Joint Ventures, Partnerships, Strategic

Alliances, and Licensing

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Business Alliances as Alternatives to M&As

• Business alliances are vehicles for implementing business strategies

• Business alliances may be informal agreements or highly complex legal structures. Typically short term

• Alternative forms of business alliances (including legal and informal relationships)– Joint ventures – “The Big Dig” in Boston.– Strategic alliances– Equity partnerships– Licensing– Franchising– Network alliances

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Motivations for Forming Alliances• Risk sharing

– Sharing proprietary knowledge (e.g., TiVo, Sematech, and Wintel)

– Management skills and resources (e.g., Dow Chemical/Cordis)

– See web for examples in Pharma, specifically Novartis.

• Gaining access to new markets

– Using another firm’s distribution channels (e.g., Redhook & Bud)

• Globalization

– Gaining access to foreign markets where laws prohibit 100% foreign ownership or where cultural differences are substantial (e.g., China)

• Cost reduction

– Purchaser/supplier relationships (e.g., GM/Delphi, Ford, and Daimler Chrysler online purchasing consortium)

– Joint Manufacturing (e.g., major city newspapers)

• Prelude to acquisition or exit (e.g., TRW/Redi, Bridgestone/Firestone)

• Favorable regulatory treatment (e.g., collaborative research)

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Business Alliance Critical Success Factors

• Clarity of purpose, roles, and responsibilities• Synergy (e.g., economies of scale/scope; access to

new products, distribution channels, and proprietary know-how)

• Risk reduction (e.g., Verizon and Vodafone share network costs to form Verizon Wireless)

• Cooperation (e.g, MCIWorldcom and Telefonica de Espana)– Greatest when partners share similar cultures

• Win-win situation (e.g., TRW REDI, Merck and J&J)• Compatible time frames for partners• Support from the top• Similar financial expectations

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Chinese (International)JV • To Be Successful:

– Clear Objectives– Play to Each Other's Strengths– Head off Culture Clash– Language

• Common Causes of JV Failure – Research indicates that 50 to 70% fail. – Not many CEOs of joint ventures view their venture as "very successful".

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– – – – The most common causes of failure cited by CEOs are:

– • Cultural differences (49%

– • Poor or unclear leadership (49%)

– • Poor integration process (46%)

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Chinese (International)JV

– The most common causes of failure cited by CEOs are:• Cultural differences (49%)

• Poor or unclear leadership (49%)

• Poor integration process (46%)

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Examples

• Starbucks – Barnes & Noble – 1993– Pepsico– United Airlines– Kraft – NAACP

• Apple –Clearwell , Sony, Motorola, Philips A&&T • Disney – HP and McDonalds• TiVo – Amazon• Ford – Sirius• Health Care – Lahey Clinic and Winchester Hospital

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Legal Form Follows Business Strategy

• Business strategy provides direction• If management determines a business alliance is

best way to implement strategy, an appropriate legal form must be selected.

• Legal form affects:– taxes, – limitations on liability, – control, – duration, – ease of transferring ownership, and – ease of raising capital

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Alternative Legal Forms of Business Alliances: Limited Liability Companies

• Limited Liability Companies:– Advantages: Offers limited liability, owners can

be managers without losing limited liability protection, avoids double taxation, allows unlimited number of members (owners), allows corporate shareholders, can own more the 80% of another firm; and offers flexibility in allocating investment, profits, losses

– Disadvantages: Structure lacks continuity, ownership shares illiquid as transfer subject to approval of all members; members must be active participants in the firm

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Alternative Legal Forms of Business Alliances: Other

• Franchise alliances: – Advantages: Allows repeated application of a successful

business model, minimizes start-up expenses; facilitates communication of common brand and marketing strategy.

– Disadvantages: Royalty payments (3-7% of revenue)• Equity partnerships:

– Advantages: Facilitates close working relationship; limits financial risk, potential prelude to merger; may not require financial statement consolidation

– Disadvantages: Limited tactical and strategic control• Written contracts:

– Advantages: Less complex; no separate legal entity established; potential prelude to merger

– Disadvantages: Limited control, may lack close coordination; potential for limited commitment

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Alliance Deal Structuring Issues

• Defining scope (included/excluded products and duration)

• Determining control and management (how are decisions made?:steering or joint management committee, majority/minority, equal division of power, or majority rules framework.

• How are resources to be contributed (form and value) and how is ownership determined?– Tangible contributions (cash or cash commitments

and assets required by the business)– Intangible contributions (services, patents, brand

names, and technology)

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Alliance Deal Structuring Issues Continued

• Governance (protecting stakeholder interests)--board or partnership committee

• Profit/loss and tax benefits allocation and dividend determination

• Dispute resolution and termination (Who owns assets following dissolution?)

• Financing ongoing capital requirements (What happens if additional capital is needed?; Can the alliance borrow? Target debt/equity ratio?)

• Performance criteria (How is performance to plan measured and monitored?)

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Empirical Studies of Business Alliances

• Abnormal returns to business alliance partners average about 2% during the 60 days preceding the alliance’s announcement.

• Partner share prices often increase prior to announcement for alliances involving firms within the same industry as well as in different industries– However, the increase is greatest for firms to the same

industry involving technical knowledge transfer.• Alliances often account for 6-15% of the market value of

large firms.• While the number of alliances is growing rapidly, about

two-thirds fail to meet participant expectations.• Financial returns on investment tend to be higher for those

firms with significant experience in forming alliances.

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Things to Remember…• Alliances often represent attractive alternatives to M&As.• Motivations for forming alliances include risk sharing, gaining

access to new markets, accelerating new product introduction, technology sharing, cost reduction, globalization, a desire to acquire or exit a business, or their perceived acceptability to regulators.

• Alliances may assume a variety of different structures from highly formal to highly informal, handshake agreements.

• As is true for M&As, a business plan should always precede concerns about how the transaction should be structured.

• Business alliance deal structuring focuses on the fair allocation of risks, rewards, resource requirements, and responsibilities of participants.

• While business alliances are expected to remain highly popular, their success rate in terms of meeting participants’ expectations is about the same as M&As.

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