Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
Chapter 16
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?
Answer: LLCs were first recognized for tax purposes in 1988. The LLC combines features of the
corporation and the limited partnership and offers both tax and non-tax benefits. Like a
corporation, the LLC protects all its owners from liability, whether or not they participate in the
management of the company. This feature enables owners to be managers without running the risk
of losing their limited liability protection. Like a limited partnership, the LLC passes through all
the profits and losses of the entity to its owners without itself being taxed. Unlike S-type
15.2 Why is defining the scope of a business alliance important?
Answer: Scope outlines how broadly the alliance will be applied in pursuing its purpose. For
example, an alliance whose purpose is to commercialize products developed by the partners could
manufacture products, acquire or license technology, or purchase products from the venture.
15.3 Discuss ways of valuing tangible and intangible contributions to a JV.
Answer: Intangible or tangible assets contributed to a JV by each partner may be valued using the
income, market-based, asset-based, and cost or replacement methods. However, parties to the JV
15.4 What are the advantages and disadvantages of the various organizational structures that could be
employed to manage a business alliance?
Answer: Control of business alliances is most often accomplished through a steering committee.
The steering committee is the ultimate authority for ensuring that the venture stays focused on the
2
when necessary. These include the majority-minority framework, equal division of labor, majority
rules, and multiple parties’ framework.
The majority–minority framework relies on identifying a clearly dominant partner. A dominant
partner is defined as having at least a 51% ownership stake in the enterprise. This type of structure
tends to promote the ability to make rapid mid-course corrections and clearly defines who is in
charge. The equal division of power approach usually means that equity is split 50/50. This
approach helps keep the partners actively engaged in the management of the venture. However,
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.
Answer: Google would most likely seek to protect the proprietary nature of its search software.
Time Warner would want to have limits on the types of content Google is able to access and how
such content would be used. Both firms would want to place limits on how their brands are used.
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?
Answer: Conoco could have negotiated a change in the Lukoil corporate charter to require
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?
Answer: In negotiating the original partnership agreement, the partners would have been well
served by including language about how revenue from new products created by the JV would be
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%?
Answer: The low minority investment in Fuji provided a low cost way for GM to gain sufficient
access to Subaru’s management decision making, culture, and new technologies in order to
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?
Best Buy was seeking a cash infusion.
Solutions to End of Chapter Case Study Questions
Disney Creates Order Out of Chaos
Discussion Questions and Answers:
1. What were the primary motivations for Disney and Comcast to reach an agreement allowing
Disney to take full ownership of Hulu by 2024?
Answer: Disney wanted to bundle Hulu with its own direct to consumer video streaming service.
2. What were the primary assumptions underlying Disney and Comcast's strategies with respect
to Hulu?
Answer: Both are assuming significant appreciation in the value of Hulu over the next five
years. Comcast is assuming that it can compete effectively with the likes of Netflix,
3. How did Hulu's original objectives conflict with its organizational arrangement?
Answer: To have access to diverse content, Hulu needed access to the major producers of
4. What alternatives to a joint venture did the original investors in Hulu have? Why was the JV
structure chosen?
Answer: Each investor in Hulu could have individually built their content and streaming platform.
Examination Questions and Answers
True/False Questions: Answer true or false to the following questions.
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
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
8
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
Multiple Choice Questions: Circle only one of the alternatives given in each question.
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
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
10
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
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
11
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
GOOGLE AND WALMART PARTNER TO COMPETE WITH AMAZON
________________________________________________________________
Case Study Objectives: To illustrate how business alliances can
• Help firms manage risk,
• Leverage financial and nonfinancial resources, and
• Gain access to needed skills and assets.
___________________________________________________________________________
With a 76% share of the online retail market place today, few companies can seriously challenge
Amazon.com for the top spot in retailing. The firm's strategy has been to build its service offering and
fulfillment capability largely on its own. It also introduced a $99 annual Prime membership (increased to
$119 in mid-2018) with same-day and even one-hour shipping options to develop loyalty. Amazon is
attracting customers with its Alexa-powered devices. Consumer Intelligence Research Partners estimate
that Amazon has sold more than 10 million Alexa-powered Echo devices in the U.S. since it was
introduced late in 2014.
