In today’s corporate world alliances have become an important strategy for organizations to expand. Statistics have proved that there has been an increasing trend in the number of alliances globally. Organizations are aggressively considering strategic alliances as a preferred form of growth along with other inorganic growth routes.
Understanding Alliances
Alliances are also one of the important ways to grow in the present business scenario but have certain distinctive characteristics. Before adopting any of form of growth strategy it is necessary to understand the special features of each form of strategic alliance:
Mergers:
A merger refers to the coming together of two or more companies to form a new entity or one or more entities merging into other entity. Thus there is equal control over the combined entity & no one company dominates the other. Usually, the management of both companies shares the control of the resultant company and names of both companies are retained for the resulting companies. There are many high profile examples of mergers – AOL Time Warner, GlaxoSmithKline (the second largest pharmaceutical company in the world after Pfizer), Hero Honda (the leading motorcycle brand in India), Sony Ericsson (the third largest manufacturer of mobile phones in the world) and many others. In each of these cases, names and management of both companies were retained in order to leverage the equity of both brand names. Thus mergers result into a new organization from two or more organizations of more or less equal stature and where all resources are pooled.
Acquisitions:
Acquisitions, on the other hand, refer to processes in which one company buys the other company. In such a situation the buying company absorbs the bought company into the existing company. Acquisitions can be carried out either to eliminate competition by absorbing the competing company or to expand the corporate portfolio by retaining the acquired company as an independent entity under the overall corporate management. This latter case is at the heart of many conglomerates. News Corp Inc acquired MySpace, the leading online networking site with an estimated 100 million registered users, not in order to merge it with the other news businesses, but to expand the corporate portfolio. On the other hand Vodafone Group plc, the world’s largest mobile communications network company with a market capitalization of GBP 86 billion (US$169 billion or 1.16 trillion yuan) recently acquired a 67% stake in Essar Hutchison (one of India’s leading mobile phone network) for US$19 billion (130 billion yuan). The purpose of this acquisition was to enter the highly lucrative Indian mobile phone market. By this acquisition, India became Vodafone’s second largest market after the US. As is evident from the many examples mentioned before, acquisitions serve three main purposes: viz. can serve as a market entry strategy, as a corporate portfolio expansion tool, and as a competitive defense mechanism.
Joint Ventures:
It refers to a legal entity that is formed between two or more parties to undertake an economic activity together. In the Joint Venture, the parties agree to create, for a definite period, a new entity and new assets by contributing equity. They then share in the revenues, expenses, and assets and “control” of the enterprise. Joint Ventures are also driven by business, taxation, and political objectives. Joint Ventures are very feasible in an environment where parent-subsidiary relationships are not encouraged because of (a) national objectives (b) parental control of funds and (c) disallow competition.
Alliances:
Alliance is an approach in which two or more companies agree to pool their resources together to form a combined force in the marketplace. Unlike a merger, an alliance does not involve the emergence of a new combined entity. Each participant in the alliance retains their individual entity but choose to compete against competitors as a unified business force. The joint venture is a very popular form of an alliance. Recently, the world’s largest retailer Wal-Mart entered into a joint venture with India’s Bharti Enterprises to get a toehold in the booming Indian retail market. This move was the only way Wal-Mart could have entered the Indian market as regulatory restrictions prohibit a fully owned foreign retail chain to operate in the Indian market. As such, this joint venture was a market entry strategy for Wal-Mart. Consider another example – Costa Coffee, the leading coffee brand across the UK and Western Europe. This brand entered the Chinese market recently with a joint venture with the Yueda Group based in Jiangsu Province in China. This was not because of any regulatory restriction but more because of its need to learn about an alien market and get a foothold. Therefore joint ventures are indeed a very common entry strategy for companies. This approach has its own pros and cons. The obvious advantage is that companies entering markets through JVs would benefit from the local knowledge of the local company. The obvious disadvantage is that companies entering new markets may be taken for a ride if joint ventures are not agreed upon carefully. As such, defined simply, alliances are less risky than acquisitions because they are negotiable, co-operative and easier to walk away from. They bring two firms together with mutual interests but different strengths to work on particular projects that offer benefit to both.
