Mergers and Acquisitions: Strategic Alliances - Essay Example

Mergers and Acquisitions: Strategic Alliances (Joint Ventures) Table of Contents Introduction 3 Strategic Alliance 3 Types of Strategic Alliances andtheir comparison 4 Case studies: Recent successful and unsuccessful joint ventures 6 Sony-Ericson 6 DLF – Hilton 8 Tata-Docomo 9 Critical evaluation of the Joint Venture case studies 9 Discussion and analysis 11 Conclusions 12 Reference 14 Introduction The companies in the global market cannot remain satisfied with their daily operations, present existence and profits. In order to sustain, the corporate groups need to survive the competitive scenario by expanding their operations, by leveraging risk factors, conduct an analysis of their strengths and weakness, tap the potential market opportunities and save themselves from possible threats. In order to gain competitive advantage and achieve higher growth in performance and profits, companies more often enter into strategic alliances. The most common form of strategic alliance is a joint venture. In a joint venture, the companies are able to attain higher profits than they could have done individually at the cost of shared expenses and also shared risk exposures. There are many factors that may lead to the success or failure of joint ventures. In this essay, we shall discuss those factors by critical evaluation of case studies on successful and unsuccessful strategic alliances. Strategic Alliance Strategic alliance is a process of development of strategic relationship between two entities that have a common set of business goals and objectives but at the same time continue to operate as individual entities. The alliance is entered by the two business partners who understand that they would be able to obtain greater proportions of profit by operating jointly compared to what they could generate out of individual business operations. The partners enter into strategic alliance in the areas of manufacturing, product, distribution, project funding, knowledge expertise and also intellectual property (Das, 2010, p.77). The advantages of entering into strategic alliance include the distribution of expenses as well as the distribution of risk between the entities entering into the alliance. The advantages of entering into a strategic alliance allow the business partners to maximise their earnings to the best of their capabilities. Strategic alliance also helps a business to learn from their allies and develop competitive advantage. Strategic alliance provides a sustainable environment for the businesses and helps them excel in the long run (Sudi, 2003, p.13). Types of Strategic Alliances and their comparison Strategic alliance involves bringing the resources and the manpower together for a specified period or an indefinite interval to achieve a common objective. The strategic alliance may be of various types which involves coalition. The strategic alliance may be in the form of joint ventures and consortia, licensing agreements and strategic networks between two businesses. A license arrangement is a legal binding or contract between business entities that is enforceable by law. The license agreement allows a business entity in sharing intellectual rights of another business entity. The intellectual rights may be in the form of patents or trademarks. The license arrangement is not a property right. This means that the holding unit of the license do not have absolute rights to the patent or the trademark. License arrangements are entered into by companies strategically where the holder’s business is not well known and thus uses the goodwill of its alliance partner (Berger, 2011, p.26). The license may be given to the holder by the other party into alliance taking care of its strong distribution channels and product uniqueness to obtain greater revenues. Due to a mutual need between two business parties, the firms enter into a strategic alliance of sharing their network of suppliers, distribution channels, intermediaries, etc. to gain competitive advantage and sustain in the long run. A business entity entering into a strategic alliance with another company may take advantage of the network of supply of its goods and in turn could share its factory operations in which the other partner in alliance may not have invested till date. The third category of strategic alliance is the joint venture between the business units (Gregoriou and Renneboog, 2007, p.259). A joint venture comprises of investments by two business entities with a common objective and leading to the formation of a new business entity with contribution of resources and capital as decided by the two business entities to maximize their operating efficiency. In a joint venture, the business partners have control and influence in matters of operation and decision making in direct proportion to their holdings. When a joint venture is formed by the two companies for a particular project, it is referred to as consortium. The consortia are created when the technological expertise, skilled areas of operation or distribution or knowledge are shared for a one-time project or activity like building a large scale bridge or tunnel, etc. The joint venture may be formed by companies looking at long term prospects as well for an indefinite period of time. A joint venture helps young companies in the business scenario to obtain sources of revenue required for funding the project. Both the parties in a joint venture must put strategic plans in place rather than focussing at short term returns on their investment. The essential traits in a joint venture are honesty, integrity, communication and transparency of the business entities that sharing risks along with profits (Underhill, 1996, p.27). Before entering into a joint venture, the business entities entering into the strategic alliance should assess their market positions and assess their future growth and market share sustainability. The companies should do an inside and outside analysis of product, services or knowledge or goodwill to be shared for gaining competitive advantage to its competitors. Thus the two companies entering into a joint venture should screen their probable partners, undertake a feasibility study of the joint venture, decide on the competitive cost of availability of resources and forces and then enter into a strategic alliance. The companies coming into a joint venture