Chapter 8 M&A and Strategic Alliances

Mergers

The joining of two independent companies to form a combined entity.

Acquisitions

The purchase or takeover of one company by another.

Drivers of M&A (6)

1. Revenues synergies

2. Reduced market rivalry

3. Cost synergies

4. Stronger competencies

5. The convergence of blurred boundaries industries.

6. Principal-agent problem

The Relationship Between M&A and Performance

Most M&As "destroy" shareholder value with a 70%-90% fail rate.

Strategic Alliannces

Voluntary arrangements between firms that involve the sharing of knowledge, resources, and capabilities with the intent of developing processes, products, or services.

Non-Equity Alliances

Contract-based alliances that are the most common type of strategic alliance; flexible and easy to initiate but tempory and lacks trust and commitment.

Equity Alliances

A strategic alliance in which at least a partner takes partial ownership in the other partner; creates strong ties but requires larger investments and has less flexibility and speed.

Joint Venture (JV)

A type of strategic alliance in which a standalone organization is created by and jointly owned by two or more parent companies; the strongest ties among the three mechanisms, but takes longer and significant investment but difficult to undo and rewards have to be shared.

Why Do Firms Enter Strategic Alliances (6)

1. To stregthen competitive position

2. To enter new markets

3. To hedge against uncertainty

4. To access critical complementary assets

5. To learn new capabilities from competitors

6. To increase bargaining power

Advantages of Strategic Alliances Over M&As (2)

1. Lower investment costs and risks

2. Faster to deploy

Risks of Strategic Alliances

1. The possiblity of a poor fit between the partners

2. Can lose proprietary knowledge base.