A COMPARATIVE ANALYSIS OF STRATEGIC ALLIANCES AND M&A:
Source: Boston Consulting Group website and M&A Critique analysis
When should be alliances be preferred over merger and acquisitions
- Any M&A transaction involves the creation of almost permanent relationships Thus in situations when companies are desirable of having short to medium term relationships strategic alliances can be a better option since the parties to the alliance can decide the tenure of the relationship.
- M&A involves huge transaction costs and is practically irreversible. In today’s dynamic world companies’ growth strategies may keep on changing and they may be on a lookout for a nimble-footed alliance where the unwinding work if required can be done without significant additional costs and time.
- Alliances can be an extremely effective way to embrace new strategic opportunities, pursue new sources of growth, and contribute to the upside of the business. They are particularly useful in situations of high uncertainty and in markets with growth opportunities that a company either cannot or does not want to pursue on its own.
- One of the main reasons to engage in an alliance (as opposed to M&A) is to share risk and limit the resources a company must commit to the venture in question. Risk can take many different forms. One is the financial risk associated with the high costs of the investment that is required to pursue a particular opportunity. An alliance can be a way to spread— and sometimes even lower—those costs.
- The multicarrier alliances in the airline industry, for example, allow companies to take advantage of the network effects made possible by a global system of hubs that any single company would find financially prohibitive to build on its own. Similarly, in the automotive industry, companies have engaged in joint research in certain base technologies in order to take advantage of economies of scale unavailable to any single partner. Companies also commonly use alliances to manage the risks associated with emerging geographic markets. This trend has been difficult by legal and regulatory provisions in some countries that require global companies to create joint ventures as a condition for direct foreign investment. Take the example of China. Although the Chinese economy is increasingly open to foreign investment, there are still many situations in which multinational companies are obliged to take on a Chinese partner (and, in some cases, a majority partner) before they may invest in the country.
- Finally, companies in industries going through a major technological or business discontinuity are increasingly turning to alliances to manage the risks associated with uncertainty. In situations in which the future evolution of an industry is highly uncertain, alliances can be a way to combine capabilities and explore new market opportunities—without committing too many resources before the future shape of the industry becomes clear.
- The telecommunications industry, for example, is currently going through a profound transformation brought about by the convergence of telecommunications, information technology, and consumer electronics, and by the parallel deconstruction of the value chain of traditional telecommunications.
- As companies in the industry try to cope with the implications of these changes, a number have turned to strategic alliances to test new business models and market opportunities.
Factors to be considered in an Alliance
Understand that alliances are different from M&A:
Alliances are a distinctive form of corporate control and entities have to understand the strategic objective before going for an alliance. Thus they should be strategically driven.
Put alliances in growth strategy:
Organization’s try to place alliances in their growth strategy.
Alliances may fail:
History has proved that even marriages that were meant to be “eternal” have failed. Companies should be drawn away by unfortunate alliances and should mitigate this risk by entering into multiple alliances.
Review the alliance performance:
Companies should periodically review the performance of alliances. The continuity in the particular alliance would be solely driven on the basis of performance.
Have a systematic entry & exit strategy:
It is critical to have a standard alliance entering strategy laying out the criteria to be adopted in partner selection etc. Moreover when it comes to exciting it is necessary to have clarity in understanding the outcomes in terms of losses/gains in the alliance.
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CONCLUSION
As a native saying goes “There is a limit up to which your thumb can swell- it cannot swell into a size football how so ever healthy”.
Similarly, in a world where competition is the order of the day with almost homogeneous products and a seamless global market no individual corporate how so ever big can grow and dominate indefinitely. At some stage, it has to choose the inorganic path for growth. The type of alliance it chooses will depend on what its growth needs are and the time frame. Again having reached a particular goal, new ones will attract the corporate and a new choice needs to be made. In the current era of growth, alliances are the only stimulant to meet the potential.
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Mergers and acquisitions have become an essential and integral part of corporate strategy and will gain more significance as competition intensifies and companies move up the growth curve. In fact, M&A should grow in magnitude across the scale regardless of type and size of corporate from the blue chips to S&M companies…… Know More.
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Joint Venture is a right option for inorganic growth when both the parties to the transaction have unique strength and want to come together to leverage the strength of each other without affecting their present structure or ownership. With the advent of globalization and increasing business opportunities,…… Know More.
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