Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
Chapter 15
Business Alliances:
Joint Ventures, Partnerships, and Alliances
Examination Questions and Answers
1. Business alliances may represent attractive alternatives to mergers and acquisitions. True or False
2. A joint venture is rarely an independent legal entity such as a corporation or partnership.
True or False
3. Strategic alliances generally create separate legal entities in order to achieve their business
objectives. True or False
4. Obtaining additional investment funds from others is the primary motivation for creating various
types of alliances. True or False
5. Major motivations for business alliances include risk sharing as well as gaining access to new
markets and skills. True or False
6. A cross-marketing relationship is one in which one party to the agreement agrees to sell to its
customers the products or services of another firm. True or False
7. Purchaser-supplier relationships are also called logistics alliances. True or False
8. Companies wishing to do business abroad often enter into an alliance with an indigenous company
to facilitate entry into a foreign market. The foreign company is usually the majority owner in
such relationships. True or False
9. Foreign companies having a minority ownership position in international business alliances rarely
have control over the alliance even though they may possess much of the expertise required to
manage the alliance. True or False
10. Parent firms sometimes contribute a subsidiary to a partnership as a prelude to eventually exiting
that business. True or False
11. U.S. antitrust regulatory authorities generally view the creation of R&D alliances among
businesses in the same industry as anticompetitive, even if the alliance shares its research with all
alliance participants. True or False
12. Poorly defined roles and responsibilities are an important factor contributing to the failure of many
alliances to achieve their objectives. True or False
2
13. A corporate legal structure is seldom used in implementing business alliances, because it may be
subject to double taxation and significant set up costs. True or False
14. Unlike other legal structures, a corporate structure does not have to be dissolved because of the
death of the owners or if one of the owners wish to liquidate their ownership position.
True or False
15. The major disadvantages of a sub-chapter S corporation are that the number of shareholders is
limited, corporate shareholders are excluded, it must distribute all of its earnings, the liability of
shareholders is limited, and it can issue only one class of stock. True or False
16. Strategic alliances often make use of written contracts rather than more formal legal structures
such as a corporation. True or False
17. In limited liability companies, owners must also be active participants. True or False
18. In setting up business alliances, the initial focus of the parties involved should be on determining
the appropriate legal structure. True or False
19. In terms of important deal structuring issues, scope outlines how broadly the alliance will be
applied in pursuing its purpose. True or False
20. Failure to define scope adequately can result in situations in which the alliance may be competing
with the products or services offered by the parent firms. True or False
21. How ownership interests will be transferred in a business alliance is a relatively unimportant deal
structuring issue. True or False
22. Who receives rights to distribute, manufacture, acquire or license technology, or purchase future
products or technology is an issue usually resolved in defining the scope of the alliance.
True or False
23. Equity owners or partners usually make contributions of cash or assets in direct proportion to their
ownership or partnership interests. If one party chooses not to make a capital contribution, the
ownership interests of all the parties are adjusted the changes in their cumulative capital
contributions. True or False
24. JVs established as partnerships typically raise capital through increased contributions from
existing partners or through the issuance of limited partnership interests to investors, with the
sponsoring firms becoming the general partners. True or False
25. In partnerships, the allocation of profits and losses among partners will normally follow directly
from the allocation of shares or partnership interests. True or False
26. Termination provisions in the alliance agreement should not include buyout provisions enabling
one party to purchase another’s ownership interests. True or False
27. The success rate among business alliances is usually much higher than for mergers and
acquisitions. True or False
28. The number of business alliances established each year is usually much smaller than the number
of mergers and acquisitions. True or False
29. Empirical studies show that the business alliance announcements seldom have any impact on the
market value of their parent firms. True or False
30. Alliance agreements must be flexible enough to be revised when necessary and contain
mechanisms for breaking deadlocks, transferring ownership interests, and dealing with the
