Joint Ventures, Partnerships, Strategic Alliances, and Licensing

1. Joint Ventures, Partnerships, Strategic Alliances, and Licensing

2. Business Alliances as Alternatives to M&As • Business alliances are vehicles for implementing business strategies • Business alliances may be informal agreements or highly complex legal structures. Typically short term • Alternative forms of business alliances (including legal and informal relationships) • Joint ventures – “The Big Dig” in Boston. • Strategic alliances • Equity partnerships • Licensing • Franchising • Network alliances

3. Motivations for Forming Alliances • Risk sharing • Sharing proprietary knowledge (e.g., TiVo, Sematech, and Wintel) • Management skills and resources (e.g., Dow Chemical/Cordis) • See web for examples in Pharma, specifically Novartis. • Gaining access to new markets • Using another firm’s distribution channels (e.g., Redhook & Bud) • Globalization • Gaining access to foreign markets where laws prohibit 100% foreign ownership or where cultural differences are substantial (e.g., China) • Cost reduction • Purchaser/supplier relationships (e.g., GM/Delphi, Ford, and Daimler Chrysler online purchasing consortium) • Joint Manufacturing (e.g., major city newspapers) • Prelude to acquisition or exit (e.g., TRW/Redi, Bridgestone/Firestone) • Favorable regulatory treatment (e.g., collaborative research)

4. Business Alliance Critical Success Factors • Clarity of purpose, roles, and responsibilities • Synergy (e.g., economies of scale/scope; access to new products, distribution channels, and proprietary know-how) • Risk reduction (e.g., Verizon and Vodafone share network costs to form Verizon Wireless) • Cooperation (e.g, MCIWorldcom and Telefonica de Espana) • Greatest when partners share similar cultures • Win-win situation (e.g., TRW REDI, Merck and J&J) • Compatible time frames for partners • Support from the top • Similar financial expectations

5. Chinese (International)JV • To Be Successful: • Clear Objectives • Play to Each Other's Strengths • Head off Culture Clash • Language • Common Causes of JV Failure • Research indicates that 50 to 70% fail. • Not many CEOs of joint ventures view their venture as "very successful". • The most common causes of failure cited by CEOs are: • • Cultural differences (49% • • Poor or unclear leadership (49%) • • Poor integration process (46%)

6. Chinese (International)JV • The most common causes of failure cited by CEOs are: • Cultural differences (49%) • Poor or unclear leadership (49%) • Poor integration process (46%)

7. Examples • Starbucks • Barnes & Noble – 1993 • Pepsico • United Airlines • Kraft • NAACP • Apple –Clearwell , Sony, Motorola, Philips A&&T • Disney – HP and McDonalds • TiVo – Amazon • Ford – Sirius • Health Care – Lahey Clinic and Winchester Hospital

8. Legal Form Follows Business Strategy • Business strategy provides direction • If management determines a business alliance is best way to implement strategy, an appropriate legal form must be selected. • Legal form affects: • taxes, • limitations on liability, • control, • duration, • ease of transferring ownership, and • ease of raising capital

9. Alternative Legal Forms of Business Alliances: Limited Liability Companies • Limited Liability Companies: • Advantages: Offers limited liability, owners can be managers without losing limited liability protection, avoids double taxation, allows unlimited number of members (owners), allows corporate shareholders, can own more the 80% of another firm; and offers flexibility in allocating investment, profits, losses • Disadvantages: Structure lacks continuity, ownership shares illiquid as transfer subject to approval of all members; members must be active participants in the firm

10. Alternative Legal Forms of Business Alliances: Other • Franchise alliances: • Advantages: Allows repeated application of a successful business model, minimizes start-up expenses; facilitates communication of common brand and marketing strategy. • Disadvantages: Royalty payments (3-7% of revenue) • Equity partnerships: • Advantages: Facilitates close working relationship; limits financial risk, potential prelude to merger; may not require financial statement consolidation • Disadvantages: Limited tactical and strategic control • Written contracts: • Advantages: Less complex; no separate legal entity established; potential prelude to merger • Disadvantages: Limited control, may lack close coordination; potential for limited commitment

11. Alliance Deal Structuring Issues • Defining scope (included/excluded products and duration) • Determining control and management (how are decisions made?:steering or joint management committee, majority/minority, equal division of power, or majority rules framework. • How are resources to be contributed (form and value) and how is ownership determined? • Tangible contributions (cash or cash commitments and assets required by the business) • Intangible contributions (services, patents, brand names, and technology)

12. Alliance Deal Structuring Issues Continued • Governance (protecting stakeholder interests)--board or partnership committee • Profit/loss and tax benefits allocation and dividend determination • Dispute resolution and termination (Who owns assets following dissolution?) • Financing ongoing capital requirements (What happens if additional capital is needed?; Can the alliance borrow? Target debt/equity ratio?) • Performance criteria (How is performance to plan measured and monitored?)

13. Empirical Studies of Business Alliances • Abnormal returns to business alliance partners average about 2% during the 60 days preceding the alliance’s announcement. • Partner share prices often increase prior to announcement for alliances involving firms within the same industry as well as in different industries • However, the increase is greatest for firms to the same industry involving technical knowledge transfer. • Alliances often account for 6-15% of the market value of large firms. • While the number of alliances is growing rapidly, about two-thirds fail to meet participant expectations. • Financial returns on investment tend to be higher for those firms with significant experience in forming alliances.

14. Things to Remember… • Alliances often represent attractive alternatives to M&As. • Motivations for forming alliances include risk sharing, gaining access to new markets, accelerating new product introduction, technology sharing, cost reduction, globalization, a desire to acquire or exit a business, or their perceived acceptability to regulators. • Alliances may assume a variety of different structures from highly formal to highly informal, handshake agreements. • As is true for M&As, a business plan should always precede concerns about how the transaction should be structured. • Business alliance deal structuring focuses on the fair allocation of risks, rewards, resource requirements, and responsibilities of participants. • While business alliances are expected to remain highly popular, their success rate in terms of meeting participants’ expectations is about the same as M&As.