ACQUIRING NEW KNOWLEDGE: THE

ROLE OF RETAINING HUMAN CAPITAL IN

ACQUISITIONS OF HIGH-TECH FIRMS

ANNETTE L. RANFT
Wake Forest University

MICHAEL D. LORD
Wake Forest University

Many acquisitions of high-tech firms are motivated by the acquirers desire to

enhance their strategic technological capabilities. However, these capabilities
are likely to be embedded to a large degree in the tacit and socially complex
knowledge of the acquired firms individual and collective human capital. This
presents a dilemma for acquirers because, unlike tangible or financial assets, the
acquired firms valuable human assets cannot be purchased or owned outright
and they can leave the firm at any time. Retention therefore is likely to be of
central importance during acquisition implementation in knowledge-intensive
firms. Using data from a sample of acquisitions in high-technology industries,
the results of this study confirm that retention of specific types of human capital
is critical for determining the success of the acquirers efforts to gain valuable
new technological capabilities. Applying the theory of relative standing to predict
post-acquisition retention, we find that autonomy, status, and commitment significantly affect retention, but economic incentives do not. We discuss and integrate these results in the context of knowledge-based views of the firm and the
existing literature on acquisition implementation. 2000 Elsevier Science Inc.

INTRODUCTION
Since 1990 there has been a substantial increase in merger and acquisition (M&A)
activity, with a significant portion of the activity occurring in technology-based
Direct correspondence to: Annette L. Ranft, Calloway School of Business and Accounting, Box 7285
Reynolda Station, Wake Forest University, Winston-Salem, NC 27109-7285; Tel: (336) 758-5098; Fax:
(336) 758-6311; E-mail: ranftal@wfu.edu
The Journal of High Technology Management Research, Volume 11, Number 2, 295319
2000 Elsevier Science Inc.
All rights of reproduction in any form reserved.
ISSN: 1047-8310

296

THE JOURNAL OF HIGH TECHNOLOGY MANAGEMENT RESEARCH VOL. 11/ NO. 2/ 2000

industries. More than 11,000 M&A deals were completed in 1997, for example,
valued at over $900 billion. These results indicate a 47% increase over the number
of mergers and acquisitions occurring in 1996 (Aley & Siegel, 1998). The overall
level of M&A activity has continued to increase notably in subsequent years. Acquisitions in computer hardware and software, electronics, telecommunications, biotechnology, and pharmaceuticals dominate much of this activity. These industries
frequently place among the top 10 most active merger and acquisition industries
in the Securities Data Corporations annual merger and acquisition almanacs.
Many of the acquisitions in the 1990s appeared to be motivated by firms need
to obtain critical technologies or capabilities. In contrast to acquisitions used to
achieve economies of scale, gains in market share, or geographical expansion, many
acquisitions are attempting to obtain highly developed technical expertise and skills
of employees, high-functioning teams for product development or other functions,
or specific new technologies in fast-paced industries (Kozin & Young, 1994; Wysocki,
1997). Acquiring firms may not have the ability to develop these valuable knowledge-based resources internally or, alternately, internal development may take too
long or be too costly.
As an example, one of the most aggressive acquirers in the 1990s was Cisco
Systems, Inc. Between 1994 and 1997, Cisco acquired over 30 technology companies:
. . . mostly small software outfits, with 50100 employees, just on the brink
of launching commercial products. Cisco is buying new product teams on
the open market because it takes too long to assemble them from the
ground up. And it is paying lofty pricessometimes as much as $2 million
an employee . . . [According to CEO John Chambers] Its the critical
massbringing in the team of people in a different area of expertise than
we have today (Wysocki, 1997).

According to Chambers, Cisco makes acquisitions both to obtain critical technologies and to retain the services of the best-skilled knowledge workers, including
hard to find engineers and programmers. In these high-tech acquisitions, some of
the acquiring firms couldnt care less about product lines, plants, equipment, or
real estate, assets which have traditionally been the focus of many other types of
acquisitions (Wysocki, 1997).
The academic literature highlights that many acquisitions do not succeed in
achieving their desired objectives and instead result in poor organizational and
financial outcomes. Problems with post-acquisition implementation are among the
primary reasons given for this disappointing record. Acquisition implementation
problems often arise because of clashes of organizational cultures, systems, or
strategies and because of the loss of key executives in the acquired firm. In the
academic literature, researchers have focused on the causes and consequences of
top management team turnover in an acquired firm (Hambrick & Cannella, 1993;
Krug & Hegarty, 1997; Very, Lubatkin, Calori, & Veiga, 1997; Walsh, 1988, 1989;
Walsh & Ellwood, 1991). The departure of an acquired firms top managers, and
the consequent loss of their knowledge and skills, is thought to be one important
determinant of poor post-acquisition performance (Cannella & Hambrick, 1993).
This study builds from a knowledge-based view of the firm to investigate the
causes and consequences of employee turnover throughout the acquired organiza-

Retaining Human Capital

297

tion, and the impact of this turnover on the newly combined firms knowledgebased resources. As illustrated by John Chambers comments regarding Ciscos
acquisition strategy, key employeesboth individually and collectivelyembody an
acquired firms intellectual capital and are the repository of much of its technological
capabilities. Many of these employees are not top managers, but instead are located
at different levels and in different functions or locations throughout the firm (Badaracco, 1991; Nonaka, 1994). Because the acquisition of key employees valuable
knowledge and skills may be a primary motivation for the acquisition in the first
place, their departure makes the success of the acquisition much more difficult and
much less likely.
The existing acquisitions literature offers limited understanding of the antecedents and consequences of retaining key employees throughout an acquired firm,
however, because of a predominant focus on the upper echelons of the organization. Empirical research to date has primarily focused on turnover in the top
management team of the acquisition target (Cannella & Hambrick, 1993; Hambrick & Cannella, 1993; Very et al., 1997; Walsh, 1988, 1989; Walsh & Ellwood,
1991). In contrast, knowledge-based views of the firm argue for the importance of
employees elsewhere in the organizationthose who possess critical individual
expertise and skills or those who in combination possess valuable team- or groupbased capabilitieswho may be critical for determining the overall success of the
acquisition.
Integrating perspectives from the acquisitions and knowledge literatures, this
study empirically explores the determinants and the effects of retaining key employees on the transfer of an acquired high-tech firms knowledge-based resources,
specifically its valued technologies and capabilities, to the acquirer.
ACQUISITION OF KNOWLEDGE-BASED RESOURCES:
LITERATURE & HYPOTHESES
From a knowledge-based view of the firm, firms are dynamic repositories of different
sets of knowledge that are critically dependent upon the individual and collective
human capital of the organization. Unique sets of knowledge, and the distinctive
ways in which knowledge is integrated and organized by the firm, can generate
capabilities that either create or support a firms competitive advantage (Grant,
1996; Leonard-Barton, 1995; Nonaka, 1994; Winter, 1987). Knowledge-based resources can be better understood by examining the degree to which they are based
on knowledge that is tacit in nature, and the degree to which they are socially
complex and embedded in the social fabric of the firm (Badaracco, 1991; Itami &
Roehl, 1987; Kogut & Zander, 1992; Nelson & Winter, 1982; Winter, 1987). Knowledge that is highly tacit and socially complex is a valuable competitive resource
because it is very difficult for other firms to imitate (Barney, 1991). This same
tacitness and social complexity, however, make it difficult for firms to manage,
particularly in the context of mergers and acquisitions (Coff, 1997).
Tacit knowledge consists of individuals implicit, non-codified body of expertise
and skills accumulated through experience (Polanyi, 1962; Reed & DeFillippi, 1990).
In contrast to more explicit types of knowledge that can be readily articulated and
codified in the form of manuals, blueprints, and other documented material, tacit

