- - - - - - - -
- - - - - - - -
©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 1

– Participants continue as separate firms
– May be organized as partnership, corporation, or any other form of business
– Formal long-term contract of 8 to 12 years duration
©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 2

– Limited scope and duration
– Generally involve only two firms
– Involve only small fraction of participants' total activities
– Each participant offers something of value
– Joint production of single products
– No sharing of assets/information beyond venture
– Need not affect competitive relationships
©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 3

– Joint property interest in subject matter of venture
– Right of mutual control or management of enterprise
– Right to share in cash flows of the enterprise
– Limited risk
©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 4

– Correlation between mergers and joint venture start-ups over 0.95
– Both stimulated by same factors affecting total investment activity
©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 5

– Risk sharing
• Each participant diversifies risk
• Reduces investment cost of entering risky new area
• Realizes benefits of economies of scale, critical mass, learning curve effects sooner
©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 6

– Knowledge acquisition — learning experience for both partners
• Shared technology
• Shared managerial skills in organization, planning, and control
• Successive integration — joint venturing as a way to learn about prospective merger partners
– Entry into new, expanded, foreign markets
• Augments financial or technical capabilities
• Reduces risk
• Foreign country may require joint venture with local partner
©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 7

– Financing — to raise capital
• Share investment expense
• Small company has product idea but no cash
• Joint venture with large company that has cash to develop product
– Distribution/marketing
• To obtain distribution channels
• To obtain raw materials supply
©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 8

– More favorable tax/political treatment
• Foreign ventures
• Antitrust issues — joint ventures increase rather than reduce number of firms
– Long-run strategic planning — spider's web strategy
• Provide countervailing power among rivals
• Small firms in a concentrated industry do multiple joint ventures with dominant firms to form self-protective networks
©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 9

– Goal of at least 50% of joint ventures is knowledge acquisition
– Complex knowledge, embedded within technological/organizational systems
– Learning-by-doing, teaching-by-doing to transfer complex knowledge
• Classroom setting inappropriate
• May require successive adaptations to changing circumstances
• Job incumbents may be able to teach task skills only in operational setting
©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 10

– Contribution of a patent or licensable technology to a joint venture may have better tax consequences than a licensing arrangement with royalties
– Examples:
• One partner contributes technology
• Other partner contributes depreciable assets
• Depreciation offsets revenues
• Joint venture ends up with lower tax rate than any of its partners
• Partners pay deferred capital gains if/when venture is terminated
©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 11

– Other tax aspects
• Limitation on operating loss carryovers
• Partnership status of unincorporated commercial joint ventures
• Use of equity method in consolidating joint venture into partners' financial statements
• Benefit of multiple surtax exemptions
©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 12

– High risk of worker, product, environmental liability
– If joint venture is organized as a corporation, only the joint venture's assets are at risk, not those of participating firms
©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 13

– Joint ventures can be used as transitional mechanism in a broad restructuring process
• Buyer can use joint venture experience to better determine value of seller's brands, distribution systems, and personnel
• Risk of making mistakes is reduced through direct involvement with business
©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 14

– Advantages — Nanda and Williamson (1995)
• Customers are moved to buyer over a period of time in which both seller and buyer continue to be involved
• Buyer builds experience with new line of business
• Buyer receives managerial and technical advice and assistance from seller during transition period
• Experience and knowledge developed during life of joint venture enable buyer to obtain better understanding of the value of acquisition
• Seller is able to realize higher value from sale than it could have under immediate, outright sale when buyer must necessarily discount purchase price because of lack of knowledge about assets being purchased
©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 15

– Widely used
– Reduce risks of expanding into foreign environments
– May be legal requirement of local joint venturer in some foreign countries
– Local partner's contribution likely to be in the form of specialized knowledge about local conditions
– Subject to clashes of different cultures
©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 16

– Transaction costs
• Involved in all exchanges and organizing activities
• Affect allocation of resources
©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 17

– Complementary production
• Joint use of assets or inputs to produce outputs which cannot be attributed to any single input
• Synergy — output is more than sum of inputs
• Complementary asset defined as one whose value in production process depends upon combination with other assets/technology
• Problem arises when complementary assets have different owners
©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 18

