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Deploying the M&A Counterattack

Sometimes it pays for a company to respond to a deal in its own backyard, and sometimes it doesn’t.

(originally published by Booz & Company)

Title: Is a Counterattack the Best Defense? Competitive Dynamics Through Acquisitions (fee or subscription required)

Authors: Thomas Keil (University of Zurich), Tomi Laamanen (University of St. Gallen), and Rita G. McGrath (Columbia Business School)

Publisher: Long Range Planning, vol. 46, no. 3

Date Published: June 2013

Few corporate moves have as much potential to shake up an industry as mergers and acquisitions. But although the post-deal performance of acquiring firms has been widely studied, little attention has been paid to the peripheral effects of M&A deals on other companies in the same industry. This study examines how the acquisition of rivals by an existing competitor or new player affects the performance of third-party firms, and how those firms could best strike back. As the authors found out, sometimes it makes sense to sit tight and do nothing at all.

Software firms such as Microsoft, Oracle, SAP, and Symantec have long made headlines for the aggressive acquisition strategies they use to expand and defend their turf. As the San Francisco Business Times put it in 2010, “Scarcely a month, or sometimes even a week, goes by without a press announcement from Oracle that it has bought another business.”

Accordingly, and though they note that their study could apply to a broad range of businesses, the authors focused on the software field. They looked at publicly owned software firms with up to US$100 million in sales—companies that must often grapple with the strategic plays made by larger competitors.

Combining several databases on acquisitions and firm performance, the authors analyzed 1,316 companies from 1980 through 2005, a time frame that saw the software industry grow from a period of volatile early sales into maturity. They focused on return on assets (ROA) as a standard measure of performance, and controlled for such variables as overall industry profitability, firm size, market share, and the number of companies operating in the field.

As expected, the authors found that acquisitions made by new entrants to the industry created competitive pressure on other firms in the business—enough of a squeeze to drive down profitability. Typically, new entrants are larger firms that have been successful in other industries and are seeking to expand their scope. Think of Microsoft’s entry into the media player industry, which put huge pressure on RealNetworks.

To the authors’ surprise, however, they observed similar harm to others in the industry when an existing competitor acquired a rival. They had expected that the opposite would be true—that the consolidation of two existing players would reduce competition and improve the fortunes of the firms still standing. But it appears that the synergies gained through M&A deals often leave firms that are uninvolved in the mergers at a disadvantage.

The way firms respond to acquisitions in their industry also affects them. Conventional wisdom holds that not responding to a competitor’s attack is a sign of weakness, and that companies should react to such threats by making similar acquisitions in either the same industry or another one. But the authors found that the source of the threat is an important consideration when making such a decision.

For intra-industry acquisitions, sitting tight proved a better strategy than making a copycat move, the analysis found. As an example, the authors cite the recent bidding wars over companies developing navigation capabilities for mobile devices: When Nokia and Google couldn’t beat their rivals’ offers, they abandoned the counterattack strategy and focused on developing their own mobile maps.

Yet when new entrants were involved, the conventional wisdom about deploying a counterattack proved true. This is probably because a fortification strategy (one in which an incumbent simply hunkers down) is ineffective against a new entrant that possesses vast resources and a fresh outlook on the business.

“Aggressive acquisition strategies may well be sensible in light of a new entry that can change the competitive dynamics in an industry but may be less successful otherwise,” the authors note. They also found that when a firm elected to purchase another company in response to a competitor’s acquisition, it fared much better if it branched out of its own business than if it made an intra-industry deal.

Overall, the study’s findings suggest that the optimal counterstrike in response to a rival’s acquisition is much more nuanced than previously thought. Rather than automatically launching takeovers of their own, the authors caution, managers should first consider alternative strategies such as partnering with other small or medium-sized firms or, in extreme cases, assenting to being bought by a competitor to ensure survival under the larger company’s umbrella.

Bottom Line:
How should a firm respond to an acquisition made by a rival? Instead of taking a knee-jerk approach that mimics a competitor’s aggression, managers should first base their response on whether the deal is being struck by a new entrant or an old rival. In the end, sitting tight may be the wisest choice. 

Author profile:

  1. Matt Palmquist is a freelance journalist based in Oakland, Calif.


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