A growing number of companies are opting for strategic alliances rather than full-blown mergers or acquisitions.
Mergers and acquisitions hit a new high in 2000, but this month's CFO Forum shows that many companies chose a different strategy for assuring future growth.
Perhaps mindful of the extraordinary number of outright acquisitions that fail, 57.1 percent of the CFOs surveyed made smaller, strategic equity investments in other companies. More than one quarter limited their investment to a single company, but an equal number made at least ten. More than half bought stakes greater than 20 percent on average, and 60.7 percent invested more than $20 million.
To many CFOs, equity investments are a new tactic. Nearly two thirds invested more last year than they did five years ago, but almost the same number spent more than they did one year before. A small number reduced their stakes. Most of these CFOs said there were fewer good investments available, but 50 percent gave their own lower earnings as the reason.
Many CFOs were looking for capital appreciation from their stakes, but the overwhelming majority cited strategic alliances as their objective. Perhaps for that reason they played the part of venture capitalists. More than one third invested primarily in private start-ups; even more concentrated their purchases on later-stage companies. Only 21.4 percent bought stock in public companies.
Most of the investments appeared to be long term. Fewer than one third of those who invested realized revenues from their stakes. Of these, only 58.3 percent generated revenue from cashing out; 25 percent merely marked their positions up to market value.
In the year the technology bubble burst, only 34.1 percent of the investors surveyed lost money. All lost because of write-downs to market value of their holdings.
Has your company taken an equity stake in another company during the past year?
Yes 57.1%
No 42.9
If so, how many such investments have you made during the past year?
One 28.6%
Two 10.7
Three 10.7
Four 7.1
Five 10.7
Six to ten 3.6
Ten or more 28.6
If so, what is the average size of the stake you have taken?
Less than 5 percent 22.2%
5 to 10 percent 11.1
11 to 20 percent 11.1
More than 20 percent 55.6
If so, how much have you spent overall?
Less than $1 million 3.6%
$1 million to $5 million 17.9
$6 million to $10 million 3.6
$11 million to $15 million 3.6
$16 million to $20 million 10.7
More than $20 million 60.7
How does that compare with one year ago?
It's higher 62.9%
It's lower 8.6
It's about the same 28.6
How does that compare with five years ago?
It's higher 65.7%
It's lower 14.3%
It's about the same 20.0
If your company has spent less on equity investments in other companies during the past year, why? (Check all that apply.)
Opportunity for capital appreciation is diminished in current market 16.7%
Reduction in our own earnings meant less funds for such investments 50.0
Reticence related to bursting of technology-stock bubble 8.3
Fewer quality investments available 75.0
Hurt by losses related to such investments during previous year 8.3
If you have made equity investments in other companies during the previous year, in what type of company was the majority of your investment activity focused?
A privately held start-up 35.7%
A privately held later-stage company 42.9
A publicly traded company 21.4
If you have made equity investments in other companies during the previous year, what were your objectives? (Check all that apply.)
Capital appreciation 42.9%
Strategic alliance 82.1
An alternative or precursor to outright acquisition 17.9%
To acquire a minority stake as part of a separate acquisition or as consideration in another deal 7.1
To retain or attract employees by giving them an opportunity to work with other firms 3.6
Has your company realized revenues during the past year associated with gains in the value of minority stakes held in other companies?
Yes 31.8%
No 68.2
Where did that revenue come from?
Selling equity 58.3%
Marking up to market increases in the value of the equity we still hold 25.0
Both 16.7
During the previous year, has your company had to write down losses related to these kinds of equity investments?
Yes 34.1%
No 65.9
If so, what was the write-down due to?
Selling all or part of the equity stake 0.0%
Marking down to market decreases in the value of equity we still hold 100.0
The results of CFO Forum are based on quarterly surveys of a universe of 1,600 chief financial officers. Because of rounding, responses may not total 100 percent.
