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2007

International Business Strategy

Topic 6: Strategic Alliances, Mergers and Acquisitions in International Business

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2007

Principle Learning Objectives

Develop an understanding of the variety of strategic alliances utilized in international business practice.

Develop an understanding of effective approaches to the formation and management of strategic alliances in IB.

Develop an understanding of mergers and acquisitions in IB as an alternative to strategic alliances and the motivations behind such strategic actives in IB.

Develop an understanding of how best to manage and monitor the performance of mergers in IB.

Develop an understanding of the implications of all of the above for international business strategy and practice.

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2007

The Choice of Entry Modes

Figure 6.3

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2007

Build? Buy? Cooperate?

Which approach:

Which one can create the most value for the firm? USA: 1996-2002, created 57,000 alliances and 74,000 acquisitions – roughly one acquisition & one alliance every hour each day;

Europe: $1.59 trillion M&As in 2006, overtaking the values of deals in America (at $1.54t); the value tripled since 2004

Asia: In the 1990s, Japanese firms did more cross-border M&As than domestic M&A (95%); Foreign acquisitions in Japan still face considerable obstacles;

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2007

There is a growing list of alliance networks appearing in various industries (e.g. Airlines, Automobiles, Computers, & Telecommunications

In 2002, the alliance activities of US large firms account for 35% of their total revenue;

Alliance increases importance in emerging markets

% of total FDI transactions

Korea 77%

China 72%

Latin America 52%

Eastern Europe 54%

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2007

Strategic alliances

Global Strategic Alliance (GSA):

Voluntary agreements between two or more firms from different countries who pursue exchange, sharing, or co-developing of products, technologies, or services.

As globalization increases, strategic alliances and networks have proliferated globally.

–By 2000, alliances & networks produced 25% of the revenues of these firms; Yet 30-70% of alliances and networks reportedly fail (e.g., Opening Case).

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2007

A compromise between short-term, pure market transactions (e.g., spot transactions) and long-term, pure organizational solutions (e.g., mergers and acquisitions)

The Variety of Strategic Alliances

Figure 7.1

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2007

Alliance formation, management and Performance

1. Formation (3-stage model)- To cooperate + Partner selection

- Alliance design (i.e. Contract or equity?)

- Positioning the relationship

2. Management and control

3. Performance implication

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2007

1. A Three-Stage Decision Model

Figure 7.3

Source: Adapted from S. Tallman & O. Shenkar, 1994, A managerial decision model of international cooperative venture formation (p. 101), Journal of International Business Studies, 25 (1): 91–113.

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2007

Strategic Alliance

CombinedCombinedResourcesResourcesCapabilitiesCapabilities

Core CompetenciesCore Competencies

ResourcesResourcesCapabilitiesCapabilities

Core CompetenciesCore Competencies

ResourcesResourcesCapabilitiesCapabilities

Core CompetenciesCore Competencies

Firm AFirm A Firm BFirm B

Mutual interests in designing, manufacturing,Mutual interests in designing, manufacturing,or distributing goods or servicesor distributing goods or services

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2007

Stage One: Cooperate or Not

How to find partners? (SIA 7.3: Local firms)

–Informally, managers translate their interpersonal ties with executives at other firms (at the micro, individual level) into interfirm alliances (at the macro, firm level)—a micro-macro link

–Rely on successful previous business dealings

–Formal systematic scanningStrategic fit: Focus on complementary

“hard” skills and resources

Organizational/cultural fit: Focus on “soft” organizational attributes (such as goals, experiences, and behaviors)

* These methods are not mutually exclusive

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2007

The Five-Cs scheme of partner selection

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2007

Stage Two: Contract or Equity?

Equity Alliance

–Have ownership

–Form new legal entity

–Substantial resource commitment

Non-equity Alliance

–No ownership

–No new legal entity

–Less resource commitment

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2007

Equity Alliance

• Issues– role of each partner in management of venture– “fairness” of technology and management payments– stability of JV: varies according to type of contribution

Foreign Partner Local Partner

TechnologyMarket

Knowledge

JV

Take Existing Products to New Markets or Acquire Foreign Products for Local Markets

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2007

Joint R&D

– jointly organize and fund the program– share interim and final results– work separately

● Issues - original design of program - following new leads as program develops - “pre-competitive” orientation

● Examples– pre-competitive alliances in computers, VCRs, CDs…

A

R&D

B

R&D

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2007

The Relationships

Strategic alliances formed by multiple firms to compete against other such groups and against traditional single firms.

