Growth Through Mergers, Acquisitions, and Strategic Alliances: To Merge or Not to Merge

The sustenance and development of IC is closely related to the creation and maintenance of competitive advantage in the knowledge economy. The speed with which an organization would need to develop its IC to respond to market changes and challenges has increased in most industries. This led many organizations to consider mergers and strategic alliances to fortify the base of their intellectual capital and resources.

At no time has business witnessed such an upsurge in the number and value of mergers and acquisitions like the past decade. In 2000, in the United States alone there were around 7,739 deals worth about $1.2 trillion. Though over half of these deals were in the telecom and technology sector, other sectors and industries accounted for a disproportionate number of deals. Indeed, this phenomenon is global with acquisitions crossing borders for better companies and better deals. A study by KPMG International has shown that the United States ranked second following Germany, which came first in foreign business acquisitions of $209 billion. As a cross border buyer, the United States ranked third, spending $95 billion after the United Kingdom's $254 billion and France's $113 billion.

The reason for this trend is that sometimes to secure the IC necessary for the desired or projected rate of growth, the level of your internal development and maximization of IC may be too slow or uncertain. To cope with this problem, companies get IC from the market or partner with another organization to share it. Mergers and acquisitions have always provided a route for growth, but in the new economy we have seen phenomenal proliferation in mergers and acquisitions so much so that it has been called merger mania.The main driver of these mergers is the need to grow the IC base and maintain its depth and breadth.

This explains why the most vibrant merger activity has been reported in the high tech industries where the pace of change and the complexity of the technology sometimes drive organizations to merge or perish. Take the pharmaceutical industry, for example, which worked with 40 proteins as the basis for new drugs for decades. After the discovery of the human genome, suddenly a virtually unlimited reservoir of material for innovation, some 200 proteins, was made available. The raw materials of innovation are abundant, limitless, and, primarily, yet to be explored. That in and of itself may be a persuasive reason not to merge. However, organizations have discovered that their intellectual capabilities were not sufficient to tackle the wealth of new knowledge.

New knowledge is in many ways still virgin and requires a very strong IC to be processed before it can be the basis of any useful invention. Thus, pharmaceutical companies found themselves in great need of trained human minds, or human capital, and proven ways of extracting and processing knowledge. The only sound business decision was to merge one or more of their businesses with that of their competitors.

The most recent merger, and maybe the largest in the pharmaceutical industry, was that of Pfizer and Warner Lambert. Pfizer paid $90 billion in February 2000 to acquire Warner Lambert Company. Pfizer CFO David Shedlarz said at the time, "Certainly, the impact on intellectual capital and knowledge is one of the critical things we are trying to achieve." He declared the goal of the merger was to "create a new competitive standard in developing a breadth and depth of research capability."40 Wall Street saw a winner in the marriage of the two pharmaceutical giants. Combined, they will grow faster (24 percent annually) than either could alone (20 percent annually).

Similarly, in the computer industry, major companies are constantly on the lookout for small companies with solid IC to acquire. The AOL acquisition of iAmaze and Quack.com in October 2000 upgraded AOL's site graphic and audio capability. What AOL, Pfizer, Hewlett Packard (HP), and other major players are buying with their mergers and acquisitions is brainpower.

There is another strategic reason for such acquisitions. Acquisitions allow an organization to maintain market leadership and create more entry barriers to competition. This type of growth strategy should be exercised with discretion as not to subject the organization to antitrust allegations as in the case of Microsoft. Microsoft's obsession with buying every smaller company that has promising IC brought its practices under judicial scrutiny.

The rate and complexity of mergers and acquisitions sometimes makes it difficult to know who owns what and when. Take the AOL-Time Warner merger with possibilities of having AT&T becoming a party in the deal. In July 2000, there were major discussions between AT&T and AOL Time Warner to merge their number 1 and number 2 performing cable television companies. AT&T declared its intention to spin off its cable company first, then merge it with Time Warner Cable. What makes the alliance landscape between these two companies more complicated is that AT&T owns 25.5 percent of Time Warner Entertainment as well.

While it seems intuitive that this is only happening in the high tech industries where new knowledge and inventions have made organizations doubt the efficacy of their intellectual capability to face new challenges and the resultant change, that is not true. Mergers are widespread even in traditional industries in which the combined intellectual capability is of equal strategic importance. For example, Devon Energy Corporation set out to buy the Canadian natural gas producer Anderson Exploration Ltd. in September 2001 for $3.4 billion, to become the largest independent producer of oil and gas in North America. Three weeks earlier it announced its acquisition of Mitchel Energy & Development for $3.1 billion.

Even when organizations do not want to get on the merger and acquisition radar screens, they are entering into more strategic alliances than ever, sometimes even with their own competitors, to help each other survive. The two competitors Visa International and MasterCard International found they had to collaborate to develop an Internet technology for making secure credit card payments. While the deal resulted in cost savings for both companies, the main driver was to combine their IC to provide a solution to a problem that threatened the market share of both.

It is the IC enabled dynamic of networking and interaction that is changing the way organizations are behaving. Consequently, both the volume of strategic alliances and their frequency have multiplied in the knowledge economy. At no time was the competitive landscape as tangled as it is now. Determining who competes with whom and where requires a lot of research to uncover.

Because IC is what drives mergers, the alliance between the acquirer and acquired IC is what makes or breaks a merger. Intellectual capital misfits have been reported to be the primary reason behind failed mergers where major financial losses have been sustained. In the example of Med Partners Inc. and PhyCor Inc., two physician practice management companies spoiled their $6.25 billion merger as a result of IC misfits. The two companies found that they not only could not integrate their computer systems but that their respective approaches to business were different in a number of key areas. In short, their business philosophy and cultures were different to the point of defying the streamlining required for a merger despite the great potential in cost reduction as a result of the merger.

The need to have the right IC, including business approach, culture, and people, promoted the start up business model as one of the main models in the knowledge economy. That development is also one brought about by IC enabled dynamics.