IB-Ch 12

Chapter 12—Making Alliances and Acquisitions Work
TRUE/FALSE
1. Equity-based alliances include co-marketing, research and development, contracts, turnkey products,
strategic suppliers, and strategic distributors.
ANS: F PTS: 1 DIF: Difficulty: Easy

OBJ: LO: 12-1 NAT: BUSPROG: Analytic KEY: Bloom's: Knowledge
2. Contractual alliances involve sharing of ownership.
ANS: F PTS: 1 DIF: Difficulty: Moderate

OBJ: LO: 12-1 NAT: BUSPROG: Analytic KEY: Bloom's: Comprehension
3. Cross-shareholding is based on financial interest between the firms.
ANS: T PTS: 1 DIF: Difficulty: Moderate

4. A joint venture (JV) is a form of equity-based alliance.
ANS: T PTS: 1 DIF: Difficulty: Easy

5. Licensing is a form of equity-based alliance.
ANS: F PTS: 1 DIF: Difficulty: Easy

6. Strategic investments in an equity-based alliance involve one partner investing in another.

7. Cross-border mergers are more common than acquisitions.

8. Mergers and acquisitions represent the largest proportion of foreign direct investment (FDI) flows.

9. Antitrust authorities provide easy approvals for both alliances and acquisitions with less intervention.

10. Formal government policies regarding entry mode requirements are generally becoming more
conservative.
11. The informal institution-based view that stresses on the cognitive pillar is centered on the internalized
taken-for-granted values and beliefs that guide firm behavior.

12. Acquisition premium is the difference between the acquisition price and the market value of the
acquiring firm.

13. The formal institution-based view that drives mergers and alliances is based on the normative and
cognitive pillars.

14. The “O” in the VRIO framework indicates opportunity.

15. The real options view gives the investor the levy of buying an option for initial investment, holding it
until a decision point is arrived, and abandoning it if necessary.

16. Alliances have emerged as great instruments of real options because of their flexibility to sequentially
scale up or scale down investment.

17. One of the disadvantages of having strategic alliances is potential partner opportunism.

18. Managers involved in alliances require collaborative relationship skills.

19. The "imitability" of an alliance is based on the trust and understanding between the partners.

20. Every alliance or acquisition decision is driven by imitation.

21. Alliances permit firms to sequentially increase their investment should they decide to pursue
acquisitions.

22. During the first stage of alliance formation, a firm decides whether growth can be achieved strictly
through market transactions, acquisitions, or alliances.

23. In the context of alliance formation, shared capabilities is one of the driving forces in deciding whether
to take a contract or an equity approach.

24. Importance of direct organizational monitoring and control is low in equity-based alliances.

25. The degree of tacitness is low in non-equity-based alliances.

26. Influence of formal institutions is low in both equity- and non-equity-based alliances.

27. The more hard to describe the capabilities of a firm in an alliance, the greater the preference for an
equity involvement.

28. Equity alliance relationships tend to have less direct control over joint activities on a continual basis
than contractual relationships.

29. One way of combating opportunism in an alliance is to wall off critical capabilities.

30. The alliance dissolution is a four-step process.

31. The first phase in an alliance dissolution is mediation by third parties.

32. Equity, learning and experience, relational capabilities, and nationality are four factors that may
influence alliance performance.

33. The three potential motives for alliances are synergistic, hubristic, and managerial motives.

34. In the context of acquisitions, synergistic motives destroy value while hubris and managerial motives
add value.

35. Alliances preclude acquisitions.

MULTIPLE CHOICE
1. In the context of equity-based alliances, _____ involves both firms investing in each other.
a. strategic fit
b. acquisition premium
c. strategic investment
d. cross-shareholding
ANS: D PTS: 1 DIF: Difficulty: Easy

2. Which of the following alliances is an equity-based alliance?

a. Strategic investment
b. Licensing
c. Turnkey projects
d. Co-marketing
ANS: A PTS: 1 DIF: Difficulty: Easy

3. Which of the following alliances is a contractual alliance?
a. Strategic investment
b. Franchising
c. Cross-shareholding
d. Joint venture
ANS: B PTS: 1 DIF: Difficulty: Easy

