Choosing the right type of transaction is the key

In recent years, there has been rapid growth in collaboration as an alternative to mergers and acquisitions. The growth has not just been in value, but in the ever widening range of deals available. These include joint ventures, consortia, outsourcing, networks, franchises and licences.

Jonathan Berman, corporate partner at law firm Mishcon de Reya, explains that collaboration is appropriate for a wide range of circumstances, including: sharing risk; conducting a one-off project; utilising third party skills or intellectual property; or gaining access to a new customer base to provide a wholly different product or service.

In contrast, he says that an acquisition is appropriate for: taking full control; realising efficiencies; improving management; using assets more effectively; or cross-selling new products to new customers.

“We live in a much more dynamic and complex world,” says Joanna Causon, director of marketing and corporate affairs at the Chartered Management Institute. “The speed of change means that organisations need to be fleet of foot to grab opportunities as they arise. A collaboration, which could lead to a later acquisition, is much quicker to set up than mergers or acquisitions.”

Greg Davis, chief executive and founder at Catalyst, a consultancy, argues that the prize of collaboration can be wonderful and synergistic, but the risk is capped, too. “If it is unsuccessful you have not bet the whole [business],” he says. “Acquisitions can be seen as a move to avoid the uncertainties of a collaborative approach. There is one set of decision makers and a single set of intellectual property. They are usually made in order to make a ‘step change’ and to directly enhance earnings, accelerate growth or provide greater scale and scope. However, there is a lot more at risk and it is possible for them to destroy shareholder value.”

Mergers and acquisitions are especially appropriate for companies that are seeking scale and global consolidation. Multinational organisations operating in global industries need global economies of scale and an integrated global supply chain.

“It is very hard to drive synergies and cost advantages to a truly global business model through a collaborative approach,” says Mark Spelman, European head of strategy at Accenture, the consultancy. “You need ownership of all the components of the value chain.”

Collaboration through a consortium or joint venture is a well-established means of sharing high costs and managing risk, such as in the oil and construction industries. This risk sharing would not be possible through sole ownership. Collaboration is also appropriate where the scope is naturally limited, such as a specific contract or patent. The collaboration can serve its term and then come to its natural conclusion, an outcome that is not easily available through ownership.

Collaboration is also used extensively by western companies to enter rapidly growing markets, such as China, India and Japan. Western products are attractive to consumers, but the local partners have the contacts, market knowledge and cultural skills to market them, as well as local manufacturing facilities. Mr Spelman points out that there is a huge future market potential, as a billion new consumers – defined as people having an annual income of $5,000 or more – will come into the global market in the next 10 years.

Collaboration is also a common practice in research and development. “The pharmaceutical industry used to purchase a lot of small biotechnology, but found that they were killing the originality of the smaller company,” says Edouard Croufer, head of the chemical and pharmaceutical practice at consultancy Arthur D Little. “They have found that partnerships are the only way to maintain the original efficiency and ability to innovate. They can’t buy all the research laboratories, so they set up a network-based partnering approach.”

Sharing of skills is another major driver of collaboration. Collaboration is a much more flexible way to access just the specific skills needed, without having to take on and integrate the full range of skills built up by an acquisition target.

“Organisations of equal size often have complementary skills,” says Mr Croufer. “It would be too expensive to buy a competitor in order to acquire their skills. The problem with acquisition is that you need to have a large amount of your skill in overlap. If only part of the company has the skills you need, an alliance is a much more efficient because you don’t acquire skills you do not need.”

Nortel, a global telecommunications equipment manufacturer, sees a strategic need for both collaboration and acquisition and has been involved in both for a long time. Its experience of collaborative arrangements covers co-marketing agreements, original equipment manufacture, technology licensing, joint development agreements and joint ventures.

“We use collaboration to address a specific product or region, so that we can create value and minimise execution and integration risk,” says George Riedel, the company’s chief strategy officer. “Collaboration involves low to medium organisational interdependence, has clear goals on both sides and a good strategic fit. Although the level of commitment may vary, the terms are inherently more flexible. In contrast, mergers eliminate duplication and create a single management team. However, they bring challenges associated with cultural fit, revenue slippage, product and technology rationalisation and power struggles.”

Ms Causon points out that acquisitions are more formal, potentially more costly and can introduce significantly more financial risk than collaboration. Collaboration provides an opportunity for the parties to work together and can eventually lead to acquisition.

Catalyst’s Mr Davis points out that when a smaller company collaborates with a larger one it often acts as a “toe in the water” for the bigger “animal”. In other words, what can begin as a collaboration may culminate in an acquisition – and this was often the objective for both parties. “Recent studies have proved that over the last five years, a great improvement has been made in the success of acquisitions,” he says, “with about half now seen to be adding value.”

Mr Berman agrees, and explains that an acquisition may follow collaboration, once one party understands how the product or service provided by the other can assist it in increasing profits or making it more robust against competitors.

“Partnership is the best due diligence work you can do,” says Mr Croufer. “Research shows that the use of collaboration or acquisition depends on the state of the economy. You see more merger and acquisition activities than you do collaboration, but in times of recession people don’t want to spend money and follow the partnering option.

Clearly, the modern agile organisation needs to have the full range of merger, acquisition or collaboration options available in its strategic armoury.

“It isn’t a question of whether to own or collaborate,” says Mr Spelman, “but when to do each. Organisations need to be adept enough to be able to handle both.”