The Choice among Acquisitions, Alliances, and Divestitures

Author: Villalonga, B. and McGahan, A.Strategic Management Journal, 26 (13): 1183-1208.

Presented by Nan Zhang

About the Authors

Belén Villalonga

Leonard N. Stern School of Business, NYU

Associate Professor of Management and Organizations

Ph.D., Economic and Management Sciences, 2000 (Universidad Complutense de Madrid)

Ph.D., Management, 2001 (UCLA)

Anita M. McGahan

School of Management, Boston University

Visiting Professor of Strategy and Innovation

Ph.D., Business Economics, 1990 (Harvard University)

2

Overview

Introduction

Determinants of Boundary Choice

Data

Theory, Hypotheses, and Results

Conclusion

3

Introduction Earlier empirical studies of boundary choice look at:

Alternative governance structure (transaction focus); Choices that firms make between acquisitions and alliances (firm focus); Joint decisions by two or more firms to ally (dyad).

Motivation: Lack of studies about selling (divestitures) vs. buying or making (acquisitions).

Divestitures, alliance and acquisitions can fit into the three groups defined by earlier studies. Transaction: Divestitures and acquisitions both represent reactions to changes

in the transaction costs created by specialized assets. Firm: Divestitures and alliance are alternative ways to contract boundaries,

just as acquisitions and alliances are alternative way to expand boundaries. Dyad: Divestitures are a way of allocating control of resources between

parties.

Objective: Examine how firms choose among acquisitions, alliances, and destitution when deciding to expand or contract boundaries.

4

Acquisition, Alliance and Divestiture

AcquisitionsAlliances &

Joint ventures

Divestitures

High IntegrationLow Integration

5

Determinants of Boundary Choice

6

Data9,276 acquisitions, alliances, and

divestitures announced and completed by 86 members of the Fortune 100 between 1990 and 2000

Data are from the SDC (Joint Ventures and Alliances; Mergers and Acquisitions).

Deal types grouped into three, seven, and nine categories for refined analysis.

Dependent variable: governance form

7

Variable Summary

8

Theory, Hypotheses and Results (1)

Logic Hypothesis Variable Sign

Result

Focal firm attributes

Intangible resources (RBV +TCE)

Highly valuable technological resources more integrative forms.

H1a: The firm’s technological resources are associated with the choice of acquisitions over alliances, and alliances over divestitures.

Focal firm’s technological resources

+ ✔

Brand capital cannot be shared: advertising-intensive firms more integrated forms.

H1b: The firm’s marketing resources are associated with the choice of acquisitions over alliances, and alliances over divestitures.

Focal firm’s marketingresources

+ ✗

Ownership structure (Agency)

Managers are incentive to maximize assets under the firm’s control (agency problem) prefer acquisition to alliance, then to divestitures higher insider ownership, blockholder ownership and institutional ownership can reduce agency problem.

H2a: The level of insider ownership of the firm is associated with the choice of divestiture over alliances, and alliances over acquisitions.H2b: The level of blockholder ownership of the firm is associated with the choice of divestitures over alliances, and alliances over acquisitions.H2c: The level of institutional ownership of the firm is associated with the choice of divestitures over alliances, and alliances over acquisition.

Insider ownership (H2a)Blockholder ownership (H2b)Institutional ownership (H2c)

_ H2a: ✔H2b: ✗H2c: ✔

9

Theory, Hypotheses and Results (2)Logic Hypothesis Variable Sig

nResult

Focal firm attributes contd.

Acquisition, alliance, divestiture experience (Organizational learning)

Value generated depends upon capabilities developing through repeated experience with these governance forms.

H3a: The firm’s acquisition experience is associated with the choice of acquisitions over both alliances and divestitures.H3b: The firm’s divestiture experience is associated with the choice of divestitures over both alliances and acquisitions.H3c: The firm’s alliance experience is associated with the choice of alliances over both acquisitions and divestitures.

Acquisition experience (H3a)Divestiture experience (H3b)Alliance experience (H3c)

+ (H3a)_ (H3b)

+, - (H3c)

H3a: ✔H3b: ✔H3c: ✔

Prior diversification (RBV + TCE + Agency)

Greater prior diversification more activities with the transaction more integration ex post.Diversification managers are incentive integration.

H4a: The firm’s diversification level is associated with the choice of acquisitions over alliances, and alliances over divestitures.

