Choosing between Acquisitions and Alliances: What is the Right Option?

Both acquisitions and alliances are often used strategies for external growth. Where an acquisition involves taking control over another company through obtaining shares or properties, an alliance comprises companies that cooperate to pursue shared goals while remaining legally independent. Therefore, although both strategies allow the focal company to grow externally, they have very different consequences for the companies involved. Several authors have attempted to come up with frameworks to choose between the two depending on several contextual factors. In this article, these criteria will be summarized into one simple framework that will allow managers to more easily choose between either an acquisition or an alliance. Contextual factors can be divided into three distinct dimensions: environmental characteristics, company characteristics and transactional/relational characteristics.


Environmental Characteristics

Environmental characteristics are external factors that companies often have none to little influence on. These factors are industry-wide (or even nation-wide) and are therefore likely to affect all companies in a certain industry. As a consequence, you can often see a clear trend in preference for either alliances or acquisitions per industry.

Strategic uncertainty

First of all it’s important to know how uncertain the environment surrounding the focal company is. If there is little knowledge on legal, market, technological and competitive developments, it is of great importance to remain flexible as company. In this case it is wiser to engage in alliances rather than acquisitions, since they are easier to set up and break down accordingly. This phenomenon can be indicated as strategic uncertainty. When strategic uncertainty is high, alliances are preferred. When strategic uncertainty is low, acquisitions might be a better option.

Dispersion of knowledge

Secondly, one should look at the dispersion of knowledge in the environment. In industries where certain knowledge to develop new potential businesses is spread among too many different companies (e.g. the multi-media industry), it can be hard for a single firm to purchase all of these required companies. First of all, companies might not be willing to be sold and secondly the focal firm might not have enough financial capital to fund these multiple acquisitions. In those cases, a web of alliances consisting of these companies is regarded as more feasible than acquiring all of these firms.


The urgency for complementary or additional resources is another criteria. If the focal company’s environment is pushing for quick adaptation, it cannot wait too long till a deal has been made. Acquisitions normally take at least several months before a deal can be closed. During this time, companies are usually involved in activities such as partner selection, due diligence, negotiation, and integration planning. In addition, it often takes some extra months before the target company is integrated in such a way that true value creation can be facilitated. If this time is not available, alliances allow for quicker ways of realizing the desired outcomes.


Lastly, one should look at the competition. If it is known that competitors in a certain industry are fiercely pursuing acquisitions, the focal firm may have no choice but to buy a company in order to preempt the competition. Companies should therefore always check if they have rivals for certain potential partner firms before thinking of a deal. When competition is low however, (equity-) alliances might be a more favorable option to start with.

Transactional Characteristics

Transactional characteristics are factors related to the relationship that is being established between the two partner companies and the kind of agreement and collaboration they are intending to have.

Specificity of the transaction-related investments

With regard to the transactional characteristics, it is first very important to look at the specificity of the transaction-related investments. For almost all cooperation strategies, some degree of upfront investments are needed to make it work. If these costs are high, you would at least want to make the cooperation work untill these costs are paid back through profits. In those cases it can be risky to engage in contractual alliances that can be easily terminated by each partner independently. When the specificity of the investments are high, acquisitions are therefore a more favorable external growth strategies.

Opportunistic behavior

When dealing with an external company, there is always the risk of opportunistic behavior. In alliances it is often seen that ‘partner’-companies try to benefit from the alliance by learning as much as possible from the other company without giving too much away of their own knowledge and best practices, resulting in so called ‘learning races’. In order to protect each company’s core knowledge, expensive safeguards and control mechanisms have to be established. Therefore, it is often more attractive to just acquire a company for its resources when the risk of opportunistic behavior in an alliance agreement is too high.

Strategic intents

The foregoing might be less of an issue when the strategic intents of both companies involved are aligned. When there are compelling reasons for both companies to make an alliance work (e.g. both companies deeply rely on each other complementary resources), it is more likely that they will do whatever they can to keep the relationship going. Consequently, companies are less inclined to behave opportunistically. In those cases, alliances might be a more viable option.

