MAKING ALLIANCES AND ACQUISITIONS WORK

Why did GM and Daewoo form strategic alliances? Among many forms of alliances, why did they choose a

JV form both times? Why did one JV fail but the second JV (essentially an acquisition) succeed? These are

some of the key questions we address in this chapter. Alliances and acquisitions ae two major strategies for

firm growth around the world, thus necessitating our attention. This chapter first defines alliances and

acquisitions and follows with a discussion of how institution and resource based views shed light on these

topics. We then discuss the formation, evolution and performance of alliances and acquisitions. Finally, we

introduce a debate over the level of equity one should have a JV and discuss some tips on managing alliances

and acquisitions.

DEFINING ALLIANCES AND ACQUISITIONS

Strategic alliances are “voluntary agreements between firms involving exchange sharing or coordinating of

products, technologies or services. “Remember that the dotted area in Exhibit 10.4 in Chapter 10 consisted of

non-equity-based contractual agreements and equity-based JVs, these can all be broadly considered as

strategic alliances. Exhibit 11.1 illustrates this further, depicting alliances as degrees of compromise between

pure market transactions and acquisitions. Contractual(non-equity-based) alliances are associations

between firms that are based on contracts and do not involve the sharing of ownership. They include co-

marketing research and development (R &D) contracts, turnkey projects strategic suppliers, strategic

distributors and licensing /franchising. Equity –based alliances, on the other hand, are based on ownership

or financial interest between the firms. They include strategic investment (one partner invests in another)

and cross –shareholding (each partner invest in the other). Equity-based alliances also include JVs, which

involve the establishment of new legally independent entity (in other words, a new firm) whose equity is

provided by two or more partners.

Although JVs are often used as examples of alliances (as in Opening Case), not all alliances are JVs. A JV is

a corporate child produced by two or more parent firms, as is the case with Sony Ericsson. A non JV, equity-

based alliance can be regarded as two firms getting married but not having children. For example, Renault is

a strategic investor in Nissan, but both automakers still operate independently and they have not given birth

to a new car company if they did, the new company would be a JV.

An acquisition is a transfer of the control of operations and management from one firm (target) to another

(acquirer) the former becoming a unit of the latter. For example, GM Daewoo is now a unit of G. A merger

is the combination of operations and management of two firms to establish a new legal entity. For example,

the merger between South African Brewery and Miller Beer resulted in SABMiller.

Although the phrase “mergers and acquisitions” (M&As) is often used in reality acquisitions dominate the

scene. Only 3% of M&As are mergers. A Word Investment Report opines that the “number of real” mergers

is so low that, for practical purposes, “M&As” basically mean acquisitions” Consequently, we will use

“M&As” and acquisitions interchangeably. Specifically, we focus on cross-border (international) M&As

(Exhibit 11.2). This is not only because of our global interest but also because of the (1) the high percentage

of ( about 30%) of an international deals among all M & As and the (2) the high percentage ( about 70%) of

M&As among foreign direct investment (FDI) flows.

INSTITUTIONS, RESOURCES, ALLIANCES AND ACQUISITIONS.

What drives alliances? What drives acquisitions? We will now draw on the institution and resource based

views to shed light on these important questions. The institution-based view suggests that as rules of the game,

institutions influence how a firm chooses between alliances and acquisitions in terms of its strategy. However,

rules are not made just for one firm. The resource-based view argues that although a number of firms may be

governed by the same set of rules, some excel more than others because of the differences in firm-specific

capabilities that make alliances and acquisitions work (see Exhibit 11.3 on the next page).

