The impact of alliances on share prices
It seems that alliances are good for companies, at least their share prices, whether or not the alliance achieves any positive outcomes.
In 2000 Dyer, Kale and Singh, academics at University of Michigan, Brigham Young University and Wharton Business School conducted a survey that found that a company's market capitalisation rose by 1%, or roughly $54 million, for each partnership announced, irrespective of the long-term outcome of the partnership. Based on a survey population which signed a total of 1,572 alliances between 1993 and 1997, this research examined the partnering activities of 200 large companies across a number of industries including the pharmaceutical sector. The survey included an assessment of the impact of partnerships on the stock market valuation of the partnering companies.
Alliances seem to have an upward effect on share prices, no matter what the outcome of the alliance eventually turns out to be. So much for the efficient markets hypothesis.
Curiously the number of alliances for each company that Dyer, Kale and Singh included in the survey was significantly less than the 800 partnerships reported by pharmaceutical companies. For example Pfizer reported having more than 600 partnerships in its 10K filed with the SEC in March 2007. Dyer, Kale and Singh reported that the top 500 global businesses each have an average of 60 major strategic partnerships at any one time.
Further research is need to determine whether drug companies like Pfizer have significantly larger portfolios of partnerships than companies in other industrial sectors, or whether the academics' study was based upon a subset of each participating company's portfolio of alliances.
Notwithstanding that open question, if the figure arrived at by Dyer, Kale and Singh is even approximately correct it would translate into a value, for example, for Pfizer's portfolio of partnerships of over $43 billion out of a total market capitalisation of $182 billion (as of 7th March 2007) and would make Pfizer's portfolio of partnerships, on its own, more valuable than all but a dozen or so other drug companies.
So it appears that partnerships effectively create an upward only pressure on share prices. Markets typically react favourably to the announcement of an alliance. On the other hand when a partnership fails to deliver the expected returns the partners can quietly shelve it without publicity or fanfare. So the failure of the partnership need not result in a claw back of the equity gains that arose as a result of entering into the partnership in the first place.
The study raises two intruiging questions. First, why equity markets look upon alliances and partnerships so favourably in the first place. Second, does the equity market's view of alliances and the premium given to alliances fluctuate over time, in other words is the alliance premium higher in rising markets or in falling markets?
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