21
Selecting an alliance partner must be done judiciously to avoid competing with a firm’s own customers or
partners, cannibalizing its own product offering, or unintentionally transferring proprietary information
and technology.
____________________________________________________________________________________
Smartphones outsold personal computers for the first time in the fourth quarter of 2010. The Apple
iPhone and devices powered by Google’s Android operating system have won consumers with their sleek
touchscreen software and with an army of developers creating applications for their devices. In just three
years, they have captured the largest share of the market. These developments put Microsoft’s core
business, selling software for PCs, in jeopardy and have caused Finnish phone handset manufacturer
Nokia to fall further behind in its efforts to compete with Apple and makers of Android-based devices in
the smartphone market.
On February 11, 2011, Nokia’s CEO, Stephen Elop, announced an alliance with Microsoft to establish
a third major player in the intensely competitive smartphone market, currently dominated by Google and
Apple. Under the deal, Nokia will adopt Windows Phone 7 (WP7) as its principal smartphone operating
system, replacing its own software, which has been losing market share. Nokia and Microsoft are betting
that the carriers want an alternative system to iPhone and Android. While some WP7-based products
were anticipated in 2011, a substantial increase in volume was not expected before 2013. Nokia could
have partnered with Google, as have many handset manufacturers. However, it would require that the
firm compete with the likes of Samsung, HTC, and Motorola—all makers of Android-powered
smartphones.
Under the agreement with Microsoft, WP7 becomes Nokia’s primary smartphone platform; Nokia also
agreed to help introduce WP7-powered smartphones in new consumer and business markets throughout
the world. The two firms will jointly market their products and integrate their mobile application online
stores such that Microsoft’s Marketplace (applications and media store) will absorb Nokia’s current
online applications and content store (Ovi). Nokia phones will use Microsoft’s Bing search engine, Zune
music store, and Xbox Live gaming center and will work with Microsoft on future services to expand the
capabilities of mobile devices. However, the deal is not exclusive, for Microsoft will continue to have
other hardware partners. Microsoft also agreed to invest about $1 billion in Nokia over a period of years
to defray development and marketing costs.
The alliance enables Nokia to adopt new software (WP7) with an established community of
developers but that has sold relatively poorly since its introduction in late 2010. With the phase-out of its
discontinued Symbian operating system over a period of years, Nokia will be able to reduce substantially
its own research and development and marketing budgets. Microsoft will also benefit from Nokia’s
extensive intellectual property portfolio in the mobile market to strengthen the WP7 system. For
Microsoft, the deal represents a major opportunity to boost lagging sales in the mobile phone market and
Elop also announced that effective April 1, 2011, Nokia would be reorganized into two business units:
Smart Devices and Mobile Phones. The Smart Devices unit would focus on manufacturing the new
Windows Phone 7 devices. The Smart Devices business must compete in the smartphone market against
the likes of those producing handsets powered by the Google operating system, Blackberry, and Apple
with only the Windows Phone 7–powered phone. The Mobile Phones operation would continue to
develop phones for Nokia’s mass market. The mass market feature–phone business represented Nokia’s
core business, in which the firm would produce large volumes of phones for the mass market
differentiated largely by their features. While this market had proven lucrative for years, it is now under
increasing pressure from mass-produced Chinese phones.
Investors expressed their disapproval of the deal, with Nokia’s stock falling 11% on the
announcement. Similarly, Microsoft’s shares fell by 1% as investors expressed concern that the firm had
teamed with a weak player in the smartphone market and that the two-year transition period before WP7–
based smartphones would be sold in volume would allow only Android-based smartphones and iPhones
to get further ahead.
The partnership faces many challenges. With Samsung, HTC, and LG having invested heavily in
Android-powered devices, they have little incentive to commit to WP7-based devices. Their strategy
seems to be to use the WP7 system as an alternative to Android in its negotiations with Google,
threatening to shift resources to WP7. Furthermore, Nokia is a European company, and Europe is where it
has greatest market share. However, Microsoft has had a checkered past with EU antitrust authorities,
which sued the firm for alleged monopolies in its Windows and Office products. European companies
have been much faster to adopt open-source solutions, often in an effort to replace Microsoft software.
