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What are Strategic Alliances?
A strategic alliance is when two or more businesses join together to grow their businesses. The businesses are generally not in direct competition but have similar goods, services and products directed toward the same target audience.
Strategy Development involves: Studying the alliance’s feasibility, objectives and rationale Focusing on the major issues and challenges around development of resource strategies for production, technology, and people. It requires aligning alliance objectives with the overall corporate strategy.
Alliance Steps Partner Assessment involves: Identifying & analyzing a potential partner’s strengths and weaknesses Creating strategies for accommodating all partners’ management styles Preparing appropriate partner selection criteria Understanding a partner’s motives for joining the alliance and addressing resource capability gaps that may exist for a partner. 4 .
Who do you make alliances with? Alliance must: -Benefit both parties -Understand contributions & rewards -Protect any proprietary information -What is the operational philosophy 5 .
What has your experience been in an ‘alliance’? Was your alliance beneficial? -Why? What potential drawbacks or conflicts do you see .Why? 6 .
Measuring and rewarding alliance performance 7 .Alliance Steps Alliance Operation must address: Senior management’s commitment Finding the caliber of resources devoted to the alliance Linking of budgets & resources with priorities Assessing the performance & results of Alliance.
M. attainable realistic.Measuring Success Identify objectives & benchmarks Goals must be S. growth? 8 . (specific. time bound) Review organizational goals at set dates Is success defined in increased sales.R.A.T. measureable.
Successful Alliances Successful alliances have: Clear planning Performance feedback mechanisms Similar management philosophies Similar commitment levels Understood roles and responsibilities 9 .
issues include change in language. Incompatible personality types and/or Clash of cultural norms 2. egos.Downfalls of Alliances 1. Lack of trust. difference of opinions i. business measures profits. 6. lack of long term commitment 10 . Finger pointing when things go wrong doesn’t solve the problem. etc. Cultural clash is a major problem. Lack of clear organizational objectives and goals Alliances can be formed for the wrong reasons. Reasons alliances fail: inability to share risk and different objectives. it makes it Bigger. market share.e. red flags may be raised on why a company is Partnering up and brings an unwanted spotlight 5. 4. may focus on helping people. If you can’t trust your partner then the alliance should be terminated. growing knowledge and education 3.
Why are Alliances Important? Some of the advantages of strategic alliances include: -Learning from partners -Combining resources -Expand contacts -Increase the capabilities of your business Are there other advantages that you recognize? 11 .
Conclusion Strategic Alliances can be very beneficial to both parties if outcomes and responsibilities are identified right from the start Know who to partner with and when to terminate partnership Measure the success or improvements needed Learn from successful and unsuccessful partnerships 12 .
What is corporate restructuring? Corporate Restructuring External Expansion Merger Acquisition Failure Bankruptcy 13 .
What is corporate restructuring? 1980’s: corporate restructuring identified with leveraged buyouts (LBO’s) An attempt to buy a company using borrowed money by its management or outsiders . 1990’s: corporate restructuring identified with troubled debt restructuring: workouts and reorganization Mergers and Acquisitions Booming in Technology Post 2000: back to troubled debt to improve business models 14 .
15 . Consolidation A+B=C Two corporations join and create a third corporation.Types of Combinations Restructuring 1. The original two corporations dissolved.
Mergers and Acquisitions A + B = AB A+B=A One corporation may acquire and absorb another. The acquired business is dissolved.Types of Combinations Restructuring 2. We often use the term M&A as meaning the same thing. 16 .
A is parent corporation or holding company. Advantages: Ability to control without owning all its stocks. Easily dissolved by regulations 17 . B is subsidiary.Types of Combinations Restructuring 3. Less risks Disadvantages: Double taxes of earnings. Holding (parent) and Subsidiary Corporations A may own all or almost all of the stock of B.
Types of Takeovers General Guidelines Takeover The transfer of control from one ownership group to another. A genuine merger in which both sets of shareholders must approve the transaction Requires a fairness opinion by an independent expert on the true value of the firm’s shares when a public minority exists Merger Amalgamation 18 . Acquisition The purchase of one firm by another The combination of two firms into a new legal entity A new company is created Both sets of shareholders have to approve the transaction.