298

THE JOURNAL OF HIGH TECHNOLOGY MANAGEMENT RESEARCH VOL. 11/ NO. 2/ 2000

knowledge cannot be specified and communicated independent from the possessor

of the knowledge (Winter, 1987: 168). In many cases, only through lengthy experience and learning-by-doing can tacit knowledge be successfully acquired. Precisely
because they are difficult, costly, and time-consuming to obtain, tacit forms of
knowledge may be of paramount strategic value and may be a relatively strong and
lasting source of competitive advantage for firms (Barney, 1991; Winter, 1987).
However, managing this tacit knowledge creates unique challenges. Firms cannot
build and maintain an advantage if their most valuable knowledge assets simply
walk out the door to go to work for competitors or to start their own companies
(Coff, 1997).
Not all of a firms knowledge assets are contained within specific individuals,
however. Critical organizational competencies often are embedded in relationships
among individuals, or in a firms more general social and organizational fabric, rather
than in any particular person (Huber, 1991). A significant portion of a firms knowledge
may be located in the formal and informal networks of relationships within the
organization, and even across organizational boundaries (Badaracco, 1991; Coff, 1997;
Nelson & Winter, 1982; Winter 1987). In other words, a firms valuable knowledgebased resources may reside not only in particular individuals, but also in socially
complex relationships among different individuals and organizational subunits (Barney, 1991; Kogut & Zander, 1992; Leonard-Barton, 1995). Socially complex knowledge
resides primarily in specialized relationships among individuals and groups and in
the particular norms, attitudes, information flows, and ways of making decisions that
shape their dealings with each other (Badaracco, 1991: 79). In the case of socially
complex knowledge, no single person has the full set of skills and capabilities required
to create a commercially viable product or service. This social complexity makes
knowledge difficult to manage because critical interrelationships can be easily disturbed, such as when key individuals or teams leave the firm (Leonard-Barton, 1995;
Nelson & Winter, 1982). Consequently, retention of key employees is not only a
critical issue for retaining individual knowledge, but also for preserving valuable types
of knowledge that are socially complex.
A firms total stock of knowledge develops both from the individual experiences
of organizational members, and from the collective experiences of the organization
as a whole (Nelson & Winter, 1982). Leonard-Barton (1992, 1995) discusses how
knowledge sets giving rise to organizational capabilities are embedded in both
human and organizational capital. Specifically, she notes that knowledge-based
capabilities reside in a complex combination of employee skills, managerial systems
and processes, organizational values and norms, and the physical capital or physical
systems of the organization. A firms intangible, knowledge-based resources are an
interrelated and interdependent system arising from these dimensions of human,
organizational, and physical capital (Leonard-Barton, 1995). Technological capabilities built on socially complex knowledge transcend the level of individual expertise,
though disruption of one or more critical individual links can cause problems for
the whole system.
Retaining Human Capital During Acquisition Implementation
When a firm attempts to gain another firms valuable technological capabilities
through an acquisition, the tacitness and social complexity of the acquired firms

Retaining Human Capital

299

knowledge-based resources creates a critical challenge during post-acquisition implementation. In particular, the need for retention of individual and collective
human capital is a central concern because many valuable employees of the acquired
firm tend to leave during the post-acquisition transition period, resulting in the loss
of their knowledge and skills (Hambrick & Cannella, 1993; Walsh, 1988, 1989;
Walsh & Ellwood, 1991). Cannella and Hambrick (1993), for example, conclude
that the departure of acquired firms top executives is detrimental to post-acquisition
performance. This negative performance effect was found in both related and
unrelated acquisitions. Consistent with Castanias and Helfat (1991), Cannella and
Hambrick suggest that executives from acquired firms are an intrinsic component of
the acquired firms resource base, and that their retention therefore is an important
determinant of post-acquisition performance. In other words, if executives of acquired firms are part of the valuable resources obtained in the acquisition (Pitts,
1976; Walsh & Ellwood, 1991), then the success of the acquisition may hinge on
the retention of their knowledge and skills. Though these prior studies have focused
on the post-acquisition turnover of top management team members, these arguments might be extended to consider the impact of the departure of other members
of the acquired firm.
Particularly from a knowledge-based view of the firm, focusing only on retention
of top managers omits an important part of the motivation for many acquisitions.
Top managers may be a central source of knowledge in an organization through
their particular individual skill sets, through the ways in which they work with one
another, and through their organizational actions and leadership. As the literature
highlights, however, valuable knowledge may reside in individuals and relationships
throughout the organization, in different functions and areas and levels, and not
simply at the upper echelons of the firm (Badaracco, 1991; Davenport & Prusak,
1998; Nelson & Winter, 1982; Nonaka, 1994). Top managers are likely to possess
a great deal of the acquired firms valuable managerial knowledge and skills, for
example, but much of the firms technological knowledge and skills may reside
elsewhere within the organization. This technological knowledge may reside in
researchers, engineers, programmers, marketers, and middle- and lower-level managers, both in the form of individual human capital (Saura-Diaz & Gomez-Mejia,
1997) and in the form of effective, high-functioning teams or groups (LeonardBarton, 1995).
Not all individuals in the firm are necessarily critical to maintain a firms knowledge base. Key employees to retain are those that possess individual expertise about
a particular technology, or those individuals that are part of a highly functioning
group that plays a critical part in generating the firms value-creating capabilities.
These key employees are critical to the maintenance of knowledge-based resources
during the post-acquisition implementation period. If these employees leave a firm,
the loss of their tacit and socially complex knowledge will cause organizational
capabilities to mutate or wither (Nelson & Winter, 1982). In addition to the relatively
discrete effects of individual departures, turnover of key employees may cause
more systemic disturbances in the social structure of the acquired firm that may
negatively alter the firms capabilities (Fryxell & Judge, 1997).
Extending the logic of the knowledge-based view of the firm, we discuss how
retaining valuable human capital is likely to be necessary to preserve and transfer
both tacit and socially complex knowledge when one firm acquires another. The

300

THE JOURNAL OF HIGH TECHNOLOGY MANAGEMENT RESEARCH VOL. 11/ NO. 2/ 2000

success of knowledge transfer is evident when the desired skills and capabilities
are ultimately redeployed to the acquirer (Capron, Dussauge, & Mitchell, 1998).
If key employees depart during the acquisition transition, the acquirer may find
itself losing the skills and capabilities which largely motivated the acquisition in
the first place. Consequently, retention of the acquired firms key employees
throughout the acquired organization, not just at the top management team level,
should significantly enhance the success of the transfer of knowledge-based resources to the acquirer.
Hypothesis 1:

Retention of key employees in the acquired firm is

positively associated with the transfer of technological
capabilities from the acquired firm to the acquirer.

In the next section, we discuss the theory of relative standing and the existing
acquisition implementation research. We extend the theory of relative standing and
develop hypotheses that consider factors that may influence the retention of valuable
human capital throughout the acquired firm, not just at the top management team
level.
Relative Standing and Post-Acquisition Retention of Key Employees
The abnormally high rate of departure of acquired firms top executives during
the first two to three years after an acquisition has generated considerable attention
in the strategy literature (Cannella & Hambrick, 1993; Hambrick & Cannella, 1993;
Krug & Hegarty, 1997; Very et al., 1997; Walsh, 1988, 1989; Walsh & Ellwood,
1991). Much of this research uses the theory of relative standing (Frank, 1986) to
examine why turnover in acquired top management teams occurs. The theory of
relative standing describes the importance of individuals feelings of status and
worth relative to that of others in a proximate social setting. Relative standing is
manifested in such things as access to centers of power, titles, others acts of respect,
inclusion, and warmth (Frank, 1986: 736). Researchers have argued that some
acquisitions result in extremely low relative standing for acquired executivesthey
feel inferior, the acquirers see them as inferior and themselves as superior, autonomy
is removed, status is removed, and a climate of acrimony prevails (Hambrick &
Cannella, 1993: 733). The theory of relative standing predicts that acquired executives are more likely to be retained after an acquisition when they are given a
greater degree of autonomy and a greater sense of status and importance in the
newly merged firm. Appointing acquired executives to the newly merged firms
management team may help provide them with a positive sense of their status and
worth in the new organization. Likewise, other actions or symbols that indicate the
importance of the acquisition to the acquiring firm, and that signal the commitment
of the acquirer to the success of the acquisition, are likely to minimize departure
of key managers (Hambrick & Cannella, 1993).
In addition to the work by Hambrick and Cannella (1993), Walsh (1988, 1989)
and Walsh and Ellwood (1991) also investigated top management turnover following
acquisitions. These studies attempted to determine the underlying reasons for turnover but found that neither the relatedness of the acquisitions (Walsh, 1988), the
degree of hostility of negotiating the acquisition deal (Walsh, 1989), nor market

