Session IX

Strategic Alliances and

M&A
Prof. Sushil
Department of Management Studies
Indian Institute of Technology Delhi
Hauz Khas, New Delhi – 110 016
profsushil@gmail.Com
Combination of Means and Forms of Diversification
Vertical
Acquisitions Time Inc. acquires Warner
Communications, creating a
vertically integrated
entertainment business
Strategic Cetus, a leading firm in the
Alliances biotechnology field, teams
up with larger corporations
Means
which provide the capital
and marketing needed to
introduce new Cetus
technology
Internal Humana develops a full line
Development of health care services,
vertically integrating across
insurance, hospitals, and
follow-up treatment services
Sushil/IITD/2021
Forms
Horizontal
Phillip Morris buys Kraft
and General Foods in an
effort to diversify out of the
cigarette business
Dow Chemical and
Corning Glass join forces
to create a joint venture
more profitable than either
of its parents.
3M consistently gets more
than 25% of its revenues
from products it has
developed within the last
five years
Global
BASF, a German chemical
producer, buys Inmont, a
US chemicals company, to
overcome limited growth
opportunities at home
Fuji Photo Films and
Xerox, Inc. form a single
import sales operation that
later grows to become one
of the world’s leading
producers of photocopiers
Anheuser-Busch attempts
to open up new markets
by taking Budweiser, its
flagship product into
Britain
2
 Evaluating Reasons to Diversify

Least Power to Most Power to

Create Value Create Value

Capitalizing
Capitalizing
Reducing Maintain
Maintain Balancing Sharing
Sharing Increasing
on
on Core
Core
Risk Growth
Growth Cash Flows Infrastructure Market Power
Competencies
Competencies

Not Recommended
Recommended as a Reason
as a Reason to Diversity
to Diversify

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Critical Elements for Shared Opportunities to be
Meaningful

1. Shared opportunities must be a significant portion

of the value chain of businesses involved

2. Businesses involved must truly have shared needs

or there is no basis for synergy in the first place

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 GE: Strategic Circles
In 1981, John E. Welch Jr., Chairman and CEO of General Electric
designed the company’s operations on the basis of three `strategic
circles’:
• Core manufacturing units such as lighting and locomotives
• Technology -intensive businesses services
• To achieve the first or second position in the global market for each of
its businesses: By 1986, this strategic orientation had taken shape with
14 distinct businesses, including aircraft engines, medical systems,
engineering plastics, major appliances, television and financial
services.
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 IBM’s Partners

Sears 1988 Jointly own Prodigy, an interactive computer service

for consumers

Toshiba 1989 Jointly built a US $200 million plant in Japan to

manufacture high-resolution colour flat screens for
laptops

Siemens 1990 Jointly developing future chips and jointly built

Mitsubishi 1991 16-Mb DRAM memory chips in France

Borland 1991 Mitsubishi Electric sells IBM mainframes in Japan
under its own name

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 IBM’s Partners

Wang 1991 Developing tools to make it easier to create software

for the OS/2 system

Novell 1991 Sells IBM’s PCs and RS/6000 workstations under its
own name
1991 IBM sells Novell networking software

Apple 1991 Two joint ventures: Taligent and Kaleida

Motorola 1991 Jointly developing the RISC microprocessor

Intel 1991 Jointly developing a new generation of integrated
microprocessor chips

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 Reebok’s Outsourcing
Its main function is marketing with a current staff strength of 35 in India. The
other activities are outsourced as given below:
• Apparel design National Institute of Fashion Technology
• Warehouse managementBakshi Associates
• Logistics Nexus Logistics
• Retailing Phoenix
• Advertising Hindustan Thompson
• Store design and execution Aakar
• Sports management 21st Century
• Gymnasium A private firm
• Manufacturing Shoes: Phoenix, Aero, Lakhani
• ApparelViniyoga and six others
• Selection Prospects Sushil/IITD/2021 8
Major Elements in a Successful International
Strategic Alliances
• Complementary skills: which can contribute to the strength of the
venture.

