Lecture 4 - Alliances and Acquisitions

Question 1

What is a strategic alliance?

Answer 1

• Voluntary agreements of cooperation between firms.

Question 2

What are contractual (non-equity based) alliances?

Answer 2

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

Question 3

What are the two types of alliances?

Answer 3

Contractual

Equity

Question 4

What is an equity based alliance?

Answer 4

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

Question 5

What is an acquisition?

Answer 5

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

Question 6

What is a merger?

Answer 6

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

Question 7

Which typically dominate mergers or acquisitions?

Answer 7

Aquisitions as the account for about 97% of M&A cases

Question 8

What are the formal legal and regulatory frameworks that impact alliances and acquisitions?

Answer 8

1) Antitrust concerns

2) Entry mode requirements

Question 9

Why are antitrust authorities more likely to approve alliances than acquisitions?

Answer 9

• 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

Question 10

How do formal requirements on market entry modes affect alliances and acquisitions?

Answer 10

• 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

Question 11

What is meant by value within resources and alliances?

Answer 11

• Alliances must create value
• They can do this by reducing costs, risk and uncertainties
• Real option

Question 12

What is meant by ‘real option’?

Answer 12

This is an investment in real operations as opposed to financial capital

Question 13

What are the drawbacks of alliances?

Answer 13

• 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

Question 14

What is meant by rarity within resources and alliances?

Answer 14

• 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.

Question 15

What is meant by Imitability within resources and alliances?

Answer 15

• One firms resources and capabilities may be copied by partners

Question 16

What is meant by organisation within resources and alliances?

Answer 16

• 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

Question 17

What makes up the VRIO model?

Answer 17

Value
Rarity
Imitability
Organisation

Question 18

What is meant by value within resources and acquisitions?

Answer 18

• 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

Question 19

What is meant by rarity within resources and acquisitions?

Answer 19

• For acquisitions to add value, one or all of the firms involved must have rare, unique skills that enhance the overall strategy

Question 20

What is meant by imitability within resources and acquisitions?

Answer 20

Firms that excel in integration possess hard to imitate capabilities that are advantageous in acquisitions

Question 21

What is meant by organisation within resources and acquisitions?

Answer 21

• Whether acquisitions add value boils down how merged firms are organised to take advantage of the benefits whilst minimising the costs

Question 22

What is strategic fit?

Answer 22

This is the extent to which an organisation is matching its resources and capabilities with another

Question 23

What is organisational fit?

Answer 23

This is the similarity in cultures, systems and structures

Question 24

Whats involved in stage 2 of alliance formation?

Answer 24

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

Question 25

What is opportunism within alliances?

Answer 25

- breaking promises, not sharing resources or facilities as per agreement, bluffing, lying,misleading, misrepresenting, distorting, cheating, stealing, etc.’’ (Das and Rahman 2001, p. 43)

Question 26

How can firms minimise the threat of opportunism?

Answer 26

1) Walling off critical capabilities | 2) Swapping critical capabilities through credible commitments

Question 27

What is meant by walling off critical capabilities?

Answer 27

- 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

Question 28

What is meant by swapping critical capabilities through credible commitments?

Answer 28

- This is the exact opposite of walling of critical capabilities - Both firms share information with each other

Question 29

What are the stages of alliance dissolution?

Answer 29

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

Question 30

What are the four factors that may influence alliance performance?

Answer 30

1) Equity 2) Learning and experience 3) Nationality 4) Relationship capabilities

Question 31

Why is equity importance to how an alliance performs?

Answer 31

- 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

Question 32

Why is nationality important to how an alliance performs?

Answer 32

- Dissimilatires between alliances in regards to their nationality can cause strains on the relationship

Question 33

What are the three things that drive acquisitions?

Answer 33

1) Synergistic - Add value 2) Hubristic (Over confidence from manager in there capabilities) - destroy value 3) Managerial motives - destroy value

Question 34

According to the institution based view, what are synergistic motives?

Answer 34

- 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

Question 35

According to the resource based view, what are synergistic motives?

Answer 35

- Leverage superior managerial capabilties | - Enhance market power and scale of economies

Question 36

What is a synergy?

Answer 36

Synergy is the concept that the combined value and performance of two companies will be greater than the sum of the separate individual part

Question 37

What does Hubris refer to?

Answer 37

- Overconfidence in ones capabilities

Question 38

According to the institution based view, what are hubristic motives?

Answer 38

- This is when managers get on the bagwagon and follow the norms

Question 39

According to the resource based view, what are hubristic motives?

Answer 39

Managers overconfidence in their capabilities | e.g 'we can manage your assets better than you can' or 'we are smarter than the market'

Question 40

What are managerial motives?

Answer 40

Managers desire for power, prestige and money which may lead to decisions that do not benefit the firm overall in the long run

Question 41

What are the two problems acquisition failures can be identified in?

Answer 41

1) Pre acquisition | 2) Post acquisition

Question 42

What issues are there in pre-acquisition for all M&As?

Answer 42

- 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

Question 43

What issues are there in pre-acquisition particularly for cross boarder M&As?

Answer 43

- Institutional and cultural distances, lack of familiarity | - Nationalistic concerns against foreign takeovers

Question 44

What are the issues with post acquisition for all M&As?

Answer 44

- 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

Question 45

What are the issues with post acquisition for cross border M&As?

Answer 45

- clashing of national cultures, hard time intergrating

Question 46

What is meant by the Alliances vs acquisitions debate?

Answer 46

- 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

Question 47

What is meant by Majority joint ventures as control mechanisms vs minority joint ventures as real options

Answer 47

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

Question 48

What is the institution based view on alliances and acquisitions? and resource based view

Answer 48

- 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

Question 49

What are the implications for action?

Answer 49

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

Question 50

What are the DO's for alliance success

Answer 50

- 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

Question 51

What are the Donts for alliance success?

Answer 51

- Don't overpay for targets

Question 52

How can firms grow purely through market transactions?

Answer 52

- firm must confront its competitive challenges independently