carefully study the legal, political, social, economic, technological and environmental scenario of the country where the new company would be formed. Thus while considering aspects before forming a joint venture, the companies must be very careful in selecting their partners, have a review and scrutiny of their partner’s credentials. The companies must develop a business plan and foresee whether the joint venture would carry the reputation and goodwill of their brands. The companies before forming the joint venture must also assess the whether the structure of their ventured corporation is agreeable and confirm the agreements on allocation of gains or losses, liabilities and assets. (Ruud, Frederikslust and Ang, 2008, p.488). Case studies: Recent successful and unsuccessful joint ventures The recent successful and unsuccessful joint ventures can be illustrated with case studies of the joint venture of Sony-Ericsson mobile phones, joint venture of the DLF group of India and the Hilton Group of Hotels of USA, joint venture between the Tata group of India and the Docomo Corporation of Japan. Sony-Ericson The joint venture between Japanese electronics giant Sony and Swedish telecommunication giant Ericson proved successful initially with the integration of Sony’s highly advanced electronic mobile sets being added to the advantage offered by the technology advanced wireless communication network of Ericson. The joint venture started in 2001 between the two eminent companies. Sony was, however, a marginal player in the world market of mobile phones with close to 1% market share. The venture, however, apart from focusing on mutual advantages and capturing a larger market segment in the competitive world also looked at the brand image of their individual companies. The venture started with around 3500 employees. But in 2002, the share price of Ericsson had fallen leading to its disappointment that the joint venture is not aligned to its core business. In 2003, both companies planned to inject more money in their effort to stem the losses. Adding to their agony, the advent of smart-phones in the competitive market saw fall in demand of the Sony-Ericson mobile sets leaving them at the fifth position worldwide. Sony Ericsson struggled following the launch of Apple i-phone in 2007. The company’s asset value declined from 30.8 million in 2007 to 8.1 million in 2011. The company’s net sales, market share and net profit also declined over the years. The sales over the years are given below. Calendar year Unit sales (millions) 2004 42 2005 50 2006 74.8 2007 103.4 2008 96.6 2009 57.1 2010 43.1 2011 34.4 The venture promising at initial stages was later unsuccessful with Sony buying out 50% of the stake of Sony-Ericson. This allowed both the companies to focus on their individual strengths. Ericson on one hand was able to focus more on its communication networks and Sony on the other hand was able to increase its market share by buying out Ericson’s stake in the joint venture (Marr and Gray, 2012, p.215). DLF – Hilton The joint venture between India’s largest real estate player DLF and the Hilton Group of Hotels in the hospitality sector of USA had entered into a joint venture in 2006 with DLF holding around 76% stake in the joint venture. The agreement was that the Hilton group in this joint venture would invest about $143 million dollars in the joint plan of building 75 hotels and apartments in India in the period of next five to seven years. However, it has been explained by DLF that the pace of progress of Hilton Group’s investment is quite slow as the group has invested only 35 million dollars in about three years time. DLF raised the issue that projects were being delayed to the extent of 12 to 18 months. This has led to the completion of only one hotel under the joint venture with about 30 hotels under construction during this time. Hilton Group has, however, refused to respond to such claims. The construction of land bank under this joint venture rose from the amount of 5000 million dollars to 6000 million dollars. was an area of major interest. The mutual interests are hit supposedly due to liquidity crunch. This prevailing situation and non-fulfilment of objectives of the joint venture has led to its failure. DLF as a result of this has bought the remaining stake of the Hilton Group of Hotels in this joint venture, thereby retransforming the joint venture into a wholly owned subsidiary of DLF. Tata-Docomo The joint venture between the Tata Tele Services of India and the NIT Docomo of Japan led to the formation of the cellular service provider under the brand name of Tata-Docomo. It is the world’s sixth largest service provider in terms of the subscriber’s base. The joint venture between these two companies started in 2008. The joint venture faced severe challenges in the face of rampant growth of Uninor. But Uninor had to discontinue its operation following discontinuation of temporary licence by the Supreme Court. In 2010, the company became the first service provider to launch 3G services in India with over 42 million subscriber base. The Tata Tele services have integrated all its services of CDMA, GSM, photon and internet under the brand name of Tata-Docomo. The Docomo group has also benefitted from the increasing size of market share under the Tata-Docomo brand. The venture in the face of competitive market scenario has turned out to be successful. (Yoshino and Rangan, 1995, p.4). Critical evaluation of the Joint Venture case studies The success and failure of Joint Ventures would depend on factors like basic infrastructural conditions, labour and quality of life, flexibility of government policies, market potential of the product or service, economic laws and legal system in place and the supportive service facilities, long term plans for mutual benefits of the companies entering into joint venture and support for each other along with alignment of mutual interests for strategic growth instead of short term returns. This theory on the success and failure of joint venture can be related to the three case studies of joint venture discussed in the previous section (Das, 2012, p.93). The success of the joint venture of Tata-Docomo can be attributed to availability of basic infrastructural facilities in its area of operation of providing service to the cellular phone market. Tata-Docomo service was provided in India where the market had a good