What Is a Strategic Alliance?

A strategic alliance is an arrangement between two companies to undertake a

mutually beneficial project while each retains its independence. The agreement is
less complex and less binding than a joint venture, in which two businesses pool
resources to create a separate business entity.
A company may enter into a strategic alliance to expand into a new market, improve
its product line, or develop an edge over a competitor. The arrangement allows two
businesses to work toward a common goal that will benefit both.
The relationship may be short- or long-term and the agreement may be formal or
informal.
Goals of strategic alliances
• All-in-one solution
• Flexibility
• Acquisition of new customers
• Add strengths, reduce weaknesses
• Access to new markets+technologies
• Common sources
• Shared risk

The effects of forming a strategic alliance can include allowing each of the
businesses to achieve organic growth more quickly than if they had acted alone.
The partnership often entails sharing resources that only one of the companies
possesses. As an example, if a small printing company allied with another that
owned high-speed presses, the small business could capture more of the local
printing business at less cost.
Further advantages of strategic alliances[edit]
• Access to new technology, intellectual property rights
• Create critical mass, common standards, new businesses
• Diversification
• Improve agility, R&D, material flow, speed to market
• Reduce administrative costs, R&D costs, and cycle time
• Allowing each partner to concentrate on their competitive advantage
• Learning from partners and developing competencies that may be more widely
exploited elsewhere
• To reduce political risk while entering into a new market
• An alliance plan will provide the opportunity to manage and achieve defined
results from a corporate ecosystems
Disadvantages of strategic alliances include:[2]
• Sharing: In a strategic alliance the partners must share resources and
profits and often skills and know-how. This can be critical if business secrets are
included in this knowledge. Agreements can protect these secrets but the partner
might not be willing to stick to such an agreement.
• Creating a competitor: The partner in a strategic alliance might become a
competitor one day, if it profited enough from the alliance and grew enough to end
the partnership and then is able to operate on its own in the same market segment.
• Opportunity costs: Focusing and committing is necessary to run a Strategic
Alliance successfully but might discourage from taking other opportunities, which
might be beneficial as well.
• Uneven alliances: When the decision powers are distributed unevenly, the
weaker partner might be forced to act according to the will of the more powerful
partner(s), even if he or she is actually not willing to do so.
• Foreign confiscation: If a company is engaged in a foreign country, there is
the risk that the government of this country might try to seize this local business
so that the domestic company can have all the market on its own.
• Risk of losing control over proprietary information, especially regarding
complex transactions requiring extensive coordination and intensive information
sharing.
• Coordination difficulties due to informal cooperation settings and highly
costly dispute resolution.
Example of a Strategic Alliance
The deal between Starbucks and Barnes&Noble is a classic example of a strategic
alliance. Starbucks brews the coffee. Barnes&Noble stocks the books. Both companies
do what they do best while sharing the costs of space to the benefit of both
companies.

What Is a Joint Venture (JV)?

