Corporate Strategy: Strategic Alliances and Mergers & Acquisitions

Chapter 9a: Corporate Strategy:
Strategic Alliances and

Mergers & Acquisitions
2
Chapter Case 9:
Disney: Building Billion Dollar Franchises
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• Disney: creates billion-dollar franchises

– Frozen, Toy Story, Star Wars
• Why this is risky:
– Many obtained through acquisition (e.g., Star Wars)
• Only so many can be acquired.
– This may reduce originality / increase boredom.
• Recipe for success becomes predictable.
– Half of Disney profits come from TV networks
• This industry is being disrupted.
4
• Disney is the world’s largest media company

– $50 billion in annual revenues
– Has grown through high-profile acquisitions
• Pixar (2006), Marvel (2009), and Lucasfilm (2012)
• How Pixar became an acquisition
– Originally produced graphic display systems,
animated movies demonstrated systems capabilities
– Steve Jobs bought it for $5 million
– Rolled out one blockbuster after another
• Toy Story, A Bug’s Life, Monsters, Inc.,
• Finding Nemo, The Incredibles, and Cars
5
• Disney acquisitions
– Pixar for $7.4 billion in 2006
– Marvel for $4 billion in 2009
– Lucasfilm for $4 billion in 2012
• Franchise model
– Get a big movie hit, then derive spin-offs
• TV shows, theme park rides, video games, toys, clothing
• Disney’s hit Frozen
– Most successful animated movie ever
– Grossed $1.5 billion since 2013
6
• Given the build-borrow-buy framework

(Exhibit 9.1), do you think Disney should
pursue alternatives to acquisitions? Why or why
not?
7
• Why do you think Disney was so successful with

the Pixar and Marvel acquisitions, while other
media interactions such as Sony’s acquisition of
Columbia Pictures or New Corp’s acquisition of
MySpace were much less successful?
8
How Firms Achieve Growth
9
The Build-Borrow-or-Buy Framework
• Conceptual model
• Aids in determining whether firms should pursue:
– Internal development (build)

– Enter a contract /strategic alliance (borrow)
– Acquire new resources, capabilities, and competencies (buy)
10
Guiding Corporate Strategy:

The Build-Borrow-or-Buy Framework
Exhibit 9.1
11
The Main Issues in the Build-Borrow-or-Buy Framework
• Relevancy
– How relevant are existing internal resources to solving the resource
gap – do they pass the VRIO(N) test (chapter 4)?
• Tradability
– How tradable are the targeted resources that may be available
externally? -- e.g., biotech firm licenses to pharmaceutical company.
• Closeness
– How close do you need to be to your external resource partner?
• Integration
– How well can you integrate the targeted firm should you determine you
need to acquire the resource partner?
12
Strategic Alliances
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What are Strategic Alliances?
• A voluntary arrangement between firms
• Involves the sharing of:

– Knowledge
– Resources
– Capabilities with the intent of developing:
• Processes
• Products
• Services
Number of R&D Alliances
Explosive growth in R&D alliances since the 1980s

9-14
15
How Do Strategic Alliances

Assist Firms?
• They may complement a firm’s value chain.

• They may focus on similar value chain activities.
• They may enable:
– Firms to achieve their goals faster
– Lower cost
– Fewer legal repercussions than M&As
• An alliance qualifies as strategic if:

– It has the potential to affect a firm’s
(sustainable) competitive advantage
16
Why Do Firms Enter

Strategic Alliances?
• Strengthen competitive position
• Enter new markets
• Hedge against uncertainty
• Access critical complementary assets
• Learn new capabilities
17
Strengthen Competitive Position
• Strategic alliances can help:

– Change industry structure to the firm’s favor
– Influence industry standards
• Example: IBM & Apple

– Entered a strategic alliance
– Desired to strengthen their competitive position
• In mobile computing and business productivity apps
– Put competitive pressure on rivals such as Microsoft
18
IBM and Apple:

From Big Brother to Alliance Partner
•IBM was a fierce competitor with Apple (1980s).