Institutions

Alliances function within a set of formal legal and regulatory frameworks. The impact of these formal

institutions on alliances and acquisitions can be found along two dimensions (1) antitrust concerns and (2)

entry mode requirements. First, many firms establish alliances with competitors. For example, Siemens and

Bosch compete in automotive components and collaborates in household appliances. Antitrust authorities

suspect at least some tacit collusion when competitors cooperate. However, because integration within

alliances is usually not as tight an acquisitions (which would eliminate one competitor), antitrust authorities

are more likely to approve alliances as opposed to acquisitions. A proposed merger of American Airlines and

British Airways was blocked by both US and UK antitrust authorities. But the two airlines were allowed to

form an alliance that has eventually grown to become the multi-partner One World.

Another way formal institutions affect alliances and acquisitions is through formal requirements on market

entry modes. In many countries, governments discourage or simply ban acquisitions to establish wholly owned

subsidiaries (WOSs), thereby leaving some sort of alliance with local firms as the only choice for FDI. For

example, before the North American Free Trade Agreement (NAFTA) went into effect in 1994. The Mexican

government not only limited multinationals’ enterprise (MNE) Recently, two trends have emerged in the entry

mode requirements dictated by formal government policies. First is a general trend toward more liberal

policies. Many governments that historically approved only JVs as an entry mode (such as those in Mexico

and South Korea) now allow WOSs. As a result, JVs have declined and acquisitions have increased in

emerging economies. Despite the general movement toward more liberal policies, a second noticeable trend

is that many governments still impose considerable requirements, especially when foreign firms acquire

domestic assets. The strategically important Chinese automobile assembly industry and the Russian oil

industry permit only JVs, thus eliminating acquisitions as a choice. US regulations limit foreign carriers to a

maximum 25% of the equity in any US airline and EU regulations limit non-EU ownership of EU-based

airlines to 49%. In 2008-2009, in the middle of the worst financial market meltdown since the Great

Depressions, US regulators continue to be reluctant to approve Chinese acquisitions of US banks which are in

desperate need of cash injection.

Informal institutions also influence alliances and acquisitions. The first set of informal institutions centers on

collective norms, supported by a normative pillar. A core idea of the institutions-based-view is that because

firms want to enhance or protect their legitimacy, copying what other reputable organizations are doing – even

without knowing the direct performance benefits of doing so-may be a low-cost way to gain legitimacy.

Therefore, when a firm sees competitors entering alliances, that firm might jump on the alliance bandwagon

just to be safe rather than risk ignoring industry trends. When M&As appear to be the trend, even managers

with doubt about the wisdom of M&As may nevertheless be tempted to hunt for acquisition target. Although

not every alliance or acquisitions decision is driven by a lot of these activities. The flip side is that many firms

rush into alliances and acquisitions without due diligence and then get burned big time.

A second set of informal emphasizes the cognitive pillar, which is centered on internalized, taken for0granted

values and beliefs that guide alliances and acquisitions. For example, in the 1990s, Britain’s BAE systems

announced that all of its future aircrafts development programs would involve alliances. General Electric (GE)

has 230 full time staff members devoted to acquisitions. Many managers believe that such alliances and

acquisitions are the right (and sometimes the only) thing to do.

Resources and Alliance

How does the VRIO (value, imitability and organization) framework that characterizes the resource-based

view influence alliances and acquisitions? In this section, we will look at alliances, (we will discuss

acquisitions in the next section) Alliances must create value. The three global airline alliance Networks-One

World Sky Team and Star Alliance-create value by reducing ticket costs by 18% to 28 % on two stage flights

compared with separate flights on the same route if the airlines were not allied. Exhibit 11.4 identifies three

broad categories of value creation in terms of how advantages outweigh disadvantages. First, alliances may

reduce costs, risks and uncertainties. As Google rises to preeminence, industry rivals such as eBay, Yahoo!

and Microsoft (MSN) are now exploring alliances to counter Google’s influence while not taking on excessive

risks. Second, alliances allow firms to tap into partners’ complementary assets and facilitate learning. That is

how Sony and Ericsson pooled resources together to develop new cell phones via a JV name Sony Ericsson.