potential for termination. True or False
31. The desire to share risk is a common motive for a business alliance. True or False.
32. Business alliances usually exist for decades. True or False
33. Business alliances often receive favorable antitrust regulatory treatment. True or False
34. Joint ventures sometimes represent good alternatives to an outright merger. True or False
35. With respect to joint ventures, so-called distribution issues relate to dividend policies and how
profits and losses are allocated among the owners. True or False
36. In general, business alliances are not intended to become permanent arrangements. True or False
37. Joint venture and alliance agreements often limit how and to whom parties to the agreements can
transfer their interests. True or False
38. Control of business alliances is most often accomplished through a steering committee. True or
False
39. Business alliances generally do not exhibit a higher success rate than mergers and acquisitions.
True or False
40. Business alliances may represent attractive alternatives to merges and acquisitions. True or False
41. Business alliances may assume a variety of legal structures. True or False
42. The written contract is the simplest legal structure and most often is used in strategic alliances.
True or False
43. The automotive industry rarely uses alliances to provide additional production capacity,
distribution outlets, technology development, and parts supply. True or False
44. Project-oriented JVs often are viewed unfavorably by regulators. True or False
45. Successful alliances are usually characterized by partners who have attributes that either
complement existing strengths or significant weaknesses. True or False
46. Successful alliances are often those in which the partners contribute money, which is generally
more important than a specific skill or resource. True or False
47. Successful alliances generally do not hold managers directly accountable for their actions, since
that would tend to stifle risk taking. True or False
48. The length of time an alliance agreement remains in force depends on the partners’ objectives, the
availability of resources needed to achieve these objectives, and the accuracy of the assumptions
on which the alliance’s business plans are based. True or False
49. Top management of the parents of a business alliance should not involve themselves aggressively
and publicly, as this may tend to stifle alliance management’s risk taking and creativity. True or
False
50. The choice of legal structure should be made before the parties to the business alliance are
comfortable with the venture’s objectives, potential synergy, and preliminary financial analysis of
projected returns and risk. True or False
51. Efforts to insist on a detailed written agreement or contractual relationship may be viewed as
offensive in some cultures. True or False
52. Unlike other legal forms, the C corporate structure has an indefinite life as it does not have to be
dissolved as a result of the death of the owners or if one of the owners wishes to liquidate their
ownership position. True or False
53. Under a C corporate structure, ownership can be easily transferred, which facilitates raising
money. True or False
54. Because the limited liability company offers its owners the significant advantage of greater
flexibility in allocating profits and losses and because the LLC is not subject to the many
restrictions of the S-Corporation, the popularity of the S-corporation has increased. True or False
55. Unlike a limited partnership, the LLC is taxed on all profits before they are paid out to its
members. True or False
56. Unlike limited partnerships, LLC organization agreements do not require that they be dissolved in
case of the death or retirement or resignation of any member. True or False
57. The life of the LLC is determined by the owners and is generally set for a fixed number of years in
contrast to the typical unlimited life for a corporation. True or False
58. Equity partnerships commonly are used in purchaser–supplier relationships, technology
development, marketing alliances, and in situations in which a larger firm makes an investment in
a smaller firm to ensure its continued financial viability. This is important because it ensures one
partner has dominant control over the partnership. True or False
59. The formation of a successful alliance requires that a series of issues be resolved before signing an
alliance agreement. True or False
60. An alliance whose purpose is to commercialize products developed by the partners generally
should be broadly defined in specifying what products or services are to be offered, to whom, in
what geographic areas, and for what time period. True or False
1. Which of the following are examples of business alliances?
a. Mergers
b. Acquisitions
c. Joint ventures
d. Equity partnerships
e. C and D
2. Which of the following is not a typical characteristic of a licensing arrangement?
a. Obtaining the rights to use a particular type of technology.
b. Obtaining a controlling interest in another firm
c. Obtaining patent rights
d. Paying royalties in direct proportion to revenues generated by the agreement
e. Utilizing another firm’s trademark to market your product
3. Which of the following is not a motivation for establishing an alliance?
a. Risk sharing
b. Gaining access to new markets
c. Gaining access to a new technology
d. Achieving maximum control
e. Entering into a foreign market
6
4. Which one of the following is not a characteristic of a corporate legal structure?
a. Unlimited liability
b. Double taxation
c. Continuity of ownership
d. Managerial autonomy
e. Ease of raising money
5. Which of the following is not a typical question that must be addressed in defining scope?
a. Which products are included
b. Which products are excluded
c. How are profits are losses to be allocated
d. Who receives rights to distribute, manufacture, acquire, or license or purchase future
products developed by the alliance
e. Which partner will sell which products in which markets
6. Which of the following is not a typical question that must be addressed in defining how ownership
interests will be transferred?
a. What are the restrictions on transfer
b. How will new alliance participants be treated
c. Will there be a right of first refusal
d. How is the alliance to be managed
e. Will there by drag along, tag along, or put provisions
7. Business alliances typically use which of the following ways to finance ongoing capital
requirements?
