The Choice Among Acquisitions, Alliances, and Divestitures

Villalonga, B. and McGahan, A. 2005. Strategic Management Journal

Background

• Objective of paper is to examine the motives behind the acquisitions, alliances, and divestitures of Fortune 100 firms in the 1990s• Continuum of governance modes

• Ties to literature on boundary choice and alternative governance structures• In specific industries• Acquisitions vs. alliances• Decisions to form alliances and/or merge

• Authors study a broad range of strategic options and draw from a variety of theoretical perspectives • e.g. TCE, RBV, Agency theory, Internationalization theory

Determinants of Boundary Choice

Focal Firm Attributes (1)

• Intangible resources (TCE and RBV)• H1a: The firm’s technological resources are associated with the choice of

acquisitions over alliances, and alliances over divestitures• H1b: The firm’s marketing resources are associated with the choice of

acquisitions over alliances, and alliances over divestitures

• Ownership structure (Agency theory)• H2a: The level of insider ownership of the firm is associated with the

choice of divestiture over alliances, and alliances over acquisitions• H2b: The level of blockholder ownership of the firm is associated with

the choice of divestitures over alliances, and alliances over acquisitions • H3c: The level of institutional ownership of the firm is associated with

the choice of divestitures over alliances, and alliances over acquisitions

Focal Firm Attributes (2)

• Acquisition, alliance, divestiture experience (Organizational learning)• H3a: The firm’s acquisition experience is associated with the choice

of acquisitions over both alliances and divestitures• H3b: The firm’s divestiture experience is associated with the choice

of divestitures over both alliances and acquisitions• H3c: The firm’s alliance experience is associated with the choice of

alliances over both acquisitions and divestitures

• Diversification (TCE, RBV, Agency)• H4a: The firm’s diversification level is associated with the choice of

acquisitions over alliances, and alliances over divestitures• H4b: The firm’s diversification level is associated with the choice of

divestitures over alliances, and alliances over acquisitions

Relationship Between Focal and Target/Partner Firms

• Industry activity (TCE, RBV, and Asymmetric information)• H5: The relatedness between the focal firm and the target (or

partner) firm is associated with the choice of acquisitions over alliances, and alliances over divestitures

• Size balance (‘Digestibility’ theory)• H6: The size balance between the focal firm and the target (or

partner) firm is associated with the choice of divestitures over alliances, and alliances over acquisitions

• Prior alliances (Social embeddedness, Real options, and Corporate refocusing)• H7: The number of prior alliances between the firm and the target

(or partner) firm is positively associated with the choice of alliances over both acquisitions and divestitures

Transaction – Focal Firm Relationship Attributes

• Relatedness (TCE, RBV, and Asymmetric information)• H8: The relatedness between the firm and the activity that is subject to the

transaction is associated with the choice of acquisitions over alliances, and alliances over divestitures)

• Governance form specialization • H9a: The firm’s governance specialization is insignificantly associated with the

choice of governance form• H9b: The firm’s governance specialization is associated with the choice of

acquisitions over alliances, and alliances over divestitures• H9c: The firm’s governance specialization is associated with the choice of

divestitures over alliances, and alliances over acquisitions

• Recency of same-form governance experience• H10a: The recency of the firm’s same form governance experience is

associated with the choice of acquisitions over alliances, and alliances over divestitures

• H10b: The recency of the firm’s same form governance experience is associated with the choice of divestitures over alliances, and alliances over acquisitions

Target/Partner Firm Attributes and Transaction Attributes

• Intangible resources (RBV)• H11a: The target (or partner) firm’s technological resources are

associated with the choice of acquisitions over alliances, and alliances over divestitures

• H11b: The target (or partner) firm’s marketing resources are associated with the choice of acquisitions over alliances, and alliances over divestitures

• Market transaction costs and internal organization costs (TCE)• H12a: The interaction between uncertainty and asset specificity is

associated with the choice of acquisitions over alliances, and alliances over divestitures

• H12b: The internal organization costs of integrating the target firm into the focal firm are associated with the choice of divestitures over alliances, and alliances over acquisitions

Summary of Hypotheses

Data and Sample

• 9,276 acquisitions, alliances, and divestitures announced and completed by 86 members of the Fortune 100 between 1990 and 2000

• Data are from the SDC (Joint Ventures and Alliances; Mergers and Acquisitions)

• Deal types grouped into three, seven, and nine categories for refined analysis

• Dependent variable: governance form

Results (1)

Results (2)

Boundary-expanding and boundary-contracting forms

Conclusions

• Varying levels of theoretical support for hypotheses • e.g, TCE, RBV and internationalization (+/-); Agency theory

(+/-); Organizational learning (+)

• Results imply that a multi-theoretical approach is needed to study firms’ boundary choices

• Limitations• Emphasis on the Fortune 100 firms• Validation of proxies (i.e,. governance form specialization,

recency of same-form experience)?

• Future research• Alliances vs. divestitures (boundary-contracting choices)• Exploration of organizational learning explanations