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Alina B. Sorescu, Rajesh K. Chandy, and Jaideep C. Prabhu
Executive Summary
In the 2004 alone, there were more than 30,000 acquisitions worldwide, worth an estimated $1.35 trillion. Chief executive officers obsess about acquisitions. Investors look warily at them, and perhaps with good reason. As the Economist (2000, p. 19) once put it, the experiences of acquisitions in the past suggest that they are "like second marriages, a triumph of hope over experience … with even higher failure rates than the liaisons of Hollywood stars." The conclusion of decades of academic research is that the average acquisition leaves the acquiring firm worse off financially than before.
However, not all acquisitions are bad for shareholders; averages conceal winners and losers. Anecdotal evidence suggests that some acquirers have consistently better acquisition records than others. Why do the acquisitions of some firms perform better than those of others? Remarkably, little research has examined this question in a systematic manner. The work that has examined this question has mostly focused on deal-specific variables (i.e., how the acquisitions are conducted; that is, whether the acquisition was friendly or hostile, whether it a cash or a stock offer).
In this article, Sorescu, Chandy, and Prabhu highlight a firm-specific reason why some acquirers do better than others. In doing so, they shift the focus from how acquisitions are conducted to which firms should acquire in the first place. They introduce product capital as a driver of success or failure: product capital represents the marketing- and technology-related assets that a firm has built over time. After controlling for deal-specific factors, they show that firms that invest beforehand in product capital are more likely to succeed at acquisitions than other firms.
Firms with product capital are better at acquisitions because their investments in marketing and technology provide them with the ability to (1) select better targets and (2) deploy the targets better. In turn, better selection and deployment yield greater financial rewards.
The results of an analysis of acquisitions in the pharmaceutical industry across seven countries over ten years (1992–2002) provide empirical support for these arguments. The authors examine two dimensions of selection and deployment: people and products. On the people dimension, they find that firms that have invested substantially in product capital tend to acquire targets with more highly cited scientists. Moreover, they are more likely to retain these top scientists after the acquisition is consummated than are other firms. (In contrast, a majority of the top scientists in targets acquired by firms with low product capital leave within one year of the acquisition.) On the products dimension, they find that firms that have invested in product capital tend to acquire targets with fuller product pipelines. Moreover, they are more likely to push the products through the pipeline and actually launch these products than are other firms.
Not long ago, the Economist (1999, p. 15) had this advice for would-be acquirers: "How, the prudent boss should ask, can we be one of the minority that succeed, rather than of the majority that fail?" To this prudent boss, the authors say, "Build before you buy." A growth strategy that relies primarily on buying other firms is not a good idea. Firms that attempt to buy growth without first building from within are likely to make bad acquisitions. They are also likely in the long run to be punished by the stock market for their acquisitions. Firms that invest ahead of time in product capital tend to acquire better targets, deploy these acquisitions better, and perform better in the long run.
Biography
Alina B. Sorescu is Assistant Professor of Marketing in the Mays Business School at Texas A&M University. She has a BS from University of Bucharest, a Master of Statistics from University of Florida, and a PhD from the University of Houston. Her research interests lie on the marketing finance interface, particularly in measuring the effect of marketing assets and activities on shareholder value. She is also interested in new product development and valuation, in both high-tech and consumer packaged goods industries. Her publications have appeared in Journal of Marketing, Journal of Advertising, and Journal of Advertising Research. She has received several awards for her research, including the American Marketing Association John A. Howard Dissertation Award and the Academy of Marketing Science Mary Kay Dissertation Award.
Rajesh K. Chandy is Carlson School Professor of Marketing and an associate professor in the Carlson School of Management at the University of Minnesota. He received his PhD from the University of Southern California. His areas of research and teaching include innovation, technology management, and advertising strategy. His publications have appeared in Journal of Marketing Research, Journal of Marketing, and Marketing Science, among others. His research awards include the Journal of Marketing Harold Maynard Award for contributions to marketing theory and thought, the American Marketing Association Strategy Special Interest Group’s Early Career Award for Contributions to Marketing Strategy, the American Marketing Association Technology and Innovation Special Interest Group Award for the best article on Technology and Innovation, the Marketing Science Institute Alden Clayton Award for the best marketing dissertation proposal, the Mary Kay Award for the best marketing dissertation, and the ISBM dissertation proposal award. His teaching awards at the Carlson School include the 2002–2003 Outstanding Professor of the Year Award, the 2003–2004 Award for Excellence in Teaching, and the 2003–2004 Outstanding Faculty Dedication Award.
Jaideep C. Prabhu is Professor of Marketing in the Tanaka Business School at the Imperial College London and has been on the faculty at the University of Cambridge, Tilburg University, and University of California, Los Angeles. He has a BTech from the Indian Institute of Technology, New Delhi, and a PhD from the University of Southern California. His research interests include radical innovation, competitive interaction, and organizational learning, particularly in high-technology industries, such as biotechnology and pharmaceuticals. His publications have appeared in Journal of Marketing Research, Journal of Marketing, International Journal of Research in Marketing, Marketing Letters, and elsewhere. He has consulted for and taught executives from (among others) British Telecom; Philips; Xerox; ING Bank and Egg; in Colombia, Portugal, Germany, Netherlands, Switzerland, the United States, and the United Kingdom. He has also consulted for the U.K. Government's Department of Trade and Industry, for whom he cowrote a white paper on innovation in the United Kingdom. |