The Choice Among Acquisitions, Alliances, and Divestitures Villalonga, and McGahan Strategic Management Journal, 2005 Presented by – Amit Darekar, 2016

Background and Objective contd… Divestitures Alliances and Joint-Ventures Acquisition INTEGRATION The choice among acquisitions, alliances, and divestitures

Background and Objective Studies of Boundary Choice Alternative Governance Structures Make Vs Buy Equity alliance Vs Non-equity alliance In-house Vs External R&D Procurement Acquisitions Or Alliances Ally OR Merge Research Question How firms choose among acquisitions, alliances, and divestitures to expand or contract their boundaries? The choice among acquisitions, alliances, and divestitures

Data collection / processing Population  All acquisitions, alliances, and divestitures of Fortune100 firms Sample  9276 acquisitions, alliances, and divestitures by 86 firms from Fortune 100 list during 1990-2000 Unit of analysis – Firm SDC’s database Lexis – Nexis, and Dow Jones News Retrieval Services Available choices to firms  Acquisitions (Mergers, Full or majority acquisitions, Minority acquisitions) Alliances (JV and other equity alliances, Non-equity alliances, Licensing) Divestitures (Spin-offs and sell-offs) Used SDC’s: “Joint ventures and alliances database” for alliances; “Mergers and acquisitions database” for acquisitions and divestitures; Sine SDC’s alliance dates are unreliable, used… The choice among acquisitions, alliances, and divestitures

Firm’s choice influencers The choice among acquisitions, alliances, and divestitures

The choice among acquisitions, alliances, and divestitures Methods Ordered Probit Model  For the choice among acquisition, alliance, and divestiture. DV  Governance Form Binary Probit Model  For choice between acquisitions and alliances, and the choice between alliances and divestitures The choice among acquisitions, alliances, and divestitures

Theory, Hypotheses, and Results contd… 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 marketing resources ✗ Ownership structure (Agency) Managers have 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: ✔ The choice among acquisitions, alliances, and divestitures

Theory, Hypotheses, and Results contd… Logic Hypothesis Variable Sign Result 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 firm relatedness + ✔ 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 – transaction The choice among acquisitions, alliances, and divestitures

Theory, Hypotheses, and Results contd… Logic Hypothesis Variable Sign Result 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. + Asymmetric spillover  less integration. H9c: The firm’s governance specialization is associated with the choice of divestitures over alliances, and alliances over acquisitions. - 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-form experience 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 The choice among acquisitions, alliances, and divestitures

Theory, Hypotheses, and Results Logic Hypothesis Variable Sign Result 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 technological resources + ✗ 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 marketing 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 - The choice among acquisitions, alliances, and divestitures

The choice among acquisitions, alliances, and divestitures Discussion Hypotheses postulated show association of variables, but not causation. What is the difference between Blockholder owner Vs Institutional owner that influences governance structure decision? (As in Hyp-2b and 2c) Too many parallel / contrasting hypotheses (e.g. H4a-H4b, H9b-H9c, H10a-H10b) – sign of non-adequate / strong theory? How do we deploy strong measures? (e.g. Variability of profit as proxy for uncertainty, % of employees that are engineers in the focal firm’s industry as proxy for human asset specificity?) The choice among acquisitions, alliances, and divestitures