An estimated 55% of Americans begin their online shopping research on Amazon; and, when they do
decide to buy, consumers often do so on Amazon. Amazon's customers tend to spend an average of $157
monthly, while Walmart's customers make purchases averaging only $27 per month. This huge disparity in
average monthly buying patterns appears to be driven by the convenience of online sales. Online grocery
sales are gaining traction, which is why Amazon bought grocer Whole Foods in June 2017 for $13.7
billion. Walmart paid $3.3 billion for Jet.com, an online retailer. While Walmart sales were up during much
of 2017, its profits slipped, reflecting increased spending on e-commerce activities. But even as it ramps up
12
including Target, Costco, Walgreens, and Whole Foods (now owned by Amazon). Google Express makes
money by collecting commissions from these merchants. Amazon is sometimes viewed as a department
store with just about everything inside. In contrast, Google Express is a shopping mall populated by
different retailers.
Walmart has been trying to integrate its online business with its network of almost 4700 stores. With
annual revenue of $486 billion in 2016, more than three times Amazon's $136 billion, Walmart has spent
aggressively to expand its online capabilities. It is the second-largest online retailer, behind Amazon, as a
result of its 2016 purchase of Jet.com. In January 2017, in a move targeted at Amazon Prime, Walmart
began offering free, two-day shipping on more than two million items. Many brick-and-mortar retailers are
struggling with what to do with their increasingly empty stores, but Walmart is partially repurposing its
stores into e-commerce fulfillment centers where consumers can pick up in stores merchandise ordered
online.
In an effort to become more competitive with Amazon, Google Express eliminated the $95 annual
membership in late August 2017. Now shoppers can get free delivery within one to three days on orders
exceeding the merchant's minimum purchase amount.
Both Walmart and Google view Amazon as a threat to their online shopping businesses. Walmart's brick
and mortar stores are particularly threatened by Amazon's dominance, as consumers increasingly buy
online. From Google's perspective more people are conducting web searches for products on Amazon
instead of Google, eating into the firm's advertising revenue. With both firms viewing Amazon as a threat
for different reasons and possessing complementary capabilities, it is not surprising that Walmart and
Google would consider collaborating to at least slow the Amazon juggernaut.
As of September 2017, Walmart began offering hundreds of thousands of items on Google Express.
Walmart customers can reorder items they purchased in the past by speaking to Google Home, the
company's voice controller speaker developed in response to Amazon's Echo. The eventual plan is for
Walmart customers to also shop using the Google Assistant, the artificial intelligence software assistant
found in smartphones running Google’s Android software. Walmart customers can link their accounts to
Google, allowing the technology giant to learn their past shopping behavior to better predict what they want
in the future.
While Amazon may dominate the online ordering of many different items, it has made little headway
into the perishable goods market. This market is Walmart's franchise. This is why Amazon bought Whole
Foods and began to cut prices aggressively to attract new customers.. However, even with Whole Foods,
Amazon's share of U.S. grocery sales was about 2% in 2017.
The partnership is not without challenges. Working together does not ensure they will be successful. For
most consumers, Amazon remains the primary option for online shopping. No other retailer can match the
size of its inventory, how it encourages shoppers to move from browsing to buying, or its many delivery
options.
13
Discussion Questions and Solutions:
1. What were the primary motivations for Walmart and Google to create a partnership?
Answer: Amazon represented a threat to both Walmart and Google. Walmart's brick and mortar
stores were being hurt by the shift to online buying, while Google's advertising revenue was being
2. What are the goals of the partnership? Do you believe it will be successful in achieving these
goals? Why? Why not?
Answer: Ideally, the partnership could reverse strides made by Amazon in online retailing.
Realistically, the goals are largely defensive in nature. Walmart wanted to at least retain its
3. What are the major hurdles the partnership must overcome and why?
Answer: It is unclear if a technology driven culture like Google can work well with a more
traditional (and perhaps bureaucratic) retailer like Walmart. Both partners have to be
committed to the partnership's success if it is to achieve the desired outcome of slowing
4. In the 1980s and 1990s, companies such as IBM, AT&T, and Microsoft were investigated
by the Justice Department because they were viewed as wielding monopolistic power. Do
you believe the government should investigate Amazon because it may be engaging in
noncompetitive practices? Why? Why not?
Answer: No. Amazon is successful because it was able to fulfill a market need that no one else
had foreseen. They should not be penalized for their success as it appears that no laws have been
14
5. What alternatives to a partnership with Google did Walmart have? Why was partnership selected
as the means of implementing the firm's voice-activated online ordering strategy?