Retaining Human Capital

301

for corporate control theories (Walsh & Ellwood, 1991) were able to explain high
turnover rates. Consequently, the theory of relative standing appears to offer the
best explanation for top management turnover in acquired firms. Because top
executives are not the only important form of human capital in technology-motivated acquisitions, the theory of relative standing may have implications beyond
the acquired firms top management team. The theory might also be applied to
other human capital in the acquired firm, such as scientists, engineers, programmers,
middle managers, sales personnel, etc. (Very et al., 1997).
Drawing on concepts from the theory of relative standing, we predicted three
significant influences on the post-acquisition retention of valuable human capital
in acquired firms. First, the degree of autonomy given to the acquired firm increases
the relative decision-making latitude of acquired managers and employees. Rather
than be dominated or subjugated by the acquirer, greater autonomy provides incentives for employees to stay with the firm because they are able to maintain greater
control over their environment (Hambrick & Cannella, 1993; Huselid, 1995; Very
et al., 1997). This is especially likely to be the case in knowledge-based acquisitions,
where acquiring new skills and capabilities is the objective, because highly skilled
professionals or knowledge workers tend to desire or require relatively high
levels of autonomy (Jelinek & Schoonhoven, 1995; Raelin, 1991).
Second, relatively greater post-acquisition status of the acquired firms human
assets may also increase their propensity to stay with the newly merged firm (Coff,
1997). Status may be indicated by the acquired firms role in the management of
the newly merged firm after the acquisition is completed (Hambrick & Cannella,
1993). Managers and other employees from the acquired firm may be allowed to
manage not only their own operations, but they also may be promoted to assume
greater responsibilities through being appointed to larger general management or
functional responsibilities within the new, overall combined organization. Perhaps
more typically, many acquirers strip the acquired firms managers and employees
of their key responsibilities, effectively demoting them and reducing their status,
and instead appoint their own executives to manage the acquired firms operations
(Hambrick & Cannella, 1993; Haspeslagh & Jemison, 1991).
Finally, evidence of the acquirers commitment to the success of the acquisition
is likely to increase feelings of relative standing among the acquired firms managers
and employees. This commitment may be expressed through positive internal and
external media emphasizing the importance of the skills and capabilities of the
acquired firm to the newly combined organization. Such positive publicity may
increase acquired employees feelings of worth within the new organization. Other
types of evidence of the acquirers commitment might include mechanisms such as
increased resources for training and professional development for acquired managers and employees. Highly skilled employees are likely to value opportunities for
continued learning, training, and other forms of personal development in order to
increase their expertise and skills (Coff, 1997; Huselid, 1995; Pfeffer, 1994; Raelin,
1991). Investment in such opportunities by the acquiring firm demonstrates their
commitment to the success of the acquisition. Consistent with the predictions of
the theory of relative standing, these positive expressions of commitment are likely
to increase the propensity of acquired firms employees to remain after the acquisition deal is closed.

302

THE JOURNAL OF HIGH TECHNOLOGY MANAGEMENT RESEARCH VOL. 11/ NO. 2/ 2000

Applying these insights from the theory of relative standing in the specific context
of high-tech acquisitions, we propose the following three hypotheses:
Hypothesis 2:

Post-acquisition autonomy is positively associated with

retaining key employees.

Hypothesis 3:

Post-acquisition status of the acquired firm (as indicated

by management roles and responsibilities) is positively
associated with retaining key employees.

Hypothesis 4:

Evidence of the acquirers post-acquisition commitment

to the acquired firm is positively associated with retaining key employees.

Financial Incentives and Retention of Key Employees

As applied in the strategy literature, the theory of relative standing primarily
emphasizes the importance of non-financial incentives, related to perceptions of
the acquired firms autonomy, status, and worth, for determining post-acquisition
retention. But financial incentives may substitute at least partially for many of
these more intangible factors (Coff, 1997; Hambrick & Cannella, 1993). Financial
incentives provide another form of indication of an employees worth to an organization. The use of financial incentives to help achieve strategic and operational
objectives, including specifically to enhance retention of valuable managers and
knowledge workers, has received some attention in the literature (Saura-Diaz &
Gomez-Mejia, 1997). In high-technology industries, for example, the use of financial
incentives to retain highly skilled workers sometimes is a key component of retention
strategies (Balkin & Gomez-Mejia, 1990).
In the specific context of acquisitions, however, there is relatively little research
on the use and efficacy of financial incentives as a mechanism to enhance retention.
Some practitioner-oriented literature supports the use of short- and long-term
incentives to help keep valuable executives on board during the transition period
and signal key executives that they have important roles to play in the organization
going forward (Ferracone, 1987: 61). Financial incentives used to retain employees
in acquisitions can take several forms: (1) stay put bonuses, generally a large
bonus payable after the expiration of a certain period of time; (2) long-term contracts
with bonuses payable over a given period of time; (3) stock options that can be
exercised over some period of time or after a future date; and (4) increased base
salary and/or benefits.
To retain valuable human capital, firms may need to share the wealth they help
generate through some form of rent sharing, such as through various types of
financial incentives. Sharing the profits generated by knowledge workers valuable
expertise and skills promotes retention by raising their compensation higher relative
to the general labor market, as well as by increasing their perceived status in the
firm (Coff, 1997; Hambrick & Cannella, 1993). Economic rewards linked to key
employees continued employment within the newly merged firm therefore are
likely to enhance the prospects that these employees will remain after the acquisition

Retaining Human Capital

303

is consummated. The logic behind the use of such direct economic incentives suggests the following hypothesis:
Hypothesis 5:

The use of financial incentives is positively associated

with retaining key employees in the acquired firm.

METHODS
Sample Selection
Three criteria guided the selection of an appropriate sample of acquisitions for
this study. First, we focused on domestic acquisitions of high-technology firms.
Second, these acquisitions were relatively recent events, having occurred during
the time period 19941995. Third, the acquisitions had a transaction value between
$10 million and $250 million. These criteria and the resulting sample are discussed
in this section.
Acquisitions of domestic firms in industries classified as high-technology in
the Securities Data Corp (SDC) Worldwide Mergers and Acquisitions database
comprised the initial sample set. These industries include biotechnology, computer
equipment, computer software, computer services, electronics, and communications.
We selected these industries both because of a high level of recent acquisition
activity and because they represented technology-intensive businesses in which
knowledge-based resources were likely to be important strategic motives for the
acquisitions. The desire to obtain a particular technology or capability is a key
driver of most of these acquisitions (Kozin & Young, 1994). Because much of the
data were gathered through surveying of key managers, the use of relatively recent
acquisition events (19941995) helped minimize recall or bias problems due to
elapsed time.
The sample was limited to acquisitions valued at between $10 million and $250
million. Transactions of this size were more likely to be acquisitions of singlebusiness or single-division firms. This criteria helped control for the complexities
arising in acquisitions of larger and more diversified multidivisional firms. The focus
on small to medium-sized firms also increased the likelihood of being able to identify
issues related to acquisition of specific knowledge-based resources and increased
the likelihood of being able to identify key managers intimately involved in the
acquisition implementation process. In acquisitions of this size, generally two or
more managers in each firm had familiarity with both the acquisition decision and
the acquisition implementation process. In larger, more complex transactions, any
single manager would likely have had only limited information regarding the entire
acquisition process.
A total of 268 acquisitions of high-tech firms that met the three criteria were
identified in the SDC Worldwide Mergers and Acquisitions database. Subsequently,
Lexis/Nexus was used to search PR Newswire and Business Wire for press releases
associated with each of these acquisitions. Press releases were not available for 32
acquisitions. We examined press releases for each of the remaining 236 acquisitions
for evidence of whether gaining knowledge-based resources such as a specific technology or capability was described as an important motive for the acquisition.