A joint venture (JV) is a business arrangement in which two or more parties agree
to pool their resources for the purpose of accomplishing a specific task. This task
can be a new project or any other business activity.
In a joint venture (JV), each of the participants is responsible for profits,
losses, and costs associated with it. However, the venture is its own entity,
separate from the participants' other business interests.
Joint ventures, although they are a partnership in the colloquial sense of the
word, can take on any legal structure. Corporations, partnerships, limited
liability companies (LLCs), and other business entities can all be used to form a
JV.1 Despite the fact that the purpose of JVs is typically for production or for
research, they can also be formed for a continuing purpose. Joint ventures can
combine large and smaller companies to take on one or several big, or little,
projects and deals.
There are three main reasons why companies form joint ventures:
Leverage Resources
A joint venture can take advantage of the combined resources of both companies to
achieve the goal of the venture. One company might have a well established
manufacturing process, while the other company might have superior distribution
channels.
Cost Savings
By using economies of scale, both companies in the JV can leverage their production
at a lower per-unit cost than they would separately. This is particularly
appropriate with technology advances that are costly to implement. Other cost
savings as a result of a JV can include sharing advertising or labor costs.
Combined Expertise
Two companies or parties forming a joint venture might each have unique
backgrounds, skillsets, and expertise. When combined through a JV, each company can
benefit from the other's expertise and talent within their company.
Advantages of Joint Venture
1. Economies of Scale
Joint Venture helps the organizations to scale up with their limited capacity. The
strength of one organization can be utilized by the other. This gives the
competitive advantage to both the organizations to generate economies of
scalability.
2. Access to New Markets and Distribution Networks
When one organization enters into joint venture with another organization, it opens
a vast market which has a potential to grow and develop. For example, when an
organization of United States of America enters into a joint venture with another
organization based at India, then the company of United States has an advantage of
accessing vast Indian markets with various variants of paying capacity and
diversification of choice.
At the same time, the Indian company has the advantage to access the markets of the
United States which is geographically scattered and has good paying capacity where
the quality of the product is not compromised. Unique Indian products have big
markets across the globe.
3. Innovation
Joint ventures give an added advantage to upgrading the products and services with
respect to technology. Marketing can be done with various innovative platforms and
technological up gradation helps in making good products at efficient cost.
International companies can come up with new ideas and technology to reduce cost
and provide better quality products.
4. Low Cost of Production
When two or more companies join hands together, the main motive is to provide the
products at a most efficient price. And this can be done when the cost of
production can be reduced or cost of services can be managed. A genuine joint
venture aims at this only to provide best products and services to its consumers.
5. Brand Name
A separate brand name can be created for the Joint Venture. This helps in giving a
distinctive look and recognition to the brand. When two parties enter into a joint
venture, then goodwill of one company which is already established in the market
can be utilized by another organization for gaining a competitive advantage over
other players in the market.
For example, a big brand of Europe enters into a joint venture with an Indian
company will give a synergic advantage as the brand is already established across
the globe.
6. Access to Technology
Technology is an attractive reason for organizations to enter into a joint venture.
Advanced technology with one organization to produce superior quality of products
saves a lot of time, energy, and resources. Without the further investment of huge
amount again to create a technology which is already in existence, the access to
same technology can be done only when companies enter into joint venture and give a
competitive advantage.
It is very common for joint venture contracts to restrict outside activities of
participant companies while working on a venture project. You need to make sure you
understand what you are getting into if you don’t want to negatively impact your
entire business.
7 – A lot of research and planning are necessary
The success of a joint venture highly depends on thorough research and analysis of
the objectives.
8 – It may be hard for you to exit the partnership as there is a contract involved
Once again, even though a joint venture is temporary, it is crucial that you know
what you are getting into if you don’t want to be locked in a partnership.
9 – You might be tempted to leave the joint venture
You will get enough leadership and support in the early stages of a joint venture
and might be tempted to leave.
10 – Lack of clear communication
As a joint venture involves different companies from different horizons with
different goals, there is often a severe lack of communication between partners.
11 – Unreliable partners
Because of the separate nature of a joint venture, it is possible that the partners
do not devote 100% of their attention to the project and become unreliable.
12 – Unclear and unrealistic objectives
Unrealistic and unclear objectives may be set up. To avoid this, it is necessary
that you and your partners do a lot of research before starting your joint venture.

Special Considerations
Paying Taxes on a Joint Venture (JV)
When forming a JV, the most common thing the two parties can do is to set up a new
entity. But because the JV itself isn't recognized by the Internal Revenue Service
(IRS), the business form between the two parties helps determine how taxes are
paid. If the JV is a separate entity, it will pay taxes like any other business or
corporation does. So if it operates as an LLC, the LLC will then pay taxes.
The JV agreement will spell out how profits or losses are taxed. But if the
agreement is merely a contractual relationship between the two parties, then their
agreement will determine how the tax is divided up between them.
Using a Joint Venture (JV) to Enter Foreign Markets
A common use of JVs is to partner up with a local business to enter a foreign
market. A company that wants to expand its distribution network to new countries
can usefully enter into a JV agreement to supply products to a local business, thus
benefiting from an already existing distribution network.2 Some countries also have
restrictions on foreigners entering their market, making a JV with a local entity
almost the only way to do business in the country.
Requirements for Joint Ventures
The key elements to a joint venture may include (but are not limited to):
• The number of parties involved
• The scope in which the JV will operate (geography, product, technology)
• What and how much each party will contribute to the JV
• The structure of the JV itself
• Initial contributions and ownership split of each party
• The kind of arrangements to be made once the deal is complete
• How the JV is controlled and managed
• How the JV will be staffed
Dissolution[edit]
The JV is not a permanent structure. It can be dissolved when:
• Aims of original venture met
• Aims of original venture not met
• Either or both parties develop new goals
• Either or both parties no longer agree with joint venture aims
• Time agreed for joint venture has expired
• Legal or financial issues
• Evolving market conditions mean that joint venture is no longer appropriate
or relevant
• One party acquires the other

Examples of Joint Ventures

Once the joint venture (JV) has reached its goal, it can be liquidated like any
other business or sold. For example, in 2016, Microsoft Corporation (NASDAQ: MSFT)
sold its 50% stake in Caradigm, a JV it had created in 2011 with General Electric
Company (NYSE: GE). The JV was established to integrate Microsoft’s Amalga
enterprise healthcare data and intelligence system, along with a variety of
technologies from GE Healthcare. Microsoft has now sold its stake to GE,
effectively ending the JV. GE is now the sole owner of the company and is free to
carry on the business as it pleases.

