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Why could a Business Alliance be more Attractive than a Merger or Acquisition?

Tuesday January 10, 2017,

7 min Read

The greatest change in the way business is being conducted is the accelerating growth of relationships based not on ownership but on partnership.

- Peter Drucker, Keynote Speaker, Collaborative Commerce Summit, June 2001

When Drucker made the following statement back in 2001, little did we know that this idea could be implemented by thousands of startups and companies today in India. Whether you are a budding CEO on track to launch your company, an entrepreneur trying to save your business, or a leader of a well-established organization looking for new opportunities, business alliances will come in handy at any point in time. Startups and young companies can leverage business relations to launch themselves successfully by associating with a known brand. A mature and established company can form partnerships with peers, competitors, or suppliers to become more competitive in the industry. A business alliance is a cooperative relationship with another company. Here are some of the common alliance structures and if you are a business person you might be familiar with some of them:

Joint Venture: A business relationship and a new legal entity formed by two or more parties to achieve common objectives. Each partner continues to exist as a separate entity though.

Strategic Alliance: An agreement between two companies to sell each other’s products to customers or to co-develop a technology, product, or process. It may be legally binding or largely informal. Some of the activities might involve cross-training and coordinated product development.

Equity Partnership or Minority Investments: Passive investors make frequent investments in firms which have attractive growth opportunities but lack the resources to pursue them. Investors receive representation on the board or control over strategy changes, capital expenditures, and sale of the business.

Licensing: Enables a firm to extend its brand to new products and markets by permitting others to use the brand name or gain access to a proprietary technology. Under the agreement the franchiser may offer a variety of services and benefits in exchange for a share of the franchiser’s revenue.

Franchising Alliance: A network of alliances in which partners are linked by licensing agreements which grant exclusive rights to sell or distribute goods/services in specific geographic location. Licensees may be required to purchase goods and services from other firms in the alliance.

Network Alliance: An interconnecting alliance among companies crossing international and industrial boundaries. This may involve companies collaborating in one market while competing in others. These alliances are formed to access skills from different but increasingly interconnected industries.

Exclusive Agreement: Involves sole rights for manufacturing or marketing specific products or services. In this type of agreement each party benefits from the specific skills or assets the other party brings to the relationship.

Why enter into a business alliance of any sorts?

1. Intense competition in an industry that requires the use of cash in operations

India’s ride-hailing sector has turned into a battlefield where Ola and Uber are competing to capture the market and customers. Last year Mahindra & Mahindra Ltd. teamed up with Ola to offer drivers discounts on cars as well as financing with zero down payments, subsidized insurance premiums, and maintenance services. In addition, drivers will be offered accident insurance and scholarships for their children. This partnership could generate more than $400 million in business if the alliance can draw a dedicated customer base that the two companies have built up. The strategic alliance will not only encourage micro-entrepreneurship opportunities but also develop mobility solutions for India’s growing transportation needs. Ola previously partnered with Nissan Motor Co. to allow drivers to lease Nissan and Datsun cars for monthly payments. The ride hailing industry has attracted investments and partnerships in India and globally: General Motors – Lyft, Toyota – Uber, and Ford Motor – Zoomcar.

2. Capitalize on established brands to gain a new customer base

In 2013, Reebok collaborated with Marvel to come up with a line of footwear inspired by comic book superheroes. Characters like Captain America, Spiderman, Deadpool, and The Red Skull were chosen to be imprinted on retro style sneakers and Reebok models from the 1980’s and 1900’s. The shoes were designed with character’s superpowers, iconic symbols, and colors. Children, teens, sports fans, and comic book fans formed a large part of the customer base. In 2013, Marvel owned 33.5% of the comic books market. And in 2009 Marvel became a subsidiary of The Walt Disney Company. This licensing relationship with Disney could open doors for future licensing opportunities of Disney characters for Reebok in an industry with strong established competitors like Nike, Adidas, and Puma.

3. Share existing customers and increase profits

Worldwide, the airline industry generates about $760 billion in revenue annually. The number of air travelers is expected to grow to about 3.9 billion in 2017, per the International Air Transport Association. Top regions for passenger growth include the emerging economies of Africa, Asia/Pacific, Latin America, and the Middle East. How are airlines able to create revenues when airplanes have limited capacity? Airlines collaborate to form a network of alliances. Code sharing agreements offer passengers an extended network for reservation, ease of moving between connection flights, and sometimes lower ticket prices. Frequent flier rewards can be used to book tickets for flights taken among the network airlines. There are three major alliances: Star Alliance with 27 airlines, Oneworld with 15 airlines, and SkyTeam with 20 airlines in their respective networks. Thus, airlines increase efficiency, reduce operational costs, and generate profits.

4. Access to new technologies and strengthen innovation capabilities

In 2014 Uber and Spotify joined forces to enable passengers to remotely control the music that played in their Uber cars. Spotify premium users, if matched with music-enabled cars could play their favorite songs while on the journey and would also be entered for artist ride-alongs and exclusive live-sessions with famous artists like Jake Owen. Next, Uber collaborated with Pandora in US, Australia, and New Zealand to offer music via Bluetooth, USB, and AUX cable on and off trip. Currently Spotify has more than 75 million subscribers whereas Pandora has 80 million users. These streaming music services are the biggest source of revenue for the recording industry at 34.3% of the total revenue. The innovation in music combined with the ride hailing services provides a mutual benefit to riders and service providers.

Advantages of business alliances include access to and sharing of skills, products, and markets at a lower overall cost without the need for M&A. Disadvantages are limited control in some instances, profit sharing, and potential loss of trade secrets and skills to competitors. Business Alliances are basically a win-win situation for the companies involved and the customers. While it might be worthwhile to acquire a company in some instances, the ability to capitalize on fads and temporary successes could lead to profits in the short-term. We should also keep in mind that not all companies have the resources to engage in M&A. Creating a successful alliance requires a strong focus on strategy, planning, trust building, and tracking metrics. Young, growing, and mature companies can make the most out of alliances and choose the ones that fit the best with their business strategy.

(All definitions are taken from: DePamphilis, Donald M. Mergers, Acquisitions, and Other Restructuring Activities: An Integrated Approach to Process, Tools, Cases, and Solutions. 8th ed. USA: Elsevier, 2015. Print.)


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