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In many situations, mergers and acquisitions are the only options for maintaining competitiveness. Shareholder demand, for instance, often mandates spinning off non-core divisions, and then quickly acquiring new and strategically complementary resources to maximize achievement of core objectives.
In addition, rapid consolidation in vertical industries such as high technology, financial services, and telecommunications means companies must initiate mergers “among equals” or buyouts of smaller firms simply to survive. Deregulation of industries such as utilities is also driving strategic consolidation through acquisitions–ensuring the increased size, diversity of resources, and broader industry “playing field” that facilitate international leadership. The rapid internationalization of business has also been a strong influence on merger activity. Many experts, for example, believe that the euro’s emergence is spurring increased interest in mergers among European corporations seeking more favorable global positioning.
Often, however, the window of opportunity is so narrow that it is impossible to negotiate a merger or acquisition in a timely manner. In this case, a strategic alliance, which can be quickly formed and disbanded if necessary, is particularly well suited. Especially in the high-technology arena, the ability to capitalize on strategic alliances enables companies to rapidly penetrate “hot” new marketplaces through a quick infusion of talent, manufacturing capabilities, or additional distribution channels, Faced with increased earnings pressure, corporations also view strategic alliances as a means for leveraging non-core resources rather than spinning them off. Finally, strategic alliances allow companies to enter into “trial marriages” before making the substantial commitment of resources that mergers and acquisitions entail.
The forms such alliances take are virtually unlimited, but they include joint marketing arrangements, shared research and development, collaboration on product design, technology licensing, and outsourcing of virtually all types.
Large corporations that are initiating strategic alliances are more and more often gravitating toward synergistic arrangements with small or midsize partners. These arrangements offer:
• Access to top-tier engineering talent that would normally shy away from a mammoth corporate structure
Instant access to the technology that holds the most potential for shaping market place demands frequently most available from smaller companies that maximize incentives for creativity and fast-paced development
A mutually beneficial means for sharing the risk, expense, and potential return involved with entering a promising new market. For growing companies, alliances with large corporations provide validation and accelerated visibility for their products, increased overall valuation of their companies, and added clout that makes funding more readily available.
A recent alliance between a world-class computer manufacturer and a smaller developer of desktop management solutions for enterprises illustrates the lure of such arrangements. The alliance agreement calls for the manufacturer to pre-load the developer’s leading-edge applications, which are rapidly becoming “must have” integration tools, onto its enterprise PCs. The manufacturer’s new ability to offer this unique and in-demand enterprise solution is jump-starting its potential for new growth. In turn, its smaller developer partner now enjoys an exponential increase in prospects. Both companies risked some up-front investment to optimize the performance of the software on the manufacturer’s systems, but the promise of a substantial return makes the strategic arrangement compelling[1]
Risk, is a paramount consideration with even the most straightforward alliances. There is always the concern that one alliance partner will decide to leverage resources gained from the temporary arrangement and move forward independently or with different partners. The risk is as important to large companies as it is to smaller firms because of their increasing dependence on intellectual property and cross-border partnerships for renewed competitiveness.
Because today’s economy is founded on knowledge transfer, alliance-related risks have become especially complex. The potential for “stealing” such intangible re as marketing know-how and engineering talent is daunting to companies of all sizes, and the consequences are far-reaching. The risk grows when alliances are international, especially when distance and differing ways of conducting business complicate daily oversight of alliance activities.
Risk also increases in relation to the level of commitment an alliance requires. The more two companies share in order to form a rewarding venture, the more resources they stand to permanently sacrifice should the venture fail. And failure is a common occurrence. In fact, more than half of all alliances between large and small technology s fail after four years.
