Content M-4: Creating value externally - Alliance or Acquisition

Question 1

There are distinct processes between the process for an alliance and for an acquisition. What is the general process for an alliance? (five steps)

Answer 1

1. Business case & need
2. Partner selection
   > Partner search
   > Partner identification
   > Assessing fit
3. Negotiation & governance
   > Assessing value
   > Legal issues
   > Closing deal
4. Management
   > Knowledge transfer
   > Trust building
   > Conflict resolution
5. Assessment & evaluation

Question 2

There are distinct processes between the process for an alliance and for an acquisition. What is the general process for an acquisition? (five steps)

Answer 2

1. Business case & need
2. Due diligence & target selection
   > Analysis
   > Justification
3. Buying decision
   > Agreement
   > Announcement
4. Post-acquisition integration
   > Level of integration
   > Immediate PAI
5. Assessment & evaluation

Question 3

According to Dyer, Kale & Singh (2004), companies choosing between alliances and acquisitions should consider five determinants, under 2 rubrics. What are the two categories and what are the corresponding determinants?

Answer 3

• Resources & synergy
  > Type of synergy: modular, sequential or reciprocal
  > Nature of resources: hard or soft
  > Extent of redundant resources
• Market factors
  > Degree of market and technological uncertainty
  > Forces of competition / competition for resources

Question 4

Modular synergies is mostly associated with which synergy operators? (4Cs)

Answer 4

• Connection
• Combination

Question 5

Sequential synergy is mostly associated with which synergy operators? (4Cs)

Answer 5

• Connection
• Combination
• Customizaton

Question 6

Reciprocal synergy is mostly accoiated with which synergy operators? (4Cs)

Answer 6

• Consolidation
• Customization

Question 7

As opposed to Dyer, Kale & Singh (2004), Hoffmann & Schaper-Rinkel (2001) argue that the relative favorability of alliances and acquisitions hinges on 9 determinants, under 3 categories. What are these categories and associated determinants?

Answer 7

• Environment
  > Strategic uncertainty
  > Dispersion of knowledge
• Transaction (cost)
  > Specificity of transaction-related investments
  > Behavioral uncertainty
  > Persistence of synergies
  > Appropriability regime
• Company (value)
  > Resource endowment (esp. financial resources)
  > Absorptive capacity
  > Institutional capital

Question 8

There is also a matrix for determining which approach is more suitable along the dimensions of the need for strategic flexibility and need for control. Into which four quadrants/categories does this translate?

Answer 8

• Contractual collaboration: low need for flexibility; low need for control
• Merger/acquisition: low need for flexibility; high need for control
• Web of contractual collaborations: high need for flexibility; low need for control
• Equity joint venture: high need for flexibility; high need for control

Question 9

What are the benefits of increasing equity ownership?

Answer 9

• Exclusivity
• Cooperation
• Coordination

Question 10

What are the costs of increasing equity ownership?

Answer 10

• Lowered motivation
• Uncertainty and commitment
• Cost of control
• Synergy independent costs

Question 11

The Alliance / M&A deciders… (3 main categories)

Answer 11

• Environment
  > Uncertainty
  > Urgency (demand, technology, legal and institutional)
  > Dispersion of knowledge
  > Competition for resources (or, exclusivity)
• Efficiency (most transaction cost-efficient?)
  > specific investments
  > nature of resources
  > uncertainty about asset quality
  > managerial indigestibility risk (important)
  > trust
  > behavioral uncertainty (risk for opportunism or lowered motivation)
  > alignment of strategic intents
  > control premium
  > coordination need
• Value creation (most effective for transferring resources?)
  > resource endowment (financial strenght)
  > need for knowledge sharing
  > absorptive capacity
  > institutional & social capital
  > type of synergies
  > persistence of synergies

Question 12

What are relational rents?

Answer 12

“Returns that exceed a factor’s short run opportunity cost… (and) are and excess over the returns to a factor in its next best use”.

Question 13

What are the four sources of relational rents?

