Management is asked to act faster, invigorate growth and capture even greater profits, while using fewer resources and less capital. Under these circumstances, it is no surprise that alliances, predicated on shared risk and on the prudent use of capital and resources, are becoming an increasingly important approach for increasing shareholder wealth and competitive strength.
In May 2001, Matt Schifrin, editor of Forbes.com, wrote in a Forbes special issue on alliances: “Alliances may be the most powerful trend that has swept (global) business in the past 100 years. Strategic alliances are hot….” Schifrin is not alone. Fred Weston, former president of the American Finance Association and UCLA professor, noticed a dramatic rise in new joint venture announcements to rival merger completions – a correlation of nearly 100 per cent. Peter Drucker, the father of modern management, has observed “not only a surge in alliances, but a worldwide restructuring for major corporations is occurring in the shape of alliances and partnerships.”
Just five years ago such statements about alliances would be hard to find. Most professional service firms and academics dismissed alliances as a fad. So what has happened in the last five years for alliances in general, and equity alliances in particular?
In 2000, we wrote an article titled “The next wave of alliance formations: forging successful partnerships with emerging and middle market companies”. That article was a primer on alliance formations, written from the perspective of inexperienced, small to middle market firms seeking to partner with large firms experienced and skilled in alliance formations and management.
In this article we will discuss why equity alliances are taking centre stage and why major corporations are choosing the “bond” option over the “buy” or “build” options to stimulate growth and increase corporate wealth.
We argue that this drive to equity-based alliances amounts to a new chapter in the evolution of free enterprise.
In addition, we discuss the different equity alliance types and highlight characteristics, benefits and limitations of each. We compare alliances with acquisitions in terms of wealth creation, revenue growth and probabilities of success and present some real-world examples and insights from executives. Finally, we look at best practices in successful alliance formations in the section The art of the deal.
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