• Cooperative cultures: cognizant of the importance of cooperation

• Compatible goals: based on their particular firm’s goals and not
just convenience

• Commensurate levels of risk: consider the risks involved

Sushil/IITD/2021 9
 Different Types of Strategic Alliances
Contd….
Alliance Types Examples
• Collaborative  American Express and Toys R Us (cooperative efforts for television
advertising advertising and promotion)
• R&D partnerships  Cytel and Sumitomo chemicals (alliance to develop the next
generation of biotechnology drugs)
• Lease service  Cigna and United Motor Works (arrangement to provide financing for
agreements non-US firms and governments)
• Shared distribution  Nissan and Volkswagen (Nissan sells Volkswagens in Europe and
Volkswagen distributes Nissan’s cards also in Europe)
• Technology transfer  IBM and Apple Computers (arrangement to develop the next
generation of operating system software)
• Cooperative bidding
 Boeing, General Dynamics and Lockheed (cooperated together in
winning the contract for an advanced tactical fighter)

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 Different Types of Strategic Alliances
Alliance Types Examples
Cross -manufacturing Ford and Mazda (design and build similar cars on the same
manufacturing/assembly line)
Resource venturing
Swift Chemical Co., Texasgulf, RTZ and US Borax
Government and (Canadian-based mining natural resources venture)
industry partnering DuPont and National Cancer Institute (DuPont worked with
NCI in the first phase of the clinical cancer trial on IL)
Internal spin-offs Cummins engine and Toshiba Corporation (created a new
company to develop/market silicon nitride products)
Cross-licensing Hoffman-LaRoche and Glaxo (HL and Glaxo agreed for BHL
to sell Zantac, an anti-ulcer drug in the United States)

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 Stages of an Alliance
• Strategy development The focus is on development of resource strategies for
production, technology and manpower. This has to be aligned to the
objectives of corporate strategy alliances.
• Partner assessment The attempt to assess the strengths and weaknesses of a
partner and understand a partner’s motives for alliance formation.
• Contract negotiations It is necessary to have realistic objectives, defining
each partner’s contributions and rewards. It is also necessary to incorporation
termination clauses, penalties for poor performance and arbitration
procedures.
• Alliance operations This is concerned with the management’s commitment,
and linking of budgets and resources with priorities.

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 British Airways
• The alliance between British Airways and American Airlines was
announced in June 1996. BA and American together control 60 per cent
of the flights between the UK and the US, 70 per cent of the traffic
between London and New York, 90 per cent between London and
Chicago, and all flights between London and Dallas.

• Bermuda II, the UK-US aviation agreement, was concluded in 1977

which gives details of which airlines can fly between specified US and
UK cities, and the number of flights they can operate. BA was against
the scrapping of the agreement till recently.

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 British Airways
Contd...

• American Airlines was against the trend towards code-sharing agreements

which allows airlines to sell tickets on routes they do not serve. This was
considered to be anti-competitive. Now both BA and American have to
retreat from their respective positions.

• BA has a partnership with US Air in which it has a 24.6 per cent stake. The
US government has not granted anti-trust immunity to the alliance to
coordinate their operations more closely. Therefore, BA and American are
asking for anti-trust immunity and requesting their governments to
negotiate a new, liberalized aviation agreement.