Answer 13

• Relation-specific assets
  > Duration of safeguards
  > Volume of transactions
• Knowledge-sharing routines
  > Partner-specific absorptive capacity
  > Incentives to encourage transparency
• Complementary resources
  > Ability to identify and evaluate resources
  > Role of organizational complementarities
• Effective governance
  > Ability to employ self-enforcement
  > Ability to employ informal mechanisms

Question 14

Sources of relational rents.
What are relation-specific assets?

Answer 14

Assets that are specialized in conjunction with the assets of an alliance partner; in other words, co-specialized assets/resources that increase uniqueness.

They require specific (and thus risky) investments.

Question 15

Sources of relational rents.
What are knowledge-sharing routines?

Answer 15

A regular pattern of interfirm interactions that permits the transfer, recombination or creation of specialized knowledge.

Sharing tacit knowledge requires customization.

Question 16

Sources of relational rents.
What are complementary resources?

Answer 16

Distinctive resources of alliance partners that collectively generate greater rents than the sum of those obtained fromt he individual endowments of each partner.

Influenced by the relatedness in activities.

Question 17

Sources of relational rents.
What is effective governance?

Answer 17

Mechanisms put in place to influence transaction costs and the willingness of alliance partners to engage in value-creation initiatives.

To control and coordinate partner (activity)

Question 18

Value creation decline can be a result of which four sources (two internal, two external)?

Answer 18

Internal:
- Changes in complementary resources
> Resource convergence: learning and close collaboration
> Resource divergence: may lead to diminishing relatedness
- Changes in governance
> Information governance develops trust that may lead to inertia
> Not introducing more vigilant formal governance

External:
- Market competition
> Resource imitation by competitors
> Imitation of knowledge sharing and relation-specific assets

• Rate and magnitude of environmental change
  > Inhibits adaptation of interdependent resources
  > May require development of new resources

Question 19

Value capture changes as a result of…?

Answer 19

• Replication of partner’s resources
• Development of additional competitive resources
• Unequal investment in relation-specific assets
• Prevention of imitation of competitive resources

It changes the bargaining power positions.

But… governance is meant to prevent that, and changes in governance and control mechanisms may reduce unequal division of value.

Question 20

The relational view framework offers a theory of inter-firm value creation and proposes 4 primary determinants of value creation and relational rents in alliances, which are…

Answer 20

• Complimentary resources
• Relation-specific assets (RSA)
• Knowledge-sharing routines (KSR)
• Effective governance

The perception that another firm possesses complementary resources is what motivates a firm initiate an alliance relationship. Thus, complementary resources as a driver of cooperation typically precedes the other 3 determinants of value creation at the alliance formation stage.

Question 21

What’s one of the differences between the relational view and the dynamic view?

Answer 21

The original relational view model was a static model that didn’t’ consider how cooperation, value creation and value capture unfold over time. A dynamic lens provides grater insight into understanding what drives cooperation for value creation and what leads to competition for value capture alliances.

Question 22

When are resources complementary?

Answer 22

When the marginal return to one resource increases int he presence of the other.

Question 23

Dynamic relational view model: determinants of relational rents.
Complementary resources can generate value on their own without additional investments in RSA or KSR. However, complementary resources are ONLY likely to generate value without investment in in RSA or KSR when the resources are characterized by a low level of interdependence.

As partners attempt to generate rents from complementary resources, they first must consider the nature of interdependence or degree of coordination required to realize gains form the complementary resources. Which type of interdependences are these?

Answer 23

• Pooled interdependence: each partner brings a self-contained set of resources tot her relationship where gains can be achieved by linking self-contained modules.
• Sequential interdependence: requires higher levels of organizational coordination as the output of one partner is the input tot he other.
• Reciprocal interdependence: requires complex and overlapping division of labor that requires continuing mutual adjustments that require each partner to link specific activities with other partners closely and regularly.

Question 24

When resource interdependence increases, what happens to the optimal governance structure?

Answer 24

Increased resource interdependence –> increased coordination costs –> optimal governance structure need to be more hierarchical.