Share Transaction The offer by an acquiring company of shares or a combination of cash and shares to the target company’s shareholders. A special form of acquisition where the purchaser already owns a majority stake in the target company.Types of Takeovers How the Deal is Financed Cash Transaction The receipt of cash for shares by shareholders in the target company. Going Private Transaction (Issuer bid) 19 .
Friendly Acquisition The acquisition of a target company that is willing to be taken over. the target will accommodate overtures and provide access to confidential information to facilitate the scoping and due diligence processes. 20 . Usually.
Normally starts when the target voluntarily puts itself into play.Friendly Acquisitions The Friendly Takeover Process 1. 21 . accounting team may seek advance tax Final sale may require negotiations over the structure of the deal including: » » Tax planning Legal structures 2. Can be initiated by a friendly overture by an acquirer seeking information that will assist in the valuation process. o Target uses an investment bank to prepare an offering memorandum • • • • May set up a data room and use confidentiality agreements to permit access to interest parties practicing due diligence A signed letter of intent signals the willingness of the parties to move to the next step – (usually includes a no-shop clause and a termination or break fee) Legal team checks documents.
Friendly Acquisition Friendly Acquisition Information memorandum Confidentiality agreement Main due diligence Ratified Sign letter of intent Final sale agreement Approach target 22 .
both parties have the opportunity to structure the deal to their mutual satisfaction including: 1.Friendly Takeovers Structuring the Acquisition In friendly takeovers. Earn outs where there is an agreement for an initial purchase price with conditional later payments depending on the performance of the target after acquisition. 23 . Asset purchases rather share purchases that may: • • Give the target firm cash to retire debt and restructure financing Permit escape from some contingent liabilities (usually excluding claims resulting from environmental lawsuits and control orders that cannot severed from the assets involved) 3. Taxation Issues – cash for share purchases trigger capital gains so share exchanges may be a viable alternative 2.
24 .Hostile Takeovers A takeover in which the target has no desire to be acquired and actively rebuffs the acquirer and refuses to provide any confidential information. The acquirer usually has already accumulated an interest in the target and this preemptive investment indicates the strength of resolve of the acquirer.
Hostile Takeovers The Typical Process The typical hostile takeover process: 1.this offer contains a provision that it will be made only if a certain minimum percentage is obtained. Slowly acquire a toehold by open market purchase of shares at market prices without attracting attention. 2. 3. Accumulate of the outstanding shares through open market purchase over a longer period of time Make a tender offer to bring ownership percentage to the desired level (either the control or amalgamation level . 25 . During this process the acquirer will try to monitor management/board reaction and fight attempts by them to put into effect shareholder rights plans or to launch other defensive tactics.
2. Market price stays close to the offer price o o o Little trading in the shares Great deal of trading in the shares 26 . themselves building a position to negotiate an even bigger premium for themselves by coordinating a response to the tender offer.Hostile Takeovers Capital Market Reactions and Other Dynamics Market clues to the potential outcome of a hostile takeover attempt: 1. Market price jumps above the offer price o o A competing offer is likely or The bid price is too low The offer price is fair and the deal will likely go through A bad sign for the acquirer because shareholders are reluctant to sell. 3. Large numbers of shares being sold from normal investors to arbitrageurs (arbs) who are. 4.
Can involve a large dividend to remove excess cash from the target’s balance sheet. Selling the Crown Jewels • • The selling of a target company’s key assets that the acquiring company is most interested in to make it less attractive for takeover. White Knight • The target seeks out another acquirer considered friendly to make a counter offer and thereby rescue the target from a hostile takeover 27 .Hostile Takeovers Defensive Tactics Shareholders Rights Plan • • Known as a poison pill or deal killer Can take different forms but often Non-acquiring shareholders get the right to buy 50 percent more shares at a discount price in the event of a takeover.
Often in an attempt to achieve economies of scale and/or scope. Vertical • • 3. A merger in which two firms in unrelated businesses combine. Often in an attempt to control supply or distribution channels.either the acquiring or target company. Horizontal • • A merger in which two firms in the same industry combine.Classifications Mergers and Acquisitions 1. 2. A merger in which one firm acquires a supplier or another firm that is closer to its existing customers. Cross-border (International) M&As • 28 . Purpose is often to ‘diversify’ the company by combining uncorrelated assets and income streams A merger or acquisition involving a Indian and a foreign firm . Conglomerate • • 4.