Finally, an important advantage of alliances lies in their value as real options. Conceptually, an option is the

right (but not obligations) to take some action in the future. Technically, a financial option is an investment

instrument permitting its holder, having paid for a small fraction of an asset, the right to increase investment

by eventually acquiring the asset if necessary. A real option is an investment in real operations as opposed to

financial capital. A real options view suggests two propositions.

• In the first phase, an investor makes a small, initial investment to buy an option, which leads to the

right to future investment but is not an obligation to do so.

• The investor then holds the option until decision point arrives in the second phase and then decides

between exercising the option or abandoning it.

For firms interested in eventually acquiring other companies but uncertain about such moves, working together

in alliances affords an insider view tot eh capabilities of these partners. This is similar to trying on new shoes

to see if they fit before buying them. Since acquisitions are not only costly but also very likely to fail, alliances

permit firms to sequentially increase their investment should they decide to pursue acquisitions. If after

working together, as partners a firm finds than an acquisition is not a good idea, there is no obligations to

pursue it. Overall, alliances have merged as great instruments of real options, because of their flexibility to

sequentially scale the investment up or down.

On the other hand, alliances have a number of nontrivial drawbacks. First, there is always a possibility of

being stuck with the wrong partner(s). Firms are advised to choose a prospective partner with caution,

preferably a known entity. Yet, the partner should also be sufficiently differentiated to provide some

complementary (non-overlapping) capabilities. Many firms find it difficult to evaluate the true intentions and

capabilities of their prospective partners until it is too late.

A second disadvantage is potential partner opportunism. While opportunism is likely in any kind of economic

relationship, the alliance setting may provide especially strong incentives for some (but not necessarily all)

partners to be opportunistic. A cooperative relationship is always entails some elements or trust that may be

easily abused. In an alliance with Britain’s Rover, Honda shared a great deal of proprietary technology beyond

what was contractually called for. Honda was stunned when Rovers’ parent firm announced that Rover would

be sold to BMW and the Honda would literally be kicked out. Unfortunately, such an example is not an isolated

incident.

In addition to value, rarity, is also a factor in alliances because the ability to successfully manage interfirm

relationships-often called relational (or collaborative) capabilities- may be rare. Managers involved in

alliances require relationship skills rarely covered in the traditional business school curriculum, which

typically emphasizes competition rather than collaboration. To truly derive benefits from alliances, managers

need to foster trust with partners yet to be on guard against opportunism.

As much as alliances represent a strategic and economic arrangement, they also constitute a social,

psychological and emotional phenomenon. Words such as “courtship”, marriage and “divorce” are often used

when discussing alliances. Given that the interest of partner firms do no fully overlap and are often in conflict,

managers involved in alliances live a precarious existence, trying to represent the interest of their respective

firms while attempting to make the complex relationship work. Not surprisingly, sound relational capabilities

necessary to successfully manage alliance are in short supply.

Imitability occurs at two levels in alliances (1) firm level and (2) alliance level. Alliances between rivals can

be dangerous because they may help competitors. By opening their doors to outsiders, alliances make it easier

to observe and imitate firm-specific capabilities. A learning race can arise in which partners aim to learn the

other firm’s tricks-imitate its resources- as fast as possible. For example, in the late 1980s, McDonald’s set up

a JV with the Moscow Municipality Government to help the fast-food chain enter Russia. During the 1990s,

however, the Moscow mayor set up a rival fast-food chain. The Bistro. The Bistro replicated many of the fast

food giant’s products and practices. Mc Donald’s could do little about the situation because nobody sues the

mayor of Moscow and hopes to win.

Another imitability issue is the trust and understanding among the partners in successful alliances. Firms

without genuine trust and understanding may have a hard time faking it. CFM international, a JV set up by

GE and Snecma to produce jet engines in France, has successfully operated for over 30years. Rivals would

have a hard time imitating such a successful relationship.