Thus, the greater the resource interdependence between partners, the greater the appropriation concerns and the greater the coordination costs.

Question 25

The first step in forming an alliance is for potential alliance partners to…

Answer 25

• assess whether a partner has complementary resources
• assess the nature of interdependence between its resources and those complementary resources.

Question 26

There are two primary factors internal tot he alliance relationship that lead to the downward inflection in value creation. Which are those?

Answer 26

1. Diminished complementary resources between partners due to resource convergence or resource divergence.
2. Increased relational inertia which neagitvley influences alliance value creation activities.

Question 27

There are two primary factors that are external to the relationship that can lead to a downward inflection in value creation. Which are those?

Answer 27

1. Replication or replacement of value-creation resources by competitors.
2. Environmental dynamism that result sin obsolescence of the value-creation resources in the alliance.

Question 28

Although there’s potential for synergies due to complementarities between partners ‘ resource combinations, there’s also a potential for partners’ resource to:

Answer 28

• Converge: become redundant (likely to happen at amore rapid rate when the complementary resources of partners are easily acquired and cannot be effectively protected.
• Diverge: through changes in resource allocation, divestiture, or strategic direction.

Question 29

Relational view: informal governance lowers contracting, monitoring, adaptation and recontracting costs and it may also provide superior incentives for value creation whereas formal governance is likely to destroy value as it undermines trust and can lead to more opportunistic behavior.

Dynamic perspective: development of informal safeguards (trust) in an alliance requires time and social interaction so partners in a new relationship ay rely on formal safeguards such as contracts and gradually rely on informal governance.

Answer 29

True!

Question 30

What is relational inertia?

Answer 30

When goodwill trust and embeddedness lead to persistence in underperforming alliances (e.g. excessive rust, blind faith, escalating commitments etc.).

Relational inertia may also reduce an alliance’s adaptability to changing conditions and can result in rigidity over time as partners with a history of repeated ties may be less likely to search for more optimal solutions. –> Thus, informal mechanisms can sometimes prove to be a liability!

Question 31

Value partnership resources are subject to competitive imitation. What does that entail?

Answer 31

If a firm obtains a competitive advantage through a partnerships, rivals want to form similar partnerships involving similar complementary resources.

Question 32

Dynamic view for value capture.
What does resource dependence theory entail?

Answer 32

Partners that bring the more critical or scarce resources to the relationship will have more bargaining power and are able to appropriate a higher % of rents.

Question 33

A firm’s bargaining power and ability to appropriate value in an alliance can increase over time in 4 ways:

Answer 33

1. Replication or replacement of the partner’s complementary resources leading to greater bargaining power.
2. Development of additional VRIN resources that are synergistic with the alliance leading to greater bargaining power.
3. Asymmetric (lower) investment in relation-specific assets leading to less relative dependency on the partner and greater bargaining power.
4. Preventing imitation of its VRIN resources by competitors (more effectively than its partner) thereby leading to greater bargaining power.

Question 34

There are three types of asset specificity. What are those?

Answer 34

1. Site specificity: locating facilities nearby
2. Physical asset specificity: customized equipment or processes
3. Human asset specificity: personnel who develop knowledge that’s primarily valuable in the partnership relationships.

The degree to which partners make asymmetrical investments in relation-specific assets will influence bargaining power and value capture in alliances.

Question 35

One of the conclusions:
- Interdependence between complementary resources of partners is the critical factor determining the patterns of alliance value creation.
- Viewed dynamically, many relational view mechanisms that are often argued to lead to effective value creation (e.g. repeated ties, trust, co-specialized assets) may over time actually trigger diminished alliance performance.
- Tensions between value creation and appropriation: competitive forces pose a challenge as partners seek to approraite the benefits from cooperation.
- Investment in RSA become a double-edged sword over time: higher RSA investment potentially drive higher joint value but can result in lock-in and asymmetric distribution of relational rents.

Answer 35

True!

Question 36

Current theories provide two main explanations for firm existence, firm boundaries, and interfirm linkages. Which are those?