Answer: Both firms could have attempted to build the capabilities required to compete
COMCAST AND CHARTER FORGE WIRELESS ALLIANCE
__________________________________________________________________
Key Points: Alliances
Enable firms to leverage their resources by gaining access to skills, technologies, and assets they do not
currently possess;
Allow cost/risk sharing in implementing business strategies;
Require participants cede some amount of control to the other parties; and
Represent one means of executing a business strategy.
______________________________________________________________________________
In the highly saturated and competitive U.S. market for mobile service, wireless carriers have been
slugging it out in a fierce price war. Similarly, cable companies like Comcast and Charter are facing a
mature pay-TV business under assault from an array of online video services. Struggling to change their
product offering, cable firms view wireless phone service as an opportunity to offer additional bundled
services to retain existing customers. This presumes that offering a combination of cable TV, residential
internet, and wireless and landline packages could discourage customers from dropping their service and
moving to a competitor.
Comcast has about 29 million customers in cities including Philadelphia, Boston and Chicago. Charter,
which bought Time Warner Cable in 2016, has about 26 million subscribers in markets like New York and
Los Angeles. Both Comcast, the largest U.S. cable operator, and Charter, No. 2, are seeking new sources of
revenue as demand for cable-TV services declines. They also face the long-term threat from wireless
companies like AT&T that are building the fifth generation of wireless services (5G), which has the
potential for offering TV service along with fast internet speeds on mobile phones.
In mid-2017, the two largest U.S. cable operators gave us a glimpse of the future when they announced
an agreement to collaborate in the wireless business to compete with giants like AT&T and Verizon
15
Communication. Comcast and Charter agreed not to make a significant merger or acquisition in the
wireless industry for firms such as T-Mobile US or Sprint without the other's consent for one year. The two
firms also agreed that for one year they would only work together on new wireless deals such as the
airwave reseller contract they already have with Verizon. Such agreements allow them to resell Verizon air
waves for a fee to offer cellphone service to their cable customers. The net result of this agreement is to
eliminate the potential for the two firms to get into a bidding war over a major wireless carrier, at least
during the term of their agreement. The agreement also could set the stage for the two firms to make a joint
bid for a major wireless carrier at some time in the future.
The partnership also allows Charter and Comcast to share technology and collaborate in vendor
negotiations to gain price concessions for such things as handsets from suppliers like Samsung. They intend
GENERAL MOTORS HEDGES ITS BETS WITH AN INVESTMENT IN
RIDE HAILING FIRM LYFT
________________________________________________________________
Case Study Objectives: To illustrate how business alliances can
• Manage risk and
• Leverage financial and nonfinancial resources
__________________________________________________________________________
In an era in which rapid changes in technologies are reshaping the long-standing business models of most
companies, senior managers find themselves having to gaze into the future to anticipate rather than simply
react to market changes. The automotive industry is no exception. Those that will survive long-term must
make educated guesses about what lies ahead in terms of how people will chose private versus public
modes of transportation. While the latter has long represented an alternative in areas of high population
density, new trends are emerging that represent both a threat and an opportunity to the traditional passenger
vehicle.
Among the economic and social developments likely to impact the mode of transportation in high
density affluent areas is the advent of autonomous (or self-driving) cars and ride-hailing services (like Uber
and Lyft).3 Consequently, firms both within the car manufacturing industry and major technology
16
companies are seeking ways to exploit changes in the giant automotive transportation market. Ride hailing
companies using autonomous driving car technology have the potential to substantially erode consumers'
desire to own motor vehicles, particularly in urban areas, and in turn to reduce auto makers' sales and
profits.
Automotive executives are keenly aware of the potential for ride-hailing services to reduce the demand
for owning or leasing cars in urban areas. However, opportunities for automakers do exist. Even if the
industry's passenger car sales decline, the number of miles driven by cars can actually increase as cars
remain the preferred mode of transportation nationwide. Car companies see the potential to offer paid
services to take advantage of all the miles driven by the current fleet of cars, which in the U.S. exceeds 100
million vehicles. Such paid services could provide a significant source of future income in addition to the
more traditional sale of cars and replacement parts.
The growing popularity among consumers of ride-hailing indeed portends a major paradigm shift in the
way we travel. But the capital requirements to make it happen are proving to be huge. Uber has been unable
to sustain its rapid growth through internal financing. In mid-2016, Uber announced publicly plans to raise
billions of dollars from investors and creditors. Smaller competitors such as Lyft acutely aware of the
amount of capital required to compete with Uber pursued various options ranging from partnerships to
seeking minority investors to sale of the business.
