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 ALLIANCES VRIO 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 ALLIANCES VRIO Framework Rarity - ability to successfully manage interfirm relationships—often called relational (or collaborative) capabilities— may be rare relational (or collaborative) capabilities relationships that occur within an organization firms must have unique skills to execute strategy

RESOURCES AND ALLIANCES VRIO 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 - very demanding 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 Relationship Firms 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 diversified their 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.