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At he core of your company’s strategy lies a dilemma, wrapped in a problem, inside a challenge. As companies find it increasingly tougher to achieve and sustain growth, they have placed their faith in acquisitions and alliances to boost sales, profits, and, importantly, stock prices.

That’s most evident in developed countries. American companies, for instance, created a titanic acquisitions and alliances wave by announcing 74,000 acquisitions and 57,000 alliances from 1996 through 2001. During those six years, CEOs signed, roughly, an acquisition and a partnership every hour each day and drove up the acquisition’s combined value to $12 trillion. The pace of collaboration has slowed since then. U.S. firms struck only 7,795 acquisitions and 5,048 alliances in 2002 as compared with 12,460 and 10,349, respectively, in 2000, according to data from Thomson Financial.

But as companies gear up for greater growth, collaboration is once again high on priority lists. In fact, firms clinched more acquisition deals (8,385) and alliance agreements (5,789) in 2003 than in the previous year.

There’s a problem, however, and it refuses to go away. Most acquisitions and alliances fail. A few may succeed, but acquisitions, on average, either destroy or don’t add shareholder value, and alliances typically create very little wealth for shareholders. Company’s share prices fall by between 0.34% and 1% in the ten days after they announce acquisitions, according to three recent studies in the Strategic Management Journal. (The target companies’ stock prices rise by 30%, on average, implying that their shareholders take home most of the value.)

Unlike wines, acquisitions don’t get better over time. Acquiring firms experience a wealth loss of 10% over five years after the merger completion, according to a study in the Journal of Finance. To add to CEOs’ woes, research suggests that 40% to 55% of alliances break down prematurely and inflict financial damage on both partners. When we analyzed 1,592 alliances that 200 U.S. companies had formed between 1993 and 1997, we too found that 48% ended in failure in less than 24 months. There’s plenty of evidence: Be it the DaimlerChrysler merger or the Disney and Pixar alliance, collaborations often make headlines for the wrong reasons. Clearly, companies still don’t cope very well with either acquisitions or alliances.

What are we missing? For more than three decades, academics and consultants have studied acquisitions and alliances and written more tomes on those topics than on virtually any other subject. They’ve applied everything from game theory to behavioral science to help companies “master” acquisitions and “win” at alliances. They’ve worshipped at the altars of firms that got the stray acquisition or alliance right.

Surprisingly, although executives instinctively talk about acquisitions and alliances in the same breath, few treat them as alternative mechanisms by which companies can attain goals. We’ve studied acquisitions and alliances for 20 years and tracked several over time, from announcement to amalgamation or annulment.

“When to Ally and When to Acquire”, Jeffrey H. Dyer, Prashant Kale and Harbir Singh, Harvard Business Review, August 2004.