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GRACEFUL EXIT

Examples: Merck sold its stake in Astra Merck after nine years and

its interest in DuPont Merck after five. Petroleum and Mobil terminated a pair of European

downstream oil JVs three years after forming them.

All alliances end eventually. The average joint venture lasts seven years, according to a McKinsey study, with almost 80% ending up in a sale to one of the partners.

Non-equity alliances often have shorter life spans. In high-tech and retail, for example, marketing alliances often last no more than a year or two, with some measuring their existing in months. Even the highest-profile alliances come undone.

Examples: Delta Air Lines ended Global Excellence Alliance, its

pioneering global partnership with Swissair and Singapore Airlines, after the Star Alliance changed the nature of industry competition.

After eighty years, Fire-stone announced the end of its supplier alliance with Ford Motor following a bitter dispute over safety issues.

GRACEFUL EXIT

Termination is a natural part of the alliance life cycle, yet most companies do not adequately plan for it.

• Pay no attention to exit• Do not think about termination, but do so in

incomplete ways. • Spend their time assessing and working to prevent

the common causes of alliance termination, rather than maximizing termination success.

• Focus on a limited number of contractual provisions around termination without addressing important strategic considerations.

GRACEFUL EXIT

How do companies improve the termination process? • Companies need to take a broader – and more

strategic- view of alliance termination and do so during the initial phases of venture creation.

• Companies should preplan the initial integration of asset, also carefully prepare up front for termination.

GRACEFUL EXIT

STRATEGIC TO SHAPE TERMINATION

Strategic considerations are those factors outside the detailed legal language of the alliance contract that determine the path of termination. Five merit special attention are; Set clear termination goals. Make appropriate contributions to

the alliance. Keep the deal structure flexible. Institute effective human

resource policies. Develop a portfolio of options.

CLEAR TERMINATION GOALS

What are our termination goals in this alliance?

Before entering an alliance, the deal-making team should generate a list of perhaps three to ten termination goals. These may include maintaining control over contributed assets, receiving a fair market price for those assets, preserving positive relationships with this partner in the future, and terminating the alliance quickly.

APPROPRIATE ALLIANCE CONTRIBUTIONS

Coordinated rather than combined, when the firm is concerned about termination costs. By coordination, we mean the partners position themselves to provide essentially separate contributions to the alliance.

Consider the complexity of contributions – especially when there are worries that the partner will prematurely terminate the alliance.

The more deeply the partners integrate their contributions, the more difficult exit

becomes.

FLEXIBLE DEAL STRUCTURE

Structuring an alliance facilitate exit more than others.

example, BP and Mobil structured their European downstream oil consolidation as two separated JVs – one focused on refining and marketing, the other on lubricants. BP became the operating partner for the refining and marketing venture, while Mobil managed the lubricants business. The partners had other reasons for creating two separate JVs with separate management teams and assets, but this structure also made it easier for the partners to exit the alliance if needed. Indeed, when larger forces in the oil business made these alliances less attractive, BP simply bought out Mobil in the first venture, while the partners divided up the assets in the second.

One of the most common in the high-tech field is to structure alliances as a series of short-term renewable contracts, often with a trial period upfront.

For examples: Yahoo! has said that it almost never formed an alliance that

didn’t come up for renewal in a year or less.

Mapquest, a leading provider of online directions and travel information, formed a series of short-term alliances as it was experimenting with ways to bring its content to wireless devices such as cellular phones and personal digital assistants.

FLEXIBLE DEAL STRUCTURE

These can be powerful ways to smooth the exit process in highly

uncertain environments that do not demand deep asset integration

between the partners.

Other structural issues may also be considered, for instance, managers should ask questions such as these: Would a joint venture best serve

our exit goals? Is a non-equity alliance best? Would a direct investment in or

from the partner have a material effect?

Would the number of partners in the alliance in any way alter the context for exit?

FLEXIBLE DEAL STRUCTURE

EFFECTIVE HUMAN RESOURCE POLICIES

There are 3 ways to use Human Resource policies to shape termination process and performance.

First is to appoint an executive sponsor. This will increases the chances that the alliance will not die too soon or linger on too long. Executive sponsors would provide the strategic perspective to terminate the alliance at an appropriate time.

Second, is to rotate alliance managers. An underappreciated risk in alliance is that the alliance manager will become too connected to the partner and lose focus on the company’s own best interests. Rotating alliance managers every two years or so can help overcome this problem.

Third is to create a clear career path for alliance management. When managers see alliances as a profession where current skills can be applied to future relationships, they are less prone to defend an alliance at all cost.

PORTFOLIO OF OPTIONS

It can also be useful to create alternatives or options in the case the alliance fails. EX: Microsoft in the late 1980s, the company used

alliances (and internal initiative) to generate options as it was trying to understand what would replace the aging MS-DOS. Microsoft not only allied with IBM and its OS/2 initiative, it also entered into alliances that gave it a role in the Apple Macintosh and Unix operating systems. At the same time, Microsoft continued to invest in DOS while also pouring money into the eventual winner, Windows.

Termination success can hinge on having other alternatives.

CONTRACTUAL TERMS GOVERNING TERMINATION

Termination success is also contingent on the details in the alliance contract. Therefore, firms are recommended to focus on four contractual dimensions.

