September/ October 2006

Sink or swim?

How businesses stay afloat in technologically advanced markets

Michael Hitt Anyone in business knows that when it comes to making money with mergers and acquisitions, the odds are against you. But losing money is not the norm when technologically advanced Internet firms are thrown into the mix, according to new research from Mays Business School.

“The Internet has changed industries—it allows firms to reaches new customers and to provide new services, facilitating globalization,” says Michael A. Hitt, a Texas A&M Distinguished Professor of Management and Joe B. Foster ’56 Chair and Conn Chair at Mays. As a co-author of “Market Value Effects of Acquisitions Involving Internet Firms: A Resource-Based Analysis,” Hitt and his colleagues found that mergers involving online (Internet-based) firms often result in financial gains.

“Primarily, offline or traditional firms that buy technologically based companies gain the most value,” Hitt said. Online firms that merge with other online firms may also see an increase in profit. In either circumstance, Hitt said, both the acquiring firm and the target firm reap a variety of benefits.

Acquisitions of the online firms provide offline firms with global communication and marketing abilities while facilitating links with external stakeholders and improving efficiency. Likewise, online firms gain new in-house ideas and staff from the merger, resulting in a new firm that grows quickly.

Previous research suggests that companies failing to invest in new technology, or at least develop similar capabilities, might end up locked out of markets or beaten out by price competition from major competitors.

For instance, Barnes & Noble’s two-year lag behind Amazon.com, the first major online retailer, exemplifies how companies that market the same product in a new way can not only embezzle customers, but can also create a fresh consumer base. “Barnes & Noble wasn’t technologically oriented and its executives didn’t see the value of the Internet technology until Amazon came online,” Hitt explained. As a result, not only did Amazon take some of Barnes & Noble’s customers, but it also attracted new customers who don’t want to go into a store to buy books.

When it comes to acquisitions in general, Hitt said the ability to use mergers to gain access to products can be a perk. This strategy allows businesses to view the success of products that are already in the market, eliminating introductory risks—a process that is faster and cheaper than developing the new products internally. While this approach has its rewards, he adds, solely using acquisitions to obtain and offer new products to the market may deplete a company’s ability to create and market independently, subsequently harming its ability to remain competitive.

Hitt’s research confirms what many have already assumed. In the fast-paced world of evolving technology, companies must adapt—or they’ll be swimming with the fishes.

The research, forthcoming in the Strategic Management Journal, was co-authored by Klaus Uhlenbruck of the University of Montana and Matthew Semadeni of the University of South Carolina.

— Ashley N. Coker


September/ October 2006
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