Between Market and Hierarchy: Mergers, Acquisitions, Joint Ventures Aldo Geuna

Merger and Acquisitions (M&As): What they are, Why they happen, What are the outcomes. Joint Ventures (JVs): Production and distribution JVs, Strategic Technology Alliances.

Type of M&As Horizontal merger = acquisition in the same four-digit industry (give examples) Related business = experience in the same two-digit but not in the same four-digit industry Pure conglomerate = no experience in the same two-digit. Vertical merger = acquisition of in a vertically integrated industry.

Main Motives for M&As The monopoly/competition-inhibiting mergers, Efficiency increase via economies of scale/scope, Multi-plant economies (marketing, R&D, etc..), Speculative/stock market motives, Tax reasons, Capital raising for small firms (capital economies).

History of M&As I Scherer four main merger waves: 1887-1904: ~15% of all plans/employment, Standard Oil Company, United State Steel Corporation. 1916-1929: smaller than the previous, mainly electrical and gas utility sectors, more vertical/diversification mergers. 1964-1971: diversification/conglomerate mergers. 1980-1990: stock market driven, hostile takeovers, resurgence of horizontal mergers due to relaxation of antitrust regulation. Standard Oil Company (100 companies, 90% petroleum refining market),United State Steel Corporation (> 200 companies, 65% steel ingot-pouring capacity). Merger for monopoly. Antitrust regulation started to be enforced.

History of M&As II A new wave, 1994-????: Data on the share of acquisition volume over total stock market capitalisation show a new upsurge of M&As approaching 12% in 1998, it was 10% in 1988 (Kaplan, 2000). International large size M&As.

History of M&As III On top of the motives for the previous waves: Formation of an international oligopoly, ICT allows to reduce the diseconomies of conglomeration, Increasing reliance on knowledge for production and distribution, thus need of knowledge scale economies (??????).

M&As in the Pharmaceutical Industry During the period 1985-1996 (half during 1994-1996) 400 deals for $250 billion involving pharmaceutical or biotech firms. 65 deals involved only pharmaceutical firms. For over 50 pharmaceuticals mergers the value was over $1 billion (70% of total mergers value). 10 of the top 15 mergers are horizontal.

Outcomes of M&As Overall advantages of M&As can be summarised in: monopoly power increase and efficiency increase. The main disadvantages are size diseconomies. Effects of M&As are examined on the short-term (event studies) studying the returns to shareholders (usually positive). Longer-term implication focus on stock return or direct measures of profitability/performance (contradictory results, weak evidence of positive effects). Assuming that stock markets are “efficient” allow to analyse stock return as proxy for increased monopoly power or increased efficiency. ~ 50% CONGLOMERATE MERGERS MADE DURING THE 1960s/70s WERE SUBSEQUENTLY UNDUNE.

Characteristics of JVs Joint Venture = new organisational entity jointly owned and controlled by the parents organisations. Cooperative agreement (CA) = non equity based agreement, can include organisational mechanisms for oversight and management. JVs and CAs are interorganisational linkages that enable the organisation to manage some of its environmental constraints (quasi-markets, quasi-hierarchies). Strong increase in formation of JV in the last 25 years.

Main motives for JVs/CAs To spread the risks of new industrial developments, Joint or combined facilities for greater economy -economies of scale, To accumulate large amount of needed capital -capital raising, To undertake programmes that are too extensive for individual companies to handle -combine complementary strengths. EXAMPLE: expansion of MNEs into new markets via JV with an indigenous distribution company as a partner.

Strategic Technology Alliance Strategic Technology Alliance (STA) = form or cooperation and agreement for which a combined innovative activity or an exchange of technology is at least part of the agreement. Prior to 1975 STA were or little or no importance.

Types of STAs Simple unilateral contracts ("technology for cash") -e.g. technology licensing, Multilateral contracts -e.g. Cross-licensing & Technology sharing, Customer-supplier (user-producer) partnership, Joint development agreement (which often includes organisational mechanisms for oversight and management), ”Pure" equity joint venture.

Theoretical approaches to STA Mainstream analysis of R&D cooperation based on game-theoretic approaches: analysis of strategic behaviour of firms and societal/competitive consequences of R&D cooperation (d’Aspremont and Jacquemin, 1988). Resource based view of the firm /organisational learning: collaboration is seen as a response by organisations to environmental changes demanding improvements in their know-how and/or technological capabilities (Mowery, Oxley & Silverman, 1996).

Main motives for STAs I Present rapid changes in technological development ICTs/Biotech Acquisition of new technical skills and technological capabilities), Necessity of monitoring a wide spectrum of technologies.

Main motives for STAs II Necessity of quick preemption strategies, Complexity and uncertainty surrounding technological development: Need of spreading costs and risks, Coordinating and formulating technical standards (user-producers, producers in telcom),

Outcomes of STAs There is mix evidence on the outcomes of STAs: Some works provide empirical evidence for the view that equity agreements support greater transfer of technological capabilities (Kogut, 1988; Mowery et al., 1996). Other works examine economic performance providing weak evidence for higher returns for the non-equity form of agreement (Hagedoorn & Schakenraad, 1994).

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