North America Free Trade Agreement Deregulation Sector booms such as energy or metals or IT 29 .Mergers and Acquisition Activity M&A activity seems to come in ‘waves’ through the economic cycle domestically. or in response to globalization issues such as: Formation and development of trading zones or blocks (EU.
Waves in M&A activity The First Wave 1897-1904 After 1883 depression Horizontal mergers Create monopolies The Second Wave 1916-1929 Oligopolies The Clayton Act of 1914 The Third Wave 1965-1969 Conglomerate Mergers Booming Economy The Fourth Wave 1981-1989 Hostile Takeovers Mega-mergers Mergers of 1990’s Strategic mega-mergers 30 .
the amount by which the value of the combined firm exceeds the sum value of the two individual firms. Synergy value is created from economies of integrating a target and acquiring a company. 31 .Motivations for Mergers and Acquisitions Creation of Synergy Motive for M&As The primary motive should be the creation of synergy.
Creation of Synergy Motive for M&As Synergy is the additional value created (∆V) : [ 15-1] V VAT -(VA VT ) Where: VT VA – T VA = = = the pre-merger value of the target firm value of the post merger firm value of the pre-merger acquiring firm 32 .
33 .Value Creation Motivations for M&As Operating Synergies Operating Synergies 1. Economies of Scale o o o Reducing capacity (consolidation in the number of firms in the industry) Spreading fixed costs (increase size of firm so fixed costs per unit are decreased) Geographic synergies (consolidation in regional disparate operations to operate on a national or international basis) 2. Complementary Strengths o Combining the different relative strengths of the two firms creates a firm with both strengths that are complementary to one another. Economies of Scope o Combination of two activities reduces costs 3.
The combined firm can make use of unused production/sales/marketing channel capacity Financing Synergy Reduced cash flow variability Increase in debt capacity Reduction in average issuing costs 34 .Value Creation Motivations for M&A Efficiency Increases and Financing Synergies Efficiency Increases New management team will be more efficient and add more value than what the target now has.
Value Creation Motivations for M&A Tax Benefits and Strategic Realignments Tax Benefits Make better use of tax deductions and credits o o o Use them before they lapse or expire (loss carry-back. 35 . and new products/services. connections to markets or people. carry-forward provisions) Use of deduction in a higher tax bracket to obtain a large tax shield Use of deductions to offset taxable income (non-operating capital losses offsetting taxable capital gains that the target firm was unable to use) Strategic Realignments Permits new strategies that were not feasible for prior to the acquisition because of the acquisition of new management skills.
Managerial Motivations for M&As Managers may have their own motivations to pursue M&As. are not necessarily in the best interest of the firm or shareholders. but do address common needs of managers 1. Increased firm size • • Managers are often more highly rewarded financially for building a bigger business (compensation tied to assets under administration for example) Many associate power and prestige with the size of the firm. 2. The two most common. Reduced firm risk through diversification • Managers have an undiversified stake in the business (unlike shareholders who hold a diversified portfolio of investments and don’t need the firm to be diversified) and so they tend to dislike risk (volatility of sales and profits) • M&As can be used to diversify the company and reduce volatility (risk) that might concern managers. 36 .
61% lost value over the following year The biggest losers were deals financed through shares which lost an average 8%. Between 1995 and 2001 37 .Empirical Evidence of Gains through M&As Target shareholders gain the most Through premiums paid to them to acquire their shares o o 15 – 20% for stock-finance acquisitions 25 – 30% for cash-financed acquisitions (triggering capital gains taxes for these shareholders) Gains may be greater for shareholders will to wait for competitors to negotiate higher offers or bidding wars develop between multiple acquirers.
o o When using cash.Empirical Evidence of Gains through M&As Shareholder Value at Risk (SVAR) Is the potential in an M&A that synergies will not be realized or that the premium paid will be greater than the synergies that are realized. 38 . the risk is borne by the shareholders in both companies SVAR supports the argument that firms making cash deals are much more careful about the acquisition price. the acquirer bears all the risk When using share swaps.
THANK YOU! 39 .
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