by Dovev Lavie, Randy Lunnan, and Binh Minh T. Truong
Managers consider alliances and acquisitions as alternative choices for creating value, yet a recent study reveals that the value of a firm’s alliances depends on its alliance partners’ subsequent acquisitions which are often difficult to foresee.
A study published in the Strategic Management Journal, co-authored by Dovev Lavie (Bocconi University), Randi Lunnan, and Binh Minh T. Truong (BI Norwegian Business School), reveals that a partner’s acquisition can either undermine or enhance the value of an alliance with that partner, depending on the profile of the acquired target firm.
How does the Profile of the Acquisition Matter?
The researchers studied a sample of publicly traded firms and their U.S.-based publicly traded software partners, which in turn engaged in acquisitions from 2000 to 2016. The analysis reveals that when a firm’s partner acquires a target that competes with the firm, the value of the alliance with that partner declines: “The partner’s acquisition of the firm’s competitor may reduce the partner’s commitment while increasing competitive tension in the alliance,” says Binh Minh T. Truong.
In contrast, when the firm and the partner’s target operate complementary businesses, this may open new opportunities for collaboration with the partner and thus enhance the value of the alliance with that partner.
Keep One Eye on your Enemy, and Two Eyes on your Friends
Surprisingly, the study also reveals that if the firm and its partner have maintained a close relationship developed through a long history of collaboration, things get worse. Specifically, following the acquisition of a competitor, the loss of the alliance value becomes larger, whereas the gain in the case of the partner’s acquisition of a complementary business becomes smaller: “When the firm and its partner have a close relationship, the partner’s acquisition of the firm’s competitor may be seen as a betrayal of trust and also arouse the firm’s fear of sensitive information leaking to its competitor,” explains Randi Lunnan.
In addition, when the partner acquires a target that operates a business that complements thefirm’s business, the firm and its partner may need to modify their collaboration routines in order to take advantage of emerging opportunities. However, these routines may be difficultto change if they have been developed throughout a long history of collaboration and become rigid.
The Way Forward
Although alliances and acquisitions are often managed separately in practice, Dovev Lavie recommends that “alliance managers should monitor their partners’ acquisitions in order to identify competitive threats and opportunities for synergies.” As for close partners, it is essential that managers convince these partners to forgo adversarial acquisitions or terminate their alliances before the hazards materialize. Alternatively, if the partners’ acquisitions bring in potential synergies, it is important to maintain adequate operating flexibility to take advantage of the new opportunities that arise. As for the firms that consider acquisitions, their managers should carefully assess the implications of these acquisitions for their alliance portfolio.
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. https://doi.org/10.1002/smj.3389.
Dovev Lavie is a Professor of Management at the Department of Management and Technology of Bocconi University. His research interests include the evolution and performance implications of alliance portfolios, the balancing of exploration and exploitation, and applications of resource-based theory in interconnected technology-intensive industries.
Randi Lunnan is a Professor of Strategy and the Tom Wilhelmsen Chair of Ocean Business at the Department of Strategy and Entrepreneurship at BI Norwegian Business School. Her research interests focus on the performance of networks and alliances over time, its implications for corporate acquisitions and external collaborations on events such as environmental changes, and the applications to firms within the ocean space where the shift towards sustainable energy requires collaborative efforts.
Binh Minh T. Truong is a PhD Candidate at the Department of Strategy and Entrepreneurship at BI Norwegian Business School. Her research interests include alliances and acquisitions, as well as their interplay and applications in international business environments.