Acquisitions and alliances as a growth strategy: buy, partner or build

The phone rings: a competitor without a successor asks if you would like to buy the business. Many acquisitions start like this, with an opportunity rather than a strategy, which reverses the order. An acquisition speeds up the plan you already have, and if that plan is unclear, it speeds up the confusion.

Acquisitions and alliances are two of three routes to growth; the third is building it yourself. Below you compare them, choose with four questions, and see why the value of an acquisition is mostly made or lost after signing.

Buy, partner or build: how do the routes compare?

Between these sit a licence, a long-term supply contract, a minority stake or a joint venture. If you cannot say why a growth direction fits your strategy, the question of how to get there comes too early; the Ansoff matrix helps with the direction.

Build, borrow or buy: four questions in order

Laurence Capron and Will Mitchell turned this choice into a sequence in Build, Borrow, or Buy (Harvard Business Review Press, August 2012). Most firms use only one or two routes out of habit. The questions run from the simplest option to the most complex.

1. 01

   Are your own resources relevant?

   If what you have is close to what you need and better than what competitors have, build it yourself.

2. 02

   Can you obtain the resource by contract?

   If a licence, supply or service contract gives you what you need, borrow it that way.

3. 03

   Do you need to work closely with the owner?

   If the resource only works through joint effort, such as shared development or shared customers, form an alliance.

4. 04

   Can you buy the owner and integrate it?

   Only if the answer is yes is an acquisition the right route. If not, go back to the earlier options.

Kale, Singh and Dyer add in Harvard Business Review (July 2004) that acquisitions are competitive, priced at market rates and risky, while alliances are cooperative.

What research says about acquisitions

Clayton Christensen and co-authors wrote that study after study puts the failure rate of mergers and acquisitions at 70 to 90% (source: Harvard Business Review, March 2011). Definitions of failure differ, so read the range as a warning, not a measurement. Their more useful point is that acquisitions serve two purposes, each needing different treatment.

• To improve the current business: buying share, customers or cost savings. The value comes from absorbing the target, so integrate fully and do not pay for savings you cannot capture.
• To change the business model: buying a different way of earning money. Folding it into the old model tends to destroy what you paid for, so keep it separate for longer.

Experience counts too. McKinsey's research on programmatic acquirers, which make a steady series of smaller deals around a clear thesis, finds they are more likely to outperform and treat M&A as a capability rather than an event (McKinsey, February 2024). For a smaller firm the lesson is that a written integration plan is worth more than a sharp negotiation.

Alliances and joint ventures: agree how you will work together

Alliances fail often too: Jonathan Hughes and Jeff Weiss put the share at 60 to 70% (source: Harvard Business Review, November 2007). Their first rule is to spend less time on the alliance's business plan and more on how the partners will work together. Agree these points before you start:

• Purpose: what the alliance must achieve, and how you measure progress along the way.
• Decisions: who decides what, and how you break a deadlock.
• Money: how costs, revenue and investments are shared.
• Knowledge and customers: who owns what you develop together, and who owns the customer relationship.
• Exit: on what terms either party can leave, and what happens to shared assets.

Review an alliance yearly on these points. It can also be a trial run: if it works, it may grow into an acquisition with far less uncertainty.

Buy-and-build in a fragmented market

In fragmented industries, such as accountancy, installation, veterinary care or IT services, investors and entrepreneurs often follow a buy-and-build model: buy one solid platform company and add smaller firms to it. The value comes from shared purchasing, systems and management, and from the higher price a larger group may fetch when sold. That only works if each add-on is truly integrated.

For a smaller business owner this cuts both ways: as a buyer you meet better-funded rivals for the same targets, as a seller you may find a buyer you would not otherwise have had. See succession and exit and buying a business.

Due diligence: the questions only you can ask

Accountants and lawyers check figures, contracts and liabilities. The strategic questions are yours.

Compare the target's margins and costs with its industry in the profit and cost benchmark; a margin far above average deserves as many questions as one far below.

Integration: where value is made or lost

• Plan before you sign: decide what changes on day one, in the first months and in the first year, and price the deal on that plan.
• Customers first: tell the largest customers yourself what changes for them and what does not.
• Keep the key people: agree their role with them before the announcement.
• One owner: one person leads the integration, with time freed up for it.
• Name the culture differences: how decisions are made and how mistakes are handled. The McKinsey 7S model helps you compare.
• Look back after a year: compare the result with the plan you priced the deal on.

Acquisition or alliance example: a security company chooses

A security company with 70 staff installs alarm and camera systems for businesses. Customers increasingly ask for round-the-clock monitoring. The company subcontracts it to a monitoring centre that also serves its competitors, and slow responses on busy nights cause complaints. Three options are on the table.

• Build: set up its own monitoring centre. Two operators around the clock means 336 staffed hours a week; at 36 hours per full-time employee plus about 15% for leave and sickness, that is about 11 people, or €528,000 a year at €48,000 each, before premises, systems and certification.
• Partner: a long-term contract with the current centre, with a dedicated team and agreed response times.
• Buy: take over a small monitoring company with 18 staff whose owner, aged 63, is looking for a successor.

Fictitious Firmfocus example. Scale from ++ (very favourable) to -- (very unfavourable). Staffing: 2 operators x 168 hours = 336 hours; 336 / 36 = 9.3, plus 15% = about 11 people; 11 x €48,000 = €528,000. The logic works in any currency.

Buying wins on control and know-how but carries the highest integration risk; partnering wins on speed, investment and reversibility. The company signs a two-year partnership with an agreement to talk about an acquisition. That pays off when it later examines the monitoring company: many customer contracts can be ended on a change of control, and its certification names the owner as responsible manager, so a successor must be in place before any transfer. The partnership buys time to solve both.

Acquisitions and alliances in a small business and a larger organisation

This page answers how you grow, once the Ansoff matrix has shown where. The BCG matrix and portfolio shows which units can fund a deal. All models for this decision are in strategic choices, part of the strategy overview.