Tth Advantage Chain: Antecedents to Rent From Internal Corporate Ventures

Subject: Finance
Pages: 6
Words: 1853
Reading time:
7 min
Study level: PhD

An Analytical Approach

The authors have dwelled at length on the necessity of generation of valuable new resources, combination specific to the firm, which alone it may exploit. Five thrust areas identified are 1) Causal understanding 2) Team proficiency 3) New competency 4) Distinctive competency 5) Competitive advantage, and these should follow sequentially.

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  1. Casual understanding: A new venture can make a profit only by overcoming uncertainty. In other words, the firm which is entering into a new venture should be able to identify the uncertainties which are not clear to the competitors and take remedial action in advance to resolve them. A unique insight is thus an important factor for the firm to become successful.
  2. Team proficiency: To transform the ideas or goals into reality, a proficient team is required at the management level to coordinate the tasks in order to meet the objective of the firm. The team proficiency will facilitate a reduction in various elements of cost such as opportunity cost, transaction cost, and agency cost.
  3. New competencies: The yardstick for the measurement of new competence is consistency and reliability in achieving the results in a changing environment.
  4. Distinctive competencies: New competence always relates to past performance, whereas distinctive competence is always with reference to the competitors of the firm.
  5. Competitive advantage: It is not enough that the competence is new and distinctive; it should be competitive. In other words, it should relate to superior attributes in the eyes of the customer.

Advantage from Adversity: Learning from Disappointment in Internal Corporate Ventures

This topic mainly defines corporate ventures and attempts to analyze how a company studies more things from disappointment. Every time a corporate venture should expect the risk of failure. If there is no good manager, there entails the chance for failure. The ventures can avoid failures by checking past failure experiences in similar business units. When the ventures sustain a loss, there would be a disappointment, and at that time, the manager search for the reason for the failure, and he will try to avoid these reasons from happening again. In the venture, there are two types of utilization of disappointment: first is strategic utilization. The strategic function is the main step in a corporate venture.

When a person takes a decision to start a corporate venture, he will expect more profit, but if he doesn’t make a suitable decision about which venture to start and identify the product and if he doesn’t search the marketplace and customer, the venture will not be able to succeed in the market. When a venture starts functioning, firstly, one should consider which venture will be profitable and which market is best. It should also know whether any competitors and search about customers. They should also conduct market research to decide about which product will suit the market. After an appropriate decision is arrived at and customer research is done, they should decide on a product that fetches the customer the value for his money. If there is no good accounting system, the corporate venture cannot do as per their planning and cannot reach their goal. Then the venture will suffer loss, and there would be a disappointment. Therefore they should devise a proper accounting system to avoid failure. The second utilization of the disappointment is operational level. A good manager will search for the reason for the failure and try to avoid recurrence of the reasons. Therefore, if there is a good manager, a corporate venture can study more things through disappointment and become successful.

Sources of Value Creation in Acquisitions: An Empirical Investigation

This part deals with value creation as a result of acquisitions. The authors say that there is more value creation in the case of related acquisitions than in unrelated acquisitions. Economies of scale, the efficiency of operations, and more power in the marketplace are there in the case of related acquisitions. In the case of unrelated acquisitions, the main value created is the coinsurance effect. But the authors cautioned that there is only empirical but very little indirect evidence as to why this is so. For example, in the case of market power through horizontal acquisitions, there is no compelling evidence, according to a study conducted by Eckbo and Stillman. However, the authors claim that no real comparative study has ever been done between different types of acquisitions and the different sources of value creation. The main purpose of the authors is, in effect, to have a comparative study of the same.

They claim that the concept of value creation through acquisitions is to create synergy, a situation where the acquisition creates a value in excess of the total of the individual values of the relevant companies. A mathematical formula is given for the calculation of the synergistic value. After the valuation of synergy, the authors say that the next step is to evaluate the sources of value creation, both for related and unrelated acquisitions. They then touch upon the main part of their study, the association between different acquisition types and sources of value creation. They test two hypotheses for this purpose. The first one is that in the case of related acquisitions, value is created mainly due to operating decisions, whereas, in the case of unrelated acquisitions, value creation occurs as a result of financial decisions and diversification. A detailed study of the valuation models of assets is done next. Terms such as production, marketing, and size relatedness are also explained. Taking into account all these studies and calculations, the authors find a relationship and show how value is created during various types of acquisitions.

