Lecture 4 - Alliances and Acquisitions Flashcards
What is a strategic alliance?
- Voluntary agreements of cooperation between firms.
What are contractual (non-equity based) alliances?
These are associations between firms that are based on contracts and do not involve the sharing of ownership e.g co marketing, research and development, turnkey projects etc
What are the two types of alliances?
Contractual
Equity
What is an equity based alliance?
Based on the ownership or financial interest between firms.
- They include strategic investment where one partner invests in another and cross shareholding where each partner invests in each other - they include JV
What is an acquisition?
A transfer of the control of operations and management from one firm (target) to another (acquirer)
- one company (generally the larger one) buys another company (generally the smaller one). Facebook acquired Whatsapp at a whopping 22$billio
What is a merger?
This is the combination of operations and management of two firms or more firms to establish a new legal entity e.g the merger between Fiat and Chrysler resulted in the Fiat Chrysler
Which typically dominate mergers or acquisitions?
Aquisitions as the account for about 97% of M&A cases
What are the formal legal and regulatory frameworks that impact alliances and acquisitions?
1) Antitrust concerns
2) Entry mode requirements
Why are antitrust authorities more likely to approve alliances than acquisitions?
- Many firms establish alliances with competitors, cooperation between competitors is usually suspected by some antitrust authorities
- ## As integration is usually not as tight in alliances as acquisitions they are more likely to be accepted
How do formal requirements on market entry modes affect alliances and acquisitions?
- In many countries governments discourage or simply ban acquisitions to establish Wholly owned subsidiaries, allowing some sort of alliance with local firms to be the only energy choice for foreign direct investment
What is meant by value within resources and alliances?
- Alliances must create value
- They can do this by reducing costs, risk and uncertainties
- Real option
What is meant by ‘real option’?
This is an investment in real operations as opposed to financial capital
What are the drawbacks of alliances?
- May be stuck with the wrong partner, firms find it difficult evaluating their potential partners
- Potential for a learning race in which partners aims to outrun each other by learning tricks from the other side as fast as possible
What is meant by rarity within resources and alliances?
- The ability to successful manage interfirm relationships may be rare
- To truly derive benefits from alliances, managers need to foster trust with partners whilst also being on guard.
What is meant by Imitability within resources and alliances?
- One firms resources and capabilities may be copied by partners
What is meant by organisation within resources and alliances?
- Some successful alliance relationships are organised in a way that makes it difficult for others to replicate
- Firms in unsuccessful alliances find it challenging, if not impossible, to effectively organize and manage their interfirm relationships
What makes up the VRIO model?
Value
Rarity
Imitability
Organisation
What is meant by value within resources and acquisitions?
- Overall their performance record is poor for creating value with 70% of acquisitions failing
- They only identifiable group of winners is the share holders due to acquisition premium
- This is the different between the acquisition price and the market value of the target firm
What is meant by rarity within resources and acquisitions?
- For acquisitions to add value, one or all of the firms involved must have rare, unique skills that enhance the overall strategy
What is meant by imitability within resources and acquisitions?
Firms that excel in integration possess hard to imitate capabilities that are advantageous in acquisitions
What is meant by organisation within resources and acquisitions?
- Whether acquisitions add value boils down how merged firms are organised to take advantage of the benefits whilst minimising the costs
What is strategic fit?
This is the extent to which an organisation is matching its resources and capabilities with another
What is organisational fit?
This is the similarity in cultures, systems and structures
Whats involved in stage 2 of alliance formation?
Firm must decide whether to take a contract or an equity approach - Contract includes Co-maketing R&D Turnkey
Equity includes:
- Strategic investment
- Cross shareholding
- Joint ventures
What is opportunism within alliances?
- breaking promises, not sharing resources or facilities as per agreement, bluffing, lying,misleading, misrepresenting, distorting, cheating, stealing, etc.’’ (Das and Rahman 2001, p. 43)
How can firms minimise the threat of opportunism?
1) Walling off critical capabilities
2) Swapping critical capabilities through credible commitments
What is meant by walling off critical capabilities?