4. _____ are associations between firms that are based on contracts and do not involve the sharing of
ownership.
a. Joint ventures
b. Cross-shareholdings
c. Non-equity based alliances
d. Strategic investments
ANS: C PTS: 1 DIF: Difficulty: Easy

5. A non-equity based alliance is also called a _____.

a. cross-border alliance
b. synergistic alliance
c. hubristic alliance
d. contractual alliance

6. _____ alliances are based on ownership or financial interest between the firms.
a. Contractual
b. Hubristic
c. Equity-based
d. Synergistic

7. In which type of equity-based alliance does one firm invest in another?

a. Hubristic investment
b. Cross-shareholding
c. Licensing
d. Strategic investment

8. The combination of operations and management of two firms to establish a new legal entity is called
a(n) _____.
a. joint venture
b. merger
c. contractual alliance
d. acquisition

9. A(n) ____ is the transfer of the control of operations and management from one firm to another with
the former becoming a unit of the latter.
a. joint venture
b. merger
c. acquisition
d. contractual alliance

10. The institution-based view driving alliances and acquisitions focuses on _____ concerns.
a. value
b. rarity
c. learning by doing
d. antitrust

11. The set of informal institutions that stresses the cognitive pillar lays emphasis on _____.
a. establishing wholly owned subsidiaries
b. granting more liberal policies
c. copying reputable organizations to ensure a low-cost way to gain legitimacy
d. the internalized taken-for-granted values and beliefs that guide firm behavior
ANS: D PTS: 1 DIF: Difficulty: Moderate

12. The act of investigating prior to signing contracts is called _____.

a. due diligence
b. strategic fit
c. relational capability
d. hubristic motive

13. A(n) ____ is an investment in real operations as opposed to financial capital.
a. real account
b. hubris
c. real option
d. foreign direct investment

14. Which of the following is a disadvantage of alliances?

a. Lack of learning race
b. Partner opportunism
c. Value as real options
d. Scale up and scale down of investments
ANS: B PTS: 1 DIF: Difficulty: Moderate

15. The difference between the acquisition price and the market value of target firms is called _____.
a. acquisition equity
b. acquisition cost
c. acquisition value
d. acquisition premium

16. In the context of acquisitions, the similarity in cultures, systems, and structures between firms is called
_____.
a. strategic fit
b. acquisition premium
c. organizational fit
d. relational capability

17. Who benefits the most from the acquisition premium valued during an acquisition?
a. The shareholders of the acquiring firm
b. The shareholders of the target firm
c. The opportunistic partner
d. The partner who possesses hard-to-imitate capabilities

18. Pre-acquisition analysis often focuses on strategic fit, which is the effective matching of ____ strategic
capabilities.
a. competitive
b. complementary
c. relational
d. collaborative

19. The ability to successfully manage interfirm relationships is called _____.

a. hubristic capability
b. synergistic capability
c. contractual capability
d. relational capability

20. At which stage in the formation of alliance must a firm decide whether to take a contract or an equity
approach?
a. Stage 1
b. Stage 2
c. Stage 3
d. Stage 4

21. At stage 1 in the formation of an alliance, a firm must _____.

a. check the degree of tacitness
b. evaluate institutional constraints
c. decide whether growth can be achieved through market transactions
d. choose between a contract or an equity approach
ANS: C PTS: 1 DIF: Difficulty: Moderate

22. Which is the best-case scenario for an equity-based alliance?

a. High tacitness and high importance to direct organizational monitoring and control
b. Low potential as real options and low influence of formal institutions
c. High tacitness and low influence of formal institutions
d. Low tacitness and high importance to direct organizational monitoring and control
ANS: A PTS: 1 DIF: Difficulty: Moderate

23. Which is the best-case scenario for a non-equity-based alliance?
a. High tacitness and low influence of formal institutions
b. Low potential as real options and low influence of formal institutions
c. High tacitness and high importance of direct organizational monitoring and control
d. Low tacitness and low importance of direct organizational monitoring and control