304

THE JOURNAL OF HIGH TECHNOLOGY MANAGEMENT RESEARCH VOL. 11/ NO. 2/ 2000

Examination of the press releases resulted in elimination of 42 acquisitions from

the sample because there was no evidence of a technology or capability to be
transferred. These press releases typically discussed issues such as pending bankruptcy in the acquired firm, acquiring specific physical assets such as a particular
plant, or they described partial acquisitions of a single division or product line.
Seven additional acquisitions were eliminated because of a lack of sufficient contact
information. In these cases, contact information in the press releases was invalid
and the information also was unavailable in Wards Business Directory or other
references. A contact person for each of the remaining 187 acquisitions was identified from the press releases and other references, including through direct contact
with the firms. For the majority of acquisition cases, key managers were directly
contacted by phone to describe the project and to secure their participation before
the survey was actually sent. The survey was then sent through the mail to the
primary contact person and to one other senior manager in the firm. In all the
mailed survey packages, a cover letter explained the nature and intent of the study
and specified which acquisition the respondents were to consider when answering
the questionnaire.
Managers from 27 firms indicated that they would not be able to participate in
the research. The most common reasons given for not participating in the study
were company policy and time pressures. Four of the returned surveys had incomplete data and so were not used. When multiple responses for the same case were
compared, the average rate of inter-item agreement between the respondents was
73%. Response scores were averaged for these cases (Very et al., 1997). A total
of 89 cases, accounting for 48% of the initial sample of 187, were included in the
final sample. Given the potentially sensitive nature of the questionnaire and the
level of manager queried (CEO, etc.), the level of response was reasonably good.
Prior research reports response rates range from 1827% (Datta, 1991; Very et al.,
1997).
Respondents reported average experience of six years in their current position,
10 years in their current firm, and 19 years in the industry. Forty-eight percent of
respondents were affiliated with the acquired firm prior to the acquisition. Fiftytwo percent were affiliated with the parent firm prior to the acquisition. T-tests
revealed no significant differences between these two groups of respondents with
regard to the survey measures. In addition, 69% of respondents reported that they
were senior managers (CEO, president, executive or senior vice president, etc.).
The average transaction value of the acquisitions in our final sample was $69
million, with values ranging from $11 million to $249 million. Sixty-one percent of
the acquisitions were related at the two-digit SIC level. Thirty-six parent firms and
forty-seven acquired firms were computer software or information technology firms.
Thirty-six parent firms and twenty-seven acquired firms were involved in electronics
or related industries. The remaining firms were from the biotechnology, computerrelated equipment, and telecommunications sectors.
To check for nonresponse bias, respondents and nonrespondents were compared
according to several criteria: the average value of the acquisition, the average size
of the parent firm, and the relatedness of the acquisition. The means of each of
these variables for the final sample were compared with the means for the total
population of firms in the initial survey sample. Each of the calculated t-statistics
was statistically insignificant.

Retaining Human Capital

305

Measurement of Key Variables

Established scales were used when such scales existed. Five management researchers examined the survey instrument for both content and face validity. In
addition, managers in seven acquisitions participated in a pretest of the survey.
Following the pretests, slight wording and ordering modifications were made to
improve the clarity and organization of the survey. A description of the measures
of each of the variables is provided in this section.
Descriptive Information
Motivation for the Acquisition. Each survey respondent first identified the primary knowledge-based resource that was a key motivation for the acquisition in
each particular case. A list of 10 examples was developed from a series of structured
interviews with managers who pre-tested the survey, from press releases of acquisition announcements, and from prior literature categorizing knowledge-based resources (e.g., Grant, 1996). In 35% of the acquisitions, specific product-related
technology was identified as the most important knowledge-based resource of the
acquired firm. Product innovation and engineering capabilities accounted for 32%
of the acquisitions. Market or customer knowledge and sales relationships were
identified as most important in 18% of the acquisitions. Basic research capabilities
and production technology each accounted for 6% of responses. Finally, managerial
capabilities were identified as most important in only 2% of the acquisitions. These
survey responses were consistent with information gathered from the press releases
of the acquisitions.
Social Embeddedness of Knowledge. Several items assessed the social embeddedness of the acquired technology or capability by asking respondents the location
of the key knowledge-based resources within the acquired organizations. Based on
Leonard-Bartons (1992) work, King (1996) developed a measure to assess where
the knowledge supporting a particular organizational capability resides. This fiveitem measure asked respondents to divide 100 points among the five places within
the firm that hold knowledge critical to sustain the acquired resource. Respondents
indicated that 40% of the key acquired knowledge resided in the technical skills
of the employees. Another 16.5% were identified as residing in employees social
and professional relationships. Organizational mission and values was identified as
the location of 16% of the critical acquired knowledge. Managerial systems accounted for 8% of the acquired knowledge, while physical systems accounted for
just 18%. These values are consistent with the knowledge literature in that the
majority (82%) of the acquired knowledge was cited as residing either in particular
individuals or in the social complexity of the relationships, teams, and culture of
the acquired firm (Badaracco, 1991; Kogut & Zander, 1992; Leonard-Barton, 1995;
Winter, 1987).
Dependent Variables
Retention of Key Employees. To examine the retention of key employees
throughout the organization, multiple survey items were developed to measure two
dimensions: (1) a weighting of importance of different types of employees in the

306

THE JOURNAL OF HIGH TECHNOLOGY MANAGEMENT RESEARCH VOL. 11/ NO. 2/ 2000

acquired firm, and (2) the actual percentage retained. Respondents first identified
key employees by their location within the acquired firm (R&D, engineering, middle
management, marketing, etc.). Managers then provided objective data representing
the actual percentage of employees retained in each of these areas. This measure
allowed for an assessment of retention of employees in different areas and functions
throughout the acquired firm.
The overall retention measure was created by using a weighted average score
based on the two criteria: (1) the indicated importance of retaining a particular
group of employees (1 not important at all; 7 extremely important), and (2)
the actual percentage retained from that group (0100). Table 1 provides a summary
of the disaggregated data regarding which groups of employees were considered
to be most important and the corresponding mean percentage retained for each
group. Table 3 provides the mean and standard deviation for the weighted average
retention score for all of the cases.
Transfer of Knowledge-Based Resources. To assess the transfer to the acquirer
of the knowledge-based resources of the acquired firms (i.e., their valued technologies and capabilities), we adapted our measure from prior work attempting to
examine the transfer of resources and capabilities in an acquisition context (Capron
et al., 1998). Respondents were asked to identify to what extent each of the key
knowledge-based resources of the acquired firm had enhanced the competitiveness
of the newly merged firm (1 not at all; 7 to a very large extent). Scores on
these items were averaged to obtain an overall indicator for this variable. Managers
in each firm were contacted and asked to provide additional follow-up data approximately 912 months after our initial data collection. In addition to helping provide
greater assurance of the validity and reliability of the survey data, this follow-up
data also was used to assess and reduce concerns about potential common method
bias. Respondents were asked about: (1) the percentage of key acquired employees
retained after the acquisitions, and (2) the success of the acquirers at gaining and
utilizing critical technologies and capabilities from the acquired firms. Comparison
of the initial survey responses for these variables with the follow-up data indicated
a correlation of 0.84 between the initial measure of retention and the follow-up

TABLE 1
Retention of Key Employees (n 89)
Function
Research & development
Middle management
Engineering
Top management
Sales
Marketing
Manufacturing
Finance
Purchasing
Distribution

Average Importance
of Retention

Average %
Retained

5.79
5.49
5.10
5.10
5.04
4.75
3.91
3.37
3.10
3.06

77.3%
72.0%
69.9%
56.0%
66.0%
63.8%
59.5%
54.8%
59.1%
58.5%

Retaining Human Capital

307

TABLE 2
Composition of Key Management Group After
the Acquisition (n 89)
Origin
Originally part of acquirers management
Originally part of acquired firms management
Originally in parent firm but not part of management
Originally in acquired firm but not part of management
Hired after the acquisition

