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Mergers & Acquisitions vs Alliances
August 18, 2002

During the last couple of years, we have seen giant mergers & acquisitions intended to create greater economic value, market share and share prices.

However, the actual peformance of such mergers & acquisition like Daimler-Chrysler, Vivendi-Universal, Worldcom-MCI, AOL-Time Warner are now being questioned as share prices are steadily falling.

A research conducted by Hans Schenk of Tilburg University - Netherlands shows that since 1960s, merged companies typically performed 17% worse than independent rivals in terms of productivity, profitability, new patents and growth in market share.

About 5.8 trillion USD of the total 9 trillion USD of merger dealss in US and Europe between 1996-2000 failed to create any wealth according to Schenk's findings.

According to McKinsey, only %12 of 160 mergers in 1995-1996 managed to grow faster than their rivals in the first 3 years of operation and on average revenues fell by %4.

This is partly due to the fact that it's not so easy to cut costs or raise revenue through synergies. As big and different companies in nature merge operations, this process takes quite along time before any additional benefit is realized.

It seems that CEOs are underestimating this fact although there is historical evidence at hand that mergers & acquisitions rarely provide any real benefit. May be this is due to CEOs' strong egos for "ruling the biggest", being infront of the media all times and the possible increase in their compensation packages for successfully managing the merger & acquisition :)

According to McKinsey, alliances are better received than mergers & acquisitions in fast-moving, highly uncertain industries such as electronics, mass media, and software. They are also the preferred choice for companies trying to build new businesses, enter new geographies, or access new distribution channels.

Contractual alliances, simple and flexible, are better received by the market than more complicated equity joint ventures. And, finally, when it comes to alliances, it turns out that polygamy pays: multipartner alliances and consortia tend to be quite well received.

McKinsey's research comprised 2,050 deals involving 4,583 partners and covering a broad range of industries, geographies, and kinds of alliances. It is seen that large alliances at least, do create shareholder value. 52% of them caused the share price of the parent to rise or fall by more than one standard deviation of its normal movement, and of these, 70% of the price reactions were increases - "win rate" that is substantially higher than the percentage for acquirers in M&A transactions.

For example, 75 electronics and software companies that made significant alliance announcements, 64% were winners, compared with just 33% of acquirers involved in M&A transactions in this industry sector.

Multipartner alliances are particularly attractive for setting standards. Psion - a small UK-based software company - joined forces with Ericsson, Motorola, and Nokia to create Symbian, a joint venture to support the adoption of Psion's operating system to the benefit of all parties in June 1998. That joint venture created a combined abnormal return of $10 billion.

Lessons learned: Mergers & Acquisitions are not the only tool for value creation. Simple and multipartner alliances can be well used instead, for reaching new markets, to increase revenue and share prices.

© 2002 Ilker Atalay
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