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This chapter describes the various forms of cooperative domestic and international relationships common in business today, including joint ventures, partnerships, strategic alliances, equity partnerships, licensing agreements, and franchise alliances. The primary theme of this chapter is that well-constructed business alliances (both domestic and foreign) often represent viable alternatives to mergers and acquisitions, and they always should be considered one of the many options for achieving strategic business objectives. This chapter details the wide variety of motives for business alliances and the factors common to most successful alliances. Also addressed are the advantages and disadvantages of alternative legal structures, important deal structuring issues, the implications of the 2017 tax legislation, and empirical studies that purport to measure the contribution of business alliances to creating shareholder wealth.

This chapter describes the various forms of cooperative relationships common in business today, including joint ventures, partnerships, strategic alliances, equity partnerships, licensing agreements, and franchise alliances. The primary theme of this chapter is that well-constructed business alliances often represent viable alternatives to mergers and acquisitions, and they always should be considered one of the many options for achieving strategic business objectives. This chapter details the wide variety of motives for business alliances and the factors common to most successful alliances. Also addressed are the advantages and disadvantages of alternative legal structures, important deal-structuring issues, and empirical studies that purport to measure the contribution of business alliances to creating shareholder wealth.

The integration phase is an important contributor to the ultimate success of the merger or acquisition, and ineffective integration is commonly given as one of the primary reasons mergers and acquisitions (M&As) sometimes fail to meet expectations. This chapter outlines a practical process for realizing successful integration. The critical success factors include careful premerger planning, candid and continuous communication, adopting the right pace for combining the businesses, appointing an integration manager and team with clearly defined goals and lines of authority, and making the difficult decisions early in the process. This chapter concludes with a discussion of how to overcome some of the unique obstacles encountered in integrating business alliances.

Bankruptcy and liquidation represent alternative restructuring or exit strategies for failing firms. As such, this chapter focuses on the characteristics of such firms and the bankruptcy process. This chapter discusses in detail the major motivations for bankruptcy, the conditions under which a firm is considered bankrupt, and how the 2020 COVID-19 pandemic impacted failing firms. Bankruptcy enables a failing firm to reorganize, while protected from its creditors, or to cease operation by selling its assets to satisfy all or a portion of the firm’s outstanding debt. How reorganization and liquidation take place both inside and outside the protection of the bankruptcy court are examined in detail, as are Section 363 sales, prepackaged and prearranged bankruptcies, and cross-border bankruptcy. Common tactics, such as debt-for-equity swaps, compositions, and extensions, used by debtor firms to negotiate with creditors and the circumstances in which they are used, are analyzed. This chapter also addresses the advantages and disadvantages of strategic options for failing firms ranging from merging with another firm to reaching an out-of-court voluntary settlement to voluntary and involuntary liquidations. Moreover, the chapter describes the increasing role of hedge funds in the bankruptcy process. The current state of bankruptcy prediction models and their limitations as well as the results of recent empirical studies of the performance of firms experiencing financial distress also are examined.

Publisher Summary This chapter explores application of financial modeling techniques in context of mergers and acquisitions. Financial modeling refers to the application of spreadsheet software to define simple arithmetic relationships among variables within the firm's income, balance sheet, and cash-flow statements and to define the interrelationships among the various financial statements. The primary objective of applying financial modeling techniques is to create a computer-based model, which facilitates the acquirer's understanding of the effect that changes in certain operating variables have on the firm's overall performance and valuation. Once in place, these models can be used to simulate alternative plausible valuation scenarios to determine which one enables the acquirer to achieve its financial objectives without violating identifiable constraints. This chapter illustrates a process for building a financial model in the context of a merger or acquisition. The process allows the analyst to determine the minimum and maximum prices for a target firm and the initial offer price. The chapter also provides a simulation model for assessing the impact of various offer prices on postmerger EPS and discusses how this capability can be used in the negotiating process. The flexibility of these modeling techniques is illustrated by showing how they may be applied to special situations, such as when the acquirer or target is part of a parent firm or when the objective is to value, structure, and negotiate a joint venture or business alliance.

Publisher Summary This chapter summarizes the principal differences in various types of business alliances. The chapter discusses the wide variety of motives for business alliances and the factors common to most successful ones. Joint ventures (JVs) and alliances have been commonplace in high technology industries; many segments of manufacturing; the oil exploration, mining, and chemical industries; media and entertainment; financial services; pharmaceutical and biotechnology firms; and real estate. They have taken the form of licensing, distribution, co-marketing, research and development agreements, and equity investments. What all of these arrangements have in common is that they generally involve sharing the risk, reward, and control among all participants. The term business alliance is used throughout this chapter to describe the various forms of cooperative relationships common in business today, including joint ventures, partnerships, strategic alliances, equity partnerships, licensing agreements, and franchise alliances. The primary theme of this chapter is that well-constructed business alliances often represent viable alternatives to mergers and acquisitions, and they always should be considered one of the many options for achieving strategic business objectives. The chapter also discusses the advantages and disadvantages of alternative legal structures, important deal-structuring issues, and empirical studies that purport to measure the contribution of business alliances to creating shareholder wealth.