Expected duration of the synergies

In addition, one should look at the expected duration of the synergies between both companies. When there are long term plans for creating economies of scale and scope between both companies, acquisitions seem a very logical option. However, if the complementary resources of the target company are only short term, it might not be worth the effort to acquire a company. As mentioned earlier, an acquisition process can be a very long and time-consuming process. Not to mention the large upfront costs that have to be made to buy a company. When the expected duration of the synergies is therefore short-term, alliances are a better external growth strategy.

Company Characteristics

Company characteristics are internal factors specifically related to the focal company, i.e. the company you are representing. They summarize the resources and capabilities of the focal company and its ability to either form an alliance or an acquisisition, which are both processes that can be very complex without the needed skills and resources.

Resource endowment

In order to grow externally, a company needs internal resources like financial resources and management capabilities to make it work. Especially alliances are often seen as quick and relatively inexpensive ways to grow externally. Acquisitions however are more capital-intensive since they require a focal company to pay a large premium for the target. A company’s resource endowment is therefore crucial in determining whether an acquisition is possible to be realised in the first place. Companies with a strong resource endowment are therefore more likely to acquire other companies.

Management capabilities

Secondly, one should look at the current management capabilities and management’s previous experience. Both acquisitions and alliances are complicated external growth strategies that need to be executed by experienced people. Depending on a company’s current top management and its experience, it might be wiser to perform either one of the two strategies to increase the chance of success. However if there is little experience on acquisitions or alliances internally, it is possible of course to bring in an external party like an investment bank or consultancy to advice top management on the matter.

Absorptive capacity

Coming back to the problem of learning races within alliances, a company’s absorptive capacity could slightly change the decision between acquisitions or alliances. If the focal company is more quickly and effective in learning and adapting than the alliance partner, it might be able to ‘win’ potential learning races. In those cases, alliances could still offer a viable option even though opportunistic behavior from the partner company is high.

Appropriability regime

The aforementioned can be complemented with a company’s appropriability regime: its ability to protect its core capabilities and resources from unwanted appropriation by an alliance partner. Again, to not be outlearned by an alliance partner, it is important to keep certain knowledge exclusively internal. If a company is aware that its appropriability regime is weak and the risk of opportunistic behavior is high, it shouldn’t engage in alliances.

In sum

Taken this all together, one can compose a framework of factors that helps managers choose between acquisitions and alliances (see example below). Managers can for example determine the relative favorability for acquisitions or alliances for each factor individually. In the end, by looking at the entire framework, it becomes clear which external growth strategy seems more logical. In the example below it seems that especially the environment is pushing for an acquisition. With regard to the transactional and company characteristics, there seems to be more ambiguity. The factors favoring an alliance however are not necessarily negative for acquisitions. The fact that opportuntistic behavior is low and the allignment of strategic intents are high is for example good for alliances, but does not affect acquisitions in a bad way. The only thing that should be taken into account is the resource endowment: the focal company is low on its financial resources. In sum it seems that an accquisition is the best option in this case. Negotiations however should be aimed at lowering the target price as much as possible in order to deal with the limited financial capacity.


As a final note it should be mentioned that decisions regarding external growth strategies do not have to be completely black and white by only having acquisitions and alliances as options. In case the completed framework seems to be ambiguous regarding a concrete choice between one of the two, managers can think of more middle-of-the-road solutions like joint ventures or strategic alliances with cross-shareholdings.

Further reading:

  • Dyer, Kale & Singh (2004). When to Ally and When to Acquire. Harvard Business Review.
  • Hoffmann & Schaper-Rinkel (2001). Acquire or ally? – A Strategy Framework for Deciding between Acquisition and Cooperation. Management International Review.

One thought on “Choosing between Acquisitions and Alliances: What is the Right Option?

Leave a Reply

Your email address will not be published. Required fields are marked *