978-1305500891 Chapter 12 Lecture Note

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CHAPTER 12

MAKING ALLIANCES AND ACQUISITIONS WORK

LEARNING OBJECTIVES

After studying this chapter, you should be able to:

1. define alliances and acquisitions.

2. articulate how institutions and resources influence alliances and acquisitions.

3. describe how alliances are formed.

4. outline how alliances are evolved and dissolved.

5. discuss how alliances perform.

6. explain why firms undertake acquisitions.

7. understand why acquisitions often fail.

8. participate in two leading debates concerning alliances and acquisitions.

9. draw implications for action.

GENERAL TEACHING SUGGESTIONS

Hardly a week goes by without some story in the Wall Street Journal about the formation of a

global alliance or acquisition. You might consider having groups of students research one of

these alliances or acquisitions and give an oral report discussing the application of chapter

concepts to the deal. Note: one of the benefits of an oral report is that people would have to do

more than just download something from the Internet in order to intelligently discuss the news.

OPENING CASE DISCUSSION GUIDE

Fiat Chrysler: From Alliance to Acquisition

In 2009, Chrysler went bankrupt. When it emerged from bankruptcy, it was owned by the U.S.

government, the Canadian government, the United Auto Workers, and Fiat. Chrysler and Fiat

combined their strengths to find success. Chrysler repaid its loans and repurchased its shares

from the U.S. and Canadian governments. Over time, Fiat continued to buy shares of Chrysler. In

2009, Fiat owned 20% of Chrysler. By 2014, Fiat owned 100% of Chrysler. The relationship that

started as an alliance in 2009 became an acquisition in 2014.

CHAPTER OUTLINE: KEY CONCEPTS AND TERMS

Sections I through IX of Chapter 12

I. DEFINING ALLIANCES AND ACQU1SITIONS

1. Key Concept

Important terminology related to alliances and acquisitions is introduced to understand

the balance of the chapter.

2. Key Terms

Acquisition is a transfer of the control of operations and management from one firm

(target) to another (acquirer), the former becoming a unit of the latter.

Contractual (non-equity-based) alliance is an alliance between firms that is based

on contracts and does not involve the sharing of ownership.

Cross-shareholding is both firms investing in each other to become

cross-shareholders.

Equity-based alliance is an alliance based on ownership or financial interest

between the firms.

Merger is the combination of operations and management of two firms to establish a

new legal entity.

Strategic alliance is a voluntary agreement of cooperation between firms.

Strategic investment is one firm investing in another as a strategic investor.

II. INSTITUTIONS, RESOURCES, ALLIANCES AND ACQUISITIONS

1. Key Concepts

Formal institutions influence alliances and acquisitions through antitrust and entry mode

concerns. Informal institutions affect alliances and acquisitions through normative and

cognitive pillars. The impact of resources on alliances and acquisitions is illustrated by

the VRIO framework.

2. Key Terms

Acquisition premium is the difference between the acquisition price and the market

value of target firms.

Due diligence is investigation prior to signing contracts.

Learning race is alliance partners aiming to outrun each other by learning the

“tricks” from the other side as fast as possible.

Organizational fit is the similarity in cultures, systems, and structures.

Real option is an investment in real operations as opposed to financial capital.

Relational (or collaborative) capability is the ability to manage interfirm

relationships.

Strategic fit is the effective matching of complementary strategic capabilities.

III. FORMATION OF ALLIANCES

1. Key Concept

Alliances are typically formed when managers go through a three-stage decision process.

Stage One: to cooperate or not to cooperate?

Stage Two: contract or equity?

Stage Three: specifying the relationship.

2. Key Terms

Learning by doing is a way of learning, not by reading books but by engaging in

hands-on activities.

IV. EVOLUTION AND DISSOLUTION OF ALLIANCES

1. Key Concepts

Managers need to combat opportunism and, if necessary, manage the dissolution process.

2. Key Terms

None

V. PERFORMANCE OF ALLIANCES

1. Key Concept

Four factors affect performance: (1) equity, (2) learning, (3) nationality, and (4) relational

capabilities.

2. Key Terms

None

VI. MOTIVES FOR ACQUISITIONS

1. Key Concept

Acquisitions are often driven by synergistic, hubristic, and managerial motives.

2. Key Terms

Hubris is overconfidence in one’s capabilities.

Managerial motive is a manager’s desire for power, prestige, and money which may

lead to decisions that do not benefit the firm overall in the long run.

VII.PERFORMANCE OF ACQUISITIONS

1. Key Concept

Many acquisitions fail because managers do not address pre- acquisition and

post-acquisition problems.

2. Key Terms

None

VIII. DEBATES AND EXTENSIONS

1. Key Concept

The debates involve (1) alliances versus acquisitions and (2) majority JVs versus

minority JVs.

2. Key Terms

None

IX. MANAGEMENT SAVVY

1. Key Concept

Managers need to understand and master the rules of the game governing alliances and

acquisitions around the world. When managing alliances, managers must pay attention to

the “soft” relationship aspects. When managing acquisitions, the savvy manager should

not overpay and should focus on both strategic and organizational fit.

2. Key Terms

None