Publisher Summary This chapter addresses common motives for international mergers and acquisitions, as well as the advantages and disadvantages of a variety of international market entry strategies. The motives for international corporate expansion include a desire to accelerate growth, achieve geographic diversification, consolidate industries, and exploit natural resources and lower labor costs available elsewhere. Other motives include applying a firm's brand name or intellectual property in new markets, minimizing tax liabilities, following customers into foreign markets, as well as avoiding such entry barriers as tariffs and import barriers. Alternative strategies for entering foreign markets include exporting, licensing, alliances or joint ventures, solo ventures or greenfield operations, and mergers and acquisitions. The focus in this chapter is on M&A as a market entry or expansion mode because cross-border M&As comprise on average one-fourth of all global transactions and more than one-half of direct foreign investment annually. This chapter also addresses the challenges of M&A deal structures, financing, valuation, and execution in both developed and emerging countries. The chapter also summarizes empirical studies investigating the actual benefits to both target and acquiring company shareholders of international diversification.

Corporate governance refers broadly to the rules and processes by which a business is controlled, regulated, or operated. There is, though, no universally accepted goal for corporate governance. Traditionally, the goal has been to protect shareholder rights. More recently, this goal as expanded to encompass additional corporate stakeholders, including customers, employees, the government, lenders, communities, regulators, and suppliers. Common bidding strategy objectives include winning control of the target, minimizing the control premium, minimizing transaction costs, and facilitating postacquisition integration. If minimizing the cost of the purchase (i.e., the price paid to purchase the target firm) and transaction costs, while maximizing cooperation between the two parties, is considered critical, the bidder may choose the “friendly” approach, which has the advantage of generally being less costly than more aggressive tactics and minimizes the loss of key personnel, customers, and suppliers during the fight for control of the target. The tactics that may be used in developing a bidding strategy should be viewed as a series of decision points, with objectives and options usually well defined and understood before a takeover attempt is initiated. Pre-offer planning should involve a review of the target's current defenses, an assessment of the defenses that could be put in place by the target after an offer is made, and the size of the float associated with the target's stock.

This chapter focuses on the alternative forms of legal and organizational structures that can serve as acquisition vehicles and postclosing organizations. It discusses the implications of each for risk management, financing flexibility, tax optimization, and management control. The acquisition vehicle is the legal or business structure employed to acquire a target firm, and the postclosing organization is that used to operate the new company following closing. Determining the legal form or business structure of an acquisition vehicle or postclosing organization should follow the creation of a coherent business strategy. The choice of legal structure should be made only after the acquirer is comfortable with the venture's objectives, potential synergy, and preliminary financial analysis of projected returns and risk. The decision about which legal entity to use as an acquisition vehicle requires consideration of a host of practical, financial, legal, and tax issues, which could include the cost and formality of organization, ease of transferability of ownership interests, continuity of existence, management, control, ease of financing, method of distribution of profits, extent of personal liability, and taxation. Each form of legal entity has markedly different risk, financing, tax, and control implications for the acquirer. The selection of the appropriate entity can help to mitigate risk associated with the target firm, maximize financing flexibility, and minimize the net cost of the acquisition to the acquiring firm.

This chapter focuses on negotiation in the context of problem solving or interest-based bargaining, in which parties look at their underlying interests rather than simply state positions and make demands. In most successful negotiations, parties to the transaction search jointly for solutions to problems. All parties must be willing to make concessions at satisfy their own needs as well as the highest-priority needs of the others involved in the negotiation. This chapter also describes the process to develop an effective negotiating strategy and explains how parties to a transaction can reach consensus on purchase price. It states that the negotiation phase often is the most complex aspect of the acquisition process. It involves refining the preliminary valuation, structuring the deal, conducting due diligence, and developing a financing plan. It is interactive and iterative. It is during this phase at the actual purchase price paid for the acquired business is determined—and frequently the price is quite a bit different from the initial valuation of the target company, which was probably made before due diligence and with only limited, publicly available information. Finally, the chapter sheds light on the elements of integration planning and closing.

This chapter explores application of financial modeling techniques in context of mergers and acquisitions. Financial modeling refers to the application of spreadsheet software to define simple arithmetic relationships among variables within the firm's income, balance sheet, and cash-flow statements and to define the interrelationships among the various financial statements. The primary objective of applying financial modeling techniques is to create a computer-based model, which facilitates the acquirer's understanding of the effect that changes in certain operating variables have on the firm's overall performance and valuation. Once in place, these models can be used to simulate alternative plausible valuation scenarios to determine which one enables the acquirer to achieve its financial objectives without violating identifiable constraints. This chapter illustrates a process for building a financial model in the context of a merger or acquisition. The process allows the analyst to determine the minimum and maximum prices for a target firm and the initial offer price. The chapter also provides a simulation model for assessing the impact of various offer prices on postmerger EPS and discusses how this capability can be used in the negotiating process. The flexibility of these modeling techniques is illustrated by showing how they may be applied to special situations, such as when the acquirer or target is part of a parent firm or when the objective is to value, structure, and negotiate a joint venture or business alliance.