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horizontal integration (industrial consolidation) - motivations
- Lower costs (economies of scope and scale)
- Acquire access to complementary resources (knowledge, products, market access)
- Reduction of competitive intensity
- Pre-emption of competitors
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vertical integration - motivations
- Overcome barrier to entry
- achieve synergies
- Acquire access to complementary resources (knowledge, products, market access)
- Increase negotiating power
- Pre-emption of competitors
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diversification- motivation
- Overcome barriers to entry
- Acquire access to complementary resources
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Why M&A on average creates value for the sellers and destroys value for the buyers
- Integration failures (corporate cultures, Failure to realize potential synergies, Loss of valuable resources)
- Winner’s curse
- Principal-agent problem (enhance the standing on the managers)
- Managerial hubris (managers may believe they are better than the average)
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How to have successful M&A
Well-developed processes for identifying, evaluating, bidding for and integrating acquisitions (VRIO resource)
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Strategic alliances – eg
- R&D agreement
- licensing agreement
- joint production agreement
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Strategic alliances – motivation
- Combine complementary resources
- Cheaper and lesser commitment than an outright acquisition
- Hedge against uncertainty due to the creation of real options (especially in JVs and equity alliances)
- Learn new capabilities and exchange of tacit knowledge
- Meet regulatory requirements
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Strategic alliances – risk
- Cooperation failures - the danger of partner opportunism due to misalignment of incentives (Shirking (withholding of resources), Hold-up (opportunistic renegotiations), Misappropriations (e.g., stealing knowledge))
- Coordination failures- inefficient and/or ineffective combination
- Weakening of relative competitive position learning races
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Effective alliance management – key questions
- Alliance partner selection (searching for and evaluating prospective partners)
- Alliance design and governance (overarching structure of the alliance, details of the alliance contract
- Post-formation alliance management (monitor and assess the progress of the alliance, continue/build on/terminate the alliance)
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questions to consider about the search for alliance partners - Cooperation-related concerns
- Alignment of incentives (direct competitors?, one stand to benefit more than the other?)
- trust due to prior interactions, relationships b/w leaders
- trust due to shared partners(provide ex ante referrals, endorsements, sanction ex post opportunism)
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questions to consider about the search for alliance partners - Coordination-related concerns
- Quality/quantity of partner’s resources
- Compatibility of the partner’s resources (Similarity)
- Complementarity of the partner’s resources (total combined contribution of the parties worth more than the sum of its parts)
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Contractual agreements – pros and cons
- Flexible
- Fast and cheap to initiate and terminate
- Lesser protections against partner opportunism
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Equity alliances - pros and cons
- Creating stronger tie & alignment of incentives
- Optionality
- Up-front investments
- Break-up is more costly
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Joint ventures - pros and cons
- Greater transparency of performance & relative contributions
- Significant protections against opportunism
- Most expensive and slow to initiate & terminate
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questions to consider in structuring the alliance contracts –Cooperation-related concerns
- Level of alignment of interests and trust (more alignment means simpler contracts, less hierarchic arrangements)
- Opportunities to cheat and corresponding protections that can be built into the governance of the alliance:
- Shirking (withholding of resources) clauses regarding expected contributions and monitoring mechanisms; more equity commitments
- Hold-up (opportunistic renegotiations) contingency clauses, exchange of hostages
- Misappropriations (e.g., stealing knowledge) info exchange protections
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questions to consider in structuring the alliance contracts - Coordination-related concerns
- higher complexity may require more formal coordination mechanisms
- Uncertainty and the need for adaptation may necessitate more formal coordination arrangements
- Accumulated experience from past collaborations
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Post-formation alliance management –Monitoring
Assessing the progress of the collaboration, diagnose, behavior of the alliance partner, external environment and recognizing potential opportunities and threats of the collaboration
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Post-formation alliance management – Renegotiating
adjustments in the governance, contractual clauses or their implementations
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Post-formation alliance management - Following up
- whether and when to terminate , expand the scope, make additional investments, buy out the partner
- Codify any learnings
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