The partnership does, however, have potential advantages. Nokia remains a powerhouse in feature
phones, and, if it can successfully transition these devices to the WP7 operating system, it may be able to
increase market penetration sharply. Android may be vulnerable due to a number of problems: platform
fragmentation, inconsistent updates and versions across devices, and the operating system’s becoming
slower as it is called on to support more applications. WP7, at this time, has none of these problems. If
customers become frustrated with Android, WP7 could gain significant share. As always, time will tell.
Discussion Questions
1. Conduct an external analysis of the smartphone market place (see Chapter 4).
2. Conduct an internal analysis of Nokia and Microsoft (see Chapter 4).
3. What alternatives to a partnership did Nokia and Microsoft have? Why was a partnership
selected as the means of implementing the firm strategy to enter the smartphone market?
23
4. Who do you believe benefitted most from the partnership (Microsoft or Nokia) and why?
General Electric and Comcast Join Forces
____________________________________________________________________________________
Key Points
Joint ventures are sometimes created if a business cannot be sold outright.
Such JVs are viewed as a way of improving a firm’s operations enabling the parent to exit the business
eventually at a higher value.
In an effort to shore up its big finance business, severely weakened during the 2008 financial crisis, and
to focus more on its manufacturing and infrastructure operations, General Electric (GE) sought to sell its
media and entertainment business, NBCUniversal. GE’s decision to sell also reflected the deteriorating
state of the broadcast television industry and a desire to exit a business that never quite fit with its
industrial side. NBC has been mired in fourth place among the major broadcast networks, and the
economics of the broadcast television industry have deteriorated in recent years amid declining overall
ratings and a reduction in advertising. In contrast, cable channels have continued to thrive because they
rely on a steady stream of subscriber fees from cable companies such as Comcast. Moreover, while
NBCUniversal was profitable in 2009, it was expected to go into the red in subsequent years.
Unable to find a buyer for the entire business at what GE believed was a reasonable price, GE sought
other options, including combining the operation with another media business. After extended
discussions, GE and Comcast announced a deal on December 2, 2009, to form a joint venture consisting
of NBCUniversal and selected Comcast assets. Comcast is primarily a cable company and provider of
programming content, with 24.3 million cable customers, 16.1 million high-speed Internet customers, and
7.8 million voice customers. Comcast hopes to diversify its holdings as it faces encroaching threats from
online video and more aggressive competition from satellite and phone companies that offer subscription
TV services, by adding more content on its video–on-demand offerings. Furthermore, by having an
interest in NBCUniversal’s digital properties, such as Hulu.com, Comcast expects to capitalize on any
shift of its cable customers to viewing their favorite TV programs online by owning the program content.
24
Comcast’s strategy is to integrate vertically by owning the content it distributes through its cable
operations. Previous attempts to do this, such as AOL’s acquisition of Time Warner in 2001, have ended
in failure, largely because the cultures of the two firms did not mesh. Some media companies have
merged successfully —for example, Time Warner’s merger with Turner Broadcasting. Having learned
from AOL’s rush to achieve synergy, Comcast is allowing the NBCUniversal JV to operate independent
of the parents and is sharing the risk with GE.
This joint venture transaction is noteworthy for its potential impact on limiting competition in the
entertainment industry, its complex financial engineering, and its multifaceted organizational structure
and as an exit strategy for GE from the media and entertainment business. Each of these considerations is
The deal reflected complicated financial engineering, involving both parties contributing assets to
create a joint venture, agreeing on the total value of the endeavor, determining the value of each party’s
contributed assets to determine ownership distribution, and finally determining how GE would be
compensated. The joint venture transaction based on the value of the assets contributed by both parties
was valued at $37.25 billion, consisting of GE’s contribution of NBCUniversal, valued at $30 billion, and
Comcast’s contribution of cable network assets valued at $7.25 billion. The ownership interests were
determined based on the value of the contributed assets and cash payments made to GE as described in
Figure 15.1.
