1. Prof. Ian Giddy New York University Mergers & Acquisitions: Strategic Alliances

2. Copyright ©1999 Ian H. Giddy M&A 2 Mergers and Acquisitions: Summary l Mergers & Acquisitions l Divestitures l Strategic Alliances

3. Copyright ©1999 Ian H. Giddy M&A 3 Strategic Alliances: An Alternative to Acquisition l "A strategic alliance is a collaborative agreement between two or more companies, which contribute resources to a common endeavor of potentially important competitive consequences, while maintaining their individuality." l Example with internal emphasis: Sunkyong with GTE, Vodaphone & Hutchinson Whampoa for cellular system l Example with external emphasis: Santander with Royal Bank of Scotland for European market in financial services l Driving forces:  Complementary resources - gain strategic resources  Similar capabilities - gain economies or market power

4. Copyright ©1999 Ian H. Giddy M&A 4 A List Of Alliance Options

5. Copyright ©1999 Ian H. Giddy M&A 5 Forms of Strategic Alliance l Many linkages are options for future development of relationships IRREVERSIBILITY OF COMMITMENT POTENTIAL FOR CONTROL INFORMAL ALLIANCE JOINT PROJECTS JOINT VENTURE MERGER WITH FULL INTEGRATION ACQUISITION SPECIFIC DISTRIBUTION OR SUPPLY AGREEMENT

6. Copyright ©1999 Ian H. Giddy M&A 6 Pitfalls and Problems l Linkage may not offer access to partner's resources (JP Morgan-Espirito Santo) l Disagreement on contribution (Euroclear-Cedel) l Partners competing in one another's market (Credit Lyonnias-Commerzbank) l Linkage may exclude other options for expansion into a product or market l Clash of cultures; cross-purpose marketing (Credit Suisse-First Boston) Key predictor of stability is asset specificity and irreversibility of commitment.

7. Copyright ©1999 Ian H. Giddy M&A 7 Success Rates For Cross-Border Mergers And Acquisitions

8. Copyright ©1999 Ian H. Giddy M&A 8 Success Rates For Cross-Border Alliances

9. Copyright ©1999 Ian H. Giddy M&A 9 Geographic Overlap Helps Mergers And Acquisitions... 8 94 92 6 Minimal geographic overlap (sample of 12) Moderate or high geographic overlap (sample of 16) Failure for acquirer Success for acquirer

10. Copyright ©1999 Ian H. Giddy M&A 10...But It Hinders Alliances

11. Copyright ©1999 Ian H. Giddy M&A 11 Questions to Ask Before the Alliance l Identify value creation logic to both firms. Are the logics similar? Are they compatible? l What is the potential value of the alliance to each firm (versus the cost of not having the alliance?) l What are the specific financial and competitive risks to each partner? l What is the value of complementary assets? Of common assets contributed? l Evaluate the investment each partner would make. l Evaluate other resource commitments. l What are the scope and boundaries of the alliance? l What commitments are made in the alliance? l What are the criteria for success? Are they shared? l What revenues and returns are projected? What risks? l What are the critical limiting factors? l Is there an action plan to reduce the limiting factors?

12. Copyright ©1999 Ian H. Giddy M&A 12 Summary l Strategic alliances can be a good alternative to M&A, offering an option for future M&A l To make them work, need:  Partners focused on core competencies and core businesses  Complementary co-specialized assets creating new business opportunities  No threat of encroachment on either partner's part

13. Copyright ©1999 Ian H. Giddy M&A 13 Case Study: Citigroup Questions: l How would evaluate the probabilty that there will be positive net economic value out of the combination of Citicorp and Travelers? l Where will the value come from? l How long should it take for the value to be realized? l What factors could destroy value?

15. n www.stern.nyu.edu

16. www.giddy.org

18. Copyright ©1999 Ian H. Giddy M&A 18 www.giddy.org Ian Giddy NYU Stern School of Business Tel 212-998-0332; Fax 212-995-4233 ian.giddy@nyu.edu http://www.giddy.org