Strategic Alliances & Acquisitions PSU MGMT 510 Week # 1 Dave Garten daveoutside@alum.mit.edu 4/17/2017

Dave Garten – Background Highlights Current Faculty, PSU/OEMBA – Strategy, M&A, Negotiation, Biz Projects Consulting: management, strategy, alliances, M&A Board(s): Organically Grown Company, SeQuential, Bridlemile Soccer, Forest Park Conservancy CEO, SeQuential Biofuels, Inc. Intel – 15 year career General Manager Director of Business Development. >200+ alliances Marketing and product management Engineer early-on – designed fuel injection Education: MBA M.I.T 1987; BS/MS Engineering 4/17/2017 Dave Garten – Business Strategy

Syllabus Course Topics Alliance Phases Planning Deal making Execution Integration Alliance Structures Acquisitions Divestitures Spin-outs Vertical alliances Licensing Joint ventures Outsourcing Equity Focus Topics Valuation Antitrust Negotiation Due diligence Ecosystems 4/17/2017 Dave Garten PSU MGMT 510

Strategy Gaps Make Buy Ally ? External Analysis Mission Strategy “Basis of Competition” External Analysis Gap Planning “What we need” Make Buy Ally R & D Supply Mftg Sales Mktg Mission Strategy ? Internal Analysis “What we have” 4/17/2017 Dave Garten PSU MGMT 510

Alliance Phases Planning Deal-Making Launch Execution Integration Strategy Screening Analysis Planning Negotiation Deal Structure Due diligence Deal-Making Launch Perform Manage Execution Integration Assess Expand Exit Adjust Unwind/separate 4/17/2017 Dave Garten PSU MGMT 510

Alliance Growth Drivers Growth of Alliance Use – need to engage others Driven by the gap in what a company would like to achieve vs. what it can achieve Pace of change in technology Globalization of markets Product complexity increasing. X 4/17/2017 Dave Garten PSU MGMT 510

Source: Booze, Allen, Hamilton analysis of 2000 alliances 1995-6 Data: Alliance Types Proportions of Alliances by Industry Competitive Rivalry 50% 25% 75% 100% 0% Non-competitors Computers & Communication Health Care Financial Competitors Energy Airlines Other Auto Consumer 4/17/2017 Dave Garten PSU MGMT 510 Source: Booze, Allen, Hamilton analysis of 2000 alliances 1995-6

Data: Global Reach a Significant Factor 4/17/2017 Dave Garten PSU MGMT 510

Data: Success & Failure Lots of studies -> indicators at best… Success: ~30% acquisitions; ~ 50% alliances Tend to be more successful Acquisitions in core businesses, existing geographies Alliances for related businesses, new geographies Alliances between strong companies Acquisitions between large and small companies [45%] Alliances that evolve beyond initial objectives [79%] JVs with even split of ownership [60%] LBO & corporate buyers [~80%] Source: various including Bleeke and Ernst, McKinsey 4/17/2017 Dave Garten PSU MGMT 510

M&A Success & Failure Top 5 reasons for M&A Failure Top 3 Ways to Beat the Odds… X 4/17/2017 Dave Garten PSU MGMT 510

Alliance Success & Failure Source: Vantage Partners “an alliance is like a foreign body that has been grafted onto separate organizations. To keep it alive you have to guard against rejection by each one” – Jordan D. Lewis, Trusted Partners 4/17/2017 Dave Garten PSU MGMT 510 X

Industry Structure Forward Integration Unrelated Related Customers Distribution Unrelated Diversification Related Horizontal Consolidation New product, same customer Same product, new customer Conglomerate Vertical Backward Integration Supply chain Manufacturing Natural resources 4/17/2017 Dave Garten PSU MGMT 510

Industry Structure Mature Declining Growth Emerging Early Majority Quality & reliability Declining Price Growth service Emerging Features Early Majority Late Majority Early Adopters Innovators Laggards Growth strategies Consolidation 4/17/2017 Dave Garten PSU MGMT 510

Structure Types Commitment Ownership Outsourcing Purchase Agreement Acquisition Joint Venture Joint Development Multiyear Purchase Agreement Commitment Licensing Purchase Order Joint Marketing “Strategic” “Transactional” Ownership 4/17/2017 Dave Garten PSU MGMT 510

Structure Propensities Types of synergies Nature of Resources value of “soft” to “hard” Degree of Uncertainty Degree of Competition for resources Alliance Acquisition “Modular” Airline & hotel “Sequential” Biotech-pharma “Reciprocal” Mobile-Exxon Higher Lower Higher Lower Lower Higher Source: adapted from When to Ally and When to Acquire 4/17/2017 Dave Garten PSU MGMT 510

Value Drivers (Synergies) Underlying purpose of strategic actions Links strategic intent to day-to-day operations Ultimately->Effect on earnings & cash flow Examples Increase revenue (growth) Sell a solution, add new products or customers, increase market share, more sales force coverage Reduce costs (consolidation) Lower unit costs (economies of scale), lower capital costs or taxes, consolidate facilities, reduce redundancies 4/17/2017 Dave Garten PSU MGMT 510

Value Drivers (Synergies) New products through new channels Low Existing products through new channels New products through existing channels Probability of Success Increasing risk Facilities shared Operating activities shared Functions Duplicated High Short Time Frame Long Derived from: When to Walk Away from a Deal 4/17/2017 Dave Garten PSU MGMT 510