To acquire, to ally…? Questions we ask ourselves in the context of the growth strategy of our business. I read some good news today about our Company’s growth, lead in over 25% year on year organically but assisted in another over 10% by acquisitions. Sounds very nice, especially in a publishing market where decline is pervasive worldwide and Internet revenues are not bridging the gap.
However, research provides disconcerting statistics on the outcome of most strategic alliances (and most acquisitions at that). After a company purchases another it’s share value goes down between 0,34 and 1%, whereas the acquired goes up 30% on average. So it’s their shareholders that hit jackpot, not the purchasers’. Today, to make my evening bleaker, I read that acquiring firms experience a wealth loss of about 10% in the 5 years following most acquisitions, according to research by Journal of Finance.
To make things worse, statistics reveal that 48% of alliances incur financial loss and fail within 24 months.
An interesting Harvard Business Review article (you’ll have to pay) provides a framework on the issue to assist companies avoid the myopic decisions than are often guided by hindsight.
Before doing this, it provides a couple of simple truisms and a couple of typical misconceptions:
Acquisition deals are competitive, based on market prices, and risky
Companies habitually deploy acquisitions to increase scale or cut costs and use partnerships to enter new markets, customer segments, and regions. Sometimes previous experiences become blinders: if success was attained in collaborative experiences, often companies rebuff acquisitions when, infact, they could be needed.
Alliances are cooperative, negotiated, and not so risky
Organizational barriers often stand in the way. In many companies M&A handles acquisitions and does not collaborate with Business Development, which looks after alliances. The two teams do not collaborate and, ultimately, do not let companies adequately compare the pros and cons of either strategy
Tags: acquisitions, mergers, organic growth, strategic alliances, valuations
