Strategic alliances

Joint ventureMerger & acquisition

Strategic Alliances

• A Strategic Alliance is a formal relationship between two or more parties to pursue a set of agreed upon goals or to meet a critical business need while remaining independent organizations.

• Partners may provide the strategic alliance with resources such as products, distribution channels, manufacturing capability, project funding, capital equipment, knowledge, expertise or intellectual property.

Strategic Alliances

• The alliance aims for a synergy where each partner hopes that the benefits from the alliance will be greater than those from individual efforts.

Merger

• A Merger refers to an agreement between two companies to combine their resources, in order to arise as a more powerful and dominant marker player.

• For example, when Air France and KLM-Royal Dutch Airlines merged in May 2004 to form the Air France KLM group, they automatically became continental Europe's largest carrier.

• Glaxo Wellcome and SmithKline Beecham, both firms ceased to exist when they merged, and a new company, GlaxoSmithKline, was created.

• Another type of acquisition is reverse merger, a deal that enables a private company to get publicly listed in a short time period.

• A reverse merger occurs when a private company that has strong prospects and is eager to raise financing buys a publicly listed shell company, usually one with no business and limited assets.

• Cross-border M&A

Reverse merger- example

• US-based Trans-India Acquisition Corporation (TIL) has signed an agreement to acquire 80 per cent stake in Hyderabad-based solar photovoltaic modules maker Solar Semiconductor.

• The deal is a reverse-merger agreement and valued at around $375 million.

• “The merger will help us access the capital market as TIL is an American stock exchange-listed company,” says Hari Surapaneni, president of Solar Semiconductor

Joint venture

• A Joint venture, in contrast, is when two otherwise independent companies join forces in order to cooperate on a common project or in providing a specific service.

• In many cases, a new firm or organization is actually created, and both of the independent founders have a stake in this joint company.

Joint venture

• All revenue which is not re-invested into the firm is then divided between the founders.

A good example of a joint venture is Verizon Wireless. In this case, Verizon teamed up with Vodafone to provide a mobile communication service

Acquisition

• Also known as takeover or a buyout • An acquisition is simply when a more dominant

company purchases a smaller firm, which also happens to be a competitors.

• By removing a key competitor from the market, the larger company increases its dominance.

Acquisition

• For instance, in October 2008 delta Air Lines bought northwest airlines and as such, it will eventually phase out the latter's independent brand name

• Sometimes, however, a smaller firm will acquire management control of a larger or longer established company and keep its name for the combined entity. This is known as a

Reverse takeover.

Reasons for strategic alliance

• Increased market power• Overcoming entry barriers• Cost of new product development and

increased speed to market• Lower risk compared to developing new

products• Increased diversification• Reshaping firm’s competitive advantage• Learning and developing new capabilities

Problems in achieving success

• Integration difficulties• Inadequate evaluation of target• Large or extraordinary debt• Inability to achieve synergy• Too much diversification• Managers overly focused on acquisitions• Too large

Effective Acquisitions

• Complementary assets or resources• Friendly acquisitions facilitate integration of

firms• Effective due-diligence process (assessment of

target firm by acquirer, such as books, culture, etc.)

• Financial slack• Low debt position • Innovation• Flexibility and adaptability