Takeovers, Joint Ventures and the Acquisition of Resources for Diversification
| Published date | 01 August 1999 |
| DOI | http://doi.org/10.1111/1467-9485.00134 |
| Date | 01 August 1999 |
{Journals}sjpe/sjpe46-3/q126/q126.3d
Scottish Journal of Political Economy, Vol. 46, No. 3, August 1999
#Scottish Economic Society 1999. Published by BlackwellPubl ishersLtd, 108 Cowley Rd., Oxford OX4 1JF, UK and
350 Main St., Malden, MA 02148, USA
TAKEOVERS, JOINT VENTURES AND THE
ACQUISITION OF RESOURCES FOR
DIVERSIFICATION
Steve Thompson
ABSTRACT
This paper explores the influence of acquisition costs on the choice between the
takeover and joint venture modes of obtaining the resources required for
diversifying expansion. It uses the conditions created by privatisation in the UK
utility sector as a natural experiment to examine the determinants of mode choice
across groups of firms with unusually homogeneous opportunity sets. The empirical
design is able to incorporate acquirer, target and geographical market variables as
explanatory factors in mode choice. It is shown that the form of diversifying
expansion adopted is highly sensitive to the anticipated costs of using the
acquisition process.
II
NTRODUCTION
The resource-based theory (Penrose, 1959; Teece, 1980, 1982; Wernerfelt, 1984;
etc.) views each firm as a constantly changing collection of tangible and
intangible productive assets. Indivisibilities, attaching to the acquisition,
construction and replication of these, entail that at any time some assets display
incomplete utilisation that cannot be remedied in their current use. This, as
Penrose (1959) first showed, generates a motive for diversifying growth. Teece
(1982), however, pointed out that in the absence of transactions costs surplus
resource capacities could be sold on factor markets without the requirement of
diversified, multi-output firms. He concluded that it was the presence of such
transactions costs, particularly those associated with asset specificity and
embodied knowledge, which encourage the pursuit of economies of scope.
Subsequent empirical work (e.g. Lemelin, 1982; Montgomery and Hariharan,
1991; Ingham and Thompson, 1995) has confirmed that inter-industry and inter-
firm diversification patterns are not random but appear consistent with attempts
to exploit firm-specific assets.
In principle, diversification can be achieved by internal expansion via the
creation of a de novo venture. However, in practice, expansion into new product
or geographical markets frequently requires the acquisition of complementary
assets. New entrants may generate these over time but studies of entry (e.g.
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University of Leicester
{Journals}sjpe/sjpe46-3/q126/q126.3d
Geroski, 1991) indicate high rates of attrition among the newcomers. It follows
that many firms which have embarked on a programme of diversified expansion,
to exploit more fully their existing assets, will begin by acquiring any necessary
complementary resources from existing market participants. This could be either
via the acquisition of a firm currently holding the desired resource or by some
strategic alliance or collaborative arrangement, such as a joint venture.
The purpose of this paper is to explore the influence of transaction costs on
the choice between the takeover and the joint venture, as alternative means of
obtaining the resources required for diversifying expansion. The continuing
popularity of the joint venture form, despite the obvious difficulties associated
with shared controlÐ see Grossman and Hart (1986) on shared governance in
general and Balakrishnan and Korza (1993), Hennart (1988) and Kay (1997) on
joint ventures in particularÐ implies that it possesses at least some offsetting
advantages in the procurement and=or management of assets for expansion.
However, the particular nature of any such advantages has been the subject of
considerable recent debate. This paper utilises a unique dataset, generated by the
process of privatisation in the UK utility sector, to examine the determinants of
expansion mode choice across firms with homogeneous opportunity sets. Using
a large sample of 227 diversifying expansions, which occurred over the period
1990± 95, the paper confirms that mode choice is substantially determined by the
costs of using acquisitions markets under conditions of uncertainty. Those
characteristics of the diversifying firm or its target activity which appear to raise
acquisitions costs ± for example, entering research-intensive industries ±
increase the probability of joint venturing, while those that lower them, such as
possessing prior experience in the same industry, raise the likelihood of a
takeover. Unlike previous work, which has largely been restricted to studies of
inward investment into the USA, this paper is able to investigate diversification
into a range of foreign destinations. The analysis of this dimension also supports
an acquisition cost interpretation, with takeovers being relatively favoured in
countries with developed markets for corporate control and joint ventures
elsewhere.
The rest of the paper is organised as follows: Section II compares takeovers
and joint ventures as modes of diversification. The sample and date are
described in Section III and the model is specified in Section IV. The results are
described in Section V and a brief Conclusion follows.
II THE TAKEOVER JOINT VENTURE CHOICE:THEORY AND EVIDENCE
In principle, a diversifying firm seeking specific assets to complement its own
surplus resources and facilitate an expansion may look either to the takeover
ofÐ or merger withÐ a firm possessing such assets or to their sourcing via some
form of collaboration or strategic alliance with the assets' owner. As the growing
literature on such alliances (e.g. Bleeke and Ernst, 1993; Yoshino and Rangan,
1995; Kay, 1997; etc.) makes clear, these can cover a wide spectrum of
collaborative arrangements from informal agreements to equity joint ventures.
This paper will concentrate purely upon the latter. In part this is a matter of
304 STEVE THOMPSON
#Scottish Economic Society 1999
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