The Quest for Synergistic Effects in Horizontal Mergers Using Combined Transaction Cost Theory and Resource-based View The Case of Activision Blizzard Mariana Boev MSc International Business 6/6/14 Konstantina Kaisheva Economics MSc International Business Economics International Business Center Department of Business and Management Master Thesis: The Quest for Synergistic Effects in Horizontal Mergers Using Combined Transaction Cost Theory and Resource-based View Date of delivery: June 6, 2014 Page Count: 152 Written by: Mariana Boev _____________________________ Konstantina Kaisheva _____________________________ Examiners: Finn Frandsen Søren Eschen Executive Summary The following thesis encompasses the research and analysis the authors have conducted to explain how transaction cost theory and resource-based theory of the firm can be employed to understand the conditions under which horizontal integration may create competitive advantage. The merger of Activision and Blizzard Entertainment concluded in 2008 is chosen as the case, which the authors refer to in order to investigate the practical applications of synergy-creating horizontal mergers. The aim of the thesis is addressing the two theories and their applications towards horizontal mergers and proposing a combined framework which extends the theories towards understanding of the prerequisites of competitive advantage in terms of synergy. The aim of the thesis is approached by formulating the following problem statement: In regards to the theories exploring horizontal mergers, how can transaction cost theory and resource-based view of the firm be employed to explain the conditions under which the merged companies achieve competitive advantage and the consequences from synergy-creating M&As? Additionally the authors break down the problem statement into the following three research questions, which guide the analysis: 1. How can transaction cost theory and resource-based view be combined in order to understand the conditions under which horizontal mergers will achieve competitive advantage? 2. Taking into consideration the merger between Activision and Blizzard Entertainment in the interactive entertainment industry, how did the merger of the companies lead to operational efficiency and competitive advantage? 3. What are the consequences from the synergistic effects of the merger on the overall structure and performance of the industry? The methodological approach chosen is the systems view, developed by Arbnor and Bjerke (2009). The authors choose to study the relationships that are generated between the elements of transaction cost theory and resource based view and to develop a model that comprises the elements of the theories in addressing the case of horizontal mergers. This manner of addressing the thesis falls in the finality relationships of the system view, where the events of the theories are explained through their purpose and the driving force that influences the relationships, allowing the system created to be greater than the sum of its parts. The thesis is an academic research involving the deployment of qualitative research methods of secondary data, related to literature review and documentation analysis. 1 A chapter devoted to theoretical review includes summarized overview of the transaction cost theory, resource-based theory of the firm, discounted cash flow model and literature on the phenomenon of mergers and acquisitions. Following is the analysis chapter which involves the authors’ input on the manner in which the transaction cost theory and resource-based theory of the firm can be combined when understanding the circumstances under which horizontal integration can create synergy. The chapter includes the combined theoretical framework, proposed by the authors, as well as a detailed analysis of the case of the merger between Activision and Blizzard Entertainment and its correspondence with the research questions and the problems statement. Transaction cost theory can be related to horizontal mergers when combined with resource-based view to explain horizontal mergers which occur in order for the companies to obtain complementary strategically valuable resources. The combined framework presents a structured synthesis of the arguments for entering a horizontal integration option in order to attain synergistic effects (competitive advantage). It shows under what conditions and prerequisites can this be achieved. Addressing the case of the merger, the authors conduct discounted cash fow model to evaluate the standalone values of the two firms in 2007 and their combined value in 2010. The Activision Blizzard valuation of 2010 revealed that the newly formed company has reached a standalone value of $10.851 billion, which clearly demonstrates that the merger of the companies has led to operational efficiency. The authors go one step further to analyze what is the influence of the synergy from the merger on the interactive entertainment industry and their main rival Electronic Arts. It is shown that following the horizontal merger, the overall performance of the industry is positive whereas the operating performance of the competitor will be negative. The thesis is concluded with a recommendations and reflections chapter outlining further research opportunities and the authors’ reflective research process. The contribution of this thesis is towards a deeper understanding of the components of transaction cost theory and resource-based theories and their extension towards explaining horizontal integration. The authors offer a combined perspective of the conditions under which a horizontal integration may create synergy and consequently influence the market and its rivals. It is the belief of the authors that the theoretical discussion and combined theory present an opportunity to extend both theories towards horizontal integration options and provide a starting point for future academic discussion. 2 Table of Contents Executive Summary ................................................................................................................... 1 1 Introduction ........................................................................................................................ 7 1.1 Background ................................................................................................................. 7 1.2 Problem Formulation................................................................................................... 8 1.3 Thesis Approach .......................................................................................................... 9 1.3.1 Research Design ................................................................................................... 9 1.3.2 Case Approach ................................................................................................... 11 1.4 Scope and Limitations ............................................................................................... 18 2 Methodology..................................................................................................................... 20 2.1.1 The Concept of Paradigm .................................................................................. 20 2.2 Methodological Approaches ..................................................................................... 25 2.2.1 The Analytical View .......................................................................................... 25 2.2.2 The Systems View ............................................................................................. 27 2.2.3 The Actors View ................................................................................................ 29 2.2.4 Chosen Methodological View ............................................................................ 31 2.3 Research Methods ..................................................................................................... 33 2.3.1 Quantitative Research Methods ......................................................................... 33 2.3.2 Qualitative Research Methods ........................................................................... 39 2.3.3 Mixed Research Methods .................................................................................. 45 3 Theoretical Review ........................................................................................................... 49 3.1 Transaction Cost Theory ........................................................................................... 49 3.1.1 Definition and Theoretical Essence ................................................................... 49 3.1.2 Transaction Cost Theory Application and Theoretical Consistency ................. 54 3.1.3 Transaction Cost Theory and Systems View ..................................................... 59 3.2 Resource-based Theories of the Firm ........................................................................ 61 3.2.1 Definition and Theoretical Essence ................................................................... 62 3.2.2 Resource-based Theory of Competitive Advantage .......................................... 69 3.2.3 Resource-based Theory and Other Theories ...................................................... 69 3.2.4 Resource-based Theory and Systems View ....................................................... 73 3 3.3 Mergers & Acquisitions ............................................................................................ 75 3.3.1 Cooperation strategies – Integration