Network Positions and the Probability of Being Acquired: An Empirical Analysis in the Biopharmaceutical Industry
| Author | Giovanni Perrone,Dzidziso Samuel Kamuriwo,Erica Mazzola |
| Date | 01 July 2016 |
| DOI | http://doi.org/10.1111/1467-8551.12174 |
| Published date | 01 July 2016 |
British Journal of Management, Vol. 27, 516–533 (2016)
DOI: 10.1111/1467-8551.12174
Network Positions and the Probability of
Being Acquired: An Empirical Analysis in
the Biopharmaceutical Industry
Erica Mazzola, Giovanni Perrone and Dzidziso Samuel Kamuriwo1
DICGIM – Managerial and Economics Division, Universit`
a degli Studi di Palermo, 90128, Palermo, Italy, and
1Cass Business School, City University London, 106 Bunhill Row, London, EC1Y 8TZ, UK
Corresponding author email: giovanni.perrone@unipa.it
This paper examines the relationship between the firm’sdirect ties, its inter-firm network
prominence and its likelihood of being acquired. The authors argue that firm’s directties
and prominence enhance the firm’s visibility and signal its quality – and thus foster the
firm’s likelihood of being acquired. However, higher levels of direct ties and prominence,
by providing access to resources and the firm’s status, respectively, increase the firm’s
ability to remain independent and thus reduce its likelihood of being acquired. Thus, the
authors posit the overall relation as an invertedU-shaped. Further more, they show that,
for firms that undergo an initial public oering, the aforementioned relation becomes
much weaker. The hypotheses are empirically tested in the biopharmaceutical industry
and important theoretical and managerial implications are discussed.
Introduction
In addition to Amylin, BioSeek has had collabora-
tions with numerouspharmaceutical and biotechnol-
ogy companies including Merck-Serono, UCB, and
Dainippon Sumitomo. (BusinessWire,2009)
The quote from Asterand Bioscience’s announce-
ment of its acquisition of BioSeek Inc. in 2009
is an example of the importance a target’s inter-
firm agreement to prospective acquirers. Surpris-
ingly, social capital (SC) literature has still not
examined how a firm’snetwork position influences
its likelihood of being acquired. Past work on the
impact of network positions has focused on re-
lated topics such as the firm’s survival (Br ¨
uderl
and Preisend¨
orfer,1998; Mitchell and Singh, 1996;
Uzzi, 1996; Watson, 2007), the firm’s dissolution
(Pennings, Lee and Van Witteloostuijn, 1998) and
the firm’s propensityto make acquisitions or merg-
ers (Haunschild, 1993; Hoang, 1997; Lin et al.,
2009; Yang,Lin and Peng, 2011). Further, research
on mergers and acquisitions (M&A) has not used
a network perspective, but, rather, has focused on
dyadic relations between the target and acquirer
(i.e. be they customers, suppliers or competitors).
This gap is also relevant from a managerial point
of view. Most firms looking for a possible buyer
highlight their inter-firm relations among the ‘rea-
sons to be bought’. Furthermore, market business
intelligence websites routinelyprovide information
on the firm’s inter-organizationaldeal activity (see
for instance https://www.pharmamedtechbi.com).
In this research, we aim to fill this gap by pro-
viding possible explanations on how and why a
firm’s network position influences its likelihood of
being acquired. We build on signaling and net-
work theories to explain how and why the firm’s
direct ties and prominence in its ego network in-
fluence its likelihood of being acquired. In this
paper, the focus is on inter-firm networks based
on company-to-company relationships (Grandori
and Soda, 1995).
We argue that the firm’s direct ties and promi-
nence are ‘visibility-enhancing signals’ (Pollock
and Gulati, 2007) that allow the firm to ‘stand-out
© 2016 British Academy of Management. Published by John Wiley & Sons Ltd, 9600 Garsington Road, Oxford OX4
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Probability of Being Acquired 517
from the crowd’ and get noticed by potential ac-
quisition suitors. Moreover, the firm’s direct ties
and network prominence signal the firm’s quality,
which helps to reduce the information asymmetry
between the firm and the market (Ozmel, Reuer
and Gulati, 2013; Stuart, 2000), thus increasing its
likelihood of being acquired.
