MAN 4720 Huning Chapter 9: Corporate Strategy: Strategic Alliances, Mergers and Acquisitions

Partner Selection and Alliance Formation

Benefits must exceed the costs. Five reasons for alliance formation: 1.Strengthen competitive position 2.Enter new markets 3.Hedge against uncertainty 4.Access critical complementary resources 5.Learn new capabilities Partners must be compatible and committed.

Principal - Agent Problems

Managers incentives to acquire: •To build a larger empire •To receive prestige, power, and pay Managerial hubris: •A form of self-delusion •Managers convince themselves of their superior skills •They see themselves as exceptions to the rule

Mergers and Acquisitions

Merger: •The joining of two independent companies •Forms a combined entity Acquisition: •Purchase of one company by another •Can be hostile When thetarget firm does not wish to be acquired

Examples of Integration Failure

Multibillion-dollar failures include the Daimler-Chrysler integration, AOL and Time Warner, HP and Autonomy, and Bank of America and Merrill Lynch. More than cultural differences were involved in Microsoft's 2015 decision to write down $7.6 billion in losses (or more than 80 percent) on its $9.4 billion acquisition of Nokia some 15 months earlier.

Governing Strategic Alliances

Non-Equity Alliances •Partnerships based on contracts •Examples: supply agreements, distribution agreements, and licensing agreements Equity Alliances •One partner takes partial ownership in the other. Joint Ventures •A standalone organization created and jointly owned by two or more parent companies

What are Strategic Alliances?

A voluntary arrangement between firms Involves the sharing of: •Knowledge, resources, capabilities To develop: Processes, products, services

M&A and Competitive Advantage

Benefits of mergers & acquisitions are often hard to achieve. •Anticipated synergies don't materialize. Other reasons to merge: •Principal-agent problems •The desire to overcome competitive disadvantage •Superior acquisition and integration capability

How Firms Achieve Growth

Build •Internal development Borrow •Enter a contract / strategic alliance Buy •Acquire new resources, capabilities, and competencies

Why Do Firms Acquire Other Firms?

To access new markets & distribution channels •To overcome entry barriers •To access new capabilities or competencies To preempt rivals •Facebook and Google are famous for this

Why Do Firms Merge?

•Horizontal integration: -The process of merging with competitors -Leads to industry consolidation •Three main benefits: 1.Reduction in competitive intensity •Changes underlying industry structure in favor of surviving firms 2.Lower costs •Economies of scale 3.Increased differentiation •Fills product gaps

Chapter Case 9: Lyft

A private startup worth only 1/10 of Uber Pursued powerful alliance partners to •Strengthen competitive position •GM: invested $500 million •Waymo: autonomous car technology •Enter new markets •GM: mobile transportation and logistics leader •Hedge against uncertainty •Potential fleet ownership business model •Learn new capabilities •Mobile logistics, new services, technology Entered into alliances to gain access to complementary assets GM •Capabilities to manufacture cost-competitive cars •Capabilities with large scale manufacture •Proprietary algorithms Waymo Autonomous vehicle development

Closeness

M&As are complex and costly. •Used only when extreme closeness is needed Closeness can be achieved through alliances. •Equity alliances •Joint ventures This enables resource borrowing Mergers and acquisitions are the most costly, complex, and difficult to reverse strategic option. This implies that only if extreme closeness to the resource partner is necessary to understand and obtain its underlying knowledge should M&A be considered the buy option. Regardless, the firm should always first consider borrowing the necessary resources through integrated strategic alliances before looking at M&A.

Relevance

Are the firm's internal resources highly relevant? •If so, the firm should develop internally. Internal resources are relevant if: •They are similar to those the firm needs. •They are superior to those of competitors. They pass the VRIO Framework.

Access Critical Complementary Assets

Complementary assets such as: •Marketing (JNJ, P&G) •Manufacturing (Magna) •After-sale service Helps complete the value chain: •From upstream innovation to downstream commercialization

Integration

Conditions for integrating the target firm: •Low relevancy •Low tradability •High need for closeness Consider other options first •Examples of post integration failures abound Mergers and acquisitions are: •The most costly •The most complex •The most difficult to reverse strategic option

Strategy Highlight: Tesla's Alliances

Daimler •Access to superior engineering expertise •Infusion of $50 million cash •Saved them from bankruptcy Toyota •Access to manufacturing facility in CA Panasonic •World leader in battery technology •Jointly investing in Nevada's lithium-ion battery plant

How to Make Alliances Work

Each alliance is managed by a three-person team: an alliance champion, alliance leader, and alliance manager. •The alliance champion is a senior, corporate-level executive responsible for high-level support and oversight. This senior manager is also responsible for making sure that the alliance fits within the firm's existing alliance portfolio and corporate-level strategy. •The alliance leader has the technical expertise and knowledge needed for the specific technical area and is responsible for the day-to-day management of the alliance. •The alliance manager, positioned within the Office of Alliance Management, serves as an alliance process resource and business integrator between the two alliance partners and provides alliance training and development, as well as diagnostic tools.