What Are Mergers and Acquisitions – M&A?

Mergers and acquisitions (M&A) is a general term used to describe the consolidation
of companies or assets through various types of financial transactions, including
mergers, acquisitions, consolidations, tender offers, purchase of assets and
management acquisitions. The term M&A also refers to the desks at financial
institutions that deal in such activity.

The Essence of Merger

The terms "mergers" and "acquisitions" are often used interchangeably, although in
actuality, they hold slightly different meanings. When one company takes over
another entity, and establishes itself as the new owner, the purchase is called an
acquisition. From a legal point of view, the target company ceases to exist, the
buyer absorbs the business, and the buyer's stock continues to be traded, while the
target company’s stock ceases to trade.
On the other hand, a merger describes two firms of approximately the same size, who
join forces to move forward as a single new entity, rather than remain separately
owned and operated. This action is known as a "merger of equals." Both companies'
stocks are surrendered and new company stock is issued in its place. Case in point:
both Daimler-Benz and Chrysler ceased to exist when the two firms merged, and a new
company, Daimler Chrysler, was created. A purchase deal will also be called a
merger when both CEOs agree that joining together is in the best interest of both
of their companies.
The Action of Acquisition
Unfriendly deals, where target companies do not wish to be purchased, are always
regarded as acquisitions. Therefore, a purchasing deal is classified as a merger or
an acquisition, based on whether the purchase is friendly or hostile and how it is
announced. In other words, the difference lies in how the deal is communicated to
the target company's board of directors, employees and shareholders. Nestle, for
instance, has performed a variety of acquisitions lately.
Types of Mergers & Acquisitions
Here is a list of transactions that fall under the M&A umbrella:
Merger
In a merger, the boards of directors for two companies approve the combination and
seek shareholders' approval. Post merger, the acquired company ceases to exist and
becomes part of the acquiring company. For example, in 2007 a merger deal occurred
between Digital Computers and Compaq, whereby Compaq absorbed Digital Computers.
Acquisition
In a simple acquisition, the acquiring company obtains the majority stake in the
acquired firm, which does not change its name or alter its legal structure. An
example of this transaction is Manulife Financial Corporation's 2004 acquisition of
John Hancock Financial Services, where both companies preserved their names and
organizational structures.
Consolidation
Consolidation creates a new company. Stockholders of both companies must approve
the consolidation. Subsequent to the approval, they receive common equity shares in
the new firm. For example, in 1998, Citicorp and Traveler's Insurance Group
announced a consolidation, which resulted in Citigroup.
Tender Offer
In a tender offer, one company offers to purchase the outstanding stock of the
other firm, at a specific price. The acquiring company communicates the offer
directly to the other company's shareholders, bypassing the management and board of
directors. For example, in 2008, Johnson & Johnson made a tender offer to acquire
Omrix Biopharmaceuticals for $438 million. While the acquiring company may continue
to exist — especially if there are certain dissenting shareholders — most tender
offers result in mergers.
Acquisition of Assets
In an acquisition of assets, one company acquires the assets of another company.
The company whose assets are being acquired must obtain approval from its
shareholders. The purchase of assets is typical during bankruptcy proceedings,
where other companies bid for various assets of the bankrupt company, which is
liquidated upon the final transfer of assets to the acquiring firms.
Management Acquisition
In a management acquisition, also known as a management-led buyout (MBO), a
company's executives purchase a controlling stake in another company, making it
private. These former executives often partner with a financier or former corporate
officers, in an effort to help fund a transaction. Such M&A transactions are
typically financed disproportionately with debt, and the majority of shareholders
must approve it. For example, in 2013, Dell Corporation announced that it was
acquired by its chief executive manager, Michael Dell.
The Structure of Mergers
Mergers may be structured in multiple different ways, based on the relationship
between the two companies involved in the deal.
• Horizontal merger: Two companies that are in direct competition and share the
same product lines and markets.
• Vertical merger: A customer and company or a supplier and company. Think of a
cone supplier merging with an ice cream maker.
• Congeneric mergers: Two businesses that serve the same consumer base in
different ways, such as a TV manufacturer and a cable company.
• Market-extension merger: Two companies that sell the same products in
different markets.
• Product-extension merger: Two companies selling different but related
products in the same market.
• Conglomeration: Two companies that have no common business areas.
Mergers may also be distinguished by following two financing methods--each with its
own ramifications for investors.
• Purchase Mergers: As the name suggests, this kind of merger occurs when one
