Ch 9- Corporate Strategy: Strategic Alliances and Mergers and Acquisitions

Why do firms acquire other firms

- To gain access to new markets and distribution channels- Firms may resort to acquisitions when they need to overcome entry barriers into markets they are currently not competing in or to access new distribution channels - To gain access to a new capability or competency- Firms often resort to M&A to obtain new capabilities or competencies - To preempt rivals- Sometimes firms may acquire promising startups not only to gain access to a new capability or competency, but also to preempt rivals from doing so.

Joint ventures

A standalone organization created and jointly owned by two or more parent companies. The least common of the three types of strategic alliances. Since partners contribute equity to a joint venture, they are making a long-term commitment. Exchange of both explicit and tacit knowledge through interaction of personnel is typical. If the alliance doesn't work out as expected, undoing the JV can take some time and involve considerable cost. A further risk is that knowledge shared with the new partner could be misappropriated by opportunistic behavior. Finally, any rewards from the collaboration must be shared between the partners.

Partner selection and alliance formation

necessary conditions for successful alliance formation. Partner compatibility captures aspects of cultural fit between different firms. Partner commitment concerns the willingness to make available necessary resources and to accept short-term sacrifices to ensure long- term rewards

relational view of competitive advantage

strategic management framework that proposes that critical resources and capabilities frequently are embedded in strategic alliances that span firm boundaries

equity alliance

Partnership in which at least one partner takes partial ownership in the other. Require larger investments. Used to signal stronger commitments.Equity alliances are frequently stepping-stones toward full integration of the partner firms either through a merger or an acquisition. Essentially, they are often used as a "try before you buy" strategic option Allow for the sharing of tacit knowledge corporate venture capital (CVC) investments

Acquisition and merger

The combining of two firms of comparable size is often described as a merger even though it might in fact be an acquisition. In contrast, when large, incumbent firms buy start-up companies, the transaction is generally described as an acquisition

managerial hubris

a form of self-delusion in which managers convince themselves of their superior skills in the face of clear evidence to the contrary Two forms: 1. Managers of the acquiring company convince themselves that they are able to manage the business of the target company more effectively and, therefore, create additional shareholder value. This justification is often used for an unrelated diversification strategy. 2. Although most top-level managers are aware that the majority of acquisitions destroy rather than create shareholder value, they see themselves as the exceptions to the rule

real-options perspective

approach to strategic decision making that breaks down a larger investment decision into a set of smaller decisions that are staged sequentially over time

Alliance design and governance

choose an appropriate governance mechanism from among the three options: non-equity contractual agreement, equity alliances, or joint venture. Effective governance, therefore, can be accomplished only by skillfully combining formal and informal mechanisms.

co-opetition

cooperation by competitors to achieve a strategic objective

corporate venture capital (CVC)

equity investments by established firms in entrepreneurial ventures; CVC falls under the broader rubric of equity alliances

merger

the joining of two independent companies to form a combined entity

acquisition

the purchase or takeover of one company by another; can be friendly or unfriendly

Given that mergers and acquisitions, on average, destroy rather than create shareholder value, why do we see so many mergers?

1. Principal-agent problems- Problem: managerial hubris 2. The desire to overcome competitive disadvantage (like achieving greater economies of scale) 3. Superior acquisition and integration capability- some firms are consistently able to identify, acquire, and integrate target companies to strengthen their competitive positions. Since it is valuable, rare, and difficult to imitate, a superior acquisition and integration capability, together with past experience, can lead to competitive advantage.

