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

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

3. 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

4. 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
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

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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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