Answer 36

1. Transaction-cost theory: transaction costs relate to establishing and governing exchange relations between firms. This theory recommends choosing the mode of organization that minimizes the sumo f fixed and continuous transaction cost.
2. Resource-based theory: explains firms as bundles of (in)tangible resources that comprise all the firm’s assets and capabilities and are considered as the source of a firm’s strength and advantage, shifts the focus from cost to value considerations. RBV recommends selecting the mode of organization that provides the best opportunity for sharing and transferring resources.

Question 37

Acquisitions and alliances. Context dependent framework. What are the rational factors determining the selection of the most appropriate external growth strategy?

Answer 37

• Environmental characteristics: external constraints. Firms look for strategies of external growth if internal growth is limited by high barriers. Barriers to internal growth can be:
  > Barrier of market entry (e.g. legal constraints, consumer loyalty, access to distribution)
  > Amount of time required
  > Lack of know-how in the firm
• Transactional characteristics: characteristics of the transaction or the firms’ relationship form a central issue:
  > Specificity of transaction related investments: when specificity is high, acquisitions appear more appropriate.
  > Behavioral uncertainty: results from opportunism risk and moral hazards and requires establishment of expensive safeguards and control. Unlimited control by an acquisitions brings an increase in efficiency.
  > The greater the persistence of economic synergies, the more acquisition is worth the effort.
  > Appropriability regime: determines the ability of the focal firm to protect its core capabilities and resources from unwanted appropriation by a partner. In an alliance, it’s easier to protect competitive advantages.
• Company characteristics:
  > Focal firm’s resource endowment has an essential influence on all types of inter-organizational relationships -> alliances are seen as possibilities for quick, inexpensive, and resource-protective external growth.
  > Absorptive capacity = firm’s capability to learn and adapt. Alliances can be seen as “learning races”.
  > Social capital = sum of firm’s personal and organizational relationships with its environment and its position in industry -related and regional network -> firms with high social capital tend to use alliances more frequently than acquisitions.

Question 38

Both strategies for external growth (acquisition or alliance) can successfully provide access to external resources and enable the utilization of synergies. The superiority of one or the other depends on their relative transaction costs and is largely determined by the following factors:

Answer 38

• Characteristics of the environment
• Characteristics of the transaction / relationship
• Characteristics of the focal firm (e.g. financial strength, learning capacity)
• Amount of transaction-specific investment
• Uncertainty about partner behavior (danger of opportunism)

Question 39

In environments with high environmental uncertainty and knowledge dispersion, which form of external growth provides more advantages?

Answer 39

Alliances, because they provide greater strategic flexibility.

Question 40

In environments with less strategic uncertainty and a lower need for strategic flexibility, and when the transaction aims to make the most efficient utilization of sustaining economies of scale and scope, which external growth form provides more advantages?

Answer 40

Acquisitions

Question 41

• The higher the need for control, because of large specific investments and high behavioral uncertainty, the more favorably acquisition compares to collaboration.

Answer 41

True!

Question 42

What are 3 modes of inorganic growth?

Answer 42

• Non-equity-alliances: typically rely on contracts but they constitute alliance if the contract alone is insufficient and a close working relationship is also needed.
• Equity alliances: can serve as an important supplement to contracts in alliances. It involves one party taking an equity ownership in the other.
• Outright acquisition: if a party’s stake is larger than 50%, then it has gained control over it. A contract may no longer be necessary

Question 43

What are strategic relationships?

Answer 43

Relationships between firms that cannot be managed by a contract alone

Question 44

What are benefits of increasing ownership in strategic relationships?

Answer 44

1. Exclusivity: Rivals are unlikely to consider creating relationships with a focal firm’s partner if you have equity in them.
2. Cooperation: equity ownership aligns the incentives and interests of the two partners. Complete ownership through acquisition provides the greatest level of interest alignment and ability to monitor and control behavior. This is most important when the synergies require significant modification of resources (i.e. consolidation and customization).
3. Coordination: Greater equity ownership gives ta firm greater authority to implement more elaborate coordination mechanisms and stronger organizational linkages. Increasing levels of equity ownership generate greater benefits from the control of governance costs arising from conflicting incentives and difficulties of coordination.