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 Modes of Cooperation
• Joint ventures and research corporations Combinations of at least two firms into a
`distinct’ firm with shared equity investments. Profits and losses accrue on the basis
of investment.
• Joint R&D Joint research agreements to establish joint undertaking of R&D projects
with shared resources.
• Technology exchange agreement Technology sharing agreements, cross-licensing
and mutual second-souring of existing technologies.
• Equity investment Large firms partnering with a smaller high tech company with a
minority sharing coupled with research contracts.
• Customer-supplier relationships There can be many forms such as co-production
contracts, co-marketing relationships, and research contracts.
• Unilateral technology flows Second-sourcing and licensing agreements (Hagedoorn
and Schakenraad, 1994)
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 Samsung Group
• A joint venture with Texas Instruments to manufacture semiconductors - they are building a
semiconductor plant in Portugal.
• Cooperation with General Instrument in developing high definition televisions (HDTV).
• The sharing of technology for flash memory devices with Toshiba.
• Co-developing computer workstations with Hewlett Packard-they have a joint venture,
Samsung -Hewlett Packard-which markets the American company’s products in Korea.
• Supply of memory chip technology to Oki Electric.
• Partnership with General Electric in high-tech medical equipment.
• Lockheed for F-16 jet fighters (local assembly)
• Pratt and Whitney for jet engines (supplies components)
• Amoco for textile raw materials
• Corning for TV glass and building plants in China and Malaysia
• Mitsui Petrochemical for petrochemicals

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 Toshiba
• An agreement with Apple Computers for new technology creation for
multimedia.

• A technology -sharing agreement with IBM to develop new data storage

devices using `NAND-flash’ memory chips semiconductor devices; it has
developed the world’s smallest 256-Mb D-Ram.

• Through an alliance with IBM, Japan, it opened a second large-size thin-

film transistor (TFT) LCD plant in 1995.

• Alliances with National Semiconductor and Samsung Electronics of

Korea to jointly develop and market flash memory chips.

Sushil/IITD/2021 17
 Toshiba
Contd….

• An alliance with Sun Microsystems Inc. of the US in the areas of

rightsizing, Internet and interactive technology. They will share product
development, marketing and distribution in these fast-growth areas.
Toshiba plans to develop and build systems based on Sun’s 64-bit
UltraSPARC microprocessor. The rightsizing or integration of in-house
information systems is aimed at enhancing the efficiency of the company’s
white-collar workers. Toshiba will invest about US $303 million to
rightsize its computer systems between 1995 and 1999. Sun Microsystems
will bring in the technology for the projects, while Toshiba will provide the
hardware to enhance efficiency of information technology.

Sushil/IITD/2021 18
 Hitachi
• An R&D agreement with Texas Instruments to develop a next-generation
computer memory chip.
• Providing chip manufacturing technology to Goldstar Electron of Korea.
• Supplying mainframe computers to Germany’s Comparex and Italy’s Olivetti.
• A joint venture with GE to sell lighting products in Japan.
• Joint development of a new RISC computer chip with Hewlett Packard.
• Joint development of medical equipment with Boehringer-Mannheim of
Germany
• Research cooperation between Hitachi Cambridge Laboratory and Cambridge
University for developing a single electron memory device.

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 Mergers
• A transaction that forms one economic unit from two or more previous ones.
• Horizontal Merger
– Involves two firms operating in same kind of business activity (e.g. steel)
• Vertical Merger
– Involves difference stages of production operations.
(e.g. oil industry - exploration, refinery, marketing)
• Conglomerate Merger
– Involves firms engaged in unrelated types of business activity.
– Product extension mergers: broaden the product lines of firms.
(Mobil - Ward - retailing operation of Ward as an extension of retail petroleum product marketing
experience of Mobil)
– Geographic market - extension merger: two firms whose operations had been conducted in non-
overlapping geographic areas.
– Pure conglomerate merger: unrelated business activities that would not qualify as previous two
categories.

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20
 Acquisitions
Tender Offers

• One party -seeking a controlling interest in another corporation - asks the stock
holders of the firm to submit, or tender, their shares of stock in the firm.
Bear Hug

• Company mails a letter to the directors of the takeover target announcing the
acquisition proposed to make a quick decision on the bid.

• If approval cannot be obtained the acquiring company can appeal directly to

stockholders by tender offer (unless the management hold enough stock to retain
control).

• If stockholder respond favourably - gain control and have the power to replace the
directors (hostile takeover)

Sushil/IITD/2021 21
 Acquisitions
Contd….

