School of Management MBA 6262 High Tech Entrepreneurship

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School of Management MBA 6262High Tech
Entrepreneurship

• Winter 2006
• Margaret Dalziel

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Session 5 Alliances and Acquisitions

• Large-small firm relations
• Where are the opportunities for new firms?
• Why dont large firms occupy these spaces?
• What types of large-small firm alliances are
  there?
• Do small firms always define themselves with
  respect to one or a group of large firms?
• How are large-small firm alliances expected to
  evolve?
• Acquisitions?
• Types of acquisitions (Bower)
• Which high technology firms are likely to get
  acquired?

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Porters 5 Forces
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Interfirm Relations(Brandenburger Nalebuff,
1996)
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Dimensions of Interfirm Relations
Proximity to Customer
Horizontal
Knowledge Novelty
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(No Transcript)
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1. Where are the opportunities for new firms?

• In spaces not occupied by large firms
• These spaces are becoming more numerous because
  large firms must focus
• To compete for customers (need to understand
  them)
• To compete for investors (need to offer high
  returns)
• Most successful large firms are focused (see
  Waitman slide)

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2. Why dont large firms occupy these spaces?

• Waldinger Aldrich, 2000
• Abandoned because they are insufficiently
  profitable
• Low economies of scale
• Fluctuating demand (seasonal, uncertain)
• Customers are seeking specialized, customized
  solution
• Christensen, 1997
• Disruptive technologies (cheaper and initially
  lower performing)
• Bhide, 2000
• Ambiguous opportunities

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Disruptive Technologies (Christensen)
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3. What types of large-small firm alliances are
there?
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Automotive Industry
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Bio-Pharmaceutical Industry
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Communications Equipment Industry
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4. Do small firms always define themselves with
respect to one or a group of large firms?

• Complementors do
• Competitors may not
• Some may depend on specific geographic or product
  markets
• What are their chances of becoming global
  leaders?
• What happens when a large firm enters their
  market?
• Some may create new markets
• Extraordinary growth models, e.g. Ebay, Linux,
  Google

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The Trajectory ofInnovative Central Firms

• Towards increased value for customers
• Offering a more complete solution
• Moving up the systems hierarchy
• Shifting the firms center of gravity through
  outsourcing
• Helping customers generate revenues rather than
  save costs
• Serving markets of one with fully customized or
  fully customizable products

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The Trajectory ofInnovative Central Firms (cont)

• Towards new knowledge
• New scientific or technical knowledge
• New ways of organizing
• New product design
• New understandings, fashions
• Emerging markets

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5. How are large-small firm alliances expected
to evolve?
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Propositions on Relationship Evolution

• Direction of knowledge flows
• From firms addressing high levels of knowledge
  novelty to those addressing low levels
• From firms closer to customer to those further
  from customer
• Relationship evolution
• Leaders most likely to get acquired
• Complementors must move in tandem with central
  firm to continue to add value to relationship
• Follows may enjoy strong growth opportunities

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6. What about acquisitions

• What is an acquisition?
• What types of acquisitions are there?
• Which small firms are likely to get acquired?
• When are acquisitions likely to take place?

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Mergers and Acquisitions(Bower, 2001)

• Five types of mergers and acquisitions
• The overcapacity MA
• The geographic roll-up MA
• The product or market extension MA
• The MA as research and development
• The industry convergence MA

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Types of Acquisitions Revisited
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The overcapacity MA

• Air Canada and Canadian Airlines

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The geographic roll-up MA
MDSs roll up of private labs
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Industry Convergence
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Acquisitions and Market CapCisco Lucent
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Nortel 3Com
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Cisco Acquisitions

• 93 acquisitions between 1993 and April 2005
• Classified into three categories
• 0 Optical, wireless, voice, content delivery
  networks (areas with stiff competition, less than
  30 market share)
• 1 Routing/switching (areas of strength, 60-70
  market share)
• 2 Software components

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Number of Cisco acquisitions per year
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Cost of acquisitions per year
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6. Which high technology firms are likely to get
acquired?

• Firms will acquire competitors and
  entrepreneurial competitors
• Growth acquisitions will likely be associated
  with growth of both industry and acquirer
• Consolidation acquisitions likely associated with
  industry consolidation
• Horizontal diversity in acquisitions likely to be
  associated with growth
• Aggressive forward momentum on the knowledge
  novelty dimension likely to be associated with
  growth.

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In-Class Exercise

• Small firm Your groups firm from Assignment 2
• Large firm Identify a large firm with which
  your firm might have a relationship
• Relationship type One of the six types of
  relations just described
• Answer the questions on the next slide and
  present your findings to the class

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• Describe the two firms and the industry in which
  they operate
• Could your firm have been a spin-off of your
  large firm partner?
• Describe the relations between your firm and your
  large firm partner in terms of
• Roles (customer, supplier, complementor, etc.)
• Relationship design (Number of participants, the
  way it is managed, i.e. through market relations,
  contracts, equity, etc.)
• Geographic proximity
• Why does your large firm partner care about your
  firm?
• Describe the knowledge flows between your firm
  and your large firm partner
• What will your firm learn from your large firm
  partner?
• What will your large firm partner learn from your
  firm?
• What type of financing assistance might your
  large firm partner provide to your firm?
• Why (not) would your large firm partner provide
  this type of financing?
• What type of firm might acquire your firm?
• What kind of acquisition would it be?
• What is the relationship between your potential
  acquirer and your large firm partner?