24. In a non-equity-based alliance, which of the following should be high for possible upgrading to equity-
based relationships?
a. Degree of tacitness
b. Importance of direct organizational monitoring and control
c. Potential as real option
d. Influence of formal institutions

25. In an alliance, keeping critical skills and technologies not meant to be shared a secret helps prevent
_____.
a. proxy fight
b. corporate raider
c. opportunism
d. hostile takeover

26. Which of the following occurs in the uncoupling stage of an alliance dissolution?
a. Last minute salvage
b. New relationships
c. Reconciliation
d. Mediation by third parties

27. Which is one of the four phases in an alliance dissolution?

a. Imitation
b. Going public
c. Strategizing
d. Opportunism

28. The second phase in an alliance dissolution is _____.
a. going public
b. imitation
c. strategizing
d. uncoupling

29. In the context of the motives for acquisition, from a resource-based view, the most important _____
rationale is to leverage superior resources.
a. managerial
b. synergistic
c. hubristic
d. collusive

30. With respect to the motives for acquisition, _____ motives add value.
a. collusive
b. hubristic
c. managerial
d. synergistic

31. ____ refers to overconfidence in one’s capabilities.

a. Hubris
b. Fringe
c. Decoupling
d. Andon

32. Which of the following motives for acquisition faces the resource-based issue of access to
complementary resources?
a. Collaborative
b. Hubristic
c. Managerial
d. Synergistic
ANS: D PTS: 1 DIF: Difficulty: Moderate

33. In the context of acquisitions, which of the following is a resource-based issue faced by synergistic
motives?
a. Herd behavior
b. Enhancement of market power and scale economies
c. Chasing fads of M&As
d. Self-interested actions

34. Which of the following stakeholders has the most concern over short-term revenue falling during
mergers and acquisitions?
a. Investors
b. Top management
c. Middle management
d. Customers

35. Which of the following reasons for cross-border acquisition failure is associated with pre-acquisition?
a. Failure to address multiple stakeholder groups’ concerns
b. Poor organizational fit
c. Nationalistic concerns against foreign takeovers (political and media levels)
d. Clashes of organizational cultures

ESSAY
1. Elaborate on the institution-based view of alliances and acquisitions.
ANS:
Alliances and acquisitions function within formal legal and regulatory frameworks.
The impact of these formal institutions can be found along two dimensions: antitrust concerns and
entry mode requirements. Many firms establish alliances with competitors. Cooperation between
competitors is usually suspected of at least some tacit collusion by antitrust authorities. However,
because integration within alliances is usually not as tight as acquisitions, antitrust authorities are more
likely to approve alliances than they are acquisitions.
Formal requirements on market entry modes affect alliances and acquisitions. Recently, two trends
have emerged concerning formal government policies on entry mode requirements. First is the general
trend toward more liberal policies. A second characteristic is that many governments still impose
considerable requirements, especially when foreign firms acquire domestic assets.
The first set of informal institutions centers on collective norms, supported by a normative pillar. One
core idea of the institution-based view is that because firms act to enhance or protect their legitimacy,
copying other organizations—even without knowing the direct performance benefits of doing so—may
be a low-cost way to gain legitimacy.
A second set of informal institutions stresses the cognitive pillar, which centers on the internalized
taken-for-granted values and beliefs that guide firm behavior.
PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 12-2

NAT: BUSPROG: Analytic KEY: Bloom's: Comprehension
2. One of the merits of alliances is to use them as real options. Elaborate.
ANS:
One important advantage of alliances lies in their value as real options. A real option is an investment
in real operations as opposed to financial capital. A real options view suggests two propositions:
· In the first phase, an investor makes a small, initial investment to buy an option, which
leads to the right to make a future investment without being obligated to do so.
· The investor then holds the option until a decision point arrives in the second phase and
then decides between exercising the option or abandoning it.
Alliances have emerged as great instruments of real options because of their flexibility to sequentially
scale up or scale down the investment.