Question 45

What are costs of increasing equity in strategic relationships?

Answer 45

1. Lowered motivation: when firm A takes an equity stake in firm B, 2 mechanisms weaken motivation for individuals in firm B:
   > Give up certain portion of their rights to future gains
   > Giving up autonomy
2. Uncertainty and commitment: by taking a minority equity position in the partner, a firm creates the option to acquire it later. This option becomes more valuable as uncertainty about the value of the partner increases, because uncertainty means that both the upside and the downside increase.
3. Cost of control: What kid of premium over current valuation will we have to pay in order to induce the partner to cede control? Acquisition or control premium, licensing or francising fees.
4. Synergy independent cost of integration: Costs of disentangling the wanted form the unwanted assets and disposing of the later are costs of restructuring. Further, larger and older firm swill require greater integration efforts to convert their systems and processes to be compatible with the acquirer –> synergy independent cost of integration.

Question 46

What are the three steps for conducting an analysis for the optimal governance mode?

Answer 46

1. Do a synergy test: whatever mode of diversification, synergies with the existing business are necessary unless sone can be assured of bargains. Use the 4Cs approach, if synergy test is passed move to the next step.
2. Identify the resource & capability gaps int he value chains of the target business: using the value chain of the target business, identify which of your existing resources and capabilities has excess capacity that can be repurposed. Whatever is left represents the gaps in the value chains you’ll need to fill through (in)organic growth.
3. Select inorganic growth modes: generate a set of possible candidate firms that have the necessary capabilities you identified in the gap analysis (step 2). For each candidate firm, the question you have to ask is about the optimal level of equity ownership int his firm that would get you the most value from entry for each mode of entry.

Question 47

There are several stages in the process of setting up an alliance involving several people (stakeholders) from within and outside the partners firms. What is this five-step process?

Answer 47

1. Partner selection: much of strategic thinking on diversification must be completed before and overlaps partly with step 1 of the alliance process (partner selection).
2. Due diligence in an alliance process: a period in which the partners may exchange more information with each other to confirm that the partnership is based on valid assumptions.
3. Valuation & negotiation: structuring of the alliance and how to split the gains between partners.
4. Implementation: achieving the desired level of integration of activities across partners in order to extract synergies.
5. Evaluate/exit: a periodic review of whether the alliance is meeting its objectives and may lead to decisions to terminate the alliance.

Question 48

Because unity of interests cannot be presumed and the relationship itself is temporary, there are several problems related to synergy valuation and distribution between partners. Which are those?

Answer 48

1. Managing one-sided synergies: synergies between businesses may be one-sided when one business benefits but not the other.
2. Ongoing competition between alliance partners: alliances between competitors are common.
3. Learning races: alliance partners sometimes have hidden agendas, each side may have an incentive to copy the capabilities of the other through the alliance. This is more relevant for synergies involving dissimilar resources (connection & customization) than those involving similar resources (consolidation & combination).

Question 49

Assessing the robustness or fragility of collaboration in an alliance can be done with a simple analytical framework that helps you understand whether collaboration by each side may be expected to raise in a robust manner. These leads to four scenario’s, which ones?

Answer 49

1. Bliss: there is no incentive to free-ride and you’re not penalized is you unilaterally collaborate. You always collaborate regardless of what the other does.
2. Prisoner’s dilemma: If the other collaborates, it’s optimal for yo not to collaborate (gains form free-riding) but if the other doesn’t collaborate, you prefer no collaboration (costs for unilateral collaboration).
3. Pure coordination problem: Your believe about the other influences whether you will collaborate. There ‘s no incentive to free-ride if the other collaborates (cost of free-riding) but if you don’t know that the other will collaborate, you’re also worried about the costs of unilateral collaboration should the other not collaborate. Int his pure coordination game, the danger comes from fear and not greed.
4. Pure free-riding problem: Collaboration is only optimal for some beliefs. Not fear, but greed is the main obstacle to joint collaboration. You would collaborate if the other doesn’t (benefits of unilateral collaboration) but if the other collaborates you’re tempted not to collaborate. If greedy, you will take the gains from free-riding at the expense of the other.