- e.g company A and Company B are building jet engines but yet company A are not willing to share its proprietary technology in full with company b
- As long as both sides are willing to live with these deals, their relationship will work
What is meant by swapping critical capabilities through credible commitments?
- This is the exact opposite of walling of critical capabilities
- Both firms share information with each other
What are the stages of alliance dissolution?
Initiation - initiator feels uncomfortable with the alliance
Going public - Party that breaks first has first mover advantage
Uncoupling - May be friendly or hostile
Aftermath - May search for a new partner or go it alone
What are the four factors that may influence alliance performance?
1) Equity
2) Learning and experience
3) Nationality
4) Relationship capabilities
Why is equity importance to how an alliance performs?
- The level of equity may be crucial in how an alliance performs
- Great equity stake may signal that a firm is more committed, which is likely to result in a better performance
Why is nationality important to how an alliance performs?
- Dissimilatires between alliances in regards to their nationality can cause strains on the relationship
What are the three things that drive acquisitions?
1) Synergistic - Add value
2) Hubristic (Over confidence from manager in there capabilities) - destroy value
3) Managerial motives - destroy value
According to the institution based view, what are synergistic motives?
- Respones to formmal institutional constraints and transitions that affect a companies each for synergy
- E.g not a coincidence that the number of cross border acquisitions has risen in last last two decades, the same time trade and investment barriers had gone down
According to the resource based view, what are synergistic motives?
- Leverage superior managerial capabilties
- Enhance market power and scale of economies
What is a synergy?
Synergy is the concept that the combined value and performance of two companies will be greater than the sum of the separate individual part
What does Hubris refer to?
- Overconfidence in ones capabilities
According to the institution based view, what are hubristic motives?
- This is when managers get on the bagwagon and follow the norms
According to the resource based view, what are hubristic motives?
Managers overconfidence in their capabilities
e.g ‘we can manage your assets better than you can’ or ‘we are smarter than the market’
What are managerial motives?
Managers desire for power, prestige and money which may lead to decisions that do not benefit the firm overall in the long run
What are the two problems acquisition failures can be identified in?
1) Pre acquisition
2) Post acquisition
What issues are there in pre-acquisition for all M&As?
- Managers overestimate their ability to create value
- Inadequate pre-acquisition screening which leads to poor strategic fit - without enough homework the fit is not their
What issues are there in pre-acquisition particularly for cross boarder M&As?
- Institutional and cultural distances, lack of familiarity
- Nationalistic concerns against foreign takeovers
What are the issues with post acquisition for all M&As?
- Pay inadequate attention to people issues, which typically results in low morale and high turnover
- Firms often fail to address the concerns of multiple stakeholders including job losses and diminished power
What are the issues with post acquisition for cross border M&As?
- clashing of national cultures, hard time intergrating
What is meant by the Alliances vs acquisitions debate?
- Alliances cost less, allows for greater opportunities to learn from working with each other before engaging in full blown acquisitions
- Acquisitions are typically one off deals and many would have been better if alliances were pursued first
What is meant by Majority joint ventures as control mechanisms vs minority joint ventures as real options
Minority JVs
- Low cost
- Low demand on managerial resources and attention
- They are recommended ‘toehold’ investments , seen as possible stepping stones for future scale ups
Majority JVS
- The implementation of control is often problematic
- Everything must be negotiated or fought over for a 50/50 JV
- In highly uncertain industries and countries, the cost of failure may be tremendous
What is the institution based view on alliances and acquisitions? and resource based view
- Alliances and acquisitions depend on throough understanding and skilful manipulation of the tules of the game
- The resource based view calls for the development of firms specific capabilities to make them work
What are the implications for action?
1) Managers need to understand and master the rules of the game governing A&A around the world
2) When managing alliances pay attention to the ‘soft’ relationship aspects
3) When managing acquisitions don’t not overpay focus on both strategic and organisational fit
What are the DO’s for alliance success
- alliances require continuous nurturing, invest in the relationship
- Managers need to handle conflicts in a controlled and credible fashion
- Look out for warning signs and discuss them
- Address the concerns of mutiple stakeholers and keep the best talent
What are the Donts for alliance success?
- Don’t overpay for targets
How can firms grow purely through market transactions?
- firm must confront its competitive challenges independently
