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Will Mergers and Acquisitions be

Beneficial or Harmful to Innovation?
A wave of mergers and acquisitions is taking over the Finan
entire world. During the first quarter of this year, the total
value of mergers and acquisitions reached approximately Leade
$900 billion, up 44% from the same period last year.
Companies have always used this strategy to grow and Execu
consolidate, and to eliminate competitors. Moreover, one
of the main arguments for carrying out these deals has Marke
been that they create synergies. However, according to
Bruno Cassiman, a professor at Spain’s IESE business Insura
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school, “many companies have overestimated the
potential of synergies and have underestimated the Health
possible negative impact of mergers and acquisitions on the process of
innovation.” In his study, “The Impact of Mergers and Acquisition on Innovation,” Strate
Cassiman asks these questions: How do mergers and acquisitions really affect the
process of innovation? And, even more simportant, is it possible to anticipate the Real E
precise impact of mergers and acquisitions on innovation?
Public
In his research, Cassiman found that the impact of mergers and acquisitions
(“M&A”) on “R&D&I” (Research and Development plus Innovation) depends on the
Huma
technological similarities that exist between the companies involved in a particular
merger or acquisition, and on the similarities between the markets they are active
Busin
in. “With mergers and acquisitions, achieving the potential for innovation involves
a thorough understanding of how the integration process affects innovation as
Innov
well as the role played by the similarities [that the merging companies share] with
respect to technologies and markets,” he says. When two companies focus on the
Opera
same technological areas, it should lead to a rationalization of the R&D process
[after the merger or acquisition]. However, those companies that operate in
Mana
complementary areas of technology “have a higher probability of achieving long-
range synergies and economies in their R&D as a direct result of their merger.”

In contrast, when companies are active in similar markets, they can use M&As “to
win market share, and to create economies of scale in production and/or
distribution,” according to Cassiman. These changes affect the process of
innovation. In much the same way, long-term economies in marketing and product
diversifiction result in greater efficiencies in the R&D process, while indirectly
stimulating R&D activities. In addition, “growing strength in the market for a
product has a positive impact on research results, although there is no consensus
among researchers about whether this also leads to more or less R&D activity.”

Cassiman cites, for example, the chain of mergers that occurred in the
pharmaceutical industry when Pharmacia & Upjohn merged with Monsanto in
th
March 2000. Pharmacia, the company that resulted, became the 11 largest
pharmaceutical company in the world. In 2003, Pharmacia Corp. was acquired by
Pfizer, and became the giant of the sector, with annual consolidated revenues of
$45 billion in that year. Its $7 billion research budget enabled the new company to
acquire new patents, reduce its dependence on certain products, and introduce
innovative new products into the market.

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When the first two companies merged in 2000, their strategy involved focusing on
different therapeutic areas since the products they were making were not direct
competitors and their technologies were complementary, according to Cassiman.
Monsanto’s star product was Celebrex, which served as a technological platform
for other products that were developed later. This enabled the new company to
benefit from that technology. In addition, it opened doors to the European market
for the other major participant in the merger.

“Surprisingly, after the merger, R&D activity declined,” Cassiman says. However,
this reduction in activity did not translate into lower returns from R&D because the
newly expanded company pursued a higher number of candidates for new
products. As for the similarity between the various parts of the new company, he
adds, “when it comes to complementary technologies and products that don’t
compete with each other, we can confirm that, thanks to management’s long-term
approach, synergies in innovation were created, through which complementary
technologies opened new opportunities for long-term economies in R&D.”

Similarities in Technology and Markets

In his study, Cassiman analyzes the impact on the innovation process that results
when merging companies have similar technologies and markets. He uses data
collected by the European Union during interviews with key employees of high and
medium-technology companies that participated in mergers and acquisitions. The
study measured the impact of those mergers and acquisitions on the managerial
level, more than on the enterprise level.

The research showed that the impact of mergers and acquisitions on the nature,
management and magnitude of the R&D, varied considerably, depending on the
sorts of similarities that existed between the participants in the merger before it
took place. According to the study, if the companies that merged were active in
the same fields of technology, the new company created after the
M&A:

• Reduced its costs and cut personnel in its R&D department.

• Did not open new research labs, and had a greater chance to ‘rationalize’
R&D by ending some projects in this area.
• Demanded more rapid results from its R&D department by:
◦ Focusing on a more concentrated mission for R&D.
◦ Making “development” a top priority over “research,” and
◦ Cutting the typical time horizon of R&D projects.
• Reduced competition in technology by
◦ Eliminating rival [product] standards, and
◦ Reducing the danger that it could be imitated.

On the other hand, if the merger or acquisition took place between companies with
complementary (but not identical) technologies, the newly formed company:

• Developed competency in new areas of technology.

