Mergers & Acquisitions:
Strategic Alliances
Prof. Ian Giddy
New York University
Mergers and Acquisitions: Summary
 Mergers
& Acquisitions
 Divestitures
 Strategic Alliances
Copyright ©1999 Ian H. Giddy
M&A 2
Strategic Alliances:
An Alternative to Acquisition
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"A strategic alliance is a collaborative agreement
between two or more companies, which contribute
resources to a common endeavor of potentially
important competitive consequences, while
maintaining their individuality."
Example with internal emphasis: Sunkyong with GTE,
Vodaphone & Hutchinson Whampoa for cellular
system
Example with external emphasis: Santander with
Royal Bank of Scotland for European market in
financial services
Driving forces:


Complementary resources - gain strategic resources
Similar capabilities - gain economies or market power
Copyright ©1999 Ian H. Giddy
M&A 3
A List Of Alliance Options
Alliances
Copyright ©1999 Ian H. Giddy
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Penetrate new
geographic
markets
Share development costs
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Fill product
line gaps
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Exploit
economies
of scale
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Increase capacity
utilization
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Share upstream
risks
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Leapfrog product
technology
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Develop new
product markets
Acquisition
Merger
Core Business JV
Sales JV
Production JV
Development JV
Product Swap
Production License
Technology License
Development License
M&A 4
Forms of Strategic Alliance

Many linkages are options for future
development of relationships
POTENTIAL
FOR CONTROL
ACQUISITION
MERGER
WITH FULL
INTEGRATION
JOINT
VENTURE
JOINT
PROJECTS
INFORMAL
ALLIANCE
SPECIFIC
DISTRIBUTION
OR SUPPLY
AGREEMENT
IRREVERSIBILITY OF COMMITMENT
Copyright ©1999 Ian H. Giddy
M&A 5
Pitfalls and Problems
Linkage may not offer access to partner's
resources (JP Morgan-Espirito Santo)
 Disagreement on contribution (Euroclear-Cedel)
 Partners competing in one another's market
(Credit Lyonnias-Commerzbank)
 Linkage may exclude other options for expansion
into a product or market
 Clash of cultures; cross-purpose marketing (Credit
Suisse-First Boston)
Key predictor of stability is asset specificity and
irreversibility of commitment.

Copyright ©1999 Ian H. Giddy
M&A 6
Success Rates For Cross-Border
Mergers And Acquisitions
100%=28
Success
43%
Failure
57%
Copyright ©1999 Ian H. Giddy
M&A 7
Success Rates For Cross-Border
Alliances
100%=45
Undecided
18%
Success
55%
Failure
27%
Copyright ©1999 Ian H. Giddy
M&A 8
Geographic Overlap Helps Mergers
And Acquisitions...
6
Failure for
acquirer
92
94
Success for
acquirer
8
Minimal
geographic
overlap (sample
of 12)
Copyright ©1999 Ian H. Giddy
Moderate or
high geographic
overlap (sample
of 16)
M&A 9
...But It Hinders Alliances
Failure for
both
partners
24
Mixed
Results
14
Success
for both
partners
37
38
62
25
Minimal
geographic
overlap
(sample of 37)
Copyright ©1999 Ian H. Giddy
Moderate or
high
geographic
overlap
M&A 10
Questions to Ask Before the Alliance
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Identify value creation logic to both firms. Are the logics similar? Are
they compatible?
What is the potential value of the alliance to each firm (versus the
cost of not having the alliance?)
What are the specific financial and competitive risks to each partner?
What is the value of complementary assets? Of common assets
contributed?
Evaluate the investment each partner would make.
Evaluate other resource commitments.
What are the scope and boundaries of the alliance?
What commitments are made in the alliance?
What are the criteria for success? Are they shared?
What revenues and returns are projected? What risks?
What are the critical limiting factors?
Is there an action plan to reduce the limiting factors?
Copyright ©1999 Ian H. Giddy
M&A 11
Summary
Strategic alliances can be a good
alternative to M&A, offering an option
for future M&A
 To make them work, need:

Partners
focused on core competencies
and core businesses
Complementary co-specialized assets
creating new business opportunities
No threat of encroachment on either
partner's part
Copyright ©1999 Ian H. Giddy
M&A 12
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