Here are two facts we have known for a long time. One is
that a firm acquiring another firm combines their assets, and that can give
synergies if they have something that works better together than apart. That
something can be any kind of asset, by the way, including knowledge or
intellectual property. The other is that firms establish and change interfirm
networks through forming and dissolving alliances with other firms, and they use
alliances to gain synergies too. So far everything sounds conventional and
straightforward.
But these two facts don’t tell the whole story. A firm
acquiring another firm also combines their networks, and that can create synergies
when the combined network is better than the original ones. In fact, it can
change a network much more radically than just forming and dissolving alliances
one by one. This third fact is the start of an article in Administrative Science Quarterly by Exequiel Hernandez and J. Myles Shaver, but the article
does not end there. It also checks whether firms are deliberately choosing
acquisition targets based on these network synergies.
The question is important. It speaks to how smart firms are
in maneuvering and modifying interfirm networks, which is useful to know,
especially because people are not particularly smart in modifying interpersonal
networks. But firms are not people, and acquisitions are not normal firm
actions – they are analyzed carefully, and networks could be one of the factors
taken into account. They could even be more important for acquisitions than
some of the assets that researchers have long obsessed over. After all,
alliances are observable in advance, like physical assets are, but they are
unique and therefore more strategic. The other unique and strategic assets in
play are often people with knowledge, but they are known to sometimes leave a
firm after it has been acquired, so it is pretty risky to acquire to get
people. Alliances usually stay.
Network synergies are especially potent if they make the
combined firm a better broker of knowledge because they connect to firms that
are not themselves connected and do not have other shared connections (that’s
called gaining structural holes). Brokers of knowledge can help create novelty
and can reap more of its benefits. Synergies are also potent if they make the
combined firm more central in the overall network, giving it higher status.
Pretty much any combination of firm networks will improve brokerage and status,
however, so it is not enough to see that this happens after an acquisition.
What we need to know in order to look for deliberate choice of network synergy
is whether the increase from the firm network that got acquired was better than
the increase would have been for other firms that could have been acquired.
Strategy is about choices, so a choice has to be compared with what was not
chosen.
This is where Hernandez and Shaver make a fully convincing
case for network synergies as an important factor in acquisitions. They studied
biotech, where networks are very important, and so are assets like people and
intellectual capital. Their analysis is impressive and leaves no doubt that the
opportunity to combine networks and gain network synergies was an important
factor in the choice of acquisition targets. That means we now have a new way
of looking at acquisitions, and we are better able to tell what firms may get
acquired, and what they were acquired for.
