Build before you buy: top academics warn that some companies just aren't equipped for acquisitions!

An issue puzzling many leaders of global companies is: why do some companies' acquisitions succeed while others fail?

New research from top academics, including Professor Jaideep Prabhu of Tanaka Business School, Imperial College London, has found that a firm that invests in marketing, R&D, and sales force will be more likely to identify good acquisition prospects. This then allows these companies to utilise their strengths, retain top talent and preserve or gain a good standing in the market. They are also less likely, in the long-term, to be punished by the stock market for their acquisitions. This research helps to explain why Time Warner's acquisition of AOL has been an unmitigated disaster when Procter & Gamble seem to be making a success of their acquisition of Gillette.

Through careful analysis of acquisitions and their results in the pharmaceutical industry across seven countries over 10 years (1992-2002) Alina B. Sorescu of Texas A&M University, Rajesh K. Chandy of the University of Minnesota and Jaideep C. Prabhu of Tanaka Business School, feel that they've found the answer to the acquisitions conundrum. Their groundbreaking research, which shifts the focus from how acquisitions are conducted to who is better positioned to acquire in the first place, has just been published in the prestigious Journal of Marketing Research. With the huge number of acquisitions made every year (more than 30,000 acquisitions worldwide in 2006) and their perceived importance as an efficient and rapid way for companies to grow, insight on this issue will prove invaluable for some of the world's biggest companies.

This new research presents the idea that it is firms' marketing and technology related investments (product capital), which make them more likely to succeed at acquisitions than other firms. In short, a company's growth must be built before it can be successfully bought. More specifically, firms with high product capital are better at selecting acquisition targets with greater innovation potential and deploying this innovation potential more extensively than other firms. These firms select better, deploy better, and ultimately perform better than their counterparts that do not invest in product capital. Successful firms tend to emphasise innovation potential in their selection of targets and leverage this potential by deploying it more extensively. For example, from a managerial perspective, the retention of top scientists and researchers from an acquired firm can be a key factor for continuing success. However, scientists will be more likely to stay in an acquired firm if there has been more investment in marketing and technology of the parent firm. Following on from this, the authors argue that some firms should probably not partake in acquisitions at all, no matter how much they know about deal-specific success factors, because of their fundamental incapacity to draw advantage from the acquisition.

In order to support their findings, the authors have used newly developed metrics of long-term shareholder value to evaluate the financial performance of acquisitions. These measures pick up the effect of returns from the acquisition itself rather than the overall performance of the firm. They also restricted themselves to looking at companies working in the pharmaceutical industry, ensuring that the variables they were examining could be clearly compared across companies.

ENDS

For further information, please contact:

Tanaka Business School
Eoin Bedford
T:  +44 (0) 20 7594 9154
E:  e.bedford@imperial.ac.uk

Note to Editors

1. An executive summary of the article and the article itself "Why Some Acquisitions Do Better than Others: Product Capital as a Driver of Long-term Stock Returns", are available on request.

2. Tanaka Business School, Imperial College London - www.imperial.ac.uk/tanaka

Imperial College's Tanaka Business School is a world-class provider of business education and research, focusing primarily on Imperial strengths in innovation and entrepreneurship, finance and healthcare management. The School offers full-time and executive MBAs, Master's programmes in Finance, Risk Management, International Health Management, Actuarial Finance and Management; and a Doctoral programme. Website: www.imperial.ac.uk/tanaka