There are many good reasons for companies to buy other businesses. There are always alternatives to pursuing M&A activities however: the company can meet the same strategic goals through internal development efforts.

When should you buy a business instead of acquiring competences through internal development?

Gomes et al. (2011) introduced a model based on four simple questions that can be helpful in determining whether a company should pursue M&A activities or develop the needed competences through internal R&D. As always, theoretical models are simplifications of real life situations but Gomes’s chart provides a good framework for strategy work that companies should consider very carefully. (Especially given the fact that many M&A deals eventually fail to meet their targets).

Mergers, acquisitions and strategic alliances – understanding the process

1 Gomes, Weber, Brown & Tarba – Mergers, acquisitions and strategic alliances – understanding the process (Palgrave, Macmillan, 2011).

This model works best in situations where a company has made the strategic decision to invest in a new business. It has made calculations and forecasts about a business case and decided that it’s worthwhile to set up a new unit that is perhaps not directly attached to its core business.

 

You might have the resources and competences – but do you have the time?

The model by Gomes et al. is usable also in a sense that it creates a good tool for an outsider to assess the motivations behind some M&A deals. Let’s look at a popular example: Microsoft bought Nokia’s handset business for 5.4 billion euro – what could have been Microsoft’s decision tree path? Here is my suggestion, feel free to disagree:

  • Did Microsoft have the resources and competences to get into mobile hardware market? –> NO. It had the resources for sure, but no solid competences in hardware as it has been solely a software company without any strong experience in manufacturing mobile phones.

 

  • Could that competence of mobile phone manufacturing become of critical importance of Microsoft’s future competitive advantage? –> YES. Most likely, because Microsoft is obviously shifting from pure software player to hardware as well (especially in mobile phones and tablets).

 

  • Was there enough time and potential capability to develop mobile phone division internally? –> NO. Potential capability? Maybe, while Microsoft had been already manufacturing some hardware such as keyboards and mice. But time it did not have. If Microsoft had started to build its mobile phones internally, it would have taken probably years to reach the same level of quality and productivity compared to e.g. Samsung and Apple. At that time, Microsoft’s plans to become a leading smart phone provider would have been buried under the heavy competition. Now it still has a (marginal) chance to challenge the top players.

 You might find out that urgency is playing a key role in many acquisitions 

Feel free to test this model on some other case. You might find out that urgency is playing a key role in many acquisitions especially in innovation and technology driven industries, where internal development is simply be too slow an alternative to bring a product to a dynamic market in time and on budget.