Diversification

+ ✔

Much of the corporaterestructuring activity that took place duringthe 1980s and 1990s was aimed at reversingthe diversification undertaken in earlier decades.

H4b: The firm’s diversification level is associated with the choice of divestitures over alliances, and alliances over acquisitions.

Diversification - ✔

Theory, Hypotheses and Results (3)Logic Hypothesis Variable Sig

nResult

Attributes of the relationship between the focal firm and the target or partner firm

Industry activity (RBV + TCE + Asymmetric Information)

Greater relatedness implied lower cost of integration more integration.Greater relatedness lower asymmetric information more integration.

H5: The relatedness between the focal firm and the target (or partner) firm is associated with the choice of acquisitions over alliances, and alliances over divestitures.

Focal – target firmrelatedness

+ ✔

Size balance (‘Digestibility’ theory)

More balanced size More difficult for any party to be digested by another Less integration.

H6: The size balance between the focal firm and the target (or partner) firm is associated with the choice of divestitures over alliances, and alliances over acquisitions.

Size balance - ✔

Prior alliances (Social embeddedness, Real options, and Corporate refocusing)

Prior alliance create trust alliance.Prior alliance create value alliance.

H7: The number of prior alliances between the firm and the target (or partner) firm is positively associated with the choice of alliances over both acquisition and divestitures.

Prior alliances +, -

✔

Relatedness (TCE, RBV, and Asymmetric information)

More close between activities subject to transaction and firm activities integration.

H8: The relatedness between the firm and the activity that is subject to the transaction is associated with the choice of acquisitions over alliances, and alliances over divestitures,

Focal firm – transactionrelatedness

+ ✔

Theory, Hypotheses and Results (4)Logic Hypothesis Variable Sig

nResult

Transaction – Focal Firm Relationship Attributes

Governance form specialization (Spillover)

More spillover effect less effect of governance specialization.

H9a: The firm’s governance specialization is insignificantly associated with the choice of governance form.

Governance specialization +, -

✔

Symmetric spillover more integration

H9b: The firm’s governance specialization is associated with the choice of acquisitions over alliances, and alliances over divestitures.

Governance specialization

+ ✔

Asymmetric spillover less integration.

H9c: The firm’s governance specialization is associated with the choice of divestitures over alliances, and alliances over acquisitions.

Governance specialization - ✔

Recency of same-form governance experience (Spillover)

Learning effect is more important for acquisition integration.

H10a: The recency of the firm’s same form governance experience is associated with the choice of acquisitions over alliances, and alliances over divestitures.

Recency of same-formexperience

+ ✔

Learning effect is more important for divestiture less integration.

H10b: The recency of the firm’s same form governance experience is associated with the choice of divestitures over alliances, and alliances over acquisitions

Recency of same-formexperience

- ✔

12

Theory, Hypotheses and Results (5)Logic Hypothesis Variable Sig

nResult

Target/Partner Firm Attributes and Transaction Attributes

Intangible resources (RBV)

See H1a. H11a: The target (or partner) firm’s technological resources are associated with the choice of acquisitions over alliances, and alliances over divestitures.

Target’s technologicalresources

+ ✗

See H1b H11b: The target (or partner) firm’s marketing resources are associated with the choice of acquisitions over alliances, and alliances over divestitures.

Target’s marketingresources

+ ✗

Market transaction costs and internal organization costs (TCE)

Higher value of interaction between uncertainty and asset specificity (true cost of transaction) integration.

H12a: The interaction between uncertainty and asset specificity is associated with the choice of acquisitions over alliances, and alliances over divestitures.

Asset specificity

+ ✔

H12b: The internal organization costs of integrating the target firm into the focal firm are associated with the choice of divestitures over alliances, and alliances over acquisitions.

Internal organization costs

- ✔

13

Main Results

14

Additional ResultsBoundary-expanding and boundary-contracting forms

15

ConclusionSupports are founded by findings.

The combined RBV, TCE and internationalization theory is supported. Agency theory also finds mixed support in the results. The study provides strong support for organizational learning

explanations.

Results imply that a multi-theoretical approach is needed to study firms’ boundary choices

Limitations Emphasis on the Fortune 100 firms Validation of proxies (i.e., governance form specialization, recency of

same-form experience)?

Future research Alliances vs. divestitures (boundary-contracting choices) Exploration of organizational learning explanations

16