper suggests the following:
 Target select ion strategi es can be r eviewed from both pe rspectives o f a cquiring companies
and target companies. It i s indicated that f indings f rom both t wo v iews do not have big
differences.
 Acquiring co mpanies tend to have a cons ervative strat egy in selecti ng ta rget. Re latively,
companies w hich hav e finished t heir f irst stage bu t sti ll in their small size have more
possibility to be acquired than companies in other status.
 A crisis assess ment the ory is proposed to depict the natur e of select ing target companies in
mergers and acquisitions.
- 23 -
How to Select Target Firms in M&As? Evidence from the Medical Technology Industry
Tian Wei, Xin Tian
International Journal of Engineering and Industries Volume 2, Number 2, June 2011
Six c onstructs of t he theory are dev eloped to p resent the criti cal dim ensions o f t he crisis
assessment th eory. These s ix con structs ar e con sidered as t he gui deline for acqui ring
companies in selecting target companies.
It is important to recognize that findings based on only four cases cannot provide robust validation
of the framework and further work is undoubtedly needed to test issues in discussion to develop a more
validated framework. Al so, t he w ork o f t his stu dy n eeds to b e test in other i ndustries in order t o
generalize the findings. Finally, the theory also offers the opportunity to develop tools to support more
systematic and comprehensive selection of target companies in mergers and acquisitions. This can also
be considered as part of future work.

8. References
[1] Angwin, D., Mergers and Acquisitions, Oxford: Blackwell Publishing, 2007.
[2] Angwin, D., Savil l, B., “ Strategic p erspectives on Europe an cr oss-border acquisitions – a vi ew
from top European executives”, European Management Journal, vol. 15, pp. 423-435, 1997.
[3] Ansoff, H.I., Corporate St rategy: A n An alytical Ap proach to Busin ess Poli cy f or G rowth and
Expansion, Homewood: Richard D. Irwin, 1965.
[4] Ansoff, H. I., R. G . B randenburg, F . F. P ortner, R. Radosevi ch, Acq uisition Beh avior of U.S.
Manufacturing Firms. 1946-1965. Vanderbilt University Press, Nashville, TN., 1971.
[5] Astrachan, J. H., Mergers. Acquisitions, and Employee Anxiety: A Study of Separation Anxiety in
a Corporate Context, Praeger, New York, 1990.
[6] Barney, J . B., “Organizational culture: Can it b e a source o f sustained competitive adv antage?”,
Academy of Management Review, vol. 11, pp. 791-800, 1986.
[7] Barney, J.B., “Firm resources and sustained competitive advantage”, Journal of Management, vol.
17, pp. 99-120, 1991.
[8] Barreto, I., “Dynamic Capabilities: A Review of Pas t Research and an A genda for th e Fu ture”,
Journal of Management, vol. 36, no. 1, pp. 256-280, 2009.
[9] Bettis, R. A., Hitt, M. A., “The new co mpetitive landscape”, Strategic Management Journal, vol.
16 (Special Issue), pp. 7-19, 1995.
[10] Chatterjee, S., “Types of synergy and economic value: the impact of acquisitions on m erging and
rival firms”, Strategic Management Journal, vol. 7, pp. 119-139, 1986.
[11] Chandler, A.D. Jr., Strategy and Structure. Garden City, NY: Doubleday, 1962.
[12] Danneels, E., “The dynamics of product innovation and firm competences”, Strategic Management
Journal, vol. 23, pp.1095–1121, 2002.
[13] Datta, D . K., “ Organizational fit and acq uisition p erformance. E ffects of post- acquisition
integration”, Strategic Management Journal, vol.12, pp. 281-297, 1991.
[14] D’Aveni, R., Hypercompetition. New York: Free Press, 1994.
[15] Dierickx, I., Cool , K., “ Asset sto ck accu mulation an d su stainability o f co mpetitive advantag e”,
Management Science, vol. 35, pp. 1504-1511, 1989.
[16] Eisenhardt, K . M., “ Building theories from case stu dy research”, Academy of Man agement
Review, vol.14, no. 4, pp. 532-550, 1989.
[17] Fama, E. F., “Agency problems and the theory of the firm”, Journal of Political Economy, vol. 88,
pp. 288-307, 1980.
[18] Farjoun, M., “Towards an organ ic per spective on strategy”, Strategic Manag ement J ournal, vo l.
23, pp. 561–594, 2002.
[19] Furrer, O., T homas, H ., Gou ssevskaia, A ., “ The structure and evol ution o f the st rategic
management field: A content analysis of 26 years of strategic management research”, International
Journal of Management Reviews, vol. 10, no. 1, pp. 1-23, 2008.
