Archetypes for Value-Creating Acquisitions  595 out of their plants at the same time as new competitors (for example, Saudi Arabia in petrochemicals) continue to enter the industry. The combination of higher production from existing capacity and new capacity from new entrants often leads to more supply than demand. However, it is in no single competi- tor’s interest to shut a plant. Companies often find it easier to shut plants across the larger combined entity resulting from an acquisition than absent an acquisi- tion, to shut their least productive plants and end up with a smaller company. Reducing excess capacity is not limited to shutting factories but can ex- tend to less tangible forms of capacity. For example, consolidation in the phar- maceutical industry has significantly reduced sales force capacity as merged companies’ portfolios of products have changed and they have rethought how to interact with doctors. The larger pharmaceutical companies have also significantly reduced their research and development capacity as they have found more productive ways to conduct research and pruned their portfolios of development projects. While there is substantial value to be created from removing excess capac- ity, the bulk of the value nevertheless often accrues to the seller’s sharehold- ers, not the buyer’s. In addition, all the other competitors in the industry may benefit from the capacity reduction without having to take any action of their own (the free-rider problem). Accelerate Market Access for Products Often, relatively small companies with innovative products have difficulty accessing the entire potential market for their products. For instance, small pharmaceutical companies typically lack the large sales forces required to ac- cess the many doctors they need to see in order to promote their products. Larger pharmaceutical companies sometimes purchase these smaller compa- nies and use their own large-scale sales forces to accelerate the sales growth of the smaller companies’ products. IBM has pursued this strategy in its software and services businesses. Be- tween 2010 and 2013, IBM acquired 43 companies for an average of $350 mil- lion each. By pushing the products of these companies through IBM’s global sales force, IBM estimated that it was able to substantially accelerate the ac- quired companies’ revenues, sometimes by over 40 percent in the first two years after each acquisition.18 In some cases, the target can also help accelerate the acquirer’s revenue growth. In Procter & Gamble’s acquisition of Gillette, the combined company benefited because P&G had stronger sales in some emerging markets while Gillette had a bigger share of others. Working together, they were able to in- troduce their products into new markets much more quickly. 18 IBM Investor Briefing website, 2014. 596  Mergers and Acquisitions Acquire Skills or Technologies Faster or at Lower Cost Many technology-based companies buy other companies whose technologies the acquirers need to enhance their own products. They do this because they can acquire the technology more quickly than developing it themselves, avoid royalty payments on patented technologies, and keep the technology away from competitors. For example, Apple bought Siri (the automated personal assistant) in 2010 to enhance its iPhones. In 2014, Apple purchased Novauris Technologies, a speech recognition technology company, to further enhance Siri’s capabilities. During the same year, Apple also purchased Beats Elec- tronics, which had recently launched a music-streaming service. One reason for the acquisition was that Apple could quickly offer its customers a music- streaming service as the market was moving away from its iTunes business model of purchasing and downloading music. Cisco Systems, the network product and services company (with $49 bil- lion in revenue in 2018), used acquisitions of key technologies to assemble a broad line of network solution products during the frenzied Internet growth period. From 1993 to 2001, Cisco acquired 71 companies at an average price of approximately $350 million each, helping it to increase revenues from $650 million in 1993 to $22 billion in 2001, with nearly 40 percent of its 2001 rev- enues coming directly from these acquisitions. Exploit a Business’s Industry-Specific Scalability Economies of scale are often cited as a key source of value creation in M&A. While they can be, you have to be very careful in justifying an acquisition by economies of scale, especially for large acquisitions. That’s because large com- panies often are already operating at scale, in which case combining them will not likely lead to lower unit costs. Take big package-delivery companies, for example. They already have some of the largest airline fleets in the world and operate them very efficiently. If they were to combine, it’s unlikely that there would be substantial savings in their flight operations. Economies of scale can be important sources of value in acquisitions when the unit of incremental capacity is large or when a larger company buys a subscale company. For example, the cost to develop a new car platform is enormous, so auto companies try to minimize the number of platforms they need. The combination of Audi, Porsche, and VW allows the three companies to share some platforms. For example, the Audi Q7, Porsche Cayenne, and VW Touareg are all based on the same underlying platform. Companies also find economies of scale in the purchasing function, but such benefits often come with nuances. For example, when health insurance companies combine, they can negotiate better rates with hospital systems— savings they can pass to their customers. However, merging health insurers typically derive these savings only in cities where both insurers are already