a. Request participants to make a capital contribution
b. Issuing additional equity or partnership interests
c. Borrowing without partner guarantees
d. A and B only
e. A, B, and C
8. JV and alliance agreements often limit how and to whom parties to the agreement can transfer
their interests. These limitations include which of the following mechanisms?
a. Tag-along provisions
b. Drag-along provisions
c. Put provisions
d. A, B, and C
e. A and B only
9. Methods of dividing ownership and control in business alliances may take which of the following
forms.
a. Majority-minority framework
b. Equal division of power framework
c. “Majority rules” framework
d. Multiple party framework
e. All of the above
10. Antitrust regulatory authorities tend to look most favorably on which type of alliances?
a. Equity partnerships
7
b. Marketing alliances among competitors
c. Global alliances
d. Project oriented ventures involving collaborative research
e. None of the above
11. In general, business alliances are not intended to become permanent arrangements. All of the
following are common reasons for terminating such arrangements except for
a. Diverging objectives of the partners
b. Successful operations resulting in merger of the partners
c. Completion of the project
d. Unexpectedly favorable financial performance
e. Antitrust considerations
12. Termination provisions in alliances commonly include all but which of the following:
a. Buyout provisions enabling one party to purchase another’s ownership interests
b. Predetermined prices at which the buyouts may take place
c. Breakup payments payable to the remaining partners
d. How assets and liabilities will be divided among the partners
e. What will happen to patents and licenses owned by the alliance
13. If one party chooses to exit an alliance, the remaining party or parties often have the contractual
right to
a. First offer their ownership interests to the other partners
b. Sell their ownership interests to the highest bidder
c. Put their interests to a third party that has no relationship to the alliance
d. Require that the other parties to the alliance buy them out
e. Dissolve the partnership
14. Which of the following is generally not true of a business alliance?
a. Tax considerations are often the primary motivation for forming the alliance
b. The events triggering dissolution of the alliance are generally spelled out
c. Remaining partners have a right of first refusal if one partner chooses to exit the
partnership
d. One partner is generally responsible for day-to-day operations
e. Allocation of profits and losses follow from the allocation of shares or partnership
interests
15. Which of the following is generally true about financing JVs and partnerships?
a. Lenders rarely require guarantees from the parents
b. Bank loans are commonly used to meet short-term cash requirements
c. Participants must agree on an appropriate financial structure for the organization
d. Contributions by the partners of intangible assets are usually easy to value
e. Corporations are an uncommon form of legal structure
16. Autos R Us and Pre-owned Inc represent used car dealers that compete in the same city. These
competitors each invest $15 million to form a new, jointly owned company, Real Value Inc, that
will sell cars in a nearby city. The new firm is best described by which of the following terms:
a. Merger
b. Acquisition
c. Leveraged buyout
8
d. Joint venture
Case Study Short Essay Examination Questions:
British Petroleum and Russia’s Rosneft Swap Shares
Extending its already close ties with Russia, British Petroleum PLC announced an agreement to exchange
shares with Russia’s largest oil company, OAO Rosneft, on January 14, 2011. Rosneft is 75% owned by the
Russian government. BP and Rosneft also announced the formation of a JV to develop three massive
offshore exploration blocks that Rosneft owns in northern Russia. The two firms said they will jointly
explore three areas in the South Kara Sea in the Russian Arctic, spending between $1.4 and $2 billion on
seismic tests and drilling wells in the initial exploration phase. The JV will be two-thirds owned by
Rosneft, with the remainder owned by BP.
Reflecting Europe’s escalating dependence on Russia for an increasing share of its energy usage,
particularly for clean-burning natural gas, the agreement is backed by Britain’s prime minister, David
Cameron, and Russia’s prime minister, Vladimir Putin. Russia holds one-fifth of the world’s proven
reserves of natural gas, and, by some estimates, the South Kara Sea contains some of the largest reserves of
oil and gas in the world.
The deal comes in the wake of BP’s sale of assets to raise funds to cover the costs of the Gulf of Mexico
oil spill in mid-2010. Such costs are expected to eventually total $40 billion. Rosneft, which had announced
in late 2010 that it was seeking a partner for exploiting its Arctic leases, indicated that BP’s experience in
dealing with such problems gives it an edge over other potential partners. Rosneft also regards BP’s deep-
water drilling technology and experience as cutting edge. BP’s expertise received another vote of
confidence when Australia granted BP licenses to initiate extensive drilling activity off its coast several
days after the Rosneft announcement.