• Achieved a critical mass in new fields of technology, and
• Committed itself more to the reutilization of technological resources..

These results confirmed the author’s hypothesis that, in companies that have
overlapping technological strengths, there is a greater probability that the impact
of investments on R&D will be more negative. “It is especially clear from the
rationalizations of R&D that takes place as a result of this sort of M&A,” he says.
“In addition, as we saw earlier, the R&D department’s mission is affected in
opposite ways depending on the technological similarities between the companies
that merge. For both sorts of companies, we expect that they will increase their

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production and their performance from R&D investments.” Nevertheless, he warns,

“the process of generating these positive results differs. Those companies that
have overlapping technological strengths not only promote rationalization; they
also specialize their R&D efforts and they reduce competition in [their area of]
technology. In contrast, those companies that have complementary technological
strengths reutilize resources in the newly formed company in order to create a
critical mass in new technological fields, and to develop new competencies.”

When it comes to affinities in the marketplace, the study makes it clear that, after
mergers or acquisitions involving rival firms, the newly enlarged companies:

• Experienced more reductions in R&D operations by:

◦ Closing R&D locations, and
◦ Dismissing R&D personnel.
• Did not launch new R&D projects.
• Achieved lower returns from R&D, including:
◦ A lower propensity for new patents, and
◦ A slower pace of introducing new products and developing new
knowledge of technology.

The results for companies that shared similar markets also confirmed the author’s
basic hypothesis about the impact of mergers and acquisitions on the R&D
process. Cassiman notes that mergers and acquisitions that involve companies
that are rivals “have a less negative impact on the R&D costs, production and
performance than do other, horizontal mergers and acquisitions. This result was
not anticipated. One possible explanation is that these mergers and acquisitions
are not made for any reasons related to innovation, and the indirect impact on the
R&D process is quite pronounced in these cases.”

Conclusions and Recommendations

Cassiman believes that companies could find this research very valuable when it
comes time to choose the most appropriate partners for a merger or acquisition.
The findings could also help the integration process after companies undergo a
merger or acquisition. Although the lessons of the research are relatively simple,
adopting and applying them can be something more complicated.

Cassiman emphasizes that if a merger (or acquisition) takes place largely because
of market factors, then choosing a partner whose technology is different from
yours will affect the process of innovation and, ultimately, the success or failure of
the new company over the long term. Once a partner is selected, “a total
understanding of its impact on the R&D process will help managers integrate the
companies that are involved. This is true, whether or not the merger or acquisition
is made because of any factors related to innovation.”

Cassiman adds that integration after the merger or acquisition “is an arduous
process that can have negative consequences for R&D and for the senior managers
of the companies that must take this process seriously. More specifically,
managers must see to it that the process of bringing together various previously
separate operations does not divert valuable time and energy from R&D and other
long-term investments. One of the most important risks after any merger is that
these organizational upheavals could provoke key R&D employees to abandon the
company.

As for mergers and acquisitions that involve companies that have overlapping R&D
operations, the results show that these sorts of deals usually have a negative
impact on R&D. “However, action by management and careful attention to the
integration process can alleviate the possible negative effects of the merger or
acquisition on the [new company’s] innovation process,” he adds.

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To support his theory, Cassiman cites the case of Solvin, a company that combined
Solvay (75%) and BASF (25%). Solvin brought together the two company’s
competency in polyvinyl chloride (PVC). The merger, explains Cassiman, was
motivated largely by market factors and its goal was to increase competitiveness.
The merger fused two companies that were active competitors in the same fields
of technology.

“This merger should have severely negative effects on the inputs, outputs and
performance of R&D,” says Cassiman in his study. However, “the creation of a
combined company that managed the new entity, along with a careful
reorganization of its R&D department, led to a significant improvement in
technological performance. Shortly after the merger, Solvin even began to hire
new personnel for its R&D department. Before the merger, the PVC divisions of the
two companies played only a marginal business role for Solvay and BASF. The
additional concentration that the new company brought to this area had an
enormously positive impact on motivating its R&D personnel. In addition, the
reorganization of the R&D department liberated researchers from their more
logistical tasks so they could focus entirely on their research goals.”

According to Cassiman, the Solvin case demonstrates that “a thorough

understanding of the impact of a specific merger or acquisition on the innovation
process, along with management practices that are appropriate for integrating [the
companies], can control the impact of mergers and acquisitions on the process of
innovation.”

Publish Date: May 03, 2006

Enlaces
Why Do So Many Mergers Fail?:Universia-Knowledge@Wharton
The Innovation-through-Acquisition Strategy: Why the Pay-off Isn't Always
There:Universia-Knowledge@Wharton
How Corporate Venture Capital Investing Increases Innovation:Universia-
Knowledge@Wharton

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