– Specialization
• Asset's productivity increases with its specialization to other inputs used in production
• Specialization increases risk of loss to owner of complementary asset if other inputs are withdrawn
• Nonrecoverable portion of investment cost of complementary asset lost if other inputs withdrawn
• Owners of other inputs can expropriate owner of complementary asset by taking greater share of output
©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 19

– Leads to pre-investment arrangements to promote confidence in joint use of assets
• Choose transaction-cost-minimizing form of pre-investment arrangements
• The greater the transaction costs relative to output value, the more critical the search for economizing organizational form
– Contractual arrangements
• Costly to write and enforce
• Repetitive transactions would require repetitive contracting
©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 20

– Joint ownership
• More likely with greater frequency of exchange of inputs
• Frequency of transaction improves prospects of recovering investment cost of specialized asset
• Joint ventures more appropriate than merger where:
– Complementary production involves only small subset of each participant's assets
– Complementary assets have limited service life
– Complementary production has limited life
©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 21

– Inflexibility problems similar to other longterm contracts
– Implementation requires substantial commitments of managerial resources
– Joint ventures do not last as long as planned
• About 70% are disbanded before scheduled maturity
• On average they do not last as long as one-half the term of years stated in agreement
©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 22

– Reasons for disbanding joint ventures
• Inadequate preplanning
• Technology did not develop as expected
• Disagreement between parties on approaches to joint venture objectives
• Refusal to share knowledge with counterparts in venture — firms wants to learn as much as possible but not to convey too much
• Inability of parent companies to share control or compromise on difficult issues
– Public policy concerns — conflict with firms' long-term strategies
©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 23

– Clayton Act — for real or potential anticompetitive effects
– Sherman Act — for cartel behavior, boycotts, exclusion of competitors
©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 24

– Threat of industrywide collusion
– Loss of potential competition
– Restraints on distribution
– Heterogeneous products
– Inequality of costs
– Rapid and unstable changes in demand, supply, and technology
©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 25

– Ease of entry and expansion
– Dissimilarity in firm strategies and policies
– Many firms
– High price elasticity of demand
– Substitutability among products on demand side
– Likelihood of additions to supply of products by other firms if one firm restricted supply
– Difficulties in enforcing collusion; high risk and cost of being detected
©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 26

• Involves use of subcontractor, supplier, or outside firm to perform some percentage of total production of product
• Has grown substantially during first half of
1990s
• Reduced manufacturing cost by 10 - 15%
• Represents a different form of arm's-length alliances similar to joint ventures
©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 27

– Facilitates rapid growth
– Avoids need to build required competencies within company
– Modern version of use of division of labor to increase efficiency
– Reduces costs
– Personnel to monitor outsourcing activities
– Firms may produce components at cost lower than outside suppliers as they become more experienced
©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 28

– Firms may change outsourcing needs as their strategies change with experience
– Firms may limit number of outsourcing firms used in order to improve communication, and retain competition among suppliers
– Firms may not control product quality
– Resistance from trade unions
– Flexibility and speed needed for building to order may be found only by producing within the company
– Firms may use their own resources more efficiently
©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 29

– Industry joint venture participation increases with:
• Average firm size - only pervasive influence across all industries
• Average capital expenditures
• Average profitability
©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 30

– Technologically oriented joint ventures
• Joint venture participation rises with average
R&D intensity
• Joint ventures substitute for R&D in chemicals and engineering industries, but not in resourcebased industries
• Long-term R&D substitution effect stronger than short-term effect
• Significant negative impact on large firms' rates of return in chemicals and engineering in short run, although long-run effect on rate of return not significant
©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 31

– Industry level — technological and nonhorizontal joint ventures
• Strong positive effects on R&D intensity — joint ventures and R&D are complements at industry level
• Joint ventures have significant negative effect on industry average rates of return
©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 32

– 1972-1979; 136 joint ventures by 210 companies
– Average size = $5 million
– Two-day announcement period abnormal return of 0.73% (significant)
– CAR over 62-day period up to announcement day was 2.15% (significant)
©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 33

