Strategic alliance or corporate partnerships – Alternative to merger

Introduction

Takeovers encompass a broader set of activities than just acquisitions. Takeover is a general term referring to the transfer of control of a firm from one group of shareholders to another. Takeover can occur through any one of three means: acquisitions, proxy contests, and going-private transactions. A takeover achieved by acquisition will occur by merger, acquisition of stocks, or acquisition of assets.

However, firms don’t have to merge to gain control, thereby combining their efforts. Two (or more) firms can simply agree to work together by selling each other’s products, perhaps under different brand names, or jointly developing a new product or technology. Firms will frequently establish a strategic alliance, which is usually a formal agreement to cooperate in pursuit of a joint goal.

What is strategic alliance

Strategic alliances have become a staple of business strategy that many investors
regard a complete business plan only when possible corporate partners have been determined. Corporate partnering arrangements would be a compilation of extensive agreements covering the broad range of corporate alliances, such as supply and distribution agreements, product and technology licenses, and research and development agreements, to investment and investment-related arrangements.

As a corporate partnering arrangement is a system and an ongoing interdependent
relationship, it is much more difficult to structure and understand than more traditional relationships. Structuring successful corporate partnering arrangements requires two intimately related tasks: crafting the components comprising the arrangement and designing the system that defines the interrelationship among these components.

Category of strategic alliance

Strategic alliances are categorized as either equity or non-equity arrangements.
Equity arrangements include joint ventures, which involve the formation of a separate entity to operate what is essentially a separate business, and complete combinations of strategic assets and resources through some form of negotiated acquisition. As opposed to creation of a new business entity by way of a joint venture or merger or consolidation, non-equity arrangements are essentially contractual in nature, and are based on one or more long-term contracts that set out the understanding of the parties with respect to sharing of resources, costs and profits.

The classic corporate partnership structure arose in the chemical and materials industries. Technology-based industries, including biotechnology, telecommunications, information technology and “Green Tech”, have been unceasingly active in forming corporate partnering arrangements and alliances. The arrangements mainly involve a substantial contribution of some combination of products, technology/intellectual property and/or research and development by at least one party and some sort of investment (equity, debt or R&D funding) and/or services by the other party. They also usually involve the allocation of manufacturing and/or distribution rights to technology and products arising from the arrangement.

Why strategic alliance is important

Here are some reasons for entering into corporate partnering arrangements from practitioners’ point of view:

  • Funding;
  • Risk Sharing;
  • Access to Technology and Expertise;
  • Access to Domestic and International Distribution Channels and Customer Bases
  • Access to Regulatory Expertise;
  • Access to Manufacturing Capacity and Second-Source Arrangements;
  • Creation of Manufacturing Capacity;
  • Critical Mass: Market Share and Economies of Scale;
  • Preventing Competition; Prelude to Acquisition;
  • Reduced Time to Market.

Depending on firm’s ultimate goals from time to time, certain motives are more important than others. It is commonplace that corporate partnering agreements are used daily by lawyers, executives, corporate development staffs, venture capitalists, investment bankers, accountants—anyone involved in strategic alliances. As a complex arrangement, a combined team of professionals should work together to craft and establish the most workable corporate partnering arrangement.

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