Finally, organization influences alliances because some successful alliance relationships are organized in a

way that is difficult to replicate. Tolstoy makes the observation in the opening sentences of Anna Karenina:

“All happy families are alike. Each unhappy family is unhappy in its own way. Much the same can be said for

business alliances. Each failed alliance has its own mistakes and problems and firms in unsuccessful alliances

(for whatever reason) often find it exceedingly challenging, if not impossible, to organize and manage their

interfirm relationships better.

Resources and Acquisitions

We now consider how the VRIO framework affects acquisitions. First, do acquisitions create value? Overall,

their performance record is sobering. As many as 70% of acquisitions reportedly fail. On average, the

performance of acquiring firms does not improve after acquisitions. Target firms after being acquired and

becoming internal units, often perform worse than when they were independent, stand-alone firms. The only

identifiable group of winners is the shareholders of target firms, who may experience on average a 24%

increase in their stock value during the period of the transaction. This increase is due to the acquisition

premium, which is defined as the difference between the acquisition price and the market value of target

firms. Shareholders of acquiring firms experience a 4% loss in their stock value during the same period. The

combined wealth of shareholders of both acquiring and target firms is only marginally positive, less than 2%.

Consider Daimler Chrysler. In 1998, Daimler paid $35billion for Chrysler. In 2007, Chrysler was sold to

Cerberus Capital, a private equity firm, for $7.4billion-one fifth of what Daimler paid for it.

For acquisitions to add value, one or all of the firms involved must have unique skills that enhance the overall

strategy. In other words, the firms must have rare skills to make the acquisition work. In 2004, an executive

team at Lenovo, China’s leading PC maker, planned to acquire IBM’s PC division. Lenovo’s board, however,

raised a crucial question: If a venerable American Technology company failed to profit from the PC business,

did Lenovo have what it takes to do better when managing such a complex global business? The answer was

actually No. The board gave its blessing to the plan only when the acquisition team agreed to acquire the

business and to recruit top American executives (see the closing case)

While many firms undertake acquisitions, a much smaller number of them have mastered the art of post-

acquisition integration. Consequently, firms that excel in integration possess hard-to imitate capabilities that

are in advantage in acquisitions. For example, each of Northrop’s acquisitions must conform to a carefully

orchestrated plan of nearly 400 items, from how to issue press releases to which accounting software to use.

Unlike its bigger defense rivals such as Boeing and Raytheon, Northrop thus far has not stumble with any of

its acquisitions. Fundamentally, whether acquisitions add value boils down to how merged firms are organized

to take advantage of the benefits while minimizing the costs. Pre-acquisition analysis often focuses on

strategic fit, which is the effective matching of complementary strategic capabilities. Yet, many firms do not

pay adequate attention to organizational fit, which is the similarity in cultures, systems and structures. On

paper, Daimler and Chrysler in 1998 had great strategic fit in terms of complementary product lines and

geographic scope, but there was little organizational fit. Despite the official proclamation of a merger of

equals, the American unit in Daimler Chrysler saw itself as Occupied Chrysler. American managers resented

answering to German managers and Germans disliked being paid two thirds less than their Chrysler

colleagues. These clashes led to a mass exodus of American managers from Chrysler- a common phenomenon

in acquired firms.

FORMATION OF ALLIANCES

The next few sections discuss in some detail the formation evolution and performance of alliances and

acquisitions. First: How are alliances formed? Exhibit 11.5 illustrates a three-stage model to address this

question.

In stage One, a firm must decide if growth can be achieved strictly through market transactions or cooperative

alliances. To grow by pure market transactions, the firm has to confront competitive challenges independently.

This is highly demanding, even for resource-rich multinationals. And, as noted drawbacks, leading many

managers to conclude that alliances are the way to go.

In stage Two, a firm must decide whether to take a contract or an equity approach. As noted in Chapters 6 and

10, the choice between contract and equity is crucial. The first driving force is shared capabilities. TH more

tacit (that is, hard to describe and codify) the capabilities, the greater the preference for equity involvement.

