To Buy or Ally That is the QuestionHere are some worrisome statistics from The Journal of Finance: On average, companies that take over others have a 10% reduction in wealth over five years post-acquisition. And up to 55% of all alliances fall flat with losses accruing to both firms. It seems that too many company executives have a narrow-minded view of takeovers and alliances, seeing them mistakenly as equivalent strategies. But the two are definitely not the same, even if an alliance involves acquiring a large share in your target company.

An inappropriate choice can be disastrous, so which strategy to apply in any given opportunity has to be considered carefully by “beginning with the end in mind.” Ask yourself two questions, because they each have unique advantages and drawbacks:
⚫ What are the precise profit-improving and or cost-reducing synergies that you want to achieve as the outcome of your chosen strategy?
⚫ Will a takeover or an alliance be the better decision?

THEN compare and contrast both strategies against three outcome criteria:

Process synergies1.  Process Synergies: 1 + 1 = 3 only when you match your “+” strategy to the nature of the synergies you are looking for. So, investigate whether are they “sequential,” “modular,” or “two-way.”

a.  Sequential synergies are when, for example, products are made before they are marketed. Companies quite often have more strength in one function than the other. So a marketing-strong firm could best grow profits by acquiring an equity stake in a firm with better manufacturing capabilities.

b.  Modular synergies are, for example, when a hotel chain works with a car rental company to satisfy customer twin needs for accommodation and transport. In such a case, a business alliance, and not a takeover, would best leverage the strengths of both firms.

 c.  Two-way synergies derive from pooling all the resources of two businesses, each improving its respective processes and saving on duplication and redundancies in the combined processes. Here an acquisition is the best approach.

Resource synergies2.  Resource Synergies: On the one hand, takeover (or even partial equity holding) is the most straightforward and effective strategy if the major rationale is to combine physical assets, such as capital equipment and facilities, or where there are major overlap and duplication in close geographical proximity.

While on the other hand, an equity alliance will be more effective if the resources to be combined are “soft.” By this we mean people’s talent, skills, and intellectual property. With this strategy, the unintended consequences of a culture shock can be avoided.

Market synergies3.  Market Synergies: If the market conditions are such that you find yourself one among several businesses looking to take over a juicy target, then a full-on acquisition is certainly your favored strategy. But an equity alliance is the better strategy if the environment is uncertain. This is about hedging your investment in case of adverse events such as regulatory interference, failed beta testing, or patent challenges.

At PBC we know from long experience that building business partnerships is a crucial leadership skill. It is up there with communicating your vision and values and empowering continuous improvement. Decision-making, such as the “buy or ally” strategy choice outlined here, can always be improved.