Integrating Real Option and Dynamic Capability Theories of Firm Boundaries: The Logic of Early Acquisition in the ICT Industry

Integrating Real Option and Dynamic Capability Theories of Firm Boundaries: The Logic of Early Acquisition in the ICT Industry

Alfred G. Warner (Penn State Erie, USA) and James F. Fairbank (Penn State Erie, USA)
Copyright: © 2010 |Pages: 17
DOI: 10.4018/978-1-60566-946-5.ch009
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Abstract

Firms often acquire other firms to source technology but it is unclear why they might assume such risk by buying before a product standard is established in their industry. We draw upon real options and dynamic capability theories of firm organization to develop an integrated framework that explains why firms might acquire early and which firms are more likely to do so. We develop propositions regarding certain firm attributes as predictors of acquisition timing relative to passage of a technology standard. We argue that from a real options perspective, the primary reason firms acquire early is related to the firm’s knowledge of the technology. However, attributes such as political influence in the standardization process, prior experience making acquisitions, and how the firm resolves uncertainty about the technical expertise of potential acquisition targets are capabilities that also enter the acquisition timing decision. We provide a model based on those propositions and address how it can be empirically tested.
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Introduction

Competition in industries where product standards define winning technologies has been compared to a particularly chancy casino game: Not only are outcomes and risks unknown, but the rules for competition emerge only in the process of playing (Arthur, 1996), defining (or re-defining) which firm skills, abilities, and know-how are valuable. Entering early (i.e., before the successful or standardized technologies are defined) with particular skills or resources is risky because they could be the wrong resources and ultimately have no value. This problem is exacerbated when firms enter via acquisition of another firm, as acquirers notoriously fail to realize value after the purchase. Yet, in the information and communication technologies (ICT) industry, firms have increasingly chosen to enter this way and do so well before standards are established.

As an example, Table 1 shows acquisitions in the ICT industry in three key technologies over the period 1995-2000. Public records show that although almost all acquisitions of firms providing Fast Ethernet technologies occurred after the Institute of Electrical and Electronics Engineers (IEEE) generated the 802.3u standard, about half of the acquisitions in Gigabit Ethernet occurred before 802.3ab was accepted. At about the same time, firms like Cisco and Cabletron were acquiring asymmetric digital subscriber line (ADSL) startups well before the ITU G.Lite 992.2 standard was accepted in 1999. Acquisition has become an increasingly common mode of entry and a key element in how firms manage technology (Chaudhuri & Tabrizi, 1999; Karim & Mitchell, 2000) but it is not obvious why firms would choose to spend millions or billions of dollors to enter new technologies in standards-based industries before the standard is defined and uncertainty about outcomes is high. In this article, we integrate recent work in real options and dynamic capabilities theories as an explanation and framework for further empirical research.

Table 1.
Acquisitions in three technologies in the ICT industry, 1995-2000 (acquisitions prior to standard in italics)
    Acquirer    Target    Date
FORE SystemsApplied Network TechnologyJun-95
CiscoGrand JunctionSep-95
SiemensORNETSep-95
CabletronEnterprise NetworksNov-95
CompaqNetworthNov-95
FORE SystemsALANTEC CorpFeb-96
Bay NetworksNetICsDec-96
IntelCase TechnologyJan-97
IntelDayna CommunicationsSep-97
CabletronNetVantage IncJun-98
Lucent TechnologiesLannet, div. of Madge NetworksJul-98
Lucent TechnologiesEnable SemiconductorMar-99
Fast Ethernet acquisitions (IEEE 802.3u, effective July 1995)
CiscoGranite SystemsSep-96
FORE SystemsScalable NetworksNov-96
Bay NetworksRapid City CommunicationsJun-97
CabletronYago SystemsJan-98
Lucent TechnologiesProminet CorporationJan-98
ODSEssential CommunicationsMay-98
Level OneAcclaim CommunicationsJun-98
FORE SystemsBerkeley NetworksAug-98
AlcatelPacket EnginesOct-98
Level OneJatoNov-98
IntelLevel One CommunicationsMar-99
IntelXLNTMar-99
Vitesse SemiconductorXaQtiMay-99
Gigabit Ethernet acquisitions (IEEE 802.3ab, effective June 1998)
CiscoTelesendMar-97
CiscoDagazJul-97
CiscoNetSpeed IncMar-98
CabletronArielJun-98
CabletronFlowpointJun-98
MarconiReltecMar-99
CiscoFibex SystemsApr-99
CiscoMaxComm TechnologiesAug-99
NetopiaStarNet TechnologiesOct-99
TerayonRadwizOct-99
Efficient NetworksFlowpointNov-99
Westell TechnologiesTeltrend Inc.Dec-99
Nortel NetworksPromatory CommunicationsJan-00
IntelAmbient TechnologiesFeb-00
IntelBasis CommunicationsMar-00
TerayonRaychem AccessMar-00
OrckitEDSL NetworksMay-00
VirataExcess BandwidthJun-00
VirataAgranat SystemsJul-00
InfineonSavan CommunicationsDec-00
ASDL acquisitions (ITU G.992.2, effective June 1999)

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