Coping Strategies of Target Firms

• May seek to join with another firm with which it would rather be
associated
• May seek to elicit an offer from a partner it considers more
desirable - a white knight.
• Restructuring - offering to pay shareholders large cash dividend
financed by debt - which may be preferred by shareholders than
to the outside offer.

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 Sell - Offs
Spin - off

• Creates a separate new legal entity; its shares are distributed on a pro - rata basis to
the existing shareholders of the parent company.
– same proportion of ownership in the new entity.
– no cash is received by the parent company.

• In a sense represents a form of a dividend to existing shareholders.

Split - off

• A portion of existing shareholders receives stock in a subsidiary in exchange for

parent company stock.

Split - up

• The entire firm is broken up in a series of split-offs, so that the parent no longer exists
and only the offsprings survive. 23

Sushil/IITD/2021
 Corporate Control
Premium by - backs
• Repurchase of a substantial stockholder’s ownership interest at a premium above the
market price.
Standstill agreement
• A voluntary contract in which the stockholder who is bought out agrees not to make
further attempts to takeover the company in future.
• Without a buy-back - the substantial stockholder simply agrees not to increase
ownership which presumably would put in an effective control position.
Anti - takeover amendments
• Changes in corporate by laws to make an acquisition more difficult or expensive.
• supermajority voting provisions requiring a high percentage (80% of stock holder to
approve a merger)

Sushil/IITD/2021 24
 Corporate Control
Contd….

• Staggered terms of directors which can delay change of control for a number
of years.
• Golden parachutes which award large termination payments to existing
management if control of the firm is changed and management is terminated.
Proxy Contest
• An outside group seeks to obtain representation on the firm’s board of
directors.
• Outsiders - “dissidents” or “insurgents” - seek to reduce the control position
of “incumbents” or existing board of directors.

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 Changes in Ownership Structure
Exchange offers

• Exchange of debt or preferred stock for common stock, or vice versa.

• Exchanging debt for common stock
• Exchanging common stock for debt
Share repurchase

• Corporation buys back some fraction of its outstanding shares of common

stock - new reduced company total.

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 Theories Of M & A
EFFICIENCY
Differential Efficiency
• A particular firm performs better.
• A particular firm has a management system that another firm would like to be able to
understand better and to copy
(American Stores buy out Lucky Stores for effective management system in the retail
grocery market).
Operating Synergy
• Advantages of scale, scope and organizational learning.
• Scale - economies of spreading fixed costs over as large number of units
• Scope - Combining activities such that one activity makes other activity more efficient

Sushil/IITD/2021 27
 Theories of M & A
Contd …

AT & T

• Enter in computer business because central station telephone exchange

systems represent large specialized computers.

• Broader capability in computers will make central station telephone apparatus

more effective

• Experience in so may aspects of computers in exchange apparatus would give

AT&T capabilities of competing in computer market.

• Convergence of capabilities in computers, transmission equipment, exchange

apparatus, printing, copying.

Sushil/IITD/2021 28
 Theories of M & A
Contd….

Diversification

• Spreading risks to preserve organization values by avoiding bankruptcy

Financial synergy

• Economies of scale in flotation and transactions costs of raising funds.

• Combining cash flows that are not perfectly correlated so that debt capacity is
increased.

• Tax savings on investment income.

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 Under Valuation

• May occur because the management of a firm is not operating

the company up to its potential.

• Another aspect is the difference between the market value of

securities and the replacement cost of assets. (q ratio) - less than
one (may be because of inflation, market depression).

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 Information - Signaling

• A tender offer conveys information that the target shares are

undervalued.

• The offer causes the market to revalue the shares upward.

• Another possibility is that the offer stimulates the target firm

management to implement a more efficient business strategy
which increases value.

