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Chapter 11: Making Alliances & Acquisitions Work
Chapter Outline
LO1: Define alliances and acquisitions.
1. Key Concepts
Strategic alliances are voluntary agreements of cooperation between two firms. An
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.
2. Key Terms
3. Discussion Exercise
On September 30, 2009, Abbott Laboratories, a leading pharmaceutical and medical
products company, purchased Solvay Pharmaceuticals (a drug, chemicals, and plastics firm
based in Belgium) for $6.6 billion. As CEO Miles White said, the acquisition of Solvay was
motivated in large part by the huge amount of cash the firm had on hand, enough so that the
$6.6 billion deal was completed with no borrowing. Given the historically low interest rates
and the lagging stock market, White argued that the acquisition of Solvay was a far more
efficient use of company assets than either savings or investment. Also, the acquisition
provided Abbott quick access to development pipelines and foreign markets, something that
would have taken years to develop internally. (Source: David Greising “Abbott again shows
it is better to buy than to build,” Chicago Tribune, September 29, 2009,
http://articles.chicagotribune.com/2009-09-29/news/0909290052_1_abbott-solvay-
pharmaceuticals-solvay-sa)
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Chapter 11: Making Alliances & Acquisitions Work
Based on this case, have the students discuss the following questions: What are the benefits
of acquisitions? How do acquisitions differ from alliances and internal developments? What
are the risks associated with acquisitions? How might the purchase of Solvay hurt Abbott in
the future?
LO2: Articulate how institutions and resources influence alliances and acquisitions.
1. Key Concepts
2. Key Terms
3. Discussion Exercise
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Chapter 11: Making Alliances & Acquisitions Work
LO3: Describe how alliances are formed.
1. Key Concepts
The formation of an alliance typically progresses through three stages. In stage one, a firm
must decide if growth can be achieved through market transactions, acquisitions, or
alliances. In stage two, a firm must decide whether to take a contractual or an equity
approach. Eventually, firms need to specify a specific format that is either equity based or
contractual (non-equity based), depending on the choice made in stage two.
LO4: Outline how alliances are dissolved.
1. Key Concepts
Alliances are often described as corporate marriages and, when terminated, as corporate
divorces. It consists of four phases: initiation, going public, uncoupling, and aftermath.
2. Discussion Exercise
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Chapter 11: Making Alliances & Acquisitions Work
LO5: Discuss how alliances perform.
1. Key Concepts
LO6: Explain why firms make acquisitions.
1. Key Concepts
2. Key Terms
LO 7: Describe what performance problems firms tend to encounter with acquisitions.
1. Key Concepts
Problems can be identified in both pre-acquisition and post-acquisition phases. During the
pre-acquisition phase, because of executive hubris and/or managerial motives, acquiring
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Chapter 11: Making Alliances & Acquisitions Work
2. Discussion Exercise
As detailed in the chapter, a key factor in the success of alliances and acquisitions is
relational capability, which is the ability to work together in an alliance or the ability to have
two organizations blend seamlessly into one. The relational difficulties between two
organizations are exacerbated in cases of global alliances/acquisitions due to the potential
for extensive cultural, political, and moral differences.
In a relationship between two U.S. firms, what relational traits would be important to ensure
success? What steps would an individual take to make sure that both his or her firm and the
partner firm had the required skills? How would these traits apply to alliances or acquisitions
with foreign firms? If there are severe conflicts within the relationship, how would
individuals decide which firm should make compromises?
LO8: Articulate what you can do to make global alliances and acquisitions successful.
1. Key Concepts
Debate: Ethical Dilemma
Can Mergers of Equals Work?
1. Key Concepts
In 1998, Daimler and Chrysler announced their “merger of equals.” After two years,
Chrysler’s former boss Robert Eaton left. Jürgen Schrempp, Daimler’s boss, shared with the
media that the term “merger of equals” had been used only for “psychological reasons”—in
other words, it was a lie. Not surprisingly, the two sides divorced each other later (in 2007).
In case people think that the DaimlerChrysler tragedy was caused in part by the cross-
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Chapter 11: Making Alliances & Acquisitions Work
cultural difficulties (which undoubtedly added to the challenges), mergers of equals between
two firms from the same country may still be unworkable.
Why are mergers of equals so hard? Because both firms are not willing to let the other have
an upper hand and both bosses, whose egos are typically huge, are not willing to let the other
to be in charge. It is possible at least one of the two bosses is opportunistic in the beginning
and determined to drive away another—as evidenced in the case of Schrempp at Daimler.
Closing Case Discussion Guide
Fiat Chrysler: From Alliance to Acquisition
The year 2009 was one of the most tragic and unforgettable years in the history of the US
automobile industry: two of the Big Three automakers, GM and Chrysler, went bankrupt in
April. By 2009, nobody wanted Chrysler, which was pulled down by deteriorating products,
hopeless finances, and the Great Recession. Its desperate call asking GM, Honda, Nissan-
Renault, Toyota, and Volkswagen to help went nowhere. Only Fiat answered the call with $5
billion. As the “new Chrysler”—Chrysler Group LLC, which is different from the pre-
bankruptcy “old Chrysler,” formerly called Chrysler LLC --emerged out of bankruptcy in June
2009, the US government (which spent $8 billion to bail out Chrysler) had 10% of equity. The
Canadian government had 2%. The United Auto Workers (union) had 68%. Although Fiat only
had 20%, clearly as the senior partner in this new alliance it was calling all the shots.