In exchange for contributing NBCUniversal operations valued at $30 billion to the JV, GE received $15.6
billion in cash ($6.5 billion from Comcast + $9.1 billion borrowed by the NBCUniversal JV) + a 49%
ownership interest in the NBCUniversal JV).
In exchange for contributing $7.5 billion in cable network assets to the JV and paying GE $6.5 billion in
cash, Comcast received a 51% interest in the NBCUniversal JV.
Figure 15.1
NBCUniversal Joint Venture at Closing.
General Electric
Comcast
NBCUniversal Joint
Venture
$6.5 Billion in Cash
$7.5 Billion in
Cable Network
Assets
NBCUniversal
Operations Valued at
$30 Billion
25
NBCUniversal Holdings is the sole member (owner) in NBCUniversal Media LLC. By having the right to
designate the majority of the board members of NBCUniversal Holdings, Comcast effectively controls the
holding company and, in turn, NBCUniversal Media LLC. To maintain its status as a pass-through
organization for tax purposes, NBCUniversal Media makes quarterly distributions to the holding company,
which has no independent source of income, to meet its cash requirements. Among other things, these
obligations include making cash distributions to Comcast and GE so that they can pay taxes due on the
income generated by NBCUniversal Media. As long as GE retains at least a 20% ownership interest in the
combined firms, it has certain approval rights over acquisitions, mergers, dissolution, bankruptcy, material
expansion of the business, dividend payouts, new equity issues or repurchase, additional borrowing in
excess of working capital requirements, loan guarantees, and other actions that could affect the value of its
investment.
Figure 15.2
NBCUniversal Postclosing Organization
Finally, the deal enables General Electric to pursue a staged exit of NBCUniversal over a number of
years. In doing so, GE hopes that the potential synergy with Comcast will increase substantially the value
of its share of the joint venture. GE has redemption rights (a put option) during the six months beginning
January 28, 2014, to redeem one-half of its interest in NBCUniversal Holdings. In the six months beginning
on January 28, 2018, GE can redeem its remaining interest. Comcast is committed to funding $2.9 billion
for each of the two redemptions, payable in cash and stock up to $5.8 billion to the extent NBCUniversal
Media cannot fund the redemptions. The purchase price to be paid with any redemption by GE will be
120% of the “public market trading value” of NBCUniversal Holding, to be determined by an appraisal if
the business is not yet publicly traded, less 50% of the “public market trading value” greater than $28.4
billion. After January 28, 2014, GE may transfer its interest to a third party, subject to Comcast’s having
the right of first offer (first refusal). Comcast has a call option to buy out GE after the same dates
designated for GE’s put option at the same price required under the put option.
In 2011, NBCUniversal Media had revenue of $19.3 billion, earnings before interest and taxes of $2.3
billion, and net income of $1.7 billion. While the financial outlook for the business has stabilized, the deal
continues to be subject to the criticism that there is little overlap between Comcast and NBCUniversal
Media’s businesses to provide significant cost savings. Moreover, big media deals have a poor track record,
as illustrated by the AOL Time Warner debacle. Comcast is placing a big bet that it will be able to combine
content and distribution successfully and to grow the value of the consolidated businesses. In contrast,
General Electric may be more intent on exercising its option to sell its interests unless the fortunes of
NBCUniversal Media improve dramatically in the coming years.
Discussion Questions
Comcast
General
Electric
26
1. Speculate as to why GE may have found it difficult to manage NBC Universal. Be
specific.
2. Why was the NBC Universal joint venture used to borrow the $9.1 billion paid to GE?
How might this impact the ongoing operation of NBCUniversal? What are the trade-offs the
partners are making in agreeing to fund a portion of the purchase price through
NBCUniversal?