4 questions executives must determine the degree to which certain conditions apply, high or low. Helps find the best course

1. Relevancy. How relevant are the firm's existing internal resources to solving the resource gap? - If the firm's internal resources are highly relevant to closing the identified gap, the firm should itself build the new resources needed through internal development. Evaluate the relevance of internal resources in two ways: they test whether resources are (1) similar to those the firm needs to develop and (2) superior to those of competitors in the targeted area. If both conditions are met, then the firm's internal resources are relevant and the firm should pursue internal development. 2. Tradability. How tradable are the targeted resources that may be available externally? - The implication is that if a resource is highly tradable, then the resource should be borrowed 3. Closeness. How close do you need to be to your external resource partner? 4. Integration. How well can you integrate the targeted firm, should you determine you need to acquire the resource partner? - Consider cultural differences Only if the three prior conditions (low relevancy, low tradability, and high need for closeness) are met, should the firm consider M&A

alliance management capability

A firm's ability to effectively manage three alliance-related tasks concurrently: (1) partner selection and alliance formation, (2) alliance design and governance, and (3) post-formation alliance management.

build-borrow-or-buy framework

Conceptual model that aids firms in deciding whether to pursue internal development (build), enter a contractual arrangement or strategic alliance (borrow), or acquire new resources, capabilities, and competencies (buy). resources that are valuable, rare, and difficult to imitate are often embedded deep within a firm, frequently making up a resource bundle that is hard to unplug whole or in part. The options to close the strategic resource gap are, therefore, to build, borrow, or buy. Build in the build-borrow-buy framework refers to internal development; bor- row refers to the use of strategic alliances; and buy refers to acquiring a firm

non-equity alliance

Most common. Partnership based on contracts between firms. The most frequent forms are supply agreements, distribution agreements, and licensing agreements. Firms tend to share explicit knowledge Because of their contractual nature, non-equity alliances are flexible and easy to initi- ate and terminate. However, because they can be temporary in nature, they also some- times produce weak ties between the alliance partners, which can result in a lack of trust and commitment supply agreements, distribution agreements, and licensing agreements (vertical strategic alliances)

Alliances can be governed by the following mechanisms

Non-equity alliances Equity alliances Joint ventures

Post-formation alliance management

Ongoing management of the alliance. The partnership needs to create resource combinations that obey the VRIO criteria. This can be most likely accomplished if the alliance partners make relation-specific investments, establish knowledge-sharing routines, and build interfirm trust. build management capability through repeated experiences over time. To accomplish effective alliance management, strategy scholars suggest that firms create a dedicated alliance function

strategic alliance

a voluntary arrangement between firms that involves the sharing of knowledge, resources, and capabilities with the intent of developing processes, products, or services An alliance, therefore, qualifies as strategic only if it has the potential to affect a firm's competitive advantage.

hostile takeover

acquisition in which the target company does not wish to be acquired

Why do Firms Enter Strategic Alliances?

economic value creation. alliance formation is frequently motivated by leveraging economies of scale, scope, specialization, and learning 1. Strengthen competitive position- competing in so-called battles for industry standards. Increases the competitive pressure on rivals of both companies 2. Enter new markets- either in terms of products and services or geography 3. Hedge against uncertainty- In dynamic markets, strategic alliances allow firms to limit their exposure to uncertainty in the market. real-options perspective 4. Access critical complementary assets- Building downstream complementary assets such as marketing and regulatory expertise or a sales force is often prohibitively expensive and time-consuming, and thus frequently not an option for new ventures 5. Learn new capabilities- When the collaborating firms are also competitors, co-opetition ensues. Learning races

M&A Competitive Advantage

in most cases mergers and acquisitions do not create competitive advantage (anticipated synergies never materialize) If value is created, it generally accrues to the shareholders of the firm that was taken over (the acquiree), because acquirers often pay a premium when buying the target company

explicit knowledge

knowledge that can be codified; concerns knowing about a process or product

tacit knowledge

knowledge that cannot be codified; concerns knowing how to do a certain task and can be acquired only through active participation in that task

learning races

situations in which both partners in a strategic alliance are motivated to form an alliance for learning, but the rate at which the firms learn may vary

horizontal integration

the process of merging with competitors, leading to industry consolidation Firms should go ahead with horizontal integration if the target firm is more valuable inside the acquiring firm than as a continued standalone company. An industry-wide trend toward horizontal integration leads to industry consolidation. three main benefits to a horizontal integration strategy: Reduction in competitive intensity- strengthening bargaining power vis-a`-vis suppliers and buyers, reducing the threat of entry, and reducing rivalry among existing firms. Lower costs- enhance their economic value creation Increased differentiation- filling gaps in a firm's product offering