121025 - MIM IBS C Session 4 Partnerships

7/28/2019 121025 - MIM IBS C Session 4 Partnerships

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Session 4:

INTERNATIONAL PARTNERSHIPS:

ALLIANCES AND ACQUISITIONS

International Business Strategy (I.B.S.) - MSc. In International Management

Class C

25th October, 2012


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Agenda

n Introductionn When do Ally and when do Acquire? (Dyer et al., 2004)n An Integrative Model on Governance Modes (Villalonga and McGahan,

2005)

n Interfirm Resource Combination Perspective (Wang and Zajac, 2007)n Other relevant contributionsn An International Perspective on Governance Modesn TATA-STARBUCKS case


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Introduction

WHAT ARE GOVERNANCE MODES?

WHICH TYPES OF GOVERNANCE MODE

DO YOU KNOW?


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Introduction

WHAT IS AN ALLIANCE?

WHICH TYPES OF ALLIANCE DO YOU

KNOW?


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Introduction

A collaborative agreement (or several

agreements) between two or more firms, which

contribute resources to a common endeavour of

potentially important competitive consequences,

while maintaining their individuality (Gulati,

1995)


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Introduction

WHAT IS AN ACQUISITIONS?

WHICH TYPES OF ACQUISITION DO YOU

KNOW?


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Introduction

WHAT IS THE DIFFERENCE BETWEEN AN

ACQUISITION AND A MERGER?


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Introduction

n Since the origins of Strategic Management (Penrose, 1959), Growth hasbeen the most important firms goal.

n Growth can be classified as Internal (Organic) and External.

n While Greenfields are mode of Organic Growth, ALLIANCES ANDACQUISITIONS are modes of External Growth.

As external modes, Acquisitions, Alliances, and

Divestitures are strategic alternatives along a continuum

of governance modes (Williamson, 1975, 1991;

Hennart, 1993)


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Introduction

HOW WOULD SUCH CONTINUUM LOOK

LIKE (DIMENSIONS)?


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Introduction

Acquisition

(full)Merger JV

Equity

AllianceNon-equity

AllianceDivesture

Control

+ -

Acquisition

(Majority)

Acquisition

(Minority)

+

Flexibility

+-

Integration

+ -+

Acquisition

(full)Merger JV

Equity

AllianceNon-equity

AllianceDivesture

Control

+ -

Acquisition

(Majority)

Acquisition

(Minority)

+

Flexibility

+-

Integration

+ -+


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Introduction

HOW DO WE MEASURE M&As AND

ALLIANCES PERFORMANCE?


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Introduction

From Zollo and Meier (2008), What it an M&A Performance?,Academy of Management

Perspective


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Introduction

n What are we missing?

Most companies simply

don't compare the two

strategies before picking

one!!!


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Agenda


2005)



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Dyer et al. (2004)

n Dyer et al. (2004) propose a model showing that executives must analyze3 sets of factors before deciding on a collaboration option:

1. Resources and Synergies they desire.

2. Marketplace they compete in.

3. Competencies at Collaborating.


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Dyer et al. (2004)

n Types of Synergies: companies create 3 kinds of synergies by combiningand customizing resources differently. Those resource combinations, or

interdependencies, require different levels of coordination between firms

and result in different forms of collaboration.

o Modular: when they manage resources independently and pool onlythe results for greater profit (example: Airline and Hotel chain)

o Sequential: when one company completes its tasks and passes on theresults to a partner to do its bit (example: Abgenix and AstraZeneca)

o Reciprocal: by working closely together and executing tasks throughan iterative knowledge-sharing process (Exxon and Mobil)

1. RESOURCES AND SYNERGIES


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Dyer et al. (2004)

n Types of Synergies:o Modularo Sequentialo Reciprocal

n Governance Choice:o Non equity-based Allianceo Equity-based Allianceo Acquisition


MATCH!


