Chapter 15
Business Alliances:
Joint Ventures, Partnerships, and Alliances
Solutions to End of Chapter Discussion Questions
15.1 What is a limited liability company? What are its advantages and disadvantages?
15.2 Why is defining the scope of a business alliance important?
15.3 Discuss ways of valuing tangible and intangible contributions to a JV.
15.4 What are the advantages and disadvantages of the various organizational structures that could be
employed to manage a business alliance?
15.5 What are the common reasons for the termination of a business alliance?
15.6 In 2005, Google invested $1 billion for a 5 percent stake in Time Warner’s America Online unit as
part of a partnership that expands their existing search engine deal to include collaboration on
advertising, instant messaging, and video. Under the deal, Google will have the usual customary
rights afforded a minority investor. What rights or terms do you believe Google would have
negotiated in this transaction? What rights or terms do you believe Time Warner might want? Be
specific.
15.7 In late 2004, Conoco Phillips (Conoco) announced the purchase of 7.6 percent of Lukoil’s (a
largely government owned Russian oil and gas company) stock for $2.36 billion during a
government auction of Lukoil’s stock. Conoco will have one seat on Lukoil’s board. As a
minority investor, how could Conoco protect its interests?
3
15.8 In 1999, Johnson & Johnson (J&J) sued Amgen over their 14-year alliance to sell a blood-
enhancing treatment called erythropoietin. The relationship had begun in the mid-1980s with J&J
helping to commercialize Amgen’s blood-enhancing treatment, but the partners ended up
squabbling over sales rights and a spin-off drug. The companies could not agree on future
products for the JV. Amgen won the right in arbitration to sell a chemically similar medicine that
can be taken weekly rather than daily. Arbitrators ruled that the new formulation was different
enough to fall outside the licensing pact between Amgen and J&J. What could these companies
have done before forming the alliance to have mitigated the problems that arose after the alliance
was formed? Why do you believe they may have avoided addressing these issues at the outset?
15.9 In late 1999, General Motors (GM), the world’s largest auto manufacturer, agreed to purchase 20%
of Japan’s Fuji Heavy Industries, Ltd., the manufacturer of Subaru vehicles, for $1.4 billion.
Why do you believe that General Motors may have wanted to limit initially its investment to 20%?
15.10 Through its alliance with Best Buy, Microsoft is selling its products—including Microsoft
Network (MSN) Internet access services and hand-held devices such as digital telephones, hand–
held organizers, and WebTV that connect to the Web—through kiosks in Best Buy’s 354 stores
nationwide. In exchange, Microsoft has invested $200 million in Best Buy. What were the
motivations for this strategic alliance?
Solutions to End of Chapter Case Study Questions
Case Study Comcast Completes the Takeover of NBCUniversal
Discussion Questions:
1. Speculate as to why GE may have found it difficult to manage NBC Universal. Be specific.
2. What are the critical assumptions underlying Comcast’s decision to exercise its option to
acquire the remainder of NBCU that it did not own at an earlier date than anticipated? What
are GE’s?
3. Explain why GE might have been willing to accept subordinated debt and preferred stock for
such a large part of the purchase price? Why might Comcast want to use debt and preferred
equity as part of the purchase price?
4. In what way can the Comcast/GE JV created in 2011 be viewed as a phased entry strategy
into owning content for Comcast and as a phased exit strategy for GE?
5. What is the form of payment and acquisition? What portion of the purchase price might be
immediately taxable to GE and on what portion might taxes be deferred and why?
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
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
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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
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
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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
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
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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
d. Joint venture
e. Consolidation
Case Study Short Essay Examination Questions:
Nokia Gambles on Microsoft in the Smartphone Wars
______________________________________________________________________________________
Key Points
An alliance may represent a low-cost alternative to a merger or acquisition.
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.
____________________________________________________________________________________
12
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
gives it access to Nokia’s brand recognition.
Despite having been an early entrant into the smartphone business, Microsoft had been unable to gain
significant market share. Over the years, Microsoft has struck deals with many of the world’s best known
cellphone manufacturers, including Motorola and HTC Corp. But these alliances were hampered either by
execution problems or by an inability of Microsoft to prevent handset makers from shifting to other
technologies, such as Google’s Android operating system. For example, after failing to deliver mobile
phone technology that would compete with Apple’s and Google’s innovative systems, Taiwanese handset
manufacturer HTC lost interest in manufacturing smartphones based on what was then known as the
Windows Mobile operating system and now makes many different Android phone models in addition to
devices powered by WP7. Even though Microsoft’s Mobility software was substantially revamped and
dubbed Windows Phone 7, it was only able to capture 2% market share in the fourth quarter of 2010
following its introduction early in the fall of that year.
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?
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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.
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
15
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
discussed next.
The announcement raised significant concerns within the media and entertainment industry about the
potential for limiting access to both content and distribution by increasing industry concentration. After
receiving significant concessions, regulators approved the creation of the joint venture media giant on
January 17, 2011. The U.S. Federal Communications Commission and the Department of Justice required
Comcast and NBCUniversal to relinquish voting rights and board representation to Hulu, although they
could continue to remain part owners. Furthermore, Comcast has to ensure what the FCC called
“reasonable access” to its programming for its competitors, and the firm may not discriminate against
programming that competes with its own offerings.
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.
Organizationally, the two parties own NBCUniversal indirectly through their ownership in a holding
company (see Figure 15.2). As part of the deal, NBCUniversal Inc. was converted to a limited liability
company (NBCUniversal Media LLC), which is a wholly owned subsidiary of NBCUniversal Holdings
Inc., a corporation in which Comcast owns 51% of the outstanding shares and GE the remainder.
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,
General Electric
Comcast
NBCUniversal Joint
Venture
$6.5 Billion in Cash
$7.5 Billion in
Cable Network
Assets
Proceeds of $9.1
Billion Borrowed
by NBCUniversal
JV
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
6. Speculate as to why GE may have found it difficult to manage NBC Universal. Be specific.
NBCUniversal
Holdings, Inc.
Comcast
General
Electric
NBCUniversal
LLC.
49% Ownership
Interest
51% Ownership
Interest
7. 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?
8. 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.