Chapter 11
Alliances and Acquisitions
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1.
articulate how institutions and resources affect alliances and acquisitions
2.
gain insights into the formation, evolution, and performance of alliances
3.
understand the motives and performance of acquisitions
4.
participate in two leading debates on alliances and acquisitions
5.
draw implications for action
ALLIANCES AND ACQUISITIONS
strategic alliances - voluntary agreements
between firms involving exchange, sharing, or
co-developing of products, technologies, or
services
contractual (nonequity-based)
alliances - co-marketing, research and
development (R&D) contracts, turnkey projects,
strategic suppliers, strategic distributors, and
licensing/franchising
ALLIANCES AND ACQUISITIONS
equity-based alliances - strategic investment;
one partner invests in another
cross-shareholding - both partners invest in each
other
acquisitions - transfer of the control of operations
and management from one firm (target) to another
(acquirer), the former becoming a unit of the latter
merger - combination of operations and management
of two firms to establish a new legal entity
Institutions, Alliances, and
Acquisitions
formal institutions – set of formal legal and
regulatory frameworks impacting:
(1) antitrust concerns
(2) entry mode requirements
informal institutions - imitation drives many
alliance/acquisition decisions yet some firms rush into
alliances and acquisitions without adequate due diligence
and then get burned
RESOURCES AND ALLIANCES
VRIO Framework
Value alliances - must create value by reducing
costs, risks, and uncertainties
real option - investment in real operations as
opposed to financial capital
learning race - competitive situation in which
partners aim to outrun each other
by learning the “tricks” from the
other side as fast as possible
acquisition premium - difference between the
acquisition price and the market value of target
firms
RESOURCES AND ALLIANCES
VRIO Framework
Rarity - ability to successfully manage
interfirm relationships—often called
relational (or collaborative) capabilities—
may be rare
relational (or collaborative)
capabilities
relationships that occur within an
organization firms must have unique skills
to execute strategy
RESOURCES AND ALLIANCES
VRIO framework
Imitability - one firm’s resources and capabilities may
time
be imitated by partners
- trust and understanding -firms without
good “chemistry” may have a hard
imitating such activities
- firms that excel in integration possess
hard-to-imitate capabilities
RESOURCES AND ALLIANCES
VRIO framework
Organization - alliance relationships are
organized in a way that makes it difficult for
others to replicate
- whether acquisitions add value boils down to
how merged firms are organized to take
advantage of the benefits while minimizing costs
ALLIANCES AND ACQUISITIONS
How do firms choose between alliances
and acquisitions?
alliances - create value primarily by combining
complementary resources
- as real options, may be more suitable under
high levels of uncertainty
acquisitions -
derive most value by eliminating
redundant resources
- preferable when the level of uncertainty is
low
FORMATION OF ALLIANCES
Stage One: To Cooperate or Not to
Cooperate?
To grow by pure market transactions, the firm has to
independently confront competitive challenges - very
demanding even for resource-rich multinationals
Stage Two: Contract or Equity?
The choice between contract and equity also boils down
to institutional constraints
Stage Three: Specifying the Relationship
Firms need to choose a specific format among the family
of equity-based or contractual (nonequity-based)
alliances
COMBATING OPPORTUNISM
It is difficult to completely eliminate opportunism, but it
is possible to minimize its threat by:
(1)
(2)
walling off critical capabilities, or
swapping critical capabilities through credible
commitments
Sometimes none of these approaches work, and the
relationship deteriorates
FROM CORPORATE MARRIAGE TO
DIVORCE
initiation - initiator starts feeling uncomfortable with
the alliance (for whatever reason)
going public - initiator likely to go public first but
partner may preempt by blaming the initiator
uncoupling - alliance dissolution can be friendly or
hostile
PERFORMANCE OF ALLIANCES
Acquisitions are often the largest capital
expenditures most firms ever make, they are
frequently the worst planned and executed
activities.
PERFORMANCE OF ALLIANCES
Factors that may influence alliance
performance:
(1) equity
(2) learning and experience
(3) nationality
(4) relational capabilities
None of these is able to assert an
unambiguous, direct impact on performance
MOTIVES FOR ACQUISITIONS
(1) synergistic - response to formal institutional
constraints and transitions in search of synergy
(2) hubris - manager’s overconfidence in his or her
capabilities - may unknowingly overpay for targets
(3) managerial motives - self-interested reasons –
some managers may have deliberately over diversified
their firms through M&As in their quest for more power,
prestige, and money
PERFORMANCE OF ACQUISITIONS
Why do as many as 70% of acquisitions
fail?
Preacquisition - executive hubris and/or managerial
motives
- inadequate screening and failure to
achieve strategic fit
- 80% of acquiring firms do not analyze
organizational fit
- failure to address multiple stakeholders’
concerns regarding job losses and
diminished power
PERFORMANCE OF ACQUISITIONS
Why do as many as 70% of acquisitions
fail?
Postacquisition - integration problems
- strategic fit
- organizational fit resulting in
inadequate attention to people issues,
resulting in low morale and high
turnover
- clashes of national cultures
M&As + Alliances
Given the high rates of M&A failures, it seems
imperative that firms seriously and thoroughly
investigate alliances as an alternative before
embarking on acquisitions.
Majority JVs as Control Mechanisms
versus Minority JVs as Real Options
Although the logic of having a higher level of equity
control in majority JVs is straightforward, its actual
implementation is often problematic. Asserting one
party’s control rights, even when justified based on a
majority equity position, may irritate the other party.
Minority JVs are recommended toehold investments as
possible stepping stones for future scaling up. Whether
this more aggressive strategy is justified remains to be
seen.