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When Rivals Merge, Think Before You Follow Suitby Thomas Keil and Tomi Laamanen

On October 25, 2005, the Swedish telecommunications equipment maker Ericsson announced theacquisition of key parts of Marconis telecom businessthus starting a wave of deals that would reshape

the global industry. Many competitors responded to the news by initiating similar moves. Alcatel and

Lucent merged in 2006; Nokia and Siemens combined their telecom equipment units the following year.

Today Ericsson remains the undisputed market leader. The companies that tried to keep pace by

launching mergers of their own not only failed to usurp Ericsson but also found themselves under assault

by the only player that abstained from the M&A frenzy: the Chinese company Huawei.

The M&A domino effect occurs in industry after industry. It has played out over the past decade in

pharmaceuticals, automotive manufacturing, and financial services. When a major rival executes a

headline-making merger, companies often feel under attack. These events can be so emotionally charged

that its hardnot to get drawn into a competitive acquisitions game. But is countering with your own M&A

always the smartest move?

Our research, which spans a number of high-tech industries, shows thatcontrary to the established

wisdom about competitive dynamicscompanies that react to a rivals merger with a head-on merger of

their own frequently exhibit poorer performance than companies that carefully develop a less direct

response. Weve identified three interrelated reasons. First, managers under pressure to act quickly are

more apt to come up with flawed plans. Second, after a company has made an acquisitive move, others

in the industry may engage in a bidding war for the remaining targets, which often results in overvaluedtransactions that may not be good fits. Finally, the firm making the initial acquisition gets the first pick,

leaving rivals to settle for less-optimal targets.

Alternative ResponsesFor many companies contending with the challenge of a competitors merger, the following strategies may

prove more effective than an in-kind response:

A strategic retreat.If the merger attack isnt in your main market, consider retreating to your core

market rather than diverting valuable resources to protect a peripheral one. For example, faced with

increasing consolidation in the business-services industry, Siemens divested itself of its business-servicesunit and concentrated on its core industrial businesses instead.

An oblique maneuver. Sometimes you can obtain more advantage by turning to innovation and organic

growth. For instance, during the many telecom mergers of the mid-2000s, Huawei opted for indirect

counterattacks, in the form of innovation and focused investments, rather than the more direct assault of

bidding for competitors. From 2005 to 2010 it gradually increased its R&D budget from just over

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$800million to more than $2.5 billion. It leveraged this investment to become one of the top patent

holders in the emerging wireless standard called LTE and simultaneously gained share in developed

markets once dominated by competitors that had joined the merger fray and were now distracted by

postmerger issues. Similarly, from 2004 to 2010 Oracle attacked SAP through acquisitions valued at

more than $40 billion. With the exception of its 2008 acquisition of Business Objects, SAP responded notby counterattacking directly but by renewing its focus on product development and improving its

capabilities for helping big companies manage complex technologies.

Consider what happened in the personal navigation device (PND) market. In 2007 the dominant

manufacturers were TomTom and Garmin. Along with Nokia, which was looking to expand its navigation

device business, they began bidding for Tele Atlas and Navteqthe main suppliers of digital maps. When

the attacks and counterattacks were over, TomTom owned Tele Atlas, Nokia owned Navteq, and

Garminwhich had withdrawn from the biddinghad a long-term content deal with Navteq.

While all this was going on, however, a much bigger threat was looming: competition from Apples iPhoneand Googles Android operating system. Both use maps developed by Google, which chose not to

participate in the bidding war, innovated its own technology, and eventually ate into the PND market.