Knowhow, Core Competencies, and the Choice between Merging, Allying, and Buying Assets

Abstract

We characterize the conditions under which two firms choose to (i) merge, (ii) form an alliance, or (iii) trade assets. For that purpose, we distinguish between the firms' assets, their knowhow, and their core competencies. We show that a merger is chosen when the two firms have similar core competencies. When one firm has markedly higher core competencies than the other, that firm operates the assets separately if it also has markedly higher knowhow. Finally, an alliance is chosen when the firm with markedly higher core competencies has markedly lower knowhow.