Mean
%

Standard
Deviation

27.4
48.1
7.5
8.6
10.2

31.5
36.0
18.4
15.1
19.7

measure of retention, and a correlation of 0.76 between the initial measure of

knowledge transfer and the follow-up measure.
Independent Variables
Post-Acquisition Autonomy of the Acquired Firm. To assess post-acquisition
autonomy of the acquired firm, the survey included a multiple-item scale developed
by Very and colleagues (1997) examining autonomy by functional area. This scale
includes 12 items that ask respondents to what extent various functions were consolidated with the parent (1 totally independent; 7 totally consolidated). The
functional areas included in the items were production, supply sources, R&D,
engineering, distribution, sales, marketing, personnel management, strategic planning, financial & budget controls, accounting, and senior management. An aggregate
measure of autonomy was calculated by averaging the scores on all the items (
0.95). Results for this measure were compared with responses on the single-item
measure developed by Hambrick and Cannella (1993) to assess overall autonomy,
which also was included on the survey. The two measures were highly correlated
(r 0.78, p .001).
Post-Acquisition Status of the Acquired Firm. To measure post-acquisition status of the acquired firm, respondents were asked to indicate the percentage of the
top management team of the newly merged firm that was originally employed by
the acquired firm. The total percentage of the acquired firms employees that were
part of the newly combined firms top management team was used as our measure
of the relative post-acquisition status of the acquired firm (Hambrick & Cannella,
1993). Table 2 provides descriptive data regarding the post-acquisition composition
of the top management team.
Acquirers Commitment to the Acquired Organization. Because no existing measure could be found to assess this variable, a new scale was developed from our
literature review and from background interviews (Haspeslagh & Jemison, 1991;
Huselid, 1995). The four items in this measure assessed various dimensions of the
acquirers corporate commitment to the success of the acquisition. First, respondents
indicated to what extent they agreed or disagreed with the statement that the
acquirer was visibly committed to making the acquisition a success (1 strongly
disagree; 7 strongly agree). The remaining items assessed other potential indica-

308

THE JOURNAL OF HIGH TECHNOLOGY MANAGEMENT RESEARCH VOL. 11/ NO. 2/ 2000

tors of commitment: the use of positive public relations; support for travel and
liaison between the acquired firm and the new corporate parent; and support for
continued training and development of the acquired firms employees. Factor analysis of the items (with varimax rotation) extracted a single factor. An aggregate
measure of commitment was calculated by averaging respondents scores on the
four items ( 0.91).
Financial Incentives. The survey presented respondents with items assessing
the use of four different types of financial incentives that might be used to encourage
employees to stay with a company. These items included (1) short-run incentives,
(2) long-term contracts, (3) stock options, and (4) performance bonuses (Balkin &
Gomez-Mejia, 1990; Gerhart & Milkovich, 1990). Respondents were asked to rate
on a seven-point scale the extent of use for each type of incentive (1 did not
offer; 7 used to a great extent). Factor analysis on these items (with varimax
rotation) extracted two factors with eigenvalues >1. The first factor consisted of
short-run incentives and long-term contracts, each linked to a specific time frame
for retaining an employee. The second factor consisted of stock options and other
types of bonuses linked directly to performance outcomes of the newly merged
business. An overall score for each of the factors was calculated by averaging the
scores for the items that loaded on each factor. Because each measure appeared
to tap into a different type of financial incentive, both measures were used in
subsequent analyses.
Control Variables
Three control variables were included in the analysis. The three controls were
(1) the relatedness of the acquisition, (2) the acquired firms performance relative
to the acquirers at the time of the acquisition, and (3) the acquired firms size relative
to the acquirer. A well-developed argument in the strategy literature suggests that
related acquisitions should be more successful than unrelated ones because both
tangible and intangible resources can be more easily combined when a firm extends
its activities into a related area (Bettis, 1981; Lubatkin, 1987; Ravenscraft & Scherer,
1987). To control for potential effects of relatedness, the relatedness of the acquired
firm and the acquirer was included in the analysis and was coded as a binary
variable. The acquisition was considered related if the acquirer and the acquired
firm operated in the same primary 2-digit SIC code (Lubatkin, Merchant, & Srinivasan, 1993).
In addition, previous researchers have argued that acquisitions of relatively larger
and more successful firms may be more difficult to implement effectively (Kitching,
1967; Nahavandi & Malekzadeh, 1988). When the acquired firm is relatively large
and/or successful, this creates pressures to give it more post-acquisition autonomy,
and to allow it to retain more control and greater assets, even if they are not
considered to be critical to achieving the objectives of the acquisition. In acquisitions
of relatively larger or more successful firms, it may be more difficult for the acquirers
to control the post-acquisition implementation process. The size and performance
of the acquired firm relative to the acquirer therefore were used as control variables.
Over half of the acquisition sample consisted of privately held firms for which
public data was not available. Therefore, an item was included on the survey asking

Retaining Human Capital

309

respondents to assess the relative size of the two firms at the time of the acquisition.
For 42 acquisitions for which complete public data were available, we also obtained
the ratio of the number of employees in the acquired firm to the number of employees in the parent firm from Wards Business Directory to check the reliability of
our survey measure. The archival measure and the survey measure were highly
correlated (r 0.79) for these 42 acquisitions. To measure relative performance,
an item on the survey asked respondents to state the relative annual sales growth
of the two firms at the time of the acquisition. We again obtained archival data
from Wards Business Directory to check the reliability of the survey measures.
The archival data and the survey measure were highly correlated (r 0.89), providing greater assurance of the reliability of our survey measure of relative performance.
These data are summarized in Table 3.
RESULTS
We screened the survey data to check for outliers, out-of-range values, missing
data, and assumptions of normality and homoscedasticity by examining univariate
statistics and scatterplots of the residuals (Tabachnick & Fidell, 1996). Descriptive
statistics and correlations for each of the variables used in the analyses are presented
in Table 3.
A mediated regression model was used to test the five hypotheses. Mediated
regression allows for assessment of both direct and indirect effects of independent
variables and an intermediate variable on the dependent variable (Baron & Kenny,
1986). Three regression models were analyzed. First, we tested a regression model
assessing the impact of the independent variables (autonomy, status, commitment,
and financial incentives) on the intermediate variable (retention). This first model
allowed for testing of Hypotheses 24. Second, a regression model examining the
impact of the independent variables on the ultimate dependent variable (knowledge
transfer) was conducted. Finally, a regression model examining the impact of both
the independent variables and the intermediate variable (retention) on the dependent variable (knowledge transfer) was tested. Comparing models 2 and 3 allowed
for the assessment of any direct effects the hypothesized independent variables
may have on knowledge transfer, as well as their indirect effects through retention
(Baron & Kenny, 1986). Condition indices and variance inflation factors were
analyzed for all three models to assess any potential problems with multicollinearity
(Tabachnik & Fidell, 1996). No significant problems with multicollinearity were
found as a result of these diagnostic checks. The regression models are presented
in Table 4.
The first model was significant (R2 .50, F 10.129, p .001). Specifically,
autonomy ( 0.321, p .001), status ( 0.270, p .01), and commitment (
0.259, p .01) were positive and significant predictors of retention during postacquisition implementation, providing support for Hypotheses 2, 3, and 4. However,
neither type of financial incentive (time-based, performance-based) was a significant
predictor of retention. Hypothesis 5, therefore, was not supported. In addition, the
control variable for relative size was significantly related to retention ( 0.189,
p .05). The other control variables, relatedness and relative performance, were
not significant (p .05) predictors of retention.

3.68
5.53
56.75
3.50
3.06
5.38
4.80
0.61
45.95
4.15

Autonomy
Commitment
Relative status
Financial incentive (perf.)
Financial incentive (time)
Relative size
Relative performance
Relatedness
Retention
Knowledge transfer

* p .05.
** p .01.