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Dyer et al. (2004)

n Nature of resources: companies should check if they must create thesynergies they desire by combining hard resources orsoft resources

o Hard resources: easy to value and synergies can be created quickly(example: manufacturing plants)

o Soft resources: difficult to value and to appropriate (example:people)

n Companies have to look at the relative value of soft resources to hardresources (level)



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Dyer et al. (2004)

n Level of relative value of soft to hard resources:o Lowo Low/Mediumo High



MATCH!


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Dyer et al. (2004)

n Extend of redundant resources: companies must estimate the amount ofredundant resources they'll be saddled with if they team up with other

organizations


n Level of redundant resources:o Lowo Mediumo High


MATCH!


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Dyer et al. (2004)

n Degrees of Uncertainty: technological and market uncertainty2. MARKET FACTORS

n Degree of uncertainty:o Lowo Low/Mediumo High


21

MATCH!


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Dyer et al. (2004)

n Forces of competition for resources2. MARKET FACTORS

n Degree of competition:o Lowo Mediumo High


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MATCH!


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Dyer et al. (2004)

n A company's experience in managing acquisitions or alliances is boundto influence its choices.

n Some businesses have developed abilities to manage acquisitions oralliances over the years and regard them as core competencies.

n They've created special teams to act as repositories of knowledge andinstitutionalized processes to identify targets, bid or negotiate with them,

handle due diligence, and tackle issues that arise after a deal is made

(examples: Cisco and J&J).

n They've developed formal and informal training programs that sharpenmanagers' deal-related skills.

n However, specialization poses a problem.

3. COLLABORATION CAPABILITIES


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Dyer et al. (2004)

FRAMEWORK


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Agenda

n Introductionn When do Ally and when do Acquire? (Dyer et al., 2004)n An Integrative Model on Governance Modes (Villalonga and

McGahan, 2005)



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Villalonga and McGahan (2005)

n The paper examines the acquisitions, alliances, and divestitures of agroup of large firms during the 1990s to evaluate how these firms chose to

conduct transactions that expanded and contracted their boundaries.

n Acquisitions, alliances, and divestitures are strategic alternatives along acontinuum of governance modes.

n A variety of theories have explained boundaries choices: R.B.V., T.C.E.,Internalization Theory, Agency theory, Asymmetric Information, Asset

Indivisibilities, Organizational Learning, and Social Embeddedness

(Integrative Model).


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n Intangible Resources (technological and marketing resources)o R.B.V. : excess of resourceso Internalization theory: appropriation risk

Focal Firm Attributes

n Ownership Structureo Agency Theory : max assets under managers controlo Incentive alignment through insider ownership, blockholder ownership

n Acquisition, Alliance and Divesture Experienceo Organizational Learning Theory: capability development through repeated experience

n Prior Diversification (technological and marketing resources)o Agency Theory and Organizational Learning theories: inverted U-shape between the

choice of an acquisition over alliance over divesture and prior diversification


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n Industry Relatednesso R.B.V. : generation of economies of scale

o T.C.E.: more information on the target/partner firms assets value

Attributes of relationship between the focal firm and the target/partner firm

n Size balanceo Digestibility Theory: (dis-)economies of scale and scope

n Prior Allianceo Social Embeddedness Theory: trust in repeated dyad partnershipo Real Option Theory: prior partnership create valuable options


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n Relatedness in SIC codes between the firm and the transactiono R.B.V. : generation of economies of scale

o T.C.E.: more information on the transaction

Attributes of the transaction and of the firm

n Governance specializationo Organizational Learning and Spillover Theory: symmetrical or not experience

spillovers

n Recency of experienceo Elapsed time since the last same type of partnership


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Target/Partner Attributes

n Intangible Resources (technological and marketing resources)o R.B.V. : excess of resources

Transaction Attributes

n Market transaction costs and internal organization costso Uncertainty in the relevant market

o Degree of asset specificityo Relationship between uncertainty and asset specificity


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Results

n Most of the predictions coming from different theories have beensupported.

n There are 2 main results against the predictions from a learningperspective:

o The lessons learned by firms in prior alliances may be applicable todivestitures but not to acquisitions, which is consistent with Zollo

and Reuers (2001) finding of a negative spillover effect of alliance

experience on acquisition performance for low experience levels.

o The recency of the focal firms experience is less influential foracquisitions than it is for alliances or divestitures.


