Angela K. Love
Personal + Business Finance Consultant

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Domestic Absorptive Capacity and Spillover Effects

Are you planning on a joint venture, acquiring another company, or merging two companies?  Have you considered the absorptive capacity of the smaller company?  Are spillover effects a possibility?  How will company culture be affected?  These considerations are typically missed or avoided when only domestic companies are involved in joint ventures, acquisitions, mergers, etc. 

The ideology of spillover effects, absorptive capacity, and changes in company culture are typically applied to foreign direct investment (FDI).  However, too many times we see large domestic companies merging or acquiring smaller domestic ones and spillover effects and absorptive capacity are not a consideration.  Changes in company culture are well-managed.  These areas should be part of the implementation planning as larger companies plan their strategies to enlarge their influence by purchasing and merging with smaller ones.   

Discussing spillover effects and absorptive capacity on a micro, domestic level may appear simplistic on the surface; yet, we see mergers and acquisitions (M&A) causing a rocky road of blending companies on a consistent basis.  Sometimes, companies cannot navigate through the perilous waters of coming together, leading to failure.  A successful strategic M&A plan should include possible positive and negative results from spillover effects, absorptive capacity, and changes in company culture.

Spillover Effects.  Positive spillover effects occur more often when M&As of complementary companies rather than those in the same industry.  For example, Bass Pros acquisition of the competing Cabela’s company most likely did not provide a great deal of transfer of knowledge; however, it did lead to an expanded market area.  The direction of the merger has caused uncertainty in the Sydney, NE, real estate market, leading to one negative spillover effect.  Positive spillover effects will likely occur in productivity, economies of scale, technology, and efficiencies.  The transfer of knowledge can go both directions. Some large companies do not recognize the possibilities of spillover effects occurring from small companies.  Cabela’s opens new market territories to Bass Pro, and Cabela’s understands the consumer mindset in those regions. 

Absorptive Capacity.  It would be difficult to measure the absorptive capacity of Cabela’s from being acquisitioned by Bass Pros.  Bass Pros is taking over operations while keeping maintaining Cabela’s name for now.  AT&T and DirecTV is a well-known merger of complementary companies.  They experienced a rocky start in their billing, but both companies used absorptive capacity as they realized, assimilated, and applied valuable technology and knowledge to further combined offerings to consumers.  These are large, global companies but absorptive capacity can occur with smaller, domestic companies as well. 

For example, last week two U.S. domestic companies, Pixel Pines (a software company) and B9Creations (a 3D printing solutions company) located in Rapid City, SD, announced their merger to combine their knowledge and technologies.  A transfer of knowledge and improved technologies is the desired effect of the merger between the two companies.  The degree of their success will be measured by their ability to identify new information from one another.  Blending their company culture may or may not bring challenges.     

Company Culture.  The effects of M&A on company culture are significant when looking at FDI’s.  Changes in company culture can also be significant for domestic mergers, too.  In my experience, I have seen larger nationally based companies not consider the regional knowledge from those in the smaller company.  Taking it one degree smaller, the dynamics of interpersonal relationships and switching leadership roles can have a substantial impact on employee morale, loyalty, and productivity. 

Changes in company focus, leadership styles, expectations, processes, technology, etc., are unsettling to some extent to most employees.  A shift in employee influence at the water cooler can cause the most confident employee to be a concerned about the future.  On the other hand, an openness to shared ideas and celebrating the addition of strengths of combined efforts can lead to exciting innovations. 

Many articles list the key factors to mergers and acquisitions but do not include the factors of absorptive capacity, spillover effects, and changes in company culture.  These areas may have a significant impact on your M&A and are worth consideration during your planning phase