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Acquire, Ally
Acquire, Ally
etween 1996 and 2001 American CEOs signed an acquisition or alliance every hour
B of every day. The deals totaled 74,000 acquisitions and 57,000 alliances in six years,
with a combined value of $12 trillion. The future, it seems, is about growth. Yet out of
all those business moves, research indicates that around fifty percent of them will have
failed. Time and again mergers and acquisitions see shareholder value plummet: the
Daimler-Chrysler partnership lost the two firms $60 billion of market value and AOL Time
Warner found themselves worth $54 billion less after the merge.
As a result, business press sends out conflicting messages. On the one hand we are told to
grow or die, on the other that if we try to grow we will probably end up shrinking. It may come
as no surprise, then, that the pace of acquisitions has tailed off somewhat since 2001, with
firms increasingly uneasy about going ahead with joint ventures. In February 2001, for
instance, Coca-Cola and Proctor & Gamble declared a $4 billion collaboration, which would
oversee more than 40 brands and 10,000 staff. Five months later, after Coca-Cola’s stock
had dropped and Proctor & Gamble’s share price risen soon after the announcement, the
deal was off. Neither party, it appeared, had properly thought the collaboration through –
Coke came to question why it at had arranged to share half its profits with one of its weaker
rivals and backed out.
Nevertheless, few question the facts that when joint ventures go well they can be hugely
profitable for both parties, and that growth is increasingly important in an evermore
competitive business environment. The question is how can a firm make moves to grow with
confidence of success? Further, is there any way of knowing for sure when the time is right or
wrong to plan a collaboration?
DOI 10.1108/02580540510571700 VOL. 21 NO. 1 2005, pp. 19-21, Q Emerald Group Publishing Limited, ISSN 0258-0543 j STRATEGIC DIRECTION j PAGE 19
‘‘ Is there any way of knowing for sure when the time is right or
wrong to plan a collaboration? ’’
It is important that firms understand the differences between each type of deal before they
make a decision as to the best path to take. Often a firm will gain experience in forming
alliances and then fail to see that in a particular circumstance an acquisition would be more
successful. Dyer, Kale and Singh offer quite specific advice on when to adopt each strategy,
based on certain internal and external circumstances. Internally, they focus on the nature of
resources that are to be combined, the extent of redundant resources and the type of
synergy the firms seek to create. The external factors that should be taken into question are
the degree of market uncertainty and the level of competition. For an acquisition to be the
best option the relative value of soft to hard resources should be low to medium, the extent of
redundant resources should be high and reciprocal synergies, which work around a mutual
knowledge-sharing basis, should be sought. Externally, the optimum conditions for an
acquisition are a low to medium degree of market uncertainty and a high level of competition.
With any different combination of these factors, an alliance is advised.
One firm that has learned both when to acquire and when to ally is Cisco Systems Inc. The
networking giant is known for is acquisition-led growth strategy, having taken over 36 smaller
firms in ten years. Yet Cisco also formed over 100 alliances over the same time scale, and it
was the combination of both strategies that saw the firm’s sales and market capitalization
grow between 36 and 44 percent every year between 1993 and 2003. How is it done? Cisco
avoids acquisitions if employees would have to move far or if vital facilities are not located
nearby. It also likes to work with a company through an alliance for at least a year before it
decides an acquisition will work. Caution and good planning are central to the firm’s
successful growth.
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growth comparatively poorly explored. Among these, organizational innovation offers a way
of cutting costs and keeping ahead of the market. Such innovation focuses on operations
Keywords: within a firm, always questioning what, why and how things are done. Finding inspiration
Joint ventures, through firms in different sectors, refusing to fall into habit and creating job roles with
Management strategy, organizational innovation at their centre can all bring a better service at lower costs.
Acquisitions and mergers, Operations may not be as glamorous as acquisitions, but cutting costs quietly is always a
Innovation smarter move than abandoning a joint venture in the public eye.
Comment
This is a review of ‘‘When to ally and when to acquire’’ by Jeffrey H. Dyer, Prashant Kale and
Harbir Singh, ‘‘The drivers of success in post-merger integration’’ by Marc J. Epstein and
‘‘Deep change – how operational innovation can transform your company’’ by Michael
Hammer.
‘‘When to ally and when to acquire’’ seeks to provide a guide as to whether collaboration
should take the form of an acquisition, an equity alliance or a non-equity alliance. The
authors suggest that the most important factors to be considered are the type of resources to
be combined, the synergies sought, the extent of redundant resources, the degree of market
uncertainty and the level of competition faced. Depending on the experiences and interests
of the company, each collaboration will hold these factors in different degrees of importance.
A case study of Cisco demonstrates how a successful alliance can be brought about
through well-structured management.
Marc J. Epstein argues that the lack of a well-planned post-merger integration strategy is
responsible for many failed mergers. He therefore identifies and discusses five drivers of
successful post-merger integration: a coherent integration strategy; a strong integration
team; consistent and constant communication from senior management; speed in
implementation and success measures that are aligned with the merger strategy and
vision. The article then focuses on the merger between J.P. Morgan and Chase Manhattan
Bank, which illustrates the importance of an effective post-merger integration process.
Finally, the key performance indicators that were used to evaluate the success of the
process are discussed.
‘‘Deep change – how operational innovation can transform your company’’ discusses a
US-based auto insurance company, Progressive Insurance. Hammer points out that the
firm’s exceptional performance stems from constant organizational innovation, which
enables it to offer lower prices and better service that its competitors. Toyota, Wal-Mart and
Dell are identified as three further companies whose successes rely on operational
innovation. Hammer then considers why similar potential for innovation is overlooked by so
many firms, offering as explanation the fact that operations is seen as an unexciting area of
business. The challenges to implementing organization innovation are discussed, but
Hammer advises that these can be overcome by breaking large-scale implementations into
a series of limited steps.
References
Dyer, J.H., Kale, P. and Singh, H. (2004), ‘‘When to ally and when to acquire’’, Harvard Business Review,
Vol. 82 No. 7/8, pp. 109-15, ISSN 0017-8012.
Epstein, M.J. (2004), ‘‘The drivers of success in post-merger integration’’, Organizational Dynamics,
Vol. 33 No. 2, pp. 174-89, ISSN 0090-2616.
Hammer, M. (2004), ‘‘Deep change – how operational innovation can transform your company’’, Harvard
Business Review, April, pp. 85-93, ISSN 0017-8012.
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