When Should Acquisitions Be Avoided?
Sometimes, buying another company (an acquisition) may not be the best move. There are cases where forming a merger or alliance is smarter, safer, and more cost-effective. Let’s explore the key situations where acquisitions should be avoided and what companies should consider instead.
📌 Top Situations Where Acquisitions Should Be Avoided
1. High or Medium Market Uncertainty
- When it’s unclear whether a product will succeed or how customers will respond, it's risky to acquire a company.
- 💡 Better Option: Form a nonequity or equity merger. Start small, test the collaboration, and expand if it works.
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📌 Example:
- Bad case: Hoffmann-La Roche acquired Genentech, but the drug didn't perform as expected.
- Good case: Bristol-Myers Squibb only bought a 20% stake in ImClone, reducing their risk when the drug faced FDA issues.
2. High Competition + High Uncertainty
- In a crowded market with rivals eyeing the same partner, companies may rush to acquire. But if there's uncertainty too, this can backfire.
- 💡 Better Option: Create an alliance with an option to buy later if the partnership proves successful.
- 📌 Example: Pfizer first partnered with Warner-Lambert for Lipitor (uncertain product) and later acquired it after success.
3. When Synergies Are Modular or Sequential
- If companies can work independently or in a step-by-step manner, an acquisition may be too much.
- 💡 Better Option: Use nonequity alliances for modular synergies or equity mergers for sequential ones.
- 📌 Example: HP and Microsoft collaborated without merging to create technology solutions.
4. Soft Resources Are Key
- If people or ideas (soft resources) are the main value, acquisitions can cause employees to leave or lose motivation.
- 💡 Better Option: Use equity mergers to keep people engaged while still aligning interests.
- 📌 Example: In people-driven industries like biotech or software, equity partnerships work better than takeovers.
5. Low or Medium Redundant Resources
- If companies don’t have many overlapping departments or assets, there’s no need for full control through acquisition.
- 💡 Better Option: Use mergers to collaborate efficiently without duplicating efforts.
- 📌 Example: When two companies have unique, complementary strengths, merging helps share value without wasting resources.
📊 Comparison: When to Avoid Acquisitions
| Factor | Avoid Acquisition If... | Recommended Strategy | Example |
|---|---|---|---|
| Market Uncertainty | Product success or customer adoption is unclear | Nonequity or Equity Merger | ImClone & Bristol-Myers Squibb |
| High Competition + Uncertainty | Many suitors + unclear outcome | Alliance with future buyout option | Pfizer & Warner-Lambert (Lipitor) |
| Type of Synergies | Modular or Sequential | Nonequity (Modular) / Equity (Sequential) Merger | HP & Microsoft partnership |
| Soft Resources Involved | People or IP are key to value | Equity Merger | Biotech alliances (e.g., Abgenix & AstraZeneca) |
| Redundant Resources | Low or Medium overlap in assets | Nonequity or Equity Merger | Complementary resource partnerships |
💡 Final Thought:
Being good at acquisitions doesn’t mean it’s always the right move. Smart companies build both merger and acquisition capabilities and choose based on the situation, not just their strengths.