•Then Apple dominated
•2014: Apple and IBM form a strategic partnership
– Apple sold mostly to consumers, IBM to businesses.
– IBM and Apple -- long-time rivals – have formed a

strategic alliance to created simple-to-use business
productivity apps and to sell iPhones and
iPads to corporate clients. Discuss how
each company might benefit through
this alliance.
19
Enter New Markets
• Product markets
• Service markets
• Geographical markets
– Governments such as Saudi Arabia or China may
require that foreign firms have a local joint venture
partner before doing business in their countries.
20
Hedge Against Uncertainty
• Real-options perspective:
– Approach to strategic decision making
– Breaks down a larger investment decision into a set of
smaller decisions
– Staged sequentially over time
– Allows firms to obtain information in stages
 Roche invests in Genentech 1990 and

buys it in 2009
21
Access Critical Complementary Assets
• Complementary assets such as:

– Marketing
– Manufacturing
– After-sale service
• Helps complete the value chain:

– From upstream innovation to downstream commercialization
22
Learn New Capabilities
• Firms are motivated by the desire to learn from their

partners (e.g., GM & Toyota (NUMMI) – formed in 1984)
• Co-opetition
– Cooperation by competitors to achieve a strategic objective
• Learning can take place at different rates.

– The firm that learns more quickly is motivated to exit the
alliance / reduce knowledge sharing.
– Referred to as “learning races”
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Governing Strategic Alliances
• Non-Equity Alliances
– Partnerships based on contracts
– Examples: supply agreements, distribution
agreements, and licensing agreements
• e.g., Genentech licensing an insulin drug to Eli Lilly
• Equity Alliances
– One partner takes partial ownership in the other.
• (Equity) Joint Ventures (JVs)
– A stand-alone organization created and jointly owned
by two or more parent companies
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Key Characteristics of
Different Alliance Types
Exhibit 9.2
Alliance Type Governance Type of
Mechanism Frequency Knowledge Pros Cons Examples
Exchanged
Non-equity (supply, Contract Most common Explicit • Flexible • Weak tie • Genentech–Lilly (exclusive)
licensing, and • Fast • Lack of trust and licensing agreement for Humulin
distribution • Easy to initiate commitment • Microsoft–IBM (nonexclusive)
agreements) and terminate licensing agreement for MS-DOS
Equity (purchase of Equity Less common Explicit; • Stronger tie • Less flexible • Renault–Nissan alliance based
an equity stake or investment than non-equity exchange of • Trust and • Slower on cross equity holdings, with
corporate venture alliances, but tacit knowledge commitment • Can entail Renault owning 44.4% in Nissan;
capital, CVC more common possible can emerge significant and Nissan owning 15% in
investment) than joint • Window into investments Renault
ventures new technology • Roche’s equity investment in
(option value) Genentech (prior to full
integration)
Joint venture (JV) Creation of new Least common Both tacit and • Strongest tie • Can entail long • Hulu, owned by NBC, Fox, and
entity by two or explicit • Trust and negotiations and Disney-ABC
more parent knowledge commitment significant • Dow Corning, owned by Dow
firms exchanged likely to emerge investments Chemical and Corning
• May be • Long-term
required by solution
institutional • JV managers
setting have double
reporting lines (2
bosses)
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Alliance Management Capability

Exhibit 9.3
• The three phases of Alliance Management:

1. Partner selection and alliance formation
2. Alliance design and governance
3. Post-formation alliance management
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How to Make Alliances Work
Exhibit 9.4
27
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• Merger:
– The joining of two independent companies
– Forms a combined entity
• Acquisition:
– Purchase of one company by another
– Can be friendly or unfriendly.
– Hostile takeover:
• The target company does not wish to be acquired.
– e.g., Vodafone’s acquisition of Germany-based
Mannesmann
Value Destruction in M&A: The Worst Offenders
Shareholder value destroyed based on up to 3 years post-merger analysis

compared to overall stock market 9–29
• Many M&As actually destroy shareholder value!
 When there is value, it often goes to the acquiree

 Acquirers tend to pay a premium
• Why are M&As still desired?
9–30
31
Why Do Firms Merge?
• Horizontal integration:
– The process of merging with competitors
– (e.g., Nation buys Ticketmaster in 2010)
– Leads to industry consolidation
• Three main benefits:
1. Reduction in competitive intensity
• Changes underlying industry structure in favor of surviving firms
2. Lower costs
• Economies of scale
3. Increased differentiation
• Fills product gaps
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Sources of Value Creation and Costs

in Horizontal Integration
Corporate Strategy Sources of Value Creation Sources of Costs (C)