telecommunication capacity and developing standards of social status. The service provide also tapped the opportunities which the cellular phone market offered as its potential. Also, it was able handle competition from Uninor, the latter’s license being cancelled by the Supreme Court in subsequent stages. Also the labour wages, attitude of community towards the service provider’s acceptance, government policies, supportive living facilities for foreigners and compliance to the legal system helped in making the joint venture of Tata-Docomo a successful one (Angwin, 2007, p.26). On the other hand, the DLF – Hilton group joint venture although had common objectives in the starting phase but later on the individual groups differed in implementation of their long term objectives. The joint venture planned to build 75 hotels along with service apartments in a phase of five to seven years. But due to the liquidity crunch or undisclosed reasons the pace of progress of their construction activities was incredibly slower. The Hilton group invested one-fifth of their planned expenditure in about three years time. This mismatch in mutual interest between the groups led to the fall of this joint venture with the DLF buying out Hilton Group’s stake for an estimated 1200 million dollars thereby by transforming it into a wholly owned subsidiary (Ulijn, Duysters and Meijer, 2010, p.22). The joint venture of Sony-Ericson also fell apart or became unsuccessful after initial promising performance. The difference in growth and prominence of their brand names in the market led to fall of this joint venture. Also the market share of mobile phone was also not supporting the growth of the telecommunication network business of Ericsson group of Sweden. As a result of their mismatch in interests, Sony ended up buying remaining 50% of the stake of Ericson in the joint venture. Thus both the parties benefited from the dissolution although the joint venture became unsuccessful (Gaughan, 2007, p.32). Discussion and analysis The case studies discussed for the joint ventures between Sony-Ericson, DLF-Hilton Group and Tata-Docomo can be attributed to several reasons for their respective success and failures. The joint venture of Sony-Ericsson turned out to be unsuccessful as a difference in interest in the growth of their brand names and alignment with their core business between telecommunication network and mobile handsets. It was found that Sony bought out Ericsson’s 50% stake in the joint venture for $1.47 billion. The transaction resulted in a positive capital gain for Ericsson which sourced funds for their new investments. As a result of this, Sony would also focus on increase its market share of smart-phones by tapping the market share and opportunities created by Sony-Ericsson (Stonehouse and Houston, 2012, p.230). DLF – Hilton Group joint venture led to a failure with the DLF Group buying out around 26% stake of the Hilton Group in the joint venture. The joint venture proved to be unsuccessful as there was disparity in implementation of common objectives and goals. The Hilton Group had not invested as much was required and the pace of growth was very slow. The construction of hotels and apartments was nowhere near the set targets during a period of five to seven years. Hilton group only invested 35 million dollar instead of 143 million dollars probably due to liquidity crunch and undisclosed reasons. Thus the joint venture was dissolved eventually. Considering the joint venture of Tata-Docomo which proved to be successful so far is due to the sustenance of the company in the face of competitive market. The fall of Uninor which was one of its major competitors also contributed to its success. Docomo has 26% stake in Tata-Docomo. This has allowed the Tata group to be flexible in its measures of tightening the market segment that offers poor revenue. Although this led to fall in subscriber base from 91 million to 81 million, the Tata Docomo has been able to maintain its profitable position in the market and sustain growth in future with the help of strategic policies (He, 2009, p.26). Conclusions The strategic alliance leads to the sharing of resources by two businesses starting from products, services as well as forces and infrastructure to knowledge and technology and intellectual rights that lead to greater profits compared to those of individual performance. The most prominent strategic alliance if formed by joint ventures. The joint venture gives the opportunity to its participating business to shares their profits at the cost of sharing their expenses and risk. The sharing of profit and loss as well as decision making is done in accordance with the proportions of stake of the business units that have ventured jointly (DePamphilis, 2011, p.28). The other types of strategic alliance involve licensing arrangements and strategic networks. Several joint ventures have found their recent destinations in China and India due to the liberalisation of economy. Some of the example of joint ventures includes the joint venture of Sony-Ericsson mobile phones, joint venture of the DLF group and the Hilton group, joint venture between the Tata group of India and the Docomo Corporation of Japan. Although some joint ventures turn out to be successful ones, the others may be unsuccessful due to mismatch of their long term objectives and growth. Although Sony-Ericsson and DLF-Hilton Group made a promising start to their joint ventures or had common goals but the same was dissolved in later stages due to mismatch of long term interests, strategic wind up of operations in select countries, growth of brand name and its core products, etc. the factors that affected the success and failures of the joint ventures are basic infrastructural conditions, labour and quality of life, flexibility of government policies, market potential of the product or service, economic laws and legal system in place and the supportive service facilities, long term plans for mutual benefits of the companies entering into joint venture and support for each other along with alignment of mutual interests for strategic growth instead of short term returns (Bruner, 2004, p.32). Reference Angwin, D. 2007. Mergers and Acquisitions. Wiley; USA. Berger, A. 2011. Applied Research Methods - Mergers and Acquisitions (M&A). GRIN Verlag; Germany. Bruner, R. F. 2004. 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