Between Market and Hierarchy: Mergers, Acquisitions, Joint Ventures

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

2. 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.

3. 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.

4. 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).

5. 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.

6. 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.

7. 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 (??????).

8. 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.

9. 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).

10. 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).

11. 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.

12. 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.

13. 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.

14. 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).

15. 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.

16. 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),

17. 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).

18. Andrade, G., M. Mitchell, and E. Stafford. 2001. New Evidence and Perspective on Mergers. Journal of Economic Perspectives. Vol. 15: pp.103-120. • Buckley, P. J. and M. Casson. 1990. Joint Ventures. In Enterprise and Competitiveness, ed. M. Casson. Oxford: Oxford University Press. • Cohendet, P., P. Llerena, H. Stahn, and G. Umbhauer, eds. 1998. The Economics of Networks. Interaction and Behaviours. Hidelberg: Springer-Verlag Berlin. • D’Aspremont, C. and A. Jacquemin. 1988. Cooperative and noncooperative R&D in duopoly with spillovers. American Economic Review. Vol. 78: pp. 1133-1137. • Holmstrom, B. and S. N. Kaplan. 2001. Corporate Governance and Merger Activity in the United States: Making Sense of the 1980s and 1990s. Journal of Economic Perspectives, Vol. 15: pp.121-144. • Kaplan, N. (ed.) 2001. Mergers and Productivity. Chicago: University of Chicago Press. • Kogut, B. 1988. Joint Ventures: Theoretical and empirical perspective. Strategic Management Journal, Vol. 9: pp. 319-332. • Mowery, D. C., J. E. Oxley, and B. S. Silverman. 1996. Strategic Alliances and Interfirm Knowledge Transfer. Strategic Management Journal, Vol. 17: pp. 71-91. • Osborn, R. N. and J. Hagedoorn. 1997. The Institutionalization and Evolutionary Dynamics of Interorganizational Alliances and Networks. Academy of Management Journal, Vol. 40: pp. 261-278. • Pfeffer, J. and P. Nowak. 1976. Joint Ventures and Interorganizational Interdependence. Administrative Science Quarterly, Vol. 21(3).