After having tried unsuccessfully to sell itself to General Motors, Apple, Google, Amazon, Uber, and
Chinese ride hailing firm Didi Chuzing, U.S. based Lyft Inc. initiated a new round of funding in early 2016
raising more than $1 billion. This included a $500 million investment by General Motors (GM). Other
investors in the equity offering included Saudi Arabia’s Kingdom Holding Co., Janus Capital Management
LLC and Japanese e-commerce firm Rakuten. The financing valued Lyft at $5.5 billion, more than double
its valuation in its prior financing round in early 2015.
The deal marks the first time a major car maker has joined with a ride-hailing company. GM and Ford
are among a cadre of car makers interested in developing their own “alternative” autonomous driving
capabilities either alone or in partnership with other firms. This comes at a time when large technology
firms including Uber, Alphabet (Google’s parent), and Apple Inc. are seeking to increase their role in the
personal transportation market.
17
in-house research and development that many automakers have been pouring into vehicle automation. In
the short term, the partnership will look similar to one Lyft already has with Hertz. That is, GM will
establish rental hubs around the country that will make vehicles owned by GM available to Lyft drivers on
a short term rental basis.
The longer term vision for the partnership is that the two companies can combine GM’s experience in
manufacturing and autonomous technology with Lyft’s mobile software and infrastructure to create a self-
driving car network that might be cheaper and more ubiquitous than any existing ride hailing business
models. Such a network would be similar to the way Uber and Lyft operate today. Each offers a fleet of
cars that respond to a request from a consumer’s mobile phone request. However, the key difference would
by the use of autonomous driving cars to replace drivers and slash labor costs while improving productivity
While the proposed network has considerable conceptual appeal, there are numerous roadblocks that
must be overcome: some regulatory, some technical, some human behavior, and some cultural. Regulatory
considerations entail concerns about the safety of autonomous driving cars and the potential for liability. In
late 2015, California passed legislation requiring a driver to be behind the wheel of a self-driving vehicle at
all times. This would preclude the labor cost reduction presumed in the GM-Lyft network concept. Like
any new technology, it is likely to take years for consumers to accept the driverless car concept putting the
realization of the proposed network years into the future. Finally, the behemoth GM has a large and often
ponderous bureaucracy as compared to Lyft’s. Lyft’s corporate culture is more likely to reflect nimbleness
and informality in contrast to GM’s more structured and risk adverse way of decision making.
G.M.’s $500 million interest in Lyft is the single largest direct investment by an auto manufacturer into
a ride-hailing company in the United States. But it is by no means the first attempt to partner with others to
tap into the ride hailing market. In 2011, GM teamed up with RelayRides, a website that lets GM car
owners rent out their idle vehicles. Ford reached a similar agreement with Getaround. Daimler has been
experimenting with Car2Go, a Zipcar-like service4 that offers Daimler smart car rentals in urban areas like
Brooklyn, Berlin and Toronto.
What began as a race to turn driverless cars into a form of mainstream transportation is now moving on
to its next stage. This is occurring even before the first stage has been completed. This next stage is a
business model based on personal mobility in which consumers have instant access to cars you don’t have
to own. Will the shift to autonomously driven car networks hurt GM’s traditional business? GM argues it
18
Discussion Questions:
1. What alternatives to a partnership with Lyft did GM have? Why was a partnership selected as
the means of implementing the firm’s strategy to enter the ride-hailing business?
Answer: GM could have acquired Lyft. An acquisition would have the distinct advantage of
gaining control over decision making. However, acquisitions are expensive and often make
strategy implementation difficult because of the challenges of integration. This may have been
2. Who do you believe benefitted most from the partnership (GM or Lyft) and why?
Answer: While both partners need the other, GM is the prime beneficiary in that this is a
relatively inexpensive way of investing in the car-hailing marketplace. While GM has the
3. In addition to risk sharing, what other motivations existed for GM and Lyft to partner?
Answer: Both firms gained access to the other firm’s proprietary technology and know-how.
GM needed the management skills of Lyft to successfully navigate what is a very different
4. Speculate as to why GM invested in Lyft rather than other ride hailing services such as Uber?
5. Of the risk factors mentioned in the case study, which do you believe is the most likely to
prevent the realization of the partnership’s vision of achieving a car hailing network of
autonomous driving cars? Explain your answer.
