121025 - mim ibs c session 4 partnerships
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Session 4:
INTERNATIONAL PARTNERSHIPS:
ALLIANCES AND ACQUISITIONS
International Business Strategy (I.B.S.) - MSc. In International Management
Class C
25th October, 2012
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1
Agenda
n Introductionn When do Ally and when do Acquire? (Dyer et al., 2004)n An Integrative Model on Governance Modes (Villalonga and McGahan,
2005)
n Interfirm Resource Combination Perspective (Wang and Zajac, 2007)n Other relevant contributionsn An International Perspective on Governance Modesn TATA-STARBUCKS case
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Introduction
WHAT ARE GOVERNANCE MODES?
WHICH TYPES OF GOVERNANCE MODE
DO YOU KNOW?
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Introduction
WHAT IS AN ALLIANCE?
WHICH TYPES OF ALLIANCE DO YOU
KNOW?
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Introduction
A collaborative agreement (or several
agreements) between two or more firms, which
contribute resources to a common endeavour of
potentially important competitive consequences,
while maintaining their individuality (Gulati,
1995)
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Introduction
WHAT IS AN ACQUISITIONS?
WHICH TYPES OF ACQUISITION DO YOU
KNOW?
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Introduction
WHAT IS THE DIFFERENCE BETWEEN AN
ACQUISITION AND A MERGER?
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Introduction
n Since the origins of Strategic Management (Penrose, 1959), Growth hasbeen the most important firms goal.
n Growth can be classified as Internal (Organic) and External.
n While Greenfields are mode of Organic Growth, ALLIANCES ANDACQUISITIONS are modes of External Growth.
As external modes, Acquisitions, Alliances, and
Divestitures are strategic alternatives along a continuum
of governance modes (Williamson, 1975, 1991;
Hennart, 1993)
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Introduction
HOW WOULD SUCH CONTINUUM LOOK
LIKE (DIMENSIONS)?
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Introduction
Acquisition
(full)Merger JV
Equity
AllianceNon-equity
AllianceDivesture
Control
+ -
Acquisition
(Majority)
Acquisition
(Minority)
+
Flexibility
+-
Integration
+ -+
Acquisition
(full)Merger JV
Equity
AllianceNon-equity
AllianceDivesture
Control
+ -
Acquisition
(Majority)
Acquisition
(Minority)
+
Flexibility
+-
Integration
+ -+
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Introduction
HOW DO WE MEASURE M&As AND
ALLIANCES PERFORMANCE?
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Introduction
From Zollo and Meier (2008), What it an M&A Performance?,Academy of Management
Perspective
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Introduction
n What are we missing?
Most companies simply
don't compare the two
strategies before picking
one!!!
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Agenda
n Introductionn When do Ally and when do Acquire? (Dyer et al., 2004)n An Integrative Model on Governance Modes (Villalonga and McGahan,
2005)
n Interfirm Resource Combination Perspective (Wang and Zajac, 2007)n Other relevant contributionsn An International Perspective on Governance Modesn TATA-STARBUCKS case
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Dyer et al. (2004)
n Dyer et al. (2004) propose a model showing that executives must analyze3 sets of factors before deciding on a collaboration option:
1. Resources and Synergies they desire.
2. Marketplace they compete in.
3. Competencies at Collaborating.
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Dyer et al. (2004)
n Types of Synergies: companies create 3 kinds of synergies by combiningand customizing resources differently. Those resource combinations, or
interdependencies, require different levels of coordination between firms
and result in different forms of collaboration.
o Modular: when they manage resources independently and pool onlythe results for greater profit (example: Airline and Hotel chain)
o Sequential: when one company completes its tasks and passes on theresults to a partner to do its bit (example: Abgenix and AstraZeneca)
o Reciprocal: by working closely together and executing tasks throughan iterative knowledge-sharing process (Exxon and Mobil)
1. RESOURCES AND SYNERGIES
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Dyer et al. (2004)
n Types of Synergies:o Modularo Sequentialo Reciprocal
n Governance Choice:o Non equity-based Allianceo Equity-based Allianceo Acquisition
1. RESOURCES AND SYNERGIES
MATCH!
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Dyer et al. (2004)
n Nature of resources: companies should check if they must create thesynergies they desire by combining hard resources orsoft resources
o Hard resources: easy to value and synergies can be created quickly(example: manufacturing plants)
o Soft resources: difficult to value and to appropriate (example:people)
n Companies have to look at the relative value of soft resources to hardresources (level)
1. RESOURCES AND SYNERGIES
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Dyer et al. (2004)
n Level of relative value of soft to hard resources:o Lowo Low/Mediumo High
n Governance Choice:o Non equity-based Allianceo Equity-based Allianceo Acquisition
1. RESOURCES AND SYNERGIES
MATCH!
