Does Innovation Through Acquisition Work?

If you can’t beat them, buy them.

That was the mantra of leading technology companies in the tech boom days of the 1990s, when innovation was moving at such a frantic pace that even industry leaders, like Cisco (nasdaq: CSCO – news – people ), couldn’t keep up with the latest advances. Faced with the prospect of falling behind the competition, top companies began buying smaller firms–and their promising, if untested, technologies–to stay on the cutting edge.

For a while, the strategy seemed to be a good one–or, at the very least, a popular one. Companies spent $3.5 trillion on acquisitions between 1992 and 2000, making those eight years the most active mergers-and-acquisitions period in history. Then the tech-bubble burst, and M&A activity came to a screeching halt. Acquisition leader Cisco, which purchased 70 companies between 1992 and 2000, bought just two in 2001. It became evident that, while some purchases helped acquirers reap benefits, many failed to create the intended value. Saikat Chaudhuri, Wharton’s management professor, believes he knows why. His research is especially timely given the recent growth in M&A activity in the tech sector and other innovation-driven industries.

Full Story: http://www.forbes.com/entrepreneurs/2005/11/08/microsoft-nortel-acquisitions-cx_1108wharton.html