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 Agency Problems
Control Device
• Takeovers represent a control mechanism to unseat inefficient managements.
Managerialism
• Managers engage in acquisition activity to build larger firms for the sake of
size (Napoleonic Complex) - managerial compensation based on sales not
profit.
Hubris theory
• Takeovers occur because of overoptimistic expectations of buyers.

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 Tax Considerations

• Mergers are propelled by tax savings.

• General studies indicate that the impact of tax is relatively small

MARKET POWER

• Firms acquire other firms in their same line of business in order to

dominate their markets.

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 Johnson & Johnson – Growth through Acquisitions
Strategy
 Johnson & Johnson is a manufacturer and marketer of a wide range of health care products. Over
the period 1995-2005, the company engineered over 50 acquisitions as part of its growth through
acquisitions strategy. This strategy is similar to that pursued by companies in other rapidly
changing, innovation-filled industries such as the computer software industry. Rather than
internally try to be on the forefront of every major area of innovation, Johnson & Johnson, a $55
billion company, has sought to pursue those companies who had developed successful products.
In doing so they do not waste time with unsuccessful internal development attempts and only go
after those products and companies that have demonstrated success. However, the company has
to pay a premium for such details. This strategy has sometimes simply meant that Johnson &
Johnson would buy its competitors rather then try to surpass them using internal growth. For
example, in 1996 it acquired Cordis in the medical stent business for $1.8 billion. When this deal
failed to place J&J in the lead in this market segment, Johnson & Johnson resorted to M&A again
by its $25.4 billion bid (initial bid) for market leader Guidant. This acquisition would have been
the largest deal in Johnson & Johnson’s long history of M&A. However, it lowered its bid when
Guidant’s litigation liabilities became known and then was outbid by Boston Scientific.
Following the collapse of the Guidant deal, the cash rich J&J acquired Pfizer’s Consumer
products division for $16 billion.

34
Sushil/IITD/2021
 International Diversification in the Automobile
Industry
 Over the past two decades, many of the major automobile companies have engaged in a pattern of
cross-border acquisition as they have sought to exploit markets outside of their own borders. Indeed
this form of expansion has been going on much longer than the past couple of decades. However,
when the pace of M&As from two of the largest merger waves took hold, the automobile industry
responded like so many others and pursued their own deals.
 As we look back on many of these deals, we see that many were major disappointments. Probably
the most notable flop was Daimler’s 1998 takeover of Chrysler. Chrysler was profitable at the time it
was acquired by Daimler, but the market was changing around that time, and following the deal,
sales of many of its profitable cars and SUVs declined as consumer tastes changed, Led by its
hubris-filled CEO, Jurgen Schremp, Daimler Chrysler would never admit the deal was a failure even
as it generated staggering losses in 2001. the distracted Daimler worked to fix the problems at
Chrysler, which it did, but only at the expense of “taking their eye off the ball” at Mercedes, their
highly successful luxury brand. Quality problems began to emerge in various Mercedes autos, such
as the E and M class sedans, and Mercedes began to lose ground to its chief rival –BMW Indeed
Daimler’s losing deal with Chrysler was not its only flop. Its investment in Mitsubishi was also
fraught with problems.
(Contd.)

Sushil/IITD/2021 35
 International Diversification in the Automobile
Industry
 Daimler was not the only auto company to lose from its international deals.
General Motors pursued a number of international acquisitions as it sought to
expand is its presence throughout the world. Many of these were major losers.
Perhaps the most embarrassing for GM was its investment in Fiat, which gave the
troubled Italian automaker the right to require GM to pay $2 billion to Fiat if GM
wanted to end their alliance. As Fiat’s financial problems mounted, GM was
forced to pay $2 billion at a time it was experiencing many other financial
problems. In addition, other GM global deals were also troubled. Its investment
in the Russian auto market were fraught with difficulties.
 Ford experienced its share of M&A woes. It acquired targets in Europe so as to
expand its presence in that market white also providing the number-two U.S. auto
maker with luxury brands such as jaguar.

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