1.Trigger eventsThe first step in assuring that the alliance contract deals sufficiently with termination is to determine what events will trigger termination means that when the corporate parents are allowed to end the alliance.

Alliance completionThe partners have right to terminate the

alliance when the venture crosses certain time, technological, financial, or market thresholds.

Alliance performance failureThe partners may want to have the option

to end the alliance if the venture or one of the partners fails to achieve some predetermined performance.

EX: A marketing alliance or new business JV might automatically trigger termination rights if a certain market share is not reached, or one partner fails to make a certain number of sales calls per month.

CONTRACTUAL TERMS GOVERNING TERMINATION

Change in the external environmentThe partners may want to indicate which of these events will trigger terminations rightsEX: An oil industry alliance might specify that a drop in the per barrel price of crude oil below $10 would do this.

Change in parent statusFirms should consider whether certain changes in the status of the corporate parents should prompt termination rights.Macro level- ownership issue as the sale of one partner to another firm or the transfer of substantial portion of the firm’s assets (above35%). These changes may also relate to financial health, including the bankruptcy or financial insolvency of either corporate parent.Micro level-come material change in the employment status of members of the management team, board of directors, or other staff who are essential to the functioning of the alliance such as scientists and alliance managers would trigger termination

CONTRACTUAL TERMS GOVERNING TERMINATION

Parent breachOne partner fails to meet its basic obligations to the agreement.

Parent deadlockAn alliance contract should indicate what will happen if the partners deadlock on critical decisions. The best agreements tend to include dispute resolution mechanisms.

Termination at will Simply allow the partners to terminate the alliance whenever desired. This tends to make sense only when the alliance entails very limited resource integration between the firms and when the business context is extremely fluid and uncertain, putting a high value on the resulting flexibility.

CONTRACTUAL TERMS GOVERNING TERMINATION

2.Future Ownerships Rights

- The alliance contract needs to spell out who will own the alliance related assets in the future once termination rights have been triggered.- In non-equity alliances, each partner simply retains the assets it lent to the alliance.

EX: when a pharmaceutical company and a biotech company shut down a research alliance, each firm would expect to bring its scientists and equipment back home.EX: When two e-tailers terminate a co-marketing alliance, each firm would retain its own brands, customers, and other assets.

CONTRACTUAL TERMS GOVERNING TERMINATION

The contract will also need to address the ownership of ideas and other intellectual assets created in the course of the alliance. Alliance contracts can deal with this in two ways.1. One is to allow the partners to share the rights2. The other approach is for one partner( usually one

funding the alliance) to control most or all of the intellectual assets coming out of the alliance.This is often the model in biotech alliances and other forms of funded research.

CONTRACTUAL TERMS GOVERNING TERMINATION

As a result, when firms decide to terminate a joint venture, the contract needs to address who will take ownership of the business and how the exiting partner’s stake will be valued.

VALUATION METHODSThe contract should indicate how the firms will value the business in the event of termination. There are three basic models for valuing assets in joint ventures.1) Roulette – one firm places a dollar value on the total

business, and the other partner then determines whether it wants to buy or sell its interest based on that price. This approach is appealing on many levels. It is simple, fast, and seems fair.

2) To allow an independent assessor such as an investment bank to set a price on the assets. It also makes sense to stipulate in the alliance agreement what guidelines or criteria the assessor should use to determine valuation

3) To set a predetermined price or pricing formula for the business

Example : The U.S. refining in the 1990s between Shell Oil and Texaco. The venture contracts reportedly stated that if one partner decided to terminate at will, the other partner could buy its share back at a 10 percent discount on a fair-market assessment of the firm’s interest. Texaco decided to get out of the JVs so as to gain antitrust approval for its merger with Chevron.

VALUATION METHODS

POST-TERMINATION DEMANDSThe alliance needs to indicate whether the partners will have any future demands placed upon them after the alliance terminates.

Future Relationships – firms may decide that some continued links are needed after the alliance has ended. For example, a new business JV may depend on some or all corporate parents for ongoing access to certain brand names, technological know-how, or material supplies. The firms may want to stipulate in the formation documents that these resource flows continue for some period after termination, as well as indicate the terms and conditions for future use.

Future Restrictions – such restrictions may include noncompete provisions that block some or all the partners from competing in a certain product or geographic area for a period.

Future Responsibilities – sometimes, terminated alliances have remaining obligations to customers, suppliers, or other parties. Although it can be difficult to anticipate precisely what these responsibilities will be, the firms should attempt to think them through up front and deal with them as best they can in the contract.

POST-TERMINATION DEMANDS

THINK AHEAD, WORK BACKWARDBy answering these questions before entering detailed structural discussions, managers will gain a new appreciation for the timing, path, and tasks of alliance termination.Such as:

What is the realistic (versus stated) life span of the alliance? What are the ten most likely reasons that the alliance will end? Are there natural decision points for terminating or recommitting to the

alliance? On a scale of 1 to 10, how large are the termination risks? (1= no material

effect on our firm; 10 = threatens our very survival.) What are the main termination goals in this alliance? Will certain alliance structures or asset contributions make it much easier

for us to exit the alliance, or harder for the partner to do so? Is it in our interest to make it harder for our partner to exit the alliance? What will be the five hardest tasks in closing down the alliance? (For

example, valuing assets or determining future ownership.) Are there ways to create options today in case this alliance fails tomorrow?