Answer: The greatest risk factor may be the time required to establish the vision. It may be
decades before the concept is realized, thereby making the financial return on investment
unattractive. The willingness of the public to accept autonomous driving cars may take years.
19
COMCAST’S NBCUNIVERSAL INVESTS IN BUZZFEED and
VOX IN A SEARCH FOR A YOUNGER AUDIENCE
______________________________________________________________________________________
Key Points
Firms may make minority investments in other companies to gain access to skills, assets, and customers
they do not currently possess.
While money invested in alliances does matter, the eventual success of alliances often depends on the value
of the intangible and tangible assets contributed by each partner.
Large companies often attempt to hedge their investments by making a number of relatively small
investments in different firms in the hope at least one will be wildly successful.
______________________________________________________________________________________
The media world is in turmoil. The median age of prime-time TV viewers rose from 46.3 to 50.5 in the past
five years, according to Horizon Media. Less than one quarter of people aged 18 to 34 watch prime-time
TV today, compared to 53.1% of those over 55. Younger people are fleeing in droves to watch online
content and videos. Increasingly, the big name media firms are in a panic as they see their customers
increase in age. Advertisers tend to be attracted mostly by younger viewers who tend to spend more
impulsively and often more lavishly than baby boomers. Not knowing precisely what to do, large media
companies are struggling to adapt to the changing demographics.
More than half of BuzzFeed’s 82.4 million unique monthly visitors are between the ages of 18 and 34,
according to comScore Inc. Prior to the NBCUniversal investment, BuzzFeed had raised $96.3 million in
five investment rounds. Last year, it raised $50 million from venture capital firm Andreessen Horowitz,
valuing the company at $850 million. BuzzFeed used much of that money to invest heavily in BuzzFeed
Motion Pictures, its Los Angeles-based video production unit. According to Quantcast, Vox gets about 75
million unique visitors a month to its various content sites, with about 40% of its traffic between 18 and 34
years of age. Vox is spending aggressively to grow its advertising business and as such is losing money and
burning through its available cash. The NBCUniversal investment in Vox Media valued the company at
almost $1 billion. While the number of monthly visitors for both firms is impressive, both BuzzFeed and
Vox are much smaller than sites like the Huffngton Post which gets more than 125 million monthly
visitors.
20
millennials. Moreover, giant money machines like Comcast often lack the ability to innovate due to bone
crushing bureaucracy. They need to acquire other, more nimble businesses to infuse fresh thinking into
their aging businesses.
Given the soft nature of the presumed synergy between NBCUniversal and upstart media companies,
BuzzFeed and Vox, it remains to be seen how much NBCUniversal and its parent Comcast will actually
benefit. At a minimum, Comcast may recover its investment and earn a return on its investments if they go
public. But whether they will be able to change their much larger culture to reflect the creativity of
Comcast Completes the Takeover of NBCUniversal
Case Study Objectives: To illustrate
• The use of joint ventures as an exit strategy and
• Phased transactions
__________________________________________________________________________
Culminating a four year effort to exit the media and entertainment business, General Electric (GE)
announced on February 12, 2013 that Comcast Corporation (Comcast) acquired the remaining 49%
common equity it did not own in NBCUniversal (NBCU). In addition, Comcast also agreed to acquire the
properties occupied by NBCU at 30 Rockefeller Plaza and CNBC’s headquarters in Englewood Cliffs, New
Jersey. As the nation’s largest cable TV provider, Comcast generates about two-thirds of its revenue from
its cable operations, with the remainder coming from NBCU.
While GE had been reviewing its business portfolio for some time, the decision to undertake a radical
restructure of its operations was accelerated by external events. Forced to shore up its big finance business
severely weakened by the 2008 global financial crisis, GE moved quickly to raise capital. GE’s decision to
sell NBCU also reflected the deteriorating state of the broadcast television industry and a desire to exit a
After extended discussions, GE and Comcast announced a deal on December 2, 2009, to form a joint
venture consisting of NBC and selected Comcast assets. The agreement called for Comcast to own a 51%
stake in NBCU, with GE retaining 49% ownership. The deal did not close until January 2011, due to
lengthy negotiations with regulators. To satisfy regulators, the JV had to agree make concessions designed
to prevent it from limiting competitor access to NBCU content.
In contrast TV production companies, cable channels have continued to thrive because they rely on a
steady stream of subscriber fees from cable companies such as Comcast. Comcast hoped to diversify its