The share exchange gives Rosneft a 5% interest in BP’s voting shares, making it BP’s single largest
shareholder. In return, BP receives a 9.5% ownership stake in Rosneft. Each stake is valued at about $7.8
billion. Both firms agreed to hold each other’s equity for at least two years before selling any stock. BP’s
shares currently pay a dividend about twice that of Rosneft’s. BP and Rosneft have stated publicly that they
believe investors have significantly undervalued their firms. The Russian government has a particularly
strong interest in seeing the value of its holdings appreciate, since it announced plans to privatize a number
of largely state-owned enterprises, including Rosneft, in 2014 in order to raise funds.
At the time of the announcement, BP’s market capitalization was about $154 billion. With almost 90%
of its shares owned by the Russian government and Sherbank, Russia’s biggest retail savings bank, the
firm’s stock trading in public markets tends to be limited and not reflective of Rosneft’s true value.
However, the terms of the share exchange imply a market capitalization for Rosneft of about $81 billion.
The transaction represents the first time there has been a cross-shareholding between major international
oil firms and a major government-owned national oil company. Unlike more conventional oil and gas JVs,
the Rosneft JV will not own the oil leases but merely the right to develop them. This structure is similar to
Russian oil company Gazrpom’s agreement with France’s Total SA and Norway’s Statoil for the
development of the Shtokman gas field in early 2008.
Rosneft became Russia’s leading extraction and refining company after purchasing assets of former
privately owned oil giant Yukos at state-sponsored auctions, in which the global community decried what
appeared to be the Russian government expropriation of the privately owned assets. In 2006, Rosneft
conducted one of the largest IPOs in history by issuing nearly 15% of its shares on the Russian Trading
System and the London Stock Exchange. With the shares priced at $7.55 each, the offering raised about
$10.7 billion. Most of the proceeds went to the Russian government. BP began its relationship with Rosneft
by buying $1 billion in shares in the firm’s initial public offering, equivalent to 1.3%. Thus, the recent
agreement brings BP’s ownership interest in Rosneft to 10.8%.
Previous attempts to invest in Russia and to create partnerships between Russian state oil companies and
Western oil firms have failed due to outright expropriation by the Russian government or heavy-handed
tactics employed by certain Russian billionaires (so-called oligarchs) with close ties to the Russian
government. For example, Russian officials forced Shell Oil to sell control of its Sakhalin II oil and gas
development to state-owned Gazprom. BP and Gazprom signed a global joint venture in 2007 in which
each was to contribute assets valued at $1.5 billion, but it was later dissolved due to disagreements between
BP and large Russian investors. TNK-BP, BP’s 50 percent–owned JV with a group of Russian billionaire
business people, has also had a troubled history. The JV that contributes a quarter of BP’s global
production and nearly a fifth of its reserves was rocked by a shareholder dispute in 2008 that cost BP some
of its control. BP chief executive Bob Dudley had served as chief executive of that JV for five years until
he was expelled by BP’s Russian partners during the disagreement.
On news of the agreement, BP’s partners in the TNK-BP JV stated that BP had not notified them
adequately and that the Rosneft deal violated their “right of first refusal” as stated in the JV agreement. The
partners were successful in getting a court injunction in the United Kingdom to block the implementation
of the JV in February 2011. TNK-BP at the time of this writing is considering a legal claim against BP for
damages of up to $10 billion for allegedly reneging on its commitment to use TNK-BP as its main vehicle
for investment in Russia. These developments raise serious questions about the longer-term viability of the
BP-Rosneft JV.
Discussion Questions:
1. Speculate as to the purpose of the share swap between BP and Resnoft.
2. What is the purpose of the 2-year lockup period during which neither partner can sell its
stock? How might the lock-up period impact the value of each firm’s holdings?
3. Would you expect the share exchange to be dilutive to BP shareholders in the short-run? In
the long-run. Explain your answer.
10
4. Why would you expect the publicly traded Rosneft shares not to reflect the true value of the
firm?
5. How would you estimate the market capitalization for Rosneft based on the terms of the share
exchange? Show your work.
6. How can BP best protect their interests in the JV with Rosneft in the highly uncertain political
and economic environment of Russia?