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Dyer et al. (2004)
n Extend of redundant resources: companies must estimate the amount ofredundant resources they'll be saddled with if they team up with other
organizations
1. RESOURCES AND SYNERGIES
n Level of redundant resources:o Lowo Mediumo High
n Governance Choice:o Non equity-based Allianceo Equity-based Allianceo Acquisition
MATCH!
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Dyer et al. (2004)
n Degrees of Uncertainty: technological and market uncertainty2. MARKET FACTORS
n Degree of uncertainty:o Lowo Low/Mediumo High
n Governance Choice:o Non equity-based Allianceo Equity-based Allianceo Acquisition
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MATCH!
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Dyer et al. (2004)
n Forces of competition for resources2. MARKET FACTORS
n Degree of competition:o Lowo Mediumo High
n Governance Choice:o Non equity-based Allianceo Equity-based Allianceo Acquisition
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MATCH!
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Dyer et al. (2004)
n A company's experience in managing acquisitions or alliances is boundto influence its choices.
n Some businesses have developed abilities to manage acquisitions oralliances over the years and regard them as core competencies.
n They've created special teams to act as repositories of knowledge andinstitutionalized processes to identify targets, bid or negotiate with them,
handle due diligence, and tackle issues that arise after a deal is made
(examples: Cisco and J&J).
n They've developed formal and informal training programs that sharpenmanagers' deal-related skills.
n However, specialization poses a problem.
3. COLLABORATION CAPABILITIES
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Dyer et al. (2004)
FRAMEWORK
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Agenda
n Introductionn When do Ally and when do Acquire? (Dyer et al., 2004)n An Integrative Model on Governance Modes (Villalonga and
McGahan, 2005)
n Interfirm Resource Combination Perspective (Wang and Zajac, 2007)n Other relevant contributionsn An International Perspective on Governance Modesn TATA-STARBUCKS case
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Villalonga and McGahan (2005)
n The paper examines the acquisitions, alliances, and divestitures of agroup of large firms during the 1990s to evaluate how these firms chose to
conduct transactions that expanded and contracted their boundaries.
n Acquisitions, alliances, and divestitures are strategic alternatives along acontinuum of governance modes.
n A variety of theories have explained boundaries choices: R.B.V., T.C.E.,Internalization Theory, Agency theory, Asymmetric Information, Asset
Indivisibilities, Organizational Learning, and Social Embeddedness
(Integrative Model).
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Villalonga and McGahan (2005)
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Villalonga and McGahan (2005)
n Intangible Resources (technological and marketing resources)o R.B.V. : excess of resourceso Internalization theory: appropriation risk
Focal Firm Attributes
n Ownership Structureo Agency Theory : max assets under managers controlo Incentive alignment through insider ownership, blockholder ownership
n Acquisition, Alliance and Divesture Experienceo Organizational Learning Theory: capability development through repeated experience
n Prior Diversification (technological and marketing resources)o Agency Theory and Organizational Learning theories: inverted U-shape between the
choice of an acquisition over alliance over divesture and prior diversification
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Villalonga and McGahan (2005)
n Industry Relatednesso R.B.V. : generation of economies of scale
o T.C.E.: more information on the target/partner firms assets value
Attributes of relationship between the focal firm and the target/partner firm
n Size balanceo Digestibility Theory: (dis-)economies of scale and scope
n Prior Allianceo Social Embeddedness Theory: trust in repeated dyad partnershipo Real Option Theory: prior partnership create valuable options
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Villalonga and McGahan (2005)
n Relatedness in SIC codes between the firm and the transactiono R.B.V. : generation of economies of scale
o T.C.E.: more information on the transaction
Attributes of the transaction and of the firm
n Governance specializationo Organizational Learning and Spillover Theory: symmetrical or not experience
spillovers
n Recency of experienceo Elapsed time since the last same type of partnership
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Villalonga and McGahan (2005)
Target/Partner Attributes
n Intangible Resources (technological and marketing resources)o R.B.V. : excess of resources
Transaction Attributes
n Market transaction costs and internal organization costso Uncertainty in the relevant market
o Degree of asset specificityo Relationship between uncertainty and asset specificity
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Villalonga and McGahan (2005)
Results
n Most of the predictions coming from different theories have beensupported.
n There are 2 main results against the predictions from a learningperspective:
o The lessons learned by firms in prior alliances may be applicable todivestitures but not to acquisitions, which is consistent with Zollo
and Reuers (2001) finding of a negative spillover effect of alliance
experience on acquisition performance for low experience levels.
o The recency of the focal firms experience is less influential foracquisitions than it is for alliances or divestitures.
