When companies want to grow or enter new markets, they usually choose between forming an alliance (a partnership) or making an acquisition (buying another company). This decision is often influenced by external market forces—factors like uncertainty and competition that are outside their control but highly important.
Let’s break down how these forces affect the choice:
1. Market Uncertainty
In a fast-changing market, it's hard to predict outcomes. Uncertainty exists when companies don’t know if a product will work or how customers will react to it. In such situations:
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Alliances are better than acquisitions when outcomes are unclear.
- Alliances need less money and time, so companies don’t risk too much.
- If the project succeeds, the firm can invest more or even buy the partner later.
- If it fails, the loss is limited.
Example:
- ✅ Bristol-Myers Squibb took a 20% equity stake in ImClone for a new cancer drug. The drug had regulatory issues later, but since it wasn’t a full acquisition, the financial loss was limited.
- ❌ Hoffmann-La Roche fully acquired Genentech, betting on a drug with high uncertainty. The drug didn’t perform as hoped, resulting in a costly mistake.
💡 Quick Tip:
- High uncertainty = Nonequity alliance
- Medium uncertainty = Equity alliance
- Low uncertainty = Acquisition
2. Competitive Pressures
Sometimes, competition forces companies to act fast—especially if rivals are also interested in the same partner.
- In such cases, a company might feel the pressure to acquire the partner quickly before someone else does.
- But if the market is uncertain, it's risky to rush into a full buyout.
- A better option is to form an alliance first with an option to buy more later, after the uncertainty is lower.
Example:
- Pfizer first entered into a contractual alliance with Warner-Lambert to market Lipitor, which was a new and unproven drug at the time.
- When Lipitor became successful and a competitor showed interest in Warner-Lambert, Pfizer escalated and acquired the company.
- This smart move helped Pfizer win the acquisition war without taking too much early risk.
💡 Quick Tip:
- High competition = Acquisition
- Medium competition = Equity alliance
- Low competition = Nonequity alliance
