Acquisitions and Mergers

(See also Mergers and Acquisitions.) Falls under corporate strategy, meaning those strategies that answer the question, “What business or set of businesses do we want to be in?” M&A refers to the purchase of a company that is already in operation. An acquisition is a strategy by which one firm buys controlling or 100% interest in another firm, with the intent of using a core competence more effectively by making the acquired firm a subsidiary business within its corporate portfolio. Acquisitions have become a strategy for many giant firms in the software and pharmaceutical industries that are no longer able to achieve entrepreneurial Schumpeterian innovation through internal investment and R&D, and therefore “buy rather than build” new technologies.

Acquisitions can also be a human resource strategy for large firms. In a knowledge-based economy, social capital becomes the most critical factor of production and can be a bottleneck for implementing innovation-based strategies especially in high-tech industries. Examples are Microsoft's acquisition of smaller firms and IBM's acquisition of Lotus. Acquisition strategies are common in industries that are consolidating, such as the DaimlerChrysler acquisition in the automobile manufacturing industry. Acquisitions are notoriously difficult to manage. The costs of incorporating the acquired company into the parent company are significant, and paper synergies (those that appear in the planning stage—see Formal Strategic Planning) often disappear in [Page 2]battles of dueling cultures and systems and the “them versus us” quagmire. After an acquisition is announced, the stock of the acquiring company typically falls while that of the smaller acquiree rises. Thus, acquisitions are notoriously unstable, risky, and difficult to manage. Many firms look for more flexible arrangements such as alliances, networks, and joint ventures in lieu of acquisitions. Acquisition capability is a distinctive competence that can be developed through a series of acquisitions.