Mean

Variable
1.85
1.69
35.36
1.43
1.94
1.70
1.67
0.49
19.88
1.17

S.D.
.04
.49**
.21*
.29**
.09
.22*
.27**
.56**
.15

.15
.32**
.31**
.03
.01
.12
.23*
.25*

.03
.25*
.08
.17
.37**
.54**
.12

.22*
.19
.04
.13
.05
.02

.07
.04
.10
.19
.08

TABLE 3
Descriptive Statistics and Correlations (n 89)

.13
.05
.16
.30**

.01
.26*
.06

.27**
.00

.53**

310
THE JOURNAL OF HIGH TECHNOLOGY MANAGEMENT RESEARCH VOL. 11/ NO. 2/ 2000

Retaining Human Capital

311

TABLE 4
Mediated Regression Analysis (n 89)a
Variable
Controls
Relative size
Relative performance
Relatedness
Independent variables
Autonomy
Status
Commitment
Performance incentives
Time incentives

Model 1

Model 2

Model 3

0.189*
(2.256)
0.159t
(1.934)
0.112
(1.279)

0.341**
(3.207)
0.069
(0.660)
0.015
(0.134)

0.214*
(2.287)
0.038
(0.413)
0.090
(0.938)

0.321***
(3.295)
0.270**
(2.676)
0.259**
(2.864)
0.052
(0.593)
0.072
(0.810)

0.081
(0.650)
0.083
(0.648)
0.255*
(2.220)
0.131
(1.170)
0.098
(0.861)

0.135
(1.198)
0.098
(0.859)
0.081
(0.788)
0.096
(1.001)
0.147
(1.502)
0.672***
(5.531)

Retention
Model
F-statistic
R2

10.129***
0.503
DV Retention

2.448**
0.197
DV Knowledge
Transfer

6.379***
0.421
DV Knowledge
Transfer

Standardized coefficients are presented with T-ratios in parentheses.

p .1.
* p .05.
** p .01.
*** p .001.

The second model used the same independent variables, but with knowledge
transfer as the dependent variable. The overall model was significant (R2 .197,
F 2.448, p .01). However, commitment was the only significant independent
variable ( 0.255, p .05). Neither autonomy, status, nor financial incentives
were individually significant predictors of knowledge transfer. Results for the control
variable for relative size ( 0.341, p .01) again were significant, however. The
other controls, relative performance and relatedness, were not significant predictors
of knowledge transfer.
The third model used knowledge transfer as the dependent variable and included
retention as an intermediate variable. This model was also was significant overall
(R2 .42, F 6.379, p .001). The change in the F-statistic from model 2 to model
3 was also significant (F 30.589, p .001), indicating that retention explained
a significant amount of variance in knowledge transfer apart from the independent
variables. In other words, retention was a significant and positive predictor of the
extent to which technologies and capabilities had been successfully transferred from
the acquired firms to the acquirers ( 0.672, p .001), consistent with Hypothesis
1. Commitment was no longer significant in this model, indicating that the effects

312

THE JOURNAL OF HIGH TECHNOLOGY MANAGEMENT RESEARCH VOL. 11/ NO. 2/ 2000

of commitment are primarily through its positive influence on retention. In addition,

autonomy, status, and financial incentives also were not significant in model 3,
further suggesting that the key influence of these variables on the transfer of
technologies and capabilities to the acquirers is through their significant effects on
retention. The control for relative size remained positive and significant in model
3 ( 0.214, p .05). Relative performance and relatedness again were not
significant.
DISCUSSION & CONCLUSIONS
This study provides one of the first empirical tests of several key issues related
to high-tech acquisitions, transactions in which the transfer of knowledge-based
resources to the acquirers is a paramount strategic concern. First, the study confirmed the suggestion that many acquisitions in the contemporary business environment are occurring with the specific objective of obtaining critical knowledgebased technologies and capabilities from the acquired firms. Second, retaining key
employees throughout the acquired organizations (not just at the level of top
management) appears to be a critical prerequisite to promote the successful transfer
of their technologies and capabilities to the acquiring firms. Third, the results
provide evidence of some important determinants of retention of these key acquired
employees. These three contributions are discussed in turn.
The first portion of the survey asked respondents to (1) identify the most important resource of the acquired firm that motivated the acquisition, and then (2) to
identify the location of valuable knowledge-based resources within the acquired
firm. Eighty-four percent of the acquisitions in this study were made for the purpose
of acquiring specific product-related technologies, market or customer knowledge
and sales relationships, product innovation capabilities, or engineering capabilities.
Respondents indicated that over 40% of the knowledge necessary to sustain these
critical resources resided in the technical skills of key acquired employees. Another
32% of the knowledge was identified as located in the greater social context of
the organizationthe relationships employees had with one another, with other
professionals and other outside stakeholders, and in the organizations mission and
values. These descriptive data provide evidence that the desire to obtain both
individual and collectively embedded knowledge is a key motivation for many
acquisitions of high-tech firms.
While most prior research has focused on retention of the top management team
following an acquisition (Cannella & Hambrick, 1993; Hambrick & Cannella, 1993;
Walsh, 1988, 1989; Walsh & Ellwood, 1991), our results provide evidence suggesting
the importance of retaining valuable human capital other than top executives. In
fact, the data in Table 1 indicate that the acquired firms top managers, and the
knowledge and skills they possess, often are not the most critical portion of the
acquired firms human capital. For example, research and development personnel
were cited as the most important source of the knowledge-based resources for
which the firm was acquired. Given the focus of prior acquisitions research on top
management teams, these data also give a different perspective in that respondents
cited middle managers in the acquired high-technology firms as a more important
repository of the knowledge they sought to acquire. Engineering personnel tied

Retaining Human Capital

313

with top management as a location of critical expertise and skills, and the importance
of retaining acquired sales personnel was not significantly different from the importance of retaining acquired top managers. The importance accorded to these groups
of employees is consistent with the respondents primary acquisition objectives of
acquiring product-related technologies, sales relationships and customer knowledge,
product innovation capabilities, and engineering capabilities. R&D, sales, and engineering play critical roles in generating and sustaining the acquired technologies
and capabilities.
These results may suggest that the negative performance effects of top management turnover that have been observed for some acquisitions (e.g., Cannella &
Hambrick, 1993) may not necessarily be direct effects nor are they necessarily the
most important effects in all acquisitions. At least in certain types of acquisitions,
top management turnover in acquired firms may be acting as a highly correlated
proxy for departure of other key employees. A more direct cause of poor performance may be the loss of R&D employees, middle managers, or engineering personnel. As others have speculated (Very et al., 1997), another explanation is that top
management turnover may be an indicator of broader organizational problems that
then affect other organizational members. The departure of non-executive key
employees from the acquired firm may be intertwined with organizational difficulties, perhaps as both cause and effect in some sort of negative feedback loop or
downward spiral. Retention of the top management team may nonetheless be
important in some cases because their retention may provide some stability and
continuity for the acquired organization through a transition period, even though
other employees possess the actual expertise and skills that are of interest to the
acquirer. The reasons for keeping top managers therefore are likely to involve
symbolism to some degree (as our findings for the status variable suggest) and not
just to retain their executive experience and skills. Retaining top managers may be
necessary or helpful for a period of time, perhaps long enough to provide a smooth
transition and to gain loyalty of key R&D, engineering, sales, and middle management employees. Interestingly, however, actual retention of top managers ranked
next to last among the different groupings of employees, with only finance employees
more likely to leave the firm than members of the top management team.
The second, more general contribution of this research is the empirical linkage
of retention of key employees with the successful preservation and transfer of
knowledge-based resources from the acquired firms to the acquirers. The results
supporting Hypothesis 1 indicate that higher retention of key employees throughout
the acquired organization does result in significantly greater transfer of knowledgebased resources to the acquirer, at least in this sample of high-technology acquisitions. The conceptual framework developed in this study stresses the importance
of retaining these key acquired employees because valuable tacit knowledge may
be packaged both in the form of particular individuals and in the relationships and
interactions of teams or groups of key individuals. Consequently, if this knowledge
is to be successfully preserved and transferred during the acquisition implementation
process, retention of key employees should be a critical strategic objective of the
top management team of the acquiring firm. In contrast, this sort of objective may
not be as important when the motivation for an acquisition is to obtain increased
market share, greater economies of scale, or physical assets such as plant and
equipment, acquisitions in which eliminating large numbers of employees may be