Question 50

What are integration costs?

Answer 50

The costs of making the organizational changes across the partners to integrate activities and extract synergies.

Question 51

An alliance must have solutions to five basic problems of organizing. Which are those problems?

Answer 51

1. Task division: what needs to be done? Goals and scope of the alliance and what its value chain will look like.
2. Task allocation: who does what? Division of the roles and responsibilities among the partners.
3. Value sharing: who gets what? How the value created by the two partners will be shared between them.
4. Interface: who talks to whom? channels of communication and structures of coordination between the alliance partners.
5. Dispute resolution: who is the tie-breaker? When disputes arise, who has the final say on which issues?

Question 52

Organizational structure decisions constis of two sequantial choices:

Answer 52

1. About grouping into organizational units
2. Abou l inking activities across groupings

Given the temporary nature of alliances, grouping decisions are unlikely to be involved in the integration of activities; rather the focus will be on linking mechanisms.

Question 53

Key integration choice in an alliance is about linking units, or how incentives, information channels and work practices are changed across units from the two partner firms to either keep them operating autonomously or collaboratively.

Which linking choices need to be made?

Answer 53

• Incentives
  0: Continue to reward on the individual unit’s performance
  3: Reward on combined (alliance) performance
• Information channels
  0: No information flows between partner units
  3: Extensive information flows between units across partners
• Standardization of work procedures
  0: Let each unit continue to use own processes and procedures
  3: Switch to common processes and procedures

Question 54

The key principle behind the framework for integration planning in alliances is that, in every alliance, each pair or organizational units fromt he partner firms could have a different optimal level of integration between them, based on the synergy operators that link them.

Answer 54

True!

Question 55

The choice between organic growth and inorganic growth has two main considerations which relate to benefits and costs:

Answer 55

1. Synergy potential: since resources are unique, synergies crated under organic growth are slightly different than those to be expected under inorganic growth. Organic development leads to substantial benefits as the organization gets to know the resources better as they develop them, and can also align them to other resources. Inorganic ways of growth may lead an organization to access resources that are far superior.
2. Cost and time: Alliance or acquisition of an organization may be viable option of the cost of getting access to resources to fill a resource gap along those lines are lower than internal development. On average, acquisitions are more costly tha internal development but may still be a less costly option if the resource package needed is substantial.

Question 56

Since filling a resource is about bringing together resources, it would be good practice to assess the synergy potential of both growth options by looking at the resources, assuming no:

Answer 56

• Cost of control: in acquisitions it could be the premium firms pay for acquiring the target, in alliances it could be the control mechanisms needed to coordinate activity between partners to ensure the partner doesn’t behave opportunistically.
• Synergy independent costs

Question 57

Value creation in alliances and acquisitions happens along value creation logistics. Which three types of value creation logics are there?

Answer 57

• Cooption: two or more organizations contribute/combine similar resources. They can share costs and risks, create economies of scale, gain access to a foreign market, lobby collectively, gains influence over stakeholders, neutralize or block competitors etc. –> Pooling arrangement.
• Cospecialization: two or more organizations combine dissimilar resources. To make such combined resources available, they most often need to be tailored. –> Trading arrangement.
• Internalization: one or more organizations gain resources (often knowledge and expertise) from another. –> Learning arrangement

These 3 value creation logics often co-exist.

Question 58

Organizations can do transactions in various ways which can be put on a continuum. The market (left) is the most basic way of performing n transaction: firms needing access to a resource look on the market whether others have it for sale. Acquisitions (right): firms acquire others have have the required resource’s. They use hierarchical mechanisms to govern transactions.

Which types of governance in between?

