The Science of Alliances: Making a success of Joint Ventures and Strategic Alliances
January 19, 2016
Strategic Alliances are on the rise
2015 saw a run of new joint ventures and strategic Alliances in the UK. Alliances are on the rise and this trend is set to continue, with 2016 looking to be a record year in terms of volume of new Alliances involving UK corporates.
With many UK industries facing mature and consolidated markets, the onus is on UK companies to find growth from emerging markets (in particular, in Asia) and/or adjacent industry sectors. Many will not be brave, or be foolhardy enough to deliver these opportunities by going it alone, or through outright M&A.
We believe an increasing number of companies will join forces with a partner to seek the benefit of complementary capabilities to accelerate delivery times and mitigate risk. Supporting this view, recent PwC research found that 46% of UK CEOs were planning to enter a new Alliance in the next 12 months, up from 44% who had undertaken Alliances in 2014. In contrast, only 20% of UK CEOs plan to complete a domestic M&A transaction and 38% a cross-border deal.
Strategic Alliances are on the rise – but over half of all Alliances fail
Unfortunately, most Alliances fail usually due to flawed implementation.
The rationale for Alliances is usually sound. The participants are usually committed to making the Alliance a success. Yet the failure rate is unacceptably high. Over half of Alliances do not meet their objectives, and two-thirds end prematurely within 2 years of formation.
Why?
The answer, as many experienced M&A practitioners will suspect, lies in the execution process. Often, too much time is spent on lower value adding activities when planning and executing the Alliance. Legal and deal issues can consume approximately half of management’s time. Whilst these often protect the parties during the negotiations (and upon termination) they are not in themselves sufficient to drive the success of the planned Alliance.
The danger is that the principals and their advisers get bogged down in an M&A style negotiation such that the practicalities of how the Alliance will operate within the desired timetable can get overlooked.
Strategic Alliances – what good looks like
Alliances offer UK companies a way to expand and globalise without ‘betting the farm’ upfront on unfamiliar markets. Alliances, if done well, lead to outperformance and competitive advantage. An MIT study of 200 corporations with 1,572 Alliances found that stock prices jumped approximately 1 per cent, or the equivalent of $54m per Alliance, with each new announcement.
Despite there being no ‘silver bullet’ to the success of an Alliance, there are a number of factors that are paramount for success. Alliances are high risk and high maintenance. The execution process is where success is won and lost. Significant commitment from the senior leaders of each parent is required to maintain rigorous, professional end-to-end execution.
Based on our research and experience, we offer 7 keys to success which will not guarantee success, but certainly help participants avoid the most common pitfalls. If you want to read more about the seven drivers of Alliance success please click here.
What do you think makes an Alliance a success? Share your thoughts below or schedule a meeting to discuss your situation in confidence.
