Here 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.
THEN compare and contrast both strategies against three outcome criteria:
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.
2. 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.
3. 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.