Also known as constellations/networks

Star Alliance: United, Lufthansa, Air Canada, SAS, etc.

Sky Team: Delta, Air France, Korean Air, etc.

One World: American, British, Cathay Pacific, Qantas, etc.

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2007

Alliance management & control It is important to be able to manage inter-partner

learning, exercise effective managerial control, accentuate cooperation & trust, and think ahead of effective exit strategy.

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2007

Managing inter-partner learning

In a GSA, firms have to “come up to speed” and learn about one another in order to effectively operate.

Firms seek to protect their intellectual and proprietary rights and technologies, write safeguards into contracts, agree on specific skills to be shared (and not shared), and mitigate leakage risk by avoiding undue dependence.

Creating operational and managerial synergy and effective relationships requires a degree of openness that is difficult to obtain.

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2007

How to maintain managerial control over alliance activities

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2007

Relationship Lessons for Managers in Strategic Alliances and Networks

Table 7.4Source: Based on text in M. W. Peng & O. Shenkar, 2002, Joint venture dissolution as corporate divorce (pp. 101–102), Academy of Management Executive, 16 (2): 92–105.

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2007

Think ahead of alliance exit

Some reasons for exit:

Differences In strategic or operational objectives

Differences in managerial styles

Differences in conflict resolution styles

Inability to meet shifting targets

Inability to meet financial requirements

Acquisition of one or more of the partners

Bankruptcy, termination, dissolution of liquidation of one or more of the partners

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2007

Performance

High rates of alleged failures

No consensus on what constitutes alliance/ network performance

Performance at different levels: alliance vs. parent firm level

Performance Measures

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2007

Acquisition – An alternative

Defining Merge & Acquisitions

–Acquisition: transfer of the control of assets, operations, and management from one firm (target) to another (acquirer), the former becoming a unit of the latter.

PeopleSoft is now a unit of Oracle

–Merger: the combination of assets, operations, and management of two firms to establish a new legal entity.

South African Brewery & Miller Beer SABMiller

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2007

Figure 9.8

Source: Adapted from United Nations, 2000, World Investment Report 2000 (p. 100), New York: UN

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2007

Motives Examples

1. To deal with overcapacity through consolidation in mature industries

Daimler-benz acquired Chrysler

2. To roll-up competitors in geographically fragmented industries

Banc One buys local/ regional banks in 1980s

3. To swiftly extend into new products or markets

L’Oreal acquires Body Shop; GE capital and its valued acquisitions

4. As a substitute for in-house R&D Cisco acquires over 70 start-up companies

5. To exploit eroding industry boundaries by inventing an industry

AT&T acquires NCR, McCaw, and TCI

Motives Behind M&As

Source: Bower, J.L. 2001. Not all M&As are alike – and that matters. HBR, p.97

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2007

Source: Bower, J.L. 2001. Not all M&As are alike – and that matters. HBR, p.97

U.S. M&A deals over $500 million made between 1997-1999

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2007

Motives Behind M&As (cont’)

Table 9.2

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Stakeholders’ Concerns During M&As

Figure 9.9

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The performance of M&As

–As many as 70% of M&As reportedly fail.

–On average, acquiring firms’ performance does not improve and is often negatively affected.

–Acquisitions are the largest capital expenditures most firms ever make, yet they are often the worst planned and executed business activities of all.

–Competitors often launch aggressive attacks to take advantage of the M&A chaos.

Airbus increased market share during the Boeing/McDonnell Douglas merger

Dell invaded the printer market when HP was distracted in its merger with Compaq

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2007

Why do many M&As fail?

Table 9.3

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Implications for Strategists

From (single) firm strategy to interfirm strategy

Strategists must be savvy at both competition and cooperation—“co-opetition”

An alliance/acquisition perspective on the four questions

Why firms differ (Q1) and how firms behave (Q2): How different industry-, resource-, and institution-based considerations drive alliances and acquisitions

What determines the scope of the firm (Q3) – or the alliance/acquisition in this context: Strategic goals matter!

What determines the international success and failure (Q4): “soft” relational capabilities + “hard” assets

Brendan Boyle

2007

Principle Learning Objectives - revisited

Have you developed an understanding of the variety of strategic alliances utilized in international business practice.

Have you developed an understanding of effective approaches to the formation and management of strategic alliances in IB.

Have you developed an understanding of mergers and acquisitions in IB as an alternative to strategic alliances and the motivations behind such strategic actives in IB.

Have you developed an understanding of how best to manage and monitor the performance of mergers in IB.

Have you developed an understanding of the implications of all of the above for international business strategy and practice.