314

THE JOURNAL OF HIGH TECHNOLOGY MANAGEMENT RESEARCH VOL. 11/ NO. 2/ 2000

an explicit part of the implementation plan. This contrast suggests that future
acquisitions research may be improved and refined by more specific consideration
and distinction of the different and specific motivations for an acquisition and of
what is actually being acquired.
Because of the importance of retention in these acquisitions, four possible determinants of key employee turnover were examined. These four factors were: (1) the
autonomy granted to the acquired firm; (2) the status of the acquired firm, as
indicated by the composition of the post-acquisition top management team; (3)
corporate commitment to the acquisition; and (4) the use of financial incentives to
try to keep employees from departing.
First, the results provide support for the positive influence of continued autonomy
of the acquired organization on the retention of key employees. Past research
indicates that granting autonomy to an acquired firms managers increases their
feelings of relative standing in the firm and, therefore, minimizes their tendency to
leave. Consistent with the theory of relative standing and Hambrick and Cannellas
(1993) findings for top executives, our data suggest that preservation (Haspeslagh & Jemison, 1991) or separation (Nahavandi & Malekzadeh, 1988) modes
of acquisition implementation may be sometimes appropriate for acquisitions of
knowledge-based resources (at least for some period of time) to prevent the loss
of key resources through personnel turnover.
With recent high levels of M&A activity, some have recommended relatively
rapid and complete integration of acquisitions in order to increase the chances of
success (Ashkenas, DeMonaco, & Francis, 1998). For some types of acquisitions,
implementation strategies based on quick integration may be appropriate. But the
results for autonomy in this sample of high-tech acquisitions suggest that a cautious
consideration of such strategies is warranted. Critical aspects of acquisition implementation strategies, such as levels of autonomy, perhaps need to be dictated more
by the specific motivations and resources of the acquisition situation rather than
by some general prescription for all acquisitions. Again, additional research may
help better define key parameters or contingencies that should guide these acquisition implementation choices.
The autonomy findings also highlight a persistent dilemma when higher levels
of autonomy are granted to an acquired firm. With lower levels of integration and
higher levels of autonomy, how can the resources of the acquired firm and the
acquirer be successfully transferred, shared, and combined? Assuming that there
are synergies to be realized through integration in many acquisition cases, the need
to maintain a large degree of post-acquisition autonomy for the acquired firm (in
order to retain key employees) creates a serious challenge. How this tension can
be successfully managed is another question for future research. Other types of
acquisition implementation mechanisms such as formal and informal communications and other types of exchanges between the acquired firm and the acquirer may
be critical (Shrivastava, 1986). Frequent meetings and active project-based teams
might be useful where there is the necessity for exchange of ideas and combination
of knowledge across a continued post-acquisition boundary of autonomy between
the acquirer and the acquired.
As with greater autonomy, greater status accorded to the acquired firm also
appears to increase retention of key employees. The percentage of the management
team of the acquired firms operations who were originally part of the acquired

Retaining Human Capital

315

firm was positively associated with retention of other key acquired employees. By
maintaining or increasing acquired employees executive responsibilities in the
newly merged firm and by keeping or making them part of the new management
team, their feelings of importance and status in the new organizational context are
bolstered and the status of the acquired organization within the combined firm is
validated. As previously discussed, the importance of retaining top managers of
the acquired firm may be largely for symbolic and organizational reasonsto keep
the organization stable and functioning and to thereby prevent personnel losses
rather than to retain top managers executive knowledge and skills.
Relatively unique among acquisition studies of this type, the turnover measure
used in this study included turnover/retention data for a variety (10) of different
groups of employees within the acquired firm, as well as ratings of the actual
importance of their retention. The results therefore clearly support the argument
that issues of relative standing have consequences beyond just the top management
team of the acquired firm. Relative standing issues appear to flow throughout
the acquired organization. The dynamics of relative standing may be particularly
important in the sort of high-tech acquisitions examined in this study because, in
many of the cases, the acquired firm possessed some superior and relatively scarce
knowledge-based resource, which was the motivation for the acquisition. If these
types of acquisitions are implemented surrounded by an aura of conquest [of the
acquired firm], as many acquisitions are (Hambrick & Cannella, 1993: 735), the
negative consequences may be particularly acute, both in terms of departure of
personnel as well as in terms of lowering morale of those who remain. Instead,
relatively high status for the acquired organization and its key employees in the
newly combined firm may be appropriate, especially given the valuable knowledge
and skills that ostensibly motivated such an acquisition. The theory of relative
standing, then, is not only important for understanding turnover of acquired executives, but may also help to understand turnover of acquired employees throughout
the firm.
Third, the acquirers corporate commitment to the acquisition was also found
to be a positive influence on the retention of acquired employees. Expressions of
commitment to the success of the acquisition, support for training and travel, and
positive public relations on the part of the acquirer appear to enhance acquired
employees comfort within, and commitment to, the newly combined organizations.
The significant findings for this commitment variable are consistent with the theory
of relative standing and therefore also support the utility of applying relative standing concepts to examine retention of personnel throughout the acquired firm.
Perhaps one of the most surprising findings of this study was that financial
incentives did not significantly influence actual retention. Neither incentives based
on time spent with the firm following the acquisition, nor incentives based on postacquisition performance criteria, were effective determinants of retention in our
sample of high-tech acquisitions. Less economically related and more socially oriented issues related to autonomy, status, and commitment clearly were more important determinants of retention than were financial incentives. The broader social
logic behind the theory of relative standing therefore appears to be a better predictor
of employee retention than a theory simply based on direct, personal economic
interests.
These results for the financial incentives variable are worthy of further consider-

316

THE JOURNAL OF HIGH TECHNOLOGY MANAGEMENT RESEARCH VOL. 11/ NO. 2/ 2000

ation in future research, especially given the apparent popularity of such incentives
in many acquisition implementation plans. At least for some groups of employees,
broader issues related to relative standing ultimately may prove more important
than financial incentives in determining whether they decide to remain with an
organization after the deal is done. An alternative explanation is that highly skilled
individuals or teams that are worthy of substantial financial incentives for retention,
are likely to be in demand not just by the acquirer, but also by other firms who
may offer even greater incentives for these key employees to leave. Yet another
plausible explanation is that key employees in these high-technology firms may
have already realized substantial economic gains when their firm was acquired,
especially if they possessed a significant stake in the company for which they worked.
After realizing such a buyout windfall, further financial incentives may have
relatively less appeal to these employees and thus may have much lower utility as
a retention mechanism than in other situations.
Early research on work design emphasized the importance of autonomy in increasing an employees internal motivation (Hackman & Oldham, 1980). Autonomy
has also been linked to increased innovation and creativity for technology workers
(Amabile, Conti, Coon, Lazenby, & Herron, 1996; Bailyn, 1985). Highly skilled
technology workers may be able to move to other firms without requisite loss of
financial compensation; tight labor markets in technology professions (McGee,
1998) may allow them to seek organizational settings that provide other factors
that increase their internal motivation and creativity without much, if any, economic loss.
Finally, from the perspective of management practice, this study may provide
managers with some direction for where to focus their efforts and expend their
resources in order to retain valuable human capital when they acquire other knowledge-intensive organizations. While the relatively direct approach of financial
incentives for retention did not appear to be particularly effective, other less tangible
and more social factors were more significant determinants of retention. Rather
than solely focus on compensation issues, managers of the acquiring firms probably
should spend a good portion of their efforts on issues related to autonomy, status,
and commitment during acquisition implementation.
Ultimately, the retention of key employees may only be a precursor or a precondition for the successful appropriation of technologies and capabilities by the acquirer.
The successful transfer and combination of knowledge between the acquired firm
and the acquirer, and its successful application to commercial ends, will continue
to be critical and complex issues both for researchers and for those managers
actually tasked with acquisition implementation.

