STRATEGY | December 3, 2018 / 

Spring 2019/Issue 94

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Why your next deal may be a

partnership
A new study shows that alliances and joint ventures are on the rise worldwide.

by Bob Saada and Benjamin Gomes-Casseres

Illustration by Lasse Skarbovik

A version of this article appeared in the Spring 2019 issue of

strategy+business.
When Amazon, Berkshire Hathaway, and JPMorgan Chase announced a new
alliance in early 2018, the partnership turned heads. Three companies, giants
in their respective industries, were going to pool their resources and work
together. The new venture’s goal: targeting waste in the current healthcare
system and improving patient service, initially for those covered by the three
companies’ health insurance policies, but with the potential to expand.

Partnerships between businesses have a long history and come in many

forms, including strategic alliances and joint ventures (JVs). The Amazon–
Berkshire–JPMorgan deal shows how companies today, responding to
technological disruption, geopolitical uncertainty, regulatory overhaul, and
demographic shifts, are pushing such partnerships beyond their traditional
limits. The aim is often to bring together expertise to expand the companies’
reach, drive growth, and cope with rising competition. For example, Toyota
has invested more than US$5 million in a joint venture with Microsoft that
uses the tech company’s cloud computing platform to expand connected car
services. Starbucks and Nestlé nalized an alliance in August 2018 through
which the latter will sell Starbucks packaged coffee in markets around the
globe.
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One thing is clear from these and other recent partnerships: Few companies
can afford to follow their previous deal blueprints if they want to respond to
the disruptions and risks in today’s markets. More important, the traditional
lines between industries are blurring, with consumers increasingly expecting
goods and services to be interconnected, and businesses seeking to make
their supply chains more e cient and effective.

Why a Partnership?
A recent PwC analysis of more than a quarter century of global data on
alliances and JVs shows we’re in another period of upswing when it comes to
those partnerships. The combined number of alliances and JVs has increased
in the past two years and is now at its highest level since the start of the
century.
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A strategic alliance is an agreement between independent organizations to

share resources, knowledge, or other assets. Partners coordinate their
actions to pursue mutually bene cial goals while maintaining their autonomy.
Each company gains a new business opportunity, be it increasing e ciency,
expanding into a new market, capturing more market share, or some other
type of growth. A joint venture takes this arrangement a step further, with
companies pooling resources to create a separate business entity. JVs are
stand-alone enterprises that often share resources with parents, and they’re
typically more involved and complex than strategic alliances.

Mergers and acquisitions remain the most common path for companies
pursuing inorganic growth. But alliances and JVs provide a way for a company
to supplement internal assets and capabilities with access to needed
resources, such as distribution channels, capital equipment, and intellectual
property, with less investment and risk than the typical M&A. In addition,
alliances and JVs can often be executed more quickly than M&A.
Our research found that the use of JVs and alliances varies by industry. Since
1990, asset-heavy industries have generally favored JVs over alliances,
because creating separate structures allows the partners to best govern their
investments in real assets. These sectors include industrial, consumer and
retail, automotive, and energy and mining companies. Alliances, however,
have tended to be preferred by information-heavy industries, such as IT;
pharmaceuticals; and entertainment, media, and communications
businesses. In these sectors, the best way to govern the ow of information
has been through contractual structures that don’t require joint ownership of
physical assets. IT has seen the most alliances over the past quarter century,
and the pharmaceuticals industry is second.

Further evidence of the rise in

“
popularity of alliances and JVs

Few companies can afford comes directly from company

to follow their previous
deal blueprints if they want
to respond to the
disruptions and risks in
today’s markets.
market exit (16 percent).
leaders. In PwC’s most recent
global CEO Survey, 49 percent of
executives said they were planning
a new strategic alliance or JV in the
next year to help drive corporate
growth or pro tability. That was
more than were planning new M&A
activity (42 percent), outsourcing
(21 percent), or a business sale or

Companies are also using alliances and JVs to explore growth outside their
home countries. Unlike M&A or green eld investment, an alliance or JV can
allow a company to get experience in a particular market before considering a
more substantial investment. Although the overall number of cross-border
partnerships hasn’t grown in the last quarter century, activity in individual
nations has risen and fallen. Japanese rms accounted for more than 25
percent and China-based companies less than 15 percent of early 1990s
alliances and JVs. In this decade, however, Japan’s share is less than 10
percent, while Chinese companies are involved in nearly half of all alliances
and JVs. The partnership activity of U.S. and European companies has held
relatively steady as a share of the total during the same time period.

In a 2017 PwC survey of business leaders in 21 economies that make up the

Asia-Paci c Economic Cooperation (APEC), 71 percent said they expected to
make greater use of strategic alliances to secure a foothold in foreign
markets. If the past is any indication, companies will use alliances and JVs to
navigate the modern challenges of globalization and innovation. For example,
if M&A is tested by new regulations, alliances and JVs may ll the gap.