SABMiller in Joint Venture with Molson Coors
On October 10, 2007, SABMiller (SAB) and Molson Coors (Coors) agreed to combine their U.S. brewing
operations into a joint venture corporation. The stated objective was to create a rival capable of competing
with Anheuser-Busch, the maker of Budweiser beer. SAB and Coors, the second and third largest
breweries, respectively, in the United States in terms of market share, have equal voting rights in the newly
formed entity. Each firm has five representatives on the board. In terms of ownership, SAB, the larger of
the two in terms of sales and profits, has a 58-percent stake and Coors a 42-percent position. The combined
operation, named MillerCoors, has about a 30 percent market share versus Anheuser's 48 percent. Leo
Kiely, chief executive at Coors, became the chief executive officer of MillerCoors and Tom Long, head of
the SAB business in the United States, became the president and chief commercial officer. Peter Coors,
vice chairman of Coors, was tapped as the chairman and Graham Mackey, SAB's chief executive officer,
the vice chairman of MillerCoors. Both Coors and SAB continue to operate separate global businesses.
From its roots in South Africa, the former SAB PLC grew rapidly over the previous decade by
expanding into fast growing economies such as China, Eastern Europe, and Latin America. SAB acquired
Miller Brewing Company in 2002, but the U.S. business failed to gain significant market share in
competing with Anheuser-Busch's pervasive brand awareness and distribution strength. Molson Coors was
formed by the 2005 merger of Colorado's Adolph Coors Co. and Canada's Molson Inc., both family-
controlled companies. The families were unwilling to sell their entire companies to another firm. The JV
allows them to keep some control. Molson Coors, with dual headquarters in Montreal and Denver, has
major operations in Canada and Britain that would remain independent of SABMiller. Reflecting its larger
market share, brand recognition, and negotiating clout with distributors, Anheuser-Busch has operating
11
profit margins of 23 percent, double SAB's or Coors's margins. SAB is larger in terms of both revenue and
profit than Coors.
The major U.S. breweries have been experiencing growing competition from wine, specialty beers,
spirits, and imported beers. Spirits companies have raised the pressure on beer giants to merge by rolling
out sweet cocktails and other drinks to lure younger consumers. Premixed bottled drinks such as Smirnoff
Ice have seen sales triple in the last decade. The U.S. beer market is largely mature, with consumption
growing at an annual rate of about 1.5 percent.
MillerCoors anticipated annual cost savings to reach $500 million by the third year of operation and be
accretive for both parent firms by the second full year of combined operations. The cost savings result from
streamlining production, reducing shipping distances between plants and distribution sites, and cutting
corporate staff. Shipping costs represent a significant cost, given the nature of the product. By producing
both firms' products in the eight plants geographically distributed across the Midwestern and western
United States, MillerCoors should realize significant savings in meeting customer demand for both
products in the immediate proximity of each plant.
SAB and Coors hope to become one-stop shops for distributors, allowing them to save time and money
by dealing with one company instead of two. About 60 percent of Miller's volume is distributed by
wholesalers also selling Molson Coors brands. U.S. federal law dating back to the repeal of prohibition
requires beer to be sold in many states through wholesalers. The resulting savings to distributors could
increase MillerCoors overall market share.
By combining their U.S. advertising budgets, MillerCoors expects to have more clout at the bargaining
table with U.S. media outlets, enabling the combined firm to get lower prices and better sports marketing
deals. Such deals are viewed as critical to marketing beer in the United States. MillerCoors will find it
easier to negotiate for better placement for its ads and compete more effectively for ad rights to major
sporting events. The two firms are also geographically complementary. Miller is strong in the Midwest,
while Coors has large market share in the West.
Immediately following the joint venture announcement, Anheuser-Busch's CEO August A. Busch IV
said in a message to employees that the brewer must capitalize on the significant transition confusion he
predicted would occur when Miller and Molson Coors blend their U.S. operations. Such confusion, he
predicted, would create great concern within the SABMiller/Coors field sales and wholesale organizations,
as people attempt to determine if they will have a role in this new structure.
Discussion Questions:
1. What tactics do you think Anheuser might employ to exploit the predicted confusion during
the integration of the SABMiller and Coors operations?
2. How did the combination of the U.S. operations of SABMiller and MolsonCoors meet the
needs of the two parties? Why was a JV viewed as preferable to a merger of the two firm’s
global operations?