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Agenda
n Introductionn When do Ally and when do Acquire? (Dyer et al., 2004)n An Integrative Model on Governance Modes (Villalonga and McGahan,
2005)
n Interfirm Resource Combination Perspective (Wang and Zajac,2007)
n Other relevant contributionsn An International Perspective on Governance Modesn TATA-STARBUCKS case
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Wang and Zajac (2007)
n The paper moves the level of analysis from why a focal firm may choosean alliance vs. an acquisition to the factors that motivate two specific
firms (dyad) to choose an alliance versus an acquisition.
n The assumption is that two firms will first identify each other aspotential partners/targets with whom to combine resources, and then
decide whether the combination will be achieved with an alliance or an
acquisition (based on the characteristics of both firms).
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Wang and Zajac (2007)
n They argue below that dyadic characteristics, such as two firms:
o Resource Similarity and Complementarity
o Combined relational capabilities
o Partner-specific knowledge
n The characteristics affect the relative costbenefit relationship betweenusing alliances and acquisitions
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Wang and Zajac (2007)
Results 1/2
n Findings suggest that, as predicted, higher levels of resource similarityof two firms is more likely to trigger firms to choose acquisition rather
than alliance.
n High levels of resource complementarity of two firms are more likely totrigger firms to choose alliance rather than acquisition.
n We found that combined alliance capabilities increase not only thelikelihood of an alliance formation but also the likelihood of an
acquisition between two firms (stronger effect for alliance).
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Wang and Zajac (2007)
Results 2/2
n Results show that the combined acquisition capabilities of two firms(specifically acquiring capabilities) developed from their prior relevant
experience increase the likelihood that two firms will have an
acquisition between them, BUT it (specifically target capabilities) may
discourage these same two firms to form an alliance.
n Partner-specific knowledge of two firms in alliances developed fromprior dyadic alliance experience increases the likelihood of both an
alliance and an acquisition between these firms.
n HOWEVER, partner-specific knowledge of two firms in acquisitionsdeveloped from prior dyadic acquisition experience only increases the
likelihood of an acquisition between them.
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Agenda
n Introductionn When do Ally and when do Acquire? (Dyer et al., 2004)n An Integrative Model on Governance Modes (Villalonga and McGahan,
2005)
n Interfirm Resource Combination Perspective (Wang and Zajac, 2007)n Other relevant contributionsn An International Perspective on Governance Modesn TATA-STARBUCKS case
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Other relevant contributions
n Moving to an higher organizational levels, there are importantcontributions explain the acquisitions vs. alliance choice from:
n Network perspective (Yang et al., 2009): tension between externalresource opportunities and internal resource endowments (status)
n Industry determinants (Yin and Shanley, 2008): industry demandson firms to make significant commitment, environmental pressures
for flexibility, industry concentration and institutional conditions
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Agenda
n Introductionn When do Ally and when do Acquire? (Dyer et al., 2004)n An Integrative Model on Governance Modes (Villalonga and McGahan,
2005)
n Interfirm Resource Combination Perspective (Wang and Zajac, 2007)n Other relevant contributionsn An International Perspective on Governance Modesn TATA-STARBUCKS case
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Paper Discussion
NIELSEN (2007)
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Paper Discussion
Nadolska, A. and Barkema, H.G.
(2007).Learning to internationalize:
the pace and success of foreign
acquisitions
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Nadolska and Barkema (2007)
n It is important for internationalizing companies to learn to increase thelikelihood of success abroad.
n However, this argument has received mixed support in the domain ofacquisitions:
o More acquisition experience - - - - > more success
o but it might depend on the similarity among targets over time
Therefore.SO WHAT?
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Nadolska and Barkema (2007)
n The paper explores 3 sources of learning for internationalizingcompanies:
1. Experience with internationalacquisitions
2. Experience with domesticacquisitions
3. Experience with international joint ventures
n The paper is anchored in the organizational learning theory (Levitt andMarch, 1988) ---- > routines are based on the past more than anticipation
of the future, and are path dependent
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Nadolska and Barkema (2007)
n Companies may initially apply unsuitable but familiar routines fromexisting repertoires that they have developed from previous acquisitions,
or international joint ventures.
