How do interfirm networks evolve as firms acquire one another?

What is it about?

The position a company occupies in an interfirm network (e.g. alliances, board interlocks, industry associations) can significantly help a firm get valuable resources and improve its performance. Research has shown this for many years. So how do firms put themselves in network positions that maximize their access to resources? Virtually all the research trying to answer this question focused on a pair of underlying actions firms can take to change their networks: adding ties or deleting ties. For example, a pair of firms can establish an alliance or terminate an alliance. We explore a novel and revolutionary action that modifies the structure of firms' networks: acquisitions. Viewed from a networks lens, an acquisition has two effects: (1) the "collapse" of two nodes, acquirer and target; and (2) the ability of the acquirer to inherit all the ties of the target in one transaction. Our paper explores the implications of these node collapses, or acquisitions, for how networks evolve -- and thus how firms get access to resources from their networks. We developed a simulation that demonstrated four key properties of node collapses compared to tie additions or deletions: 1. They can change the network more dramatically in one transaction because they affect multiple ties at once instead of one tie at a time. Essentially, they have a bigger impact on structural change -- what we call network revolution (vs. incremental evolution). 2. They affect the position not just of the acquirer and target, but also of other firms in the network. We call these "network externalities," or side effects on third parties that could be positive or negative. Tie additions or deletions do not produce these externalities. 3. They allow an acquirer to gain access two two types of resources owned by a target: internal and external. Internal refer to the assets the target firms has within its boundaries (teams, patents, machines). These give rise to the synergies usually discussed in M&A research. External refer to the resources the target can access through its network of contractual partnerships (e.g. alliances), giving rise to "network synergies" -- a concept we introduce in this study. Tie additions or deletions only allow indirect access to external resources. 4. They allow an acquirer to gain exclusive control of a target's network and external resources, whereas tie additions and deletions do not. Many firms can partner with a target; only one can own it and its external contractual relationships. Our simulation shows that these properties make the network change driven by acquisitions (node collapses) very different from changes driven by simple tie additions or deletions. Perhaps most important, we show that acquisitions allow firms to access more resources faster than other means of network change.

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Why is it important?

This study is quite important for anyone interested in networks, mergers and acquisitions (M&A), or corporate strategy in general. For those who care about networks made up of strategic alliances and other partnerships among firms, it shows that acquisitions can be a powerful strategic tool to shape the network in their favor, and possibly against the interests of rivals. For those who care about acquisitions, it opens up the possibility of gaining "network synergies" -- a novel sources of value. My paper with Myles Shaver in Administrative Science Quarterly (titled "Network Synergy") explores this further and shows empirical evidence that acquirers choose targets to obtain these types of synergies. For those interested in corporate strategy generally, it shows that strategic alliance networks and M&A are more intimately related than previously understood.

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