3. How does the VRIO framework affect acquisitions?
ANS:
Value: On average, the performance of acquiring firms does not improve after acquisitions. Target
firms, after being acquired and becoming internal units, often perform worse than when they were
independent, stand-alone firms. Only the shareholders of target firms may benefit from the increase in
their stock value during the period of the transaction due to the acquisition premium.
Rarity: For acquisitions to add value, one or all of the firms involved must have rare and unique skills
that enhance the overall strategy.
Imitability: While many firms undertake acquisitions, a much smaller number of them have mastered
the art of post-acquisition integration. Consequently, firms that excel in integration possess hard-to-
imitate capabilities that are advantages in acquisitions.
Organization: Fundamentally, whether acquisitions add value is based on how merged firms are
organized to take advantage of the benefits while minimizing the costs. Pre-acquisition analysis often
focuses on strategic fit. Many firms do not pay adequate attention to organizational fit, which is the
similarity in cultures, systems, and structures.

4. Describe the four driving forces that influence the choice of a contract or an equity approach in the
formation of alliances.
ANS:
In stage two of the alliance formation, a firm must decide whether to take a contract or an equity
approach. The choice between contract and equity is crucial and is influenced by the following four
driving forces.
Shared capabilities: The more tacit the capabilities, the greater the preference for equity involvement.
Much tacit knowledge can only be acquired via learning by doing, preferably with experts (such as
Toyota) as alliance partners.
Direct monitoring and control: Equity relationships allow firms to have some direct control over joint
activities on a continuing basis, whereas contractual relationships usually do not. In general, firms that
fear their intellectual property may be expropriated prefer equity alliances (and a higher level of
equity).
Real options thinking: Some firms prefer to first establish contractual relationships, which can be
viewed as real options for possible upgrading into equity alliances should the interactions turn out to
be mutually satisfactory.
Institutional constraints: Some governments that are eager to help domestic firms climb the technology
ladder either require or encourage the formation of JVs between foreign and domestic firms.

5. Describe the stages in the formations of alliances.
ANS:
A three-stage model has been designed to explain the formation of alliances.
In stage one, a firm must decide whether growth can be achieved strictly through market transactions,
acquisitions, or alliances. To grow by pure market transactions, the firm has to confront competitive
challenges independently. This is highly demanding, even for resource-rich multinationals.
In stage two, a firm must decide whether to take a contract or an equity approach. There are four
driving forces that influence this decision: shared capabilities, direct monitoring and control, real
options thinking, and institutional constraints.
In stage three, firms need to choose a specific format that is either equity-based or contractual (non-
equity-based), depending on the choice made in step two.

6. Describe how partners in an alliance can combat opportunism.
ANS:
While an alliance is built with significant trust, both sides want to protect themselves from the other
side being opportunistic. It is possible to minimize the threat of opportunism by walling off critical
capabilities or swapping critical capabilities.
Both sides can contractually agree to wall off critical skills and technologies not meant to be shared.
This agreement only works as long as both sides are comfortable with it.
In the second approach, swapping skills and technologies, both sides not only agree to hold critical
skills and technologies back, but also make credible commitments to hold each other as a “hostage. ”

7. Elaborate on the factors that may influence alliance performance.
ANS:
Four factors are identified that may influence alliance performance: equity, learning and experience,
nationality, and relational capabilities.
The level of equity may be crucial in how an alliance performs. A higher level of equity stake is
indicative of a firm's stronger commitment that will most likely result in higher performance. Since
learning is abstract, experience is often used as it is easier to measure; however experience has no
linear impact on performance. There is a limit where increase in experience may no longer enhance
performance.
Nationality may affect performance. Dissimilarities in national culture may create stains in alliances.
International alliances tend to be more problematic than domestic ones.
The art of relational capabilities, which are firm-specific and difficult to codify and transfer, may make
or break alliances.

8. Discuss few ways of improving the odds for acquisition success.
ANS:
Considering the pre-acquisition phase: do not overpay for targets, and avoid a bidding war when
premiums are too high; engage in thorough due diligence concerning both strategic and organizational
fit.
Post-acquisition aspects include: addressing the concerns of multiple stakeholders, and trying to keep
the best talents; being prepared to deal with roadblocks thrown up by people whose jobs and power
may be jeopardized.


