Chapter 7: Merger and Acquisition Strategies 223of being able to create value through acquisitions increases when the nature of the
acquisition and the processes used to complete it are consistent with the “attributes of
successful acquisitions” shown in Table 7.1.^80 For example, when the target firm’s assets
are complementary to the acquired firm’s assets, an acquisition is more successful. With
complementary assets, the integration of two firms’ operations has a higher probability
of creating synergy. In fact, integrating two firms with complementary assets frequently
produces unique capabilities and core competencies. With complementary assets, the
acquiring firm can maintain its focus on core businesses and leverage the complementary
assets and capabilities from the acquired firm. In effective acquisitions, targets are often
selected and “groomed” by establishing a working relationship prior to the acquisition.^81
As discussed in Chapter 9, firms sometimes form strategic alliances to test the feasibility
of a future merger or acquisition between them, an experience that can also contribute
to acquisition success.
Research evidence also shows that friendly acquisitions facilitate integration of the
acquiring and acquired firms. Of course, a target firm’s positive reaction to a bid from
the acquiring firm increases the likelihood that a friendly transaction will take place.
For example, AdvancedCath responded positively to being acquired by TE Connectivity,
a world leader in designing and managing highly-engineered connectors, sensors, and
electronic components that are sold to manufacturers who integrate them into their prod-
ucts. AdvancedCath is a leading source of catheter systems, products that complement
those included in TE’s Medical business unit. Commenting about the value the acquisi-
tion creates for his firm, AdvancedCath’s CEO said that “with TE’s global footprint, we
can provide better support to our global customers as they progress through develop-
ment, clinical trials, and volume manufacturing.”^82 After completing a friendly acquisi-
tion, firms collaborate to create synergy while integration their operations.^83 This is in
contrast to hostile takeovers, situations in which common disagreements, such as those
concerned with the combined firm’s leadership structure and operational methods that
will be used in the newly created firm, strongly increase the difficulty associated with
attempts to create synergy through the integration process.
Additionally, effective due-diligence processes involving the deliberate and careful
selection of target firms and an evaluation of the relative health of those firms (financial
health, cultural fit, and the value of human resources) contribute to successful acqui-
sitions.^84 Financial slack in the form of debt equity or cash, in both the acquiring and
acquired firms, also frequently contributes to acquisition success. Even though financial
slack provides access to financing for the acquisition, it is still important to maintain a
low or moderate level of debt after the acquisition to keep debt costs low. When substan-
tial debt is used to finance acquisitions, companies with successful acquisitions reduce
the debt quickly, partly by selling off assets from the acquired firm, especially noncom-
plementary or poorly performing assets. For these firms, debt costs do not preclude long-
term investments in areas such as R&D, and managerial discretion in the use of cash flow
is relatively flexible.
Another attribute of successful acquisition strategies is an emphasis on innovation,
as demonstrated by continuing investments in R&D activities.^85 Innovation is critical to
the anticipated success of Nokia’s proposed acquisition of Alcatel-Lucent. According to
Nokia officials, “the combined company will have unparalleled innovation capabilities,
with Alcatel-Lucent’s Bell Labs and Nokia’s FutureWorks as well as Nokia Technologies.”
The initial combination of the two firms would create a R&D staff in excess of 40,000
with an allocation of EUR 4.7 billion in R&D in the first year.^86 Thus, this acquisition
appears to satisfy the criterion of emphasizing innovation in a newly created firm.
Flexibility and adaptability are the final two attributes of successful acquisitions.
When executives of both the acquiring and the target firms have experience in managing