[20] Goldberg. W. H., Mergers: Motives. Modes, Methods. Gower, Aldershot, England, 1983.
[21] Grant, R. M ., “ The resourc e-based t heory of co mpetitive ad vantage” California Ma nagement
Review, vol. 33, no. 3, pp. 114-135, 1991.
[22] Haleblian, J., Fi nkelstein, S., “ The I nfluence o f Or ganizational Acqu isition Ex perience on
Acquisition Performance: A Behavioral Learning Perspective”, Administrative Science Quarterly,
vol. 44, no. 1, 29, 1999.
- 24 -
How to Select Target Firms in M&As? Evidence from the Medical Technology Industry
Tian Wei, Xin Tian
International Journal of Engineering and Industries Volume 2, Number 2, June 2011
[23] Hambrick, D. C, Cannella, A. A. “Relative standing: A frame- work for understanding departures
of acquired executives”, Academy of Management Journal, vol. 36, pp. 733-762, 1993.
[24] Haspeslagh, P. Jemison, D., “Managing Acquisitions: Creating value Through Corpora Renewal”,
New York: Free Press, 1991.
[25] Hayward, M., Hambrick, D., “ Explaining t he premiums paid for large acqui sitions: Evidence of
CEO hubris”, Administrative Science Quarterly, vol. 42, pp. 103-127, 1997.
[26] Hennart, J. F., “ A transaction co sts th eory of eq uity joint ventures” , Strategi c Man agement
Journal, vol. 9, pp. 361-374, 1988.
[27] Hennart, J . F., Park, Y. R., “ Greenfield vs . acqui sition: The s trategy of Japanese manufacturing
investment in the United States”, Management Science, vol. 39, pp. 1054-1070, 1993.
[28] Herrmann, P ., “ Evolution o f s trategic management: Th e need for n ew do minant desig ns”,
International Journal of Management Reviews, vol. 7, no. 2, pp. 111-130, 2005.
[29] Hoskisson, R. E ., Harrison, J. S., Dub ofsky, D. A., “ Capital market evalu ation of M- form
implementation and diversification strategy”, Strategic Management Journal, vol. 12, pp. 271-279,
1991.
[30] Hoskisson, R.E., Hitt, M.A., Wan, W.P. Yiu, D., “Theory and research in strategic management:
swings of a pendulum”, Journal of Management, vol. 25, pp. 417-456, 1999.
[31] Jarrell, G. A., J. A . Br ickley., J. M. Nett er., “ The market for co rporate control: T he e mpirical
evidence since 1980”, Journal of Economic Perspectives. vol. 2, pp. 49-68, 1988.
[32] Jensen, M. C., Meckling, W., “Theory of firm: Managerial behavior, agency costs and ownership
structure”, Journal of Financial Economics, vol. 3, pp. 305-360, 1976.
[33] Kogut, B., “ Joint ventures: Theo retical and e mpirical perspectives”, Str ategic M anagement
Journal, vol. 9, pp. 319-332, 1988.
[34] Krug, J. A., Mergers and Acquisitions, Sage Publications Ltd, 2008.
[35] Larsson, R., Finkelstein, S., “Resource Perspectives on Mergers and Acquisitions : A Case Survey
of Synergy Realization”, Organization, vol. 10, no. 1, pp. 1-26, 1999.
[36] Learned, E.P., Christensen, C.R., An drews, K.R., Gut h, W.D., Business Policy: Text and Cases,
Homewood, IL: Richard D. Irwin, 1965.
[37] Lubatkin, M., “Merger str ategies and stockhol der val ue”, Str ategic Manag ement J ournal, vol . 8,
pp. 39-53, 1987.
[38] Miles, M. B., Huberman, A. M., Qualitative data analysis, Sage, 1994.
[39] Mirvis. P. H., “ Negotiations alter t he s ale: The r oots and ra mifications o f con flict in a n
acquisition”, Journal of Occupational Behavior, vol. 6, pp. 65-84, 1985.
[40] Morck, R., Yeung, B., “Internationalization: An event stud y test”, Journal o f I nternational
Economics, vol. 33, no.1, pp. 41-56, 1992.
[41] Nelson, R. R., “Why do firms differ and how does it matter?”, Strategic Management Journal, vol.
12 (Special Issue), pp. 61-74, 1991.
[42] Pablo, A. L., “Determinants of acq uisition in tegration l evel: A de cision-making per spective”,
Academy of Management Journal, vol.37, pp. 803-836, 1994.
[43] Patton, M. Q., Qual itative res earch an d eval uation methods, 3rd edit ion, Thousand Oaks, CA:
Sage, 2002.
[44] Penrose, E. T., The theory of the growth of the firm, New York: Wiley, 1959.