3. Speculate as to the potential circumstances in which either Comcast or GE would be
likely to exercise their call or put options? Which party do you believe is likely to exercise
their options first and why?
4. What are the likely challenges Comcast and GE will have in integrating the various
businesses that comprise the joint venture? Be specific.
5. Why did Comcast and GE choose to operate NBCUniversal as a limited liability
company rather than a corporation?
6. Speculate as to why the partners chose to operate NBCUniversal Media through a
holding company.
27
Exxon-Mobil and Russia’s Rosneft Create Artic Oil and Gas Exploration Joint Venture
________________________________________________________________
Key Points
Contractual commitments in cross-border alliances are effective only to the extent they are enforced by
each country’s legal system.
The success of most alliances ultimately depends on the extent to which each partner needs the capabilities
and resources of the other.
______________________________________________________________________________
Exxon-Mobil (Exxon) finalized an agreement with the government-owned Russian oil and gas giant
Rosneft on April 16, 2012, to create a joint venture to explore for oil and gas in three designated areas in
the Russian portion of the Artic Ocean known as the Kara Sea. The agreement superseded a similar but
failed agreement with British Petroleum (BP) earlier in the year. Rosneft’s attempt to strike a similar pact
with BP in 2011 fell apart because the British company had a joint venture with a separate group of private
Russian investors, which blocked the Rosneft deal in an international court. While BP had planned to swap
stock, Exxon agreed to give Rosneft assets elsewhere in the world, including some that Exxon owns in the
deep waters of the Gulf of Mexico and in Texas. Future investments could total tens of billions of dollars.
The final agreement was contingent on Russia’s reducing taxes imposed on oil and gas companies.
The U.S. Geological Survey estimates that the Artic holds one–fifth of the world’s undiscovered,
recoverable oil and natural gas. The Kara Sea has an estimated 36 billion barrels of recoverable oil
reserves. Total oil and gas reserves are estimated to be 110 billion barrels of oil equivalent, four times
Exxon’s proven worldwide reserves. Drilling is expected to start in 2015, with Exxon shouldering most of
the costs. In exchange for access to these Rosneft properties, the agreement gives Rosneft an option to
invest in certain U.S. properties. Rosneft will own two-thirds and Exxon the remainder of the joint venture.
The initial commitment by the two companies is to invest $3.2 billion in exploration in the Kara Sea.
As a world leader in Artic exploration, Exxon is willing to share its expertise with Rosneft, as well as to
transfer technology, in exchange for access to Russia’s Artic region. The Russians are particularly
interested in learning the latest techniques employed in hydraulic fracturing (so–called “fracking”) of
underground oil and gas deposits trapped in shale rock. This deal also allows the Russian petroleum
industry to diversify internationally. While Russia currently pumps more oil than Saudi Arabia, its onshore
oil fields are in decline, threatening a major source of Russian export revenue. Furthermore, Rosneft
receives an option to acquire an equity interest in certain Exxon projects in North America, including deep–
water drilling in the Gulf of Mexico and fields in Texas. In addition, Rosneft will have an opportunity to
invest in Exxon properties and projects outside of the United States. Granting Rosneft options to invest in
certain Exxon assets was an important precondition for getting agreement on the joint venture.
The Russian government had long demanded reciprocity as part of any deal. This required that in
exchange for any ownership in Russian assets, the Russian partner should have the opportunity to invest in
assets owned by the other partner. The value of the assets Rosneft would own in the United States would be
in proportion to those Exxon would own in Russia. The agreement is risky, in view of Russia’s history of
reneging on deals with Western oil companies. For example, in 2006, it compelled Royal Dutch Shell to
sell 50% of a Sakhalin offshore property to state-owned Gazprom after Shell had spent more than $20
billion of its own money and that of other investors to build the project’s infrastructure.
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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 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
29
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.
4. Why would you expect the publicly traded Rosneft shares not to reflect the true value of the
firm?
30
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
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.
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?