(V)
• Horizontal integration • Reduction in competitive • Integration failure

through M&A intensity • Reduced flexibility
• Lower costs • Increased potential for
• Increased differentiation legal repercussions
Exhibit 9.5
Food Fight: Kraft Hostile Takeover of Cadbury
• Kraft acquired Cadbury in UK

 Hostile takeover in 2012, $20 billion deal
 Cadbury has strong position in emerging economies

 Perfected distribution system in countries like India
 Kraft faces strong rivalries worldwide, including China
• The acquisition forces Hershey and other

competitors to rethink their strategies
 Hershey 90% revenues from U.S. market
1–33
9–33
34
Food Fight: Kraft Hostile Takeover of Cadbury
•In 2015, Kraft merged with Heinz.
– It is now the 5th largest food competitor in the world
•What are the advantages of the (hostile takeover)

Cadbury acquisition on the new $37 billion
Kraft Heinz merged firm?
35
Why Do Firms Acquire Other Firms?
• To access new markets and distribution channels

– To overcome entry barriers (e.g., Kraft acquiring Cadbury)
• To access new capabilities or competencies
• To preempt rivals
– Example: Facebook acquired:
• Instagram (photo & video sharing)
• WhatsApp (text messaging service)
• Oculus (virtual reality headsets)
– Example: Google acquired:
• YouTube (video sharing)
• Motorola (mobile technology)
• Waze (interactive mobile maps)
• Desire to Overcome Competitive Disadvantage

 Adidas acquired Reebok in 2006
 Benefits from economies of scale and scope
 Compete more effectively with #1 Nike
• Superior Acquisition and Integration Capability
• Some firms have superior M&A abilities

 They identify, acquire, and integrate target companies
 Example: Cisco Systems
• Sought complementary assets
• Bought over 130 firms since 2001, including large
firms: Linksys, Scientific Atlanta, & WebEx
• Principal–agent problems
 Managers have incentives to diversify through M&As to
receive more prestige, power, and pay.
 Not for shareholder value appreciation, but rather to build a large
empire; this is a principal—agent problem
• Managerial hubris
 Self-delusion
 Beliefs in their own capability despite evidence to the contrary
 Example: Quaker Oats purchase of Snapple at an unwarranted
high price of $1.7billion, which turned out to
be $1.4 billion “down the drain.”

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Chapter 9a: Corporate Strategy:

Strategic Alliances and

Disney: Building Billion Dollar Franchises

• Disney: creates billion-dollar franchises

Disney: Building Billion Dollar Franchises

• Disney is the world’s largest media company

Disney: Building Billion Dollar Franchises

Disney: Building Billion Dollar Franchises

• Given the build-borrow-buy framework

Disney: Building Billion Dollar Franchises

• Why do you think Disney was so successful with

How Firms Achieve Growth

The Build-Borrow-or-Buy Framework

• Aids in determining whether firms should pursue:

– Internal development (build)

– Acquire new resources, capabilities, and competencies (buy)

Guiding Corporate Strategy:

The Main Issues in the Build-Borrow-or-Buy Framework

What are Strategic Alliances?

• A voluntary arrangement between firms

• Involves the sharing of:

Explosive growth in R&D alliances since the 1980s

How Do Strategic Alliances

• They may complement a firm’s value chain.

• An alliance qualifies as strategic if:

Why Do Firms Enter

• Strengthen competitive position

• Enter new markets

• Hedge against uncertainty

• Access critical complementary assets

• Learn new capabilities

Strengthen Competitive Position

• Strategic alliances can help:

• Example: IBM & Apple

IBM and Apple:

•IBM was a fierce competitor with Apple (1980s).

– IBM and Apple -- long-time rivals – have formed a

Enter New Markets

Hedge Against Uncertainty

 Roche invests in Genentech 1990 and

Access Critical Complementary Assets

• Complementary assets such as:

• Helps complete the value chain:

Learn New Capabilities

• Firms are motivated by the desire to learn from their

• Learning can take place at different rates.

Governing Strategic Alliances

Alliance Management Capability

• The three phases of Alliance Management:

How to Make Alliances Work

Mergers & Acquisitions

Mergers & Acquisitions

Shareholder value destroyed based on up to 3 years post-merger analysis

• Many M&As actually destroy shareholder value!

 When there is value, it often goes to the acquiree

• Why are M&As still desired?

Why Do Firms Merge?

Sources of Value Creation and Costs

Corporate Strategy Sources of Value Creation Sources of Costs (C)