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Agenda


2005)

n Interfirm Resource Combination Perspective (Wang and Zajac,2007)

n Other relevant contributionsn An International Perspective on Governance Modesn TATA-STARBUCKS case


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Wang and Zajac (2007)

n The paper moves the level of analysis from why a focal firm may choosean alliance vs. an acquisition to the factors that motivate two specific

firms (dyad) to choose an alliance versus an acquisition.

n The assumption is that two firms will first identify each other aspotential partners/targets with whom to combine resources, and then

decide whether the combination will be achieved with an alliance or an

acquisition (based on the characteristics of both firms).


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n They argue below that dyadic characteristics, such as two firms:

o Resource Similarity and Complementarity

o Combined relational capabilities

o Partner-specific knowledge

n The characteristics affect the relative costbenefit relationship betweenusing alliances and acquisitions


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Results 1/2

n Findings suggest that, as predicted, higher levels of resource similarityof two firms is more likely to trigger firms to choose acquisition rather

than alliance.

n High levels of resource complementarity of two firms are more likely totrigger firms to choose alliance rather than acquisition.

n We found that combined alliance capabilities increase not only thelikelihood of an alliance formation but also the likelihood of an

acquisition between two firms (stronger effect for alliance).


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Results 2/2

n Results show that the combined acquisition capabilities of two firms(specifically acquiring capabilities) developed from their prior relevant

experience increase the likelihood that two firms will have an

acquisition between them, BUT it (specifically target capabilities) may

discourage these same two firms to form an alliance.

n Partner-specific knowledge of two firms in alliances developed fromprior dyadic alliance experience increases the likelihood of both an

alliance and an acquisition between these firms.

n HOWEVER, partner-specific knowledge of two firms in acquisitionsdeveloped from prior dyadic acquisition experience only increases the

likelihood of an acquisition between them.


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Agenda


2005)



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Other relevant contributions

n Moving to an higher organizational levels, there are importantcontributions explain the acquisitions vs. alliance choice from:

n Network perspective (Yang et al., 2009): tension between externalresource opportunities and internal resource endowments (status)

n Industry determinants (Yin and Shanley, 2008): industry demandson firms to make significant commitment, environmental pressures

for flexibility, industry concentration and institutional conditions


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Agenda


2005)



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Paper Discussion

NIELSEN (2007)


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Paper Discussion

Nadolska, A. and Barkema, H.G.

(2007).Learning to internationalize:

the pace and success of foreign

acquisitions


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Nadolska and Barkema (2007)

n It is important for internationalizing companies to learn to increase thelikelihood of success abroad.

n However, this argument has received mixed support in the domain ofacquisitions:

o More acquisition experience - - - - > more success

o but it might depend on the similarity among targets over time

Therefore.SO WHAT?


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n The paper explores 3 sources of learning for internationalizingcompanies:

1. Experience with internationalacquisitions

2. Experience with domesticacquisitions

3. Experience with international joint ventures

n The paper is anchored in the organizational learning theory (Levitt andMarch, 1988) ---- > routines are based on the past more than anticipation

of the future, and are path dependent


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n Companies may initially apply unsuitable but familiar routines fromexisting repertoires that they have developed from previous acquisitions,

or international joint ventures.

n However, after multiple errors (i.e., unsuccessful, divested acquisitions),companies will reconsider their routines, retain what is productive, and

weave new routines into their existing repertoires to create new, more

successful repertoires for international acquisitions

U-Shape relationship between

Acquisitive experience and

Performance


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n Structure of the hypotheses:

o They considerthe types of acquisition experience: Domestic acq. International acq, International JV

oFor each type of experience they test:

Pace of acquisitions (# of acquisitions per year) Rate ofsuccess of foreign acquisitions (survival, so no divesture)


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n International Acquisition Experience:

o Experience increases the types of knowledge and complexity ofroutines generated in previous foreign acquisitions, reducing the

ambiguity associated to location-specific factors (operational aspect

+ international aspect).

o Development of context-specific routines generates an initial dropin performance


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n Hypothesis 1a: The number of international acquisitions peryear increases as a function of experience with international

acquisitions.

n Hypothesis 1b: There is a U-shaped relationship betweenexperience with foreign acquisitions and the success of

foreign acquisitions.


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n Data and Method:o 25 Dutch companies for 33 years (from 1966)o D.V 1. : # of foreign acquisitions made by each company in each to D.V. 2 : survival (no divesture)o I.V. 1 : cumulative # of international acquisitions done since 1966o I.V. 2 : cumulative # of domestic acquisitions done since 1966o I.V. 3 : cumulative # of international JV done since 1966o Controls: .o Model of estimation: negative binomial regression


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n Results:o Experience in Domestic and International Acquisitions increase the

number of international acquisitions; Experience in International JV

not.

o There is an U-shape relationship between acquisition experience(domestic, international and marginally JV) and performance (survival)

n Conclusion:o Acquisition Experience (Domestic and International) matters in

increasing the chance of doing international expansion through

acquisitions, and it predicts a significant U-Shape relationship with Perf.

o International JV experience does not matter much


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Agenda


2005)



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Case Discussion

TATA-STARBUCKS CASE


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Agenda

APPENDIX


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An International Perspective on Governance Modes

n Cultural Fit (Chatterjee and Lubatkin, 1992):

n Cultural Fit is as important as strategic fit in the case of internationalpartnership choices.

n Cultural Fit plays an important role in the integration process.

n Main effect: investors appear to consider the cultural fit whenvaluing a merger, BUT the additional information of the tolerance

has a little effect on the stocks price of the acquirer.


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n Conform to Host Government Policy (Glaister and Buckley, 1996)

n Many governments in developing countries insist that access to thelocal market can occur only if the foreign company works in co-

operation with a local partner (Beamish, 1988)

n Policies might have implications on the industry base. In otherwords, in some industries partnerships might be more unlikely given

the critical nature of the industry for the government (defense,

telecommunication, resources, financial services)


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n Barkema and Vermeulen (1998) study how multinational diversity andmultiproduct diversity influence the decision to expand abroad through

start-ups or acquisitions.

n They propose that operating in diverse national markets (geographicaldiversity), product markets (technological diversity), or both enhances a

firm's technological capabilities. Moreover, firms operating in diverse

markets can learn something from each of them.

n HOWEVER, learning from market diversity is subject to organizationalconstraints (inertia).


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n In particular:

o Firms with strong technological capabilities are less inclined toundertake acquisitions than start-ups (few to offer and inertia).

o Multinational diversity increases the propensity of a firm to set up anew venture in a foreign country rather than to acquire a company.

o The relationship between a firm's product diversity and itspropensity to expand through start-ups rather than acquisitions is

curvilinear (an inverted U-shape), since the cognitive limitations.


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n In their studyBresman et al. (1999) aims to:

n identify the factors that facilitate knowledge transfer in cases ofinternational acquisitions.

n Identify the patterns of international knowledge transfer fromacquirer company to acquired company during the post acquisition

integration process


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n Results of their study suggest that:

o Factors facilitating knowledge transfer (i.e. visits) are more appliedwhen knowledge is tacit.

o There is a development cycle of the knowledge transfer during thedifferent phases of integration: from the acquirer to acquired (early

stage) to co-development of knowledge and from acquired to

acquirer (late stage)

o Knowledge moves from articulated (early stage) to tacit (late stage)

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121025 - MIM IBS C Session 4 Partnerships