– Relative size effect
• Dollar gains to large and small firms about evenly divided — as in mergers
• Percentage gains higher for smaller firms
– Dollar gains scaled by amount invested in joint venture
• Average premium is 23%
• Result lies in range of merger/tender offer premiums
– Gains from takeovers could be from synergy or improved management; since joint ventures involve no management change, gains must be from synergy
©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 34

– Created out of uncertainty and ambiguity in nature of industries
• Rapid advances in technology
• Globalization of markets
• Deregulation
©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 35

• Intensity of competition
• Reorganizations of capabilities, resources, and product-market activities
• Blurring of industry boundaries
• Shortened product life cycle
• Altered value chains
– Represent forms of relationships that are uncertain and ambiguous
©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 36

– Need not create new entity
– Contract need not be specified
– Relative size may be highly unequal
– Less clear contributions and benefits
– Difficult to anticipate consequences
– Allow firms to focus on fewer core competencies
– Often small resource commitments
– Limited time duration
©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 37

– May involve relations with competitors and complementor firms
– Synergistic value creation from combining different resources
– Learning and internalizing new knowledge and capabilities
– Can add more value to partnering firms by creating organizational mechanism that better aligns decision authority with decision knowledge
– Can add value to partnering firms through organizational flexibility
©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 38

– Partner firms pool resources and expertise rather than transfer specialized knowledge
– Managed actively by senior executives
– Evolving relationships
– Adaptability and change required over time
– Deliberate efforts to change direction of at least one partner
– Blur corporate boundaries
– Can have multiple partners
– Require mutual trust
– Speed of change is increased
©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 39

– Move to other alliances as attractive possibilities emerge
– Access to people who would not work directly for them
©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 40

– Sample of over 6,000 strategic technology alliances and 16,000 M&As by the same group of nearly 3,000 firms
– Only 2.6% of alliances lead to M&A between same partners
– Strategic alliances represent a form of exploratory learning
• Inconsistent with encroachment hypothesis
• Encroachment hypothesis — larger firms use strategic alliances to take over their smaller partners
©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 41

– High technology industries and strategic alliances
• Scan market-entry possibilities
• Monitor new technological developments
• Reduce risks and costs of developing new products and processes
– M&As more likely as industries mature — learning and flexibility become less important
©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 42

– Collisions between competitors
• Involve core businesses of two strong, direct competitors
• Alliances are short lived and fail to achieve goals because of competitive tensions
– Alliances of the weak
• Two weak companies join forces hoping to improve
• Alliances fail because weak grow weaker
©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 43

– Disguised sales
• Weak company joins with strong competitor
• Alliance is short lived and weak is acquired by strong firm
– Bootstrap alliances
• Weak company may be improved so that partnership develops into alliance of equals
• May succeed in meeting initial objectives and exceed seven year average life span for alliances, but one partner ultimately sells out to other
©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 44

– Evolutions to sale
• Two strong and initially compatible partners initiate alliance, but competitive tensions develop
• Outcome similar to bootstrap alliances
– Alliances of complementary equals
• Complementarity and compatibility lead to mutually beneficial relationships
• Likely to last more than average seven year life span of alliances
©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 45

– Sample of 345 strategic alliances during
1983-1992
– Positive and significant abnormal returns of
0.64% on announcement date
– Magnitude of returns similar to those for announcement of joint ventures
– No evidence of wealth transfer between partners in alliances
– No evidence that firms enter alliances because of deteriorating past performance
©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 46

– Subsamples
• Technology
– High-tech firm — significant abnormal returns of 1.12%
– Low-tech firm — insignificant abnormal returns of 0.10%
• Industry focus and presence of technological transfer
– Horizontal alliances between firms in same three-digit
SIC class that involve transfer or pooling of technology experienced highest average significant abnormal returns of 3.54%
– Nonhorizontal alliances whose main objective is to position or enter new markets have significant 1.45% return
– Horizontal nontechnical and nonhorizontal technical alliances have positive but not significant returns
©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 47