There are several good ways to grow a company, but only about a third of firms actively use all the methods available to them, and this narrow focus widens the corporate gap between success and failure significantly.

That’s according to a 10-year global study of 162 telecom companies conducted by Laurence Capron, INSEAD strategy professor, and Will Mitchell, a professor at Duke University in Durham, North Carolina.

“You should go for an acquisition when you cannot acquire the technology or specific human skills through other avenues – alliances, contracts, partnerships, licensing, joint ventures” says INSEAD’s Capron, the director of the ‘M&As and Corporate Strategy’ programme for executives. According to the study, firms acquiring resources in multiple ways are 46 per cent more likely to survive over a five-year period than those relying mainly on alliances, 26 per cent more likely than those focusing on M&A, and 12 per cent more likely than those sticking with internal development.

“Acquisitions are very expensive, they are very complex, and they are very disruptive for the organisation,” says Capron. But still CEOs regularly fall into the M&A trap – lured there by pressure: from above and from their peers, and then they fall into the M&A trap without considering other options.

“For example, CEOs may be told to grow their companies by 20 per cent per year, and obviously the fastest way to do that is by acquisition,” states Capron. “Or, they’re in an industry, and they see their competitors making acquisitions. Then it’s easy to jump on that wave because you’re afraid of being left behind.”

Capron and Mitchell devised a checklist of three questions CEOs should ask themselves before reaching for the corporate chequebook:

1. Do you already have relevant resources? Developing new resources internally is faster and more effective than acquiring them from external parties. Often companies don’t realise what they have in their own stables.

2. Do you and your provider have a shared understanding of value? If internal development won’t work, a contract such as a licensing agreement could; the caveat is that both you and the supplier be transparent in your agreement, in order to make the resource’s value more equitable and prevent one party from feeling disenfranchised.

3. How deeply involved do you have to be with your partner? If the relationship between your firm and the resource-provider involves highly strategic assets, or if the partnership won’t take you far enough towards your goals, then corporate acquisition may be your best alternative.

It’s also interesting to note the downside of the acquisition  scenario: the study shows that nearly 70 per cent of all  acquisitions fail. But they don’t start out that way.

“Typically the deal part is the fun part,” says Capron. “You have the CEO getting excited with the investment bankers about making an acquisition. They leave their mark.” The key to getting it right is keeping your goals and objectives in sight. “You need to be very clear about the key tensions,” says Capron. “There is tension between integration versus preservation, because one of the key traps is, you buy a target but you destroy the value (in the target) because you try to integrate too much.”

The M&A traps today are sprung by incredibly low stock prices and a rapidly changing corporate environment. CEOs need to be extra-cautious. “When you have a high level of uncertainty and you see your industry changing rapidly, you don’t know what to do; so you will look at what your peers are doing, particularly when they are industry leaders, and you will use that information as an input in your own decision-making,” says Capron. “So instead of processing your own information (regarding) some specific deal you will just follow what others are doing, and I think this is a very powerful dynamic here.”

That can lead to a domino effect. “Typically, you have a CEO who announces a deal and the market reacts badly and overnight you lose 20 per cent of the market cap,” points out Capron. “Then the next week you see a competitor announcing the same type of deal at the same type of price and again destroying value. So what is the psychology behind that deal? Typically, you have ego and other irrational reasons, but you also have uncertainty and social pressure.”
The message here is that “acquisition is just a tool; it’s not a substitute for corporate strategy. It’s a tool by which you’re going to achieve your strategic objectives,” says Capron. “And to create real business portfolio value over time, you also need to think of divesting.”

Laurence Capron will teach an Executive Education programme at INSEAD on the Europe campus in Fontainebleau this autumn entitled ‘M&As and Corporate Strategy’. For more information, click here.

The results of Capron and Mitchell’s study are published in the July-August 2010 edition of the Harvard Business Review.