Strategy

Much of the recent research on mergers and acquisitions (M&;A) seeks to link the market valuations of individual companies, as well as overall stock market levels, with merger activity and performance. In their review of work conducted in this field, the authors present a primer on ways to measure whether M&;A actually creates value and then offer an overview of the "winners" and "losers." But the long-held observation that stock prices affect merger activity was confirmed in 2001, they say, by work that revealed a correlation between high merger activity and high market valuations. Several other studies have shown that acquirers who pay with stock underperform their peers in the long run, whereas acquirers who pay cash outperform their peers. Another line of inquiry, according to the authors, finds that the level of the stock market when an acquisition is announced affects short-term and long-term merger performance. The short-term effects are positive for acquisitions announced in high-valuation markets and negative for those undertaken in low-valuation markets. Supporting evidence is provided in other recent work too: Acquisitions that take place during periods of below-average economic growth create more shareholder value than strong-economy acquisitions. The strong performance of low-valuation acquirers and weak-economy acquirers suggests that they are not distracted by short-run market reactions, but instead focus on business fundamentals and true potential synergies. Two articles published in 2002, suggesting that the root cause of such links between valuation and performance may be incorrect valuation by the market, are empirically supported by current work that Bouwman et al. also describe. The conclusion of these various research streams is that stock prices matter, say the authors. The key implication for managers: Be wary of acquisitions made when market or firm valuations are high, and be optimistic about acquisitions when valuations are low. This review includes a comprehensive sidebar of all referenced and relevant research.

Overreacting to corporate scandal will hobble risk taking, innovation and growth

During the late 1990s stock market boom, many large companies established corporate-venturing units, seeking to develop innovative new businesses and spur growth. However, with the downturn of the economy, many of these units ceased operations -- while others managed to survive and a few even thrived. What went wrong with failing companies, and how do those that still have corporate-venturing units manage to succeed? The authors studied nearly 100 venturing units, proposing that failures often occurred because such groups lacked clarity -- both in their objectives and in their business models. Using the example of successful venturing units, such as Intel Capital, Mustang Ventures at Siemens, Lucent New Venture Group and GE Equity, the authors outline four common types of venturing scenarios that, by using a careful, steady approach, companies can execute well: ecosystem venturing, innovation venturing, harvest venturing and private-equity venturing. They discuss the characteristics and benefits of each and how successful companies avoid the pitfalls that snare others. In the end, the authors conclude, there are many ways to do corporate venturing. But to succeed, companies must define their goals clearly and narrowly, understand the differences among the various types, and use the appropriate type for the appropriate activity. The ultimate key to accomplishing that, say the authors, lies in effectively employing the differences to their advantage.

People often talk about business competition as if it’s a short race: Get to market first and you are bound to win. Indeed, the importance of first-mover advantage has been drummed into the heads of many business executives, and some have almost been brainwashed to think that speed is everything. But when a new technology like the Internet threatens to transform an industry, the companies that are quickest to respond aren’t necessarily the ones that reap the greatest benefits. In fact, choosing a fast strategy can lock them into a set of decisions that actually hurt them in the long run. Instead, organizations that choose the right strategy for the entire race & #8212; both for the early and late stages & #8212; will come out ahead. Specifically, we have found that companies that respond quickly by launching a spinoff usually have difficulty achieving true staying power in the market. For enduring success, incumbent companies are better off creating a group that is & #8212; or will eventually be & #8212; integrated within their organizations. Only then will they be able to tap fully into their numerous strengths and assets, leveraging their incumbent’s advantage.

A misapplied bottom-up approach can often lead to unintended consequences.

Stakeholder theory may be more conducive than shareholder theory to curbing company impropriety.

Intellectual property assets now account for 50% to 70% of the market value of all public companies, and corporate America is intensifying efforts to maximize the return on those assets. That explains why a small but growing number of Fortune 500 enterprises are moving away from a strict reliance on the “exclusivity value” of their patents and other intellectual property & #8212; that is, their power to exclude or hinder competitors & #8212; and are instead seeking to tap the often enormous financial and strategic value of their core technology assets by licensing them to other companies, including competitors. The practitioners of this strategic licensing, as it is called, are betting that any loss of market exclusivity that may result from making available their “crown jewel” technologies will be more than offset by the financial and strategic benefits gained. For this article, the author interviewed some of the pioneer practitioners of this emerging approach and got them to explain the nature and degree of the benefits their companies are now reaping. Although patent rights should always remain an important weapon in a company’s competitive arsenal, strategic & #8212; licensing initiatives are encouraging managers to rethink what it means to create and sustain competitive advantage in business.