Acquisition Examples

Facebook acquired: Instagram (photo & video sharing), WhatsApp (text messaging service), Oculus (virtual reality headsets). Google acquired: YouTube (video sharing), Motorola (mobile technology), Waze (interactive mobile maps).

Learn New Capabilities

Firms are motivated by the desire to learn from their partners. Co-opetition •Cooperation by competitors to achieve a strategic objective Learning can take place at different rates. •The firm that learns more quickly is motivated to exit the alliance / reduce knowledge sharing. Referred to as "learning races"

Strategy Highlight 9.2: Kraft's Hostile Takeovers

In 2012, Kraft bought Cadbury for $20B •Cadbury was focused solely on candy & gum. •Cadbury had a mature distribution system overseas. •Restructured; separated groceries from snacks In 2015, Kraft merged with Heinz. •Created the 5th largest food competitor globally In 2017, hostile takeover bid for Unilever •Unilever successfully rebuffed the offer

Managerial Hubris Example: Quaker Oats & Snapple

Managerial hubris has led to many ill-fated deals, destroying billions of dollars. For example, Quaker Oats Co. acquired Snapple because its managers thought Snapple was another Gatorade, which was a successful previous acquisition. The difference was that Gatorade had been a standalone company and was easily integrated, but Snapple relied on a decentralized network of independent distributors and retailers who did not want Snapple to be taken over and who made it difficult and costly for Quaker Oats to integrate Snapple. The acquisition failed—and Quaker Oats itself was taken over by PepsiCo. Snapple was spun out and eventually ended up being part of the Dr Pepper Snapple Group.

Partner Compatibility vs Partner Commitment

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.

Alliance Design and Governance

Possible governance mechanisms: •Non-equity contractual agreement •Equity alliances •Joint venture Joining specialized complementary assets increases the likelihood that the alliance is governed hierarchically. Inter-organization trust is critical.

Enter New Markets

Product markets Service markets Geographical markets •Governments such as Saudi Arabia or China may require that foreign firms have a local joint venture partner before doing business in their countries.

Hedge Against Uncertainty

Real-options perspective: •Approach to strategic decision making •Breaks down a larger investment decision into a set of smaller decisions •Staged sequentially over time •Allows firms to obtain information in stages

The Main Issues in the Build-Borrow-or-Buy Framework

Relevancy •How relevant are existing internal resources to solving the resource gap? Tradability •How tradable are the targeted resources that may be available externally? Closeness •How close do you need to be to your external resource partner? Integration •How well can you integrate the targeted firm should you determine you need to acquire the resource partner?

Why Do Firms Enter Strategic Alliances?

Strengthen competitive position •Change industry structure, influence standards Enter new markets •Product, service, or geographic markets Hedge against uncertainty •Real options perspective •Breaks down investment into smaller decisions •Staged sequentially over time Access critical complementary assets •Marketing, manufacturing, after-sale service •Helps complete the value chain Learn new capabilities •Co-opetition: cooperation among competitors •Learning races: to exit the alliance quickly

Tradability

The firm creates a contract to: •Transfer ownership •Allow use of the resource Contracts support borrowing resources Ex. Licensing and franchising If a resource is highly tradable, then the resource should be borrowed via a licensing agreement or other contractual agreement. If the resource in question is not easily tradable, then the firm needs to consider either a deeper strategic alliance through an equity alliance or a joint venture, or an outright acquisition.

How Do Strategic Alliances Assist Firms?

They may complement a firm's value chain. They may focus on similar value chain activities. They enable: •Firm's to achieve their goals faster •Lower cost •Fewer legal repercussions An alliance qualifies as strategic if: •It has the potential to affect a firm's competitive advantage

Post-Formation Alliance Management

To create VRIO resource combinations: •Make relation-specific investments. •Establish knowledge-sharing routines. •Build interfirm trust. Build capability through repeated experiences over time. •Repeated alliance exposure improves learning.