The potential for such risk requires following “rules of the road” when structuring each
partnership. There are both legal and strategic routes for getting the most out of every
alliance while minimizing their hazards. Among steps companies should take to tap into the “gold mines” that alliances offer are the following:
• Begin with due diligence. Due diligence is important both for assessing the potential contribution of new partners, and for evaluating companies that have worked with yours in the past, but through markedly different arrangements. For instance, corporations entering into alliances with former vendors should use due diligence to assure that the vendors have the financial and management depth to execute new roles. Companies engaging in international alliances should find an overseas firm with skill in ferreting out and interpreting documentation about potential foreign partners. In many countries, financial documentation is difficult to access except via a local, hands-on approach.
• Be specific. Move forward with alliance arrangements only after defining and documenting clear objectives, performance benchmarks, and specific timetables for key milestones.
• Assure shared values. Even if their companies are markedly different, alliance partners must share basic values if their initiatives are to succeed. For example, a large public company that wants to accelerate research and development may find a good partner in a growing and innovative engineering firm–but only if that firm also values the strict financial controls that are important to the larger company.
• Work toward dedicated arrangements. Avoid staffing alliances with managers and employees who serve two masters with substantial and often conflicting demands. For example, if one partner’s incentives relate entirely to sales, but the other’s relate to new product development, those working on the alliance, and thus influenced by both incentive plans, will lack clear direction. You must create consistent incentives for success that tap into the staff’s inherent motivations. And you should also put your most goal-oriented in-house staff in charge of managing the alliance.
• Move toward permanent knowledge transfer. Whenever possible, rotate large numbers of in-house employees through an alliance as a training tool. Without violating terms that delineate ownership of intellectual property, take advantage of cross-training opportunities.
• Capitalize on opportunities for changing your existing corporate culture. Large companies often ally with small and midsize firms to gain access to teams that are more entrepreneurial than their own, particularly when new-market entry is the goal. If they properly structure these alliances, they can gain a major permanent benefit from a temporary partnership–a ramp-up of their full-time employees’ entrepreneurial drive By organizing entrepreneurial incentives for the individuals charged with managing these alliances–such as offering managers a reward of in creased stock options based on meeting alliance-specific goals–companies can pull these managers out of established political infrastructures that may inhibit risk taking, and modify the way they tend to approach their work in general. Managers’ teams may also adopt this new approach by osmosis–potentially leading to new levels of innovation that translate into additional market opportunities.
Allow for continual change. The best alliances are structured with room for experimentation, pullbacks due to adverse marketplace changes, and dissolution if they are hampering financial performance.
Document with care. Even relatively low-risk ventures such as joint product marketing require documentation. In this case, a news release can serve as a document for cementing the commitment of each side to honor related parameters. High-risk alliances, such as those related to joint development of core products, involve important commitments of technology, equity, and personnel, and call for extremely comprehensive written contracts that protect all involved parties. The documentation, for instance, should cover capital requirements and ownership parameters, employee incentive issues, third-party disclosures, access to future technology developments, buyback of rights, dispute resolution mechanisms, and a range of;:other considerations.
• Possible conclusion. Documentation is also important when companies approach strategic alliances from a slightly different vantage point–if, say, the alliance is acknowledged (by at least one party) as a stepping tone to a do-it-alone strategy. For instance, a manufacturer may deliberately form a temporary alliance with a distributor with the intent to convert to direct sales when resources allow. In other situations, companies may question their partner’s commitment and need to be able to regain 100% control if they are proven right. These companies should enter alliances with extreme care not to share assets that could ever be leveraged for the other party’s growth, and to have documentation in place that provides for mutually advantageous exit strategies.
• Reconsider acquisitions. Typically, alliance-related contracts anticipate that one company may seek to acquire the other should the arrangement show promise. Taking a long-term view of the alliance encourages a highly collaborative and trusting relationship early on–a precursor to a successful corporate marriage.
The return on successful strategic alliances can be significant, which justifies the substantial investment of resources in their advance planning. When structured with care, these alliances become essential to the growth of corporations across industries, including those that have already achieved synergies through previous M&A activity.[1]
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