University of Minnesota Professor Rajesh Chandy Learns Why Some Acquisitions Do Better Than Others
MINNEAPOLIS, MN (2/6/2007) -- CEOs obsess about acquisitions, and investors look warily at them -- perhaps with good reason. As the Economist once put it, acquisitions 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, in financial terms, than before.
In the February 2007 Journal of Marketing Research paper "Why Some Acquisitions do Better than Others: Product Capital as a Driver of Long-Term Stock Returns," Rajesh Chandy, Carlson Professor at the Carlson School of Management at the University of Minnesota, and his co-authors show that how acquisitions are conducted is less important than who should acquire in the first place. Successful acquirers tend to be those that invested previously in building internal capabilities in marketing and technology. They built these internal capabilities -- which the authors call product capital -- even before they sought out outside targets for acquisition.
"Perhaps the firms that have not built product capital should not be acquiring in the first place," says Chandy. "Firms with existing product capital perform better at acquisitions because their investments in marketing and technology enable them to select high-quality targets and deploy them with improved results."
Authors Chandy, Alina Sorescu of Texas A&M University, and Jaideep Prabhu of Imperial College London analyzed the stock-market performance of acquirers in the pharmaceutical industry across seven countries over 10 years to provide empirical support for these arguments. The authors examine 2 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 higher-caliber scientists and are more likely to retain these top scientists after the acquisition is consummated than are other firms. On the products dimension, they find that firms that have invested in product capital tend to acqurie targets with fuller product pipelines and actually launch these products than are other firms.
To the 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-term, 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.
Download a PDF of this press release here. |