Although not the only way, the effective way to learn complex processes is trough learning b doing. A good

example of this is learning to cook by actually cooking and not by simply reading cookbooks. Many business

processes are the same way. A firm that wants to produce cars will find that the codified knowledge found in

books or reports is not enough. Much tacit knowledge can only be acquired via learning by doing preferably

with experts as alliance partners.

A second driving force is the importance of direct monitoring and control. Equity relationship allow firms to

have some direct control over joint activities on a continuing basis, whereas contractual relationships usually

do not. In general, firms that fear their intellectual property may be expropriated prefer equity alliances (and

a higher level of equity). This, for example, explains why Chia has so many JVs but so few licensing and

franchising agreements.

Eventually firms need to specify a specific format that is either equity based or contractual (non-equity based),

depending on the choice made in Stage Two. Exhibit 11.4 on page 163 listed the different format options.

Since chapter 10 has already covered this topic as part of the discussion on entry modes, we will not repeat it

here.

DISSOLUTION OF ALLIANCES

Alliances are often described as a corporate marriages and when terminated, as corporate divorces. Exhibit

11.6 portrays an alliance dissolution model. To apply the metaphor of divorce, we focus on the two partner

alliance. Following the convention in research on human divorce, the party who begins the process of ending

the alliance id labeled the initiator, while the other party is termed the partner – for lack of better word. We

will draw on our Opening Case to explain this process.

The first phase is initiation. The process begins when the initiator starts feeling uncomfortable with the alliance

(for whatever reason). Dissatisfaction leads to quiet, unilateral pressure from the initiator, which was Daewoo

in the first JV with GM. After repeated demands to modify GM’s behavior failed, Daewoo began to sense that

the alliance was probably unsalvageable. At this point, the play of discontent became a bolder. Initially, GM,

the partner, might simply not get it. The initiator’s apparently sudden dissatisfaction might confuse the partner.

Sometimes, the partner responds by committing some grievous error, such as when GM flatly denied

Daewoo’s request to extend JV’s products line and market coverage to Eastern Europe. As a result, initiation

tends to escalate.

The second phase is going public. The party that breaks the news first has a first-mover advantage. By

presenting a socially acceptable reason in favor of its cause, this party is able to win sympathy from key

stakeholders such as parent company executives, investors and journalists. Not surprisingly, the initiator is

likely to go public first, blaming the failure on the partner. Alternatively, the partner may preempt the initiator,

laying the blame on the initiator and establishing as righteous.

The third phase is uncoupling. Like divorce, alliance dissolution can be either friendly or hostile. In

uncontested divorces, both sides attribute the separation to an outside cause such as a change in circumstances.

For example, Eli Lily and Ranbaxy phased out their JV in India and remained friendly with each other. In

contrast, contested divorces involve accusations from one or both parties. The worst scenario is a “death by a

thousand cuts” inflicted by either or both parties at every turn.

The last phase is aftermath. Like most divorced individuals, most (but not all) divorced firms are likely to

search for new partners. Understandably, the new alliance is often negotiated more extensively (such as

Second GM-Daewoo JV). However, excessive formalization may signal a lack of trust in the same way that

pre-nuptials may scare away some prospective marriage partners.

PERFORMANCE OF ALLIANCES

Although managers naturally focus on alliance performance, opinions vary on how to measure it. A

combination of objective measures (such as profit and market share) and subjective measures (such as

managerial satisfaction) can be used. Four factors may influence alliance performance. (1) equity, (2) learning

and experience, (3) nationality and (4) relational capabilities

.