IB-Ch 12

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Chapter 12—Making Alliances and Acquisitions Work

ANS: F PTS: 1 DIF: Difficulty: Easy

2. Contractual alliances involve sharing of ownership.

ANS: F PTS: 1 DIF: Difficulty: Moderate

3. Cross-shareholding is based on financial interest between the firms.

ANS: T PTS: 1 DIF: Difficulty: Moderate

4. A joint venture (JV) is a form of equity-based alliance.

ANS: T PTS: 1 DIF: Difficulty: Easy

5. Licensing is a form of equity-based alliance.

ANS: F PTS: 1 DIF: Difficulty: Easy

6. Strategic investments in an equity-based alliance involve one partner investing in another.

ANS: T PTS: 1 DIF: Difficulty: Easy

7. Cross-border mergers are more common than acquisitions.

ANS: F PTS: 1 DIF: Difficulty: Moderate

ANS: T PTS: 1 DIF: Difficulty: Easy

ANS: F PTS: 1 DIF: Difficulty: Moderate

ANS: T PTS: 1 DIF: Difficulty: Moderate

ANS: F PTS: 1 DIF: Difficulty: Moderate

ANS: F PTS: 1 DIF: Difficulty: Moderate

14. The “O” in the VRIO framework indicates opportunity.

ANS: F PTS: 1 DIF: Difficulty: Moderate

ANS: T PTS: 1 DIF: Difficulty: Moderate

ANS: T PTS: 1 DIF: Difficulty: Moderate

ANS: T PTS: 1 DIF: Difficulty: Easy

18. Managers involved in alliances require collaborative relationship skills.

ANS: T PTS: 1 DIF: Difficulty: Easy

ANS: T PTS: 1 DIF: Difficulty: Moderate

20. Every alliance or acquisition decision is driven by imitation.

ANS: T PTS: 1 DIF: Difficulty: Moderate

ANS: T PTS: 1 DIF: Difficulty: Moderate

ANS: T PTS: 1 DIF: Difficulty: Moderate

ANS: F PTS: 1 DIF: Difficulty: Moderate

25. The degree of tacitness is low in non-equity-based alliances.

ANS: T PTS: 1 DIF: Difficulty: Moderate

ANS: F PTS: 1 DIF: Difficulty: Moderate

ANS: T PTS: 1 DIF: Difficulty: Moderate

ANS: F PTS: 1 DIF: Difficulty: Moderate

ANS: T PTS: 1 DIF: Difficulty: Moderate

ANS: T PTS: 1 DIF: Difficulty: Moderate

31. The first phase in an alliance dissolution is mediation by third parties.

ANS: F PTS: 1 DIF: Difficulty: Moderate

ANS: T PTS: 1 DIF: Difficulty: Easy

ANS: F PTS: 1 DIF: Difficulty: Moderate

ANS: F PTS: 1 DIF: Difficulty: Moderate

35. Alliances preclude acquisitions.

ANS: F PTS: 1 DIF: Difficulty: Moderate

ANS: D PTS: 1 DIF: Difficulty: Easy

2. Which of the following alliances is an equity-based alliance?

ANS: A PTS: 1 DIF: Difficulty: Easy

ANS: B PTS: 1 DIF: Difficulty: Easy

ANS: C PTS: 1 DIF: Difficulty: Easy

5. A non-equity based alliance is also called a _____.

ANS: D PTS: 1 DIF: Difficulty: Easy

ANS: C PTS: 1 DIF: Difficulty: Easy

7. In which type of equity-based alliance does one firm invest in another?

ANS: D PTS: 1 DIF: Difficulty: Easy

ANS: B PTS: 1 DIF: Difficulty: Easy

ANS: C PTS: 1 DIF: Difficulty: Easy

ANS: D PTS: 1 DIF: Difficulty: Easy

ANS: D PTS: 1 DIF: Difficulty: Moderate

12. The act of investigating prior to signing contracts is called _____.

ANS: A PTS: 1 DIF: Difficulty: Easy