[45] Porter, M. E., Competitive Strategy, New York: Free Press, 1980.
[46] Ravenscraft. D. J ., F. M. Scherer., Merg ers, Sell-offs. and Economic Efficiency, Br ookings
Institution. Washington, DC, 1987.
[47] Reed, S. F., Lajoux, A. R., Nesvo ld, H. P., The art of M&A: a merger, acquisition, buyout guide
(4th ed), New York: McGraw-Hill, 2007.
[48] Rumelt, R. P., “ Toward a s trategic t heory of t he firm”, I n R. Lamb ( ed.), Co mpetitive strategic
management: pp. 556-570. Englewood Cliffs: NJ: Prentice-Hall, 1984.
[49] Salter, M.S., W, A. W einhoid., “Choosing co mpatible acqu isitions”, H arvard Business Revi ew,
vol. 59(1), 117-127, 1981.
[50] Schoenberg, R., “ Measuring the Per formance of Cor porate Acq uisitions: An E mpirical
Comparison of Alternative Metrics”, British Journal of Management, vol. 17, no. 4, pp. 361-370,
2006.
- 25 -
How to Select Target Firms in M&As? Evidence from the Medical Technology Industry
Tian Wei, Xin Tian
International Journal of Engineering and Industries Volume 2, Number 2, June 2011
[51] Schweiger, D. M., DeN isi. A. S., “ Communication with e mployees f ollowing a m erger: A
longitudinal field experiment”, Academy of Management Journal, vol. 34, pp. 110-135, 1991.
[52] Schweiger, D. M., Walsh, J. P. “Mergers and Acquisitions: An Interdisciplinary View”, In B. B.
Shaw and J. E. Beck (eds.), Research in Personnel and Human Resources Management, JAI Press,
Greenwich CT, 1990.
[53] Schweizer, L., “ Organizational I ntegration o f A cquired Bi otechnology Co mpanies into
Pharmaceutical Companies: The Need for a Hybrid Approach”, Academy of Management Journal,
vol. 48, no. 6, pp. 1051-1084, 2005.
[54] Seth, A., “Sources of val ue cr eation in acquisitions: An empirical investigation”, St rategic
Management Journal, vol. 11, no. 6, pp. 431-446, 1990.
[55] Shimizu, K., Hitt, M. A. , Vaid yanath, D., Pisano , V., “ Theoretical foundations of c ross-border
mergers and acquisitions: A revie w o f cu rrent res earch and reco mmendations for the fu ture”,
Journal of International Management, vol. 10, pp. 307-353, 2004.
[56] Singh. H., Mont gomery, C. A., “ Corporate acq uisition s trategies and econo mic per formance”,
Strategic Management Journal, vol. 8, pp. 377-386, 1987.
[57] Steiner, P. O., Mergers: Motives, Effects, Policies, University of Michigan Press, Ann Arbor, Ml,
1975.
[58] Teece, D. J ., Pisano, G., Sh uen, A., “Dynamic capab ilities and strategic management”, Strategic
Management Journal, vol. 18, pp. 509-533, 1997.
[59] Teerikangas, S., Ve ry, P ., “The Cu lture-Performance Relati onship i n M&A : Fr om Yes/No to
How”, British Journal of Management, vol. 17, no.S1, pp. 31-48, 2006.
[60] Walter. G. A ., J. B. Barne y., “ Management obj ectives in mergers and acqui sitions”, Strategic
Management Journal, vol. 2, pp. 79-86, 1990.
[61] Wernerfelt, B., “A resource-based view of the firm”, Strategic Management Journal, vol. 16, pp.
171-174, 1984.
[62] Wernerfelt, B. “ The resource-based vi ew o f the firm: T en y ears af ter”, St rategic Man agement
Journal, vol. 16, pp. 171-174, 1985.
[63] Weston, J . F., K. S. Chung., “ Do mergers make money: A r esearch summary”, Mer gers &
Acquisitions, vol.18(3), 40-48, 1983.
[64] Williamson, O. E., Markets and hierarchies, New York: Free Press, 1975.
[65] Williamson, O. E., The economic institutions of capitalism, New York: Free Press, 1985.
[66] Williamson, O. E., “ Comparative econom ic organization: The analysis of discrete s tructural
alternatives”, Administrative Science Quarterly, vol. 36, pp. 269-296, 1991.
[67] Yin, R. K., “Case Study Research: Design and Methods, 4th edition”, Sage Publications, 2009.
[68] Zollo, M., Singh, H., “Deliberate learning in corporate acquisitions: Post-acquisition strategies and
integration ca pability in U S b ank mergers”, Strategic Ma nagement Jo urnal, vol . 2 5, pp. 1 2331256, 2004.
- 26 -