When Do Acquirers Earn Abnormal Returns?

It is normal that acquiring companies expect to do derive some benefits through acquisitions. Through this paper, the authors analyze a situation where such acquirers are able to obtain higher than normal benefits. The authors say there have been many instances where the benefits of the acquisition were found to be more for the shareholders of the acquired company than for the acquiring company. The authors use certain hypotheses in this study. The first one is that the high-quality resources of the target company do not guarantee a similar or abnormal benefit to the acquirer. The second one is that transfer of acquirers’ resources to the target company need not assure an abnormal benefit to the acquirer.

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The hypothesis is that abnormal gains occur to the acquirer where the resources of both companies are transferred to each other. The methodologies used by the authors include a stock market data analysis and post-acquisition resource transfers. The data used covered a broad range of industries and acquisitions in the US and several countries in Europe. They concluded that the value of excellent resources with the target company only serves to push up the acquisition price due to the possible existence of a larger number of potential buyers. This, in turn, negates any value of the resources owned by the target company. Such a situation will result in the target firm getting abnormal returns instead of the acquiring firm. They conclude that to get abnormal returns, it is essential that the acquiring company transfers its resources to the target company and the target company does the same.

Mergers and Performance of the Acquiring Firm

The merger is a popular strategy that firms adopt nowadays to increase their competitiveness. The author makes a statement that even though many studies have shown that a merger need not necessarily benefit the acquiring firm, the real purpose is to improve the overall performance of the merged entity. The author studies mergers from two opposing propositions. The first is that mergers do not provide any valuable benefits and that mergers do provide real benefits to the acquirer. Even at this point, the author offers two reasons why mergers do not provide value. The first one is that the merger itself was a wrong one, and the second one is that the management might have to maximize profits at the expense of shareholder’s wealth. The author then presents three scenarios where an actually successful merger was perceived as a wrong one.

The first two are administrative and methodological problems. An example of the administrative problem is the difference in management styles of the two companies. Methodological problems are related mainly to the valuation of the target company. The accounting-based evaluation used prior to 1970 was inadequate, and that the current method of the Capital Asset Pricing Model is more appropriate. The third one forms the basis of this study which holds that only certain types of mergers give benefits to the shareholders of the acquiring firm. The author says that previous literature shows that a strategic fit is what is important in achieving synergy. From what can be gained from the literature of past mergers, the view that is arrived at is that there are definitely more benefits to the acquiring firm than the acquired one. But using the capital asset pricing model, the results tend to indicate just the opposite. The author concludes that more study is necessary to arrive at a definite conclusion. But the ultimate outcome of a merger will depend on the strategic fit achieved through it.

Venture Capital Investing for Corporate Development Objectives

The paper examines the trend of corporate houses to invest in venture capital companies from the period from 1979 to 1986. The authors credit the source of all the data to a magazine called Venture Economics. Quoting from the magazine, the authors say that investment in venture capital funds had given a compounded return of 25% to the investors since 1965. But they caution that such an investment should be made only after deciding whether it is for increased profits or as a part of its strategy. The paper also lists five growth strategies which include investing in venture capital companies. They are apart from what is given above regarding growth through developing its base business, internal research, and development, licensing of technology, and acquisitions.

Three areas where venture capitalists invite a corporate entry are the huge amounts of capital that can be provided, the value or goodwill of the investing company, and the huge marketing and distribution network of the investing company. A list of benefits that corporations can get through such investments is also given. They include licensed technology, marketing rights, the possibility of overseas expansion, and new contacts. The authors then explain each of these benefits in detail. Some important strategies for corporate participation in venture capitals are also given. The paper also lists certain parameters that are linked to the strategies mentioned above. They include people, capital committed, deal stream, portfolio, and financial return. The paper also says that there is a choice of a stand alone fund, or a venture capital subsidiary can be formed which has its own advantages like acceptance in the venture capital industry and in dealing with entrepreneurs. Key success factors and a few cautionary pitfalls are also mentioned. The authors conclude by saying that this trend will remain beneficial and it is likely to continue for some time in the future.