The level of equity stake may mean that a firm is more committed, which is likely to result in higher

performance. Second, whether firms have successfully learned from partners is important when assessing

alliance performance. Since learning is abstract. Experiences is often used as a proxy because it is relatively

easy to measure. While experience certainly helps, its impact on performance is not linear There is a limit

beyond which further increase in experience may not enhance performance. Third, nationality may affect

performance. For the same reason that marriages were both parties have similar backgrounds are more stable,

dissimilarities in national culture may create strains in alliances. Not surprisingly, international alliances tend

to have more problems than domestic ones. Finally, alliance performance may fundamentally boil down to

soft, hard –to-measure relational capabilities. The art of relational capabilities, which are firm specific and

difficult to codify and transfer, may make or break alliances. Overall, none of these four factors has an

unambiguous, direct impact on performance. What has been found is that they may have some correlations

with performance. It would be naïve to think that any of these four single factors would guarantee success. It

is their combination that jointly increases the odds for the success of strategic alliances.

MOTIVES FOR ACQUISITIONS

What drive acquisition? Exhibit 11.7 on the next page shows three potential motives for acquisitions (1)

synergistic, (2) hubristic and (3) managerial motives. All three can be explained by the institution and

resource-based views. From an institution-based view, synergistic motives for acquisition are often response

to a formal institutional constraints and transitions that affect a company’s search for synergy. It is not a

coincidence that the number of cross-border acquisitions had skyrocketed in the last two decades. This is the

same period during which trade and investment barriers have gone down and FDI has risen.

From a resource based standpoint, the most important synergistic rationale is to leverage superior resources.

Lufthansa recently acquired Air Dolomiti’s, an award winning regional airline in norther Italy. At a time when

many small airlines are going out of business, Lufthansa’s willingness to leverage its superior resources helps

ensure Air Dolomiti’s survival despite its loss of independence. Another synergistic rationale is to enhance

market power. After a series of M & As in three years (such as Daimler/Chrysler Renault/ Nissan and Ford/

Jaguar), the top ten automakers increased their global market share from 69% in 1996 to 80% in 1999. Such

M&A’s not only eliminate rivals but also reduce redundant assets. Finally, another rationale is to gain access

to complementary resources, as evidenced by Lenovo’s interest in IBM’s worldwide client base (see Closing

Case).

While all of the synergistic motives, in theory, add value, hubristic and managerial motives reduce value,

Hubris, refers to exaggerated pride or over-confidence in one’s capabilities. Managers of acquiring firms

make two strong statements. The first is: “We can manage your assets better than you (target firm managers)

can! The second statement is even bolder. Given that purchasing, a publicly listed firm requires paying an

acquisition premium, managers of an acquiring firm essentially say: “We are smarter than the market!” this

attitude is especially dangerous when multiple firms are bidding for the same target. The winning acquirer

may suffer from what is called the winner’s curse: in auctions-the winner has overpaid. From an institution

based view, hubristic motives join the acquisitions bandwagon. The fact that M&As come in waves speaks

volumes about such herd behavior. After a few first-mover firms start making some deals in the industry,

waves of late movers, eager to catch up, may rush in prompted by a WOW! Get it! Mentality. Not surprisingly

many of those deals turn out to be bust.

While the hubristic motive suggests that some managers may unknowingly overpay for targets, some may

knowingly overpay for targets. Such self-interested actions are fueled by managerial motives, defined as

manager’s desire for power, prestige and money, which may lead to decisions that do not benefit the firm.

Overall in the long run. As a result, some managers may deliberately over-diversify their firms through M&As

for such personal gains, these are known as agency problems.

PERFORMANCE OF ACQUISITIONS

Why do as many as 70% of acquisitions reportedly fail? Problems can be identified in both pre- and post –

acquisition phases. (Exhibit 11.7) During the pre-acquisition phase executive hubris and/or managerial

motives may cause acquiring firms to pay too much for target and fall into a synergy trap. For example, in

2006, Google paid $1.6billion to acquire You Tube, a 20-month old video sharing site with zero profit. Such

a high premium was indicative of (1) strong capabilities to derive synergy, (2) high levels of hubris, (3)

significant managerial self-interests, or all the above. Microsoft CEO Steven Ballmer commented that “there’s

no business model for You tube that would justify &1.6 billion.

