1. Brendan Boyle 2007 International Business Strategy Topic 6: Strategic Alliances, Mergers and Acquisitions in International Business

2. Brendan Boyle 2007 Principle Learning Objectives Develop an understanding of the variety of strategic alliances utilized in international business practice. Develop an understanding of effective approaches to the formation and management of strategic alliances in IB. Develop an understanding of mergers and acquisitions in IB as an alternative to strategic alliances and the motivations behind such strategic actives in IB. Develop an understanding of how best to manage and monitor the performance of mergers in IB. Develop an understanding of the implications of all of the above for international business strategy and practice.

3. Brendan Boyle 2007 The Choice of Entry Modes Figure 6.3

4. Brendan Boyle 2007  Build? Buy? Cooperate? Which approach: Which one can create the most value for the firm?  USA: 1996-2002, created 57,000 alliances and 74,000 acquisitions – roughly one acquisition & one alliance every hour each day;  Europe: $1.59 trillion M&As in 2006, overtaking the values of deals in America (at $1.54t); the value tripled since 2004  Asia: In the 1990s, Japanese firms did more cross-border M&As than domestic M&A (95%); Foreign acquisitions in Japan still face considerable obstacles;

5. Brendan Boyle 2007  There is a growing list of alliance networks appearing in various industries (e.g. Airlines, Automobiles, Computers, & Telecommunications  In 2002, the alliance activities of US large firms account for 35% of their total revenue;  Alliance increases importance in emerging markets % of total FDI transactions Korea77% China72% Latin America52% Eastern Europe54%

6. Brendan Boyle 2007 Strategic alliances Global Strategic Alliance (GSA): Voluntary agreements between two or more firms from different countries who pursue exchange, sharing, or co-developing of products, technologies, or services. As globalization increases, strategic alliances and networks have proliferated globally. –By 2000, alliances & networks produced 25% of the revenues of these firms; Yet 30-70% of alliances and networks reportedly fail (e.g., Opening Case).

7. Brendan Boyle 2007 A compromise between short-term, pure market transactions (e.g., spot transactions) and long-term, pure organizational solutions (e.g., mergers and acquisitions) The Variety of Strategic Alliances Figure 7.1

8. Brendan Boyle 2007 Alliance formation, management and Performance  1. Formation (3-stage model) - To cooperate + Partner selection - Alliance design (i.e. Contract or equity?) - Positioning the relationship  2. Management and control  3. Performance implication

9. Brendan Boyle 2007 1. A Three-Stage Decision Model Figure 7.3 Source: Adapted from S. Tallman & O. Shenkar, 1994, A managerial decision model of international cooperative venture formation (p. 101), Journal of International Business Studies, 25 (1): 91–113.

10. Brendan Boyle 2007 Strategic Alliance CombinedResourcesCapabilities Core Competencies ResourcesCapabilities ResourcesCapabilities Firm A Firm B Mutual interests in designing, manufacturing, or distributing goods or services

11. Brendan Boyle 2007 Stage One: Cooperate or Not  How to find partners? (SIA 7.3: Local firms) –Informally, managers translate their interpersonal ties with executives at other firms (at the micro, individual level) into interfirm alliances (at the macro, firm level) — a micro-macro link –Rely on successful previous business dealings –Formal systematic scanning Strategic fit: Focus on complementary “hard” skills and resources Organizational/cultural fit: Focus on “soft” organizational attributes (such as goals, experiences, and behaviors) * These methods are not mutually exclusive

12. Brendan Boyle 2007 The Five-Cs scheme of partner selection

13. Brendan Boyle 2007 Stage Two: Contract or Equity?  Equity Alliance –Have ownership –Form new legal entity –Substantial resource commitment  Non-equity Alliance –No ownership –No new legal entity –Less resource commitment

14. Brendan Boyle 2007 Equity Alliance Issues –role of each partner in management of venture –“fairness” of technology and management payments –stability of JV: varies according to type of contribution Foreign PartnerLocal Partner Technology Market Knowledge JV Take Existing Products to New Markets or Acquire Foreign Products for Local Markets

15. Brendan Boyle 2007 Joint R&D –jointly organize and fund the program –share interim and final results –work separately ● Issues - original design of program - following new leads as program develops - “pre-competitive” orientation ● Examples –pre-competitive alliances in computers, VCRs, CDs… A R&D B

16. Brendan Boyle 2007 The Relationships  Strategic alliances formed by multiple firms to compete against other such groups and against traditional single firms.  Also known as constellations/networks  Star Alliance: United, Lufthansa, Air Canada, SAS, etc.  Sky Team: Delta, Air France, Korean Air, etc.  One World: American, British, Cathay Pacific, Qantas, etc.

