Buy, Ally, Or Divest: How CFOs Decide Which Decision Is Best

Tuesday, February 14, 2006

Prof. Belén Villalonga and Prof. Anita McGahan, Strategic Management Journal, http://

Abstracted from: The Choice Among Acquisitions, Alliances, And Divestitures
By: Prof. Belén Villalonga and Prof. Anita McGahan
Harvard Business School (BV); School of Management, Boston University (AM)
Strategic Management Journal - Vol. 26, No. 13, Pgs. 1183-1208

Evaluating strategic choices.
As CFOs know first-hand, the life of a company is an evolutionary process. During the journey, those companies seeking to expand may do so through acquisitions and joint ventures, while those moving toward contraction may turn to divestitures, including spinoffs or selloffs. Yet it remains unclear why a company chooses one action from the broad range of strategic options, and how resources, areas of specialization, previous acquisition history, management ownership, and other company characteristics influence such decisions. Business professors Belén Villalonga and Anita McGahan sought answers by studying almost 9,300 acquisitions, divestitures, and alliances that 86 Fortune 100 firms announced between 1990 and 2000.

Tech-rich acquirors.
Certain characteristics of the acquiror and the target or partner influence whether a transaction takes place by acquisition or by an alliance such as a joint venture, marketing arrangement, or licensing agreement. For example, companies rich with technology resources fear the resources are more vulnerable to appropriation in a joint venture. They therefore favor ownership forms (e.g., acquisition) over partner forms (such as alliances), the authors learned, and alliance over outright divestiture. Similarly, the resources of the target or partner impact the choice of acquisition over alliance. At the same time, acquisitions are no more common than alliances among firms with rich technological resources. The same hypothesis does not hold true for marketing resources: neither the target’s nor the focal firm's marketing depth impacts the choice of vehicle.

The past becomes the future.
Governance specialization, or the degree to which a firm repeatedly engages in certain types of deals, appears to have a strong influence on strategic choices. Contrary to popular perception, diversified firms are no more likely than focused firms to divest so as to reverse earlier diversification strategies. While knowledge acquired from previous acquisitions carries over into future deals, apparently the same is not true when it comes to alliances or divestitures, although lessons from acquisitions do apply to alliances or divestitures that follow. Recent activity may be a predictor of future behavior. Firms are more likely to choose divestiture if they have just divested and to make another alliance after a recent alliance. However, a recent acquisition does not influence the decision to acquire in the future. High institutional ownership decreases the likelihood of acquisition activity, a reflection of the monitoring role such institutions play in protecting shareholders from management empire-building. The same does not hold true at companies with high insider ownership, where acquisitions are more likely to occur.

Abstracted from Strategic Management Journal,
published by John Wiley & Sons,
The Atrium, Southern Gate, Chichester, West Sussex PO19 8SQ, England

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