Another primary pre-acquisition problem is inadequate screening and failure to achieve strategic fit. For

example, Bank of America, in a hurry to make a deal, spent 48hours in September 2008 before agreeing to

acquire Merrill Lynch for $50billion. Not surprisingly, failure to do adequate homework (technically, due

diligence) led to numerous problems centered on the lack of strategic fit. Consequently, this acquisitions were

labeled by the Wall street Journal as a deal from hell”

Acquiring international assets can be even more problematic because institutional and cultural distances can

even be larger and nationalistic concerns over foreign acquisitions may erupt. When Japanese firms acquired

Rockefeller Center and movie studios in the 1980s and 1990s, the US media reacted with indignation. More

recently, In the 2000s when DP World from the United Arab Emirates and CNOOC from China attempted to

acquire US assets they had to back off due to political backlash.

Numerous integration problems may surface during the post-acquisition phase. Organizational fit is just as

important as strategic fit. One study reports that a surprising 80% of acquiring firms do not analyze

organizational fit with targets. Firms might also fail to address multiple stakeholders’ concerns, including job

losses and diminished power. Exhibit 11.9 humorously portrays one particular challenge. Most firms focus on

task issues such as standardizing reporting and pay inadequate attention to people issues, which typically

results in, low morale and high turnover.

In cross-border M&As, integration difficulties may be much worse because clashes of organizational cultures

are compounded by clashes of national cultures. When four seasons acquired a hotel in Paris, the simple quest

that employees smile at customers was resisted by French employees and laughed at by the local media as “la

culture Mickey Mouse”

Although acquisitions are often the largest capital expenditures most firms ever make, they frequently are the

worst planned and executed activities of all. Unfortunately, while merging firms are sorting out the mess,

rivals are likely to launch aggressive attacks. When HP was distracted by its highly controversial acquisition

of Compaq during 2002-2003, Dell invaded HP’s printer market and unleashed a price war. Adding all of the

above together is hardly surprising that most M&As fail.

MANAGEMENT SAVVY

What determines the success and failure in alliances and acquisitions? Our two core perspectives shed light

on this big question. The institution-based view argues that alliances and acquisitions depend on a thorough

understanding and skillful manipulation of the rules of the game as exemplified by Lenovo and IBM (see the

Closing Case). The resource-based –view calls for the development of firm-specific and acquisition

performance.

Consequently, three clear implications for action emerge; they are listed Exhibit 11. 10. First, managers need

to understand and master the rules of the game both formal and informal- governing alliances and acquisitions

around the world. Lenovo clearly understood and tapped into the Chinese government’s support for home-

grown multinationals. IBM likewise understood the necessity for the new Lenovo to give up the Idea of having

dual headquarters in China and the United States and to set up its world headquarters in the United States.

This highly symbolic action made it easier to win approval from the US government. In contrast, GE and

Honeywell two US-headquartered firms, proposed to merge and cleared US antitrust scrutiny in 2001. But

they failed to anticipate the power of the EU antitrust authorities and their incentives for killing the deal. In

the end, the deal was torpedoed by the European Union. The upshot is that in addition to the economics of

alliances and acquisitions managers need to pay attention to the politics behind such high-stakes strategic

moves.

Second, when managing acquisitions, managers are advised not to over-pay attention to the soft relational

capabilities that often make or break relationships. To the extent that business schools usually provide a good

training on hard number-crunching skills, it is time for all of us to beef up on soft but equally important

(perhaps even more important) relational capabilities.

Finally, when managing acquisitions, managers are advised not to over-pay for targets and to focus on both

strategic and organizational fit. While approaches vary, no firm can afford to take acquisitions, especially the

integration phase, lightly.