Business growth: when to ally and when to acquire

At the center of your company’s strategy is a dilemma, wrapped in a problem, within a challenge. As companies find it increasingly difficult to achieve and sustain growth, they have placed their faith in acquisitions and alliances to boost sales, profits, and most importantly, share prices. That is more obvious in developed countries. American companies, for example, created a tidal wave of acquisitions and alliances by announcing 74,000 acquisitions and 57,000 alliances from 1996 to 2001. During those six years, CEOs signed roughly one acquisition and one partnership every hour every day. and increased the combined cost of the acquisition. value to $12 billion. The pace of collaboration has slowed since then. US companies made just 7,795 acquisitions and 5,048 alliances in 2002 compared with 12,460 and 10,349, respectively, in 2000, according to Thomson Financial data. But as businesses gear up for further growth, collaboration is once again high on priority lists. In fact, companies closed more acquisition agreements (8,385) and alliance agreements (5,789) in 2003 than in the previous year.

However, there is a problem and it refuses to go away. Most acquisitions and alliances fail. Some may be successful, but acquisitions, on average, destroy or add no shareholder value, and alliances generally create very little shareholder wealth. The company’s share prices fall between 0.34% and 1% in the ten days after the announcement of the acquisitions, according to three recent studies in the Strategic Management Journal. (Target companies’ share prices rise 30%, on average, implying that their shareholders take home most of the value.) Unlike wines, acquisitions do not improve over time. Acquiring companies experience a 10% loss of wealth over the five years after the merger is complete, according to a study in the Journal of Finance. Adding to CEO woes, research suggests that 40-55% of alliances break down prematurely, inflicting financial damage on both partners. When we looked at 1,592 alliances that 200 US companies had formed between 1993 and 1997, we also found that 48% ended in failure in less than 24 months. There’s plenty of evidence: Whether it’s the DaimlerChrysler merger or the Disney and Pixar alliance, collaborations often make headlines for the wrong reasons. Clearly, companies still don’t do very well with either acquisitions or alliances.

What are we missing? For more than three decades, academics and consultants have studied acquisitions and alliances and have written more volumes on those topics than on virtually any other topic. They have applied everything from game theory to behavioral science to help companies “master” acquisitions and “win” at alliances. They have worshiped at the altars of firms that were successful with the lost acquisition or the alliance.

Surprisingly, although executives instinctively talk about acquisitions and alliances at the same time, few treat them as alternative mechanisms by which companies can achieve their objectives. We have studied acquisitions and alliances for 20 years and have tracked several over time, from announcement to merger or termination.

“When to Partner and When to Acquire,” Jeffrey H. Dyer, Prashant Kale, and Harbir Singh, Harvard Business Review, August 2004. Visit CJPS-Enterprises for more information.