04/20/23 1

Business Strategy & Policy PSU MGMT #562

Dave Gartendaveoutside@alum.mit.edu

Strategic Alliances and Acquisitions

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Planning Concepts: Gaps

Internal Analysis

External Analysis

Strategy

“Basis of Competition”

“What we have”

Mission

MakeBuy Ally

?R & D

Gap Planning“What we need”

SupplyMftg

SalesMktg

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Joining Forces: Why? (the logic)

Driven by the gap would like to achieve vs. what it can achieve

X

NPV (A+B) > NPV (A) + NPV (B)NPV (A+B) > NPV (A) + NPV (B)

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Collaboration: Success & Failure

Success: ~30% acquisitions; ~ 50% alliances

Tend to be more successful Acquisitions in core businesses, existing geographies Alliances for related businesses, new geographies Acquisitions between large & small companies [45%] Alliances that evolve beyond initial objectives [79%] JVs with even split of ownership [60%] LBO & corporate buyers [~80%]

Source: various including Bleeke and Ernst, McKinsey

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Transaction Types

Ownership

Purchase Order

MultiyearPurchase

Agreement

OutsourcingPurchase

AgreementAcquisition

JointVenture

JointDevelopment

Licensing

JointMarketing

“Strategic”“Transactional”

Price

Com

mit

ment

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Acquisition overviewType Vertical (forward or backward) Horizontal (FTC issues)

Related: product or market extension, consolidation Not related: conglomerate

Valuation Premium (P) = NPV (A+B) – NPV (A) – NPV (B) Cash or stock

Synergy value -> Integration strategy “Value drivers” the logic behind all deals Bottom line savings and/or top line growth

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Joint Venture

Clear governance; very focusedShare riskMinimize “leakage”Limited learning between companiesUsed in product or market expansion, or consolidation

Company A Company B

Joint Venture

A new legal entity

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Why Ally (vs. JV/acquire)?

X

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Vertical vs Horizontal Alliances

Joint Ventures (V) Siecor, Ownes-Corning(H) Lockheed-Boeing for missile development

Strategic supply (V) Supplier share R&D, profits: B787, A380(V) Intel-Applied materials for Fab equipment

Functional (V) Pharma (distribution – biotech R&D(V) IT outsourcing, manufacturers reps

Solutions (“modular”)

(H) Intel and Cisco networking gear(H) Airline and hotel frequent flyer

R&D collaboration

(H) Sematech

Trade groups (H) Lysine, OPEC(H/V) WIFI industry group

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Corporate Equity Investments

Aligns interestsSource of Commitment

“Investor”Company A

“Investee”Company B

Capital infusionGet to know

partnerLimits exit

options

Try before buy (option)

Less $$ vs acquireGain insight into new

developments (option)

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Ecosystems (group alliances)

Substitution Effect (horizontal)• Devalue proprietary advantage• Head to head advantage

Keystone #1

Keystone #2

Niche

Niche

KeystoneContenders

KeystoneContenders

Leaders Contenders

Keystone Squeeze (vertical)•“Coopetition”• Increase proprietary advantage• Outperform in value chain• Aid partner’s competition

Keystone-Niche (tug of war)• Keystone expansion • Niche innovation

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Soft Side of Alliances: Mindset

Transactional Strategic

Strategy

Info sharing

Decision-making

Communication

Attitude

Performance

Time frameShorter Longer

Discreet Value chain

Arms-length Common Strategy

Concept of alliance IQ…

X

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Value CaptureAcquisition integration and alliance executionNot all synergies created equal Eliminating redundancies and

purchasing economies generally solid value drivers

New products and/or new channels more difficult to attain.

Details, details, details Especially the people, bridging cultures.

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Corning: Core Competency

“An evolving network of wholly owned businesses and joint ventures” – Jaime Houghton, CEO Corning

“An evolving network of wholly owned businesses and joint ventures” – Jaime Houghton, CEO Corning

Ciba Corning:medical instrumentation

Samsung Corning:LCD & CRT glass

Siecor:Optical Fiber/Cable

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Starbucks: Alliances

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Daewoo Case Learnings

1. Daewoo’s growth strategy was driven form opportunities and strengths

2. Daewoo’s domestic experience with the Korea “miracle” became the leverage point for international growth in developing nations.

3. Daewoo’s entrepreneurial culture particularly well suited for developing nation expansion.

4. Alliance success generally requires high level commitment and a long time horizon. X

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Closing Thoughts on Collaboration

Structure follows strategy – choose your path based on your destination.Requirement for success: treat collaboration as anything but “business as usual”Understand how your own core competencies relate to alliances. Enhance your competency - do not “hollow out”….Fit is critical. VRIO and culture.