However, firms with high levels of direct ties
haveaccess to valuable resources that improvefirm
performance, boosting the firm’s organic growth
and, therefore,reducing the likelihood of its acqui-
sition (Ahuja, 2000; Gilsing et al., 2008; Koka and
Prescott, 2002; Salman and Saives, 2005; Schilling
and Phelps, 2007; Soh, 2003; Vanhaverbeke, Gils-
ing and Duysters, 2009, 2012; Wincent et al., 2013;
Wu, 2008; Zaheer and Bell, 2005; Zaheer et al,
2010). Furthermore, a highly prominent firm sig-
nals its status, which enhances its organizational
performance and thus contributes to the firm’s de-
velopment and independence (Ozmel, Reuer and
Gulati, 2013; Podolny, 1993, 2001; Shipilovand Li,
2008).
We build on these findings from SC research
to construct a theoretical framework that explains
why ego firm’s direct ties and network prominence
havean inverted U-shaped relation to its likelihood
of being acquired by a predator.
Further,we build on multiple signaling literature
(Pollock and Gulati, 2007) to explain how initial
public oerings (IPOs) interact with the aforemen-
tioned inverted U-shaped relations. Indeed, pre-
vious literature has largely indicated how IPOs
significantly influence a firm’s likelihood of being
acquired (Field and Karpo, 2002; Hovakimian
and Hutton, 2010; Jain and Kini, 1999; Ragozzino
and Reuer, 2007).
We test our theoretical framework on a net-
work of inter-firm relationships of 2083 biophar-
maceutical companies over the period 2001–2010.
We found significant support for an inverted
U-shaped relation between the firm’s direct ties,
network prominenceand its likelihood of being ac-
quired. Forfir ms thathave an IPO, the relation be-
tween networkpositions and their likelihood of be-
ing acquired is significantly weakened.
Our study contributes to the SC literature by
showing mechanisms through which a firm’s net-
work position influences its likelihood of being
acquired. In particular, our study highlights the
connection between dierences in network embed-
dedness and the signaling eect of visibility and
quality, on the one hand, and the eect of status
and resource access, on the other hand, to produce
an inverted U-shaped relation between the firm’s
network positions and its likelihood of being ac-
quired. Finally, we contribute to multiple signal-
ing literature by showing the interaction between
two dierent signals that a firm can launch: signals
emanating from its networkpositions and from an
IPO event.
In the next section, we present the theoretical
framework. We then explain our methods. Finally,
we discuss the results and their theoretical and
managerial implications.
Theory and hypotheses
The role of direct ties
Direct ties are one of the most considered network
embeddedness features in SC literature (Ahuja,
2000; Kokaand Prescott, 2002; Salman and Saives,
2005; Vanhaverbeke, Gilsing and Duysters, 2012;
Wu, 2008). We argue that firm’s direct ties have a
signaling and a resource access eect. As a firm’s
direct ties increase, the firm stands out from the
crowd (e.g. Gulati and Higgins, 2003), thus in-
creasing its likelihood of being acquired. At the
same time, the firm also gains access to valuable
resources through its direct ties, which allow the
firm to grow (e.g. Ahuja, 2000) to a point where its
strength reduces its likelihood of being acquired.
Consequently, the overall impact of firm’s direct
ties on its likelihood of being acquired is an in-
verted U-shaped relation.
Building on signaling theory, an acquisition de-
cision can be regarded as an information asymme-
try problem (Bergh et al., 2014; Connelly et al.,
2011; Spence, 1973, 2002). The predator – the ac-
quiring firm – faces diculty in assessing whether
a possible prey has the quality it claims to possess.
According to signaling theory, an eective signal
creates a separate equilibrium between a prey that
has high-quality resources versus one that does
not, thus reducing or even nullifying the adverse
selection problem. Connelly et al. (2011) highlight
studies where signaling theory has been applied ex-
tensively to explain how young firms signal their
quality to potential IPO investors through dier-
ent signals, such as board characteristics (Certo,
2003; Certo, Daily and Dalton, 2001; Filatotchev
and Bishop, 2002), former investments (Elitzur
and Gavious, 2003; Janney and Folta, 2003, 2006),
ownership (Bruton et al., 2009; Busenitz, Fiet
© 2016 British Academy of Management.
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