Chapter 11

Alliances and Acquisitions

LEARNING OBJECTIVES

After studying this chapter, you should be able to:

1. articulate how institutions and resources affect alliances and acquisitions

2. gain insights into the formation, evolution, and performance of alliances

3. understand the motives and performance of acquisitions

4. participate in two leading debates on alliances and acquisitions

5. draw implications for action

ALLIANCES AND ACQUISITIONS

strategic alliances - voluntary agreements between firms involving exchange, sharing, or co-developing of products, technologies, or services

contractual (nonequity-based) alliances - co-marketing, research and development (R&D) contracts, turnkey projects, strategic suppliers, strategic distributors, and licensing/franchising

ALLIANCES AND ACQUISITIONS

equity-based alliances - strategic investment; one partner invests in another

cross-shareholding - both partners invest in each other

acquisitions - transfer of the control of operations and management from one firm (target) to another (acquirer), the former becoming a unit of the latter

merger - combination of operations and management of two firms to establish a new legal entity

Institutions, Alliances, and Acquisitions

formal institutions – set of formal legal and regulatory frameworks impacting:(1) antitrust concerns(2) entry mode requirements

informal institutions - imitation drives many alliance/acquisition decisions yet some firms rush into

alliances and acquisitions without adequate due diligence and then get burned

RESOURCES AND ALLIANCESVRIO Framework

Value alliances - must create value by reducing costs, risks, and uncertainties

real option - investment in real operations as opposed to financial capital

learning race - competitive situation in which partners aim to outrun each other by learning the “tricks” from the other side as fast as possible

acquisition premium - difference between the acquisition price and the market value of target firms

RESOURCES AND ALLIANCESVRIO Framework

Rarity - ability to successfully manage interfirm relationships—often called relational (or collaborative) capabilities— may be rarerelational (or collaborative) capabilities

relationships that occur within an organization firms must have unique skills to execute strategy

RESOURCES AND ALLIANCESVRIO framework

Imitability - one firm’s resources and capabilities may be imitated by partners- trust and understanding -firms without good “chemistry” may have a hard

time imitating such activities - firms that excel in integration possess

hard-to-imitate capabilities

RESOURCES AND ALLIANCES VRIO framework

Organization - alliance relationships are organized in a way that makes it difficult for others to replicate- whether acquisitions add value boils down to how merged firms are organized to take advantage of the benefits while minimizing costs

ALLIANCES AND ACQUISITIONS

How do firms choose between alliances and acquisitions?

alliances - create value primarily by combining complementary resources

- as real options, may be more suitable under high levels of uncertainty

acquisitions - derive most value by eliminating redundant resources

- preferable when the level of uncertainty is low

FORMATION OF ALLIANCES

Stage One: To Cooperate or Not to Cooperate?To grow by pure market transactions, the firm has to independently confront competitive challenges - verydemanding even for resource-rich multinationals

Stage Two: Contract or Equity?The choice between contract and equity also boils down to institutional constraints

Stage Three: Specifying the RelationshipFirms need to choose a specific format among the family of equity-based or contractual (nonequity-based) alliances

COMBATING OPPORTUNISM

It is difficult to completely eliminate opportunism, but it is possible to minimize its threat by:

(1) walling off critical capabilities, or (2) swapping critical capabilities through credible commitments

Sometimes none of these approaches work, and the relationship deteriorates

FROM CORPORATE MARRIAGE TO DIVORCE

initiation - initiator starts feeling uncomfortable with the alliance (for whatever reason)

going public - initiator likely to go public first but partner may preempt by blaming the initiator

uncoupling - alliance dissolution can be friendly or hostile

PERFORMANCE OF ALLIANCES

Acquisitions are often the largest capital expenditures most firms ever make, they are frequently the worst planned and executed activities.

PERFORMANCE OF ALLIANCES

Factors that may influence alliance performance:

(1) equity(2) learning and experience(3) nationality(4) relational capabilities

None of these is able to assert an unambiguous, direct impact on performance

MOTIVES FOR ACQUISITIONS

(1) synergistic - response to formal institutional constraints and transitions in search of synergy

(2) hubris - manager’s overconfidence in his or her capabilities - may unknowingly overpay for targets

(3) managerial motives - self-interested reasons –

some managers may have deliberately over diversifiedtheir firms through M&As in their quest for more power, prestige, and money

PERFORMANCE OF ACQUISITIONS

Why do as many as 70% of acquisitions fail?

Preacquisition - executive hubris and/or managerial motives

- inadequate screening and failure to achieve strategic fit

- 80% of acquiring firms do not analyze organizational fit

- failure to address multiple stakeholders’ concerns regarding job losses and diminished power

PERFORMANCE OF ACQUISITIONS

Why do as many as 70% of acquisitions fail?

Postacquisition - integration problems - strategic fit - organizational fit resulting in inadequate attention to people issues, resulting in low morale and high turnover- clashes of national cultures

M&As + Alliances

Given the high rates of M&A failures, it seems imperative that firms seriously and thoroughly investigate alliances as an alternative before embarking on acquisitions.

Majority JVs as Control Mechanisms versus Minority JVs as Real Options

Although the logic of having a higher level of equity control in majority JVs is straightforward, its actual implementation is often problematic. Asserting one party’s control rights, even when justified based on a majority equity position, may irritate the other party.

Minority JVs are recommended toehold investments as possible stepping stones for future scaling up. Whether this more aggressive strategy is justified remains to be seen.