Acquisitions can nix existing partnerships

Business alliances are valuable because they help companies supplement critical skills, enter new markets, and gain competitive advantages.

In the pharmaceutical industry, strategic alliances are common because they help companies reduce risks and share the large R&D costs of bringing new drugs to market—like the partnership of Pfizer and BioNTech on vaccines. Such partnerships can take years to develop and are critical to a pharma company's success.

But when biopharmaceutical companies merge, preserving their preexisting alliances isn't always a priority, according to a new Texas McCombs study.

"High-performing alliances depend on trust and well-developed knowledge exchange routines between the two partners," explains study author Associate Professor of Management Ram Ranganathan. "Acquisitions disrupt both trust and exchange routines, particularly those between the target company and its partners."

Ranganathan and his co-authors—Vivek Tandon of Temple University and Navid Asgari of Fordham University—chose to research the biopharmaceutical industry because acquisitions and alliances occur there with high frequency and are critical to success.

However, the study found evidence that external partnerships—especially those that acquiring companies inherit from target companies—may suffer collateral damage. The study found the odds of termination of alliances that are exposed to acquisitions are 11% greater than for unexposed alliances. Moreover, termination odds of inherited alliances are 1.78 times as great as the termination odds for all alliances (inherited and noninherited).

The reasons alliances are more likely to be terminated include:

Too Many to Manage: When one company buys another, adding new alliances to its existing portfolio can stress the acquirer's ability to manage the now-larger portfolio. This effect is reduced if the two companies share common connections.

Too New to Retain: Older alliances are less likely to be terminated than younger ones. Target company alliances, which can span multiple partnerships, become more challenging to sustain. Those with higher potential for novelty become more unstable.

Cost of Cancellation: Ranganathan's research suggests that companies miss opportunities by ending or damaging existing alliances. If they maintained these alliances, acquirers could strengthen their partnership networks and realize new synergies. After all, he says, synergies are a big reason most companies merge in the first place.

"Divestment of Relational Assets Following Acquisitions: Evidence from the Biopharmaceutical Industry" is forthcoming, online in advance in the Strategic Management Journal.