Answer 58

• Licensing = effectively a long-term market transaction where a licensee agrees to pay a license fee to a licensor for a longer period of time. E.g. firms license out technology.
• Franchising: a franchisee makes use of resources provided by a franchisor in return for a free (e.g. McDonalds)
• Non-equity alliance = collaborations based on a contract or sometimes kept fully informal = partners bring resources into the collaboration
• Equity alliance = more extensive as they require partners to take a stake in the other’s equity (specific form is joint venture)
• Acquisition = also meant to bring resources of various organizations together but at least 1 firm loses legal and economic independence as it becomes part of the other.

Question 59

Non-equity alliances are clearly driven by hybrid forms of governance. Which two forms?

Answer 59

• Informal: fully based on trust.
• Contractual: collaboration terms are put down in a contract.

Question 60

Equity alliances involve partners taking a minority stake in the equity of the other and are more formalized than contracts. Which two main forms?

Answer 60

• Minority equity: Typically both firms take a stake in the equity of the other. We often find these in cases where firms bring in a substantial amount of knowledge/expertise to develop a new technology, product, or when substantial investments need to be made. Equity stakes help firms protect themselves sin the alliance as it would be more difficult for partners to step out and terminate the alliance.
• Joint venture: more extensive form of equity alliance. It’s a separate organization created by the partners where alliance activity takes place. Firms take not only a stake in the joint venture itself but also in the partner.

Question 61

The relative favorability of alliances and acquisitions hinges on 9 determinants under 3 rubrics/categories. What are these?

Answer 61

• Environment
  > Strategic uncertainty
  > Dispersion of knowledge
• Transaction (cost)
  > Specificity of transaction-related investments
  > Behavioral uncertainty
  > Persistence of synergies
  > Appropriability regime
• Company value
  > Resource endowment (esp. financial resources)
  > Absorptive capacity
  > Institutional capital

Question 62

What are the alliance / M&A deciders

Answer 62

• Environment: uncertainty, urgency, dispersion of knowledge, competition for resources
• Efficiency: specific investments, nature of resources, trust, behavioral uncertainty, control premium, coordination need, appropriability regime, uncertainty about asset quality.
• Value creation: resource endowment, need for knowledge sharing, absorptive capacity, institutional & social capital, type of synergies, persistence of synergies.

Use this framework (low vs high)

Question 63

The relational view consists of four important factors yielding relational rent. Which are those?

Answer 63

• Complementary resources
• Relation-specific assets
• Effective governance
• Knowledge-sharing routines

Question 64

Opportunism results form information asymmetries. Which are those?

Answer 64

• Adverse selection (ex ante): misrepresentation of the resources that will be brought into the alliance before the alliance contract is signed.
• Moral hazard (ex post): behaving inconsistently with the goals of the alliance after the alliance contract is signed.
• Holdup (ex post): specific form of moral hazard, occurring when one of the partners doesn’t make the relation-specific investments agreed upon after the alliance contract is signed.

Question 65

To control partner activity, alliance partners make use of two types of governance and/or control mechanisms. Which are those?

Answer 65

• Formal mechanisms: e.g. contracts, output measurement, behavioral guidance, business plans
• Relational mechanisms: e.g. teams, committees, task forces, project groups, job rotation, cooperation managers.

Question 66

The decision to ally or to acquire is dependent on a variety of elements relating to:

Answer 66

• Environment
• Cost efficiency associated with transaction resources (transaction costs)
• Capacity of organization and resources to create value (rent-earning capacity)

The importance of these elements varies per case and is strongly influenced by the nature and developmental stage of firms, technologies, products etc.
However, when deciding between alliances and M&As, it’s good practice to first consider the environment and its characteristics.

Question 67

Even though relations-specific investments function as safeguards, it’s often necessary to install additional safeguards, like…

Answer 67

• Governance structure
• Control mechanisms

Which:
- Contribute to protecting resources
- Coordinate and contribute to integration of resources and thus synergies

Question 68

Conclusion (safeguards). Governance, control mechanisms, and trust are strongly interrelated in the creation of self-enforcing safeguards that supplement relation-specific investments and determine the potential for value creation. In the context of acquisitions: basically the same mechanism are at work but the level of integration and the integration process determine the synergies.

Answer 68

True!