Working across Industries

Perhaps the greatest potential for alliances and JVs will come from
partnerships that involve companies in different sectors, such as the
aforementioned Amazon–Berkshire–JPMorgan deal. For some companies, a
full acquisition in a different industry may be too big a commitment. An
alliance may allow them to test the waters with less exposure. Executives can
place a bet that gives their company access to something new or
complementary. If it doesn’t pan out, the company can discontinue the
partnership instead of being saddled with a subpar acquisition.

The rise of cross-sector alliances mirrors the trend in M&A, where there has
also been a rise in cross-sector transactions — but with alliances and JVs, the
trend is even more pronounced. We found that from 2011 to 2017, six out of 10
alliances and JVs have involved companies in different industries, compared
with about four out of 10 mergers and acquisitions. Much of today’s cross-
industry collaboration is driven by the need for traditional companies to
adopt new technologies, or to react to challenges posed by new technologies.
That leads car companies to ally with software companies, media companies
to join with communications companies, and many other businesses to seek
ways to learn and exploit the emerging tools of sophisticated data analytics.

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The most common cross-industry trend in our data is the tendency of rms in
technology to tie up with rms in other industries. The evolution of
computing power, sensors, batteries, and miniaturization has left few
industries untouched. These trends have caused even the most well-
established companies to look outside their traditional boundaries for
innovation. It has led them to set up tech incubators and internal VC arms and
to invest in teams that manage alliances.

Cross-sector alliances can take any number of forms. Consider the evolution
of mobile phones. As phones became smaller and personal digital assistants
were developed, manufacturers and carriers formed partnerships. The arrival
of smartphones brought apps and new ways to consume content, leading to
other deals. Now we see alliances such as that between T-Mobile and Net ix,
with the former gaining a content stream for its mobile customers, while the
latter gets access to a new group of subscribers.

Elsewhere, Japanese carmakers and energy companies recently teamed up

to build fuel stations for hydrogen fuel cell vehicles, following a similar effort
in Germany. Other aspects of the automotive world, such as autonomous
vehicles and ride sharing, could invite alliances with insurance companies.
Meanwhile, insurance could be a factor in healthcare alliances, as mobile
technology and virtual reality change traditional data collection and delivery
of care.

The Evolution of a Deal

An alliance may be established and remain just that — two or more companies
sharing resources, working toward a common goal, and, ideally, reaping
mutual bene ts. But it’s also possible that an alliance will evolve into either a
different type of partnership or a more traditional M&A. In many cases, a
company’s inorganic growth strategy will include a mix of deals, allowing its
degree of investment and level of risk to be uid in each case.

Of course, in some circumstances,

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the preferences of one or all
partners will mean that either an
alliance or an acquisition is the
only option. But past deals have
shown how a relationship can
change. The ability of deals to
evolve over time can be especially
valuable when a business wants to
consider entering a new industry or
region. If an initial alliance or JV
proves fruitful, the company could
decide to make a stronger
 by Gary Ahlquist and John Petito
commitment and explore full
ownership of the venture, or even a
merger.

That’s what happened when the

Walt Disney Company ventured into
computer-animated lms. Pixar was an independent company when it made
a deal with Disney in 1991 to produce computer-animated feature lms. The
rst, Toy Story, was released in 1995, and Pixar held an IPO that same year.
The two companies continued to work together, and although the
relationship was contentious at times, Disney’s strong interest — buoyed by a
string of successful lms — ultimately led it to acquire Pixar in 2006 for about
$7.4 billion.

An alliance can be the tip of the spear when it comes to exploring a new path
to growth. High valuations have tested some potential buyers’ willingness to
go through with certain acquisitions, fearful the deal won’t deliver an
adequate return on investment. But alliances and JVs have proven to be an
alternative that provides access to a new market in the short term and keeps
the door open for a rmer commitment down the road.

Whatever the path of the partnership, success usually hinges on trust and
good management. Building trust early on is important in managing an
alliance or JV. It can enable partners to set big long-term goals while
celebrating small wins along the way. Companies that manage partnerships
well also design agreements that are exible, coordinate planning and
budgeting with each other, and follow strong governance processes and
principles. When partners work to be agreeable, collaborative, and
responsible, alliances and JVs can thrive.

Author Pro les:

Bob Saada is a partner with PwC US based in New York. He is the U.S. deals practice leader.
 Benjamin Gomes-Casseres is a professor of business strategy at Brandeis University and author of Remix
Strategy: The Three Laws of Business Combinations.

Topics: alliances, deals, growth, joint ventures, mergers and deals

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