17. Brendan Boyle 2007 Alliance management & control  It is important to be able to manage inter-partner learning, exercise effective managerial control, accentuate cooperation & trust, and think ahead of effective exit strategy.

18. Brendan Boyle 2007 Managing inter-partner learning  In a GSA, firms have to “come up to speed” and learn about one another in order to effectively operate.  Firms seek to protect their intellectual and proprietary rights and technologies, write safeguards into contracts, agree on specific skills to be shared (and not shared), and mitigate leakage risk by avoiding undue dependence.  Creating operational and managerial synergy and effective relationships requires a degree of openness that is difficult to obtain.

19. Brendan Boyle 2007 How to maintain managerial control over alliance activities

20. Brendan Boyle 2007 Relationship Lessons for Managers in Strategic Alliances and Networks Table 7.4 Source: Based on text in M. W. Peng & O. Shenkar, 2002, Joint venture dissolution as corporate divorce (pp. 101–102), Academy of Management Executive, 16 (2): 92–105.

21. Brendan Boyle 2007 Think ahead of alliance exit Some reasons for exit:  Differences In strategic or operational objectives  Differences in managerial styles  Differences in conflict resolution styles  Inability to meet shifting targets  Inability to meet financial requirements  Acquisition of one or more of the partners  Bankruptcy, termination, dissolution of liquidation of one or more of the partners

22. Brendan Boyle 2007 Performance  High rates of alleged failures  No consensus on what constitutes alliance/ network performance  Performance at different levels: alliance vs. parent firm level Performance Measures

23. Brendan Boyle 2007 Acquisition – An alternative Defining Merge & Acquisitions –Acquisition: transfer of the control of assets, operations, and management from one firm (target) to another (acquirer), the former becoming a unit of the latter. PeopleSoft is now a unit of Oracle –Merger: the combination of assets, operations, and management of two firms to establish a new legal entity. South African Brewery & Miller Beer  SABMiller

24. Brendan Boyle 2007 Figure 9.8 Source: Adapted from United Nations, 2000, World Investment Report 2000 (p. 100), New York: UN

25. Brendan Boyle 2007 MotivesExamples 1. To deal with overcapacity through consolidation in mature industries Daimler-benz acquired Chrysler 2. To roll-up competitors in geographically fragmented industries Banc One buys local/ regional banks in 1980s 3. To swiftly extend into new products or markets L’Oreal acquires Body Shop; GE capital and its valued acquisitions 4. As a substitute for in-house R&D Cisco acquires over 70 start- up companies 5. To exploit eroding industry boundaries by inventing an industry AT&T acquires NCR, McCaw, and TCI Motives Behind M&As Source: Bower, J.L. 2001. Not all M&As are alike – and that matters. HBR, p.97

26. Brendan Boyle 2007 Source: Bower, J.L. 2001. Not all M&As are alike – and that matters. HBR, p.97 U.S. M&A deals over $500 million made between 1997-1999

27. Brendan Boyle 2007 Motives Behind M&As (cont’) Table 9.2

28. Brendan Boyle 2007 Stakeholders’ Concerns During M&As Figure 9.9

29. Brendan Boyle 2007 The performance of M&As –As many as 70% of M&As reportedly fail. –On average, acquiring firms ’ performance does not improve and is often negatively affected. –Acquisitions are the largest capital expenditures most firms ever make, yet they are often the worst planned and executed business activities of all. –Competitors often launch aggressive attacks to take advantage of the M&A chaos. Airbus increased market share during the Boeing/McDonnell Douglas merger Dell invaded the printer market when HP was distracted in its merger with Compaq

30. Brendan Boyle 2007 Why do many M&As fail? Table 9.3

31. Brendan Boyle 2007 Implications for Strategists  From (single) firm strategy to interfirm strategy  Strategists must be savvy at both competition and cooperation— “co-opetition”  An alliance/acquisition perspective on the four questions  Why firms differ (Q1) and how firms behave (Q2): How different industry-, resource-, and institution- based considerations drive alliances and acquisitions  What determines the scope of the firm (Q3) – or the alliance/acquisition in this context: Strategic goals matter!  What determines the international success and failure (Q4): “ soft ” relational capabilities + “ hard ” assets

32. Brendan Boyle 2007 Principle Learning Objectives - revisited Have you developed an understanding of the variety of strategic alliances utilized in international business practice. Have you developed an understanding of effective approaches to the formation and management of strategic alliances in IB. Have you developed an understanding of mergers and acquisitions in IB as an alternative to strategic alliances and the motivations behind such strategic actives in IB. Have you developed an understanding of how best to manage and monitor the performance of mergers in IB. Have you developed an understanding of the implications of all of the above for international business strategy and practice.