company purchases another company. The purchase is made with cash or through the
issue of some kind of debt instrument. The sale is taxable, which attracts the
acquiring companies, who enjoy the tax benefits. Acquired assets can be written-up
to the actual purchase price, and the difference between the book value and the
purchase price of the assets can depreciate annually, reducing taxes payable by the
acquiring company.
• Consolidation Mergers: With this merger, a brand new company is formed, and
both companies are bought and combined under the new entity. The tax terms are the
same as those of a purchase merger.
Advantages: Following are the some advantages
• The most common reason for firms to enter into merger and acquisition is to
merge their power and control over the markets.
• Another advantage is Synergy that is the magic power that allow for increased
value efficiencies of the new entity and it takes the shape of returns enrichment
and cost savings.
• Economies of scale is formed by sharing the resources and services (Richard
et al, 2007). Union of 2 firm’s leads in overall cost reduction giving a
competitive advantage, that is feasible as a result of raised buying power and
longer production runs.
• Decrease of risk using innovative techniques of managing financial risk.
• To become competitive, firms have to be compelled to be peak of technological
developments and their dealing applications. By M&A of a small business with unique
technologies, a large company will retain or grow a competitive edge.
• The biggest advantage is tax benefits. Financial advantages might instigate
mergers and corporations will fully build use of tax- shields, increase monetary
leverage and utilize alternative tax benefits (Hayn, 1989).
Disadvantages: Following are the some difficulties encountered with a merger-
• Loss of experienced workers aside from workers in leadership positions. This
kind of loss inevitably involves loss of business understand and on the other hand
that will be worrying to exchange or will exclusively get replaced at nice value.
• As a result of M&A, employees of the small merging firm may require
exhaustive re-skilling.
• Company will face major difficulties thanks to frictions and internal
competition that may occur among the staff of the united companies. There is
conjointly risk of getting surplus employees in some departments.
• Merging two firms that are doing similar activities may mean duplication and
over capability within the company that may need retrenchments.
• Increase in costs might result if the right management of modification and
also the implementation of the merger and acquisition dealing are delayed.
• The uncertainty with respect to the approval of the merger by proper
assurances.
• In many events, the return of the share of the company that caused buyouts of
other company was less than the return of the sector as a whole.
Difference between Strategic Alliances and Joint Venture and Mergers and
Acquisitions
Joint Ventures
When two companies invest funds into creating a third, jointly owned company, that
new subsidiary is called a joint venture. Because the joint venture can access
assets, knowledge and funds from both of its partners it can combine the best
features of those companies without altering the parent companies. The new company
is an ongoing entity that will be in business for itself, but profits are owned by
the parents.
Example :- Sony-Ericsson
Sony-Ericsson is a joint venture between Sony and the Swedish company Ericsson.
Ericsson is the Swedish manufacturing company of the telecommunications equipment
while Sony is a mobile phone manufacturing company. Ericsson used to get chips from
Philips, but in March, 2000, a fire destroyed the production facility of Philips.
Facing an acute shortage of chips, Ericsson was prompted to form a joint venture
with Sony. On February 16, 2012, Sony acquired Ericsson’s share in the venture and
renamed the company as Sony Mobile Communications
Strategic Alliance
A strategic alliance is a legal agreement between two or more companies to share
access to their technology, trademarks or other assets. A strategic alliance does
not create a new company.
Example :- Apple & IBM
To quote IBM, its new partnership with Apple “brings together the analytics and
enterprise-scale computing of IBM with the elegant user experience of iPhone and
iPad to deliver a new level of value for businesses”
Partnership
A partnership is a legal arrangement where two or more people own a business
together. This means that the entire business is shared for as
long as the business exists. Both partners contribute money, time and expertise to
making a profitable enterprise
Example :- Warner Bros.
The Warner bros founder ( Sam, Jack, Albert, and Herry Warner ) where pioneering in
the film industry introducing sound to movie creating the first four legged film
star and revolutionising musical movie.
Merger
A merger is a deal to unite two existing companies into one new company
Merger is done on a permanent basis. Generally, it is done between two companies.
However, it can also be done among more than two companies.
During merger, an acquiring company and acquired companies come together to decide
and execute a merger agreement between them.
Example :- Mahindra & Mahindra acquires Ssangyong
In March 2011, Mahindra acquired a 70 % stake in ailing South Korean auto maker
Ssangyong Motor Company Limited (SYMC) at a total of 463 million dollars. This
acquisition will see the Korean company’s flagship SUV models, the Rexton II and
the Korando C foray into the Indian market.