REFERENCES
Aley, J., & Siegel, M. (1998). First: The fallout from merger mania. Fortune, 3/2/98, 2627.
Amabile, T.M., Conti, R., Coon, H., Lazenby, J., & Herron, M. (1996). Assessing the work
environment for creativity. Academy of Management Journal, 39, 11541184.
Ashkenas, R.N., DeMonaco, L.J., & Francis, S.C. (1998). Making the deal real: How GE
Capital integrates acquisitions. Harvard Business Review, January-February, 165178.

Retaining Human Capital

317

Badaracco, J.L., Jr. (1991). The knowledge link: How firms compete through strategic alliances.
Boston, MA: Harvard Business School Press.
Bailyn, L. (1985). Autonomy in the industrial R&D laboratory. Human Resource Management, 24, 129146.
Balkin, D.B., & Gomez-Mejia, L.R. (1990). Matching compensation and organizational
strategies. Strategic Management Journal, 11, 153169.
Baron, R.M., & Kenny, D.A. (1986). The moderator-mediator variable distinction in social
psychological research: Conceptual, strategic, and statistical considerations. Journal of
Personality and Social Psychology, 51, 11731182.
Barney, J. (1991). Firm resources and sustained competitive advantage. Journal of Management, 17, 99120.
Bettis, R.A. (1981). Performance differences in related and unrelated diversified firms. Strategic Management Journal, 2, 379394.
Cannella, A.A., & Hambrick, D.C. (1993). Effects of executive departures on the performance
of acquired firms. Strategic Management Journal, 14, 137152.
Capron, L., Dussauge, P., & Mitchell, W. (1998). Resource redeployment following horizontal
acquisitions in Europe and North America. Strategic Management Journal, 19, 631662.
Castanias, R.P., & Helfat, C.E. (1991). Managerial resources and rents. Journal of Management, 17, 155171.
Coff, R. (1997). Human assets and management dilemmas: Coping with hazards on the road
to resource-based theory. Academy of Management Review, 22, 374402.
Datta, D.K. (1991). Organizational fit and acquisition performance: Effects of post-acquisition
integration. Strategic Management Journal, 12, 281297.
Davenport, T.H., & Prusak, L. (1998). Working knowledge: How organizations manage what
they know. Boston, MA: Harvard Business School Press.
Ferracone, R. (1987). Blending compensation plans of combining firms. Mergers and Acquisitions, 22, 5765.
Frank, R.H. (1986). Choosing the right pond: Human behavior and the quest for status. New
York: Oxford University Press.
Fryxell, G.E., & Judge, W.Q. (1997). Individualism and teamwork: Synthesizing the dialictic
in the management of R&D in biotechnology. The Journal of High Technology Management Research, 6, 3354.
Gerhart, B., & Milkovich, G.T. (1990). Organizational differences in managerial compensation and financial performance. Academy of Management Journal, 33, 663691.
Grant, R. (1996). Prospering in dynamically-competitive environments: Organizational capability as knowledge integration. Organization Science, 7, 375387.
Hackman, J.R., & Oldham, G.R. (1980). Work redesign. Reading, MA: Addison-Wesley.
Hambrick, D.C., & Cannella, A.A., Jr. (1993). Relative standing: A framework for understanding departures of acquired executives. Academy of Management Journal, 36,
733762.
Haspeslagh, P.C., & Jemison, D.B. (1991). Managing acquisitions: Creating value through
corporate renewal. New York: The Free Press.
Huber, G. (1991). Organizational learning: The contributing processes & literatures. Organization Science, 2, 88115.
Huselid, M.A. (1995). The impact of human resource management practices on turnover,
productivity, and corporate financial performance. Academy of Management Journal,
38, 635672.
Itami, H., & Roehl, T.W. (1987). Mobilizing invisible assets. Cambridge, MA: Harvard
University Press.
Jelinek, M., & Schoonhoven, C.B. (1995). Organizational culture as a strategic advantage:
Insights from high-technology firms. In L.R. Gomez-Mejia & M. W. Lawless (Eds.),
Implementation management in high technology. Greenwich, CT: JAI Press.

318

THE JOURNAL OF HIGH TECHNOLOGY MANAGEMENT RESEARCH VOL. 11/ NO. 2/ 2000

King, A. (1996). Managers perceptions of organizational competencies and firm performance.

Unpublished doctoral dissertation. Kenan-Flagler Business School, University of North
Carolina at Chapel Hill.
Kitching, J. (1967). Why do mergers miscarry? Harvard Business Review, 45, 84107.
Kogut, B., & Zander, U. (1992). Knowledge of the firm, combinative capabilities and the
replication of technology. Organization Science, 3, 383397.
Kozin, M.D., & Young, K.C. (1994). Using acquisitions to buy and hone core competencies.
Mergers & Acquisitions, September/October, 2126.
Krug, J.A., & Hegarty, W.H. (1997). Postacquisition turnover among U.S. top management
teams: An analysis of the effects of foreign vs. domestic acquisitions of U.S. targets.
Strategic Management Journal, 18, 667675.
Leonard-Barton, D. (1992). Core capabilities and core rigidities: A paradox in managing
new product development. Strategic Management Journal, 13, 111125.
Leonard-Barton, D. (1995). Wellsprings of knowledge: Building and sustaining the sources
of innovation. Boston, MA: Harvard Business School Press.
Lubatkin, M. (1987). Merger strategies and stockholder value. Strategic Management Journal,
8, 3953.
Lubatkin, M., Merchant, H., & Srinivasan, N. (1993). Construct validity of some unweighted
product-count diversification measures. Strategic Management Journal, 14, 433449.
McGee, M.K. (1998). Beyond the IT people shortage. Informationweek, September 14.
Nahavandi, A., & Malekzadeh, A.R. (1988). Acculturation in mergers and acquisitions.
Academy of Management Review, 13, 7990.
Nelson, R.R. & Winter, S. (1982). An evolutionary theory of economic change. Cambridge,
MA: Harvard University Press.
Nonaka, I. (1994). A dynamic theory of organizational knowledge creation. Organization
Science, 5, 1437.
Pfeffer, J. (1994). Competitive advantage through people: Unleashing the power of the work
force. Boston, MA: Harvard Business School Press.
Pitts, R.A. (1976). Diversification strategies and organizational policies of large diversified
firms. Journal of Economics and Business, 28, 181188.
Polanyi, M. (1962). Personal knowledge: Towards a post-critical philosophy. Chicago, IL:
University of Chicago Press.
Raelin, J.A. (1991). The clash of cultures: Managers managing professionals. Boston, MA:
Harvard Business School Press.
Ravenscraft, D., & Scherer, F.M. (1987). Mergers, sell-offs and economic efficiency. Washington, DC: The Brookings Institution.
Reed, R., & DeFillippi, R.J. (1990). Causal ambiguity, barriers to imitation, and sustainable
competitive advantage. Academy of Management Review, 15, 88102.
Saura-Diaz, M.D., & Gomez-Mejia, L.R. (1997). The effectiveness of organization-wide
compensation strategies in technology intensive firms. The Journal of High Technology
Management Research, 8, 301315.
Shrivastava, P. (1986). Postmerger integration. Journal of Business Strategy, 7, 6576.
Tabachnick, B.G., & Fidell, L.S. (1996). Using multivariate statistics. New York: Harper
Collins.
Very, P., Lubatkin, M., Calori, R., & Veiga, J. (1997). Relative standing and the performance
of recently acquired European firms. Strategic Management Journal, 18, 593614.
Walsh, J.P. (1988). Top management turnover following mergers and acquisitions. Strategic
Management Journal, 9, 173183.
Walsh, J.P. (1989). Doing a deal: Merger and acquisition negotiations and their impact upon
target company top management turnover. Strategic Management Journal, 10, 307322.
Walsh, J.P., & Ellwood, J.W. (1991). Mergers, acquisitions, and the pruning of managerial
deadwood. Strategic Management Journal, 12, 201217.

Retaining Human Capital

319

Winter, S. (1987). Knowledge and competence as strategic assets. In Teece, D.J. (Ed.), The
competitive challenge: Strategies for industrial innovation and renewal (pp. 159184).
New York: Harper and Row.
Wysocki, B., Jr. (1997). Why an acquisition? Often, its the people. Wall Street Journal, 10/6.