n However, after multiple errors (i.e., unsuccessful, divested acquisitions),companies will reconsider their routines, retain what is productive, and
weave new routines into their existing repertoires to create new, more
successful repertoires for international acquisitions
U-Shape relationship between
Acquisitive experience and
Performance
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Nadolska and Barkema (2007)
n Structure of the hypotheses:
o They considerthe types of acquisition experience: Domestic acq. International acq, International JV
oFor each type of experience they test:
Pace of acquisitions (# of acquisitions per year) Rate ofsuccess of foreign acquisitions (survival, so no divesture)
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Nadolska and Barkema (2007)
n International Acquisition Experience:
o Experience increases the types of knowledge and complexity ofroutines generated in previous foreign acquisitions, reducing the
ambiguity associated to location-specific factors (operational aspect
+ international aspect).
o Development of context-specific routines generates an initial dropin performance
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Nadolska and Barkema (2007)
n Hypothesis 1a: The number of international acquisitions peryear increases as a function of experience with international
acquisitions.
n Hypothesis 1b: There is a U-shaped relationship betweenexperience with foreign acquisitions and the success of
foreign acquisitions.
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Nadolska and Barkema (2007)
n Data and Method:o 25 Dutch companies for 33 years (from 1966)o D.V 1. : # of foreign acquisitions made by each company in each to D.V. 2 : survival (no divesture)o I.V. 1 : cumulative # of international acquisitions done since 1966o I.V. 2 : cumulative # of domestic acquisitions done since 1966o I.V. 3 : cumulative # of international JV done since 1966o Controls: .o Model of estimation: negative binomial regression
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Nadolska and Barkema (2007)
n Results:o Experience in Domestic and International Acquisitions increase the
number of international acquisitions; Experience in International JV
not.
o There is an U-shape relationship between acquisition experience(domestic, international and marginally JV) and performance (survival)
n Conclusion:o Acquisition Experience (Domestic and International) matters in
increasing the chance of doing international expansion through
acquisitions, and it predicts a significant U-Shape relationship with Perf.
o International JV experience does not matter much
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Agenda
n Introductionn When do Ally and when do Acquire? (Dyer et al., 2004)n An Integrative Model on Governance Modes (Villalonga and McGahan,
2005)
n Interfirm Resource Combination Perspective (Wang and Zajac, 2007)n Other relevant contributionsn An International Perspective on Governance Modesn TATA-STARBUCKS case
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Case Discussion
TATA-STARBUCKS CASE
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Agenda
APPENDIX
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An International Perspective on Governance Modes
n Cultural Fit (Chatterjee and Lubatkin, 1992):
n Cultural Fit is as important as strategic fit in the case of internationalpartnership choices.
n Cultural Fit plays an important role in the integration process.
n Main effect: investors appear to consider the cultural fit whenvaluing a merger, BUT the additional information of the tolerance
has a little effect on the stocks price of the acquirer.
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An International Perspective on Governance Modes
n Conform to Host Government Policy (Glaister and Buckley, 1996)
n Many governments in developing countries insist that access to thelocal market can occur only if the foreign company works in co-
operation with a local partner (Beamish, 1988)
n Policies might have implications on the industry base. In otherwords, in some industries partnerships might be more unlikely given
the critical nature of the industry for the government (defense,
telecommunication, resources, financial services)
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An International Perspective on Governance Modes
n Barkema and Vermeulen (1998) study how multinational diversity andmultiproduct diversity influence the decision to expand abroad through
start-ups or acquisitions.
n They propose that operating in diverse national markets (geographicaldiversity), product markets (technological diversity), or both enhances a
firm's technological capabilities. Moreover, firms operating in diverse
markets can learn something from each of them.
n HOWEVER, learning from market diversity is subject to organizationalconstraints (inertia).
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An International Perspective on Governance Modes
n In particular:
o Firms with strong technological capabilities are less inclined toundertake acquisitions than start-ups (few to offer and inertia).
o Multinational diversity increases the propensity of a firm to set up anew venture in a foreign country rather than to acquire a company.
o The relationship between a firm's product diversity and itspropensity to expand through start-ups rather than acquisitions is
curvilinear (an inverted U-shape), since the cognitive limitations.
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An International Perspective on Governance Modes
n In their studyBresman et al. (1999) aims to:
n identify the factors that facilitate knowledge transfer in cases ofinternational acquisitions.
n Identify the patterns of international knowledge transfer fromacquirer company to acquired company during the post acquisition
integration process
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An International Perspective on Governance Modes
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An International Perspective on Governance Modes
n Results of their study suggest that:
o Factors facilitating knowledge transfer (i.e. visits) are more appliedwhen knowledge is tacit.
o There is a development cycle of the knowledge transfer during thedifferent phases of integration: from the acquirer to acquired (early
stage) to co-development of knowledge and from acquired to
acquirer (late stage)
o Knowledge moves from articulated (early stage) to tacit (late stage)
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