Do acquirers pick targets to improve their strategic alliance networks?

What is it about?

There are two things we’ve known for a long time, but they hadn't been put together yet. First, strategic alliances – collaborative partnerships with other companies – are valuable. Each of those alliances has a certain value for the firm on its own. But all combined, the portfolio of alliances the company has is also valuable because it’s a network of external resources. How a firm is positioned in that network of alliances can be valuable. For example, if your firm is the central hub in an alliance network it gets more resources and controls the flow of those resources. Or if your firm is exposed to very diverse ideas through its alliance network, it will produce more innovative products. Second, value in mergers and acquisitions (M&A) comes from synergy. But managers and researchers have focused on synergies coming from assets that the two companies own and control—think machinery, intellectual property (patents), teams and people, or rights over geographic markets. Overlooked is that external assets, like strategic alliances, are also sources of value even if they aren’t “owned and controlled.” This paper combined these two ideas to ask an original question: Couldn’t synergies come from combining the alliance networks of an acquirer and a target? We called these “network synergies.” We gathered data on a sample of acquisitions made by firms in the biotechnology industry. And we found that acquirers were more likely to acquire a target, the more the combination of the two firms’ alliances portfolios strengthened the position of the acquirer in the industry alliance network. We found two kinds of network synergies: 1. The first was “additive”: the target brought to the acquirer a set of new alliance partners it didn’t have before. This made the firm more central in the network and allowed it to access new resources. 2. The second was “subtractive”: the acquirer and target had overlapping, redundant alliances to the same companies before the merger. This meant they were competitors for the attention and resources of the same alliance partners. Merging allowed one firm to take control and become the exclusive partner, which increased its control over the flow of resources in its alliance network.

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Why is it important?

This study challenges and expands the views of two related research and practice areas: those interested in M&A and those interested in strategic alliances. Nobody interested in M&A had considered the alliance network of another company as a source of synergy or value in mergers and acquisitions. We are effectively introducing a novel source of value. And this matters because we know that acquisitions are really hard to pull off; it’s hard to find value in them. So showing that there’s a new source of value may broaden the scope of where managers can look to make deals more attractive. Conversely, nobody interested in strategic alliances had thought of how a merger or acquisition dramatically changes the network. Think of it: instead of incrementally adding or deleting an alliance, one at a time, you can make an acquisition that gives you lots of new alliances in one transaction. Or another acquisition that helps you eliminate lots of redundant alliances in one transaction. That revolutionary if you’re interested in how networks change or in how you can strategically improve your position in a network. For practical purposes, it also suggests that the people or teams managing M&A and those managing strategic alliances need to work together. In fact, it may be best if they're a single team if acquisitions affect alliance networks and vice versa.

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