The DaimlerChrysler marriage consisted of a luxury automaker and a working class truck and
SUV maker, which had a hard time working together. The Fiat-Chrysler alliance at least
consisted of two similar mass-market operations. Both offered each other a set of complementary
skills and capabilities. In addition to cash, Chrysler needed attractive small cars. Fiat supplied
Chrysler with its award-winning Alfa Romeo Giulietta small car and its excellent small-engine
technology that would comply with the increasingly strict fuel-economy standards in the United
States. In 2013, while Chrysler’s US factories were running at nearly full capacity, only 40% of
the capacity of Fiat’s Italian factories was being utilized. Thanks to Italian politics, Fiat could not
close any major factories. Therefore, Fiat needed novel models from Chrysler and made them in
Italy. In third-country markets, while each of these relatively smaller players was weak, their
odds would be better by working together. Combining forces allowed them to scale new heights
in the tough but important Asian markets.
Sergio Marchionne, who served as chairman and CEO for both Fiat and Chrysler, was
instrumental in making sure both sides worked together. Instead of the more centralized German
style, Marchionne practiced a more decentralized management style. By 2011, Chrysler repaid
$7.6 billion loans to the US and Canadian governments and bought out the shares both
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Chapter 11: Making Alliances & Acquisitions Work
governments held. Overall, Fiat gradually increased its Chrysler shares, reaching 59% by 2013.
In 2014, Fiat acquired the remaining shares and owned 100% of Chrysler.
Set up in 2014, the combined entity is called Fiat Chrysler Automobiles (FCA), which
interestingly is headquartered neither in Turin, Italy (Fiat’s home), nor Auburn Hills, Michigan (a
Detroit suburb—Chrysler’s base). Instead, it is registered in the Netherlands, which has emerged
as “Europe’s Delaware.” Cross-listed in both Borasa Italiana (BIT: FCA) and New York Stock
Exchange (NYSE: FCAU), FCA is the world’s seventh largest automaker. With combined annual
output of 4.6 million cars, FCA is behind Toyota, GM, Volkswagen, Hyundai, Ford, and Nissan-
Renault, but ahead of Honda and Peugeot.
Video Case
Watch “Why a Deal Is Done” by Stuart Grief of Textron.
1. Grief presented reasons for separating the analysis of potential M&A into the “why” and the
“how” with emphasis on the “why.” Develop a scenario in which “how” might be the most
important question and could influence the “why.”
2. In the Textron M&As, the “why” is handled by the firm’s strategic function and the “how”
by the M&A function. Discuss both the pros and cons of that approach.
3. Grief said that when Textron is considering an acquisition, it asks if it is the best “parent” for
the potential acquisition. What did he mean by that, and does that make sense to you? Why,
or why not?
The idea is that some company might be able to make the acquisition profitable. But is
Textron that company? Opinions will vary as to whether that makes sense.
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Chapter 11: Making Alliances & Acquisitions Work
4. In global acquisitions, it is possible that a focus on “why” might yield a decision to go ahead
with an M&A that fails due to overlooking the cultural issues in the “how” question. Explain
why that is possible.
Additional Discussion Material
(From Prep Cards)
Critical Discussion Questions
1. On Ethics: Some argue that a learning race in alliance management is unethical. Others
contend that a learning race is part and parcel of alliance relationships. What do you think?
2. On Ethics: During the courtship and negotiation stages, managers often emphasize equal
partnerships and do not reveal (or they try to hide) their true intentions. What are the ethical
dilemmas here?
3. On Ethics: As a CEO, you are trying to acquire a foreign firm. The size of your firm will
double, and it will become the largest in your industry. On the one hand, you are excited
about the opportunity to be a leading captain of industry and the associated power, prestige,
and income. (You expect your salary, bonus, and stock option to double next year.) On the
other hand, you have just read this chapter and are troubled by the fact that 70% of mergers
and acquisitions reportedly fail. How would you proceed?
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Chapter 11: Making Alliances & Acquisitions Work
Review Questions
1. What are the two broad categories of strategic alliances?
2. Which is more common, mergers or acquisitions? Why?
3. Outline the three stages of alliance formation.
Stage One: To cooperate or not to cooperate?
In Stage One, a firm must decide if growth can be achieved through market transactions,
acquisitions, or alliances. To grow by pure market transactions, the firm has to confront
competitive challenges independently.
Stage Two: Contract or equity?
In this stage, a firm must decide whether to take a contractual or equity approach. The first
driving force is shared capabilities. A second driving force is the importance of direct
monitoring and control. Equity relationships allow firms to have some direct control over
joint activities on a continuing basis, whereas contractual relationships usually do not.
Stage Three: Specifying the relationship
Eventually, firms need to specify a format that is either equity based or contractual (non-
equity-based).
4. Outline the process of alliance dissolution.
5. What are three of the most common motives for acquisition?
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Chapter 11: Making Alliances & Acquisitions Work
6. How does a manager avoid pre-acquisition and post-acquisition problems?
7. In what two primary areas do formal institutions affect alliances? Briefly explain the two
areas.
8. Describe at least one norm (or collective assumption) and how it would affect a firm’s
perspective on creating an alliance
9. Use the VRIO framework to describe the difference between an alliance and an acquisition.
Value: Alliances may reduce costs, risks, and uncertainties. Alliances allow firms to tap into
the complementary assets of partners and provides learning opportunities.
10. Explain the meaning of the term “real option.”
A real option is an investment in real operations as opposed to financial capital
11. Of the two methods allied firms can use to combat opportunism, which one do you think is
better? Why?
12. Of the four factors that may influence alliance performance, which do you think is the most
important and which the least important? Explain your answer.
13. If you were part of a firm’s leadership, under what conditions would you choose an
acquisition over an alliance, and vice versa?
14. Is it necessary for managers to pay attention to the politics behind alliances and acquisitions?
Why?
