Acquisition or Alliance: Choosing the Right Path for Corporate-Startup Collaboration

Acquisition vs alliance: What's the difference?

Both acquisitions and alliances are vehicles for inorganic corporate growth that give companies quick access to new resources, technologies and talent. Here’s the difference between the two:

Acquisitions 

Acquisitions involve taking control of other businesses by purchasing shares or properties. Common goals of acquisitions include:

• Building on the organisation’s strengths
• Adding to the existing corporate assets 
• Expanding the company’s reach to grow its customer base  
  

Mergers are similar to acquisitions, which is why they tend to be grouped together (e.g. M&A). However, they are quite different. In an acquisition, both companies continue to exist, with one becoming the parent of the other. 

However, in a merger, two (or more) companies combine, either by absorption or by creation: 

• Mergers by absorption happen when one or more companies are integrated into another. The absorbed companies cease to exist. 
•  Mergers by creation (aka pure mergers) happen when one or more companies merge to become an entirely new entity. 
  

While M&A essentially enables companies to grow their capabilities overnight, it’s not without challenges. As many as 70 to 90% fail to deliver growth or innovation that meets expectations.   

Alliances 

Alliances (aka strategic partnerships) involve collaborating with other companies to pursue a shared goal - all while both companies remain separate legal entities. In most cases, a large corporation enters into a collaboration agreement with a promising startup to: 

• Boost their internal innovation culture
• Gain access to new technologies
• Experiment with new business models
  

In order for these partnerships to work, the companies involved have to establish a balanced dynamic that empowers both sides.

Although both these strategies aim to bolster external growth, they are in fact quite different, each with its own advantages and disadvantages. Let’s take a closer look at what they are. 

Corporate growth through acquisitions

According to various studies by McKinsey over the last decade, companies that regularly engage in M&A activities deliver better shareholder returns than companies that don’t. The benefits are even bigger for “programmatic acquirers”, a term used to describe companies that plan a series of M&A deals around a specific theme or goal. 

Let’s take a look at some of the benefits and challenges of acquisitions as a tool for growth and innovation.

The benefits of acquisitions

A competitive advantage

Merging with or buying out a possible competitor enables companies to absorb their capabilities and strengths instead of having to compete with them. Having a larger market share can also increase a company’s bargaining power with vendors and suppliers, increasing their profit margins. 

Decreased risk

Growing new companies from scratch often involves risks related to regulatory compliance, the uncertainty of exploring a new market, building new supply chains and establishing new networks. Acquisitions decrease the risk by enabling companies to buy or merge with businesses that are already established. 

Speed

Developing a new venture from scratch can take years and a huge amount of effort. Acquisitions give companies quick access to new capabilities, talent, technology and business models and with reduced effort. 

An economy of scope and scale

Buying or merging with businesses that complement your company’s strengths can significantly reduce production costs, enhance an existing offering, provide access to a broader network and give you a competitive edge you didn't have before. It can enable you to streamline your operations through new technologies or business models, making you stronger, faster and more efficient. 

Diversification 

Acquiring or merging with companies outside your core business will enable you to diversify your products and services. This adds to your scale and capabilities and provides more sources of revenue. If one market dries out, you always have the others. 

The challenges of acquisitions

While acquisitions can be an effective way to drive growth quickly; they can easily go awry when company cultures clash or when unclear growth goals limit productivity and innovation. These are just a few of the possible disadvantages companies that engage in acquisitions might face:

The opposite of scale

One of the main benefits of M&A is to add companies that build on your strengths, complement your business and make you stronger. However, this can also backfire, making companies too large, difficult to manage and inefficient.  

The cost

M&A can be costly, involving not only the initial purchase of the company but the expenses that follow (e.g. for legal and accounting work). This can add up to millions making it hard for companies to get a return on investment.  

The long-term ROI can also be difficult to calculate, resulting in many companies paying more than their acquisition is worth.

Culture conflicts and distressed employees

Integrating two companies with conflicting cultures can be challenging and demotivating for employees. It often also results in the consolidation of departments, leading to employee cutbacks and lay-offs. Employees are well aware of this dynamic, which can lead to dissatisfaction, demotivation, stress and decreased productivity. 

Corporate growth through alliances

Corporate partnerships provide access to a myriad of resources and assets that might be missing from your company’s arsenal. According to Mckinsey, strategic alliances played a crucial role in helping companies overcome various challenges during the height of the pandemic in 2021. Here are just a few of the benefits:

The benefits of alliances

Flexibility

In most cases, partnerships are easier to form, manage and run than acquisitions. They tend to be less regulated, giving both parties more flexibility as long as they’re aligned on their goals and targets. 

Access to valuable assets

Partnerships enable companies to pool their resources and reach growth goals much more effectively than they would have on their own. For example, in a partnership between a corporation and a startup:

• Corporations bring scale, a wider reach and assets that startups don’t have.
• Startups provide access to new ideas, tech and business models.

Bringing these assets together enables both partners to get the best of both worlds, making it more likely that they’ll beat out competitors and hit their growth targets with agility.   

A boost of intrapreneurship

Collaborating with startups can have a revitalising effect on a corporation’s culture, inspiring innovation, entrepreneurship and creativity. This can make companies more competitive, inspiring new ways to leverage corporate assets to deliver new growth and revenue sources.

Speed

Partnerships provide access to new technologies, concepts and business models quicker than if they had to be developed internally from scratch. 

The challenges of alliances

A lack of alignment

Entering into a partnership requires both sides to overcome a plethora of internal processes and cultural differences. Challenges can arise due to unclear goals, unrealistic expectations or timeframes that might be unattainable. Maturity misalignment can also be a challenge (e.g. when a corporate partners with a startup on a solution it's not yet ready to implement). 

If unresolved, these challenges can hinder the innovation process and keep both partners from reaching their growth targets.

Learning from experimentation

Using lean experimentation to validate new ventures reduces risk and provides valuable insights. Both partners should embrace experimentation and not be afraid to pivot or even kill a project if the data shows it won’t be successful. Even failed ventures provide learnings that can help improve existing offerings or create entirely new value propositions.

Control issues 

Entering into a partnership means both parties should have a say in the direction of a joint venture or project. Maintaining this balance can be challenging if, for example, a smaller startup loses decision-making power to a dominant corporate partner. This dynamic will ultimately backfire because it can keep the smaller partner from making the quick decisions and pivots it takes to be truly innovative. 

Choosing the right vehicle for growth

Every venture is unique, each with its own requirements and potential for return, and because of that, there is no “one size fits all” approach to growth and success. In other words, while some ventures are better suited to be acquisitions, others are better as alliances. According to a study published in the Management International Review:

• Alliances provide strategic flexibility, shared risk and fast learning, making them a good option in cases of high environmental uncertainty and knowledge dispersion. 
• Acquisitions, on the other hand, are the better option in cases where there is less need for strategic flexibility and the goal is to promote economies of scale and scope. 

When choosing between the two, it’s also important to assess your specific capabilities as well as the speed with which you need to hit your growth goals. Once you know that, you can use the table below as a guide to help make your decision.

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Knowing the advantages and challenges that come with each of these innovation strategies, as well as the conditions and capabilities that they’re best suited for, will help you make a more informed decision. Ultimately enabling you to choose the best fit for your organisation and its overall growth objectives. 

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Want to future-proof your company and create new revenue streams for the future? We can help you create a customised venture strategy that aligns with your corporate goals, culture, and assets while driving measurable growth.