A partner’s acquisitions could change the value of your business alliance.
Both alliances and acquisitions are business undertakings that provide access to external resources, yet companies often disregard how their alliances and acquisitions connect.
Researchers Dovev Lavie, Randi Lunnan and Binh Minh T. Truong from BI Norwegian Business School and Bocconi University, set out to understand how an acquisition initiated by a company’s alliance partner would affect the value of the company’s alliance with that partner.
To answer this question, the researchers analysed a dataset of publicly traded companies and their U.S.-based publicly traded alliance partners in the software industry. This industry is characterized with many alliances and frequent acquisitions. Unsurprisingly, the data revealed that when the acquired target competes with the company, the value of the alliance with the acquiring partner declines.
“Similarity of the businesses limits value creation in the alliance because of the intensifying competition between the company and its partner following the acquisition that provides the partner with alternative resources”, says Binh Minh T. Truong.
However, when the target and the company’s businesses are complementary, the alliance creates more value by extending the resource combinations that the alliance can leverage.
More surprisingly, the researchers also found that if the company had a long history of extensive collaboration with the partner, the acquisition appears to uproar the alliance relationship.
“When the company and the partner had considerable experience working together, this reinforces the negative effect of business similarity with the acquired company, probably because of perceived betrayal and leakage of knowledge”, explains Randi Lunnan who has studied acquisitions and alliances for years.
The previous joint experience also reduces the value of complementarity, most likely because of the difficulty of modifying collaborative practices that the company and its partner used in their previous alliances. Working with the acquired target requires adjustment of collaborative practices, which may also hurt the existing relationship between the company and its partner.
In a business world of fast-changing alliances and frequent M&As, what does this research mean for companies in practice?
“Alliance managers should monitor their partners' acquisitions and study their acquisition targets in order to identify competitive threats and opportunities for synergies. Similarly, managers in the acquiring organization should assess the implications of their acquisitions for their alliance portfolio,” advises Dovev Lavie from Bocconi University who is also affiliated with BI Norwegian Business School.
If executives are informed about their partner’s acquisition plan, they could consider trying to influence the plan in favour of their existing alliance. This requires paying more attention to corporate development initiatives of partners in the alliance portfolio. In turn, executives of the acquiring party should consider the implications for their alliance portfolio when contemplating acquisitions.
Reference:
Lavie, D., Lunnan, R., & Truong, B. M. T. (2022). How does a partner's acquisition affect the value of the firm's alliance with that partner? Strategic Management Journal, 1– 30. https://doi.org/10.1002/smj.3389
Published 1. June 2022