Strategic Alliances & Acquisitions PSU MGMT 510

1. Strategic Alliances & Acquisitions PSU MGMT 510 Dave Garten daveoutside@alum.mit.edu Week # 1

2. Dave Garten – Background Highlights • Current • Faculty, PSU/OEMBA – Strategy, M&A, Negotiation, Biz Projects • Consulting: management, strategy, alliances, M&A • Board(s): Organically Grown Company, SeQuential, Bridlemile Soccer, Forest Park Conservancy • CEO, SeQuential Biofuels, Inc. • Intel – 15 year career • General Manager • Director of Business Development. >200+ alliances • Marketing and product management • Engineer early-on – designed fuel injection • Education: MBA M.I.T 1987; BS/MS Engineering Dave Garten – Business Strategy

3. Syllabus Course Topics • Alliance Phases • Planning • Deal making • Execution • Integration • Focus Topics • Valuation • Antitrust • Negotiation • Due diligence • Ecosystems • Alliance Structures • Acquisitions • Divestitures • Spin-outs • Vertical alliances • Licensing • Joint ventures • Outsourcing • Equity Dave Garten PSU MGMT 510

4. ? Strategy Gaps “Basis of Competition” External Analysis Gap Planning “What we need” Make Buy Ally R & D Supply Mftg Sales Mktg Strategy Mission Internal Analysis “What we have” Dave Garten PSU MGMT 510

5. Planning Deal-Making Execution Integration Adjust Alliance Phases • Strategy • Screening • Analysis • Negotiation • Deal Structure • Due diligence Launch • Perform • Manage • Assess • Expand • Exit Unwind/separate Dave Garten PSU MGMT 510

6. Alliance Growth Drivers • Growth of Alliance Use – need to engage others • Driven by the gap in what a company would like to achieve vs. what it can achieve • Pace of change in technology • Globalization of markets • Product complexity increasing. Dave Garten PSU MGMT 510 X

7. 100% 75% Non-competitors Competitive Rivalry 50% 25% Competitors 0% Computers & Communication Financial Airlines Auto Health Care Energy Consumer Other Proportions of Alliances by Industry Data: Alliance Types Source: Booze, Allen, Hamilton analysis of 2000 alliances 1995-6 Dave Garten PSU MGMT 510

8. Data: Global Reach a Significant Factor Dave Garten PSU MGMT 510

9. Data: Success & Failure • Lots of studies -> indicators at best… • Success: ~30% acquisitions; ~ 50% alliances • Tend to be more successful • Acquisitions in core businesses, existing geographies • Alliances for related businesses, new geographies • Alliances between strong companies • Acquisitions between large and small companies [45%] • Alliances that evolve beyond initial objectives [79%] • JVs with even split of ownership [60%] • LBO & corporate buyers [~80%] Source: various including Bleeke and Ernst, McKinsey Dave Garten PSU MGMT 510

10. M&A Success & Failure • Top 5 reasons for M&A Failure • Top 3 Ways to Beat the Odds… Dave Garten PSU MGMT 510 X

11. Alliance Success & Failure Source: Vantage Partners “an alliance is like a foreign body that has been grafted onto separate organizations. To keep it alive you have to guard against rejection by each one” – Jordan D. Lewis, Trusted Partners Dave Garten PSU MGMT 510 X

12. Industry Structure Forward Integration • Customers • Distribution Unrelated Diversification Related Horizontal • Consolidation • New product, same customer • Same product, new customer • Conglomerate Vertical Backward Integration • Supply chain • Manufacturing • Natural resources Dave Garten PSU MGMT 510

13. Industry Structure Mature • Quality & reliability Declining • Price Growth • service Emerging • Features Late Majority Early Majority Early Adopters Laggards Innovators Growth strategies Consolidation Dave Garten PSU MGMT 510

14. Structure Types Outsourcing Purchase Agreement Acquisition Joint Venture Joint Development Multiyear Purchase Agreement Commitment Licensing Purchase Order Joint Marketing “Strategic” “Transactional” Ownership Dave Garten PSU MGMT 510

15. Acquisition Alliance Types of synergies “Modular” Airline & hotel “Sequential” Biotech-pharma “Reciprocal” Mobile-Exxon Lower Higher Degree of Uncertainty Nature of Resources value of “soft” to “hard” Lower Higher Lower Higher Degree of Competition for resources Structure Propensities Source: adapted from When to Ally and When to Acquire Dave Garten PSU MGMT 510

16. Value Drivers (Synergies) • Underlying purpose of strategic actions • Links strategic intent to day-to-day operations • Ultimately->Effect on earnings & cash flow • Examples • Increase revenue (growth) • Sell a solution, add new products or customers, increase market share, more sales force coverage • Reduce costs (consolidation) • Lower unit costs (economies of scale), lower capital costs or taxes, consolidate facilities, reduce redundancies Dave Garten PSU MGMT 510

17. Increasing risk Value Drivers (Synergies) New products through new channels Low Existing products through new channels New products through existing channels Probability of Success Facilities shared Operating activities shared Functions Duplicated High Short Time Frame Long Derived from: When to Walk Away from a Deal Dave Garten PSU MGMT 510